After 18 Years, It's Finally Here
After 18 years, it's finally here... Don't miss your chance to join us tonight... The 'Trump Trade' reversal continues... Trump holds his first official press conference... What to expect as Trump takes office... Small-cap stocks are getting 'frothy'... P.J. O'Rourke takes on the welfare state...
This is it...
We're less than two hours away from the biggest event in Stansberry Research history.
We hope to see you tonight at 8 p.m. Eastern time as we unveil our brand-new Stansberry Portfolio Solutions service.
This service was designed with one goal in mind: to take all the guesswork out of safe, profitable investing... so you can finally "get there" and reach your financial goals.
With Stansberry Portfolio Solutions, following our recommendations will be easier, faster, and cheaper than ever before. We can't wait to show you exactly how it works.
Porter, Dr. David "Doc" Eifrig, and Steve Sjuggerud will also be sharing their detailed outlooks for 2017, as well as their No. 1 investment ideas for the new year. Even if your financial "house" is already in order, you won't want to miss this exclusive presentation.
Be sure to visit www.StansberryLive.com at 8 p.m. Eastern time to watch the event.
The "Trump Trade" reversal continued today...
Following the President-elect's first official press conference on Wednesday, where Trump said less to clarify his proposals on taxes, trade, or fiscal stimulus than some analysts had hoped... pushing the dollar lower and bonds higher.
The U.S. dollar – which has soared following November's election – fell as much as 1% today, after falling 0.5% yesterday.
And bonds – which plunged following the election – continued to rally as interest rates fell. The yield on the benchmark 10-year U.S. Treasury note fell as low as 2.31% today. Yields have now declined nearly 30 basis points since peaking near 2.60% in December, and they could be headed lower still.
Precious metals also continued their rally. Gold rose as much as 1.3% to new eight-week highs. It's now up 6% since bottoming last month.
While Trump didn't say much about his general policy proposals, he again singled out two industries he has criticized before...
He criticized the cost of the defense department's F-35 program, causing shares of Lockheed Martin (LMT) and other defense stocks to sell off.
He also slammed the pharmaceutical industry again, saying companies were "getting away with murder" by overcharging for drugs. "Pharma has a lot of lobbyists and a lot of power, and there is very little bidding," he said.
Biotech stocks – as tracked by the iShares Nasdaq Biotechnology Fund (IBB) – fell nearly 3% before rebounding today.
If there was one takeaway from yesterday's press conference...
It's to expect more volatility.
We still don't have many details on what a Trump administration will look like. It's still unclear how many of his proposals he'll pursue... or how successful he'll be. It's also not clear what other industries or companies could draw the administration's ire in the future.
So we won't be surprised to see erratic market swings as more details emerge in the coming weeks.
If those details fall short of Trump's big promises, the recent reversal could accelerate as markets give back their post-election moves. On the other hand, if Trump is successful in pushing through his proposals, the next few years are likely to create more winners and losers among sectors, companies, and even countries than we've seen in recent years.
Yesterday, we highlighted the bearish speculative extreme in U.S. Treasurys and crude oil...
The latest data from the Commitments of Traders ("COT") report show that bearish speculative bets against Treasurys hit an all-time record last week.
Meanwhile, our colleague Ben Morris notes that bullish speculative bets on crude oil have soared, too.
Today, we note a similar extreme in U.S. small-cap stocks...
The benchmark small-cap Russell 2000 Index has dramatically outperformed large-cap stocks since the November election. It has soared more than 10%, compared with gains of around 5% for the S&P 500 Index...
This is logical... Smaller companies earn most of their revenues in the U.S., versus larger companies, which tend to have an international presence. And Trump's proposals to renegotiate trade deals and enact new taxes and tariffs would likely benefit domestic companies at the expense of those that do business abroad.
But the latest data suggest this trade is getting awfully "frothy," too...
According to the latest COT report for Russell 2000 Index futures, bullish speculative bets on small-cap stocks have also soared to new all-time highs. This suggests "dumb money" traders are as bullish on small caps as they've ever been.
U.S. stocks have been the lone holdout in the recent "Trump Trade" reversal.
For the past few weeks, the dollar has been weakening, while bonds and precious metals have moved higher. But stocks have essentially gone nowhere. Small- and large-cap stocks alike have been trading in a narrow range since mid-December.
This recent extreme suggests market-leading small-cap stocks could soon reverse lower, too.
New 52-week highs (as of 1/11/17): Apple (AAPL), American Express (AXP), Boeing (BA), Bank of Montreal (BMO), BlackRock Floating Rate Income Strategies Fund (FRA), PNC Financial Warrants (PNC-WT), and Shopify (SHOP).
In today's mailbag, another subscriber shares his 2016 results... And a sharp Stansberry Alliance member weighs in on yesterday's Big Trade update. Are you planning to join us tonight at 8 p.m. Eastern time? We'd love to hear what you think of the live event. Drop us a line at feedback@stansberryresearch.com. (Plus, be sure to read on after the mailbag for another great essay from bestselling author and Digest contributing editor P.J. O'Rourke.)
"Hello, after reading the report card for Stansberry's Investment Advisory (of which I'm a satisfied subscriber), I decided to check my own accounts to see how they performed. Almost all of my stocks are in tax sheltered accounts, and I love dividend payers (especially insurance companies!). All dividends get reinvested to maximize the compounding. From mid-August 2015 to the end of 2016, my accounts were up a little over 15%. My goal is to get 10-12% per year, so I'm happy with the results.
"My secret? Doing nothing! Well, almost nothing. I've been like most other small investors in that the more I trade, the worse my results get. I've become more disciplined about leaving things alone so they can grow. The only major change to my portfolio during this time was that I became a lifetime subscriber to TradeStops in early 2016. I used their risk rebalancer tool to modify my position sizes in my accounts, and I think the result was a VQ somewhere around 9%. On a day to day basis, my account balance will go up and down, but over longer stretches of time I see it growing consistently." – Paid-up subscriber Todd J.
"Porter, I realize that since Trump has won the election we are supposed to look at everything with magic glasses, because stocks are all going to go to the moon. Don't get me wrong, as a small business owner, I breathed a big sigh of relief when the other choice did not prevail. Obviously having a pro-business administration is superior than the continuation of a 'you did not build that' arrogant mentality. So a lot of businesses will do better, but every crazy over leveraged business is going to implode no matter what. If the economy goes into recession, then cash flows will suffer, and refinancing becomes tougher, which means defaults will increase.
"Conversely, if the economy heats up as everyone expects, the higher interest rates are not going to be just a headwind to debt-stuffed companies, but rather trying to refinance at higher rates will be the equivalent of hiding out in a tin shack with a CAT 5 hurricane bearing down. I've been watching LIBOR grind higher lately. The 3-month rate is now over 1% for the first time in years. As you know, this benchmark is commonly used in the world of high finance. Many years ago, I had a commercial real estate loan from Lehman Brothers that was tied to that index. When a loan like that resets higher, that's tough because it just happens and the only three things that can be done are pay the higher rate, maybe hopefully refinance (never quickly), or default. When I look at your 'Dirty Thirty,' I feel like we are watching the trailer of a slow-motion train wreck movie coming to theaters soon.
"I used to think in my younger days that the financial world was full of geniuses. I don't anymore. I feel like a passenger on a ship of fools. Macy's closes a hundred stores and the REITs exposed to that go up, because most stocks associated with real estate are going up, because wait... Trump is a real estate guy and will be real estate friendly. Have we really thought this out? Trump has experienced bankruptcy himself and he does not seem the type to protect some real estate industry players with financial problems caused by declining occupancy, or interest rate increases, or having to go through bankruptcy because that becomes the last choice available. That is just part of the real estate game. Plus, he gets it that real estate is not destroyed in default, it just passes hands to someone less leveraged. He has been through that on both sides and survived.
"So unless our new president has a time machine and would want to go back in time to stop executives from taking on debt that has to either be paid off or defaulted on, the disaster we are looking at of debt addicted junkie companies will be as many of your tribe says... it is absolutely inevitable but maybe not imminent. Keep beating the drum even though it falls on some deaf ears. Some are listening and are grateful." – Paid-up Stansberry Alliance member Robert R.
Regards,
Justin Brill
Baltimore, Maryland
January 12, 2017
A 'Thought Experiment' About Federal Entitlement Programs
What would happen if we got rid of all federal entitlements?
Now's a good time to ponder the fundamental purposes of the federal government. We have a change in presidential administrations accompanied by a shift in the congressional majority. There should be room for some fresh thinking.
Actually, given the track record of our federal government, we might wonder if anyone has been doing any thinking about its fundamental purposes.
In the interest of adding a little cogitation to the process of governance, let's conduct a "thought experiment." Let's think about just one of the purposes that the federal government has been put to – providing entitlement handouts.
Let's think about not doing that anymore.
The term "thought experiment" was coined 200 years ago by Danish scientist Hans Christian Ørsted, who discovered that electrical currents produce magnetic fields. You take a well-defined hypothetical and apply logic to discover what the outcome of that hypothesis would be. You ask, "What if?" Then you really wrap your head around the "if" part.
Thought experiments are an important intellectual tool of science. They're also an important intellectual tool of investment. For example, in June 2008, just as housing prices were starting to sag and mortgages were turning delinquent... Porter began asking "What if these loans keep going bad?" That's when he wrote the issue predicting... "Freddie Mac and Fannie Mae Are Going to Zero."
What if the U.S. federal government got out of the entitlement business? Why is it even in this business? Entitlement spending makes up 60% of the federal budget. The United States was not founded as a charity.
Where in the U.S. Constitution does it say that the purpose of the federal government is to take money from one group of people and give it to another group of people in order to make a third group of people feel good? (That third group being the kind-hearted folks who are always eager to help right society's wrongs – with somebody else's money.)
The economic upside to ending federal handouts is so obvious that even a bleeding heart economist with a column in the New York Times would notice it. (I'm talking to you, Paul Krugman.)
We take that 60% of the budget, set 10% aside to lower the debt and deficit, and give ourselves a 50% tax cut. A 19.8% top tax bracket! This is almost as good as living in Hong Kong (top rate 15%) except without having a communist dictator with the world's largest military force on our doorstep.
But what happens to people when the federal government stops giving them handouts?
First, let's talk about what doesn't happen. Some federal government entitlements are not handouts. Namely veterans' benefits. Here is a useful purpose for government. When our fellow citizens put themselves at risk to protect us (and are paid rather poorly for doing so), we taxpayers should pick up the tab for their medical care, retirement, and whatever else we've promised them.
Also, Social Security and the part of Medicare that's paid for by the Medicare trust fund aren't really handouts. People spend their whole working lives paying into these schemes that the government has the nerve to call "insurance plans." People rightly expect to get a return on their "involuntary investments."
We should get rid of Social Security and Medicare anyway.
But what will happen to the old folks? They'll get rich.
Social Security and Medicare should have been privatized long ago. The libertarian think tank, Cato Institute, has been studying Social Security and retirement healthcare privatization for years. Google "Cato Institute" on the subjects to see a variety of well thought-out and practical ways that private wealth funds could replace the pitfalls of public funding (like this one).
In the meantime, let's look at some figures from a liberal think tank, the Urban Institute. Its analysis of government retirement programs claims that a dual-income couple earning average wages and retiring in 2020 will typically receive $1,059,000 in lifetime Social Security and Medicare benefits.
Sounds pretty good – until you do the rest of the math. According to the Urban Institute that couple – each of them working from age 22 to age 67 – will have paid a total of $853,000 in Social Security and Medicare taxes.
A million-plus return on an $853,000 investment is swell – if it happened in yesterday's day trade. But over 45 years?!
Averaging it out, the couple put almost $19,000 a year into their "involuntary investments." Let's say the two of them aren't Stansberry Research subscribers and have no financial savvy at all. Let's say they put their annual $19,000 into an ordinary savings account that since 1975 has paid on average 3.5% a year in interest. (The Urban Institute couple are a very average pair.)
The couple would be more than twice as rich!
As it is, they only get their million dollars if they live long enough and get sick enough to qualify for all their entitlements. What happens if they get struck by a meteor the day after they retire? Nothing. It's the government's money. Their $1,059,000 goes to some other old, sick couple.
If our Urban Institute couple had $2 million of their own, they could make a will and leave it to...
NOT to the federal government. They could leave it to an organization that was founded as a charity.
And charity will be needed if we stop federal government entitlement handouts.
We can privatize our way out of Social Security and Medicare and eliminate approximately $1.5 trillion a year in federal entitlement spending. But that still leaves us with the nearly $1 trillion in Medicaid and other welfare entitlements.
Which brings us to the most important part of this thought experiment.
What kind of a nation are we? If the federal government got out of the entitlement business, would we make it our business to feed the hungry, treat the sick, comfort the distressed, and help the helpless?
I hope to hell we would!
We might do it through state, city, town, and county programs that replace some of the federal entitlements. Surely local people know what the needy in their communities need better than Washington does.
But mostly we would perform real acts of charitableness with real charity. (Memo to those kind-hearted folks who are always eager to help right society's wrongs: Giving somebody else's money to somebody else is not charity.)
Americans already make more charitable donations than anyone else on earth. And the Gallup Poll "World Giving Index" says we are outranked in the percentage of what we give only by humble Myanmar. Good for you, people of what used to be called Burma!
The National Philanthropic Trust, a nonprofit that keeps track of these things, says that in 2015 individual Americans donated $373.3 billion to charity. Corporations gave $18.5 billion. And private charitable foundations contributed $57.2 billion.
That's a total of $449 billion. In our thought experiment, we're already halfway to meeting the needs that the remaining federal government entitlement programs were supposed to address.
And this is assuming that there's no waste, fraud, and abuse in the $1 trillion federal poverty entitlement programs. (In which case, we'd have to work with a hypothesis that clearly isn't true.)
But we can do better than $449 billion in charitable giving. We've just gotten a 50% tax cut. We have some extra cash. The average household contribution to charity is currently $2,974.
Let's double it. Let's triple it. However, not until we've spent some time pondering the fundamental purposes of the federal government.
As I said, it's just a thought experiment. But I like what I see in the test tube.
Regards,
P.J. O'Rourke