Dan’s Blog

Agita

Dan Calandro - Sunday, November 04, 2018

Volatility returned to the stock market in January 2018 and it hasn’t left, nor should it be expected to leave. It’s a function of the times and conditions. It is election year, after all. So if market instability makes you nauseous then maybe it’s time to reduce your exposure to the stock market – because it’s not going away.

Investing is not about buying at the lowest and selling at the highest. That’s a speculative view. Instead successful investment is about buying low and selling high – to profit, according to your objectives and risk tolerances. So forget about trying to pick the tops and bottoms; market timing is gambling.

The greatest opportunity to make the most money in stocks is buying low during major corrections, when everything is on sale and selling at discount prices. This is impossible to do if your portfolio is fully invested, meaning it has no dry powder. It’s easy to have that burning sensation in your stomach when fully invested in markets like these.

So if you’re feeling that way trust your gut and review your investment plan and how your portfolio’s structure relates to current Market conditions. (Remember: buying low requires cash. To not have a stockpile now is a major blunder.) The conversation about Market conditions begins with yields, not stocks.

Yields are up 34% so far this year and have been on an upward move since Trump won the election, and they’re not going to quit that trajectory any time soon. Key Federal Reserve rates still remain at historic lows, and strong employment and solid economic growth provide Chairman Powell all the ammunition needed to maintain his planned course of rate increases. Accelerated inflation will give him firepower to hasten the hikes if he so chooses. Below is a chart that spans the two years since Trump’s victory.

Yields are up 80% in the two years since the election, indicating a stronger dollar and tighter money. Gold is down fractionally (6%) in the same time, which is really a muted move compared to the increase in monetary value. It has been beaten down for years because inflation was non-existent. But that dynamic has changed, making gold low at these levels. If there is a safe place to invest outside of the U.S. dollar it is in gold.

The pace of inflation slowed a bit in the 3rd quarter versus the 2nd (from 4.1% to 3.5%) but it is poised to move higher. On October 31, 2018 the Wall Street Journal posted an article detailing how producers of things from “plane tickets to paint” are experiencing higher broad line costs and are readying to pass those increases onto consumers – who now have more money to absorb those higher prices. Wages increased by 3.1% year-over-year in October, the biggest gain since 2009.

Such a dynamic, higher prices and wages, could prompt the Federal Reserve to expedite interest rate hikes to corral inflation to support economic stability. Whatever the case, be it controlled or not, higher inflation is a major threat to stock valuations, bonds, and international economies.

Of course, inflation will push yields higher than central banks intend. The entire inflationary effect, however, is almost a complete unknown. Institutional investors hate that uncertainty. They’d much rather measured changes in rates controlled by central banks. Inflation throws a wrench into that stability, and with it comes the possibility of runaway yields – and that’s what has institutional investors so anxious.

Anxiety breeds volatility.

Interest rates run in an opposite direction as bond values. When rates rise bond values fall – and we are in a higher interest rate environment. Even though yields are up sharply in two years they are still really low. The 10-year yield is just 3.2%. It should be 6% by now. So they have a lot of room to move higher, and they will. That makes bonds richly valued at the current time.

And so are stocks – even after the most recent pullback.

Stocks have been on an absolute tear since the economy recovered from recession in 2010, with stock market strength via the 15-51 Indicator gaining 303% (or 35% per year) versus a 133% advance (or 16% per year) for the Market Averages. Real economic growth was just 2.5% per year during that time. In other words, stock market gains have been inconsistent with underlying economic output for many consecutive years. That put a ton of inflation into current stock market values, which is best seen through the untainted trend-line of the 15-51 Indicator. See below.

Further proof can be seen through “the market’s” multiple to GDP, which is still valued 3% higher than the tech-boom at its peak, and 33% higher than the top of the housing boom. That’s nuts. See below.

 Wild swings in price do not indicate stability or consensus – two traits present in the stock market during year one of Trump’s tenure but non-existent in the second. Investors, of course, are reacting to higher interest rates and yields with the threat of higher inflation, not to mention the Trade War and the deteriorating condition overseas.

And despite President Trump’s declaration that this is the best economy in American history, the numbers don’t corroborate that. At the peak of the tech-boom the economy was growing 4.7% in Real terms and unemployment was 3.8% – levels sustained for more than four years. Third quarter 2018 posted solid results, Real economic growth was 3.5% and unemployment was 3.7% – but the Trump economy has just started to hum and it’s already the end of the cycle. There’s no way it can continue like this for three more years. The world is already starting to fall apart. Speaking of which…

Have you heard that Alibaba (China’s amazon.com) cut its growth forecast by six points to 4%?  That’s the world’s second largest economy. Not good. And things are much worse in weaker nations.

These conditions, highly inflationary valuations and anxiety about the future, are certainly those that foreshadow severe stock market corrections. But I still think that’s a ways away. Significant downturns are usually led by mini-corrections like the ones we are experiencing that produce lower highs and lower lows. But that’s not the case right now; in fact, the opposite is playing out. Stocks keep reaching higher highs and fail to dip below prior lows. See below.

Most economists, including the Federal Reserve chairman, don’t see a U.S. recession until late 2019 or during the 2020 election year. Nevertheless, trouble overseas can migrate to American shores at any time – and that could be enough to push the U.S. into recession. And that’s when the shit really hits the fan.

Until then Plan Your Work and Work Your Plan – and keep those antacids close by because markets like this are certain to cause a prolonged case of agita.

Stay tuned…

 The road to financial independence.™

Gone Baby Gone

Dan Calandro - Monday, October 08, 2018

Investing is more of a discipline than anything else. And while I promised myself to not make any portfolio moves until the next major correction, inspiration to make a move now arrived from a most unusual place – Colin Kaepernick.

Once a diehard football fan, I drifted away when those bastards started disrespecting my flag and national anthem. Hey, if they can’t stand for my flag I can’t sit and watch their stupid game. If they have “free speech” I have freedom of choice. The significant drop in television ratings for the NFL over that last few years shows that I am not alone.

United We Stand.

One of the great rights that come with a free country is the right to be stupid. Stupidity like the kind Kaepernick and his ilk demonstrate to our flag would have them killed in many countries around the world – countries that Kaepernick idolizes. Recall that Kaepernick once arrived to an interview wearing a T-shirt of oppressive Cuban leader Fidel Castro. Who wouldn’t love to see Kaepernick kneeling at the Cuban anthem in Havana? He’d never be seen or heard from again.

The flag stands for one thing – unity. It is the only thing that all Americans have in common. Indeed, Americanism means different things to different people. The Left has a completely different set of ideals than the Right. Independents, too, have their own blend of standards. All things considered there is plenty that divide us – but the flag should never be one of them. Because once that is gone there is nothing everyone can agree to, nothing to bind us, no standard of unification.   

Divided We Fall.

Those who follow the game of football as I did know that Kaepernick was in jeopardy of losing his job long before he ever knelt at the anthem and flag. Cynics like me thought he did so to create a controversy so great that it would force the San Francisco 49ers into keeping him on the roster against their rightful mind and free will. Well it didn’t work out that way; Kaepernick was cut shortly after the kneeling began.

Kaepernick is big, strong and fast, and has a cannon for an arm – yet he is still not an active player in the National Football League. The reason for that is simple: he can’t read a defense or make the appropriate adjustments in the short amount of allotted time. He makes too many poor decisions, and is easily deceived by intellectually superior defenders and strategic Defensive Coordinators.

In short, it is Kaepernick’s lack of intelligence that is keeping him out of the NFL – and he is leader of the kneeling movement, which should tell you everything you need to know about it.

The reason no one has said such things is because the intolerant Left would automatically label that person as a “racist” in this highly charged and oversensitive world – even though race has absolutely nothing to do with the assessment.

Plenty of white players have fallen short of the NFL’s intellectual grade – Matt Leinart and Johnny Maziel are two that quickly come to mind. They surely don’t share the same total package of physical gifts as Kaepernick, but like the 49er they too lack the intelligence and internal fortitude to overcome their glaring weakness. All three quarterbacks are misguided in their own way -- and once again, race has nothing to do with the evaluation.

Nike was added to the 15-51 Indicator™ in 2011 as “the market” underwent dramatic changes in the aftermath of the 2008 crash. It was added to maintain a connection to the Dow Jones Industrial Average and to properly cover similar market segments. And it has done very well for the 15-51i portfolio, gaining 222% over the seven-plus year term. But the decision to feature Kaepernick in a national (and perhaps global) marketing effort is too confounding for me to overcome – especially after witnessing the dramatic drop in NFL ratings as a result of the anthem kneeling epidemic.

I’m not interested investing in management that makes those kinds of irrational decisions.

When upper management does something you hate, like Elon Musk’s ridiculous behavior of late, it’s time to liquidate and move on. They’re like a cheating partner; after the dirty deed is done it’s impossible to trust them again, or to look at them the same way. It’s time to go separate ways at the earliest convenience. Heck, there are plenty of fish in the sea. No sense in staying with one that stinks to you.

So at the end of business on Friday, October 5, 2018, Nike has been removed from the 15-51 strength indicator and replaced with German sportswear supplier Adidas. Adidas is a well-managed company that is growing strongly. In addition, I have purchased several Adidas products over the last several years (mostly golf shirts and shorts, golf shoes and sneakers) and they are superior to Nike’s not only in fit and finish but also quality; and their products can be easily found in all the establishments I frequent. The same can’t be said for Nike or UnderArmour.

Kneeling during the anthem and/or at the flag are direct messages I do not endorse and cannot condone. So I am eliminating Nike now, before the next big one as originally intended, because the decision to glorify someone so wrong, disrespectful, and misguided is insulting to me and every other proud citizen, not to mention every veteran who put everything on the line to serve this great nation, its flag, and the honor of its anthem.

Like there is no good reason to hesitate dealing with a cheating partner, the same is true when addressing poor management decisions by one of your investments. Nothing good comes from delay.

So I say let those who Nike is trying to attract with the Kaepernick ad campaign to also buy their stock, because this investor – and consumer – is gone baby gone.

Stay tuned…

 The road to financial independence.

Tomorrow's Lehman Brothers

Dan Calandro - Tuesday, September 18, 2018

Ever since Trump took the reins of the stock market it has exuded many of the qualities of the man himself – bold, optimistic, arrogant, and erratic. And now another adjective can be added – resilient.

While it has taken longer than a blink of an eye almost every major stock market index has regained its January 26th high. Only the lowly Dow Jones Industrial Average remains shy of its 2018 peak. It’s still two points short. See below.


It should not be overlooked that while stocks are up strongly in the nine months of 2018 (averaging +8%) they have averaged an 18% gain in the most recent 12 months – and 46% since Trump won the election (almost 2 years). That’s a blistering pace for any market economy – an indication that a full-fledged economic boom is underway. See two-year trend below.


Indeed economic progress is stronger, averaging 3% per year, but growth remains unreliable and uneven. Labor is tight but wages aren’t increasing in kind. That’s because inflation is back and interest rates are on the rise. So what is actually going here is a modest economic expansion, not a boom – regardless of what the stock market is trying to tell us.

In fact, the only way stock prices can be justified at these levels is if you only consider positive U.S. fundamentals. Forget about all the negatives – and forget about the rest of the world. Everything is great – S&P 3,000 here we come!

The build-up to this correction is so reminiscent of the last. Back then IndyMac and Washington Mutual were just a few “isolated” cases and “not systemic” of the financial industry as a whole. The reason no one on Wall Street saw disaster coming is because they were enthralled with all the positive fundamentals – spending, growth, and the mighty advance of stocks. And then boom! Surprise, surprise.

The only way to get blindsided by stock market corrections is to be blind to a whole side of the market equation. Wall Street and Washington DC fall victim to this shortsightedness all the time.

Banks don’t just fail all of the sudden. Crisis conditions exist long before collapse. For instance, only 3 banks failed in 2007, in what can be considered a “normal” level. Ten times that number failed in 2008 (30 banks) before 148 fell in 2009, and then another 157 more in 2010. In all some 520 banks went belly-up over a 7-year period before failures returned to “normal” levels – and somehow no one on Wall Street (financial market participants and analysts) or in government (those who regulate and supervise the financial markets) saw such a cataclysmic epidemic coming.

Only corruption can be so blind.

The same conditions are present today.

Today institutional investors are again enamored with only economic positives – growth, spending, low unemployment, and a raging stock market Bull Run. How easy it is for them to shrug off the Trade War, tariffs, rising inflation and interest rates, while a second round of  debt crisis looms.

The next major correction will be much larger than the last two because there is more currency in the system, more inflation, more debt, and more corruption present in this market than the last. These conditions are holdovers from Obama’s QE-boom, from which the world market has never corrected. Remember, the U.S. invented QE but the world bought in. That’s how emerging markets got in such deep hot water.

But as of today Argentina and Portugal are just “isolated” cases; Venezuela and Turkey, too. Ditto for most of Europe including Greece, Italy, Spain, France, and Russia – not to mention troubles in Iran, Cuba, North Korea, and China. The world market is in shambles – built on too much debt carried by borrowers with little or no chance of repaying.

That said, the only way to value stocks up this high is to neglect to see the world as one huge interconnected market, to only see certain positives, and to turn a blinds eye to the negatives staring us all in the face.

The housing-boom was a lot like the tech-boom in that millions of individuals and every sector of the economy participated in the run. Wealth was being created everywhere, wages were rising swiftly, unemployment was low, and inflation was in check. Consumer demand was the main driver of growth for both. Their major difference was in the way they corrected.

During the tech-boom-correction economic recession coincided with a receding pace of technological innovation and growth. Hey, it happens. All cycles come to an end. 

The housing-boom, much to the contrary, ended when subprime borrowers were unable to pay the unfeasible debts they incurred during economic expansion (thanks to easy money for individuals with poor credit), and were unable to borrow more to continue their pace of spending. This caused recession, and ultimately the collapse of the money and credit markets.

The same thing will happen in the next correction, with one small difference.

Today’s subprime mortgage borrower is not John Q. Public but instead Greece, Argentina, and Portugal, etc. etc., who accumulated unfeasible amounts of debt during the QE-boom (easy money for sovereign nations with poor credit). And when they default it will not be just sovereign nations that will fail but also central banks, their underlying currencies and debt instruments. All will lose tremendous value that will hamper global trade and zap investor portfolios at every corner of the globe.

In other words, tomorrow’s Lehman Brothers will have a flag instead of a corporate charter.

Sad to say that same condition will occur within U.S. borders, as highlighted by this WSJ headline from August 23, 2018: Chicago’s New Idea to Fix its Pension Deficit: Take On More Debt. How stupid is that?

It is impossible to borrow your way into prosperity. That’s a lesson we should have learned in the aftermath of the ‘08 disaster.

Chicago is the modern day version of a U.S. subprime mortgage borrower, and yet another example of how some of the great Empires in world history failed to see failure coming. Ruling elitists thought they were too smart to fail, or too clever. And they were foolishly wrong.

Those who cannot afford themselves today will collapse under tomorrow's conditions.

Did I mention that inflation and interest rates are on the rise?

That environment will only make borrowing and debt servicing harder.

Many economists, including the Federal Reserve, are projecting the next recession to occur in late 2019 or 2020. That seems about right, and perfect timing to throw a wrench into Trump’s re-election campaign – just as the establishment so badly wants. Until then this expansion, and a blind stock market, should continue their trends until emerging markets begin to fail in epidemic proportions.

Stay tuned…

 The road to financial independence.

Economic War

Dan Calandro - Monday, August 13, 2018

Certain things are taboo in politics, like members of the same Party criticizing one another; unless, of course, they are engaged in an electoral primary. Other actions are not only forbidden but also never seen, like a sitting president criticizing a cabinet member or senior administration official.

And then came Trump.

Trump is no politician indeed and that’s exactly why he was elected. Millions of Americans feel disenfranchised by, and disenchanted with, both political parties. Trump is the antithesis of them, and completely different from anything ever seen before in Washington DC. And knowing Trump as we all do, it’s really no surprise to see him chastise Federal Reserve policy and his chosen leader for it, Jerome Powell, as he did the week of July 15, 2018.

Good for him. Every tentacle of the establishment government bureaucracy is working against him and the success of his agenda. There is no time for him to be timid. Besides, it was a brilliant political move.

Look at it this way…

Trump is in a trade war and both China and the European Union are devaluing their currencies, which make their products cheaper and ours more expensive. At the same time the U.S. Federal Reserve is raising interest rates and unwinding QE (quantitative easing) – which is now being referred to as Quantitative Tightening, or QT. All of those efforts make American products more expensive, and thus counteract Trump’s foreign policy initiatives and tariff plan. And he’s pissed-off about it.

But Trump’s ire doesn’t end there. After all, the entire establishment (and especially the Federal Reserve) did everything and anything possible to support the Obama agenda – economically sound or not, constitutional or not, sane or not. Of course, Obama was one-of-their-own, an establishment guy to the nth degree. Trump is not. And so there was no reason for the establishment to rush to protect and support him as with Obama.

There can be little doubt that before going public Trump asked Powell for a more accommodative monetary policy to support his foreign policy agenda. Obama surely did the same during his years. The only difference was that Obama got a yes and Trump got a no. So he called Powell out for not getting the same grace. Fair enough.

But the strategic importance of the move goes far beyond simply highlighting the hypocrisy of the Fed’s actions under Obama (a Democrat) versus Trump (a Republican), to something directly connected to the next major crisis and the thereafter. Fact: there is always a cause to crisis, and therefore, always someone responsible, and always someone to blame. Make no mistake; Trump is in the game. He knows he’s the target.

Consider that the economy is in the late stages of expansion, taxes have just been cut and interest rates are finally on the rise. The initial estimate for 2nd quarter Gross Domestic Product (GDP) was recently released and no one is talking about the big news in that report – which was not the 4% Real rate of growth (more on growth in a bit.) Instead the big news was inflation has finally returned to the U.S. market; it reached 3.2% in Q2, above the Fed’s 2% target. (Side notes: The last time U.S. inflation was greater than three-percent was 3rd quarter 2008…Inflation drives interest rates higher.)

Trump is opportunistic and so he is using strong economic growth as leverage in his foreign trade negotiations. He is certainly making more of it than it is. That’s how he is, and what he does. Investors need to see through his gamesmanship. Q2 is only one quarter.

To take an economic bearing recall that 1st quarter 2018 growth was just 2.2%, so the average rate for the year is only 3.1%. Also consider that former CNBS anchor Larry Kudlow, who now works in the Trump administration is already talking the pace of growth down, forecasting Q3 gains to be in the 3% range.

It’s a three-percent economy, not four.

In addition, quarterly GDP has been at this level before only to fall flat for the year. For instance, the middle two quarters of 2014 averaged 4.9% growth. But the first quarter shrank by -1% and the last quarter posted a paltry 1.9% gain. The year ended with an uneven 2.7% advance.

In 2015 the economy started the year with two solid quarters of 3.3% growth but fell flat in the final six months, posting gains in those quarters of just 1% and .4%. It was a weak and uneven 2% for the year.

Be careful not to read too much into this initial estimate of 2nd quarter GDP. Growth is stronger but still uneven.

The reason for the uneven growth pattern since the Great Recession is because government spending, not consumer demand, was the main driver of growth during the time. Growth dependent on government spending is economically unreliable and fiscally unsustainable, and therefore carries little political weight in the global arena. A robust economy driven by a free people produces more wealth, prosperity, and ingenuity than any other economic model, which produces more vibrant and longer-lasting economic expansions.—And Trump knows it.

That’s the reason for his multi-pronged tax cut plan. Personal tax rates were reduced to increase the individuals’ share of market spending, something that always boosts growth and places the economic trend on a much more reliable and sustainable footing. Corporate income taxes were reduced to make it easier for businesses to profit and re-invest, incentivize employees and expand. Both tax category reductions help ease the transition to a higher tariff environment.

The Trump agenda is measured and well planned.

His position to impose higher tariffs on foreign nation states is so that U.S. taxpayers and enterprise can choose whether or not to pay higher taxes or tariff. In other words, buy American or pay a tax (tariff). The choice is for Americans to make.

Trump places America and Americans first, damn the consequences.

Another great piece of the Trump tax law was the provision for U.S. multinationals to repatriate foreign profits back to American shores at a much-reduced tax rate. This brought hundreds of billions of dollars back to America making U.S. banks stronger and more capable of withstanding the high pressure certain to arrive during the next crisis.

Trump policies place America on stronger footing.

This is purposeful, as he is preparing the country for a full-blown economic war – a trade war, currency war, and political war – that is brewing now and sure to arrive at the most inopportune time. Trump sees it coming and he is leading the charge. Those not with him are against him, calling Powell out just another example of him willing to fight on any front, whomever they are, foreign or domestic.

Good for us.

Those criticizing Trump for his public exchange with Powell do so not just because it has never been done before, but because any sane person knows that the Fed should have moved rates higher and tightened money six or seven years ago. Tightening is way overdue. If not now, when?—During the next crisis?

Powell knows he can’t do that. It would be cataclysmic to inject trillions of new QE dollars on top of what is already there during the next crisis (and clearly he is planning to use the technique again, otherwise he would acquiesce to Trump’s request for continued lower rates). So he must get as much of the old QE money out of the system as fast as he can and before the next crisis hits – without causing world panic in “the market” – and that’s the real trick. Again, the economy is in the late stages of expansion and rates have only begun to move higher.

In a nutshell, Powell has a job to do and is going to do it his way. Trump can go it alone, his own anti-establishment way.

And Trump has little concern with that. He will continue doing what he plans because he believes it is right. There is no quit in him. No let up. No fear.

Good for him.

Think of how fast the Trump policies have changed the global dynamic. The Trade War just got started and many countries and emerging markets are already feeling the pinch – China, Turkey, much of Europe, not to mention countries like Venezuela, Iran, Syria, and North Korea, are all experiencing some pain. And not only is Trump not letting up but he continues to add more foreign trade pressure. America is finally flexing her muscles!

It’s about time.

And while American economics and money are doing fine, foreign currencies are devaluing everywhere and interest rates are spiking. The recent drop in the Turkish lira, for example, sent their interest rates to 22% from 12% in a blink of an eye. Venezuela is experiencing 1,000% inflation and capital is dry. Those few conditions will only spread and get worse as American policy moves forward with higher tariffs, higher inflation, and much higher yields (the 10-year yield is still below 3%; there is long way for the U.S. to move higher).

Investors must take note: We have entered the next cycle of correction. (See: SURVINING THE NEXT CRASH for more information.)

During the heat of the next crisis, like the rest of the world, Trump will blame the U.S. establishment, namely the Federal Reserve, for lighting the fuse of global disaster with higher interest rates. Democrats and foreign governors will also blame Trump’s trade and tariff policies, and perhaps his tax cuts, for the economic explosion. But the street fighter will counter.

Trump will attack the corrupt Federal Reserve, pinpointing the unconstitutionality of the QE Hedge Fund they created during the Obama years, and then highlighting how the Fed, like the FBI and IRS, have turned themselves into a political arm of the Democrat Party. It is Us versus them, and high-time to reel in a runaway Federal Reserve and every other rogue big-government agency. 

That’s where the true wisdom of the President's exchange with Powell resides. Trump will have been on record against the rate hikes for more than a year before disaster. They will have no doubt made matters worse. And so Powell will be considered wrong at every corner and an inferior replacement for Janet Yellen. He will become a logo for the new crisis. 

And why not? 

What the Federal Reserve has done over the last two decades is nothing short of criminal. The next crisis will be the right time to fight that fight -- and it will be ugly.

That said, perhaps the best way to close this blog is with a few excerpts from my whitepaper, SURVIVING THE NEXT CRASH posted in January 2015, which are still relevant today.

“And while another act of war on the homeland can obviously begin the next major corrective cycle, I still believe the impetus will be money related: inflation, spiking yields, widespread currency and debt devaluations, the collapse of the Euro, or something along those lines.”

*

“ Inflation all by itself can cause world havoc…Inflation is the cost of money. When the cost of money increases so does the cost of debt, because debt is simply borrowed money. When interest rates rise in America they rise everywhere else. Greece, for example, will see their interest rates rise from 7% to 12%, 15%, or even 20%, depending on the level of inflation. Heck, Greece can’t afford itself at these historically low rates; higher rates will only push them further down the hill faster. And it’s not just Greece…”

*

“The QE-boom has injected too much money and a lot of risk, manipulation, and corruption into this stock market. And like all booms, it too will undue itself.

“When the QE-boom goes bust currencies and debt will experience widespread devaluation and default; yields will spike and countries will go broke; inflation will be a cancer, and banks will be in trouble again – especially foreign banks. The specter of an expanding world war will loom, DC will look lost, and Wall Street will again be surprised.

“And stocks will dramatically sell-off.”

*

I still see it that way.

Prepare your portfolios now.

Stay tuned…

 The road to financial independence.

Walgreens - Seriously?

Dan Calandro - Wednesday, July 04, 2018

It was recently announced that the last remaining original member of the Dow Jones Industrial Average, General Electric (GE), would finally be eliminated from the iconic stock market index.

It’s about time.

Market junkies like me have been calling for a Dow makeover for years. In fact, WHAT’S WRONG WITH THE DOW – AND HOW TO FIX IT was posted way back in 2015. That blog cited structural deficiencies that were causing the Dow to consistently underperform the S&P 500 – and there is no good reason for that. A 500 stock portfolio should never outperform one comprised of just 30 stocks on a regular basis. In that blog I highlighted the reason for the Dow’s misfortune this way, The Dow has become a pitiful collection of mediocrity, and the proverbial cherry on top is General Electric, the only original Dow component still remaining in the portfolio, which hasn’t sniffed a reasonable return since Jeff Immelt took office. He is clearly no Jack Welch.”

Few things in life are that obvious. Here’s another…

Small things are easier to manage than large ones.

One of the best characteristics of small portfolios like the Dow Average is that they’re easy to fix (see the aforementioned blog.)  Below is a chart that compares the two market averages since the last market bottom (March 2009).


It’s been nine years since the stock market bottomed after the “financial crisis.” During that time the S&P has outperformed the Dow by 30 points, 297% versus 267%, or just over 3% per year. This dynamic (500 stocks outperforming 30) should never persist for this long of a duration – especially when the period begins at the pricing bottom, where it’s so much easier for smaller portfolios to rebound with a faster pace of growth. The 15-51 strength indicator proves this fact consistently over the very long-term. Below is another example.


Again, the Dow’s performance should be somewhere between the S&P 500 and the 15-51 Indicator. Its sub-par long-term performance trend is a complete and utter breakdown of basic investment fundamentals and logic.  It is an outright embarrassment, and the guardians of the legendary portfolio should be ashamed of themselves.

In fact, it is becoming increasingly more difficult to see any kind of reason or sense in what the managers are doing with the most followed portfolio. They look incompetent or corrupt – and those with long-held respect and admiration for what the Dow Average is and stands for have every right to be offended by what they have done to it. The caretakers of the DJIA, like GE, should be replaced.

But not with a selection as stupid as the Walgreens choice.

Consider the move in this light…replacing GE with Walgreens reduces the number of Industrial stocks in the Average to one: 3M (Minnesota Mining & Manufacturing), or just 5% of the total portfolio. We’re talking about the Dow Jones Industrial Average here. One stock out of 30 is way too few.

Consider also that the S&P 500 and the economy (GDP) have an allocation triple that (15%), and the 15-51 Indicator has twice the amount (10%.)

What’s the Dow trying to indicate with a 5% Industrial allocation that relates to nothing --- not the economy, not the S&P 500?

Adding Walgreens to the portfolio is just as perplexing as having one industrial stock in the  Industrial Average. Take a look at the Dow’s allocation for the Consumer Service and Staple industries after the international pharmacy was added to the equation. See below.

Services

Staples

UnitedHealth Group

Johnson & Johnson

The Home Depot

Procter & Gamble

McDonald's

Nike

Walt Disney

Merck

Wal-Mart

Coca-Cola

Walgreens

Pfizer

Verizon

So let’s talk about the Dow’s drug allocation…UnitedHealth provides drug insurance coverage; Walgreens sell drugs and Wal-Mart has a pharmacy too – and then there’s the drug makers JNJ, Merck, and Pfizer. That’s a lot of exposure to drugs, too much in fact – especially when considering how light the portfolio’s allocation is in the Industrial industry.

The move just doesn’t make any sense.

And even though the Dow’s allocation to Financials (19%) is close to the economy’s (20%), the portfolio still has too many financial stocks that cover the industry too narrowly. See below.

Financial

Goldman Sachs

Travelers

Visa

JPMorgan Chase

American Express

To have five financial stocks and only one industrial stock in a portfolio of 30 named the Dow Jones Industrial Average is misleading. To have an Industrial allocation one-third the size of the economy’s allocation is malpractice. And to consistently underperform a 500 stock index is blasphemy.

Replacing GE with Walgreens is idiotic.

Coincidentally, in Walgreens’ first week of trading in the Dow Average online retailer amazon.com announced they were getting into pharmaceutical retail with the purchase of pillpack.com. Walgreens swiftly lost 12% of its value.

I have always been a skeptic but have become increasingly so with age. I hate the fact that the guardian of the Dow Jones portfolio is S&P Global. Hate it.—And by the way, the amazon purchase of pillpack had been rumored for more than a year’s time, maybe two – yet the announcement arrives within days of Walgreens being added to the world’s most famous stock market index. It’s like S&P management is sabotaging the Dow brand in order to elevate the S&P 500 – to make it “the market” – and to aid Wall Street’s mantra that more is better, bigger is better, and that more stocks bring about more profit.

So not true.

Proof of this can be seen in the 7 years since my award winning book LOSE YOUR BROKER NOT YOUR MONEY hit the streets. In that time my 15-51 portfolio has produced a league-leading 191% gain, or 27% per year. The S&P 500 posted a 103% advance, or 15% per year. The below-average Dow Jones Average added 91% in the same time, or 13% per year. See below.


My 15-51 method is designed and constructed to produce above-average investment returns using just 15 stocks. It does so consistently and reliably, over any long-term timeframe compared to any sized portfolio, be it the Dow’s 30, the S&P’s 500, or any mutual funds' 1,000+. 

So why invest in anything different?

Happy 4th of July!

 The road to financial independence.

The Effect of Trump Derangement Syndrome

Dan Calandro - Monday, June 11, 2018

February 8th seems like a lifetime ago, as discussions of “correction” and Bear Market have faded into the distance. Since that low point stocks have regained more than 80% of their losses and are just 4% off their all-time highs achieved on January 26, 2018. It has been a rocky road indeed – but then again it’s the stock market, and that kind of travel is not uncommon. See below.


So why the volatility?

First, it is important to appreciate how high stocks are presently valued. The last time stocks traded at this multiple was during the heat of the tech-boom in the 1990’s. Back then GDP growth in Real terms averaged 4.3%. The housing-boom, which produced the worst correction experienced since the Great Depression, averaged 3.2% in Real growth – and stock valuations during that expansion never approached today’s level. Obama’s QE-boom averaged 2.3% Real growth, which is a level Trump has matched since taking office. Below is a chart showing the trend of multiples the Dow Jones Industrial Average has traded to GDP over the last 20 years.


As you can see, stock prices are not low. And whenever stocks are this pricey institutional investors get antsy and tighten their trading tolerances, and so any kind of negative data – or sentiment – can send shockwaves throughout “the market.” Investors should expect to experience a higher degree of volatility during these times.

Second, many market followers were hoping, and speculating, that the Trump tax cuts would be potent enough to break the trend of weak first quarter growth that became epidemic during the Obama years. But we have had no such luck. Q1 growth was 25% lighter than the prior quarter (Q4 2017), and 15% slower than the average rate of growth for all of last year (2017). Coincidentally, the estimate that initially announced weak Q1 growth arrived on the day stocks hit their all-time highs (January 26).

The reason for the continuing trend of weakness is because the Trump tax cuts were too small for the largest segment of the economy (individuals), and therefore unable to reverse the effects of bad policy (more on that in a bit). Add to this potentially higher foreign tariffs and a stronger currency that could offset any real gains projected for the corporate world, and all of the sudden stocks look a whole lot richer than they did before.

Third and finally, it’s easy to forget that the last two years have been huge gainers for the stock market, averaging 18% ROI per year under a weak and uneven economy (1.9% growth.) If Trump got what he promised during the campaign – a highest individual tax rate of 25% and a corporate rate of 15%, and a repeal of Obamacare – perhaps current valuations could be considered reasonable. But we didn’t get that – far from it, in fact. This dynamic put stocks way ahead of themselves... And now there’s a trade war, a currency war, persistent military war with threats of escalation, and a political war that is bleeding into all factions of the populous.

Irrational and unwarranted divisive politics have stoked celebrities into polarizing civil discourse and debate. First it was Michele Wolf, then Samantha Bee, and now Roseanne Barr. The Left can say and do anything they want with impunity and the Right can only say and do whatever the Left allows. Nothing highlights this better than the dichotomy of how Barr and Bee have been treated by their employers.

The fight brewing in this country is now starting to get violent, as can be witnessed through recent confrontations in Oregon between Antifa and Patriot Prayer. One feels superior to the other and the other feels oppressed. Not a good recipe for peace and prosperity; and for as long as this nonsense festers real issues will continue to fall by the wayside.

For instance, the Affordable Care Act is proving to be the debacle it was projected to be. Healthcare costs are on a sharp rise while profits to health insurers have skyrocketed, and if the American people knew how terrible and corrupt this law truly is a revolution would already be underway – the People versus government. But instead we are fighting ourselves and losing the war, liberty and wealth.

As an example my group health insurance policy got tagged with another sharp premium increase this year – 49.5%. Premiums for middle-aged working families are between $2,500 and $3,500 per month (after taxes) and with a $14,700 (after tax) maximum annual out-of-pocket deductible, families must earn $100,000 gross income per year just to pay for health insurance. Think of how absurd that is.

Consider it in this context…President Obama defined “rich” as those who earn $200,000 per year or more – or put another way, his idea of a rich family is $100,000 of earnings for health insurance and $100,000 for living expenses – BEFORE TAXES. This steals money from workers and limits the amount of money they can circulate in other parts of the economy. In other words, it limits overall economic growth and produces outrageous inflation in just one segment (healthcare). 

According to Obama and his namesake law a 50% tax on gross income for healthcare is fair for working class families so that non-working people can get insurance for "free." That kind of rate is an egregious amount above the tea tax that sparked a prior century’s revolution against an overbearing government whose ideology superseded the will and desire of the People while depleting the riches they so rightly earned.

But as long as we allow ourselves to be distracted by the antics of the Left and Right we fail to address the real issues that face our country – and then nothing gets done, nothing gets resolved, and things only get worse. That’s the effect of Trump Derangement Syndrome: Divided We Fall.

Perhaps traders took pause to assess these dynamics. And with a glance across the pond where things are much worse than they are here, a stock market pullback accompanied by a healthy dose of volatility seems more than appropriate.

Expect more.

Stay tuned…

 The road to financial independence.

Lurking in the Woods

Dan Calandro - Monday, February 26, 2018

The investment markets are notorious for sending bombastic messages. They price daily and react to the whims of news and impulse – and speculation is the main driver. As a consequence the short-term (i.e. days, weeks, or even months) tells very little about the stock market’s condition or its future course. Nevertheless everything happens for a reason. Dramatic and/or erratic movements, whether short-term or long-term, should be seriously considered.

Many in the media have referred to the recent price adjustment as a “correction” as if that somehow classifies it as something much more than what it actually was. Price corrections happen all the time, every day, week, month and year. Indeed, a 10% move is substantial. Heck, ten-percent of anything is a significant portion. And to lose it in just 10 days is also significant. A short-term view of the downward correction looks as dramatic as it sounds. See below.

The chart above proves a few things. First, when the stock market sells-off all portfolios go down in a similar manner. The only way to escape it is to not be in stocks and the only way to mitigate it is to have a multiple asset class portfolio (see my book for more details.)  Second, the chart and correction once again prove that smaller portfolios consistently outperform larger and more diversified ones in all market conditions (both up and down); they experience higher lows at the bottom; and they recover faster and more potently after the heat is gone. These dynamics, preferred by all investors, are the bedrock of my 15-51 method.

Less is definitely best.

This is proven by consistent superior performance of the 15-51 Indicator™. In the most recent twelve months shown above, for example, the 15-51 Indicator™ gained 27% compared to 22% for the Dow Jones Average and 16% for the S&P 500 – after the most recent correction. Those are solid one-year gains. Extremely solid, in fact.

So what’s the big deal with the “correction”?

First, when stocks sell-off that quickly and sharply there is only one impetus to movement: panic. Second, the only way for stocks to fall that fast is for the Wall Street establishment – the market makers and institutional investors – to be the ones who are most panicked, first and foremost.

And why are they so jumpy?

Let’s first state the obvious: stock valuations remain ungodly high and the market dynamic is changing. All eyes are on the Federal Reserve and interest rate policy. The Trump tax cuts threw a wrench into current Fed policy – and a new chairman just took office. What will Jerome Powell do? He intends to maintain the Yellen plan but that plan didn’t account for the tax cuts. So how will he adjust?

 Wall Street is unsure.

What the establishment does know, however, is that stocks are rich and have a lot to lose and bonds are poised to take a beating. Wall Street has a lot of action on the table, not to mention being caught-up in the hoopla of free and easy money for almost a decade. So they wake up on January 26 and notice the sharp move in the 10-year note. Oh my God, they panic, and sell.  A year-to-date chart is below.

On January 26, 2018 the yield for the 10-year note was up 10% for the year that was just a few weeks old. At that time stocks were fractionally off the same pace. The day before everything seemed normal – even though yields had been spiking since Trump won the election on his promise of steep tax cuts for all. Tax cuts had no choice but to raise yields and interest rates. Everybody "in the know" knows that, Wall Street most of all.

Not ironically Jerome Powell took the helm at the Federal Reserve on February 5, 2018 – a day that saw stocks lose 4.4% in value. Welcome to office, Mr. Powell, with warm regards from your friends on Wall Street.

At the time of that January 26 fulcrum stocks lost ten percent and yields added another ten percent on top of the first ten already earned. They’re up 20% so far this year, and they are going to go higher. Wall Street knows this too. After all, the Yellen plan called for three interest rate hikes in 2018. But is that enough? If not, how big will each one be? And what will it do to stocks?

Speculation is the gasoline to panic’s fire.

Scared at the possibilities and potential outcomes Wall Street took some chips off the table and recalibrated their portfolios. This move, no doubt, was to offset losses in their bond positions. Yields and bond values run in opposite directions – and the establishment owns a ton of bonds, thanks to QE (quantitative easing.)

Investors should expect more of this kind of action because interest rates are still historically low (the 10-yr closed Feb. 23 at just 2.87%) and free market trading is pushing them higher without Fed intervention. This is concerning because QE inflated an asset bubble in the stock market and the effort to unwind it is just starting to begin; logic dictates that unraveling the effort will have the opposite effect as its implementation: this time yields will move higher and stock prices will adjust lower.

Again, this isn’t new news. Wall Street was just doing what they do and sending messages as they did it. These high valuations have them nervous and the future is uncertain. One thing is for sure, however, should the unwinding effort go awry they will blame Jerome Powell and Donald Trump in the same breath.

But the scariest part of this situation – the thing that has Wall Street panicked more than anything else – is that it is getting more and more likely that yields will runaway from the Fed because they can’t move fast enough – and then all hell will break loose. Uncontrollable yields make everything harder. They are impossible to predict and their consequences are impossible to calculate – especially when considering the QE ponzi scheme on a global scale.

That explains Wall Street’s itchy trigger finger.

It also shouldn’t be discounted that sharp sell-offs are a great way for Wall Street to take the temperature of their customers – investors who rely on them for guidance and advice – who are sure to call during a two-week mayhem of trading. Normal fluctuations are just that: normal. “Corrections” on the other hand are big and bad enough to draw their consumers in. They provide great incentive.

Already there is speculation as to whether the recent “correction” will create, or morph into, a Bear Market and recession. The stupidity of such banter drives me nuts.

For instance, it is widely broadcasted that a stock market doesn’t experience a “correction” until it is down 10% from a previous high, and that a “Bear Market” doesn’t ensue until a 20% loss is incurred – regardless of time duration and Market condition. Such a mindset is totally baseless and nonsensical.

Consider that the conventional definition of a recession is an economy that shrinks for two consecutive quarters, or six consecutive months. Time duration is a critical factor in the calculus to exclude normal anomalies that can happen at any given time, month or quarter. Yet no such standard applies to the stock market.

Using that same flawed logic a stock market can totally transform from a Bull Market to a Bear in just a single day of trading, which happened on Black Monday, October 19, 1987, when the Dow Average lost 23%. To think that a market can completely change status or condition in just one day is absurd.

A Bear Market is when stocks lead the economy lower. But the economy was growing steadily in all of 1987 and 1988. Black Monday was a correction, not a Bear Market. Size doesn’t matter (sorry couldn’t resist).

It is equally ridiculous to believe that a 5% drop over a six-month period isn’t a correction, and that a 10% loss over the course of a year is not a Bear Market should the underlying economy be in recession or moving into recession.

My advice to investors: don’t get caught up in meaningless labels with flawed definitions like “corrections” and “Bear Markets.” They are just waffle.

Five things are for sure. Price corrections happen all the time; they happen for many different reasons; and they all come in different shapes, sizes, and time durations; context is key — and the establishment is corrupt.

Let’s put the recent corrective movement into proper perspective…

First, stock market cycles are measured not in days, weeks, or percentages, but in periods from the last market top to the present price valuation, or from the last market bottom to the current value. Logic dictates that a Bottom-to-Bottom perspective is most helpful when analyzing the cycle at pricing bottoms. When evaluating toppy markets a Top-to-Top view is appropriate. That’s what we are going to look at today. Below is a Top-to-Top chart that compares the stock market averages from October 2007 (the  peak of the housing-boom) until present, Feb. 23. Take a look.

Let your eyes be immediately drawn to the end of those trend-lines – the 2018 correction. The ten-percent move doesn’t look so big and bad now, does it?—A steep sell-off indeed, but no big deal in the grand scheme of things.

The stock market averages gained 70% during this timeframe, or 8% per year. Solid returns for a lethargic economy. In fact stocks have been in a prolonged Bull Market since the last correction, rising some 300% since its’ bottom, or 33% per year. And since recovering from recession in 2010 stocks have gained 133%, or 17% per year.

Stock prices have been on an absolute tear. In fact the stock price multiple to GDP has never been higher than it is today – higher than the tech-boom or housing-boom. Put it all together and it’s easy to understand why Wall Street is so edgy. Valuations are rich, yields are rising fast and will continue, Powell is new and so are the tax cuts, QE is ending, and the worst is yet to come – and Wall Street knows it.

The most recent ten-percent downward move was just an adjustment, noteworthy only because of its size and speed – but nothing earth shattering. In fact, corrections do not become significant until they break a long-term trend-line or moving average. Such a breach would indicate a change in the direction of stock prices. But that hasn’t happened yet (refer to chart above).

For further proof of this rationale consider that when the recent sell-off took place the Dow Jones Average was up 28% in the most recent twelve months, and at the bottom of the current correction was still ahead by 15%. The “correction” only took a piece of the gain back, leaving a healthy one-year return. So what’s the problem?

This should be considered normal volatility for the current market conditions.

Many investors don’t appreciate the massive amount of price inflation currently present in the stock market today. That’s because the Dow Jones Industrial Average and S&P 500 are two of the most manipulated portfolios in the world – this because they are so widely followed and held. That makes it easy for the Wall Street establishment to choreograph large blocks of trade to affect key stock components to drive market indexes to portray a condition or trend that aids them in achieving one of their many objectives. For that reason the stock market averages do not represent an accurate picture of the true state of inflation currently residing in the stock market.

This is not the case with my stock index, the 15-51 Indicator™, which is not on the big board and doesn’t have an ETF. For this reason it escapes the manipulation ever present in the major market indexes. Below is a chart of all three stock market indicators over a very long period of time, 20 years. Take a look at the upward move in my portfolio compared to the averages since the last major correction. It accurately represents the gross level of inflation in the stock market today.

Stocks have a lot of ground to lose.

The next major correction – one that is caused by something major and real and not pure speculation that arose from thin air – is one that will make a 10 point move seem like a walk in the park without the knowledge of a ferocious bear lurking in the woods beyond.

Investors beware.

And stay tuned…

 The road to financial independence.

The Trump Stock Market

Dan Calandro - Sunday, January 21, 2018

Stocks are off boldly again this year in a continuing show of strength that has become typical under Donald J. Trump. In fact, the Trump stock market shares several characteristics of the man himself. It is showy and arrogant, and an embarrassment of riches. It, like Trump, beats to its own drum, sometimes with irrational exuberance. Trump is known as an early bird, arriving to work when most are just getting out of bed. The Trump stock market, like the man, also arrived early, about one quarter-year before his presidency. 

Bill Clinton and George W. Bush left office with an economy in recession and a stock market in correction. Notwithstanding their unfortunate endings, both presidents experienced solid long-term economic gains during their time in office. Each had bona fide booms (the tech-boom and housing-boom, respectively), and each implemented policies that contributed both to growth and calamity – all of which were stoked by an overzealous and overreaching Federal Reserve.

The actual endings of the Clinton and Bush stock markets can be argued but no one would suggest stopping them before they left office. Their respective recessions and stock market corrections had started before elections and continued through the inaugurations of their successors. Their according stock market performances ended when they left the White House.

Indeed, an argument can be made that their successor’s stock markets didn’t begin until some corrective legislation was enacted under their authority (for Bush it was a tax cut plan; and for Obama it was a multi-trillion dollar spending effort.) But that’s simply a difference in starting point for the new president. The previous president’s stock market performance ended with their presidency, as they could no longer move Congress or the Federal Reserve to enact corrective legislation or policy. So the accountability of a president’s stock market performance ends with their last day in office at the very latest.

But they could relinquish it before they leave office. The Obama/Trump transition is a perfect case in point.

President Obama left office with a stable, low-growth economy that never lived up to its expectations. That is because Obama’s expansion was a different kind of beast; it was one that shifted focus from the individual to the central authority in Washington DC, making his “boom” a centrally planned and directed one. That is why his economic performance never produced growth anywhere near his two predecessors’. Consumers represent two-thirds of all economic activity; minimize them and economic growth will flounder. Happens every time.

Central planners believe government is a much more reliable and stable market participant than individuals, and therefore, operate to assume control over a larger section of the market (a.k.a. the economy, or GDP). They believe that a greater degree of market participation by government produces more fairness, and therefore more stability. That was the reasoning behind the Affordable Care Act, a.k.a. Obamacare.

Central planners believed they could do healthcare better than the semi-socialized system America had before by controlling prices by standardizing benefit plan offerings with centrally directed mandates (their idea of fair). The benefit of experience has proven central planners wrong again, as healthcare is anything but affordable and more people are actually cut out of the system because they can’t afford the huge deductibles, let alone skyrocketing premiums.

As Ronald Reagan once said, “The trouble with our liberal friends isn’t that they are ignorant, it’s that so much they know isn’t so.”

That same ideology – that government is a more reliable and stable market participant than individuals – is what drove the solution to the 2008 financial crisis. It wasn’t about cutting taxes and rolling back government programs and regulations to empower individuals. It was about adding more regulation on top of the failed regulations that caused the crisis in the first place, and then assuming control over a larger section of the economy. They did so with debilitating central government debt and deficit that did little more than weaken freedom’s cause and We the People.

Consider that for all the historic money Obama spent during his time in office the U.S. military actually weakened during his presidency. The American People also weakened during the Obama era because they became more reliant on government programs for health and welfare. This, of course, placed a colossal debt burden onto future generations – weakening them long before they had the chance to become of age.

Make no mistake, this was made possible by unprecedented action by the Federal Reserve via QE (quantitative easing) and unconscionable spending programs granted by a Republican Congress too scared to challenge the first black president in fear of being labeled a racist; and because they are big government socialists at heart. SIDEBAR: Socialists always lose to communists because communists aren’t scared of being racist, think Black Lives Matter and Antifa. They are who they are, damn the rest. Socialists, to the contrary, are too scared to be anything but politically correct.

Barack Obama was the epitome of a big government central planner, a communist for all intents and purposes, who was moronically lauded as the one who single-handedly “saved” the economy from doom. Moronic because Obama’s policies and the according “boom” that followed had nothing to do with economic performance. It was about taking over the economy and fundamentally transforming how America operates – to change it from a quasi-capitalist economy to a quasi-communist one. Obama attempted to do so through debt and deficit – the eye of the next storm.

Obama’s expansion was growth in government that was financed by a fiasco choreographed by the Federal Reserve. His boom, the QE-boom, is one of debt and deficit and monetary dysfunction – and the world followed, as every power hungry politician and corrupt political system printed and spent, borrowed and bribed, and paid-off and kicked-back -- so reminiscent of what subprime mortgage borrowers did in the run-up to the last collapse. And Wall Street loved it just as much. After all, it was they who laundered all that money and made a king’s ransom in the process.

Many people don’t properly connect QE with the bailout of the Wall Street establishment for all the terrible derivative bets they made during the housing-boom. The QE practice exchanged toxic assets for newly printed cash, a portion of which was earmarked to purchase U.S. Treasury securities (government debt and deficit). Banks got stronger by offing their losses to the Federal Reserve, and interest rates were kept artificially low (a Federal Reserve objective), which made the financing of government debt easier (as interest expenses were at the lowest possible level.) So the Wall Street establishment got bailed out with trillions of new QE cash, a practice that lasted more than five years after calamity struck.

Every time the Federal Reserve prints that kind of currency inflation ensues.

The Obama economy never produced solid economic growth; it was always weak and uneven. That’s because it minimized the individual and grew the establishment – government, the Federal Reserve, and Wall Street. For that reason inflation never presented itself in the market economy (besides healthcare, of course). Instead “stimulus” was held-up in the banking system, a.k.a. the Wall Street establishment – which is the reason why excessive inflation presented itself in their market, the stock market.

Obama’s stock market started when he took office and the Dow Jones Industrial Average was at 8,000, or 43% off its previous high (October 2007). Stocks regained their previous high-water mark in February 2013 and then peaked in July 2016 before heading down from there until Election Day. 

Stocks reversed course the day after Trump was elected and have charged higher ever since. It was the vote for Trump’s policies that changed the direction of stocks; Obama had nothing to do with it. The proof of this reasoning is elementary: the policies that Trump campaigned on are good for business and investment, good for people and stocks. So stocks rallied.

That said, the Trump stock market began during the Obama presidency, on November 9, 2016, one day after his election. Since then stock market strength via the 15-51 Indicator has gained a stunning 45% in the 1.2 years since the vote, and the Dow Jones Average added 42%. The S&P 500 has lagged significantly behind those two indicators, advancing just 31% during the same time. See below.


Perhaps the most amazing part of this stock market surge is the breadth of gains. Only two industries have not participated in the sharp run-up (energy and consumer staples) though they have produced gains; the other five industries, however, have enjoyed an embarrassment of riches. See below.


My goodness.

And while stocks have been rallying on the Trump agenda since the vote, it wasn’t until Christmas 2017 that something finally got done; the Tax Cut and Jobs Act was signed into law on December 22, 2017 – and I am torn…

First off, any kind of legitimate tax cut program will help consumers, businesses, and stocks. The relevant questions are: How much will they help, and what are their downstream effects?

To begin it is important to note that what passed Congress last December is far from Trump’s campaign pledge. Trump campaigned on a highest individual tax rate of 25% and a corporate tax rate of 15%. The new tax law reduces the highest rates from 39.6% to 37% for individuals, and from 35% to 21% for corporations – a long distance from the president’s campaign.

And it really troubles me that a guy who wrote a book entitled, THE ART OF THE DEAL, failed to start negotiations with his campaign pledge, and then failed to leverage the historic endorsement the American people provided him on Election Day to push it through. But no, in typical Republican fashion Trump over-promised and under-delivered. Not to mention that yet again the best a Republican controlled government could do was to provide temporary, auto-expiring tax cuts.

I can’t help but feel as if Republicans are sabotaging Trump to position him as the sacrificial lamb in 2020. First, the tax cuts are way too small to really impact the economy in the short term. Recall that Republicans advertised the tax cut to increase income for middle class Americans to the tune of $1,000 per year, or less than one hundred bucks per month. That’s just not enough to boost market activity in any significant way – certainly not right away.

And second, it’s hard to determine how the corporate tax cuts will actually play out across the board. They will certainly help some companies, but it may hurt others that have been paying far less than the posted 35% rate for many years. General Electric, for example, is notorious for paying little to no federal income taxes. Should GE’s rate jump to the newly established 21% rate in 2018 the recently enacted Tax Cut and Jobs Act would translate into a huge tax increase that, due to its size, could cause layoffs.

Will the good in this new tax law offset or supersede the bad?

It is important to also remember that neither Democrats nor Republicans like President Trump. They both despise him and greatly want him to fail. You can add the FBI to that list, the Federal Reserve, and Wall Street too. Trump broke code and pierced their inner sanctum. They believe he must be punished and held as a stern example of the kind of retribution to be expected by any other foolish outsider who attempts to disrupt their accord.

The Trump tax cuts will produce more money to the market economy. That’s good. How much they will, in-fact, deliver is the trillion-dollar question everyone has. And while the world can speculate and drive stock prices to the moon without any firm basis, one person can’t be so frivolous. That person needs to be exactly sure how much new money will flow into markets, and that person is Jerome Powell.

The Federal Reserve was Obama’s key ally in his war against individualism and free markets. It was they who aided and abetted Obama’s takeover of the American ideal by printing an unprecedented amount of money and concocting an illegal ponzi scheme for which to launder it (a.k.a. quantitative easing) – this to keep interest rates low to supposedly “repair the labor market and right the economy.” But those objectives had nothing to do with the Fed’s use of QE. Those objectives were simply props in a false advertising narrative.

Think about it…the country emerged from recession in the fourth quarter of 2009 and unemployment reversed and began trending down at the beginning of 2010. QE didn’t end until October 2014 – four years after the program had achieved its objectives.  

Consider also that under chairwoman Janet Yellen the Federal Reserve finally began what was promised to be a very gradual process of unwinding QE.—When, you ask? That’s right, shortly after Donald J. Trump took the oath office – this to leave the mess for him and not Obama.

Yellen, a die-hard establishment player, would have certainly sabotaged Trump if he appointed her to a second term. And he knew it, which is why he opted not to extend her to another term. That puts the first female Fed chair in undesirable company; Yellen is the first chair not to be reappointed to a second term in more than forty years.

Ouch.

So to take the sting out of the proverbial slap in the face Trump appointed another long time establishment player to lead the Fed. The media widely portrayed the Powell selection as a safe bet because he is cut from the same cloth as Yellen. He too is a monetary dove. That means easy money and outrageously low interest rates will continue until the last possible moment, which is usually way too late. The Fed is notorious for their uncanny inability to see the iceberg, take Greenspan and Bernanke as recent examples. 

Despite this the establishment through its media arm urges us – those outside the beltway – to be happy with the Powell selection because he is just like Yellen, Bernanke and Greenspan. “Safe,” they say. 

But let me ask, Who can be truly content with sending a dove to do a hawk’s job?

Regardless of any profound response, it will be Jerome Powell who will lead the Fed’s effort to unravel the QE ponzi scheme -- and he must do so in a completely different fashion than Janet Yellen mapped out. The tax cuts changed everything. Powell must act readily and more aggressively, and be less patient – characteristics of a  hawk, not a dove. Should he mistime anything inflation will swiftly return, interest rates will spike, and the global credit markets will be thrown into a state of flux. And Powell knows it.

Today Trump loves the stock market. 

Jerome Powell is scared to death of it.

Here is Powell’s dilemma…right now the 10-year yield is 2.6%. By this time in the economic cycle it should be closer to 6%. If corporations turn all of their tax benefits loose – by increasing salaries and bonus, and expanding capital expenditures and research and development – the economy might kick into overdrive faster than any projection. Should that happen it would be impossible for anyone but God to raise interest rates fast enough to hold off inflation. And when interest rates rise due to inflation they become uncontrollable; Mr. Powell knows that too. And he also knows that higher interest rates and inflation are the impetus of the next corrective cycle.

So there are many sleepless nights ahead for Mr. Jerome Powell, as he tries to figure how to do gracefully what Janet Yellen should have done years ago.

Think about this...If the Fed would have moved when economic conditions warranted in 2011, or 2013 the latest, the next correction would have already been upon us. But Obama was in still office, his government takeover of the economy still in full swing. The establishment was benefiting, expanding, and thriving under his leadership. And the Federal Reserve was financing it. In other words, all the tentacles of the establishment were deployed to protect Obama and his big government legacy. Together they would prove that central planning was more reliable, and more stable, than the capitalist system. 

For this reason the establishment likes Powell and views him as “safe” because he is also one of them, a big government accommodator. But as sure as the sun will set tomorrow each and every one of them will turn against him the moment calamity presents itself. The media will blame him for missteps and excoriate Trump for changing Fed generals at the worst possible time (to unwind QE). And then of course Democrats will shift their focus to the “ill-timed” tax cuts. They must be repealed, they will argue.

All of this will happen so far away from Obama’s tenure that his contribution to the disaster will never come up, like Bill Clinton sidestepped any and all responsibility for the housing-bust. And then it will only be a matter of time that Obama’s “solution” to the last crisis – more printing, more spending, more debt and deficit, more government – is held out as the gold standard of recovery.

And then We are all in very big trouble.

Until then, however, stocks should continue their rise on wild expectations and steroidal speculation. Interest rates and inflation are the keys to watch. Both will rise, making bonds a risky bet. (Yields and bond values move in opposite directions.) Gold will most likely trade down on the stronger dollar only to reverse course when market inflation presents itself.

Keep alert.

One final thought about Trump’s stock market…most presidents pretend that the stock market is a sideshow or no big deal because it is so unreliable and speculative, manipulated and corrupt. Crazy to hook your wagon to it. The best example of this tempered stance is how President Reagan once referred to the Dow’s sharp decline on Black Monday, October 19, 1987, which is still the single largest one-day decline in history. He said simply, “Stock markets go up and they go down.”

Trump isn’t Reagan. He has made the stock market a big deal and by so doing he has taken full responsibility and accountability for it. He has claimed ownership. And when asset values rise sharply they fall sharply.

Markets correct all the time, but one hasn’t happened in a very long time, in fact, the longest period in history. Obama was lucky to avoid correction because he had the entire establishment helping him, a spendthrift Congress and an accommodating central banking system.

Trump has none of it. The entire establishment would like nothing more than to have the next major crisis hit during his re-election campaign. What better way to assure Trump’s removal from office?

The tax cuts, a Trump policy, make unraveling QE and controlling inflation extraordinarily more difficult. They have forced the Fed into a tighter corner. Higher interest rates and inflation are inevitable. 

Good luck Mr. Powell. 

And good luck Mr. President.

One last point, I don’t believe there has ever been a “stupid” American president. It’s simply too hard to get there for smart people. Dopes have no chance. And while it is true that some presidents say and/or do stupid things, that only proves they are human. Nobody’s perfect. Trump is human and imperfect, and like all of his predecessors, he is no dope.

One of the stipulations in the new tax law is for American companies to bring foreign profits back to the U.S. at a deeply discounted tax rate. All of the multinationals are doing it, especially the banks and technology companies. The importance of this cannot be dismissed. Hundreds of billions of dollars, perhaps even trillions, are leaving foreign banks and being infused into American banks. This weakens foreign banks and strengthens American banks. It weakens foreign central banks and strengthens the Federal Reserve and U.S. dollar. This will aid in the effort to unwind QE, and place the U.S. in a much stronger position to survive the next crash.

So when the world turns upside down and everyone blames the president, Powell, and the tax cuts for causing disaster, Trump will have some solid ground from which to stand. Around him, however, will be a stock market in shambles. And it will be his.

Stay tuned…

 The road to financial independence.


Educating Archie: A Day's Pay

Dan Calandro - Thursday, November 23, 2017

I have struggled with this blog ever since STORM SEASON was posted back in September. Since the hurricanes blew in a few months ago media coverage has been a whirlwind of nonsensical misgivings about tax reform and a flurry of sexual harassment claims.

It’s easy to get lost in the bluster.

Tax relief is easy to understand: those who earn money to fund their lifestyles (a.k.a. workers and taxpayers) get to keep more of what they work all week to produce. Tax cuts utilize the same tax code system, but with lower rates.

Tax decreases = Increases in income

Tax reform is a completely different ball of wax – and can be a whole lot scarier. After all, the Affordable Care Act (ACA) was billed as “healthcare reform.” For those who haven’t read the ACA, it is a law designed to take control of the healthcare industry via the tax code. It was a tax law, and was confirmed as such by the U.S. Supreme Court[1] in July 2012. That is how the law was passed with less than 60 Senatorial votes. That “reform” package threw the entire healthcare industry and its insurers into chaos and sent prices sharply higher.

The GOP’s “tax reform” agenda has the potential to have that same kind of effect.

Only the corrupt call something what it is not. Corruption is a failure of society and of government, the legal representatives of society.   

These sorts of tax schemes recently put forth by the Republicans are something to be expected from Democrats – not conservatives or small government proponents. To compare these plans to Reagan’s 1980’s tax reform is to admit to knowing absolutely nothing about American history and Ronnie’s inspiration – Calvin Coolidge and the roaring ‘20’s.

The definition of reform is to make changes in order to improve the item being changed.

Neither GOP proposal makes the current tax code better.

Even so, I hate to say that I wouldn’t be shocked if something actually got passed here. I also wouldn’t be surprised if it was a select few Democrats that pushed the bill over the line and into law. Truth be told, Democrats secretly want something like this, as the long-term trajectory of both bills embolden central government, weaken states, and diminish the rights of individuals.

It is right up the alley of power hungry politicians.

But the Democrats are torn. Passing a bill places their strong desire to seize more power and control in direct conflict with making Trump the worst kind of failure history has ever experienced. They don’t want him to enact one new law – even if it were destined for failure. He’s an outsider and Washington is their ballpark. They don’t even want him to step into the batter’s box.

Add to this the fact that most Republicans don’t like Trump either and it is quite sensible to project that this legislative effort may also die on the vine. It’s anyone’s guess. However, one thing is for sure, if a bill actually does get passed it will be bad for We the People. In such a case Congress will have sent a broadcast message to the American populous: screw Trump and all those who voted for him; it will serve as their warning to never elect an outsider again.

Bank on that.

It seems like a lifetime ago that I blogged in favor of Trump’s tax agenda[2]. But that was six months ago when details were short of campaign promises. It was that economic platform – tax cuts, repeal and replace Obamacare, secure the border, and renegotiate bad trade deals – that sent stocks flying. Since the fall election stock market strength via the 15-51 Indicator has gained 28% which is in lock-step with the Dow Jones Average; the S&P 500 has returned seven points shy of them (21%). Gold is flat but has been both up and down in the year, and yields jumped to greet Trump before landing 25% ahead. See below.


It’s hard to take anything as true in these corrupted investment markets, but an unsure gold seems to be the most accurate. After all, Trump has gotten absolutely nothing passed since taking the oath of office -- not to mention every proposal his Party puts forth has been terrible and far from his campaign platform.

Recall that Trump campaigned on cutting the highest tax bracket to 25% (Reagan’s was 28%), and corporate income taxes were to be reduced to 15%. Both GOP plans are way off that and either maintains the current highest tax rate (39.6%) or increases it; and they eliminate a host of deductions that will inflict a major tax increase onto many lower and middle class taxpayers. The GOP’s plan also calls to reduce corporate income taxes to 20% (from 35%), a-third higher than Trump’s pitch when he won the vote.

If either bill or some combination thereof is enacted this campaign breach would be as bad as, “If you like your healthcare plan you can keep it.”

Perhaps the most frightening thing about the “tax reform debate” is how eerily similar it is to how Democrats sold “healthcare reform.”

The Republican prognosis for their tax plan (to boost economic growth and employment and increase middle class income by $1,000 per year) is as baseless as “Healthcare premiums will go down and families will save $2,500 per year.” Both GOP tax proposals are higher tax-and-spend models that would make any power-hungry spendthrift socialist proud. Neither bill addresses the critical issues required to change the tax code for the better.

Yet stocks have moved like Trump’s campaign has become a reality even though it isn’t even possible. Nothing of what he pitched is on the negotiating table.

Many of my prior blogs have highlighted key points that true tax reform must address – to modernize the definitions of the classes (upper, middle, lower, and poverty) and reconstruct the tax brackets to fit them accordingly; to dramatically reduce all tax rates including, and most importantly, the highest rate; to significantly cut central government spending and therefore the central government’s presence and intrusion in the markets; and to protect the sanctity of national entitlement programs (Social Security, Medicare, and Veterans Affairs) by eliminating all waste and fraud and increasing funding[3]. So I won’t dive into those points again here.

Instead I will take an unconventional approach to the tax reform debate. Know upfront that the current dialogue in Washington DC has less to do with how much money taxpayers will gain or lose from this legislation and more to do with how much liberty We the People will continue to lose.

Everything is at stake.

The problem with the media today is that they distort facts and cloud important debates with politically charged propaganda that they use to pressure viewers into agreeing with one Party or the other, regardless of facts, outcomes, and possible unintended consequences. Media mayhem ensures only one thing: a confused and divided populace -- a condition that paves the way to despotism.

In the 70th year of his Hall of Fame life, singer/songwriter Van Morrison created perhaps the greatest album in a most impressive and legendary career. His album, Born to Sing: No Plan B, is as creative as it is profound, and as entertaining as it is thought provoking. With lines like, “Sartre said hell is other people,” and “When God is dead, and money’s not enough, in what do you trust,” Van the Man paints the picture of the modern American dilemma and today’s social mishaps in quick and succinct lyrical bursts surrounded by soulful instrumentation. The album, which debuted in October 2012, has never been more appropriate than it is today.

Sure the political environment was hostile five years ago when the album was released – but nothing like it is today. Born to Sing is an album that poignantly encapsulates the feelings of so many freedom loving, God-fearing Americans today – those who are irritated, frustrated, and even depressed about the diminishing American ideal playing out in Washington DC.

Music is more than just entertainment. Like writing or painting there is purpose to every stroke – the title, lyrics, song layout, the message and the beat. Where does the title track appear on the album? Why? And what is the message? Everything means something.

On Born to Sing the title track is placed third on the album. The opening track on this politically motivated album is a song entitled, Open the Door to Your Heart.

And can’t we all do a little better job at that in this politically stoked environment?

Morrison’s provocative line on the second track: “Sartre said hell is other people,” refers to French philosopher Jean-Paul Sartre’s play No Exit. Sartre was a key figure in existentialism thought, where freedom and individualism were predominant core values. In the play three characters arrive in hell and struggle to determine what sin had led them to the abyss, and what the according punishment might be. Soon they realize that in hell there is no executioner, no punishment, and no burning flames. Just the three men trapped in a room – for eternity. The “hell” was the other two persons in the room. Hence, “Hell is other people.”

And doesn’t that feel like the hell the two political Parties have inflicted on We the People of late? They are the hell. What sin did we commit to deserve it?

Of all the great songs on this recent Morrison collection one stands out as the most fitting today. It is the last song on the album – the message the artist wishes to leave you with – that captures Van’s existentialist influence and the modern American condition in one fine tune. Educating Archie is not just for today, but for the ages.

Educating Archie, Van Morrison, on Born to Sing: No Plan B

You're a slave to the capitalist system

Which is ruled by the global elite

What happened to, the individual

What happened to, the working class white

They filled his head with so much propaganda

Entertainment on TV and all kinds of shite[4]

What happened to the individual

When he gave up all of his rights

Tell you up is down and wrong is right

Nothing to hang your hat on, can't even get uptight

You're controlled by the media

Everything you say and do

What happened to, the individual

Tell me what happened to you

Tell you up is down, not able to fight

Keep you docile and complacent, can't even get uptight

Controlled by the media and you don't know what you can do

They took away your constitution you don't even know what happened to you

Waffle[5] is the language that they taught you, taught you to talk

But you can't even get any angle because you forgot how. Keep on walking the walk

You're a slave to the capitalist system and it's controlled by the global elite

Double dealing with the banks, behind your back, just can't fight

*

And that’s how he earned the nickname, Van the Man.

To begin…slavery is not a free market tenet. Free markets require freedom and slavery is the antithesis of that. Monarchs and oligarchs can believe slavery is a right. Freedom abhors it.

Next, a capitalist system that is ruled by global elites is not capitalism at all. It is socialism at its best, and communism at its worst. Instead, Morrison’s reference to slavery and capitalism is in jest, a vicious condemnation of a more perfect society gone horribly wrong.

And that is America today.

When government gets bigger so does big business – and the global elites get stronger because they control big business. The global elites are the donor class – those who fund political candidates and campaigns. They always get legislative carve-outs in tax deals because they always double-deal behind closed doors with those that they put in office.

That’s socialism.

Over the last twenty years U.S. central government has taken-over several huge sections of the American economy – education, banking, and healthcare, to name a few. Government intrusion into these markets has forced prices to rise so dramatically that they are becoming unaffordable to most people. Think of this for a moment…both GOP tax proposals have eliminated deductions for healthcare and student loans. In other words, they have ruined the pricing models in these two markets through regulation and subsidies and their answer to the problem is to impose higher taxes (by eliminating deductions) AND NOT by cutting subsidies and regulation – the origin of the problem. Such a policy raises the cost of these items to taxpayers.

That’s your government working for you.

Before you know it these markets become so expensive that nobody can afford them. And what happens next? The government must step in and provide it “free” for everyone.

That’s communism.

State solutions are communist. Market solutions are capitalist.

American government, both Democrat and Republican alike, pose as advocates of freedom and free markets but govern to an extreme contrary. They spend recklessly and beyond their means – and it’s never enough. They use the Nation’s bank (the Federal Reserve) to double-deal with the Wall Street establishment to launder money through the financial markets to fund their political ambition and power structure, while they bankrupt the nation and diminish the American ideal through regulations and a confiscatory tax code.

For eight years we heard Republican concern about debt and deficits while Democrats had no issue with them. But now that the Republicans are in power tax cuts must be near “revenue neutral” and Democrats are deficit hawks. Make no mistake; Democrats want to continue massive spending programs.—They just don’t want to lessen the tax burden for any person or group. 

Why is it that government never has to live on less but taxpayers always do?

The current GOP tax proposals are expected to add $1.5 Trillion to the national debt over ten years, or $150 Billion per year. That’s nothing and no big deal.

Consider that in 2017 the U.S. federal budget is a massive $4 Trillion with “T” and incurs a $600 Billion with a “B” deficit without the estimated tax cut factored in. To put it another way, today’s “conservative” position is to return taxpayers just 4% of an overinflated budget, while “liberals” believe the tax cut – not their $600 Billion deficit – is the problem.

And from a different angle, consider that today’s “conservatives” believe it is prudent to continue crisis level spending programs nine years after the crisis took place. Spending escalated during Obama’s administration to a point of absurdity, and has never returned to pre-crisis levels. Republicans intend to maintain that same dreadful course.

Further consider that for eight straight years the 535 members of U.S. Congress spent more money each and every year than the entire GDP of the Eurozone’s economic powerhouse, Germany ($3.5 Trillion per year).—But unlike Congress, Germany has a budget surplus.

Forget about draining the swamp. Trump ought to start gutting the farm; what a bunch of pigs they are.

No American should have to pay one extra dollar to fund such reckless government spending. Tax cuts should be much steeper than what Republicans propose and the debate should center around cutting spending by one trillion dollars per year.

That’s conservative. 

Republicans are not.

Let’s take a look at taxes, rates, and deductions, from an entirely different perspective. Let’s forget about the tax brackets in the conventional sense, and forget about arbitrary labels of rich and poor, and middle class…

Small business is the backbone of American industry and the economy – and no one pays more taxes than small business owners. No one. And it’s not even close. So let’s talk about the small business owner and place them in a high tax state, as both GOP proposals include reducing or eliminating the deductions for State And Local Taxes (a.k.a. SALTs). Let’s also make the person in our example “rich” as defined by the central government; and let’s make them a family, two life-partners and two children.

Forget about politics.

Both parents work full-time; their average workweek is five days long; hours worked has nothing to do with the equation. Small business owners work way more hours than the standard 40 hours per week – because that’s what it takes to run a successful business. Nevertheless, each working day represents 20% of their total workweek (1 of 5 work days). Right now, those in the highest tax bracket, the “rich”, must work 2 full days just to pay their federal income tax liability (39.6%).

Only three days pay remains to cover their cost of living, i.e. groceries, gas, rent, utilities, car payments, etc.

Then there is Social Security and Medicare. These entitlement taxes amount to an additional 7.62% tax on gross income – UNLESS of course, the taxpayer is a self-employed business owner. In such a case the small business owner must pay both sides of that tax, or 15.2% of gross earnings.

That’s another ¾ day’s pay.

This, of course, is not to mention the 7.62% payroll tax business owners must pay on the wages they pay all of their employees. But to make matters simple let’s make believe this tax liability doesn’t exist or factor into the tax equation for “rich” people. Even at this tempered point, the “rich” small business owner has just two day’s pay-and-a-quarter to cover their entire nut, which also includes education, healthcare, savings and retirement, etc.

Add to that burden their state and local tax liabilities. To keep matters simple let’s also forget about sales and excise taxes, the gasoline tax, and the many other fees and licensing required to simply live in most states. We’ll make believe those taxes don’t exist either. My home state of Connecticut will serve as the featured high tax state. Connecticut has a 7% income tax.

That’s another 1/3 of a day’s pay.

At this juncture the “rich” guy has just 1.9 day’s pay left to spend for their entire household expenses and savings after paying a whopping 61.8% total income tax, a three-plus day tax rate.

But wait there’s more. The local tax burden in my middle class area (Newtown, CT) averages $15,000 per year for real and personal property levies – but those are in after-tax dollars. In order to calculate the effective tax rate the after-tax amount must be grossed up. When doing so that fifteen-grand translates into $40,000 gross dollars – a 10%-20% tax to gross income depending on income level.

That’s another half-day to a day’s pay.

That said, the “rich” Connecticut small business owner has little more than a day’s pay left to live, save, and invest – which places that taxpayer just one day’s pay away from being dependent on government. Put another way, America right now is just one day’s pay away from State dependency, a day away from communism.

Another important deduction Republicans propose to eliminate is the healthcare deduction.—So let me get this straight, government intrudes on this market and throws it into a hellacious state of chaos that caused prices and premiums to skyrocket – and instead of repealing that legislative disaster, Republicans instead choose to make healthcare  more expensive by removing their tax deductibility.

Isn’t that just ducky?

When deductions are eliminated they never return. Yet tax rates rise all the time. And it is that combination that threatens our constitution, our individual rights, and our ability to operate in a free market.

SALTs allow taxpayers to deduct state and local income and property taxes from their taxable income. Their federal rate, therefore, is applied to net income (gross income after deductions). Taxpayers in high-tax states, like my home state of Connecticut, would be hurt most by eliminating this deduction.

Republicans are positioning SALTs as a socialist policy of the worst kind – one where low tax states unfairly subsidize high tax states.

That is a great misnomer.

Blue states are less dependent on federal funding dollars than their lower taxed cousins, the Red states[6]. South Carolina, the greatest beneficiary of federal funding, receives almost $8 back for every $1 their residents send to Washington DC[7]. Another low tax state, Florida, gets back $4.50 per every dollar their residents send to the Nation’s Capitol; and Texas gets $1.50 back for every buck[8] paid by their workers.

This is in stark contrast to a sample of notoriously high-taxed states; New York gets back $.75 for every dollar sent to Washington DC, New Jersey gets $.90, and California receives $.95. My home state of Connecticut receives $1.25 for every dollar their constituents send to DC.

So to say that low tax states subsidize higher tax states is not only wrong but also a gross injustice to the tax reform debate. In fact, high tax states subsidize low tax states. Eliminating SALTs makes the condition worse. It is tax deform.

It is most important to understand the purpose SALTs serves in the tax code – they exist to ensure states have the ability to fund themselves without federal government interference. Consider without SALTs how easy it would be for the central government to raise taxes by an amount so high that it would make it impossible for states to levy and collect taxes of their own. Without the ability to raise required funding through local taxes, states would be forced into central government dependency – then say good-bye to the 10th Amendment.

The practice of quid-pro-quo was invented in politics. Want highway money? Raise the legal drinking age to 21.

There are always strings attached to the money coming out of Washington DC – and that’s the big problem. Too much money is flowing through the Nation’s capital which allows them to control too much of the economy that will soon expand to controlling states. This intrusion threatens the solvency of the individual, the rights of man, and the constitution.

Central government budgets must be cut -- and must be cut dramatically.

Think of this, the “rich” family in our example is just one day’s pay away from being dependent on the government. Should the federal government eliminate SALTs and raise the highest tax bracket by just ten percentage points it would be enough to steal the rich man’s last day’s pay.

And then where are We?

The only way to justify something so drastic as the elimination of SALTs – let alone the deductions for healthcare, education, and mortgage interest – would be to dramatically reduce the top federal rate.

I’m sorry, the central government doesn’t deserve anything more than a day’s pay from any one person’s earnings – high earner or poor, middle class or “rich.” That said the top tier tax bracket should be no more than 20%.

Add to this entitlement taxes (Social Security and Medicare), which shall be no more than one-half day’s pay – 10%. Total central government taxes therefore should be no higher than 30% of gross income for any one taxpayer.

Why should government get four days pay and the earner only gets one?

And why are corporations – who operate all over the world 24/7/365, and are run by global elites – proposed to be taxed at only one day’s pay (20%) while individual earnings are taxed four times that?

And why do the global elites, who own and control those large corporations, and therefore accumulate vast wealth and income via their stock ownership, only pay one day’s pay for capital gains taxes (20%)? 

Why does the little guy – the individual – always have to pick-up the tab for the establishment and its global elites?

All of that said, the fundamental reason these two GOP tax plans are doomed to failure is because they fail to incentivize job creators (a.k.a. high earners) to create jobs – and nothing can correct fully until job creators correct fully. Incentive is required for that – and neither of these proposals provides it.

This, not to mention, that the proposed reduction in the corporate tax rate is ill-conceived and won’t produce the kind of strong hiring the economy so desperately needs. Think about it, if Congress raises taxes on individuals (a.k.a. “the rich”) and lowers corporate tax rates then executive management will simply increase compensation to “rich” persons working for them. Why wouldn’t they do this when everyone who works for them just got some of their money as a tax break?

Additionally, I’m not so sure the corporate tax “reduction” is actually a reduction. Right now the highest corporate tax rate is 35%. My small company pays a 34% effective tax rate while General Electric pays 0%. If companies run by the global elites actually end up paying 20% under the new law it would amount to a huge tax increase. That may cause mass layoffs and unemployment to rise.

Ever wonder why there are seven individual tax rates and only one corporate tax rate? I mean, are all corporations “rich?”

Just as there should be four individual tax rates (upper, lower, middle, and poverty), there should be four corporate tax rates – 0%, 5%, 10% and 15%. Remember, businesses don’t pay taxes; they collect them. Taxes are included in the price of goods.

Republicans are so misguided and inept it’s hard to believe that they’re not failing intentionally. I mean, could they really be this corrupt?

Where is Sam Adams when you need him?

Trump is better off not signing one new law than signing only one new bad law. He needs to be a long-term thinker and stop selling-out to the Party establishment. He should govern as he campaigned and let the GOP die on the vine of socialism by themselves. If he doesn’t, the failure will be his – and his alone.

And it will be him who squandered our last day’s pay.

What gives him the right?

The low-income earner must bond with the middle class cause, and those classes must unite with the higher earning class – the job creators. The tax debate should not be about brackets and faceless rates. It should be about a day’s pay and who gets it.

A day for you, or a day for them? 

Like Van Morrison said in Educating Archie, “They took away your constitution and you don’t you don’t even know what happened to you.”

That’s because it was probably stolen in a tax law, whether it was Obamacare or these new GOP proposals, that had “unintended consequences” that were never raised or debated at the time of passage -- thanks to an ignorant and corrupt media.  

Liberty will never die in direct conflict. It must be slyly stolen.

And that’s what is happening today.

Stay tuned…

 The road to financial independence.



[3] Government needs to start paying their fair share of health related expenses. They shall pay retail prices to providers not some arbitrary amount with massive and unsubstantiated discounts applied.

[4] British dialect for shit.

[5] British: to speak or write, especially at great length, without saying anything important or useful.

[6] https://wallethub.com/edu/states-most-least-dependent-on-the-federal-government/2700/

[8] A special thanks to my business partner, Dave Savoca, for forwarding me information to corroborate these points.

Storm Season

Dan Calandro - Tuesday, September 12, 2017

If the first two hurricanes of the season are any indication the 2017 storm season is going to be nature’s version of Armageddon. Harvey and Irma have destroyed billions in property value, a priceless amount of life, and displaced millions of people from their homes and businesses. And a third hurricane, Jose, is on the way. Only Mother Nature knows how many more will develop in the season.

There is little doubt that this year’s storms will greatly affect 3rd and 4th quarter Gross Domestic Product (GDP), tarnishing results for the entire year in the process. Yet stocks have essentially shrugged off their impact. The stock market averages have gained 10% so far this year, and stock market strength via the 15-51 Indicator has added 14%. See below.

It is important to highlight that hurricanes Harvey and Irma struck the American economy in two of her largest markets, Texas (ranked 2nd) and Florida (ranked 4th). The devastation is massive but incalculable at the present time, and it could take several months to figure. Whatever the actual impact turns out to be investors can be assured of two things: it is negative, and gigantic.

Markets have been destroyed. Manufacturers have been decimated. Consumers have lost their homes and workers have lost their jobs, and in some instances, have lost their businesses too.

When will they all recover?

Displaced families worried about their cost to rebuild and replace, and faced with the uncertainty of when they will return to work, will rightfully tighten their belts. Those with rainy day funds and investment accounts will judiciously deplete them. Survival trumps retirement.

The significant loss in earnings and earnings power has no choice but to constrain market activity (GDP) and pressure stock prices. The drain on savings and retirement assets will apply additional downward force to valuations.

Unbelievably this has had no bearing on stocks, which have continued their strong upward trend since the economy recovered from recession. And while short-term movements look volatile and to be building lower bases, a longer-term view shows those moves to be inconsequential. During the last five years the 15-51 Indicator™ has gained 23% per year; the S&P 500 has added 17% per annum, and the Dow has posted 13% annual gains. See below.

Short-term volatility and downward trends look mute in this wider view. Fair value (15,156) as indicated by the yellow line in the chart above represents the stock market’s average trading multiple to GDP. In other words, it is the value in which the Dow normally trades to market activity. Trading some 50% over “the market’s” normal multiple at the present time, stock valuations remain extremely expensive.

Gold and bonds have jumped recently (both have gained 17% so far this year) but both started their upward moves long before the storm season began (the first week of July 2017). Harvey didn’t hit until the last week of August and since then all three asset classes (stocks, bonds, and gold) have gained in value. In other words, the effects of the storms haven’t yet been factored into current market prices.

This is not to mention that the recent moves in gold and bonds are as insignificant on a long-term basis as recent stock market activity. See the five-year chart below. Remember, bond values and yields move in opposite directions.

We have experienced short-term volatility and slightly lower stock prices of late, and some recent gains in gold and bonds – none of which were caused by the tragic early storm season.

So stocks remain high and gold and yields are still low. One would think that dynamic was all due to a vivacious underlying economy.

No doubt, there are some positive elements to this economy: manufacturing activity is up to its highest level in six years, job gains are steady, and wages are increasing. Great.

But the problem is the economy is still limping along at less than 3% growth, with many economists projecting annual growth to be around 2% – without the ill effects of the hurricane season factored in. Production gains mean much less when market activity is timid and markets are under duress. And there's more...

The labor participation rate has remained persistently low (62.9) with the current level of job growth, which means that the current average of job additions (150,000) isn’t nearly enough to change the market dynamic. And yes, wages are growing but only at a 2.5% clip. Wage growth needs to be more like 4% to add any kind of real impact to the economy. This dreaded duo (low participation and weak wage growth) is the reason GDP growth remains weak and inflation mute (less than 2%).

It has been widely reported that the low inflation condition has given the Federal Reserve pause with regards to unwinding its quantitative easing program (QE) and raising interest rates. Short-term trends for gold and bonds are indicating this as well. If not gold would be falling and rates would be rising in anticipation of a stronger dollar.

The Fed’s logic is hard to understand. Many businesses borrow money to operate. An increase to interest rates therefore raises the cost to operate and produce. Such a move invariably raises the price of goods – a.k.a. inflation.

Higher interest rates provide more profit potential for banks. Put another way, higher rates incentivize banks to lend. More lending expands the economic base and boosts growth. Such a condition causes inflation to naturally return to the marketplace through higher employment and wages.

The Fed is misguided. Central banks cannot solve the economy’s problems. Instead they must incentivize the Market to correct economic disorder. Higher interest rates have been overdue for way too long. The longer the Fed keeps rates artificially low the longer correction will take.

The answer to the economy’s woes is to fix it at its core – the market’s most basic level – the consumer and worker level.

Tax cuts for businesses and taxpayers are just the remedy. Simplifying the tax code will also help, as will provisions for accelerated depreciation for fixed asset purchases. Businesses need capital and incentive to make investments in productivity, development and distribution. They need incentive (more profit) to place capital (borrowed or not) at risk to expand operations, replace and rebuild, and to invest in the future.

People need the same thing.

The economy is starved and under pressure. It needs energy to boost lending and borrowing, investment and job growth, and consumer income (a.k.a. spending/demand). Higher interest rates and lower taxes are the most efficient and effective way to add the necessary incentive.

All of this falls on the shoulders of a completely dysfunctional and corrupt central government and Two Party System, where neither represents core American ideals.

Trump needs to forget about healthcare. That is a fight for another day. It’s time to turnaround the economy. Tax cuts are the surest way there and the most certain way to force the Federal Reserve into raising interest rates. That should be the President’s top priority; because the longer it takes to realize tax cuts the less likely they will happen.

Not shockingly Mitch McConnell and the establishment Republicans are in his way. Trump is destined to deal with Democrats to get almost anything he wants done. And they have some common ground, both believe in a single payer healthcare system, and both want to spend heavily. Add to this the fact that Democrats like to eat their own and it is quite easy to imagine that they and Trump might actually strike an accord.

One thing about Democrats, they have a long-term strategic plan and a ton of conviction. They will gladly trade tax cuts today to gain control over the entire U.S. healthcare system in perpetuity. Tax cuts get repealed all the time. Government control over an entire industry almost never goes away – especially if they could survive the first opposition administration.

It is easy to forget that in 2001 the best that could be had by G.W. Bush and both Republican controlled chambers of Congress was an auto-expiring tax cut plan.

Have you ever noticed when Republicans are in power they are impotent and when Democrats are in the minority they gain power?

The sad truth is that Republicans also want higher taxes and more control over the economy (i.e. the heath care market.) And neither Party likes Trump.

So Democrats will give something (tax reform) to get something (a permanent stranglehold on healthcare). Add to this Trump’s ambitious infrastructure spending plan, hurricane relief, and upgrades to the military and defense, and budget deficits will most certainly widen. It will only be a matter of time (the next election cycle) until Democrat’s make the argument that the Trump tax cuts didn’t work and must be repealed.

And Republicans will reluctantly acquiesce – especially if they remain in power. If they fall out of power during the next election cycle they will fight the tax hikes in public and submit in private – as always.

Republicans are a bunch of cowards and malcontents with no principle. They’re either scared or lost. They have no unified message. No ultimate goal. No coalition. And no faith in the free market system. They hate their leader (Trump) and want nothing more than to stonewall his success – despite the will, need, and desire of the People.

Trump was elected in part because he had no core ideology. He wasn’t one of them. And that is the beginning of his demise. His own Party is sabotaging his presidency – and he knows it. 

As a consequence, his deal with Democrats on hurricane aid and the debt ceiling should be no big surprise. Nor should it make Americans trust the Republican Party any more. McConnell and Ryan were in the room when Trump, Schumer, and Pelosi, cut the deal. They were unable to persuade him not to do the deal. As usual they had no better alternative. The deal therefore is not an indictment on Trump. It is an indictment of the Republican Party, Ryan and McConnell.

And when Trump does strike a larger deal with Democrats the Republicans will blame everything on him. Trump is the problem. Not Republicans. He’s a Democrat, they will say. Democrats will say they “had” to negotiate with Trump to save Obamacare. Repealing the tax cuts will be first on their 2018 election platform. 

The problem with American government today is that there is little understanding, support, and advocacy of free market principals. Libertarians like Rand Paul and Trey Gowdy are notable exceptions. But they are just too few diamonds in a very deep and thick rough.

All eyes must remain on the President and Congress. What, if anything, will they do – and how will it affect markets and investments?

Stock valuations remain pricy and will be even more so after third and fourth quarter GDP figures are released. Expect more volatility and downward pressure. It’s storm season – on the Atlantic and in Washington DC.

Stay tuned…

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