Never Trust an Economist's 'All Clear' Signal

Turning the page on a decade of many new highs... Never trust an economist's 'all clear' signal... Goldman Sachs sings its golden oldie again... Stumbling onto a speech by an ex-Fed president... The one and only path to defeating these folks... Education is no substitute for experience... Join Porter, Steve, and Doc next week...

2019 was one for the record books...

The S&P 500 finished the year 28.9% higher than it started. It was the benchmark stock index's best yearly performance since its 29.6% gain in 2013.

The year and the decade saw many highs...

The S&P 500 made 35 new all-time highs in 2019, capping a decade with 242 all-time highs. It was second only to the 1990s, when the S&P 500 made 310 new all-time highs, according to Twitter pundit and Compound Capital Advisors CEO Charlie Bilello.

With new highs come optimism, a feeling of strength... and predictions of even greater things to come. And as if on cue, one of the country's biggest investment banks is channeling Irving Fisher...

Fisher was the economist who said in October 1929 that the U.S. stock market had reached a "permanently high plateau." Of course, as we know now, the Dow Jones Industrial Average crashed starting about a week later and bottomed out 80% lower in July 1932.

The Fisher episode and general disdain for most economists has led me (Dan Ferris) to believe that...

No forecast is more dire than an economist's 'all clear' signal...

I'll go a step further: The better the economist, the worse the sign.

Fisher was called "this country's greatest scientific economist" by Austrian economist Joseph Schumpeter (of "creative destruction" fame). Esteemed American economists James Tobin and Milton Friedman later echoed the sentiment.

In other words... The most optimistic forecast made by the greatest American economist in history presaged our country's worst economic nightmare ever.

Economists are academics who spend their lives publishing overspecialized, pseudo-scientific gibberish and flaunting their ignorance of the inscrutable complexity of trillion-dollar economies served by deep, liquid markets.

That's why they make perfect Wall Street shills...

Economists at big banks think they're like former NASA physicists who would predict the paths of approaching comets. These economists now seek to use the same math to predict approaching recessions.

But in reality, the complex math doesn't work out as well in finance. And in the end, a Wall Street economist is more like the petty thief who decided to make a more honest living by running a psychic hotline.

Two Goldman Sachs economists recently called the U.S. economy 'structurally less recession-prone today'...

William Shakespeare could not have found a better historical rhyme to Fisher's "permanently high plateau" description.

The investment bank's dynamic duo – Jan Hatzius and David Mericle – needed to at least give a nod to reality, while maintaining the ruse that the future will be just fine. So in their report, they assured us... "The prospects for a soft landing look better than widely thought."

Soft landing sounds pleasant enough, but what does it actually mean?

Does it mean folks will be happy about losing their jobs? That investors are so rich today they won't need the half of their wealth that will vanish in the accompanying bear market?

This tune is a Goldman Sachs golden oldie. In a December 2007 Barron's article, then-Goldman Sachs strategist Abby Joseph Cohen sang it well...

We expect the U.S. economy to show the strains of the deflating housing market and credit-market disruptions in early 2008... recession likely will be avoided, due to strength in exports and capital spending by corporations and government.

Cohen shared the mic with a Credit Suisse analyst, who commented in the same article...

Conditions for a hard economic landing – like slack in the labor market and weak balance sheets – are still largely absent.

The 12 "seers" – Barron's term, not mine – for that 2007 article predicted the S&P 500 would rise between 3% and 18% in 2008. A little more than a year later, the index was down nearly 40%... its worst annual performance since the Great Depression.

No recession. No hard landing. Right before it all fell apart.

My confirmation bias leads me to another Barron's article...

This one comes from 1946. With the Axis powers recently vanquished and U.S. Treasury bond rates scraping bottom, Barron's was confident in the Federal Reserve's ability to keep interest rates low...

The Federal Reserve Board has pledged itself to maintain the Treasury's low borrowing rates. Every important central bank in the world is following a policy of low interest rates. Easy money is not just a passing domestic fancy; it is a strong worldwide trend.

It seems like folks were as confident in the Fed's omnipotence 74 years ago as they are today.

Remember, low interest rates equal high bond prices... So in 1946, predicting low rates as far as the eye could see was the bond-market equivalent of Fisher's "permanently high plateau." Only this time, it was seen as permanently high because that's what the Fed wanted.

Just as stocks peaked around the time Fisher said they would never fall again, the bond market took no heed of the Barron's prediction. Bonds immediately went into a 35-year bear market that didn't end until 1981, when 30-year Treasury bond yields rose to 15%.

As I said in the December 20 Digest, I'm not making any predictions... I'm just amazed at how this drama tends to play out again and again over the decades – and even centuries.

And yes, it goes in both directions...

BusinessWeek – the precursor to Bloomberg Businessweek – famously touted "The Death of Equities" on its cover in August 1979. Stocks bottomed in 1982 and surged higher... Now, more than four decades later, through ups and downs, the total return of the S&P 500 (with dividends reinvested) is about 7,000%, according to Bloomberg.

I noticed the Goldman 'all clear' sign after I stumbled onto a speech by ex-New York Fed President William Dudley...

You may remember Dudley from his comments last summer, when he said the Fed should actively try to thwart President Trump, and "discourage further escalation of the trade war, by increasing the costs to the Trump administration."

Dudley gave the speech in January 2017 at the National Retail Federation's annual conference.

For years, I've been telling folks to accumulate cash rather than buy toppy-looking, overvalued equities. In his speech, Dudley advised the opposite... He argued that folks should borrow against their home equity and spend, spend, spend their cash.

He started by noting that most folks' "main form of wealth is human capital – the value of the wages that the household members can earn over the course of their lifetimes." But as Dudley lamented, "Human capital cannot always be credibly pledged as collateral."

Like most folks today, Dudley insinuated that he prefers spending future income in the present rather than saving current income for the future. Dudley contemplated a recent episode of debt-fueled spending with glee...

At the height of the [2000s housing] boom, annual consumption was being supplemented by around $400 billion in cash flow from debt, much of it collateralized by housing.

The rate of borrowing maintained pace with rising home values until the 2007-2008 crisis. Then, the whole thing reversed when it all blew up. That led to the opposite situation – still in place today – in which U.S. households spend about $200 billion a year to pay down home-related debt.

Dudley then pulled the typical Wall Street maneuver in his speech, breezing past the risks – so he can later say he mentioned them – before delivering the payoff (emphasis added)...

When and to what extent will households again start tapping home equity to fund their consumption?... We do not want to repeat the experience from the housing boom, but there are prudent ways for households to access their housing equity.

Dudley played to his audience of the country's retailers, threw them an official-sounding bone, and perhaps even telegraphed that the Fed can and will help (and hurt savers).

You have to wonder what he meant by "prudent ways for households to access their housing equity." There's only one way to do that, which for many folks is often less than prudent... Borrow against it.

Dudley and his friends want you to pull your income forward in time through borrowing, then spend it on Amazon or at your local Costco... maybe get yourself a set of "his and hers" Peloton bikes... visit your favorite vacation spot... or head over to the car dealer of your choice. That would create the kind of economic activity his government friends get paid to measure, which his TV friends get paid to read about on teleprompters.

It's telling that Dudley seemed disappointed in his speech that "human capital cannot always be credibly pledged as collateral." It certainly can...

But to do so, you must first spend less than you make and accumulate excess wages...

That's also known as savings.

It's a prerequisite for folks to accumulate enough capital to finance worthy pursuits like retirement income and entrepreneurial activity. Buying pallets of toilet paper at Costco, spending a week in Maui, and shopping at Whole Foods aren't supposed to be on that list.

Though Dudley is no longer a Fed president, he and the pair of economists at Goldman Sachs make their living by telling you there won't be a recession (or a hard landing) anytime in the near future... so by all means, keep borrowing and spending freely.

I know I shouldn't be shocked that a former Fed president encouraged folks to borrow against their home equity and spend it... but actually seeing it in print still shocked and disgusted me.

And as if he had been reading the two Goldman economists' report, White House trade advisor Peter Navarro chimed in during a CNBC interview on December 31...

During the interview, Navarro said he believes the Dow Jones Industrial Average will rise 12% to "at least" 32,000 in 2020. As if the ghost of Irving Fisher hadn't been sufficiently conjured up already, Navarro boomed... "It's going to the roaring 2020s next year."

I'm telling you about all these people in today's Digest so I can recommend you ignore them. They're not on your side... They're obviously working against you at every turn.

The one and only path to defeating these folks lies in a single, simple – yet emotionally difficult – practice...

Saving.

Believe it or not, back in the Pleistocene era, bankers used to think it was their job to encourage you to save.

I recently saw a 1963 bank advertisement for First Federal Savings and Loan of St. Petersburg, Florida... The full-page ad of nothing but text – titled, "The Pleasure of Walking Tall" – is an ode to savings. In part, it reads, "A man without savings is always running... A man with savings can walk tall."

Near the end, the ad quoted early 20th century cowboy comedian Will Rogers, who said, "I'd rather have the company of a janitor, living on what he earned last year... than an actor spending what he'll earn next year."

Rogers' quote conveys a simple message... Living beneath one's means – refusing to pull income forward by spending more than you earn through borrowing – is a virtuous act, revealing a sterling character.

On the other hand, the Wall Street and Fed economists are clearly responding to incentives to do what they do and say what they say.

It makes you wonder what kind of advice you'd get from someone who – as of last week – has no axe to grind...

And this expert has survived multiple bear markets, too.

Renowned trader Dennis Gartman has published The Gartman Letter for the past 30 years. While many Digest readers might not know his name, Wall Street does... According to Barron's, institutional clients paid as much as $500 a month for his unique trading ideas in the daily newsletter.

However, as of the end of 2019, Gartman is no longer publishing his letter. Now 69 years old, Gartman said he's tired of waking up at 1 a.m. to write each day's dispatch.

But he didn't go away quietly...

In a note announcing his decision to cease publication on December 31, Gartman said the coming bear market will "do real and perhaps severe damage to portfolios everywhere."

Gartman called the current market a "kid's market," an old expression that means the folks making the most money are too young to have ever seen a bear market. He said today's "kids" are "young, brash, utterly naïve, ill-educated, egregiously overconfident, neophyte-yet-fearless 'investors.'"

The old trader said education is no substitute for experience. And he added a simple piece of advice... "Don't follow anyone who hasn't been around for at least an entire cycle."

Take heart: Gartman isn't talking about us at Stansberry Research.

As regular Digest readers know, I met Stansberry Research founder Porter Stansberry and True Wealth editor Steve Sjuggerud during the dot-com boom in 1998. We've worked together ever since...

We've survived two huge bear markets and a slew of smaller – but still scary – episodes. We've all been investing our own money for decades. And I suspect we'll survive the next bear market – whenever it finally arrives – and thrive in the bull market that follows.

I hope you're around for that. It should be fun.

Speaking of Porter and Steve...

Next week, they're joining Retirement Millionaire editor Doc Eifrig for a live event you won't want to miss. It's the biggest night of the year for you and your money...

With 2020 upon us, and this historic bull market now into its second decade, you're likely wondering what's next. And don't forget... It's an election year, too. The winner between President Trump and his Democratic challengers could sway investors' decisions.

Porter, Steve, and Doc will sit down on Tuesday, January 14, at 8 p.m. Eastern time, to reveal all their thoughts on the financial markets heading into this pivotal year.

You'll hear what's next for Steve's "Melt Up" thesis... meet our newest guru, who has worked with the world's best living investors... see what a "bulletproof" 2020 portfolio looks like... and hear Porter, Steve, and Doc share their No. 1 favorite stocks for the year ahead.

This gathering has historically been our most popular live event of the year... It's free to attend. We only ask that you save your spot in advance. Get started right here.

New 52-week highs (as of 1/3/20): Huntington Ingalls Industries (HII), JD.com (JD), Lockheed Martin (LMT), Nordic American Tankers (NAT), New Pacific Metals (NUPMF), Nuveen Municipal Value Fund (NUV), Sea Limited (SE), and Splunk (SPLK).

The mailbag was quiet over the weekend. What do you think will be the No. 1 story in the markets this year? We'd love to hear your thoughts. As always, send your comments to feedback@stansberryresearch.com.

Good investing,

Dan Ferris
Vancouver, Washington
January 6, 2020