Worse Than Any Bear Market You've Seen in Your Lifetime
'This is going to be worse than any bear market you've seen in your lifetime'... What's really behind the Brexit... Warnings from a former Fed chair... New highs for munis... Doc Eifrig's favorite income opportunity right now...
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Legendary investor Jim Rogers became the latest big name to warn about the market this week.
In an interview with Yahoo Finance, Rogers noted similarities between today and the last financial crisis... But he believes it could be even worse this time around. From the interview...
This is going to be worse than any bear market you've seen in your lifetime. 2008 was bad because of debt. The debt all over the world is much, much higher now.
Stocks in the U.S., for instance, have been going sideways for 18 months to 24 months. That's called a distribution by many people. When you have distribution for a year and a half, it usually leads to bad things.
The last debt crisis started in the housing market. Rogers thinks this one will start in the sovereign (government) debt market... and says fallout from last week's Brexit vote could be the trigger. More from the interview...
The bear scenario, the bad scenario is that Scotland now leaves and takes the oil money, the city of London gets whacked by Europe, they lose a lot of income. The U.K. already has huge international debts, and it has [a] balance of trade problems, budget problems, so the bear case is the pound disappears and England becomes Spain, or Poland, or Italy or something.
It won't happen anytime soon but the deterioration will continue and make stocks go down a lot. Remember, stock markets are anticipating the future... They see that happening. It will now lead to many other separatist movements in the EU...
I'm not saying it's good or bad, I'm just telling you what's going to happen, or what the bear case is, that if all that happens we all should be very worried.
Rogers says five years from now, "the EU as we know it now will not exist, the euro as we know it will not exist." Why?
Because the same antiestablishment anger that led to the Brexit vote is growing in other EU countries... here in the U.S... and around the world.
As we discussed on Monday, this anger isn't random. It's closely connected to the problems we've been warning about in the Digest for months and even years.
Average middle-class workers don't realize terrible central-bank and government policies have hollowed out the economy and crushed their wages and earning power.
They just know they're struggling to make ends meet... while the "elites" in Washington, D.C. and Brussels are living better than ever.
Those in the lower class don't realize those same policies help keep them in poverty... or that their political saviors made promises that couldn't be paid for and would never be fulfilled (without massive inflation).
They just know they're not getting what was promised... and have less and less to lose.
Unfortunately, we're likely much closer to the beginning of this trend than the end. Expect this anger to grow and spill over in unexpected ways as the broken paper-money system implodes.
Former Federal Reserve Chairman Alan Greenspan – who played no small role in creating many of these problems in the first place – now agrees with these concerns.
In an interview with financial-news network CNBC on Friday, he echoed Rogers' warning of crisis...
This is the worst period I recall since I've been in public service. There's nothing like it, including the crisis – remember October 19, 1987, when the Dow went down by a record amount, 23%? That I thought was the bottom of all potential problems. This has a corrosive effect that will not go away. I'd love to find something positive to say.
Greenspan followed that appearance with an interview with Bloomberg on Tuesday, where he explained why he's particularly worried about our broken entitlement system...
The issue is essentially that entitlements are legal issues. They have nothing to do with economics. You reach a certain age or you are ill or something of that nature and you are entitled to certain expenditures out of the budget without any reference to how it's going to be funded.
Where the productivity levels are now, we are lucky to get something even close to 2% annual growth rate. That annual growth rate of 2% is not adequate to finance the existing needs. I don't know how it's going to resolve, but there's going to be a crisis.
He also warned that unprecedented central-bank easing has done virtually nothing to improve the economy... But it has sown the seeds of massive inflation down the road...
The thing that we should be worrying about now, which we have actually given no thought to whatsoever, is that this type of economic environment ends with inflation. Historically, fiat money has always ended up that way...
I know if you look at human history, there are times and times again where we thought that there was no inflation and everything was just going fine. And I just basically say, wait... You don't have inflation now. And you don't have it until it happens.
So what does the former Fed chair suggest? How can the government prevent this crisis? If you aren't familiar with Greenspan, the answer will probably shock you...
If we went back on the gold standard and we adhered to the actual structure of the gold standard as it existed prior to 1913, we'd be fine. Remember that the period 1870 to 1913 was one of the most aggressive periods economically that we've had in the United States, and that was a golden period of the gold standard. I'm known as a gold bug and everyone laughs at me, but why do central banks own gold now?
Greenspan was a strong proponent of the gold standard before becoming Fed chairman. And he has been a vocal "gold bug" again in recent years. It was only during his tenure as Fed chairman that he conveniently forgot those views.
Some might say this makes Greenspan a hypocrite. He not only turned his back on sound money when it mattered most, but he helped write the modern inflationary playbook central banks are using now.
We agree... But that doesn't mean he's wrong today.
Switching gears, gold was one of the biggest beneficiaries of the recent Brexit panic, but it wasn't the only one...
Municipal bonds soared to new highs on Friday, pushing yields to new all-time lows. As the Wall Street Journal reported over the weekend...
Benchmark 30-year triple-A bond yields dropped to 2.08%, according to Thomson Reuters Municipal Market Data, the lowest rate in the 35 years the curve has been published.
Analysts and asset managers said they expect yields to remain low as nontraditional and foreign buyers seek refuge in U.S. [municipal] debt.
With negative interest rates in Japan and other countries, municipal bonds had already become attractive to foreign investors, and "this is kind of the icing on the cake," said Dawn Mangerson, a portfolio manager at McDonnell Investment Management.
Longtime Digest readers know our colleague Dr. David "Doc" Eifrig has been one of the most outspoken bulls on municipal bonds over the past several years.
"Munis" are usually considered one of the least "exciting" areas of the market. They pay safe, stable (and often tax-free) income and rarely default. But that changed following the financial crisis, when investors began to predict a massive wave of defaults.
Doc disagreed. He said those predictions were flat-out wrong. In fact, he first recommended munis to his Retirement Millionaire subscribers in October 2008, during the heart of the financial crisis.
Doc has re-recommended muni bonds many times since, when fearful investors have caused the sector to sell off. And he has been proven right again and again.
Readers who took his advice have earned consistent income and big capital gains in a safe, "boring" investment.
Doc is still bullish on a few corners of the muni-bond sector, but says they generally aren't offering a great deal today.
He recommends readers who already own munis keep holding them, but says there are much better opportunities for income investors.
For example, in the latest issue of his income-focused advisory, Income Intelligence, Doc explained why real estate investment trusts ("REITs") are a "clear buy" right now. From the issue...
Many businesses in the U.S. are struggling through a "profits recession" right now. For the first quarter of 2016, the companies in the S&P 500 stock index reported that sales fell 2% and earnings dropped 8%.
Yet, in this environment, REITs keep growing earnings. Funds from operations (FFO), the key measure of REIT profitability, rose 19.5% over the last year, as you can see in the following chart...
Why are REITs doing well while many other companies are struggling? Doc says it's a result of simple supply and demand. More from the issue...
When more tenants need to rent real estate and there's less of it around, prices rise and property owners earn more money. That's what's happening right now, driving profitability up...
Meanwhile, construction is only now starting to pick up. After the property boom between 2004 and 2007, construction spending collapsed. New buildings didn't get built. But demand for buildings has grown. We've added 20 million new people to the country in the last decade, according to the Census Bureau.
Doc noted this imbalance has led to a near-perfect environment for REITs today – occupancy rates are close to record highs, and rental prices are moving higher...
This growing demand and stagnant supply has led to higher occupancy rates – currently at more than 93% across all REITs, according to the National Association of REITs.
And when properties are full, landlords have more pricing power. In fact, rents on residential apartments are up 16% over five years, according to real estate data provider Reis Analytics.
Despite the positive fundamentals, Doc says REITs are still reasonably priced and offer a solid yield of 4.4%, as tracked by the MSCI U.S. REIT Index.
And best of all, there's a kicker that could give the sector a big boost before the end of the summer. In short, a new change to mutual-fund rules will soon force billions of dollars into REITs. Here's more from Doc...
Mutual funds have rules that dictate their sector allocations. They need to match the market. So if tech stocks make up 20% of the market, the fund should have about 20% of its money in tech stocks.
According to the official calculations, REITs currently get folded into the "financials" category, along with banks and insurance companies. But that's changing at the end of summer. On August 31, REITs will split into their own "real estate" category. This is the first major change to the classification system since it was launched in 1999. Right now, the average mutual-fund manager in the U.S. is underweight REITs by 3.3% relative to their market benchmarks, according to investment bank Jefferies. When REITs split out on their own, these fund managers will be forced to up their REIT allocation.
Goldman Sachs expects this will generate about $19 billion worth of buying pressure for REITs. JPMorgan estimates it'll be closer to $100 billion. Whoever is right, REITs will be getting some extra support and buying come fall. Pair that with the strong fundamentals for REITs and it looks like a great time to get invested.
Doc revealed his two favorite REIT investments for new money in the June issue of Income Intelligence. And as he does every month, he also covered all the best opportunities across the income markets – including one other sector he says is a strong buy right now – and the riskiest and most expensive assets you need to avoid.
If you're an investor who depends on safe, consistent income streams today, you absolutely have to be reading Doc's service. Click here to try it for yourself, absolutely risk-free.
New 52-week highs (as of 6/28/16): Franco-Nevada (FNV), Invesco Value Municipal Income Trust (IIM), Johnson & Johnson (JNJ), Mid-America Apartment Communities (MAA), Nuveen AMT-Free Municipal Income Fund (NEA), Nuveen Premium Income Municipal Fund 2 (NPM), Nuveen Municipal Value Fund (NUV), Silver Standard Resources (SSRI), Vanguard Inflation-Protected Securities Fund (VIPSX), Vanguard REIT Fund (VNQ), and Wells Fargo – Series W (WFC-PW).
Several more subscribers tell us how their portfolios are holding up after the recent Brexit volatility. Send your notes to feedback@stansberryresearch.com.
"Hello, I noticed that when the market was down 3% after the Brexit vote last week, my portfolio was up 2% even with 35% in cash. Currently up 14% for the year. I have a large percentage of my portfolio invested using your gold/silver stock approach, although I'm investing a little more conservatively (weighted more in physical and large stocks). I also own some of your Blue chip suggestions which are doing very well. I am also hedging by shorting Financials and the S&P. Also investing in some of your speculative stocks...
"One challenge is that I must tailor your various investment approaches to ETFs for my 401k which does not allow stocks. Surprisingly, it is doing equally well if not better. Perhaps I could share this with you because I'm sure others could benefit since the majority of workers monies are tied up in restrictive 401ks... I also have a significant portfolio of single family home real estate which I bought over the past 4 years. They are doing very well with rents and appreciation.
"My investing approach has changed to be very value oriented. I love having the data to show me what is on sale. Beaten down stocks so far have proven very profitable. Stansberry analyses are world class and therefore I signed up for all of your newsletters. I am not a rich individual and it is stretching our budget to pay for this level of access, but your guidance is proving priceless. I also believe that buying it all is a better business case as I move towards retirement in a couple years." – Paid-up subscriber Robert Dobson
"It seems to me that some years ago you had talked about the fall of the EU. I assume that it had to do with copying what our Fed has done and so nicely failed at. Regardless, seeing all of this stuff going on makes complete sense to me. When you view it realistically, you realize that we are headed toward a big Humpty Dumpty fall. Thanks to all of you for fair warning. Thanks to all of you for the resources to preserve wealth. Thanks to all of you for telling us that precious metals are a good route to go.
"But I love this from [Monday's] Digest: 'The rise of antiestablishment sentiment in the U.K. and Europe – and even here in the U.S. during this election season – is just one symptom of a much bigger disease that Porter has been warning about for years: Rampant credit manipulation and currency debasement by corrupt governments around the world.' So accurate. Thanks for the Bear Market programs. They were exceptional." – Paid-up subscriber Jeff S.
Regards,
Justin Brill
Baltimore, Maryland
June 29, 2016
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