URGENT🔴 Dalio, Tax Cuts, the Fed…?The Fall Of The US Dollar 100% In 2019

Dalio, Tax Cuts, AAA, the Fed…?

I would like to take more time every few weeks to address some of the questions we get. And I want to hear more from you. Share your successes with me. Share you concerns. Ask questions. Challenge my arguments. That’s the only way we grow. That’s the only way we can use our unique demographic and cycles research to help you achieve your financial and investment dreams. Remember, this isn’t a one-way street. This is a conversation. So, speak up.

Speaking of, here are some questions I’ve gotten lately. You might find the answers useful…

Why Does Dalio See the Opposite of What You See?

Steven G. emailed wanting to know why I see a deflationary scenario like 1929-33 ahead while Ray Dalio sees an inflationary one like 1935-40.

That’s a good question!

Here’s the thing…

With rare exceptions, debt bubbles, which also create financial asset bubbles, end in deflation as loans and financial assets are written down and money and wealth disappear.

My long-term models show that we should have been in a deflationary mode from around 2008 through 2023. It’s a time I call the “Economic Winter Season.” But, QE was designed specifically to thwart that.

But think about that for a second. “We” printed $12 trillion and only got 1% to 2% inflation. What would we have gotten without that unprecedented QE policy?

Yup: deflation!

That’s the real trend.

Many economists also think you can just skip stages like deflation and deleveraging. History begs to differ.

I’ve spent 30 years studying economics, demographics, cycles, history, and bubbles. But, I’m not an investment manager.

Ray Dalio is one of the very best investment managers. But he hasn’t spent three decades studying economics, demographics, cycles, history, and bubbles. He should stick to his area of expertise, just like I’ll stick to mine.

Next up…

Wrong About the Tax Cuts?

John B. and John B. (two different last names) recently argued that I’m wrong about the tax cuts because small businesses like theirs needed them. They are looking to invest more. And hey, I need a gift from the government too.

The thing is, any positive impact the tax cuts could have had on small businesses like theirs and mine don’t hold a candle to what impact they had on the massive corporations, who then turned around and used them on stock buybacks, etc.

There are 14 million small businesses in this country, but most are very small. For two people to tell me that they re-invested the returns from the tax cuts doesn’t make for a very good sample size.

And while small businesses may create most of the jobs, they’re very fragmented and don’t drive the economy as much as many think.

All I can look at is the macro figures and they say companies are not re-investing like expected. That makes sense to me as we have had a low interest rate and growth environment for a long time now and businesses DO, like everyday investors, tend to over-invest when things are good for too long…

John’s, you might be right, but I’m not seeing it and can’t make financial or investment decisions on something I can’t see. Over-all we and the world don’t need a lot of new capacity currently, so why not buy back your own stocks or speculate in the marketsinstead.

Will You Tell Us When?

Another question came from Cynthia H. She asked, “Will you be telling subscribers when to buy AAA corporate and Treasury bonds.”

Cynthia, yes, this is a major trend I’ve been monitoring and will do my best to give the green light when the time comes. At this point, it’s more likely that bond yields go back up near recent peak yields of 3.46% on the 30-year Treasury and that would be the time to buy. Currently bond yields are trending down a bit and I would like to see them go higher first. My best estimate right now is we could see that happen in early 2020.

What’s to Stop the Fed from Printing Even More?

The last question for today is from Ian S. He asked if I see a trigger that will start the decline and what will stop the Fed from printing more money again.

Ian, the initial broader trigger appears to be corporate bonds around the world at record levels of GDP, with defaults beginning especially in emerging countries.

The biggest problem is that the economy has been stretched so far that it could melt down even faster than it did in the second half of 2008. Back then, the Fed and central banks responded too late. They’ll be late to respond this time around as well.

Also, think about this: If we printed all this money on a scale that no one would have thought possible, and we go into a deep crisis… is the public going to let central banks do it all over again, but at much higher levels?

$30 trillion?

$50 trillion?

$100 trillion?

There is now over $300 trillion in financial assets that could melt down. It could take $100 trillion-plus to offset that level of deflation.

And when (not if) China finally blows… how much money can you print here to offset that tsunami as it reverberates around the world, especially in global growth and real estateprices?

Catching Up on Critical Updates Post Shutdown

The Department of Labor tracks and updates the monthly jobs report, and since the partial shutdown, we’ve kept current on this important economic update.

But the Census Bureau and the Bureau of Economic Analysis (BEA) weren’t funded and are quite behind on other critical updates. As they play catch up on updates, we wait in the dark.

The backlog includes:

·         December new home sales.

·         Personal consumption.

·         The Fed’s preferred inflation index (PCE).

·         Retail sales.

·         And preliminary fourth quarter GDP.

The January Institute for Supply Management (ISM) Manufacturing Index was released on schedule Friday.

Remember, the December release of the important forward-looking and market-moving manufacturing report was quite disappointing.

The good news…

New orders rebounded by a sharp seven points after a drop of 11 points last month. Production rebounded by 6.5 points, while cost inflation flattened. Export orders slowed dramatically to the lowest in two years.

Overall, the January index surprised by showing strength and bounced 2.5 points higher than analysts’ expectations and December’s disappointment.

November’s U.S. factory orders were updated Monday.

October’s orders dropped 2.1% on the month and November orders were expected to rebound slightly. Instead, they fell another 0.6%. And, excluding the volatile transportation figures, dropped 1.3%. December’s figures are still delayed and aren’t scheduled to be released just yet.

Jobs Galore!

The non-farm jobs gained in January rose by 304,000, nearly doubling what was expected. Yet the supposed gains in December were revised lower by 90,000.

The unemployment rate increased to 4%, which is higher than the 3.9% expected. More importantly, wages only grew by 0.1% on the month when a 0.3% gain was expected. Despite that, wages still maintained a 3.2% year over year gain.

Overall, the January employment report was strong.

The stock market had its best January in 32 years and the gains will most likely continue after the better than expected jobs report. 

Caution Ahead…

Treasury yields didn’t react much after the jobs report. Maybe that’s because of the large revision to December. Or maybe because wage growth was muted. The long-term Treasury yield fell back below 3% and has again flattened following the Fed meeting earlier in the week.

Look at the yield curve just after December’s meeting to last Thursday, following the January Fed meeting:

Notice how rates have dropped and more of the curve is completely flat? That tells us that the bond market isn’t as excited about the economy or the financial markets as the stock market is.

So, take this as a warning and proceed with caution!

Schumer and Sanders to Investors: We Want Your Money

Senators Bernie Sanders and Chuck Schumer have proposed legislation that would stop public companies from paying dividends or buying back their shares unless they first meet certain conditions.

The senators aren’t worried about viability (companies are financially stable before they send cash back to their shareholders). Instead, they want to verify that companies have done enough to support employees before they give anything back to investors.

That’s not so subtle code for, “Make sure you redistribute wealth before giving anything back.”

The senators make their case by pointing to last year’s tax reform and how much of the corporate windfall was spent on stock buybacks (almost $1 trillion), even as companies refused to invest, closed locations, and fired employees.

But in making their point, Sanders and Schumer…

Miss the point!

Companies don’t choose to buy back shares or pay higher dividends because investors demand it. They take those actions because they think it’s the best use of investor money. And that’s the crux of the issue.

Who owns the cash? Is it yours as an investor, or do workers have a claim on it, as Sanders and Schumer suggest?

When I save some of my income and invest it in corporate stocks, I’m pretty sure that it’s my money. It doesn’t magically become partially owned by someone else just because I chose to invest.

And these senators are part of the reason that most people must invest in equities. They’re part of the system that increases government deficit spending and eats away at the dollar, all while the Fed holds interest rates near record lows.

We can only get ahead if we can beat inflation, which pushes us to equities, where Senators Schumer and Sanders want to chip away at our cash from a different angle.

As for workers, the senators claim in their New York Times opinion piece that companies and workers lived in a loving, kumbaya world from the mid-20th century until the 1970s, a time of joyous symbiotic goals and dreams between owners of capital and employees.

That’s a load of bull, and it only covers a paltry 25 years (1950 to 1975), which is less time than many politicians have been in office.

They’re Missing the Whole Story

We’ve discussed this at Dent Research many times. The situation wasn’t born of some enlightenment or appreciation for one another’s feelings.

The only reason workers had power in the mid-20th century is because America played an away game in World War II while the rest of the developed world was essentially bombed back to the Stone Age.

When it came time rebuild, the world needed everything from us: factors of production, food, capital, etc. We simply didn’t have the manpower to provide everything the world needed, and our labor force was the bottleneck.

As other nations brought their factories and equipment back online, they didn’t need us as much. In fact, other countries eventually outstripped us in terms of efficiency, which caused us to lose ground in manufacturing.

But this short-sightedness is typical. Everyone looks back to the time when things were best for them, instead of considering how that period might have been just a passing phase.

Back to Sanders and Schumer.

They want to recreate the value proposition of workers from that small window in time, but without any of the other characteristics of the time.

If companies were desperate for workers, they would pay more. If America was the most efficient, growing producer in many areas, we’d need more workers… and would pay more. But that’s not the way it is, so Schumer and Sanders want to force it by simply demanding higher pay, no matter what the business environment.

Companies aren’t closing locations because they’re so profitable, and they aren’t declining to invest because they have so many wonderful opportunities. We’ve had near zero interest rates for almost a decade. If a company saw a great investment, it could access plenty of cash to chase it.

As we noted last year, corporate tax reform leveled the playing field between the U.S. and many other nations in terms of what we charge companies to do business, but it didn’t change economic dynamics. We’re still stuck in a low growth environment.

What To Do Instead

I agree that many public companies are terrible stewards of investor capital, but my beef runs up and down the corporate ladder. I can’t imagine that any CEO is worth $20 million, or even $10 million. And there are plenty of employees who’ve been contributing to corporate profits for years without enjoying the benefits of their company’s success.

It would be much more American to slash executive compensation and put all employees in a profit-sharing pool voted on by investors than to have the government require some minimum level of payment.

Obviously, those at the top would share at a higher level, but everyone would be part of the ebb and flow of business. This is not about stock options, which can be gamed by stock buybacks and other sleights of hand. Profit sharing should be based on true, GAAP accounting profits.

This is a problem created by the incestuous relationship among Corporate America and their boards. Those who run one company serve on the board of another, and they all play the same game of guaranteeing outrageous payouts at the top. If we shook up corporate boards, we might get better results.

I also think we should do the same with politicians, such as Senators Schumer and Sanders.

They’ve been part of a government that has run deficits for many years, and have been part of government shutdowns where they still drew paychecks and have guaranteed pensions.

How about they feel the financial effects of their mismanagement? Or better yet, why not just yield their positions through a term limit system, and forgo their government pensions altogether?

But that’s a topic for another day.

The Stock Markets New Dumb Money

Well, it seems we have a new phenomenon in the stock market…

It’s called, “Who’s the dumb money?”

It used to be shoe-shine boys in 1929, when Kennedy stopped buying stocksand made his fortune buying them at the bottom.

I remember, during the tech bubble, taxi drivers were telling me what to buy.

It used to be that they were the dumb money… the suckers piling in at the top of the bubble only to have their feet swept out from under them.

Guess who’s the dumb money now…