All posts by Dennis Miller

There’s a 1 in 8 Chance You’ll File For Bankruptcy, Here’s Why

A New York Times (NYT) headline blared, “Too Little Too Late’: Bankruptcy Booms Among Older Americans”. They reference a Consumer Bankruptcy Project (CBP) study, “Graying of U.S. Bankruptcy: Fallout from Life in a Risk Society”:

“For a rapidly growing share of older Americans, traditional ideas about life in retirement are being upended by a dismal reality: bankruptcy.

…. Driving the surge …. is a three-decade shift of financial risk from government and employers to individuals, who are bearing an ever-greater responsibility for their own financial well-being as the social safety net shrinks.”

While the NYT is noted for wrapping selective facts inside an article pushing a political ideology, the study appears well-researched. Look at the source data and form your own conclusions.

How bad is the problem?

The study shows triple-digit gains in bankruptcy for those over 55:

“The number of senior households filing bankruptcy is not negligible. With 800,000 household filings annually, approximately 97,600 (12.2 percent) of those are households headed by seniors. The drivers of these bankruptcies were reported by our respondents. The most pressing was inadequate retirement and employment income.(Emphasis mine)”

In 2013, John Mauldin and Jonathan Tepper authored, “Code Red, How to protect your Savings from the Coming Crisis”. Central banks lowered interest rates to historically low levels (Zero Interest Rate Policy – ZIRP); forcing yield-starved savers into the stock market:Why inadequate income?

“(Fed Chairman) Bernanke openly acknowledges that his low interest-rate policy is designed to get savers and investors to take more chances with riskier investments. The fact that this is precisely the wrong thing for retirees and savers seems to be lost in their pursuit of market and economic gains.” (Emphasis mine)

The CBP weighs in:

“While many Americans confront these risk shifts, they profoundly affect older people….

…. With the 401(k)-style of savings, payout during retirement is not defined or predictable,employees bear all of the market risks, and returns depend on employees’ investment skills.” (Emphasis mine)

Retirees saw their guaranteed, safe income projections fall woefully short. There was zero risk in FDIC insured CDs!

This 2013 New Yorker magazine article, “Shut Up, Savers!” marginalizes the critics of Fed Chairman Ben Bernanke:

“…. to his detractors, Bernanke is guilty of waging a “war on savers”-fleecing people, especially retirees, of hundreds of billions of dollars that they could have earned in interest.

Certainly, it’s not the easiest time to live off interest income. The average rate on a savings account is less than 0.25 percent. Long-term certificates of deposit offer rates well below inflation, and even a ten-year government bond yields less than two percent.”

…. It’s easy to understand why savers feel like collateral damage (Emphasis mine) in the Fed’s fight against recession, but too much sympathy for their plight is dangerous.”

Dr. Ron Paul recently took another look at the economic fallout in, “The Dollar Dilemma: Where To From Here?”

“…. It is true that the rich are getting richer and the middle class is being wiped out. (Emphasis mine) …. The seriousness of the problem, …. explains the anger and frustration the people feel.”

Wiping out the middle class and almost 100,000 bankruptcies in a single year is a heck of a lot of collateral damage!

A second opinion

I reviewed the “Employee Benefit Research Institute 2018 Retirement Confidence Survey”. The EBRI is non-partisan. Retirement confidence is rapidly declining:

Their press release says:

“This year’s Retirement Confidence Survey (RCS) finds …. retiree confidence in having enough money to cover basic expenses and medical expenses has dropped: 80 percent say they are very/somewhat confident about covering basic expenses this year compared to 85 percent in 2017; and 70 percent say they are very/somewhat confident about covering medical expenses this year vs. 77 percent in 2017.

The EBRI discusses how important Defined Contribution (DC) plans, like a 401(k), are for retiree confidence.

“Those with a defined contribution (DC) plan like a 401(k) are far more likely to say they are confident in their ability to live comfortably in retirement: 76 percent of workers with a DC plan are at least somewhat confident in their ability to live comfortably in retirement versus 46 percent of those without a DC plan.

…. However, the data suggests many plan participants don’t know what to do with their DC plan assets at retirement.” (Emphasis Mine)

Here is what the New Yorker wants us to shut up about….

Ten years ago the government bailed out the banks at the expense of seniors and savers. Social security benefits won’t keep up with inflation while medical costs rise by double digits.Americans are problem solvers and will deal with it, but I hope they never shut up.

While Dr. Paul is correct, there is a lot of anger and frustration, it’s foolhardy to expect the government to fix anything.

What can WE do?

Two major factors affect us all. Even though they may not push us into bankruptcy, they should be understood and dealt with as best you can.

Debt is the enemy.

CBP weighs in:

…. 71.6 percent either “very much” or “somewhat” agreed that they filed because of the stress of dealing with debt collectors. Collectors called their homes, their workplace, their families, and knocked on their doors.

They quoted several respondents:

“All things went up in price. Retirement never went up. Had a part-time job that was helping to meet monthly payments.House payment kept going up.” ….

“Mismanaged my retirement savings…. Tried to restructure my debts but creditors refused. Unable to find suitable employment to pay my credit cards.” ….

“My wife developed medical problems and had to leave her job…. About two years later, I developed medical problems and was not able to continue working. We …. simply could not handle the debt load. The constant calls from bill collectors forced us to contact an attorney for help.”

The EBRI also discusses debt:

It appears that the majority of workers and retirees are not concerned about debt impacting their ability to save or retire until they suffer an income loss while the debts remain.

Dump the debt! Save your line of credit for real emergencies. Downsize and do what it takes to be debt free!

The debt rule is simple, “get out, stay out, and don’t ever come back!” I’ve never met anyone who lamented being debt free.

CBP weighs in heavily on medical costs:Medical Costs

“Despite the widespread belief that Medicare meets health needs of older Americans, …. it is utterly inadequate. Out-of-pocket spending among older Americans with Medicare comprises about 20 percent of their income, and the estimated total of all noncovered medical expenses for a 65-year-old retired couple during their retirement years is $200,000….

…. Respondents were asked to list the single most important thing that they or their family members were unable to afford in the year before their bankruptcies. Over half of older filers (52 percent) who responded indicated that the single most important thing they had to forego was related to medical care-surgeries, doctor visits, prescriptions, dental care, and health/supplemental insurance. These responses continue to suggest that their health care coverage is inadequate.”

EBRI shows the public has little confidence in the government providing medical care, social security – or doing the right thing:

What is the solution?

The NYT and CBP pushed for government-provided funded health care for all.

I prefer to avoid partisan politics; the entire political class governs against the will of the majority.

When I was with Casey Research I spent countless hours researching government health care. I interviewed doctors who practiced worldwide. I spoke with experts and a member of Congress who was on the committee that drafted Obamacare.

I’ve concluded:

  • Government sponsored health care sounds good, but in practice it is terrible.
  • While the motives of the health care workers may be pure, quality health care deteriorates. If the VA had to care for all Americans – do you think their quality would improve?
  • Government health care is fiscally impossible. Health care costs in the UK are bankrupting the country.
  • The underlying (unstated) motive of government health care is to ration care for seniors. A senior congressman told me the basis for care was the value of the citizen to society. Seniors could eventually expect end of life counseling as opposed to health care.
  • Most countries have a two-tiered system; one for the masses and one for the elite who can afford to pay out of pocket. Many Canadians come to the US for treatment that they cannot get in Canada. I spent an hour with the president of a big-name hospital in central America. They were gearing up for hundreds of US patients once government medical is fully implemented.
  • Expect social engineering. Politicos always pander for votes. I’m confident the majority of US citizens oppose paying for health care for those in the country illegally.

Buy good insurance! Medicare by itself will not provide quality coverage. The old adage, “you get what you pay for” applies to insurance premiums also. Many who bought inexpensive coverage did not realize it was inadequate until it was too late.

Those filing for bankruptcy are the tip of the iceberg. No one wants to live out their golden years constantly worrying about money. Get out of debt, save your money, learn how to invest wisely and buy good insurance.

And most of all – don’t ever be bullied into shutting up by anyone pushing a political agenda, whatever it may be.

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Savvy Investor Don’t Get Fooled

When I taught in night school my professor insisted I attend a full-day conference on “Effective Teaching Methods”. The speaker list was full of well accredited academics.

The morning consisted of 3-4 speakers outlining their intellectual theories. They rambled on, under the illusion the audience was enthralled with their brilliance.

The afternoon speaker told a story of a father and young son at a graduation ceremony. The boy looked at the program and asked, “What does BS, MS and PhD mean after their names?”

Dad thought for a moment and said,

“Son, everyone knows what BS is. Well, MS is just more of the same. At the top designation is PhD, meaning piled higher and deeper!”

Most of us roared with laughter as we stood and applauded, while others nervously shifted around in their seats.

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The investor’s challenge

Unfortunately, many investors must sort through too much BS that is attempting to deceive the public.

This week’s reading stack included eleven articles – like this New York Times piece, “Cash-Rich Companies Set Record for Buybacks”. They contained a common theme. Time reports:

“We’re starting to learn what America’s biggest companies are doing with the huge windfalls from President Donald Trump’s tax cuts. And the answer is great for investors – but not so great for workers.

That’s because many companies are returning huge portions of their billions in tax savings to shareholders in the form of share buybacks and dividend increases – not necessarily new hiring and investment.”

CNN Money reported on a speech by recently appointed Securities & Exchange commissioner Robert L. Jackson, Jr. at the Center for American Progress:

“An analysis released Monday by SEC Commissioner Robert Jackson Jr. found that the percentage of insiders selling stock more than doubled immediately after buyback announcements.

…. Daily stock sales spiked from an average of $100,000 to more than $500,000 per executive, researchers found.

“Right after the company tells the market that the stock is cheap,” …. executives overwhelmingly decide it’s time to sell.”

Buybacks have exploded this year thanks to Trump’s tax law, which lowered corporate tax rates and gave companies a break on returning foreign profits.

S&P 500 companies bought back a record $187.2 billion of stock during the first quarter ….

…. The tax law was supposed to encourage companies to spend on job-creating investments. But economists see little evidence so far that the tax overhaul has sparked an acceleration of investments in equipment, factories or other projects.

Jackson, who was appointed by Trump to fill a Democratic seat at the SEC, called on the agency to update its rules to limit executives from using buybacks to cash out.”

Is this a problem or political BS?

Scott A. Hedge, at the Tax Foundation offers a different perspective:

“Much has been made recently about the stock buybacks that companies have engaged in since the enactment of the Tax Cuts and Jobs Act (TCJA). To critics of the tax plan, stock buybacks are a sign that companies are not using the tax savings to either increase worker wages or to invest in new plants and equipment.

…. While the TCJA seems to have made stock buybacks a political issue, (Emphasis mine) little attention has been paid to whether companies are repurchasing more of their own stock today than in past years. That is why an article last week in The Wall Street Journal, “Record Buybacks Help Steady Wobbly Market” (under a paywall), caught my attention.

Despite the headline, the actual data contained in the chart accompanying the article shows that stock repurchases by S&P 500 firms in the first quarter of 2018 are on par with past peaks over the past six years.

We’ve re-created The Wall Street Journal chart in full, except that we adjusted the figures for inflation.

…. no matter how you look at the data it seems to show that the first quarter of 2018 is in no way an outlier when it comes to share repurchases by companies. What has changed is the political environment following the passage of the Tax Cuts and Jobs Act.” (Emphasis mine)

While I’m fed up with the political innuendos, I’ll leave the political debate to others. There is not much we can do about it anyway.

My concern is how do investors cut through the deliberate attempts to deceive and protect their nest egg and retirement income?

Here is a link to Commissioner Jackson’s talk:

“Basic corporate-finance theory (Emphasis mine) tells us that, when a company announces a stock buyback, it is announcing to the world that it thinks the stock is cheap. That announcement, and the firm’s open-market purchasing activity, often causes the company’s stock price to jump, so the SEC has adopted special rules to govern buybacks.”

“In Theory There Is No Difference Between Theory and Practice. In Practice There Is.”– Yogi Berra

The theory behind stock buybacks is the stock is cheap, however today stocks are being bought back for different reasons. Theory and practice are miles apart.

One former client had a rule; earn a minimum of 10% return on invested capital – 5% for dividends and 5% reinvested for growth.

For years it worked well. However, what happens when the business is no longer growing. What if they are not producing close to capacity?

When sales are flat, they may want to invest to improve operational efficiency and reduce their costs. Companies should not invest in their business if they see no real growth on the horizon.

Hewlett-Packard was once like many technology companies, flush with cash, a darling of Wall Street, good profits and high stock prices. They made a series of acquisitions, and many were sold at a loss down the road. They reinvested their capital poorly; their business and investors suffered.

In our 2015 article, “Buyback shares = BS 101” we discussed companies buying back their stock (reducing their number of shares outstanding) to make their Earnings Per Share (EPS) look better. Many borrowed money to buy back their shares at their all-time highs. The BS was not limited to a political agenda, it was an attempt to deceive the stockholders and increase their compensation.

How do investors know if a stock buyback is a good thing?

Fortuna Advisors produced a terrific “2018 Fortuna Buyback ROI Report”. They coin the terms Buyback ROI (Return on Investment) and Buyback Effectiveness. Many companies do a poor job:

Fortuna Advisors introduced Buyback ROI on June 3, 2011 in an article published on titled “What’s Your Return on Buybacks?” For the first time, investors and corporate observers could look clearly past the overly simplistic and often misleading Earnings Per Share (EPS) accretion assessment and determine if remaining shareholders benefit from a buyback. (Emphasis mine)

…. All EPS growth is not created equal.

Our research shows that, on average, the EPS growth that comes from reducing the number of shares outstanding is worth significantly less than the EPS growth resulting from revenue growth and operating improvements. (Emphasis mine)
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Are These Stocks Your Best Protection Against Inflation?

I recently interviewed Jeff Clark about using gold as an inflation hedge. Jeff asked why I never write about gold stocks. I own several – time to fess up!

Why don’t I write about gold stocks? I don’t recommend stocks, I know my limitations.

You can make a lot of money with gold stocks, but you better know what you are doing.

One of the top metals analysts is former Casey Research colleague Lobo Tiggre. He wrote for Casey under the pen-name Louis James.

One minute he would be traveling the world with his hardhat looking at explorers, then in the next, he would be in established mines looking at their economics. Lobo’s the real expert – and he agreed to an interview.

DENNIS: On behalf of our readers, thank you for taking the time for our education. Before we get into stocks, I want to discuss how gold is different.

Unlike most commodities, which are consumed, gold is primarily used as a store of wealth. When oil prices rise, demand slows – industry looks for other sources of energy. Sometimes can’t higher gold prices create additional demand? Lobo, am I correct?

LOBO: You’re partially right, Dennis. Gold is a safe-haven asset. It rises when people see rising risk (economic, political, or even on the personal safety risk). But the gold price is also seen as an indicator. Rapidly rising gold prices can act as a warning signal, creating more demand for gold.

In a gold mania, fundamentals can be overtaken by momentum, as happened in 1980 and 2011, but that’s rare.

Higher gold prices can cause increased demand for gold, but oddly enough, so can lower prices. In recent years when gold sold off in the West, instead of tanking after breaking below a “psychologically important price level,” it rebounded because the “sale” spurred a surge of buying in Asia.

There has been a massive transfer of physical gold from West to East over the last 10 years. Official Chinese reserves alone have doubled over this time, not including all the gold private individuals in China have socked away.

This win-win outlook should be very reassuring to gold investors. It tells us we should do well, whether safe-haven demand drives gold sharply upward or not.

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DENNIS: I look at mining companies in different categories.

The first is exploration companies, sometimes called junior mining companies. They may be boom or bust; if/when they find gold, the payoffs can be enormous.

The second group is the big boys, they have millions invested and harvest gold all over the world.

The third group doesn’t really mine, but rather provide capital for mining companies. In addition to interest income, they also receive royalties.

LOBO: Well, there’s no “official” or uniformly accepted way of categorizing mining companies, there are some small producers, however, your explanation is as good as any.

DENNIS: I know you have recommended junior mining companies that produced tremendous rewards. What do you look for?

LOBO: When I first started, solid people with great track records, highly prospective targets, and money to explore them, seemed worth a shot. Sometimes we got lucky and landed 1000% gains or better, but too often we did not. Even the very best explorers in the business routinely struck out. A general industry guideline is only one out of 300 discoveries ever becomes a mine. Many good geologists go through thousands of targets and may never make a significant discovery in their entire career.

Today, I am extremely selective with stringent criteria. I’ll speculate on early stage exploration – but only if the company has not only great people and targets, and either revenue of some kind of joint venture partners paying for all that super-high-risk work. I also look for more advanced exploration plays, in which the company has already made a discovery, and it looks to me like a real winner.

One of my favorite speculations is in the pre-production sweet spot. At this stage, there’s no exploration risk; the discovery has already been made. There’s technical risk, but only about 5% of first-time mine builders fail to build their mines.

I’ve seen companies appreciate over 800% from the time they started building their mine until the time they poured their first bar of gold or silver. Silvercorp (SVM) was an example of this sort of extraordinary gain when it built its first silver mine in China back in 2006.

A note of caution; while 95% of first-time mine builders succeed at building their mines, not all deliver positive share price results for investors. In the end, all experience extreme volatility along the way. Traditional stop losses would have been triggered in every case, sometimes causing the investor to sell at a loss.

The junior mining/exploration space should always be considered as a realm for speculators, not investors protecting a nest egg.

Personally, I try to invest the money I need cautiously and speculate only with money I can afford to lose.

DENNIS: What do you look for in the big mining companies?

LOBO: I start with the standard metrics: Price to Earnings Ratio (P/E), dividend yield, Earnings Per Share (EPS), Free Cash Flow (FCF) and such. I look for companies that manage to keep growing and delivering net income.

Operationally, growth is key. Mines are depleting assets. If a miner doesn’t have growth on tap, it’s going to shrink. You must discover or buy more, or you mine yourself out of business!

The tricky variable is political risk, which can change in an instant. Countries that are solidly pro-mining can go off the deep end for many reasons; an unfortunate election, a fiscal crisis, or a mine accident in some other part of the world. Generally, they increase taxes and regulations on once-profitable mines. It takes some work, but it’s essential to stay ahead of the curve on this.

Even the biggest mining companies can be extremely volatile. For example, In 2008 Teck Resources (TECK) dropped from about $50 per share to just over $3. While it was a market-wide crash – almost 94% is scary! In two years the stock rebounded to over $60 per share. The rout was an opportunity for the most courageous among us.

Gold stocks, even in the biggest and best companies in the world, are always going to be much more volatile than blue-chip stocks most investors are used to. Different strategies and risk tolerance are required.

DENNIS: The third group is royalty companies. What should an investor look for here?

LOBO: I love the royalty space. These companies get paid based on the top line of a miner’s production. Investor’s profit from the price of gold/silver without the risk of discovering and mining it. You can do well, but don’t expect the kind of extraordinary gains that a junior mining company many produce.

In addition to sound company metrics, I look for a good dividend and stock with a track record of rising by some multiple of the movements in gold prices. If gold goes up 1% or 2% in a week, I’d like to see the royalty company’s shares rise 4% to 10%. This happens – but again, it happens when gold drops as well.

If your only investment goal is to protect your nest egg, frankly, there isn’t a gold stock in the world for you. The prudent thing to do is to buy gold itself, which will hold some level of value no matter what happens.

DENNIS: Lobo, can you tell readers what you are doing and how they can find you?

LOBO: While I’m greatly appreciative of what Doug Casey taught me, I no longer work for Casey Research. In 2015, to avoid conflicts of interest company policy was changed. I couldn’t buy the stocks I wrote about; putting my money where my mouth was.

Today I foresee a major commodities boom; particularly precious metals. I want to participate. And my readers want me to be in the trenches, suffering and celebrating the consequences of my work alongside them.

I’ve started my own newsletter – We provide educational material for investors of all levels. Our monthly newsletter outlines the actual speculative investments I’m making. I post evidence of all my trades, including capital committed, prices bid, fees paid, everything. The goal is 100% transparency.

“Independent Speculator”, is what we are all about. I’m truly independent; none of the companies I write about pay me to do so. Investments are highly speculative and should only be considered by people with capital to allocate to speculation. My goal is to make money for my readers and myself.

DENNIS: Today you heard from a true expert. Lobo, thank you for your time.

NOTE: I have no financial arrangement with Lobo of any kind. I’m happy to promote his new venture in exchange for him sharing his expertise with our readers.

LOBO: My pleasure, Dennis.

Dennis here. I currently own stock in 3 mining companies and 2 royalty companies, all paying dividends. One is up 158%, and the other four are down about 60%. I hope I never have to sell my

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If you do business with organized crime – Be Careful!

When we last checked, since 2009 the top banks had been fined a total of $204 billion. Bloomberg now reports,“Wells Fargo’s $1 Billion Pact Gives US Power to Fire Managers”:

“The settlement covers issues in Wells Fargo’s auto-lending and mortgage units. The bank revealed last year that it had forced unwanted insurance on customers who took out car loans….”

Fines are just part of the cost of doing business:

“Still, investors appeared relieved…as shares advanced 1.8 percent to $52.44…the best performer in the 24-company KBW Bank Index. The settlement should remove one overhang from the shares, especially since the penalty isn’t as bad as some analysts had anticipated….” (Emphasis mine)

Firing executives, levying fines and no jail time will not solve the problem. Does the justice department think “Next man up” doesn’t apply to organized crime?

A week later, American Banker reports, “Yet another Wells scandal; House moves closer to passing dereg bill.” Quoting from the Wall Street Journal:

“…. Just when you thought all of the various Wells Fargo scandals had been settled, or at least known about, comes word that the Labor Department is investigating the bank for allegedly pushing holders of lower-cost 401(k) plans it manages…pressuring them into buying the bank’s in-house funds.”

Meanwhile, Congress is “moving closer to passing joint legislation that would roll back parts of the Dodd-Frank law and ease regulations on small and medium banks.”

In 2016 I asked, “Should Trump get elected and try to rein them in, are the banks that confident they have bought enough members of Congress to protect their gravy train?” Maybe we have the answer.

In February, MarketWatch updated the scorecard:

“Banks have been fined a staggering $243 billion since the financial crisis.”

Add another $1 billion to Wells Fargo – they are still pale in comparison to the top three.

Where the power is

Forbes reports, “The Five Largest US Banks Hold More Than 40% Of All Deposits.” (The top five are JPMorgan Chase, Bank of America, Wells Fargo, Citigroup and US Bankcorp. Approximately 6,500 banks make up the remainder)

“Total deposits for the five largest U.S. banks have grown by 4.3% over the last twelve months – above the industry-wide growth figure of under 4%. This is a commendable feat by these banking giants…. This represents a share of more than 40% of the…. U.S. deposit market and this figure is likely to trend even higher as the largest banks continue to outperform the overall industry.

…. With the Fed hiking benchmark interest rates…the interest rate environment has finally begun showing signs of improvement. This, in turn, has tempered the deposit growth rate over recent quarters. (Emphasis mine)

…. JPMorgan’s particularly strong growth figure of 7% over the last few quarters helped it become the largest bank in the country…surpassing Bank of America, which has held that position for more than two decades….”

Two banks paid almost 50% of the fines for illegal and unethical activities – yet they remain the two largest banks in the country. Who says crime doesn’t pay?

American Banker reports, “2017 reputation survey: Banks avoid the Wells Fargo drag”:

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“While Wells Fargo’s image is in tatters – and will likely remain so for some time…. The 2017 survey revealed that the banking industry overall extended its multiyear reputation recovery among U.S. consumers, achieving a reputation score that qualified as “strong” for the first time since the Survey of Bank Reputations began in 2011.

Simply put, banks are acting more responsibly with customers – no longer processing transactions in a way that will more quickly trigger overdrafts, for example. …. And these efforts are paying off in higher reputation scores.

Of the 39 banks evaluated in this year’s survey, more than half of them received “excellent” marks from their existing customers, up from just under a third of the banks in the 2016 survey.

…. This year (Wells Fargo’s) score went into free fall, plunging to 48.6, by far the lowest of any bank. (A score under 50 is considered “weak.” Scores between 60 and 69 are “average;” between 70 and 79, “strong;” and above 80, “excellent.”)”

Overall Reputational Ratings
Bank Rating
JPMorgan 69.2
US Bancorp 67.6
Citibank 65.4
Bank of America 57.2
Wells Fargo 48.6

When I went to school 70-80 earned a C, 60-70 got a D, and anything below received an F.

The top five banks rank “average” or below.

Looks more like D’s and F’s to me!

JPMorgan, Citibank, Bank of America and Wells Fargo were fined over $150 billion for illegal activities while paying their executives billions in bonuses along the way. As they have no fear of being jailed; expect their behavior to continue.

Reuters recently reported, “Largest US banks still ‘too big to fail’: Minneapolis Fed study”. If they falter they can count on the taxpayers to bail them out once again!

Why would anyone do business with any company that has no regard for the law or their retail customers? I don’t get it!

There is a better way!

Deposit growth has slowed, now they must compete for deposits. Might they consider treating retail customers fairly? Don’t bank on it! (pun intended)

When handling retirement money, bank professionals are (theoretically) held to the fiduciary level of responsibility – meaning they must put their clients’ interests ahead of their own. Expecting the big banks to behave ethically is asking them to perform an unnatural act. Don’t be fooled! They have shown us their true colors!

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Be a good shopper

Shortly after Jo and I were married, I began looking after her mother’s (affectionately called grandma) financial affairs. Grandma held Certificates of Deposit (CD) in several local banks. Over time, Bank of America gobbled up most of these banks.

I received a letter about a maturing CD – they would automatically roll it over at a rate that seemed low to me at the time (4%). I called the bank. The local manager said, “Since you asked, I’m authorized to raise the rate by ½%.” I told her to close out the CD and send us a check.

She was shocked! I asked, “How many other elderly seniors, who need the money, are you ripping off?” She said she would mail the check and promptly hung up. While ½% more may not sound like much, it was 12 ½% increase above the first amount. How many years had grandma been getting lower than market rates? That’s not looking after your good, loyal customers.

When I deposited the check in grandma’s brokerage account I told her broker what happened.

Get with the times!

At the time, most seniors shopped CD rates in the paper and bought them locally.

Today you can go online and buy CDs through your broker. You can quickly compare rates all over the country. I found dozens of CDs paying more than the local banks. While price fixing is illegal (wink-wink!), banks in Florida were ripping seniors off!

Wolf Richter wrote a sad, but hilarious article, “I Asked my Wells Fargo Branch about CDs with Higher Interest Rates. This is What Happened Next”:

“Competition for cash is returning for the first time in 9 years, and banks hate it.”

The article seemed so extreme I decided to check it out myself.

I found current CD rates on the Wells Fargo website. I was required to enter my zip code. Are they lower in FL or AZ? Why should that make a difference? If I want to lend them money, I want the best rate.

Here are the “Standard CD rates”:

If I bought a $10,000 Wells Fargo CD at my local branch, I would receive 0.15% interest for the year. Oh boy! I’d get $15 in interest, before taxes.

I then checked my online broker and was quickly shocked:

With the click of a mouse, I could buy a 13-month Wells Fargo CD paying 2 1/4% interest, payable MONTHLY! That is 15 times more than the rates on the Wells Fargo website. No wonder they get bad grades, they are ripping off their local customers.

As interest rates rise, CDs will offer better rates to those who take their time and shop. There are over 6,000 banks to choose from. Internet shopping has never been easier, and that includes borrowing and/or lending money.

Get rid of your savings account

Most accounts are paying a fraction of 1%, not even close to keeping up with inflation. My broker offers one-month CDs paying about 10x the interest of a cash account. Ladder them properly and you can have one mature each week!

I don’t do business with any of the criminal banks. If you do business with them, put them in a competitive environment and demand the best deal. They don’t know how to compete on a level playing field.

They make famous bank robber, Willie Sutton look like a piker. The banks have turned into the robbers! At least Willie got thrown in jail. Take your time and protect yourself from being ripped off!

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Just How Long It Takes for Your Retirement Account to Recover From a Correction

You can work your tail off, live below your means, save like a miser, invest like the experts, build a great retirement nest egg – and still end up with virtually nothing!

Don’t take the bait!

The hypocrisy of some financial professionals isn’t funny when you are talking about your life savings.

When I have discussions with licensed financial professionals, one of the first questions I ask is if they believe in diversification. The answer is emphatically “Yes!” Next question – “Why?”

I normally get an education about investing in non-correlated assets for protection. “Protection from what?”, I ask. The common answer is, “To protect from a catastrophic loss in your portfolio.” OK, so far….

I then ask about stop losses. I’d urge all readers to ask these questions to your financial advisor. While the answers vary; all too often they tell me not to worry, the market always comes back. They may produce graphs to prove their point, and the market does come back – eventually!

I’ll then ask, “If the market suffers a 40% drop or more, can you guarantee it will come back in my lifetime?” No, they can’t!

Here is what they leave out tells us that on March 9, 2000 the NASDAQ set a new record – $5,046.86. The next time it set a new record was on May 27, 2015. In real numbers it took 15 years to come back.

How much buying power was lost to inflation over that 15-year period?

The US Inflation Calculator gives us a better picture:

When adjusting for inflation, the buying power of NASDAQ recovered on January 11, 2018. On 3/31/2018 the NASDAQ closed at $7,063.44. While the NASDAQ briefly passed the previous (inflation-adjusted) high, today it has less buying power than 18 years ago.

The S&P 500 fared a little better. Reuters reports:

  • “March 24, 2000: The S&P 500 index reaches an all-time intraday high of $1,552.87”
  • “March 9, 2009: S&P 500 closes at $676.53.”

Once again, let’s factor inflation into the picture:

When adjusted for inflation, it took almost 17 years (Dec. 2016), and a wild ride, for the S&P to recover the same buying power.

Some believe diversification, coupled with a commitment to buy and hold, is the ultimate protection. How many baby boomers would have the willpower to hang on while their portfolio drops almost 60% between 2000-2009? Can you afford to have your life savings remain stagnant for almost two decades?

Stop losses protect against a catastrophic loss resulting from a market crash. Instead of riding the market all the way down, and hoping/praying for it to return, you sell and limit your losses. Baby boomers have a shorter time frame and may not be able to patiently wait for the market to come back.

Another danger seldom discussed

A market crash isn’t the only threat to your life savings. Ask your financial advisor about how you are protected against inflation like we experienced during the Carter years – or perhaps worse.

You’ll likely get a variety of responses. Don’t be fooled with Treasury Inflation Protected Securities (TIPS). By design, they do not offer any “portfolio” protection; they only protect the money you have invested in them. The rest of your portfolio is still at risk.

Ask about gold and precious metals. Many financial professionals warn me gold is much too risky and pays no interest or dividends. I know of only one financial advisor that strongly recommends gold.

Many will point to quotes like this:

“These are people who believe that gold is, to use John Maynard Keynes’s famous description, a “barbarous relic”. Many world-class investors (such as Warren Buffett) believe that gold is just a shiny rock that has little or no intrinsic value.”

Which is it, a great inflation hedge or “a shiny rock with little or no intrinsic value”?

In 2008, when the market tanked, interest rates set historic lows. Investors were inundated with pundits predicting inflation spiraling out of control while gold and silver prices skyrocketed. I also felt it was just a matter of time before our currency collapsed. The Fed is continuing to print money hand over fist, yet somehow, the inevitable collapse has not happened.

Should gold be looked upon as a stop loss – another form of insurance protecting from a catastrophic loss? Should investors be glad we’ve not seen high inflation, despite holding a percentage of their portfolio in gold?

In this article, “Inflation Is Quietly Poisoning Your Retirement Nest Egg”, I outlined a difficult truth:

THE DIFFICULT TRUTHSaving a lot of money to supplement your social security/retirement income is merely a start. Investing wisely and protecting your buying power are major factors in allowing you to retire comfortably.

I looked at inflation of several items over the last 50 years; Federal spending, a gallon of gas, a dozen eggs, a gallon of milk, a loaf of bread, an ounce of gold and the S&P 500.

The first two columns show what each item cost in 1967 and in 2017. Column 3 (Cost-inflation adjusted) calculates what each item would cost if they rose at the government reported inflation rate. Column 4 is the difference between the actual cost and the inflation-adjusted cost. It was an eye-opener.

Federal government spending increased by approximately 146% above the inflation rate. Gas prices followed inflation. Eggs, milk, and bread are actually lower. Gold rose approximately 300% above the rate of inflation. The S&P was up approximately 175% over the 50-year period.

I’d be speculating why the inflation-adjusted price of food declined. I was surprised; particularly because of the high cost of federal regulations piled upon American businesses. Perhaps it is through efficiency and market competition. If that’s the case, free market capitalism appears to be alive and well.

The “Great Society” was launched by President Johnson in the mid-1960’s. At the time, I said the government was incentivizing out of wedlock birth and the welfare population would rise. Regardless of the cause, government spending has far surpassed the inflation rate and is doing so on borrowed money.

The stock market has outpaced inflation. A conservative investor will have a portion in the market for that reason; just keep your stop losses current.

When comparing the buying power of an ounce of gold versus gas, eggs, milk and bread over the last 50 years, gold has performed very well.

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What does this mean?

In the aforementioned article, we looked at the Carter years. Inflation between 1977 & 1982 was 59.9%.

The S&P 500 increased from $96.86 to $133.00 (37%) and gold rose from $133.77 to $400.00 (300%). Unfortunately, many diligent savers and investors lost a lot of buying power in a five-year period due to inadequate inflation protection. In many cases, the buying power was lost forever!

Stocks and gold have historically performed well. I’m sure investment artwork, farmland, and other collectibles also have a history of keeping up with inflation.

While no one can predict the future, a well-diversified portfolio should provide adequate income, protect the investor against long and short-term market corrections, and adequately hedge against inflation.

Following is a list of questions you should ask yourself, your broker and financial advisor:

  • Is your portfolio diversified offering realistic protection against catastrophic losses?
  • After a major market drop, are you comfortable that it will return to its previous inflation-adjusted high in your lifetime?
  • Do you have stop losses in place to protect from a significant market downturn?
  • Do you feel that runaway government spending will inevitably cause high inflation?
  • If we experience 60% inflation like we did during the Carter years, is the buying power of your life saving adequately protected?

Vague answers and “trust me” won’t cut it, get the facts and make sure you are totally comfortable!

I’ve come to the conclusion that gold serves the same role as a stop loss – helping to insure and protect my life savings from the most catastrophic threat of all – runaway inflation.

With government spending and debt exploding as it has, I’m surprised we haven’t already experienced Carter type inflation once again. The Federal Reserve has magically managed to keep the market levitated and inflation reasonable. How much longer can this continue? No one knows; it’s uncharted territory.

I hope to never experience the horrible Carter year type of inflation again; however, I’m not selling any of my metals. Inevitably the dollar will lose a great deal of value in a short period of time. If not in my lifetime – our heirs will find their precious metal coins to be quite valuable.

Help keep us on the air!I’m committed to keeping our weekly letters FREE.

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And thank you all!

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Does Government Debt Really Matter?

The numbers on the US Debt Clock are spinning at a dazzling pace. US government debt is now over $21 trillion, $174 thousand per taxpayer. Add another $3 trillion for debts of state and local government on the stack.

Unfunded federal government promises are almost $113 trillion, $900,000 per taxpayer, not including another $6 trillion in state unfunded pension liabilities.

It’s fiscally impossible for the debts to be repaid. Governments borrow money and make political promises on the backs of future generations. If the numbers were double (or triple) what they are today; would our lives be any different? We can’t pay it back, why not just continue frivolously spending as long as people are fool enough to lend us money?

“The Budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed, lest Rome will become bankrupt.”Cicero, 55 B.C.

Does anyone really care?

Ignore the political class and their allies. Here is an example.

Nobel Prize winning economist Paul Krugman has an impressive educational pedigree – on paper. While he may be an economics professor at Princeton and the London School of Economics, he tarnishes the reputation of all economists, putting politics ahead of common sense.

In October 2016, anticipating the election of Hillary Clinton, he wrote, “Debt, Diversion, Distraction”.

“Are debt scolds demanding that we slash spending and raise taxes right away? Actually, no: the economy is still weak, interest rates still low…and as a matter of macroeconomic prudence we should probably be running bigger, not smaller deficits in the medium term. (Emphasis mine)

…. So my message to the deficit scolds is this: yes, we may face some hard choices a couple of decades from now. But we might not, and in any case, there aren’t any choices that must be made now.”

After the election, Mr. Krugman reversed his position writing, “Deficits Matter Again”.

“…. Eight years ago, with the economy in free fall, I wrote that we had entered an era of “depression economics,” in which the usual rules of economic policy no longer applied…deficit spending was essential to support the economy, and attempts to balance the budget would be destructive.

…. But these predictions were always conditional, applying only to an economy far from full employment. That was the kind of economy President Obama inherited; but the Trump-Putin administration will, instead, come into power at a time when full employment has been more or less restored.”

In October 2016 the economy was “still weak” and we shouldn’t worry about deficits or debt for a couple of decades. Less than 80 days later the economy magically changed and now deficits matter?

It’s political crap! When the party in power implements their financial agenda, whether it’s more spending or tax cuts, the minority party screams about unsustainable debt. When the process reverses, the charade continues and the new minority party screams about the debt.

The Undeniable TruthWith few exceptions, the political class doesn’t give a damn about the debt. The politicos use the tax system and government spending to buy votes to keep them in power.

They kick the can down the road; secretly hoping any negative consequences happen when they are out of power, enabling them to make political hay and convince the public they should rule forever!

Their behavior won’t change; they will continue to pile up debt until the citizens revolt!

If the politicians don’t care, should we?

Prior to the recent tax cut, The Chicago Tribune reported:

“If the House GOP tax plan becomes law, nearly 81 million Americans – 47.5 percent of all tax filers – would pay nothing in federal income taxes next year.”

Those who pay no taxes (particularly when receiving government handouts) probably don’t care about the deficit.

What about the remaining 52.5% that are working their tails off, seeing their hard-earned tax dollars (and more) being spent by an irresponsible government?

Can something bad really happen?

Common sense economics would indicate, governments creating money out of thin air might temporarily prop up the economy, but eventually it would create a large debt bubble. When it pops, expect catastrophic consequences.


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In 2008, when the government started bailing out the banks, many urged caution, suggesting high inflation and our unsustainable debts would finally come home to roost. It hasn’t happened – yet.

Pundit Bill Bonner looked at the stock market and took a critical view of “Trump’s Quack Economists”:

“Markets don’t like uncertainty. …. Presidential advisors Peter Navarro and Larry Kudlow – wrong about just about everything for just about forever – could be right this time.

Maybe the economy really is as strong as an ox. And maybe stocks will go up from here to eternity. But it’s not what we see….

Not that we are always right. ….

Yes…our error was that we misjudged the power of wrongheaded claptrap. Fake money talks louder…and BS walks further than we thought! (Emphasis mine)

We thought the fake money-pumping scheme had reached its end back in 2009.

We were wrong.”

When economists criticize and advise the government; it makes little difference; elected lawmakers show zero fiscal responsibility. The train continues down the track, full speed ahead….

Yes, we should care, and yes bad things can happen. Count on the predictability of the political class. Anyone with wealth or income becomes a target to finance their political spending. We need to protect ourselves.

What economists should we listen to?

I prefer economists with no political agenda – genuinely concerned about helping average hard-working citizens navigate the current and future potential challenges ahead.

Good friend, Dr. Lacy Hunt is tops on my list. He “calls them like he sees them” without any bias. He’s an excellent educator helping us navigate some difficult economic waters.

I recommend his company’s recent Hoisington Investment Management Quarterly Review and Outlook, it’s a primer.

It begins with a discussion of the Fed’s policies over the last decade:

“Nearly nine years into the current economic expansion, Federal Reserve policy actions appear to be benign…. Changes in the reserve, monetary and credit aggregates, which have always been the most important Fed levers…indicate however that central bank policy has turned highly restrictive. These conditions put the economy’s growth at risk over the short run, while sizable increases in federal debt will serve to diminish, not enhance, economic growth over the long run.” (Emphasis mine)

It’s not just a US problem:

“No matter how U.S., Japanese, Chinese, European or emerging market debt is financed or owned, and regardless of the economic system, the path is stagnation and then decline. Even central bank funding of debt will not negate diminishing returns.”

Might the historical cure make things worse?

“While many believe that surging debt will boost economic growth, the law of diminishing returns indicates that extreme indebtedness will impede economic growth and ultimately result in economic decline. …. The standard of living cannot be raised without increasing output.” (Emphasis mine)

Increased debt equates to increased spending and economic output – theoretically! While debt, both government and private, has reached historic levels, they question the premise over the long term.

Talk about diminishing returns…. In 2007, each $1.00 of global public and private debt increased gross domestic product (GDP) by $.36. In 2017 it dropped almost 14%, to $.31. The US dropped about 11%, from $.45 to $.40.

Where are we headed?

“As debt continues to increase, real GDP starts to fall. At this point, debt has reached the point of negative returns, resulting in the end game of extreme indebtedness.” (Emphasis mine)

What is the end game?

When Dr. Lacy Hunt uses the term “end game” we should all take heed; he chooses his words carefully.

Their current newsletter reinforces what we intuitively believed a decade ago, you don’t cure a debt problem with more debt.

How much longer can we borrow and spend before we see the inevitable economic decline? Might we face another great depression?

Might the end game be controlled by others? When creditors lose confidence in the US, the economy and the dollar, they’ll start unloading dollars, causing interest rates to rise – negatively impacting the economy.

No one knows what or when

At the end of a Casey conference a few years ago, the speakers were seated on the stage and the audience asked questions. The main concern – when and what will the end game look like.

They had no idea. Some made predictions, most felt the wheels were soon going to fall off soon – they were wrong.

One participant asked, “Inflation or deflation?” The response of the experts was, “Yes.” The consensus was we could experience high inflation which might be the last major blow to the economy; and then quickly move into deflation and perhaps a major depression.

No one knows for sure how it will shake out, but it won’t be pretty.

Help keep us on the air!

I’m committed to keeping our weekly letters FREE.

I was humbled when readers suggested we add a donations button to help us offset the cost of our publication. We are grateful for all the help we can get.

It’s strictly voluntary – no pressure – no hassle! Click here if you’d like to help.

You do not have to sign up for PayPal to use your credit card.

And thank you all!

What can we do?

While government debt may not matter to the political class, it should matter to everyone who hopes to save and retire comfortably.

Prepare for the worst and hope for the best. Diversify, own real assets and not just paper. While many have been wrong on the timing, Dr. Hunt has clearly highlighted the trend. Take heed! Those who use some common sense and take some reasonable precautions will fare much better than most.

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Source: Investors Alley 

What Happens to Your Money Under High Inflation and a Recession?

In a recent interview with Chuck Butler, he warned us that we may be in for a significant “Minsky Moment”.

The federal reserve is raising interest rates and unloading trillions in their US debt holdings. Countries that normally buy our bonds are slowing down their purchases or reducing their holdings. With fewer buyers, what happens if interest rates continue to climb?

Chuck then sent me an article by David Stockman which concerns me; the issues we discussed are happening worldwide.

David Stockman presented an eye-popping graph. Debt being held by central banks has tripled in ten years to well over $20 trillion.

If world-wide central banks are working in unison unloading debt – the Minsky Moment could be much bigger than I originally imagined.

It’s time to get some input from someone outside the US who is involved in global finance on a daily basis. I contacted Rob Vrijhof, President and Senior Partner in Weber Hartmann Vrijhof & Partners Ltd. located in Zurich, Switzerland.

DENNIS: Rob, thanks for taking the time for our education. Several experts are warning about the world-wide, staggering government debt. Central banks have reversed course – some have stopped buying, while others are selling off some of their holdings.

What are you seeing in Europe, China, Japan and elsewhere?

ROB: Thanks for inviting me.

The debt that has been building up by the world national banks is indeed staggering.

After the real estate bubble burst in the USA, enormous amounts of money created out of thin air were being pushed into the system trying to avoid a complete collapse of world economies. It seems that national banks, working in tandem, saved us from a total downfall – with interest rates falling into negative territory in Europe.

Reality is now kicking in and these enormous accumulated debts will eventually have to be paid back. The big question is how this will be done. This question is faced not only by the USA but also by Europe and Japan to name just a few.

This presents a real challenge for central banks for the years ahead. Higher interest rates are poison – perhaps it could be done through inflation.

Unfortunately, we strongly believe there will be no happy end to this party of cheap money.

DENNIS: The law of supply and demand hasn’t been repealed. When supply of debt instruments (bonds) is higher than demand, interest rates will rise. Interest rates on US treasuries have already doubled since July 2016.

A two-part question. What are you seeing outside the US? Are the days of negative interest rates disappearing?

ROB: The interest rate hikes started in 2017 by Madame Yellen of the Fed. We believe new Fed chairman, Mr. Powell, will continue the process. We anticipate he will increase rates by 0.25% in March followed by another two hikes in 2018. While he says he will keep a close eye on inflation, we believe the 2% target will be shuttered – we may be in for a period of higher inflation.

The European Central Bank headed by Mr. Draghi is under no pressure to hike interest rates. We feel he will wait and we expect the first rise in interest rates in Europe during the fourth quarter of 2018.

The Swiss National Bank will do everything they can to keep their negative interest rates in place, inflation in Switzerland is still not on the horizon. We strongly believe that the negative interest rates will be with us for another 12 to 18 months. We don’t expect the Swiss National Bank to raise rates until well into 2019.

Wouldn’t inflation have to be considered?
DENNIS: Rob, I’m concerned about the bond market. Central banks alone hold over $20 trillion in bonds that pay interest rates well below the market. What are you telling your clients who may be holding long-term bonds?

ROB: We’ve been telling our clients to use any rally on long-term bonds as an opportunity to sell since we strongly believe this everlasting bull market in bonds could be coming to an ugly end.

We are always looking for short-term bonds that are paying higher interest rates than the ones in the USA. In foreign currencies, you profit from higher interest rates and also from the weaker US Dollar. High-quality foreign currency bonds are available and very liquid, so we view this as a solid alternative.

Yes, inflation is a big concern. We anticipate a revival of inflation with most of the world economies blasting ahead at full speed, wages and interest rates moving up.

We should all hope that it will not be galloping away since high inflation numbers could also be bringing the ugly “R” – word (recession) back into circulation.

DENNIS: I’ve wondered if I would ever see safe, high quality 6% bonds again in my lifetime. When we did our retirement projections, 6% was a given. Do you feel it’s possible to return to those days? At 6%, how could debtor nations possibly afford to pay the interest on their current debt levels?

ROB: This is a very tough question at my age. It seems not very long ago that we were getting well above 6% interest on Swiss Government bonds, this was back in 1991.

When we bought our first house in 1998, our mortgage was a 4.5% fixed rate. I believed I had the best deal of the century. My last fixed 10-year mortgage rate was 1.25%.

To address your question, yes interest rates could be heading up to these levels during the next few years; helping lenders and hurting borrowers.

You are correct, the gigantic debt of our central banks will then also have to be paid back at a much higher interest rate – which could end in a catastrophe. It would probably mean higher taxes and inflation.

While lenders may like the higher rates we are seeing today, if we see galloping inflation, the higher rates will do us no good. Unless interest rates (after taxes) are higher than true inflation, you are losing buying power every day.

DENNIS: It looks like we’re anticipating a huge Minsky Moment. A bond market collapse, high inflation, and rising interest rates will certainly affect businesses all over the world and their respective stock markets.

No one can time the market; we expected the issue of skyrocketing debt to come to a head years ago. If/when it does happen, there will have to be some real bargains for investors who have cash and were patient.

What are you advising your clients?

ROB: There are times where cash could or should be looked at as an investment and we strongly believe this is the time to have cash on the side. This doesn’t have to be in US Dollars it could also be in Swiss Francs, Pounds or Euros.

We are currently underweight in equities and overweight in cash, foreign currency bonds, and precious metals.

We do not know when this party will end but we want to make sure that we are not the last ones to exit.

You have to stay ahead of the crowd, patience is a virtue and will be rewarded. The stock markets might be holding at these skyrocketing levels for another few quarters, but a big correction is in the cards, then be ready to go all in.

DENNIS: Market historians like to point to an event that sparks a crash. What do you think readers should be looking for? Are there any countries or markets that you feel might be leading indicators of what’s to come?

ROB: What we’ve been seeing since the beginning of the year is indeed very scary, with the Dow dropping 1100 points, and then ending up with a small gain in only one trading day. We do feel a large correction is in the cards in the not too distant future for many reasons.

  • We have experienced one of the longest-running bull markets in history.
  • Inflation and interest rates might surprise market makers to the upside, bad news for stocks.
  • Profit taking on stocks could easily start an avalanche of stop losses, particularly with the programmed traders.
  • North Korea, Syria, Iran, Israel etc. could scare investors which could lead to the large correction we expect.
  • A trade war between the USA, China and/or Europe could also spark the expected fire.

Pick any of the above, but then again it might come from a completely different angle. We just don’t know. We will be told by historians after it happens and that won’t be very helpful.

It appears that a serious correction is imminent and that investors need to make wise decisions now.

DENNIS: Rob, one last question. I’ve had some readers ask if you ever come to the US. Are you going to be speaking/attending any events in the US in 2018?

ROB: I will be speaking at the Four Seasons in Las Vegas from March 15th until the 18th for the Oxford Club. I’ll be back there again in September for the Total Wealth Symposium organized by Banyan Hill.

DENNIS: As a reminder, I have an account with Rob’s firm, however, we have no other financial arrangements. He graciously gives of his time. On behalf of our readers, thank you again.

ROB: My pleasure, Dennis.

Waiting (and waiting) for something to happen is difficult. With today’s computer traders, a Minsky Moment can be sudden. I agree with Rob, better to be patient than the last to exit the party!

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Where to Invest For the Next Correction.

My grandfather, William Paul Smith was an ordinary dairy farmer with a degree in common sense. One of his favorite sayings was, “It’s the same thing, only different.” 70 years ago, he warned me not to throw rocks at a wasps’ nest. As I cried and put ice on the sting, he explained what happened always happens – and I got stung! I thought I was different – and could outrun a wasp – and had to learn the lesson the hard way.

His sage wisdom does not just apply to children. Why is it that many lessons are constant, yet even as adults, we choose to ignore warnings and learn the hard way?

“The four most expensive words in the English language are this time it’s different” – Sir John Templeton

Good friend Chuck Butler, writes for Dow Theory Letters, a terrific publication. Chuck recently asked, “Will This Time Be Different?”

His headline reminded me of my grandfather. Warnings are appearing regularly – are they being ignored?

Subscribers are concerned. Mike L. recently asked:

“What do you think will happen with the dollar and today’s retirement plans if bonds tank, no one buys our debt, and other nations continue to conduct trade deals without using the reserve currency, etc.?”

Chuck warns:

“I’m only going to say this once … This is all headed for a Minsky moment. … A Minsky Moment is when a market fails or falls into crisis after an extended period of market speculation or unsustainable growth. I’ve moved that over to debt accumulation instead of a market.”

I contacted Chuck. Will the Minsky Moment appear in the stock or bond market? What can individual investors do to avoid getting stung?

DENNIS: Chuck, on behalf of our readers, thank you for taking your time for our education. Let’s get right to it.

Before I get into specific questions, you discussed a ratio of household net worth to income. I’ve never heard of that before. Can you explain it, and what it means for our readers?

CHUCK: Dennis, thank you for inviting me to share my opinions and thoughts from many years of investment experience with your readers. I get a kick from doing these interviews, just so you know!

Anyone with a home mortgage falls into this ratio… Basically, you take the house’s value, (easily obtained from and you subtract what you owe on it. Simple, right?

Add up all of your income and divide it into the net worth figure you just calculated. The higher the number the higher the risk. If the house’s value falls, the income could be eaten away with just mortgage payments or increase the chance of defaulting on the mortgage.

Before we got crazy with home values in 2004-2007, this ratio was around 5.1%. In 2007 it peaked to 6.5%, and we all know what happened then. Lo and behold right now it’s 6.75%!

Some pundits and economists are saying, “This time will be different”… I just cringe when I hear those words!

DENNIS: I’ve noticed a lot of ads encouraging people to refinance their homes while rates are still low, suggesting they can take some of the equity and pay off their credit cards. That only works if they cut up the damn credit cards. If millions of consumers refinance, basically taking equity out of their home, what impact will that have?

CHUCK: In 2005, I told my readers that consumers were using their houses like ATM machines, taking equity out of their homes to buy SUV’s, big screen TV’s, and fancy clothes. That was all fine until the house values began to fall, and now the consumers owed more on their house than it was worth.

Never in a million years would I have thought that we would again fall for that idea that house values will never fall, especially so soon after the last crisis and collapse. But here we are again…. And it’s all going to end up just like the last crisis, but this time, it will be worse, because we never cleaned out the excesses of the last boom period.

Banks and financial institutions have more derivatives on their books now, than they did before 2007…. Like your grandfather said, same thing, only different…and worse.

DENNIS: Our mutual friend, Dr. Lacy Hunt echoed your remarks about consumer credit growing at the fastest rates in 16 years when he recently wrote:

“Consumer spending, the economic heavy lifter of U.S. economic growth, has expanded by 2.7% over the past year…. Real disposable personal income rose by only 1.9% over the past year. It was only the ability to borrow that supported the spending increase. In economic terms,borrowing is a form of dissaving.

…. the only period in which the saving rate was lower than it is today was 1929-1931…” (Emphasis mine)

Chuck, I know you call it the “stupid” Consumer Confidence Index. It’s currently 94.4, which is doggone high. Consumers are so confident, they are “dissaving” at a historically high pace.

You are warning a lot of overconfident investors they may get stung – and badly! If debt is the issue, wouldn’t the Minsky Moment start in the bond market?

CHUCK: It just may do that Dennis. You see a Minsky Moment happens when everyone is complacent about the assets and thinks that nothing bad could happen, so they get overconfident and decide to take on more risk. At that point, the Minsky Moment is just around the corner.

What could cause a Minsky Moment in bonds? Well, think about this for a minute. The U.S. Fed has been a very large bond buyer since the first round of Quantitative Easing began in 2009. They bought boatloads of both U.S. Treasury bonds and Mortgage-backed bonds. Look at their balance sheet, it increased five-fold to over $4.6 Trillion in 2017.

The Fed announced a “tapering” in 2015, but they kept buying Treasuries to replace bonds that matured. Late last year they announced that they were going to stop buying bonds altogether. No replacement bonds, no auction window buying.

The question was… “Who is going to take the Fed’s place”? Well, there has been no one, to date, and the 10-year Treasury yield has risen from 2.05% on Sept. 8, 2017, to 2.65% on Jan. 18, 2018. That’s just the beginning, in my opinion!

The Fed may not be the only “no show” at the auction window. China is considering slowing down their Treasury purchases or halting them altogether! Guess who else has been slowing down their Treasury purchases? Saudi Arabia, and Russia… Oh-no! Say it ain’t so, Joe!

This is the Minsky Moment for bonds…no big Central Bank buying, will drive yields much higher. It could easily be followed with another Minsky Moment for stocks.

When interest rates hit historic lows, money flooded into the market as investors were desperately searching for yield. As yields rise, the tide will quickly turn, and mom and pop stock investors will take the risk out of their investments and go back to bonds.

DENNIS: One final question. Many of our readers are clearly seeing the signs, fearing a Minsky Moment is inevitable, but not sure about imminent. They don’t want to get hurt. When the Minsky Moment eventually happens, I believe it will be different – it will be uglier than most investors have seen in their lifetime.

What advice would you give our readers to protect themselves?

CHUCK: Well, you know me well enough Dennis that you could answer this question for me! But here it goes…

First of all, the dollar is going to be held hostage by all this chaos, expect high inflation. Diversify into euros, sterling, Aussie dollars, kiwi and some others would be prudent. In addition, either a new purchase of up to 20 to 25% of your investment portfolio in Gold & Silver, or an increase in your holdings.

I feel that Gold & Silver are going to replace all the hoopla of Bitcoin, and I also feel that once that happens there will be supply problems, thus raising the prices of these metals even higher.

There is a positive side. Those who heed the warnings will be presented with some terrific buying opportunities.

I thank you for allowing me to give my opinions and thoughts, Dennis. You have very astute readers, and I’m sure they will hear the calls to take defensive moves in their investment portfolios. As I said before, I get no kick from champagne, flying too high with some gal in the sky, is my idea of nothing to do, but I get a kick out of writing for you!

DENNIS: (chuckles) That was clever! Chuck, once again, on behalf of our readers, thank you.

Both Chuck and Lacy Hunt clearly point to similar warning signs of previous “Minsky Moments” where millions of people lost a lot of money. The same thing, only different?

We have a new generation that’s not been stung badly enough and learned a lesson. The warnings are there for all to see – some will heed them, take precautions, diversify, keep debt under control, keep stop losses current – and take advantage of some great opportunities when they appear. Others will ignore the warning signs. Why do so many of life’s lessons have to be learned the hard way? You can’t outrun a wasp!

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Source: Investors Alley 

Less Than 10% of Millennials Would Keep Paying Back Student Loans: Here’s Why

How’s this for a business proposition? I owe you $17,000. If you forgive my debt, I won’t use Uber or Lyft for my transportation needs. Or, how about I agree to give up texting and mobile messaging for a year in exchange for debt forgiveness? Doubt I’d get any takers.

I received an email about a recent survey,“Survey Reveals What Millennials Would Rather Deal With Than Paying Student Loans”. The sender suggested, “The insights would be a great fit with your audience.”

They questioned 500 millennials, age 18-34. At first, I thought it was a joke:

“We’ve … compiled some key findings:

  • A staggering 49.8% of all respondents said they would give up their right to vote in the next two presidential elections in order to have their debt forgiven
  • Ride-sharing services like Uber or Lyft don’t seem to matter to millennials quite as much… According to the results, 43.6% were willing to give up these services forever in exchange for debt forgiveness
  • Interestingly, 42.4% of respondents would also give up traveling outside of the country for 5 years, while only 27.0% said they would be willing to move in with their parents for 5 years
  • Millennials seem to value texting more than the other options – only 13.2% reported being willing to give up texting and any mobile messaging equivalent for the next year in exchange for having their debt forgiven
  • Only 8.2% of respondents chose to select none of the above and said they would rather keep paying off their student debt”

I asked the sender, “… My generation was faced with a choice. The rich kids went to college, the poor kids joined the military (gonna get drafted anyway) and then came out and used the GI bill to help fund their college. Were there any questions about trading military time for debt reduction? I received a polite response saying that was not part of the poll. Did it even dawn on them to ask?

The survey sponsor appears to be in the loan business, promoting refinancing student loans.

While I passed on the idea, I soon changed my mind. The survey appeared on Facebook, generating some brutal feedback. Many called respondent’s snowflakes and much worse. They felt the respondents had no clue about sacrifice and the real world.

Might part of the problem be the survey itself? If respondents were only given those silly choices, they would check the ones they felt most appropriate. Perhaps student loan debt is not that much of a problem. They are not willing to sacrifice much to make it go away.

Here’s one example. Survey says…49.8% would give up their right to vote in the next two elections to have their debt forgiven. The article also mentions less than half of the millennials voted in 2016.

What some consider sacrifices doesn’t cut it with many Americans.

OK Millennials, listen up!

When you took out a student loan, you entered into a contract, borrowing money to complete your education. You felt your education would lead to a better job and you could repay the debt from your earnings.

The government was a co-signer, guaranteeing repayment of the loan. By doing so, the banks offered YOU very low interest rates.

Today, paying off your debt is an inconvenient challenge. In my article, “Student Loans – A Multigenerational Curse” I outlined you are not alone:

“Since the 2008 recession began student loans have skyrocketed to over $1.4 trillion.

The Wall Street Journal reports, “Revised Education Department numbers shows that … at least half of students defaulted or failed to pay down debt within 7 years.” Many young people (not all graduated) owe several hundred billion dollars they have been unable or unwilling to repay.”

The survey says, “…The Federal Reserve puts the median student loan debt balance at $17,000, with monthly payments of $222.” More than half are failing to honor their contractual obligations.

Government guaranteed student loans are a deal with the devil.

With some very limited exceptions, you cannot discharge student loans in bankruptcy court. As a taxpayer, I LOVE that provision. In 2012 Marketwatchreported:

“According to government data … the federal government is withholding money from a rapidly growing number of Social Security recipients who have fallen behind on federal student loans. From January through August 6, the government reduced the size of roughly 115,000 retirees’ Social Security checks on those grounds.”

What is debt forgiveness?

Unlike bankruptcy, debt forgiveness is when a lender voluntarily agrees to allow the debtor to forego payment of the remainder of the debt. It’s a gift, plain and simple. If student debt is forgiven or defaulted, the government pays off the bank.

Unfortunately some politicos, pandering for votes, are promoting the concept, willingly giving away billions of our tax dollars.

Let’s cut to the core. Asking for debt forgiveness is asking taxpayers, your friends and neighbors, to pay for decisions YOU made for YOUR benefit.

The Student Loan Debt Clock tells us the current total is over $1.5 says there are approximately 138 million US taxpayers. If all student loan debt were forgiven, the cost would be approximately $10,870 per taxpayer.

Its no wonder the feedback on Facebook was so negative. Taxpayers work hard and don’t want to pay off someone else’s debts.

What to do?

Student loans should be a last resort when it comes to financing an education. Students should be educated about debt and the consequences before they take out the loan.

As I outlined in my previous article, college costs should be minimized. Four-year graduation should be expected, 36% of incoming freshmen get it done! Students are making adult decisions, many times at an early age, and parents need to guide them so they don’t end up with a huge debt burden.

I checked out the Army ROTC website:

“Scholarships and stipends in Army ROTC help you focus on what’s important. Namely, getting that college degree – not how you’ll pay for it.”

A college degree and a few years as a military officer have worked well for many young people. If you are not willing to do so, that’s fine, just be responsible and honor your contractual obligations.

27% of the respondents said they would be willing to move in with their parents for student loan debt forgiveness. That’s a bass-akward solution for sure!

A recent US Census Report tells us:

“More young people today live in their parents’ home than in any other arrangement: 1 in 3 young people, or about 24 million 18-to 34-year-olds, lived in their parents’ home in 2015.

… At 24.2 million people, the population of 18- to 34-year-olds living at home is a large and diverse group. …About 81 percent are either working or going to school.”

If you are going to live at home, do it while you are going to a local junior college, saving a tremendous amount in educational cost. The goal is to transition into adulthood easily with no debt burden.

While many parents want to help their children, having them move back home after college for extended periods of time is an economic and emotional burden. Parents must move ahead and get their retirement in order.

Plan B

Based on the survey and available choices, it’s easy to conclude that student loan debt is more an inconvenience (average $222/month???) than a real burden. If debt consolidation will help reduce monthly payments, investigate the option. However $222/month is not the case for many millennials.

My granddaughter and her husband married in their senior year in college. Their combined student loan debt is significant. They both work, husband got a second job and they are responsibly working to pay off their debt and raise a family. Yes it is difficult.

Debt Forgiveness

There are ways to legally obtain some debt forgiveness. highlights many Student Loan Forgiveness and Discharge Programs. It involves more sacrifice than promising not to text. Here are some options:

“Public Service Loan Forgiveness Program

Under this program, members of the military who have been employed by the military or a qualifying public service job for the last 10 years may have their federal student loans FULLY discharged.

Public service qualifying occupations include:

** Emergency management
** Military service
** Public safety
** Law enforcement
** Public interest law services
** Early childhood education (including licensed or regulated childcare, Head Start, and state-funded pre-kindergarten)
** Public service for individuals with disabilities and the elderly
** Public health (including nurses, nurse practitioners, nurses in a clinical setting, and full-time professionals engaged in health care practitioner occupations and health care support occupations)
** Public education
** Public library services
** School library or other school-based services

You need to be employed in these positions at least full-time, which is considered to be at least 30 hours a week or what the employer considers to be full-time.”

If you have student loan debt, sacrifice and do what it takes to get the loans paid off as quickly as you can. If you are in college, or headed in that direction, get a good education in four years with minimal student loan debt. Work your tail off so you can easily transition to your next step in life.

Decisions and behavior have consequences. Welcome to the adult world!

Stop losses are a MUST. Retirees cannot afford to gamble on the buying power of market coming back in their lifetime; the risk is much too high!

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