The U.S. Inches Closer to War
An update on Sjug's favorite trade... The 'one-way bet' is still in place... The U.S. inches closer to war... 'A tax hike the American people don't need and can't afford'... A simple way to make more money with less risk...
Back in November 2016, Steve Sjuggerud said Japanese stocks were a 'one-way bet' higher...
At the time, Japan's policymakers were worried the country was sliding back into deflation.
To prevent that from happening, Japan's central bank – the Bank of Japan – promised to drive inflation higher at any cost. In short, the BoJ "doubled down" on its previous stimulus efforts... slashing interest rates even further and ramping up its massive quantitative easing program. And it promised to continue these efforts indefinitely until inflation rose above its long-term target of 2%
As regular Digest readers may recall, Steve believed this would create a huge tailwind for Japanese stocks. And so far, he has been exactly right... Japanese stocks are up more than 20% since that call.
But last week brought an unexpected twist to the story...
During
"Right now, the members of the policy board and I think that prices will move to reach 2% in around fiscal 2019. So it's logical that we would be thinking about and debating exit at that time too," [Kuroda] said...
With the Federal Reserve already raising rates and the European Central Bank debating normalization, Kuroda has been under increasing pressure to provide details on when the BoJ may follow suit. While the outlook for prices and the economy have pointed for quite some time of the need to mull an eventual exit, Kuroda's acknowledgment of this is significant.
To be clear, Kuroda didn't say the bank would necessarily end its stimulus at that time... and he reiterated his commitment to "overshoot" its inflation target. But the market didn't care... The Japanese yen surged higher, while benchmark Nikkei 225 Index plunged nearly 3%.
What does this mean for Steve's thesis?
Is the boom in Japanese stocks running out of steam? Is it time to get out of this trade?
Steve says absolutely not. As he explained in our free DailyWealth e-letter on Monday...
The thing is, Kuroda doesn't just want inflation to reach 2%. He specifically wants to dramatically overshoot that 2% target. And even when he spoke last week, he said that this "overshooting commitment" is still in place.
Japan is nowhere near overshooting 2% inflation. And it won't be in 2019, either.
Long story short, Kuroda ain't doin' nothin'... The one-way bet is still in place. Buy Japanese stocks.
But Steve isn't alone...
You see, Kuroda himself confirmed this less than 24 hours later. As Bloomberg reported yesterday...
Governor Haruhiko Kuroda made clear on Tuesday that while the Bank of Japan may find itself thinking about exiting monetary stimulus in the 2019 fiscal year, this doesn't mean it will actually be doing it then.
"Right now, it's too early to debate what tools we should use, and what kind of pace we should take," he said on Tuesday... "I said that we would be discussing how to move forward with exit. I never said we would be exiting immediately in fiscal 2019."
Japanese stocks remain one of Steve's top recommendations today... And his favorite way to own these stocks is still a strong "buy" in his True Wealth portfolio.
True Wealth subscribers can find all the details on this opportunity in the January issue right here. If you're not already a True Wealth subscriber, you can get instant access with a 100% risk-free trial. At just $199 for an entire year, there is no better value in the industry. Click here to sign up now.
Here in the U.S., fears of a potential 'trade war' continue to rise...
Last Thursday, President Donald Trump announced a plan to impose tariffs on steel and aluminum imports. He said the tariffs of 25% for steel and 10% for aluminum would apply "broadly" and "without quotas" to all U.S. trading partners.
The proposal was immediately opposed by congressional Republicans, as well as several members of the president's own administration. This led many to believe that Trump would ultimately reconsider the move.
However, news last night that Gary Cohn – the president's top economic adviser, and one of the plan's biggest critics – was stepping down, has changed that. As the Wall Street Journal reported...
During his time at the White House, Mr. Cohn oversaw a major revamp of the U.S. tax code and pushed a significant rewrite of financial rules. But the former Goldman Sachs Group Inc. executive stumbled in an uphill and monthslong fight to sway Mr. Trump against the tariffs.
Financial markets have seesawed in recent weeks, first on the prospect that higher federal budget deficits approved by Mr. Trump might boost inflation and interest rates and more recently because of his desire to start a "trade war."
Mr. Cohn's departure could further rattle investors. Though not universally well liked on Wall Street, Mr. Cohn was widely admired for his market savvy and his pro-trade world view, which many traders and executives share.
Now, we can't say if Trump will follow through with this plan or not...
Perhaps the threat is merely a negotiation tactic meant to pressure more favorable terms with our trading partners, as the president himself has hinted. But we see a few reasons for concern should he follow through...
First, the plan is unlikely to meet its objectives.
You see, Trump is right about one thing... the U.S. steel and aluminum industries have been decimated. Data from the American Iron and Steel Institute and the Aluminum Association show these two industries employ just 300,000 Americans in total today. That's less than 0.1% of the U.S. population.
Tariffs or not, that's unlikely to change anytime soon.
Despite the rhetoric, not all of these job losses can be blamed on outsourcing. For example, the U.S. steel industry has shed roughly 80% of its jobs since its peak in 1953. Yet, U.S. steel production has fallen by less than half.
Meanwhile, companies that have outsourced jobs still have little incentive to bring those jobs back. And it would take decades to rebuild that capacity even if they wanted to.
In other words, only a small number of Americans would benefit, while the rest of us would bear the costs...
And they could be significant.
Why? Because higher steel and aluminum prices don't just mean higher profits for the companies that produce these materials... they also mean higher costs for any companies that use these materials in production.
These companies have two choices: Take the hit to earnings, which could lead to job losses in other industries... or pass these costs on to consumers, in which case you can expect to pay more for items ranging from new cars and trucks to beer and canned goods.
In other words, these tariffs would be little more than "a tax hike the American people don't need and can't afford," as Utah Sen. Orrin Hatch put it on Monday.
That is bad enough...
But the real risk is that these moves trigger retaliation from our trading partners.
In fact, the European Union ("EU") is already preparing to enact its own tariffs on several U.S. products if Trump's plan is imposed. As Bloomberg reported...
Targeting 2.8 billion euros ($3.5 billion) of American goods, the EU aims to apply a 25% tit-for-tat levy on a range of consumer, agricultural and steel products imported from the U.S. if Trump follows through on his tariff threat, according to a list drawn up by the European Commission and obtained by Bloomberg News...
The list targets imports from the U.S. of shirts, jeans, cosmetics, other consumer goods, motorbikes and pleasure boats worth around 1 billion euros; orange juice, bourbon whiskey, corn and other agricultural products totaling 951 million euros; and steel and other industrial products valued at 854 million euros. The Brussels-based commission, the EU's executive arm, discussed the retaliatory measures with representatives of the bloc's governments at a meeting on Monday evening.
Europe may expand the group of targeted American goods should Trump also follow through on a related pledge to impose a 10% duty on foreign aluminum. The list obtained by Bloomberg on Tuesday relates only to steel countermeasures.
If Trump expands these tariffs to include Chinese imports as well, the fallout could be even worse...
China isn't just one of the biggest producers of U.S. consumer goods – which again, means the prices you pay for almost everything would likely go higher – it's also one of the biggest holders of U.S. Treasury debt.
As we've discussed, the federal deficit is expected to soar over the next few years. The Treasury will need to issue a ton of new bonds. Meanwhile, the Federal Reserve – the largest buyer of Treasury debt over the past decade – is now selling. Large foreign buyers – led by China – will be needed to keep rates from soaring.
China knows this, too... If push comes to shove in a real trade war, this situation could get ugly quickly.
One last thing...
Regular readers know we expect stock market volatility to rise in the coming months.
Tariffs or not, we expect this uncertainty will only make it worse... This means there has never been a better time to learn how to make volatility work in your favor.
Tomorrow night, Dr. David "Doc" Eifrig will be demonstrating a simple strategy that anyone can use to do just that. And Doc says this strategy works even better – generating bigger returns with less risk – the higher volatility moves.
Again, this live demonstration is absolutely free for Stansberry Research subscribers. Simply click here to reserve your spot now.
New 52-week highs (as of 3/6/18): Amazon (AMZN), Arch Coal (ARCH), First Trust Nasdaq Cybersecurity Fund (CIBR), CME Group (CME), Intel (INTC), MercadoLibre (MELI), MarketAxess (MKTX), Match Group (MTCH), and ProShares Ultra Semiconductors Fund (USD).
In today's mailbag, a touching note from a longtime subscriber... and confusion about Porter's must-read Friday Digest. As always, send your questions, comments, and criticisms to feedback@stansberryresearch.com. Good or bad, we read them all.
"I, Paul, have been reading your Digest emails for over 4 years now, and your long-term wisdom is hard to question. I am convinced that I will soon trust you with a good portion of my investment capital. Your personal stories
"I have been self-employed since 1990, in the Construction and Concrete business, and at almost 61, will be gracefully moving into another phase of my life soon. I come from a large family, 11 of us kids, 30
"I want to set up a stable 'generational' investment Trust Fund to last for 100's of years for my Dad's descendants and will need help with my overall strategy. My first job was to figure out who I wanted to 'trust,' and I have come to the conclusion that you are 'trustworthy.' Trust this letter gets thru to you, let me know if you get it. Thanks." – Paid-up subscriber Paul E.
"It's interesting that Porter points out the flaws with Berkshire Hathaway while Doc has it rated a Strong Buy. How does that work? It can't be a safe retirement investment at the same time it contains such risks. So which is it?" – Paid-up subscriber Pat R.
Porter comment: Pat, I think you've badly misunderstood what I wrote.
What I said was that Berkshire Hathaway isn't likely to beat the S&P 500 going forward. For retired investors, this may or may not matter.
I didn't write anything about Berkshire being risky.
"Well... Well! Porter got some cheers from his subscribers by taking on the Oracle of Omaha. Porter's analysis, while good, said nothing firm or quantitative about where [Berkshire] might be headed.
"Beating up on a couple of guys like Warren and Charlie in their 90's is fun for you eh Porter? What absolutely perplexes me is why you didn't go the extra few yards and speculate on the future mistakes ole Warren and Charlie will make with their $116 billion in cash. Let's see... hmm... Utilities, Railroads... and maybe more Airlines (LUV)? Why didn't you take a swing at that fat pitch?
"Good article though, much better writing than that terrible blithering tirade a few months back about going out of the publishing business. With this Buffet-bust, you are back in publishing.
"Why don't you do what that other dumb ass did a few years ago and bet Warren $1 million that he will screw up and not beat the S&P 500, or even better yet, not even beat your new Stansberry Portfolios?
"Now, there is something that might get you PR for your new Bloomberg trading station... Come one, come all... help us beat ole Warren and Charlie's ass... before they retire or die!
"You are always entertaining Porter. Again, good article but, you really did not tell us much other than ole Warren and Charlie are losing the magic touch... at 90+. Most of us will be pissing in a diaper and watching FoxNews 24x7 if we live that long at 90+, and not meeting capital efficiency expectations either.
"I still take Steve and [Doc] more seriously, but this was a fun read, keep up the publishing you so want to quit." – Paid-up subscriber David R.
Porter comment: I was very clear about where I believe Berkshire is headed. Did you read what I wrote?
"Fair challenge. I will re-read. My first pass did not leave me with any clear takeaways on where BRKA/BRKB is headed, but I will check it out again. I did clearly take away your critique of Warren (and Charlie's) investment 'soundness of thought,' however.
"Look, Warren and Charlie both have been good for this world. Nobody stands above criticism of course, but these guys have done far more good than bad... especially when it comes to investing money.
"Practically, Ajit Jain and Greg Abel may not
P.S. I know this is not Porter btw... So, again, I will re-check Porter's article one more time, but I think your boss could find much better targets to critique than these old guys in the winter of their careers.
Porter comment: Actually, it is Porter. Your cynical belief that this must be an employee responding is a reflection of your own personality, not my unwavering commitment to our subscribers.
And what I said was that Buffett has drastically changed Berkshire's investment style. As a result, Berkshire is no longer beating the S&P 500. (It has underperformed over the last 10 years.) The biggest problem Berkshire faces isn't merely that Buffett isn't picking great stocks anymore, it's that it faces very large and growing capital obligations to regulated utilities and its railroad. In total, Berkshire has now spent more than $100 billion in
These investments make it virtually certain that Berkshire will no longer routinely beat the S&P 500, despite the incredible growth of its insurance float.
To my knowledge, no other journalist has pointed out these facts before.
This leads to a serious question: Why doesn't Berkshire begin to pay a dividend?
Or, barring that solution: Why doesn't Berkshire spin off its utilities and its railroad into a new public entity that will pay a dividend?
As Buffett himself preached to his shareholders for 40 years, if a CEO can't beat the S&P 500 over a rolling five-year period, he's not doing a good enough job.
Where's that self-evaluation today? Where's any discussion of the regulated businesses or in the railroad's total inability to
No question, Warren
But why have they abandoned so much of what made them great for so long... and why isn't anyone else asking these questions?
Regards,
Justin Brill
Baltimore, Maryland
March 7, 2018