- Faith in the Fed starting to crack
- Awaiting the next financial crisis: The big takeaway from yesterday’s AIG court ruling
- Two keys to 100-baggers: Top fund manager agrees with our Chris Mayer
- The best housing number since the Fed hit the panic button… why an Austrian brothel is offering free sex… tackling a reader’s sincere and worried inquiry about Greece… and more!
“2015: The year faith was lost in central bankers.”
We made this call early in the year. Jan. 22, to be precise. The Swiss Central Bank had just rocked the financial world by uncoupling the Swiss franc from the euro. Reuters posted a news analysis piece posing the question, “What if central banks become as unpredictable and fallible as they are powerful?”
In mainstream circles three years ago, the question was unthinkable…
Notice the halo effect around the main headline? Ugh…
But this morning, as the Federal Reserve convenes for one of its every-six-weeks meetings, you can’t help stumbling over the question.
“The Federal Reserve on Wednesday will unveil the latest version of its strategy for righting the American economy,” writes The Washington Post’s Ylan Q. Mui. “But the question is: Will anyone believe it?”
The Fed has been consistently overoptimistic about the pace of the “recovery” since 2009. Only yesterday, we mentioned how the Fed’s own numbers indicate the manufacturing sector is back in recession — six months of either no growth or outright contraction.
And so the establishment media have figured out what our Jim Rickards told me in 2013: “The Fed has one of the worst forecasting records out there.
“When you look at the Fed’s forecasts for the last four years, they were wrong every time, and they were wrong by a lot — meaning why should we believe the forecast now? In fact, we shouldn’t. Based on their track record, we should assume growth will be very different from what the Fed’s forecasting.
“Don’t ever think for a minute that the central bankers know what they’re doing,” Jim emphasized to me last year. “They don’t. And that’s my own view, but I’ve heard that recently from a couple central bankers…. They said the same thing: ‘We don’t know what we’re doing. This is a massive experiment.'”
Along with a loss of faith in the Fed, we’re witnessing a parallel phenomenon — an acknowledgment that another financial crisis is at least possible.
This too was a concept the mainstream refused to entertain three years ago. This morning, you can’t get away from it — thanks to a federal judge named Thomas Wheeler.
Yesterday, Judge Wheeler declared the Federal Reserve’s 2008 rescue of AIG an illegal act. The Fed had no authority to take over an insurance company, he ruled in a lawsuit brought by AIG’s ex-CEO Hank Greenberg. But the judge denied Greenberg the $40 billion in redress he sought… saying absent the Fed’s action, AIG shares would have been valued at zero.
“Judge Wheeler’s opinion,” says The Wall Street Journal, “could cast a shadow over the government’s role in any future financial crisis, lawyers and other legal observers said.”
The hand-wringing by The New York Times’ Andrew Ross Sorkin was even more explicit: “The judge’s decision could have far-reaching consequences should another financial crisis occur — and if history is any guide, one will. Legal experts say that the ruling, coupled with certain provisions of the Dodd-Frank financial overhaul law enacted after the crisis, makes it unlikely the government would ever rescue a failing institution, even if an intervention was warranted.”
Nonsense, says money manager and uber-blogger Barry Ritholtz: “In theory, the ruling may limit the Fed’s ability to deal with the next crisis. In practice, during a genuine panic, there are no rules… In an emergency, the government often ignores what courts say.”
So two of the nation’s leading newspapers — “opinion shapers,” if you will — are putting another financial crisis on the table.
There’s a growing awareness of what our Jim Rickards has said for years: The system wasn’t cleansed after 2008. Many of the imbalances in the system were allowed to remain… and have only gotten worse.
If the mainstream is catching on to at least the hypothetical possibility… that means it’s time for you to move to the next level and prepare your portfolio for that next crisis. That’s what a select group of our readers will do on Thursday here in Baltimore when they join Jim at the Four Seasons. There, Jim will unveil his “House of Cards” thesis for the first time.
He will detail the specifics of how the next collapse will unfold… and how to get ready. We’re sorry if you can’t join us Thursday, but we do offer the next-best thing — high-quality audio recordings and full transcripts of every session. We’ll email them to you as soon as they’re ready.
Best of all, if you act before midnight tonight, you get the best available price. Click here to order.
Major U.S. stock indexes are drifting higher as the Fed begins its two days of meetings. The S&P 500 is up a quarter percent, to 2,090.
Treasury yields sit around where they did yesterday, the 10-year at 2.34%. The dollar is likewise little moved, the dollar index a hair above 95.
But gold is losing ground, now $1,178. Crude is pushing up, back within 13 cents of $60.
The one economic number of note is housing starts — down 11.1% from April, but April’s number was silly high (and revised upward in today’s report from the Commerce Department).
Building permits — a more reliable indicator of future activity — are looking their strongest since August 2007. Which we’ll point out was the month the Fed first resorted to “emergency measures” to combat the early signs of the financial crisis. (Are you signed up yet to get recordings of our “House of Cards” symposium with Jim Rickards Thursday?)
“Good old-fashioned common-sense investing,” says our Chris Mayer of the approach he takes in his new “100x” project — seeking stocks that can multiply every dollar invested 100-fold.
One of Chris’ many influences over the years is a fund manager named Chuck Akre, manager since 2009 of the Akre Focus Fund. Little did he know he’d run into Tom Saberhagen — a portfolio manager at the Akre Focus Fund — at an event in Columbus, Ohio.
“Our respective presentations dovetailed very well. We had the same core message. You should focus on how much a business earns on the money invested in it. The term of art is ‘return on capital.’ And secondarily, you have to think about the ability of the firm to reinvest its cash flow at high rates of return.”
Consider Apple. “Apple earns about 30% on its equity,” says Chris.
“That means for every $1 invested in Apple, it earns almost 30 cents. An investor who paid book value would, in theory, see a 30% return on his money. But an investor can’t pay book today. The price today is 6 times book. So the implied return an investor gets is really 5%. That’s not so high.
“Second, you have to consider Apple’s ability to reinvest its cash flow. It clearly generates more cash than it can reinvest at those 30% returns. So the cash piles up on its balance sheet and Carl Icahn and others call for Apple to return more of that cash to shareholders.
“But as Tom pointed out, even if Apple paid out all of its earnings, investors would earn 5% pretax. That’s not much. It’d take 94 years to turn a 100-bagger at that rate. I realize high returns are hard to find in this market — and I’ve made few new stock picks as a result — but I aim to do better than that.”
Chris will unveil some of the fruits of his extensive 100-bagger research on Thursday when he speaks at our “House of Cards” symposium. Byron King is on the bill too… along with Ryan Cole from Laissez Faire’s Unconventional Wealth and Dan Amoss, who heads up our Jim Rickards research unit.
If you want recordings of this event, the early-mover discount expires at midnight tonight.
And now the strangest tax protest we’ve ever seen or will see — free sex at a brothel.
The owner of the Pascha brothel in Salzburg, Austria, tells the Kronen Zeitung tabloid he’s no longer willing to be “the tax office’s pimp.”
“In the last decade, I have paid taxes of almost 5 million euros,” owner Hermann Muller says. “The problem is the tax office wants more and more, and they are not cracking down on illegal street and apartment prostitution.”
Ah… so he’s got a regulated racket and he’s angry about upstart competitors. A familiar story.
The Pascha brothel: Offering more atmosphere than
“illegal street and apartment prostitution.”
Still, the logic is inescapable: If his establishment offers free sex, there’s no payment to tax.
Demand, we’re told, is off the charts: “The stunt has been great publicity for him, and he says that he plans to continue it for four-eight weeks,” reports the English-language site The Local. “Drinks are on the house, and Müller says that he is paying the prostitutes’ usual hourly rate out of his own pocket.”
Moving on…
“Thanks for publishing the Venn diagram of the similarities between the Occupy and tea party movements,” a reader writes.
“I’m a political conservative, but I’ve found myself agreeing with Sen. Elizabeth Warren a lot lately, and it’s been greatly bothering me as to why. Now I understand.”
“I am afraid we are about to see a massive game of chicken turn into a train wreck,” writes a reader who can’t shake his worries about Europe, Jim Rickards’ assurances here in The 5 notwithstanding.
“Greece understands very well Jim Rickards’ contention that the EU cannot allow them to leave, and thus will hold out for terms that satisfy the mandate of the current leaders. Meanwhile, the EU sees that Greece needs desperately to stay in the euro and EU, and assumes that they can drive a very hard bargain, which they desperately need to keep Spain, Portugal, Italy, et al., from voting for parties that would follow in Greece’s path.
“Despite the desperate need that both have for a compromise, I fear that each side sees its position as stronger than it really is and the opposition as less determined than it really is (i.e., both sides are convinced that the other side is bluffing), and they may go over the cliff together.”
The 5: Hmmm… If Jim can’t assuage your concerns, let’s hear an alternative take from our friend Chuck Butler at EverBank Global Markets.
Chuck says Greece has much more to lose by leaving the eurozone. “Greece accounts for 2% of the total eurozone GDP,” he writes in today’s Daily Pfennig:
“Many times in the past, I’ve compared the size of Greece’s economy to that of Kentucky’s. Sure, many eurozone banks and institutions hold Greek bonds, so having Greece default would hurt, but bring down the eurozone? Hardly!…
“Should Greece decide to drop the euro and go back to the drachma and then devalue the drachma by 50% or so — sounds easy, but it won’t be. It would probably involve shutting down banks and ATMs to prevent people from withdrawing money before it could be translated into a new, cheaper currency. It would take months to get new bills in circulation, and with a new currency devalued by 50%, what do you think that does to inflation in the country? That’s right, we’re talking hyperinflation…
“In the end, I still see Greece agreeing to the criteria that the creditors have presented to them, and this will have all been a bad dream.”
So Chuck reaches the same destination as Jim Rickards, just by a different route. We’ll leave Jim with the last word today…
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. Don’t worry about Greece. Worry instead about the $1.5 quadrillion — you read that right — pile of derivatives sitting on the balance sheets of the world’s banks.
Goldman Sachs alone has $49 trillion in derivatives bets. And for every $1 in capital, it has $473 of derivative liabilities.
A “House of Cards” indeed. And Jim Rickards can help you prepare. Says our fearless leader Addison Wiggin: “We’re at the precipice of what Jim says is a crisis bigger than 2008 and unlike anything we’ve ever witnessed. The closest analogy I can give you is that today is like early 2007 — the calm before the storm.”
Jim will lead a small group of our readers through a battle plan on Thursday… and even if you can’t be with us, you can get recordings and transcripts of every session.
This is your last chance to get this package at the lowest available price. The price nearly doubles after midnight tonight. Take advantage now.
