You Have Questions, We Have Answers

  • While we wait on the Fed, we answer readers’ burning questions…
  • Was China’s stock crash an act of American financial warfare?
  • Should you worry about China dumping U.S. Treasury debt?
  • Are potential 100-baggers suitable for a retirement account?
  • What if Canada closes the “piggybacking” loophole?
  • And a question of our own: If the government can’t protect the information of federal workers, how can it protect yours?

“We don’t need our enemies to destroy our markets,” says Jim Rickards on the topic of financial warfare. “We’re doing a good job of it ourselves.”
We’ll get to Jim’s remarks in a moment. We’ll preface them by acknowledging today is the Most Important Federal Reserve Meeting Ever™. The Fed’s Open Market Committee (FOMC) will decide whether to lift the fed funds rate from the near-zero level where it’s been held since the Panic of ’08.
Until a few weeks ago, conventional wisdom had it the FOMC would indeed raise the rate today. Then came the market swoon of recent weeks. Conventional wisdom has finally come around to Jim Rickards’ view — no increase today.
The Fed will issue its proclamation around the time this episode of The 5 hits your inbox — followed by a Janet Yellen news conference. We’ll pull it all apart tomorrow.
So what will we do in the meantime, today? We’ll bring you a mostly Q&A episode of The 5 featuring Jim, our investment director Chris Mayer and our income specialist Zach Scheidt.
Jim’s up first — tackling financial warfare.
“Have you seen any indication that the Chinese stock market bubble popping is an act of U.S. financial warfare against China?” inquired one of Jim’s Strategic Intelligence readers on Monday during a live, subscriber-only briefing. (You can access these monthly sessions here.)
“I was asked that a lot in 2008 — was the meltdown in 2008 an act of warfare by China against the U.S.?” Jim replied — inspiring his quip about how U.S. officials and bankers did a fine job of demolition with no outside help.
And so it goes with China’s meltdown this year. “There was a manipulation, but it wasn’t the U.S.; it was the Chinese,” Jim explained.
“Their companies were grossly overleveraged. And the Chinese authorities were worried about a credit bubble. So they said to the state-owned enterprises, ‘Hey, you people need to go out and sell stock and take the stock and pay down the debt, because we’re worried about the credit bubble.’
“Whom do you sell the stock to? Well, you always sell the stock to the suckers. So the suckers are the retail investors in China… The brokers all made margin loans and leveraged them up, and then there were 58 million new brokerage accounts — 58 million middle-class Chinese people went down and opened a brokerage account, got a leveraged loan, bought stocks and participated in the bubble. And of course, what happened next? It crashed.

“So in effect, the Chinese government treated their own citizens like suckers and fleeced them out of their savings, and the money went to state-owned enterprises to pay down the debt.”
Who needs Washington when Chinese leaders can sabotage the economy on their own? Next question…
“What’s the impact of China selling U.S. Treasuries?” asked another of Jim’s readers.
China is the biggest foreign holder of U.S. Treasury debt… and it’s been a seller most of this year. New figures out yesterday show that during July, China’s holdings registered their biggest monthly drop since December 2013. Presumably, China’s using the proceeds to prop up its deflating currency.
But it’s not cause for panic, says Jim. “The interesting thing for me is not that the Chinese are selling — which they are — but who are the buyers?
“The buyers are the U.S. banks. They got bailed out in 2008, and first they were shellshocked. They were in a foxhole and stuff was exploding over their heads. And they wake up in 2009 and go, ‘Wow, it’s over. We got bailed out. We still have our phony-baloney jobs, we still have our $1 million bonuses, nobody got fired, nobody went to jail. This is too good to be true. Isn’t the government wonderful? They bailed us out.’
“What they missed is that these banks are all captives. They do what the government tells them to do.
“The banks are sitting there like a sponge, and if the Chinese are going to dump Treasuries, the Fed just calls the banks and says, ‘You buy ’em or we’ll put you out of business.’ So yeah, there is selling pressure, but it’s being taken up by the banks.”
[Ed. note: Jim expects both China and the Fed to fuel continued market volatility in the weeks ahead. And he’s positioning his premium subscribers to seize maximum advantage. Click here for a short but urgent video briefing from Jim.]
We pause in our Q&A session long enough to note how the markets are marking time before the FOMC announcement.
As we write, not one major U.S. stock index has moved more than 0.2%. The Dow sits at 16,733 — about 8.6% below its record close on May 19. Gold is holding onto yesterday’s gains at $1,118.
The one economic number of note this morning is the September “Philly Fed” survey of manufacturing in the mid-Atlantic. The number has gone negative for the first time since February 2014. On top of the sickly number from New York state noted here on Tuesday, it’s evident American factories are slowing down.
“I think I need the growth that you suggest is possible in your 100x stocks,” a reader writes our Chris Mayer.“ On the other hand, there is also a risk of a prolonged downturn in the stock market that could be costly.”
As you likely know by now, Chris has a laser focus these days on 100-baggers — stocks with the potential to turn a $10,000 investment into $1 million.
The reader is 64 and knows the conventional advice about holding a large bond position in your older years is fatal in a world of ultra-low interest rates. He wants to know if 100x plays are appropriate in a retirement account.
With the proviso that none of our editors can provide individual advice (it’s a legal thing), Chris replies: “Any stock can get cut in half, even great stocks. For this reason, I’m reluctant to say any stock is ‘safe.’ Because what that means to most people is ‘I won’t lose money.’ And of course, you can — on any stock. Most people don’t have the stomach to sit through a stock falling by half. That’s one reason why most people aren’t good investors and will never net a 100-bagger.”
“Here’s the way I look at it,” Chris sums up: “Given enough time (say, a three- to five-year time horizon) and the ability to spread your bets a bit (not by owning 40 stocks or more, but by owning maybe eight-12 names — certainly no more than 20), the stocks I recommend are good for your retirement accounts.”
In the event of a long downturn in the stock market, however, “you must have the ability to sit through it and not give up. No doubt such markets can set you back a few years. Size your commitment to stocks according to your ability to suffer through calamity. If you can’t risk losing any of your nest eggs, then stocks may not be for you.”
“How long will I receive ‘benefit’ checks from piggybacking the Canada Pension Plan? ” a reader writes Zach Scheidt.
For months now, Zach has been singing the praises of piggybacking Canada’s version of Social Security — which, unlike the American model, is professionally managed, runs a surplus and is growing its reserves every year.
“Once you begin receiving checks,” Zach replies, “you can collect this income (barring any unforeseen events) for the rest of your life. In fact, you can even pass along your account to your children and grandchildren.”
“What happens if the Canadian government closes the loophole allowing American citizens legal access to piggybacking the Canada Pension Plan?” inquires another.
“The Canada Pension Plan is protected by legislation that makes it very difficult to alter,” says Zach. “In fact, any changes require agreement by the federal government, plus two-thirds of the provinces representing two-thirds of the population. In other words, it’s a higher requirement than changes to the Canadian constitution.
“Therefore, I personally feel that this loophole should remain available to Americans into the foreseeable future. And once you gain access, you are ‘grandfathered in.’ That’s why it’s imperative that you set up an account immediately.”
You can get started right here.
Since government incompetence has been a theme in our mailbag this week, we couldn’t help but notice an item this morning that underscores the corollary of incompetence — dodging responsibility.
Remember the story a few weeks ago about how hackers got into the files of the federal Office of Personnel Management (OPM)? The personal information of 21 million people was compromised — current and former federal employees and contractors, even people who applied for such jobs. (The feds have blamed the Chinese without offering supporting evidence.)
Recently, Sen. Ron Wyden (D-Oregon) sent a letter to William Evanina, chief of the National Counterintelligence and Security Center — the nation’s top counterintelligence agency. Wyden asked what steps the agency took to help OPM secure its systems and root out vulnerabilities.
Evanina’s response, in so many words: It’s not my job.
He said laws governing his office “do not include either identifying information technology (IT) vulnerabilities to agencies or providing recommendations to them on how to secure their IT systems.”
Sen. Wyden was not amused: “This is a bureaucratic response to a massive counterintelligence failure and unworthy of individuals who are being trusted to defend America. While the National Counterintelligence and Security Center shouldn’t need to advise agencies on how to improve their IT security, it must identify vulnerabilities so that the relevant agencies can take the necessary steps to secure their data.”
And it’s these clowns to whom we’re supposed to entrust our own most sensitive data.
Sometime this, fall Congress might vote on the Cybersecurity Information Sharing Act, or CISA. As we explained in April, CISA’s stated goal is to help businesses prevent cyberattacks by sharing information about threats with each other and with the feds.
In reality, the bill creates “yet another loophole for law enforcement to conduct backdoor searches on Americans,” according to a statement signed by everyone from the ACLU on the left to the Competitive Enterprise Institute on the right. It also grants immunity from privacy lawsuits to businesses that cooperate with the feds.
Sen. Wyden stands in opposition to CISA. The feds’ failure to stop the OPM hack only stiffens his resolve: “The way to improve cybersecurity,” says Wyden, “is to ensure that network owners take responsibility for plugging security holes, not encourage the sharing of personal information with agencies that can’t protect it adequately.”
Alas, he was the only one on the Senate Intelligence Committee to vote against CISA this spring…
Best regards,
Dave Gonigam
The 5 Min. Forecast
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Dave Gonigam

Dave Gonigam

Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer.

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