Checking in on Gold
Your last chance to 'test-drive' TradeStops, absolutely risk-free... A new warning sign in consumer credit... Checking in on gold... '1% away from a major breakout'... P.J. O'Rourke takes on health care reform...
We begin today with a reminder...
Following last week's big webinar – titled "The Day the Bull Market Will End" – our friend and TradeStops founder Dr. Richard Smith did something he has never done before...
He agreed to let all interested Stansberry Research subscribers try his complete TradeStops service – including all the bells and whistles – absolutely risk-free. The offer is simple: Sign up for TradeStops and try it with your own portfolio for a full 60 days. If you don't love it, simply let Richard and his team know and they'll issue a full refund, no questions asked. If you decide to keep it, you can lock in one of the biggest discounts Richard has ever offered on this service. You truly have nothing to lose, and everything to gain.
But please note, if you're interested in taking advantage of this generous offer, you must act soon... It expires at midnight Eastern time tonight. Click here to start your risk-free TradeStops "test-drive" now.
Rising defaults in consumer and corporate debt will inevitably lead to major problems for stocks and the U.S. economy...
Regular Digest readers know we've been warning that years of super-low interest rates have created another massive debt bubble. Only this time, the bubble isn't centered in mortgages alone... It's more widespread.
Corporations have binged on debt like never before. U.S. corporate debt has soared from less than $3 trillion to nearly $7 trillion over the past 10 years. Likewise, total consumer debt has soared to a new all-time high, led by auto loans and student loans.
Just like the last bubble in mortgages, this one has seen lending standards deteriorate as the party has gone on. Today, a higher percentage of outstanding corporate debt is rated "junk" than ever before in history... And subprime lending has exploded in consumer lending.
Of course, this isn't a coincidence. It's a natural consequence of currency manipulation by central banks. As Porter explained in the April 28 Digest...
When the Fed pushed interest rates to record lows following the 2002 recession, Wall Street moved into subprime mortgages in a huge way. By 2006, almost 40% of the mortgages being underwritten weren't prime. You know what happened next...
But it's not all Wall Street's fault. And it's not all the subprime borrowers' fault, either. Both parties were enticed into making a bad financial decision because of the "noise" in the primary financial information channel: The price of money wasn't accurate.
When the price of money is artificially lowered, subprime lending booms. It will happen every single time, because those interest rates create a huge spread between the cost of money and the price a subprime borrower can be charged to borrow it.
I'm convinced the zero-percent interest-rate policies (and even negative interest rates) we've seen in all the world's major economies have created the biggest subprime bubble ever in the U.S. consumer sector.
We're in the midst of a huge subprime collapse. Only this time, the problem isn't in mortgages... It's in credit cards, autos, and student loans.
While the market ignores these risks for now, we continue to see signs that trouble is stirring...
For example, we've noted that banks and lenders are beginning to tighten credit in autos, credit cards, and even corporate lending. Meanwhile, default rates in many of these areas are quietly ticking higher.
But that's not all. Yesterday, a report from Wells Fargo noted another potential warning sign for consumer-debt markets. As Bloomberg reported...
Borrowers are making fewer extra payments on loans that were bundled into bonds in 2015 and 2016, compared with loans in 2013 and 2014 bonds, according to Wells Fargo analysts led by John McElravey.
Why is this important? Because we saw a similar trend prior to the last credit-default cycle a decade ago. More from Bloomberg...
The data on prepayments may offer another sign that subprime consumers are having more trouble paying their bills, the analysts wrote in a note dated Tuesday. Borrowers are already defaulting on a growing amount of auto debt...
Last decade, slower monthly payment rates on credit cards were an early sign of the consumer credit cycle changing for the worse, the analysts wrote.
In other words, you'd expect borrowers to stop prepaying long before they go into default. This data suggests today's already-elevated default rates are likely to go much higher.
"1% away from a major breakout"...
Switching gears, regular readers know our colleague Ben Morris has been keeping a close eye on the gold market.
In short, back in April, he noted that gold was close to breaking out of a multiyear chart pattern that could send prices much higher. But it wasn't yet official, so Ben recommended being patient and waiting for confirmation before getting too bullish on gold and precious metals.
That was good advice – gold reversed and moved lower for several weeks.
But this month, gold has been moving higher again... And it's once again close to breaking out of this long-term pattern. As Ben noted in yesterday's issue of his DailyWealth Trader advisory...
In DailyWealth Trader (DWT)... I haven't recommended opening a new bullish position in gold stocks since mid-March. We've been waiting for a better trade setup... We've been waiting for gold to break out of its long-term "wedge"...
As Ben explained, when an asset trades within a wedge pattern, it becomes compressed like a spring. When it finally breaks out, it often makes a big, powerful move. Today, gold is back near the top of the wedge... And it will only take a move of about 1% to break out to the upside...
This is a bullish sign...
But like before, Ben continues to recommend patience before getting too bullish on gold and precious metals again...
Now, we don't want to jump too soon. Trend lines like the ones in the charts above aren't exact... And they aren't foolproof. Sometimes assets will break out by a little bit and then fall right back down into their trading ranges.
I'd like to see gold trade above $1,300 per ounce before we make our move. And that could happen soon... On June 14, the Federal Open Market Committee ("FOMC") will announce its next interest rate decision. Futures traders are placing the odds of a rate hike at 100%... And they'll likely be right.
The common view is that higher rates are bad for gold. But as we've shown you, the last two times the FOMC raised rates, gold bottomed the following day... If that pattern continues, we could see gold prices drift lower before the decision and rally after it.
No matter what happens, though, our stance in DWT hasn't changed. We want to see gold break out (convincingly) before we buy. That's when we'll have the best trade setup... Our downside risk will be low. And our upside potential will be enormous.
New 52-week highs (as of 5/30/17): Aflac (AFL), Amazon (AMZN), Becton Dickinson (BDX), Blackstone (BX), Global X China Financials Fund (CHIX), Eaton Vance Enhanced Equity Income Fund (EOI), iShares MSCI Japan Fund (EWJ), National Beverage (FIZZ), iShares China Large-Cap Fund (FXI), Alphabet (GOOGL), Nuveen Preferred Securities Income Fund (JPS), McDonald's (MCD), 3M (MMM), Microsoft (MSFT), Nvidia (NVDA), ProShares Ultra Technology Fund (ROM), Guggenheim China Real Estate Fund (TAO), ProShares Ultra FTSE China 50 Fund (XPP), and Direxion Daily FTSE China Bull 3X Fund (YINN).
In today's mailbag, a question about last week's live webinar, "The Day the Bull Market Will End"... and a "confession" from a longtime subscriber. What's on your mind? Let us know at feedback@stansberryresearch.com. And please be sure to read on for the latest essay from Digest contributing editor P.J. O'Rourke.
"I listened with great interest to the webinar last Wednesday with Porter, Steve, and Richard. I am a little confused, however, by the S&P 500 number that Richard suggested could be the tipping point. Steve is suggesting that the market could go a lot higher. In that case, how would that run up affect Richard's S&P sell number of roughly 2160? Would it follow the approximate 10% trailing stop that is in place today? Thanks." – Paid-up subscriber Mark B.
Brill comment: That's correct, Mark. The current volatility quotient (or "VQ") for the S&P 500 is 10.2%. This puts his current stop loss at 2,160. If the S&P 500 were to close below this level, it would be an indication that the character of the market had changed and a larger decline was possible.
As you noted, if stocks continue higher, this stop level would move higher, too. However, it may not remain at exactly 10.2%. As Richard noted during the webinar, the VQ of any individual stock or market can change over time. And his proprietary TradeStops system monitors and updates these levels as they do. In other words, if you want to know exactly where this level is as the rally continues, you need to be a TradeStops subscriber.
Of course, this is just one of the powerful features of TradeStops... and just one of the reasons we urge every subscriber to give it a try. The fact is, we know of no other system or service anywhere that can dramatically improve anyone's investing results as quickly or easily.
But again, you don't have to take our word for it... Until tonight, at midnight Eastern time, Richard will allow you to test-drive TradeStops – 100% risk-free – for a full 60 days. If you don't love it, he'll refund every penny of your subscription cost. Click here to get started.
"Hi, Porter, I am retiring from public education on June 2nd after 35 years of teaching an assortment of science and math courses. Everyone congratulates me, but the prospect is quite a melancholy one for me; despite the fact that there is no teaching, only horses realizing that stuff is water, I have enjoyed being instrumental in influencing a lot of horses to do so – and I still think it's a very valuable thing to do with one's life (as you must believe, too, since you are so dedicated to persuading a bunch of us horses to choose to learn about things financial).
"For the first 25+ years of my career, I advised students that they just HAD to go to college, and to get a degree in anything! I have repented of that bad counsel in recent years, and now advise students NOT to go to college unless they are going to major in a field that provides an excellent chance of finding employment, and of doing so at a rate of pay that will easily repay their student debt. I tell them to be sure to go to a community college for their first [two] years unless they have a rich daddy who wants to throw away his money (or if they can get most of their student expenses paid for through scholarships and grants). I encourage them to pursue their dreams in whatever field, but to get a second major, at least, in a field (usually STEM related) that will be likely to provide for their future.
"Anyway, I thoroughly enjoyed (as usual) this Friday's Digest. I am writing to confess that I posted the part of your missive about fraud in student loans to my Facebook page (I never look at FB, but use it as a posting platform for valuable articles). Since that part was not any kind of proprietary advice, I hope you do not mind. Of course, I didn't take credit for what you wrote; I tried to give proper attribution. If there is some sort of link or some specific wording you would like me to use for something like that, please let me know what it is. Thanks for the remarkable education you and Dr. Steve have provided to me for over a decade (and to Doc for many years, as well). Blessings." – Paid-up Stansberry Flex member Timothy S.
Porter comment: Thank you for the kind words, and for the "confession"... In the future, we ask that you not cut and paste or forward our subscriber-only content without permission. However, you're always welcome to link to previous Digests once they're published to the public archive on our website here.
Regards,
Justin Brill
Baltimore, Maryland
May 31, 2017
Come On, Washington… How Hard Can This Be?
For decades, Congress and various presidential administrations have been engaged in a stupid "health care reform" debate fueled by stupid "health care experts."
The American health care system needs just one change: We need to make sure Americans aren't turned out of their homes and made into beggars by their medical bills.
We're a rich country. We're a generous country. When people get sick or injured, they shouldn't lose the house. The boat? Maybe. But not the house.
The simplest way to keep medical care from causing impoverishment is a "10% Rule." Calculate after-tax household income (including all government benefits) and when medical bills exceed 10% of income, we as a country step in and help out.
Actually, we're damn close to having this system already. According to figures from the U.S. Department of Health and Human Services, only 11% of health care expenses are paid directly by patients out of pocket.
We just have to ensure the 11% is coming out of the right pockets (such as mine). I'm an affluent old guy on Medicare. Therefore, I'm ripping off everybody in the country who's under 65.
A 10% hit on my income would be unpleasant... but not catastrophic. Less pheasant hunting in South Dakota and more shooting crows in my backyard.
Well, shooting crows provides plenty of good sport (if not much good eating).
This is the "KISS" approach (keep it simple, stupid).
But nothing will make the health care experts or politicians who listen to them "KISS" and make up... hence decades of stupid health care reform debate.
The stupidest thing about the debate is that the U.S. health care system doesn't need "reforming." We have the best doctors, nurses, hospitals, and hospital staffs in the world.
I found this out 50 years ago when I was a hippie on a motorcycle. (Do not ride a Triumph Bonneville at 90 mph after you've taken LSD.)
I've found it out again now that I'm a 70-year-old who still drinks and smokes cigars and whose idea of regular exercise is getting out of bed at 3 a.m. to take a leak.
Yeah, yeah, the "health care experts" say American health care is not the best. The World Health Organization (WHO) claims that France has the globe's No. 1 health care system.
If I think I'm having a heart attack, I'd better get to Paris. Some pate de foie gras, a chunk of brie, and a bottle of Dom Perignon, and I'll be fine.
To give you an idea of how much expertise these experts have, the WHO ranks the American health care system 37th, behind Oman (No. 8), Colombia (No. 22), Cyprus (No. 24), and Morocco (No. 29).
Oman... Seriously, the WHO says the Sultanate of Oman has the world's eighth-best health care system. One fact: Female genital mutilation is legal in Oman.
And Morocco is ranked well above the U.S. You've probably noticed that when rich people from every corner of the Earth get sick, they don't fly to the Mayo Clinic in Minnesota. No, they fly to Marrakesh: "Eat two hashish brownies and call me in the morning."
"But," say the experts, "if you're not rich, you don't get treated in America." That's a lie. That's also illegal.
American hospitals are required by federal law to admit every person needing medical attention. It doesn't matter if you're so broke that you married your girlfriend for the rice.
This is a result of the "Emergency Medical Treatment and Labor Act" of 1986. (Passed – health care experts take note – during the "heartless" Reagan administration.)
The law applies to every hospital that receives federal funding or payments... which is all of them (except maybe a few privately operated emergency buttocks enhancement clinics). So the health care experts can shut up about availability of treatment.
Here's something else they can shut up about: health care insurance.
If Dad keels over, you don't call Blue Cross, you call an ambulance. Why do all the Democrats, too many of the Republicans, and the big green eyeshades at the Congressional Budget Office keep going on about health care insurance instead of health care?
We have health care in America. No, we don't have the body mass index of the Danes. No, we don't live as long as the Japanese. But we're a big, crazy, hard-working, hard-playing country, living high on the hog. We love eating, drinking, fussing and fighting, driving too fast, and... "Hold my beer and watch this!"
Considering the way we Americans behave, America's health care system does a miraculous job. "But, oh, oh, oh," say the experts and the politicians, "the American health care system is so expensive."
And it is: $3.2 trillion a year, 17.4% of gross domestic product (GDP). That's $9,990 per person.
But let me ask you a question: Do you want your health care done on the cheap?
Some things you buy by price, some things you don't.
The safety and security of my family, for example.
If I hear burglars breaking into my house in the middle of the night, there's a way to handle this situation that's a bargain – a toll-free call to 911.
But I live way out in the country, miles from the nearest police station. There's another way to handle this situation that's less of a bargain.
While my wife calls 911, I take my shotgun out of the closet and go to the top of the stairs. The sound of me racking a round into the chamber of my 12-gauge pump should make the burglars skedaddle.
But if it doesn't make the burglars skedaddle...
Am I going to stand at the top of the stairs carefully calculating the costs of replacing the front door, re-glazing the doorframe sidelights, patching the 00 buckshot holes in the front hall walls, and paying the legal fees of the lawyer I'll have to hire to defend me on manslaughter charges?
No. I'm going to pull the trigger.
So, Congress and Mr. President, just pull the trigger on health care and shut up and go back to bed.
Regards,
P.J. O'Rourke