Tag: Casey Research

Editor’s note: U.S. stocks continue their roller coaster ride. After its worst December since 1931, the S&P 500 stormed out of the gate in 2019… only to reverse course and drop another 2% today.

Now, we’re only three weeks into the new year, but this volatility is causing many readers to ask one simple question: “What’s in store for 2019?”

I know that Casey Report and Crisis Investing chief analyst Nick Giambruno has a lot to say on this topic. So I got him on the phone to find out what we can expect in the months ahead… and more importantly, how to prepare…

Editor: Nick, where do you see the stock market headed from here?

Nick Giambruno: Well, I think a most interesting observation is that the market is so heavily dependent on what the Federal Reserve does. Investors hang on the Fed’s every word, looking for clues, and desperately trying to cling to something that will show that they’re continuing the easy money.

This is not a sign of a strong market. It’s a sign of an economy addicted to cheap credit.

As you probably know, the Fed responded to the 2008 financial crisis with unprecedented amounts of easy money. It claimed it would “stimulate the economy.”

Just think of the $3.7 trillion in money-printing programs euphemistically called quantitative easing 1, 2, and 3. That money didn’t come from someone’s hard work and savings. The Fed simply created it out of thin air… and used it to buy bonds.

This pushed up the price of bonds and artificially suppressed interest rates to lows not seen at any other point in human history.

The Fed took interest rates to zero in 2008. It held them there until December 2015, or nearly seven years.

For perspective, the Fed inflated the housing bubble – which eventually caused the 2008 crisis – with about two years of 1% interest rates. It’s hard to fathom how much it distorted the economy with seven years of 0% interest rates.

Think of interest rates simply as the price of money. They have an enormous impact on banks, the real estate market, the auto industry, among others.

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It’s hard to think of a business that interest rates don’t affect in some meaningful way, either directly or indirectly.

That’s why interest rates are the most important price in all of capitalism.

Yet, they’re controlled by a politburo of central planners at the Federal Reserve, not set by the market like any other price.

It’s strange that so many people thoughtlessly accept this as “normal.” In reality, the Fed is engaged in a massive price-fixing scam… and nobody seems to care.

And the effects are certainly not benign.

The $3.7 trillion created by the Fed after 2008 ended up creating not just a housing bubble or a tech bubble, but an “everything bubble.”

And within the everything bubble, the bond market is where the biggest distortions are.

Editor: Can you explain how artificially low interest rates lifted the U.S. stock market?

Nick Giambruno: Corporations took advantage of these historically low borrowing costs by issuing mountains of debt.

All the easy money that corporations borrowed had to go somewhere.

They used a good portion of it to finance stock buybacks. That’s when a publicly traded company buys back its own shares.

Management at public companies usually receives a significant portion of its compensation in the form of stock options. Those options are more valuable when share prices are higher.

Further, if a company’s earnings don’t change, and the number of shares declines (from being bought back), its earnings per share – a key valuation metric – go up. This can make the company appear more valuable, even though it didn’t improve operationally.

In other words, these companies are not becoming more profitable. Management is simply using easy money to financially engineer higher valuations.

With stock market valuations nearing all-time highs, these companies are going deeper into debt to buy ridiculously overpriced stock.

Loading up on debt to buy outrageously expensive stock can only end in disaster for the shareholders of these companies.

Unfortunately, the fake money system incentivizes management to make decisions like this, especially since many corporate management types resemble characters from a Dilbert comic.

Since 2008, corporations have cumulatively purchased over $4.5 trillion worth of stock through buybacks. That represents about 15% of the market cap of the entire stock market.

In short, this is how the bond bubble helped inflate the stock bubble.

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Editor: What’s bringing the era of easy money to an end?

Nick Giambruno: The Fed is raising interest rates. It has been since the end of 2015. So they’ve been in a tightening cycle for a while.

Almost every Fed rate-hiking cycle ends in a crisis. Sometimes it starts abroad, but it always filters back to U.S. markets.

To be exact, 16 of the last 19 times the Fed made a series of interest rate hikes, some sort of crisis that tanked the stock market followed. That’s around 84% of the time.

It’s inevitable that all the malinvestment created by the trillions in easy money will get flushed, just like in previous cycles.

Editor: So it makes sense that investors are hanging onto the Fed’s every word.

Nick Giambruno: Unfortunately, yes. Given the Fed’s king-like power over the economy, they have to. I’d prefer the economy be more focused on people voluntarily exchanging products and services rather than the Fed’s destructive shenanigans. But as long as there is a central bank like the Fed, it’s simply too big of a factor for investors to ignore.

While the Fed is a huge factor in the bond market, it is not the only one. There are a lot of reasons to think interest rates are headed higher – which will help pop the “everything bubble” – independent of what the Fed does.

Editor: What other forces could cause rates to rise?

Nick Giambruno: There’s the federal government’s budget deficit, which is financed by the Treasury issuing more debt.

The U.S. Treasury issued over $1.3 trillion in new debt in 2018. That’s more than double the amount it issued in 2017.

Analysts expect the deficit to hit $1.5 trillion in 2019. And that figure assumes there’s no economic recession, which the U.S. economy is long overdue for.

If there’s even a mild recession, which would reduce tax revenue and drive the deficit higher, a $2 trillion deficit is a real possibility.

No matter what happens, trillion-dollar deficits will be the new normal. That means an avalanche of new Treasuries to finance them.

Even by the government’s own unrealistically rosy forecasts – which assume no recessions, wars, or other crises – the federal debt will continue to grow faster and faster. Within 10 years, it will hit nearly $35 trillion, up from $21.7 trillion today.

Who will buy all this paper?

It won’t be the Fed… It’s shrinking its balance sheet and trying to unload all the debt it bought from the post-2008 period.

Foreigners are also not buying as many Treasuries.

The governments of China and Japan are the two largest holders of U.S. Treasuries. Both have already started reducing their exposure to U.S. government debt.

As long as trade tensions linger, don’t expect China to help finance the deficit by buying Treasuries… at the very least.

Russia is also dumping U.S. Treasuries. From November 2017 to November 2018, it reduced its holdings by a staggering 86%, from $106 billion to just $14 billion.

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Editor: Nick, you clearly aren’t bullish on stocks and bonds. What should investors be doing with their money then?

Nick Giambruno: Shorting a special segment of the bond market is one of the best ways to profit from the collapse of the bond super bubble. But ordinarily, it’s not a simple task for the average investor.

In The Casey Report, I share easy, one-click solutions to do this (and also to short stocks) that can be done from any ordinary brokerage account. You don’t need to do anything complex or be an expert trader.

Editor: Thanks for talking to me today, Nick.

Nick Giambruno: No problem.

Editor’s note: In today’s essay, Doug Casey – Crisis Investing, explains four main steps for building and maintaining wealth, no matter what happens in the market…

Even if you are already wealthy, some thought on this topic is worthwhile. What would you do if some act of God or of government, a catastrophic lawsuit, or a really serious misjudgment took you back to square one? One thing about a real depression is that everybody loses. As Richard Russell has quipped, the winners are those who lose the least. As far as I’m concerned, the Greater Depression is looming, not just another cyclical downturn. You may find that although you’re far ahead of your neighbors (you own precious metals, you’ve diversified internationally, and you don’t believe much of what you hear from official sources), you’re still not as prepared as you’d like.

I think a good plan would be to approach the problem in four steps: Liquidate, Consolidate, Create, and Speculate.

Step 1: Liquidate

Chances are high that you have too much “stuff.” Your garage, basement, and attic are so full of possessions that you may be renting a storage unit for the overflow. That stuff is costing you money in storage fees, in depreciation, and in the weight of psychological baggage. It’s limiting your options… It’s weighing you down. Get rid of it.

Right now, it has a market value. Perhaps to a friend you can call. Or to a neighbor who might buy it if you have a yard sale. Or to some of the millions of people on eBay. A year from now, when we’re out of the eye of the financial hurricane and back into the storm, it will likely have much less value. But right now, there’s a market. Even if most people are no longer wearing those “He who dies with the most toys, wins” T-shirts that were popular at the height of the boom, there are still buyers. But the general standard of living is dropping, and mass psychology is changing. In a year or two, you may find there aren’t any bids and the psychology of the country has changed radically. People will be desperate for cash, and they’ll all be cleaning out their storage units (partly because they can’t afford the rent on them).

Liquidate whatever you don’t actually need—clothes, furniture, tools, cars, bikes, collections, electronics, properties, you name it. You’ll be able to rebuy something like it, or better and cheaper. Just as important, you’ll feel light and mobile, unburdened by a bunch of possessions that own you and weigh you down. It will definitely improve your psychology, which is critical to the next stage. And the cash it generates will be helpful for the rest of the plan.

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Step 2: Consolidate

Take stock of your assets. After Step 1, that should be a lot easier because you’ll have less junk, but a lot more cash. You’ll already feel more in control and empowered. And definitely richer. But your main assets aren’t money or things. It’s the knowledge, skills, and connections you possess. Take stock of them. What do you know? What can you do? Whom do you know? Make lists and think about these things, with an eye to maximizing their value.

If you’re light on knowledge, skills, and connections, then do something about it—although if you’re reading this, you probably already live life in a way that builds all of those assets daily. But there’s always room for improvement. Think the Count of Monte Cristo. Or if you’re not so classically oriented, think Sarah Connor after she met the Terminator.

Part of this process is to look at what you’re now doing. The chances are excellent there’s a better and more profitable allocation of your time. Even successful rock stars tend to reinvent themselves every few years. You don’t want to get stale. That leads to Step 3.

Step 3: Create

Remember, the essence of becoming wealthy is to produce more than you consume and save the difference. But it’s hard to maximize value working for somebody else. And when you’re given a job, it can be taken away for any number of reasons. There is cause, and there is effect. You don’t want to be the effect of somebody else’s cause. You want to be the cause for everything in your life. That implies working for yourself. At least turn your present employer into a partner or an associate.

Perhaps go through the Yellow Pages (while they still exist), page by page, line by line, and see what you can provide as a service for the businesses advertising there. I promise you, they’re all looking for someone to come along, kiss their world, and make it better. Think like an entrepreneur at all times. Remember that there is an infinite desire for goods and services on the part of the 7 billion other people on the planet. Find out how you can give them what they want, and the money will roll in.

I’ve said many times that I believe you could airdrop me naked and penniless into the heart of the Congo, and by the time I emerged, I’d not just have survived, I’d come out wealthy. And believe me, I don’t think wealth is by any means the most important thing in life; it’s important, but should be considered a convenience, not an imperative. Not that I’d want to be airdropped into the Congo at the moment; I’ve gotten a bit lazy, I have other interests, and you can’t be everywhere and do everything.

But now that I think about it, if I wanted to make a real fortune today from a small base, I might prefer Africa to any other continent. As an educated Westerner, you can quickly meet anyone on an equal level much more easily than you could at home. If you have a reason that makes any sense at all, you can be in the office of the president within a week. These countries are all plagued with incompetence and corruption, they need everything, and they’re full of untapped resources and talent. This all inures to the great advantage of a foreign entrepreneur.

Here’s an idea. For your next vacation, book a trip to Cameroon, Togo, Gabon, Zimbabwe, or Angola. Go through the Yellow Pages in the capital and meet everybody who is anybody. The chances are good you’ll come up with several deals in the first week alone. If you can’t find the time, send your kid who’s just out of school and idiotically thinks he may want to misallocate time and money getting an MBA. This idea alone should be worth a million dollars. Or as I would prefer to think of it, 800 ounces of gold.

But to an economist, money, like all goods, has “declining marginal utility.” In other words, the more of something you have, the less you need or want the next unit. Of course, more is always better; but it’s unseemly, even degrading, to pursue anything beyond a certain point.

When I was in Toronto, I spoke with a Chinese friend who, I believe, is worth at least $250 million. As he waxed philosophic, he allowed that he didn’t feel he really needed more than 30 extra-large to live exactly as he liked. I agreed, in that meals in the best restaurants, as well as the finest clothes, cars, and houses only cost so much. And it’s well within a conservative return on that capital, without ever even touching the principal. Is it worth it to get more? Perhaps not, unless your interests in the rest of life are entirely too narrow. The point of money is to allow you freedom, not make you crazy with getting more.

That doesn’t rule out speculation as an avocation, however. More—everything else being equal—is still better.

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Step 4: Speculate

You’ve got money. Now, you have to keep it and make it grow, because staying in the same place amounts to going backwards. That’s partially because the world at large will continue getting wealthier, even as the dollars you own lose value.

In the past, I’ve discussed why a lot of old rules for success are actually going to prove counterproductive over the next few years. Saving with dollars will be foolish as they dry up and blow away. Investing according to classic rules will be very tricky in a radically changing economy. Most people will try to outrun inflation by trading or gambling. The markets, which are the natural friend of productive people, will perversely prove very destructive to them in the years to come. You’ll know when the final bottom in the stock market has come: The average guy won’t want to hear about the stock market, if he even remembers it exists. And if he does, he’ll want it abolished.

Instead of becoming a victim of inflation and other politically caused distortions in the marketplace, you can profit from these things. Rational speculation is the optimum approach.

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What to Do If You’re Already Wealthy?

Perhaps, however, you’ve already covered all the financial bases to your satisfaction. Quo vadis? I have several thoughts on the meaning of wealth. You may find some of them of value as prices of everything fluctuate radically in the years ahead.

First, recognize that wealth is a high moral good. Don’t feel guilty about having it or about wanting more.

If you’ve already accumulated and deployed enough capital to allow you to jump off the golden treadmill, congratulations: Chances are high that you are an exceptional human being. I say that because the moral value of being wealthy is underrated. I don’t mean that in a Calvinistic way, in that Calvin believed Yahweh rewarded the righteous by making them rich. But I do believe that productive people—people who work hard to provide goods and services for others—definitely tend to be wealthier than unproductive people. They deserve to be. And since we don’t live in a malevolent universe, people generally get what they deserve. So yes, wealth is definitely one indicator of moral excellence.

Sure, some wealthy people got that way by lying, cheating, and stealing. But they’re exceptions. It’s much easier to become wealthy if (in addition to having virtues like diligence, competence, and judgment) you are known to be truthful and honest. Those who automatically think ill of the rich are, at best, paranoid fools. Put it this way: Rich people may lack some virtues, but they definitely have at least a few that made them rich. Poor people, on the other hand, will certainly lack some virtues, and they’ll definitely have some vices that kept them poor.

I’m a fan of some aspects of George Gurdjieff, the late-19th to mid-20th century Russian mystic, who was also a merchant adventurer at some points in his colorful life. He said that anyone who successfully employed at least 20 other people must be considered at least partially enlightened and a type of guru. That viewpoint always resonated with me. Self-made wealthy people may not be saints, mystics, intellectuals, or even especially thoughtful or moral. But they’ve proven they’re better than the average bear in at least one important way: They can create and conserve wealth. And they’ve thereby eased everyone’s path to further accomplishments.

Second, figure out your purpose in having money.

Sure, money makes life easier. And it’s nice how it enables you to assist people you like with material things. But I strongly suggest that you not take too short a view on this matter. Accelerating advances in medical science are not only lengthening human life expectancy, but new developments now in the works have the potential to vastly improve your capability and health as well.

Is it possible to live to age 200, with all the wealth, knowledge, and wisdom that implies, while maintaining the body of a 30-year-old? Not yet. But the prospect is on the horizon. It will, however, be available only to those who can afford it. Ray Kurzweil makes a case that the Singularity is near, and I buy his reasoning. It would be tragic if anyone frittered away his wealth, thinking he wouldn’t live very long, and then succumbed to a self-fulfilling prophecy, not because of medical difficulties, but because of financial difficulties.

Third, don’t give your money to charity.

Entirely apart from showing a lack of both imagination and foresight, it’s a complete waste of good money, pure and simple. Contrary to popular opinion, it rarely does any good; it often does great harm. The whole concept of charitable giving is corrupt and desperately in need of a complete rethinking.

Fourth, if you do care about posterity (who knows, you might be reincarnated), and on the chance you don’t make it to the Singularity, carefully consider how to dispose of your estate.

For one thing, there’s no reason to automatically leave anything to your children—unless they deserve it. The notion that someone should inherit your money just because he shares your genes is flawed and thoughtless. The example of Marcus Aurelius leaving the Roman Empire to his worthless son, Commodus, should be instructive. Wealth should be left to someone who is most capable of increasing it—at least if you want to benefit humanity in general. And yes, I’m quite aware that humanity in general may deserve absolutely nothing.

At a minimum, consider that memes are far more important than genes. It’s wiser, therefore, to leave your wealth only to individuals (related to you or not) who will carry forth values you hold dear and are worthy of the wealth. If nothing else, make sure you disinherit the government.

Also consider that dividing wealth dissipates it and generally makes it less useful. If you have $1 million, you could leave $1,000 to 1,000 people. But, apart from the fact that it’s unlikely anyone knows 1,000 worthy people, that much money is only enough for a modest vacation or a few baubles. The larger the pool of capital, the more ways it can be used, the more creative power it has, and the more likely it will be conserved and used creatively. I favor the Roman system, in which one could adopt children of any age—but always after you could see what their character was. You might want to do that if your own kids don’t make the grade.

The Bottom Line

If you want serious money, you have to get serious about money. You need to understand these fundamentals and never forget them. Don’t let all the garbage reported in the financial media you read, see, or hear confuse you about what money really is. Don’t consume more than you make: Save! Don’t spend: Invest!

Editor’s Note: Building wealth isn’t easy… And few people have a better grasp of what it takes to make (and keep) a fortune than legendary speculator Doug Casey – Crisis Investing

Today, Doug shares one of the most important parts of taking control of your life as a step to prospering in the years to come…

There’s a great deal more to becoming rich than buying the right investments and hoping for the best. The most important element in your strategy to win the battle for investment survival is your own psychology. You’ve heard that your attitude helps your health and your golf score; it’ll also improve your earning power.

It’s not enough to liquidate your past financial mistakes. It’s more important to liquidate counterproductive attitudes, approaches, and methods of dealing with problems. The results that someone gets in life are an indication of how sound his approach toward life is. A sound philosophy of life gives good results. People with chaotic, unproductive, and unhappy lives usually don’t have anyone to blame but themselves. They rarely have a strategy for living and thus, have no foundation on which to build a strategy for investing.

There’s plenty of good advice available on the subject. Marcus Aurelius’ Meditations, Ben Franklin’s autobiography, Norman Vincent Peale’s The Power of Positive Thinking, Frank Bettger’s How I Raised Myself From Failure to Success in Selling, and Maxwell Maltz’s Psycho-Cybernetics are all helpful.

One of the important things about the Greater Depression is that it will give you a chance to put your philosophy of life to the test. Almost anyone can get by in good times, but the years to come will separate the real winners from losers. Many will taste the thrill of victory or the agony of defeat firsthand; they won’t need the vicarious pleasure of Saturday afternoon TV sports to experience life.

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There is, of course, no guarantee that just because you’ve developed a workable strategy that you won’t still be a casualty in the battle for financial survival. There is such a thing as plain bad luck. But, as Damon Runyon said, the bread may not always go to the wise, nor the race to the swift, nor the battle to the strong—but that’s the way to bet.

Tilt the odds in your favor by developing pro-survival attitudes, and the law of large numbers will take care of the rest.

There is, of course, an almost infinite number of valid attitudes. Anything that works for you is as good as anything that works for me. But since the next step in the strategy (consolidation) deals with gathering physical goods, I don’t want to leave any false impressions.

You may be able to salt away ten bags of silver, a thousand Krugerrands, and enough food to open a restaurant chain, but that’s not nearly as important as knowing how to get them all back again if you should lose them for any reason. That’s one thing no one can ever take away from you, and you can never lose: your attitude towards life.

Scrooge McDuck had the right attitude.

One of the most formative stories I’ve ever read was an Uncle Scroogecomic written in 1953 by Carl Barks at Walt Disney Studios.

It finds Scrooge McDuck at play in his bin full of money, diving and wallowing in it, doing what he likes best. As he leaves his bin to go out for his daily routine, it turns out that his nephew, Donald Duck, has decided to play a prank on him by putting a fake newspaper on the park bench with the headline “Coins and Banknotes Now Worthless!… Congress Makes Fish the New Money of the Land.”

Scrooge sees it and is stunned. All his cash is worthless. He plops against a tree thinking that he hasn’t even one little minnow with which to buy a crust of bread. By the next frame of the comic book, however, the courageous old duck has picked himself up and is ready to get back in the race, saying, “Well, there’s no cause crying over bad luck. I’ll get a job and start life all over again.”

Soon, we find him down at the waterfront talking to a fisherman. He offers to paint the man’s boat for a sackful of fish. Scrooge earns his fish and takes them to a clothing store where business is bad. He trades the fish for a raincoat. Back at the waterfront, he trades the raincoat to another fisherman for two sacks of fish.

Since the fish are getting heavy to carry around, Scrooge trades the two bags to a farmer for an old horse, then trades the horse for tensacks of fish.

By the end of the day, Scrooge has a mountain of fish: three cubic acres’ worth. As much of the new money as he had of the old. He looks at the cold, clammy fish and asks himself how to count the new money… By the pound or by the inch? How to keep it? And how to spend it before it goes bad?

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Sorrowfully, he realizes that fish aren’t as nice to play with as his old money. Fish don’t feel good, and they smell bad.

All of a sudden, he doesn’t want to be rich anymore. He hires a trucking fleet to take the mountain of fish to Donald, who always wanted to be rich. Donald’s house is buried under dead fish.

Donald’s joke backfired, but Scrooge proved his point: You can start from scratch if you have the right attitude and come out ahead if you play your cards right.

Scrooge didn’t have a fish to his name when he had to start over—a lot less than you’ll have if you liquidate all your unneeded possessions. They’re costing you money and tying you down. Transform the junk you’ve accumulated into cash, which you can redeploy the way Scrooge McDuck might.

The next step in your plan is to start earning to add to your grubstake—that is, create more money. It was key to Scrooge’s second fortune, and it’s key to yours.

But it’s necessary to have the skills to provide goods and services to others. Scrooge made his fish fortune from his skills at business, but there are thousands of others.

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Gaining Skills

One of the most important parts of taking control of your life as a step to prospering in the years to come is to educate yourself and gain skills. That means a lot more than just logging eight years in high school and college. Going to college is one thing, but learning to make money is something else. Most people today appear to believe going to college is necessary for getting ahead. It’s not. It may actually be a hindrance.

A lot of people seem to think that simply going to college will bestow an education. In reality, all most people get is a diploma, which is very different. Eric Hoffer, the San Francisco longshoreman who never completed high school, but has written such profound books as The True Believer, is an outstanding example of the difference between going to college and getting an education.

Practical, marketable skills are often better acquired in trade schools, through self-teaching efforts, and through experience working from the bottom up in a field. A lot of teachers who finished first in their class couldn’t run a successful hotdog stand and are hardly in a position to help their students learn survival skills.

It would be a tragic mistake to devote all your resources to accumulating gold, hoarding commodities, devising clever tax schemes, and speculating to the neglect of much more basic intangibles. The government may negate a lot of your efforts through its inflation, taxes, and regulations. And even if you overcome them, market risk—a bad judgment, an unexpected development, a failed brokerage house—can wipe you out. As can fraud, theft, a fire, or a war.

And in the environment coming up, all of those things and many others like them could be greater dangers than they have been in the past. The only thing that’s permanently secure is what you carry in your head: your attitude, your knowledge, and your skills.

Who knows what skills may be required in the years to come? What you’re doing now, be it teaching school, practicing law, laying brick, or selling insurance, may be in low demand. But preparing French cuisine, fixing autos, keeping books, or offering financial counsel may be in high demand. Or perhaps the other way around.

The single wisest thing you can do with your money is not buy gold. It’s to take courses and acquire knowledge in other fields, as unrelated to what you are doing now as possible. Anything related to science, and particularly, technology would seem especially suitable. Computer science, medicine, mechanics, agriculture, and electronics are all going to remain in demand.

In the TV series Star Trek, the supremely knowledgeable Mr. Spock bailed the crew out as often as anyone. It’s hard to imagine him unemployed, for that reason. More knowledge can only increase your understanding of the way the world works now, and if it stops working the way it presently does, you’ll be able to continue. It will then no longer be the end of the world if you lose your present job.