Two Weeks Away From Crisis?
Two weeks away from crisis?... The next phase of quantitative easing begins tomorrow... A $10 trillion bond record... The first big tests for gold and silver...
One of the market's biggest fears last summer was a so-called "Grexit" – a Greek exit from the eurozone.
Those worries have mostly passed. Greece remains in the eurozone, and the market has moved on to other worries (at least until Greece needs another bailout down the road).
Today, another exit is making headlines... This time it's a "Brexit" – a British exit from the European Union ("EU") – that folks are worried about.
You may have noticed we made a distinction between the eurozone and the EU. If you're not familiar, the basic difference between the two is the euro itself.
The EU is a group of 27 nations that have agreed to common economic, legal, and political rules, but still use their own currencies.
The eurozone, or "euro area," is a more exclusive group of 17 EU members that also use the euro and abide by European Central Bank ("ECB") policies.
This means Britain – officially known as the United Kingdom ("U.K.") – doesn't use the euro. It maintains its own currency (the pound sterling) and its own central bank (the Bank of England) to set monetary policy. But it must also follow EU policies and regulations applying to nearly every other aspect of its economy.
It's this last point that is important today...
Proponents of a Brexit point out that the U.K. pays nearly $10 billion to the EU each year to remain a member... money that could be put to good use elsewhere.
They say EU red tape – which applies to employment, education, energy, agriculture, trade, and much more – places unnecessary burdens on businesses and workers alike.
They also complain that the EU gives the U.K. no authority to control immigration, which has soared in recent years and become a hot-button issue, like here in the U.S.
Opponents of a Brexit – including Prime Minister David Cameron, his ruling party, and EU officials – say the U.K. receives many benefits in exchange for the costs of EU membership. They warn that a Brexit could cause unintended consequences for the British economy and its currency.
British voters will decide at the polls on Thursday, June 23 – a little more than two weeks from today.
Over the past several months, surveys have shown most voters are in the "remain in the EU" camp. But the number of those in favor of a Brexit has been rising. Some recent polls have shown that "leave" is now in the lead.
We can't say how the vote will go. It appears too close to call today.
But we will note that there's a lot of money and political power with a vested interest in maintaining the status quo. Call us cynical, but we wouldn't bet on a Brexit.
In the meantime, don't be surprised to see market volatility increase as June 23 approaches. And should the U.K. vote to leave, it could go even higher.
We doubt a Brexit would cause a real crisis as some are predicting, but there's no telling how markets could react in the short term.
Elsewhere in Europe, ECB president Mario Draghi is expanding his quantitative easing program again.
At first, it bought only European government debt. Draghi then expanded it to include covered bonds and asset-backed securities. Starting tomorrow, it will buy corporate bonds as well. And it is already distorting markets...
According to Bank of America Merrill Lynch data, the average yield on investment-grade European bonds plunged to 1.002% on Monday... one of the lowest levels in history.
This means conservative investors – who have already been pushed from government bonds to investment-grade European corporate bonds – will be forced to take on even more risk. As Bloomberg reports...
Bond markets around the world are being distorted as central banks step up cheap-money policies to bolster growth and prevent deflation... Some investors are pushing back and even the most conservative firms are turning to speculative-grade debt, traditionally among the riskiest of fixed-income assets.
"We're on strike when it comes to euro investment-grade paper," said Gordon Shannon, a portfolio manager at TwentyFour Asset Management LLP, which oversees 6.3 billion pounds ($9.1 billion). "The program has ground spreads down so much that we can't bring ourselves to buy. We're buying instead sterling and dollar investment-grade paper, and high-yield bonds."
Meanwhile, the amount of government debt yielding less than 0% continues to soar...
Ratings agency Fitch reports that global sovereign debt with negative yields rose above $10 trillion for the first time ever last month. That's an increase of 5% from April.
In short, the global "reach for yield" continues... and is getting even more extreme.
Finally, regular Digest readers know we've been covering the recent rebound in precious metals...
Following Friday's weak jobs report, gold and silver rallied more than 2%, and mining stocks rallied far more. This is classic bull market action, and it suggests we could see big gains in the precious metals sector starting now.
Our colleague Ben Morris, editor of DailyWealth Trader, agrees. He has been watching the price movements of gold and silver closely, and he says the bull markets in precious metals just passed their first big "tests." As he wrote in yesterday's edition of our free Growth Stock Wire e-letter...
In the four-year chart below, you can see the top line – at $1,300 an ounce – is an important resistance level. In January 2015, gold hit $1,300 and immediately dropped lower. At the end of this past April (the start of the recent decline), it did the same.
You can also see an important support level at $1,200 an ounce. That's exactly where it stopped falling in mid-2013, after its severe decline from $1,800... then it stopped falling there again in late 2013... and again, briefly, in late 2014.
Last week, gold traded as low as $1,201.50. It "tested support"... and it held. On Friday, the price of gold jumped more than 2% higher after the U.S. Labor Department reported weak job growth.
As Ben noted, seeing gold rally following "good" news (the weak jobs report) is exactly what we would expect to see in a bull market...
Friday's big move shows that there are plenty of folks ready and willing to buy more gold. They've been cautious following the 22% rise at the start of the year. But the demand is there.
Imagine if that same report was released and gold held steady or fell. In the face of good news (for gold), it would have been an extremely bearish sign. Instead, it had a strong, bullish move.
Gold stocks followed suit. So did silver...
Ben says gold and silver aren't "out of the woods" yet. We could still see lower prices in the short term. But he thinks prices are likely headed much higher from here...
Last week's price action was bullish. Both gold and silver held support. And gold and silver stocks shot higher.
If you've followed our advice to own these assets, congratulations. Friday was a good day for you. If you're still on the fence as to whether or not to buy into the sector, or add to your precious metals holdings, you may not want to hold out much longer. The bull markets in gold and silver are on.
New 52-week highs (as of 6/6/16): Becton Dickinson (BDX), Bristol-Myers Squibb (BMY), Johnson & Johnson (JNJ), Lundin Gold (LUG.TO), Medtronic (MDT), Ritchie Bros. Auctioneers (RBA), and Silver Standard Resources (SSRI).
In today's mailbag... more great subscriber feedback on Porter's Friday Digest. Let us know what's on your mind at feedback@stansberryresearch.com.
"Should Porter be fired? Let's see: I'm tracking better than Warren Buffett for annual returns, my expenses are lower than a Vanguard ETF, my portfolio is less volatile than the S&P, I make money when the market tanks, my money is riding a market neutral train, I'm earning an excess of 25% returns in my IRAs, and I'm earning cash in my sleep. Oh ya, and this is all [and only] from subscribing to Stansberry Research and Tradestops.
"Sounds like the people who think Porter should be fired either don't understand that you have a business to run or they don't have the mental capacity to run a lemonade stand. They are probably the same people who mistake P.J. O'Rourke for J.K. Rowling and erroneously think socialism works because Sweden is pretty and hasn't been in a war in 200 years. They are probably the same people that think you have failed them because redistribution of wealth [to them] means they do nothing and money should magically appear in their brokerage account.
"I'd recommend you cancel their subscriptions just to trim the fat of your customers who don't deserve your services... but then you wouldn't be able to profit from their stupidity and we wouldn't be able to be entertained by it. Stupid is as stupid does... or to be more politically-Porter correct, there is no such thing as teaching... only learning. Happy investing." – Paid-up subscriber Bryan D.
"Hi Porter, I have said it before, so I won't go into too much detail. Your insightful contrary view has been essential to helping me navigate the last decade. In my view you and your team are irreplaceable. Do you make mistakes? Of course. And you know you do. But you try to build portfolios that weigh the risks and rewards in a rational way, as opposed to sending the sheep to slaughter like most of the Wall Street analysts do.
"You have to make money, and I am glad for your success. But you make money by providing an upfront service and not by shearing the sheep on the back end. Your services are of a 'best effort' basis, and I find the quality of the research and insight incredibly valuable.
"When it comes to calling markets tops and bottoms, that is well nigh impossible. Absolutely no one can do it with consistency. I have read the histories of many gurus. Most think it is a fool's errand to try. But it is important to be wary of the possibilities and align a portfolio with the current risk/reward climate. I think this is where your team shines: Taking opportunities where you find them. Trying to scale back where appropriate. Position sizing. Stop loss strategies. You have built a great tool kit, even for a sophisticated consumer.
"In fact, as I bought a lifetime membership a long time ago, I really feel like I have underpaid you. Can I send you guys an extra 500$? I really feel like I have ripped you off... Seriously." – Paid-up subscriber Paul
"Fire Porter? LMAO. This service, insights, and opinions are outstanding. I'm up 30% this year in a sideways market because I read and digest and act on what Porter and others say. What are the 'Fire Porters' reading anyway? Stop the madness. The future is bright. Thanks guys." – Paid-up subscriber Rob W.
"I have followed your writings for many years. Because of this, I lost a tremendous amount of potential gain that I did not make because I listened to your 'Sky is falling down' forecasts. It is true that I never was a paying subscriber and that your ideas make very good sense to me, but, they are just incorrect, as time has proven. No doubt forecasting this sort of thing is very difficult. So all we would need now to complete this sorry record, is that Porter would change tack, abandon the Chicken Little approach, become a positive forecaster and... the markets actually turn down." – Paid-up subscriber Joe C.
Brill comment: Joe – like Rob W. above, we have to ask... what have you been reading?
Regards,
Justin Brill
Baltimore, Maryland
June 7, 2016
Books That Aren't About Investing That Every Investor Should Read, Part III
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Wouldn't it have been great if we had an econ class in college that was really interesting and informative?
Maybe I did. I don't know. I slept through econ. But wouldn't it have been great if we had an econ class that was interesting, informative, and so entertaining that we had no trouble staying awake?
The book New Ideas From Dead Economists is that class. Author Todd Buchholz provides us with the whole scope of economic thinking from Adam Smith to Alan Greenspan. He tells us what the great thinkers thought. He sorts through which ideas were wise... and which were stupid. He shows us how to use the great thinkers to think for ourselves about the economy. And he does it all in 287 pages of clear, quick, and often funny writing.
Buchholz is an accomplished fellow. He has a law degree from Harvard and an economics degree from Cambridge. He's a former managing director of Julian Robertson's Tiger Management hedge fund, one of the best-known on Wall Street. He's also a successful entrepreneur who holds a number of engineering and design patents. And he was a founding producer of the Broadway show Jersey Boys.
He was also director of economic policy under President George H. W. Bush. Well, nobody's perfect... There was a little economic mess-up at the end of the Bush 41 administration.
But as Buchholz says in New Ideas, "Economics is the study of choice. It does not tell us what to choose. It only helps us understand the consequences of our choices." The consequences of our choices in 1992 were the Clintons in the White House.
Unlike the Clintons, Buchholz knows that the purpose of a good economy is not just to make politicians popular or a few political cronies rich. A good economy has a moral purpose – to improve the lives of all people by letting individuals employ ingenuity, innovation, and creativity.
What's good about capitalism is human capital.
Buchholz points out that Adam Smith regarded himself as a moral philosopher. For Smith, economics was an extension of morality – making human life better by making human capital more valuable.
Consider Smith's most famous quote...
It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.
This isn't a wisecrack about the selfishness of human nature. It's a statement of the moral benefits of free-market ingenuity, innovation, and creativity. Buchholz explains...
Market competition leads a self-interested person to wake up in the morning, look outside at the Earth and produce from its raw material, not what he wants, but what others want.
Smith was an optimist. He believed economic freedom can make us all richer. His contemporary opposite number was Thomas Malthus. Malthus believed we were all going to starve.
Malthus had logic on his side. The population keeps growing, but the amount of land to farm is fixed. We're going to run out of food. Sooner or later, the plowshare will bump into the housing project.
To this day, the world is full of "Malthusians" – politicians, academics, ecological extremists, and climate-change alarmists loudly warning that we're going to run out of things. We're going to run out of energy, water, and air itself.
But if Malthus were alive today, he would be puzzled. There are more people in the world than ever and, yet... somehow... there's also more food per person.
Malthus was proven wrong, and modern Malthusians will also be proven wrong. Buchholz tells us why we don't run out of things in two words: "Prices signal."
"Prices," he says, "signal to economic agents [that's you and me] when to conserve or economize." Likewise, prices give us signals about when and where to apply our ingenuity, innovation, and creativity. Obviously, we applied them to agriculture.
In a free market, prices send us reliable signals about what to do.
But without a free market, prices send bad signals. Under communism, prices were fixed. Some prices were fixed too low. The message was, "Use it all up." Which was why communist countries had nothing to buy. Other prices were fixed too high. The message was, "Make lots of stuff nobody wants." (Atomic bombs, for example.)
This is why Buchholz spends 34 pages detailing how wrong Karl Marx was. I doubt that many Stansberry Digest subscribers need to be convinced Marx was wrong, but it's a fun read. Also, some of us have college students in the family. The chapter on Marx is required reading for college students – or it would be if college professors weren't a bunch of Marxists.
Marxism will always have a certain appeal to kids. It makes complicated economics look simple – good guys versus bad guys. Bad-guy capitalist plutocrats exploit good-guy proletarian workers. In other words, Dad makes you mow the lawn.
Buchholz says that Marx had some understanding of capitalism, in the sense of how financial capital works. But Marx had no understanding of how human capital works. Ingenuity, innovation, and creativity are why those of us who live in free-market countries have the high standard of living we have instead of the class war that Marx predicted.
The gas-engine power mower was invented by Ransom E. Olds (later of Oldsmobile fame). I'll bet it was because his dad made him mow the lawn.
Buchholz explores every prominent economic theory. We discover how all the wisest – and the most foolish – economists concocted their ideas. If economics were a fancy restaurant, New Ideas would be a tasting menu. We get the flavor of, to name a few:
| • | David Ricardo (If it weren't for free trade, we would get our oil from France and our wine from Saudi Arabia.) |
| • | John Stuart Mill (Don't worry if you're confused by his thinking... Mill was confused by his own thinking.) |
| • | Alfred Marshall (Marginal utility – why gold is worth more than water, even though we'll die if we don't get water and all that happens if we don't get gold is that our fiancé is miffed.) |
| • | Joseph Schumpeter (Creative destruction – the little pieces of eggshell that always wind up in our omelet when we break eggs.) |
| • | John Maynard Keynes (Better plan the economy!) |
| • | Milton Friedman (Better not!) |
| • | Friedrich Hayek (We'll wind up with tyranny if we do.) |
| • | James M. Buchanan (And we'll be broke, because government is a business like any other, except more crooked.) |
Meanwhile, Buchholz never loses sight of that moral dimension of economics – putting human capital first. He tells a joke about what happens if we believe in any theory of economics, but ignore human ingenuity, innovation, and creativity...
During a flood, a pious man runs to his church. The floodwaters reach the top of the church steps. A fisherman in a rowboat rows up to the church and offers to rescue the pious man. "No," says the pious man, "God will save me." The floodwaters reach the top of the church altar.
A rich man in a yacht sails into the church and offers to rescue the pious man. "No," says the pious man, "God will save me." The floodwaters reach the top of the church steeple. A billionaire flying by in his helicopter hovers over the steeple and offers to save the pious man. "No," says the pious man, "God will save me." The pious man drowns and goes to heaven. He says to God, "I believed that you'd save me and you let me drown."
God says, "Schmuck! Why do you think I sent the rowboat, the yacht, and the helicopter?"
Regards,
P.J. O'Rourke
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