January 8, 2014
- In search of a bold prediction, we settle instead for an undervalued sector
- Act II of “the biggest fire sale in history”
- The pointlessness of waiting on Fed “minutes”
- Brace for impact: If the Fed can’t continue tapering, here’s what it will do instead
- The columnist who agrees with us that Obamacare is built to fail… the old “I dare you to print this!” trick, updated for 2014… the mystery of the missing senators… and more!
“Nobody really knows anything,” declared Chris Mayer in a momentary fit of nihilism.
Chris pushed back — hard — late last year when we asked him to make a big prediction for the coming year. He cited Karl Popper’s assertion that accurate predictions in the social sciences are impossible
Look no further, Chris said, than the performance of Barron’s expert market seers for the last decade. On average, they’ve been off by 11.8 percentage points — more than their average predicted gain of 10%!
Look too, he said, at a new book by Walter Friedman called Fortune Tellers. “The book’s main message,” said Chris, “is that the giants of economic and stock market forecasters were remarkably terrible.”
Friedman has a point when he writes, “While doctors might be able to advise patients about their general health, they could not determine whether a healthy patient would be struck by a brick upon leaving the hospital.”
Surely, we protested, there must be something you can project with a modest degree of confidence.
At last, he relented: “In markets, because opinion impacts prices, it is only sensible to consider what’s unloved. There you are likely to find very good prices at least. And in a world where nobody knows anything or can predict what will happen next, the best chance you can give yourself is to focus on buying what’s cheap on the theory that cheap won’t be cheap forever.”
“I think 2014 will be the year of European recovery,” Chris ventured to say once we finally wore down his resistance.
Hey, he said he was looking for what’s cheap, not necessarily what’s sexy. We agreed to meet halfway.
“A lot of investors,” he said, “think of Europe as one monolithic thing, like the United States. They think of maybe fussy countries with a lot of bureaucracy, high taxes, men with girly shoes. But Europe is very different.”
Poland, for instance, is the only European country that managed to escape recession in 2008. “Poland,” Chris explained, “is an economy with low taxes, low regulation and they’re really just starting to engage again with Western Europe.” This “emerging” Europe encompasses the Czech Republic, Hungary and even Turkey.
“These markets are much more undervalued compared with Western Europe, and they’re even cheaper than most of the emerging markets in Asia.”
OK, we said. That’s it?
Chris sighed heavily…
“Well, Act II of the biggest fire sale in history is underway.”
Aha! Now we’re getting somewhere. It was at this time two years ago Chris tipped us off to how Europe’s banking sector needed to raise cash to stay afloat. And so the banks were starting to sell off assets — especially real estate — at fire-sale prices.
“There is no better, more reliable way to make money than to buy something from someone who has to sell,” he said at the time. “Bankers are the best people in the world to buy from.” If they need cash, they won’t quibble too much about price.
And now, two years later? “It may be hard to believe,” Chris says, “but the European banking system is in worse shape than it was in 2008.” European banks hold 1.2 trillion euros in “nonperforming loans” — those at least 90 days in arrears. That’s double the 2008 figure.
“Banks have to get rid of these loans,” Chris explained. “There are new rules taking effect in 2014, called Basel III. They tighten every year through 2018. To meet these hurdles, the banks must clean up their books. This means they have to sell a bunch of assets. And they are selling them at deep discounts. You want to be a buyer of these assets.”
Chris’ favorite vehicle for doing so is up 97% from his initial recommendation two years ago… and he’s urging readers to hold on tight for more.
[Ed. Note: Still not excited? Chris is also urging readers to hold on for outsize gains from an unconventional play that can pay off 300-500% more than traditional stocks — and with less risk.
It’s nothing super-complicated; you can buy it in a discount brokerage account. But the window of opportunity tends to be limited. In fact, this one’s about to close in one week’s time. For the ultimate “make money while you sleep” play, take a look here.]
Major U.S. stock indexes are in suspended animation this morning, traders awaiting minutes from the Federal Reserve’s December meeting — due for release around the time this episode of The 5 hits your inbox.
For the moment, The Dow and the Russell 2000 are slightly down; the S&P 500 and Nasdaq are slightly up. Gold has slid to $1,224.
Recall the last Fed meeting brought word that quantitative easing would be “tapered” from $85 billion a month to $75 billion. As such, traders will study the minutes carefully for clues to the Fed’s next move at the end of this month.
As we’ve pointed out before, all this amateur Kremlinology is a pointless exercise; Fed “minutes” are not a record of who said what, but rather a carefully massaged document designed to mess with the minds of the very traders who give the minutes such credence.
“Talk of shrinking the Fed’s balance sheet is premature,” says our macro maven Dan Amoss, stepping back to examine the big picture.
“First, it needs to slow (or ‘taper’) the rate at which it’s printing and expanding its balance sheet. Then, it needs to stop printing; the last two times the Fed stopped printing, in 2010 and 2011, there were brutal sell-offs in stocks and other risky assets. Finally, if the reaction to stopping the printing press hasn’t already panicked the Fed back into easing, it might try reversing its prior QE operations.”
To see how little difference $10 billion a month in tapering will make, check this out…
“Here’s how the Fed will tighten, if it tightens at all,” says Dan.
“The Fed will retain all the bonds it has acquired — at least until they mature. If the Fed feels the need to adjust short-term rates, it may attempt to use repurchase agreements, or ‘repo’ trades. Put simply, repos involve the Fed selling securities from its balance sheet while simultaneously agreeing to buy them back at a specified time and price.
“If the Fed ever wants to raise short-term rates again, it’s much more likely to use repo trades to set interest rates in the money markets. Repo trades are a ‘chicken’ way of temporarily (not permanently) selling Treasuries and mortgages from its balance sheet.
“The alternative — permanent asset sales — would shrink the Fed’s balance sheet and the monetary base. Since repos are a tamer, market-friendly choice, we can expect the Fed to try using repos. Central banks may talk tough, but they’ll keep acting easy.”
The investing takeaway: “Gold investors who’ve bailed out on the assumption QE will eventually reverse and the money supply will eventually shrink will find it necessary to return to the market,” Dan suggests. “And new investors will seek shelter from the blizzard of paper money supply that will be required to keep the global debt pyramid stable. Gold trades like an option on monetary disorder.”
“How Obamacare Actually Paves the Way Toward Single Payer” reads a headline in The New Republic.
Nothing like seeing our own forecasts validated elsewhere. All last year, Jud Anglin — the Laissez Faire Club’s health expert — said Obamacare was built to fail: “The ultimate objective is a full, 100% government takeover of the entire health care industry.”
Noam Scheiber’s article was prompted by a Michael Moore rant we missed last week in The New York Times. “Obamacare is awful,” Moore declared. “The Affordable Care Act is a pro-insurance-industry plan implemented by a president who knew in his heart that a single-payer, Medicare-for-all model was the true way to go.”
“I’m still much more sympathetic to Obamacare than Moore,” Scheiber writes. “He thinks it’s awful. I consider it a deceptively sneaky way to get the health care system both of us really want.”
If Obamacare plans are “maddeningly insufficient,” to use Scheiber’s words, the cry of Medicare-for-all will grow louder: “As people age out of Obamacare and into that single-payer program we all love and support, their fondness for Medicare will only increase. Before long, their slightly younger friends and family members will be clamoring to join Medicare, too. How long before some opportunistic pol proposes that everyone on Obamacare who’s 55-and-up can enroll in Medicare?”
Deceptively sneaky, indeed. There’s still time to act to mitigate the worst effects of Obamacare on your wealth and health. In fact, Jud says there’s a three-word secret that effectively allows you to “opt out” of the program.
“For the reader who stated that gold will decline over the next 18 years,” begins today’s mailbag: “Can you name one other commodity that has declined over any 18-year period?
“I bought gold as insurance, not as an investment. Just because the value of the new house we purchased in 2006 dropped by half does not mean that I canceled my insurance. I have confidence that gold will go back to $1,900 before my house goes back to the purchase price.”
“I hope your readers who consider holding physical gold as an asset weigh the risk of confiscation, as tends to happen under draconian, fascist states,” another reader points out.
“Also,” he pivots quickly to another topic, “here’s a link I’m almost 100% sure you will never post to your members, because it’s not dumbed down by greed quite enough.”
The 5: On the first point, we see a “windfall profits tax” as a more likely response to a major rise in the gold price. Which is no reason to avoid gold, Currency Wars author Jim Rickards told us last year: “I think it’s important for readers to understand that laws like that don’t happen overnight. They have to go through Congress, there have to be bills, there have to be hearings, there have to be votes. So first of all, it might not happen at all — maybe somebody would try to do it, but it wouldn’t get through Congress, depending on who’s in Congress at the time. Secondly, you should be able to see it coming and maybe pivot out.”
On the other point… That’s a creative variation on the old “I dare you to print this!” trick. Well played, sir. We happen to have watched the documentary some time ago. Good stuff about the Fed, big banks, Big Pharma, Big Agra, the seamy nexus between Big Business and Big Government.
The stuff about ancient astronauts and free energy? Not so much…
“The vote for Janet Yellen in the Senate was 56-26,” a reader writes. “Where were the other 18 senators? Maybe on some tropical beach along with the entire Obama clan relaxing (on our tax-paid salaries and travel expenses!).
“Then again, the country would be better off if Congress were paid to stay on vacation 12 months a year.”
The 5: Supposedly, the “polar vortex” canceled enough flights that even congresscritters were affected. Alas, not enough to prevent a quorum…
Regards,
Dave Gonigam
The 5 Min. Forecast
P.S. It’s never too soon to think about your 2014 tax planning. And there’s nothing like keeping more of what you earn while sticking it to the IRS at the same time.
Here’s a New Year’s resolution you can easily keep: Limit the amount of money you send to Washington. Learn how to get started at this link.