Harry S. Dent Jr.'s Blog, page 85

Calling B.S. on Central Bankers

I’m a fan of the Marvel Comics movies, like X-Men and Iron Man.

My lovely wife often catches me watching tidbits of the Avenger films when I sit down in front of the TV to relax for a few minutes. I’ll flip around until I find one, watch just 20 to 30 minutes, then move on to another project in the house.

It drives her nuts!

I know the ending. The characters use their skills to better the world. They have clear goals, choose their targets, and execute. These are nice, neat packages, which is completely unlike the real world.

Unless you ask central bankers.

For some reason, over the last 20 years and especially in the last decade, people have attributed Marvel-like superhuman knowledge and power to those who manage currency, money supply, and interest rates.

And the bankers appear to believe it, even though it’s not just irrational, it’s demonstrably false.

As we peer in the windows of their great halls, these figures traipse around as if in capes and costumes, espousing great theories on what should happen, only to note in their press conferences that the world isn’t turning out according to plan. Right.

Ben Bernanke was no Captain America, Mario Draghi isn’t Iron Man, and Janet Yellen isn’t the Black Widow. And by the way, these characters are fictional!

Central bankers have to live in the real world where drawing lines on a graph is easy, but getting consumers to comply with the economic theory is hard.

We have our own ideas of what to do with our money, thank you very much.

Which gets back to the problem at hand.

Central bankers are full of it… economic theory, that is. But short on success. And the recent conversation about soft inflation targets proves the point.

For years – years! – the Fed has noted a 2% inflation target as measured by the personal consumption expenditure (PCE), which is a bit different from the consumer price index, but close.

The goal was to boost the economy through monetary policy to the point that growth, which should drive up wages, would lead to higher prices. Well, here we are. The PCE now sits just over 2%, with core PCE (minus food and energy), just under the magic level.

But there’s a problem.

Wage are rising at a snail’s pace, and GDP growth is anemic at best.

But hey, don’t fret! We’ve got inflation back! So even though the economy is stumbling and your income is flat, prices are higher!

Brilliant!

So, central bankers are doing what they’ve done before. Changing the target. Two percent inflation isn’t getting the job done, so now they’ll tolerate inflation around 2%, which means they will keep doling out easy money, keeping interest rates lower for longer, as they hope and pray for more growth and higher wages.

If this sounds like the same story we heard with unemployment, that’s because it is.

The Fed targeted unemployment of 5%, noting that when we fell back to that level, it should represent something close to full employment, where companies would have to bid for workers, driving up wages, and leading to faster economic growth.

We got 5% unemployment, and then 4.9%, and then 4.8%, and so on. We’ve been here for years. And yet, in 2016 the economy expanded by a mere 2%, and the Atlanta Fed estimates first quarter GDP at a whopping 0.5%. That’s annualized, so if the Atlanta Fed is right then the economy expanded by 0.125% in the first three months of this year!

Uh-oh. That didn’t work out so well.

And now, neither is inflation.

When things don’t work out, the Fed pulls out its technical manuals and tries to explain why the real world is so different from what they expected. All I hear is a bunch of B.S. that can be simply translated as, “We have no idea.”

Today we have classic stagflation, with low growth and rising prices.

The low growth is attributable to all the things we’ve covered before – an aging population, which leads to a flat or falling workforce, the Boomers saving for retirement instead of spending with abandon, and a debt hangover that’s been talked about ad nauseam, but not addressed.

We’ve got a few more years of this to deal with before the next large generation, the Millennials, takes control.

As for prices, it doesn’t take a genius to parse out the problem.

Housing is on the rise as builders take a cautious approach after getting smacked so hard in the meltdown.

Lower housing stock with a rising population leads to higher prices… but only as long as people can pay for them.

Medical costs – both services and insurance – are marching higher as the population ages.

And then there’s energy. After holding down costs for 18 months as prices cratered, the rebound in oil is now filtering through the economy.

This is not the inflation the Fed had hoped for.

Which leads to one conclusion: Central bankers do not know how to create growth. Period.

And guess what?

They shouldn’t.

It’s not their job.

We should never have asked that of them, which our politicians did when they realized they were economically powerless themselves in the downturn.

And the bankers should never have assumed that responsibility because they can’t deliver.

Instead of setting unrealistic goals about things they can’t control, central bankers should instead focus on giving the real economic drivers, business owners and managers, the best set of circumstances possible.

The arrangement is simple.

Go back to being the lender of last resort against quality collateral, and oversee the modest expansion of currency to match the demographic growth of the nation, while using experience-based rules for setting interest rate policy, like the Taylor Rule, so that everyone knew what rates would be as the economy changed over time.

If bankers used such an approach, chances are we’d never know their names, but they’d be doing the best thing they could to keep the nation on stable monetary footing.

I’m not getting my hopes up.

They’ll keep trying, and failing, which will lead to ever-changing targets and more uncertainty in the economy and markets.

It’s like a bad movie that just won’t end.

Rodney

P.S. In case you’ve missed it, we’re just one day away from when Harry reveals all the new details about what he’s calling “hidden cycles” in these crazy markets right now – and the buying opportunities (yes, you heard me right) within them. Sign up here for free to make sure you don’t miss it.

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Harry’s No “Flip-Flopper,” But…

I’ve been Harry Dent’s right-hand investment guy for six years now, and I’ve known his work for much longer.

Most people have no clue how tough it is to do what Harry does.

He’s truly an outside-the-box, big picture thinker.

He’s fiercely independent.

He’s the ultimate contrarian.

And he gives “zero f***s” when his research, opinions and forecasts set him apart from the group-think masses.

Bottom line: Harry tells it like it is – good, bad or ugly.

Most people can’t do that (even if they think they can).

Most people fall victim to herding behavior, where they do something just because everyone else is doing it (and because it feels safer to be in the herd).

Most people are so worried about looking “different” – particularly about having different results in their investment portfolios – that they’d rather play it safe, buy index funds, and close their eyes… hoping and praying for the best.

They’d rather win or lose with the crowd, rather than win or lose on their own.

Not Harry.

Of course, he’s not completely immune to the long list of cognitive biases influencing investors (nobody is, not even me!), but his track record of bold, contrarian market calls proves his ability to overcome biases and provide truly prophetic advice.

Like when he…

Issued his strongest “buy” signal in October 2002. Shortly after, we saw the Dow soar from 7,200 to 14,280 over the next five years!
Warned readers in September 2005, that the real estate bubble was peaking… The crash started just a few months later, in early 2006.
Told readers, on April 25, 2011 – the very day silver peaked – to sell their gold and silver (gold peaked just five short months later).

As I’m sure you can tell by now, when Harry speaks… you should listen!

I’ve had the pleasure of speaking with Harry just about every week for the past six years – and I can assure you, he’s one of the greatest minds I’ve ever known.

Part of Harry’s brilliance is his ability to balance two opposing forces. On one hand there’s the urge to explore new information (and, change his mind when it’s warranted)… and on the other hand, there’s the urge to stick to his opinion (and stay the course), even when everyone around him is blathering in disagreement.

As I said, Harry doesn’t really care what people think of him. That’s a huge advantage, because it allows him to stay convicted to the most meaningful long-term forecasts, even when the shorter-term cycles aren’t immediately proving him correct.

At the same time, I’ve personally witnessed Harry change his mind when it was warranted… when new or better information pointed to a different or more likely conclusion.

That makes him stand apart, because most people feel awkward changing their mind. Heck, “flip-flopper” is a derogatory term for someone who doesn’t have the spine to stay stubborn to his opinion, right?!

But for Harry, it’s not about his ego. It’s about helping is readers survive and prosper… and he tirelessly and mercilessly works toward that goal.

This mental flexibility is a must when you’re operating in financial markets.

In this arena, being a “flip-flopper” is a good thing. It means you can cut losses on a bad idea and make profits on a good one, even if you have to change your mind to get there.

Remember, the #1 goal of investing is to make money.

If you think the main goal of investing is to be right, or look smart, or never change your mind… you’re sorely misguided.

Harry knows this, of course. And that’s why he and I are committed to providing you and our other readers the very best advice – actionable advice for today’s markets.

A lot has changed in the six years I’ve worked side-by-side with Harry.

The bull market was just budding back then…

Now it’s eight years old, 240% above the March 2009 bottom, and, for now, and (suspiciously) edging higher.

Yet, just as the bull market has evolved, so too have Harry’s views on the best way to gather profits.

So I’m sure you’ll be interested in hearing the latest on Harry’s perspective on stocks – is he really saying they’re a “BUY” right now?!

Next Tuesday we’re hosting an exclusive webinar called Hidden Cycles: Why Harry Dent is Finally Saying BUY!!! You can register to watch, for free, and get a whole bunch of additional research to boot (also all free).

For now, I urge you to take a good long look at your current opinions about the markets and investing.

Are you falling victim to herding behavior?

Are you being stubborn to outdated, possibly erroneous opinions?

Harry’s no “flip-flopper,” but I can assure you that he keeps an open and flexible mind.

You should too!

Adam O’Dell

Editor, Cycle 9 Alert

Follow me on Twitter @InvestWithAdam

 

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When the Wheels Stop Rolling

When it comes to new car sales, most Americans are payment buyers.

We want a good deal, for sure, but we really need a car payment that fits our monthly budgets.

That’s a problem, given that we also want premium brands, snazzy features, and, for many of us, hulking big machines that look like they’d be more at home tearing up jungle roads than cruising on asphalt around town or on the interstate.

All of that stuff costs money, which is in short supply with modest wage growth.

But that’s OK. For the last several years, automakers, or at least their financing arms, have had an answer to keep the sales humming.

Extend, extend, extend.

Four-year car loans were the norm for many years. Then, as car prices crept higher, the number moved to five years. Now, a full 30% of new car loans stretch to 80 months, or almost seven years!

The average car loan is 68 months. That’s just over five and a half years. At this rate, buyers are at risk of their vehicles breaking down before they’re paid off.

And longer loans weren’t the only extension that financiers made. Lenders also extended or expanded their view of credible borrowers, reaching down to more subprime clients. This goes a long way in explaining how we reached a record pace of 18 million vehicles sold in December 2016.

It appears those days are over.

In March, the sales pace dropped to 16.64 million, missing expectations of 17.3 million, and that followed a dip in February to 17.6 million.

We’ve been forecasting a drop in new car sales for several years, based on predictable consumer spending patterns. It’s telling that dealers had to go to such extremes to keep the steel rolling off the showroom floor.

But the drop in auto sales isn’t just a cause for concern in the auto industry. It foreshadows slower consumer spending in general, which will keep a lid on GDP growth.

The problem is that most consumers borrow money to buy cars and it’s unlikely that, if they stop buying cars, they’ll borrow at the same rate to purchase other things.

Almost 85% of new cars are financed, and go out the door with an average transaction cost of $32,994. In 2016, the average car loan topped $30,000 for the first time, reaching $30,032. Through a little math, it’s obvious that the average new car buyer put down a mere $2,962, right at 9% of the purchase price.

If we buy one million fewer new cars in the U.S. this year, then, using the figures above, we’ll spend about $33 billion less on cars.

Considering that 85% of new vehicles are financed, this means that we’ll spend about $7.5 billion less of our savings, and take on $25.5 billion less in auto loans.

It’s hard to see how we’ll spend that money elsewhere in the economy.

Where else, beyond cars and housing, can you borrow 90% of the purchase price for many years? And how many people who would have bought cars will instead leverage their money to buy homes? I’m betting the answer is “not many.”

Instead, consumers will spend their money in other areas of their lives, like healthcare, consumables (restaurants, etc.), and might even pay down some debt, or save a bit. But that’s only for those that have a real chunk of cash sitting around.

About half of new car sales involve a trade-in. If consumers aren’t buying a new car, then they aren’t trading in their old ride, so the money tied up in the current vehicle isn’t available to spend elsewhere.

Consumers spent about $11.7 trillion last year, so a $25 billion to $30 billion drop won’t kill the economy by any means. But it does make it harder to grow.

And reducing credit expansion, which is the biggest part of money creation, will definitely leave a mark.

As car sales slow, we’ll all feel like we got thrown under the bus, whether we’re buying (or not buying) a new ride.

Rodney

P.S. Harry wrote about this problem too a few months ago, asking if cars will be the death of us. If you missed that, check it out here. Also, he’s got some important new information coming your way, on how to reel in short-term profits from “hidden” cycles within the supercycles. Click here to make sure you don’t miss it.

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A Sugary Icon Brought Back From the Dead

How many iconic food brands could you name off the top of your head right now.

Twenty?

Odds are, even if you could rattle off 30, you’d miss a few dozen.

But if you went to the grocery store and walked down the cereal aisle that, say, didn’t have any Raisin Bran, or the canned food aisle that didn’t have any Campbell’s, you’d notice something was off.

Well, that’s what happened to the latest addition to the Hidden Profits model portfolio. It disappeared from store shelves… twice! Each time there was a consumer uproar. But then something spectacular happened…

Like something you’d see in a made-for-boardrooms movie, a savior appeared.

He has an incredible track record of turning around languishing brands.

He’s made more than 80 private equity investments over 30 years.

His last 12 deals are reported to have delivered an average internal rate of return of 60%! That’s means 60% per year!

And since his arrival at our new Hidden Profits gem, new management has improved profit margins, making them some of the fastest and widest I’ve ever seen. It’s something to behold, really.

He and his team have done it by making dozens of tweaks, from improving delivery systems to increasing shelf life. And based on the six earnings quality metrics I use to uncover our hidden profits, there’s no denying that this company is on the right track and paying its shareholders well.

Here’s a breakdown of its forensic scorecard:

Test #1: Revenue Recognition

Grade = B.

There are no signs of accelerated revenue recognition, which is one of the biggest red flags that can derail the entire income statements.

The product has ample consumer demand, which lessens the risks that future expected revenues be pulled into the current quarter.

Test #2: Cash Flow Quality

Grade = A.

The company has strong cash flows.

More importantly, its cash flow is stable and recurring. This will allow them to grow over time as debt and interest payments are reduced.

Test #3: Earnings Quality

Grade = A.

On the earnings quality front, our newest addition earns top marks thus far, since its reorganization.

In particular, working capital is under control.

Thanks to strong end demand and the improvement of delivery systems, there’s less risk of management needing to use accounting aggressively to prop up margins and drive earnings growth.

Test #4: Expectations

Grade = C.

The company’s score is only average here because there is some Wall Street coverage, with everyone on a “buy” rating right now.

Estimates could go up on a high-quality beat and excellent execution, but there’s less room for major upgrades at this time.

Test #5: Valuation

Grade = A.

Currently, the stock trades at a discount to its peers.

Importantly, these valuation metrics do not feature in any future growth. That’s why, the stock is cheap at current levels.

Test #6: Shareholder Yield

Grade = A.

Our newest “Phase A” company has stable and recurring cash flows that will allow it to reduce debt. Over time, share buybacks and a dividend can further enhance shareholder yield.

The cherry on the top is that I expect this company will be sold, and at a premium of 50% to 100% or more to today’s price, in three to five years. It will be too valuable for the acquirer to ignore and to sell for cheap.

It’s a smart play for the short, middle, and long term. And you should get it into YOUR Hidden Profits portfolio immediately. You can find all the details here.

 

 

 

 

 

John

P.S. I just got word that Harry has an important message for you next Tuesday. Quite literally, when he told me what he wants to tell you, I nearly dropped the phone! I don’t think I’ve EVER heard Harry say anything like this before. Make sure you don’t miss it.

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The Phenomenon That’s Been Plaguing U.S. Investors For Years!

Call it patriotic…

Call it lazy…

But most people stick close to home when it comes to investing.

This is called home-country bias, and it’s a phenomenon that’s too big to ignore.

It’s pervasive across time and geography.

And even though it makes investors feel all warm and fuzzy inside, it generally tricks us into accepting lower returns and higher volatility from domestically-tilted portfolios.

In the U.S., this is particularly prevalent.

Americans prefer to invest in U.S. stocks because, psychologically, it feels like the right thing to do.

But it’s not!

Yes, U.S. stocks have trounced foreign stocks for years now.

But, just because U.S. stocks have outperformed for the past decade does not mean they have always outperformed… nor that they always will.

U.S. stocks outperform foreign stocks only about half the time.

Following the logic, a portfolio that is always concentrated in U.S. stocks is guaranteed to underperform about half the time.

The trick is not to extrapolate the past into the future and assume U.S. stocks will outperform for the next 10 years, just because they have for the last 10.

In fact, anyone who assumed U.S. stocks would outperform in 2017, has so far been quite disappointed.

A number of foreign stock markets have proven to be better bets.

But, buying foreign stocks is something most investors don’t feel comfortable doing. Tying up hard-earned capital in foreign stock plays feels riskier. But in reality, it isn’t…. in fact, it’s a necessity.

I’m not necessarily a proponent of buying foreign stocks and holding them indefinitely.

But I do use a forward-looking algorithm to identify pockets of outperformance opportunity in foreign stock markets – “sweet spots,” if you will.

Looking at the annualized return of foreign stocks while in these “sweet spots,” compared to their annualized return the rest of the time, can be quite tantalizing.

In our latest infographic, How Investors are Falling Short on Their Returns, I look at several different reasons why falling prey to the phenomenon of home-biased investing will NOT always get you the returns you’re seeking… while it will ALWAYS result in you missing out on some lucrative opportunities.

Click the image to learn just how pervasive this phenomenon is and what you can do to ensure you’re not a victim!

 

 

 

 

Adam O’Dell

Editor, Cycle 9 Alert

Follow me on Twitter @InvestWithAdam

The post The Phenomenon That’s Been Plaguing U.S. Investors For Years! appeared first on Economy and Markets.

Gold’s Line in the Sand: Next Downside Target Is Around $700, Even if It Breaks Up First

[image error]Many analysts have been so excited that gold broke to new highs, above $1,262, in late February.

I was excited as well, but for a different reason.

I’d forecast that gold could bounce back just above the July 2016 highs of $1,373, to around $1,400 or $1,450.

And ANY bounce, no matter how high it went, would be a good place to get rid of any gold you’re still holding.

Get rid of it, you should because the precious metal is going down. All the way to $700 an ounce within a year or so, and ultimately likely down to $400 or $450.

Right now, both gold and silver are getting pretty overbought, so it’s a perfect place to unload your final store, and maybe even make a bet against the yellow metal. (We’re just minutes away from letting Boom & Bust subscribers now exactly how to make this play, so be on the lookout for that.)

There is a crystal clear and powerful trend line down through the major tops in gold… and the metal is now right at that line in the sand.

See for yourself…

So, here’s the rub.

If gold can’t break above this trend line pretty soon, it’ll likely head for its next major downside target between $650 and $750 in the next year or so.

However, if it can break convincingly above $1,300 then it’ll likely hit a new high above the bear-market-rally level of $1,373. I expect we’ll see something closer to $1,450. Such a move would still chart as just a broader bear market rally… it’s definitely not a sign of a new bull market as many gold bugs are claiming.

I see a similar pattern in silver.

Its downward sloping trend line starts in 2012, just before the dramatic crash in both gold and silver.

The recent silver rally is just approaching that trend line as well.

A break above $18.80 would give us targets of $22 or a bit higher.

But a failure to break this trend line in the coming weeks would suggest a strong break down to the next support level of around $9, from the late 2008 crash low (remember, silver lost 50% in a matter of months!).

Ultimately, silver’s bubble origin points to an ultimate low around $8. The worst-case scenario is that it goes back to the 2002 low of $5. That’s an 83%-plus crash from its April 2011 bubble high.

The steepness of the silver trend line is good if it holds, because when the metal finally does break above that we’ll know it’s put in a major bottom. That could be confirmed earlier than with gold.

Like gold, I think we could see silver hit a major long-term low by early 2020 as the commodity sector has led this bubble crash thus far and should be the first sector to come out of it.

That said, it’s not ONLY the charts that are signaling it’s time to get our (or bet against) these two metals…

When I look at the smart and dumb money silver traders on Cotbase.com, the large speculators (dumb money) are now record long on silver at 110,000 contracts, even though this has been such a minor rally since December.

The commercials (smart money) are record short, at -120,000 contracts.

This is a very bearish, contrarian sign and suggests silver will get hit harder than gold (again) on the next major slide.

Gold has a different pattern.

The smart money was record short -320,000 contracts and the dumb money record long, with 310,000 contracts at the top in July 2016.

Both have moved in the opposite direction ever since, with much more projected to come.

That tells me the rally from late 2015 was a bear market rally, not the beginning of a new bull market.

The next few weeks should be telling. This may be “last call” for selling precious metals… whether it’s now or several months ahead if we get a break-out above.

In the meantime, Boom & Bust subscribers are about to make a trade with a high upside and low downside risk if we do fail to break this line in the sand near term.

It doesn’t get better than this for a major trade.

Harry

Follow me on Twitter @harrydentjr

 

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When Nations Threaten War over Jello

You might’ve seen that Brexit became official about two weeks ago.

Fully nine months after voters decided in a referendum to leave the European Union, the British government made it official by filing the paperwork for Article 50.

But what you probably didn’t see was that the very same day, the government of Spain demanded that Britain return Gibraltar (which is on the Spanish coast but has been a British territory for 300 years).

Spain also suggested (wink, wink) that it wouldn’t actively block Scotland from joining the EU should it decide to break away from the United Kingdom.

In the diplomatic firestorm that followed, Britain threatened to go to war with Spain should that country decide to take Gibraltar by force, and it had a few choice words to say about Scotland too.

I couldn’t make this stuff up if I wanted to.

Less than one day into Brexit negotiations, two European countries publicly considered going to war.

Now, I put the probability of armed conflict between England and Spain at zero.

This is 2017, not 1704.

In any event, war would be embarrassing.

Watching two decrepit former colonial powers fight for the scraps of the empires they used to control is like watching two old men in a nursing home fight over the last cup of Jello.

But I bring this up to show you how truly unpredictable geopolitics has become and, by extension, the world of investing…

Now that the UK is leaving the EU, Scotland is likely to agitate for another independence referendum of its own, given that Spain has now said it won’t block Scottish admission to the EU. (Previously Spain had indicated it would block Scotland, fearing it would make its own separatists in Barcelona bolder.)

Now, it’s pretty likely that Great Britain is about to get hacked down to little England.

Yet British stocks, as tracked by the iShares MSCI United Kingdom ETF (NYSEArca: EWU), are trading at a multi-month high and the pound sterling has traded in a stable range since October of last year.

That’s crazy. But I have no interest in trying to outsmart this market because, frankly, you can’t outsmart something that’s irrational.

Instead of trying to play the macro game, I’m focused on getting paid in cold, hard cash. And these days, that’s remarkably easy to do.

Bond yields started rising around the time of the Brexit vote last summer and then really shot higher after the U.S. presidential election.

Yields have drifted lower since early March and have probably peaked for now, but their spike created some interesting opportunities for value hunters like me, particularly in real estate investment trusts (REITs).

When bond yields started rising last summer, REITs got absolutely hammered, dropping about 15% from their August highs to their November lows.

They’ve recouped some of those losses over the past five months but, as a group, they’re still underwater, even as the broader stock market has rallied to all-time highs.

The good news is that a basket of quality REITs currently yields a good 4% to 5%, which is far better that what’s offered in the bond market, at least without rolling the dice on a risky junk bond.

But in my Peak Income newsletter, I can do even better than that. I’ve found a way to buy a quality portfolio of REITs at a 9.5% discount to their market prices… and at a yield of 8.8%.

I have no idea when – or if – this discount will ever close. But I’m OK with that.

I’m buying an already cheap asset class at an additional discount and getting paid almost 9% in cold, hard cash while I do it. With pricing like that, I don’t have to get the timing exactly right. I can collect the dividend indefinitely until Mr. Market comes around to seeing things my way.

If you’d like to know more about finding opportunities like these, I recommend you give Peak Income a try. While I love REITs at current prices, there are plenty of other asset classes that look every bit as good and, in some cases, pay even higher yields.

Give it a look, and see for yourself.

 

 

 

Charles Sizemore

Boom & Bust Portfolio Manager

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The Fed Must Be Reading Us

It’s too much of a coincidence. Fed officials must be reading our work.

OK, they don’t really have to be… but if they don’t, they should.

It’s not that we deserve credit for what comes next at the Fed, but I was glad to read the details last week in the nitty-gritty of the Fed’s minutes of its March meeting. (You would’ve had to have read it there; Fed chair Janet Yellen didn’t talk about it at all in her post-meeting press conference.)

The big news in the fine print? Fed officials have discussed reducing their balance sheet, maybe later this year, and by not reinvesting bond proceeds.

This is the exact topic of the April issue of our flagship monthly newsletter, Boom & Bust, which we sent to subscribers earlier this month.

We’ve talked plenty about this. All the quantitative easing the Fed did since the 2008 and 2009 crisis will eventually hit the economy in a variety of ways.

Not the least of which is the $225 billion worth of Fed-owned U.S. Treasury and mortgage-backed bonds that will mature within one year, and another $1.24 trillion that’ll come due in the next five years.

Now it’s time to find out what will happen on the back-end of all the QE.

I can’t stress this enough. QE lowers interest rates as central banks buy bonds, but the distortion doesn’t end there. When banks use the new round of cash to make loans (which has NOT happened here yet), we get another distortion. And when the central bank finally purges all the bonds from its balance sheet, we get another artificial force in the economy. This is the one that’s on the table.

Ideally, the Fed wants to bow out as gracefully as possible, creating little ripples in the markets instead of huge waves.

Should the Fed choose not to reinvest the trillions of bond proceeds and instead builds a cash position – which is the approach they’re talking about taking as early as this year – a couple things will happen.

By law, the Fed can’t hold on to an “excess cash” balance. They send the extra to the U.S. Treasury.

Think about this for a second…

That’s about $1.5 trillion worth of cash that could land directly on President Trump’s desk. It would be a gift to use on … well, anything, including infrastructure, as I suggest in the current Boom & Bust.

Build a wall! Build a bridge! Repair a dam! Replace the air-traffic control system!

Those are the cries from the White House, calling for repairs and renovations to our nation that will also create jobs.

We’ve been down this road, of course.

In 2009 we passed the American Recovery Act, pledging $800 billion for infrastructure spending and job creation. Later, Congress added the language, “or to maintain jobs,” to the details. But who’s keeping track?

We handed hundreds of billions of dollars to states, which used the funds to pay first responders, teachers, and other workers. But we didn’t build or renovate much of anything – certainly not $800 billion worth of anything.

But we did accomplish something. We added almost $1 trillion to our national debt.

In his first speech to a joint session of Congress at the end of February, Trump reiterated his plan for massive infrastructure spending. He also announced a massive tax cut aimed at the middle class.

The two ideas are at odds, unless we either divert funds from other sources to pay for the infrastructure, or earmark the gift money that the Fed sends the government for that purpose.

Then, this would happen without raising taxes.

Or cutting spending somewhere else.

Or adding to our already outrageous national debt.

Now, this stack of cash would be a tremendous artificial force in the economy that would pull us away from our natural, deflationary direction, as Harry and we, of course, say is happening. It would do nothing to change the demographic forces that are keeping economic growth low and holding back productivity.

If the government were to take this tack, it would cause inflation in goods and services used in construction. But with a $20 trillion economy, it’s highly unlikely any such gift would cause even strong inflation across the board.

But it’d be a gift nonetheless, and the time seems right.

Apparently, the Fed seems to think so too.

Hey, Chair Yellen and company… thanks for reading!

Rodney

 

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How to Stretch Your Retirement Dollars

One thing I’ve enjoyed over my many years is overseas travel. I’ve been able to satisfy my attraction to very different foreign cultures.

At the same time, I’ve taken advantage of the affordability of life in multiple paradises, from Phuket to Cape Town.

When I was last in Bali, I advised the kids to wait until the last possible minute to exchange their dollars for baht, as the local currency was crashing.

When I was last in Cape Town, I was able to exchange R5.5o for a dollar. The ratio is now 14-to-one… and I thought things were affordable back then.

Get this: I once visited the house of a Bangkok-based art dealer. He had a nice, hip house, and he employed a decent-sized staff, including a driver, a cook, and a few maids. He lived like a king, likely on something around $100,000 a year.

How’s that possible?!

Well, that hundred thousand in Thailand is the equivalent of something like $400,000 in the good, old U.S. of A.

In Phuket, the cost of living for an everyday person is 33.5% of that in New York. The same measure in Chiang Mai, to the north, is 28.4%.

Friends of mine who just got back from a month in Puerto Vallarta were able to hang out there for a very low cost. You’d be amazed at how nice, beachy, and mountainous that area is.

Of course, the cost of living down there on the Bahia de Banderas is just 22.7% of the everyday New York nut.

That means a dollar goes just over five times as far.

Click here to see larger image

My primary reference points for this table are indices from Numbeo that are global and look at the everyday cost of living plus rent, not the high end. This is what it costs an ordinary person to get by, not what it takes to luxuriate in the ritziest resort communities.

For a more civilized area, Spain is more affordable after its real estate bust that started in 2008 (and is still ongoing). I just had a friend come back from there, and he loved it.

There are smaller, more affordable cities on the Iberian Peninsula, including Valencia, Malaga, and Seville on the south side.

Valencia comes in at 36.2%.

I personally liked Madrid more than Barcelona, and it’s only 45.2% of the cost to live in the typical world-class city.

Cape Town is still one of my favorite cities in the world; costs there are likely overstated in U.S. currency that’s now so favorable. The city is also world class, with much less crime than Johannesburg. It’s surrounded by a great wine region and has killer beaches. The South Beach models have flocked there.

Some of the top Caribbean destinations, including my new haunt, San Juan, offer many tax advantages on top of their incredible natural, tropical beauty.

The costs here are similar to the U.S. – except housing is much cheaper. Prices there have drifted lower since 2006, while U.S. home prices have rebounded. That’s why it scores 49.8% on the cost of living index!

Sounds about right to me.

My condo is just a quarter of the price of a similar one in South Beach, where I used to live.

Costa Rica is a nice, all-around place to live and is only 40.9% the cost of New York.

And then there’s Panama City, another popular tax haven, with an index rating of 51.2%.

But with all of that said: Where would I live if I were not tethered to my business and time zone?

Sydney, Australia.

Now we’re starting to get more expensive, at 76.9%. But that’s still considerably less than it costs to live in New York, despite very high real estate prices. Meanwhile, the Gold Coast has better weather year-round and is very nice at a cost of only 58.0%.

Mexico is the most affordable, with many attractive cities from Cancun to the Mayan Riviera to Puerto Vallarta to Cabo St. Lucas to San Miguel. Cancun comes in at an index of a mere 23.9%.

And, finally, there are a number of extremely livable cities in South America, starting in Ecuador and Peru and ranging down to Argentina, Chile, and Uruguay, where you’ll encounter more European-leaning cultures.

Uruguay is the leading-edge hide-out down there, especially its pristine beach areas such as Playa del Barco and La Pedrera.

Moving overseas is not for everyone.

But it’s sure working well for me in Puerto Rico.

I have the best of both worlds, with a condo in the hot area of Condado in San Juan and a very remote island place just a 30-minute plane ride away from a small airport that’s a mere four minutes from my door.

And that short island hop is unimpeded by crazy security requirements.

That’s all part of the lovely lower cost of living.

You should consider it.

Harry

 

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Stop Reading the News!

I used to work for a hedge fund manager who was obsessed with reading news on his Bloomberg terminal. He’d brag about reading “hundreds” of news stories before anybody else had even rolled out of bed.

To him, more information made him feel smarter and more skillful at trading foreign currency markets, which are notoriously news-driven.

That may have worked for him. But I think the average retail investor does worse with their investments the more they read the news.

That should be troubling to you, because there’s been no time in the history of man when access to information and data has been greater. And while advancements in Internet access and information availability have benefitted societies in many ways – it hasn’t all been good.

Overconsumption has become a big issue.

Think of it this way…

You’ve heard the saying, “The dose makes the poison.” Basically, anything can be a poison if consumed in large enough quantities. Alcohol. Chocolate. Coffee. Oranges. A little is nice. Too much is poisonous.

The same goes for information, which is why I’m recommending today that you immediately stop reading the news!

And I’m not the only one saying this…

In an opinion piece entitled Want to Really Make America Great Again? Stop Reading the News, Ryan Holiday opened up about the agony he felt from his gluttonous consumption of news (mostly political in nature, given the extraordinary presidential election).

Two key points stood out to me…

First, Mr. Holiday described the mechanism by which information overload has now become the norm. In his words:

In the 1990s, political scientists coined something called the CNN Effect. The basic premise was that a world of 24-hour media coverage would have considerable impact on foreign and domestic policy. When world leaders, generals and politicians watch their actions – and the actions of their counterparts – dissected, analyzed and speculated about in real time, the argument goes, it changes what they do and how they do it… much for the worse. [emphasis added]

Think about that!

Around-the-clock access to news – and dissections and analyses of that news – is thought to affect the decision-making process of world leaders. That’s pretty scary, if you ask me!

It’s even scarier in light of the flurry of bad news over the last month, from the Syrian chemical attack to President Trump’s retaliation strike, to Putin’s condemnation of the U.S.’s strike, to the terror attack in Sweden just last Friday!

What’s more, the CNN Effect leads to another problem for ordinary people. Mr. Holiday further explains the “narcotizing dysfunction,” which simply means “paralysis by analysis.”

He says, “… the narcotizing dysfunction attempts to explain why highly informed citizens are often surprisingly inactive politically. The answer is that they confuse reading, thinking about chatting about issues (i.e. “consuming”) with doing something about them.”

The idea of “paralysis by analysis,” and the overconsumption of information, is two-fold.

For one, the simple act of analyzing an issue, or problem, gives people the feeling that they’ve done something to address it – even if they’ve done nothing more than lie in bed with their iPad and read about it.

Second, having access to more information is not the same thing as knowing the best thing to do with that information.

In fact, in many instances, having more information can make decisions and action more difficult.

We either can’t separate the important information from the noise… or we’re exposed to too many views and alternatives, making it tough to choose which is best.

Longtime readers know I routinely warn against reading too much news.

Not long ago, I talked about how Warren Buffett’s greatest strength is discipline, not genius – and how he, and other successful money managers, maintain discipline with their strategies, largely by ignoring the news.

I’ve also likened my relationship with the 24/7 news cycle to the temptation motorists feel to “gawk” at car accidents on the interstate. I’ve said, “I glance [at the news]… only because it takes too much effort to fight the urge. But then I quickly turn my focus back to the road ahead.”

You see, I’m not telling you to stop reading the news completely. That’d be a little extreme.

But I am warning you that there is such a thing as too much information. And since the 24/7 news outlets are incentivized to fill airtime, increase page clicks and sell advertising, it’s easier than ever to get too much bad information.

At the end of the day, I know you’re still going to read the news. I will, too.

But do yourself a favor: limit your consumption, take most of it with a grain of salt and don’t look to CNBC for your next “hot” investment recommendation.

Dent Research offers a number of data-driven (and news-ignoring) investment strategies, including my own Cycle 9 Alert. It will keep your focus on actionable investment opportunities and off the news cycle.

 

 

 

 

Adam O’Dell

Editor, Cycle 9 Alert

Follow me on Twitter @InvestWithAdam

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