Moving Closer to a Bear Market Warning
Venezuela plunges deeper into crisis... One of the biggest devaluations in history... Why we continue to recommend gold and silver... Moving closer to a bear market warning...
Things are going from 'bad' to 'worse' in Venezuela...
Longtime readers know the country has been spiraling toward an inflationary collapse for years. In fact, it was more than two years ago that our colleague Steve Sjuggerud noted Venezuela had crossed a rare milestone: The country's government was so broke, it was struggling to pay for the paper to print more money. As he explained in
Venezuela's currency is worthless... If you trade one U.S. penny for 10 Venezuelan bolivars, you're getting the worse end of the deal.
Specifically, right now, one U.S. dollar will get you 1,100 bolivars. (Tomorrow, it might be closer to 1,200 bolivars.) So if you want to deposit $500 U.S. dollars into the bank today, then you will need 550,000 bolivars.
Amazingly, Venezuela's largest bill is 100 bolivars – which is less than $0.10 in the U.S. You would need 5,500 of Venezuela's largest bills to deposit the equivalent of $500 U.S. dollars in the bank... Because Venezuela's largest bill is only worth less than $0.10 in the U.S., Venezuela has to print A LOT of bills. And this is where things get REALLY crazy...
Yesterday, Bloomberg reported that Venezuela is "now so broke that it may not have enough money to pay for its money"... At this point, the international companies that print money are tired of printing money for Venezuela... They either aren't getting paid on time, or aren't getting paid at all.
Unfortunately, the situation has deteriorated even further since...
Inflation continues to accelerate. Consumer prices are currently rising at an annualized rate of roughly 100,000%. And where before you could exchange 1,100 bolivars to get one U.S. dollar, as of last week, it would take an incredible 285,000 bolivars to do the same.
The result has been widespread suffering for most Venezuelans. According to a study published earlier this year, more than 90% of the country now lives in poverty... and hunger is so widespread, the average Venezuelan reported losing 24 pounds last year. It's so bad that some have reported even turning to "hunting" dogs, cats, and pigeons to survive.
Yet, as we've seen time and again in other socialist-created nightmares, President Nicolas Maduro's government has continued to "double down" on the same failed policies that created this crisis in the first place. And over the weekend, it made its most extreme move yet. As Bloomberg reported...
Maduro carried out one of the greatest currency devaluations in history over the weekend – a 95% plunge that will test the capacity of an already beleaguered population to stomach even more pain.
One likely outcome is that inflation, which already was forecast to reach 1 million percent this year, will get fresh fuel from the measures... The official rate for the currency will go from about 285,000 per dollar to 6 million, a shock that officials tried to partly offset by raising the minimum wage 3,500% percent to the equivalent of just $30 a month...
Maduro's new strategy for managing the economy is a desperate response after years of disastrous policies that undercut growth, sent prices soaring and turned what had once been one of Latin America's wealthiest countries into a dysfunctional nation that's spawned a refugee crisis.
Yes, you read that correctly: The average Venezuelan lost another 95% of whatever meager savings he still had left... virtually overnight.
As we like to say, the history of socialism is 'untarnished by success'...
Socialist countries eventually collapse for the simple reason that everyone cannot live at the expense of his neighbor indefinitely. Venezuela is just the latest proof of this fact.
We aren't predicting a similar crisis in the U.S. in the immediate future. But you'd be foolish to believe that it couldn't happen here. If the U.S. government continues on its current path, a similar outcome is all but inevitable.
Of course, this is just one of the reasons we continue to recommend holding a portion of your hard-earned savings in physical gold and silver bullion... the ultimate form of savings that no government can debase.
In the meantime, our major 'get out' warning for stocks is getting closer to flashing...
We're referring to the U.S. Treasury yield curve. As regular readers know, this measure has been a powerful "leading indicator" for both stocks and the economy over the past several decades.
In short, whenever the yield curve has "inverted" – that is, when the "spread" between long-term and short-term interest rates has fallen below zero – bear markets and recessions have predictably followed several months later.
This is why both Porter and Steve Sjuggerud have been watching the yield curve closely.
When we checked in on this measure last month, it had just narrowed to a new post-financial crisis low...
The most widely followed spread – the "2-10" spread, representing the difference between the yields on 10-year and two-year Treasury notes – had fallen to just 0.24%.
We received a respite soon after. The 2-10 spread widened back above 0.30% over the next few weeks. But it didn't last long. Spreads have been narrowing again for most of this month. And as you can see in the following chart, it just fell to another new low below 0.23% today...
At this rate, we could see inversion before the end of summer.
Again, this is concerning – but it is not a reason to panic.
As we've discussed, this signal will not be officially triggered until (or unless) this spread moves below zero. We're getting closer, but we're not there yet.
More important, as Steve Sjuggerud has explained several times, it isn't an immediate sell signal. In the past, the market hasn't peaked for another six to 18 months... which means you should have plenty of time to get out of stocks safely.
We'll keep you posted. For now, our advice remains the same: Stay long, but stay "hedged"... And keep a close eye on your trailing stops, just in case.
New 52-week highs (as of 8/17/18): Apple (AAPL), Automatic Data Processing (ADP), Becton Dickinson (BDX), Blackstone Mortgage Trust (BXMT), Fidelity Select Medical Technology and Devices Portfolio (FSMEX), Ingersoll Rand (IR), and Viper Energy Partners (VNOM).
In today's mailbag, several subscribers share their thoughts on Doc Eifrig's must-read Friday Digest essay. Send your comments and questions to feedback@stansberryresearch.com.
"Doc, great article. I sat my four grandkids down and read it to them. I confiscated all devices for the reading. I don't know if they heard it, but the seeds are planted." – Paid-up subscriber Richard S.
"I saved on average 38% of my earnings, starting when I made 12,600 in my first job, ending with a gross income of over 350,000, 35 years later. Moral: save at all occasions no matter what you make.
"I buy only previous owned autos, moderately priced clothes, took vacations when I had the cash in hand, enjoyed what was free or
"At all levels in work, I always tried to outperform my peers and always sought the work/jobs no one else wanted to do. And I did them well. Moral: be industrious, consistent and be the early worm.
"My family always came first. I tried to make all
"So today, live in a million-dollar house fully paid for, have two very successful kids who are great citizens of the world, been happily married only once to the same woman for 40 years and have multiple millions in the bank available for anything I wish, in addition to a mid-level 6 figure pension. No one looks after you better than yourself. Amen." – Paid-up subscriber David A.
"Really enjoyed Doc's suggestion: For folks looking to help your grandchildren out with college, invest a few thousand dollars when they're born, let it compound for 20 years, and you'll be the world's best grandparents come college time.
"When each of my 3 grandchildren
"My 24-year old grandson now understands the importance of having an automatic withdrawal from his GI paycheck going into a Roth IRA while he continues his college education. A 22-year old granddaughter who already has some student loan debt has been working to begin paying it off while still in school and also knows she needs to be setting up a savings plan. The 19- year old granddaughter just graduated high school and is just beginning to learn that 'spending for immediate gratification' isn't such a good idea. They each have always known they have a small portfolio of stocks and, hopefully, 
"Doc, no secrets on my end. Just a note of sincere gratitude for your tireless work to help the rest of us. You present things in such an easy to understand
Regards,
Justin Brill
Baltimore, Maryland
August 20, 2018