Dan’s Blog

The Beginning of the Beginning

Dan Calandro - Monday, August 07, 2017

Stocks have been on a complete tear since the Trump election. The Dow Jones Industrial Average closed at another milestone, ending last week above 22,000 for the first time in its history. Since the fall ballot the Dow Jones Average has added 20% to its value, with 12% coming in the first seven months of this year. The 15-51 strength indicator is also up 20% since the presidential vote with 15% coming in the current year. The S&P 500 has lagged those two portfolios, advancing just 15% since the Hillary loss and 10% this year.

Below is a year-to-date chart of the market indexes. Take careful note of how each portfolio acts at the tail end of its trend line.

All three indexes are market-diversified portfolios comprised of stocks selected from the same pool. Their performance should vary due to their size and make-up, and for that reason the 15-51 Indicator should consistently outperform the averages over the long term. It should also be expected that all three portfolios move in concert, as if they shared the same heartbeat. This dynamic has held true until recently.

In the last two weeks the Dow Jones Industrial Average jumped 2.6% while the S&P 500 stayed flat. The 15-51 Indicator also experienced a leap but it started to move two weeks earlier than the Dow; it’s up 3.6% in the last month. But unlike the Dow Average the 15-51 Indicator has started to experience volatility and pullback -- as has the S&P 500. It's a weird market. 

The recent rise in the Dow Jones Average has been widely attributed to the performance of Apple. But that is only one part of the story. Apple, also included in the 15-51 Indicator, has gained 35% so far this year, and 40% since Trump got the vote. But even more impressive is the contribution Boeing has made to the portfolios. The stock price for the airplane maker and defense contractor improved 53% for the year and 67% since the election. Even as gaudy as these results are, the move for just two stocks isn’t enough to lift the “the market” to this new height.

This stock market expansion is broad. Double-digit growth can be found in almost every corner of the stock market. In fact, far-reaching weakness can only be found at retail and in energy. This may help explain the S&P’s pause, as it has vast holdings in both underperforming segments.

Of the three trend-lines shown in the above chart only one doesn’t make any sense. The Dow Jones Average seems to be viewing the recently released economic data as strictly positive. If not, its trend-line would have shown some volatility or flattening like the 15-51 Indicator and S&P 500 have.

Second quarter 2017 GDP numbers were released last week and it’s the same old story. GDP grew at a 2.6% clip in Q2, which sounds good compared to last year’s 1.6% rate. But the average growth for the first half of 2017 was 1.9% compared to 1.4% in the first half of last year. Back in 2015 front-half growth was a solid 3%. It's now two years later; and growth remains weak and uneven.

Unemployment data was also recently released and the headlines portrayed the rate dropping to a sixteen-year low (4.3%) as great news. But the last time the unemployment rate was at this level was May 2001 when labor participation was 66.7, a large half-point off its March 2000 high (67.3). The labor participation rate today remains at a pathetic 62.9 – a consistent level for more than three years now.

Not enough people are working.

And wage growth for the working class remains meager (2.4%) – about half the required rate to produce solid long-term growth. In May 2001 when unemployment was this low U.S. wage growth was 5.1%. To compare today’s labor condition to 2001 is to compare a crisp apple to a rotten banana.

At the peak of that economic boom, call it March 2000 from a labor perspective, the economy was growing at a Real rate of 4.1%, and “the market” was valued at 1.13 times GDP. Today, the economy is experiencing one-third of that growth and the stock market is trading at a multiple that is 53% greater than it was in 2000. In other words, growth is a fraction of the rate and valuations are almost twice as rich.

Trusting this market blindly is the first step to misfortune.

This, not to mention, that the Trump Administration has yet to pass any legislation that would fundamentally improve the long-term health and vitality of the American economy. And then there’s this…

The Federal Reserve has finally announced that it would begin unwinding its quantitative easing (QE) program – and that is a game changer. The tightening of monetary supply will cause inflation and interest rates to rise and that will inflict great pain on the world economy. This is the impetus of the next corrective cycle.

The Fed's unwinding effort should have begun several years ago when the economy recovered from recession and the unemployment rate had dropped to a reasonable level. But governors don’t relinquish power easily – especially when there is so much money involved.

President Obama had ambitious plans for the remainder of his tenure and a puppet Congress too scared to go against him in fear of being labeled racist. And so he spent more money and accumulated more national debt than any other president in history, making FDR look like a fiscal conservative in the process.

Without a check and balance from Congress the American people had one more opportunity to thwart such fiscal imprudence. But during the ‘08 market crash the Federal Reserve expanded its power structure by unofficially changing its stated mission from “promoting the public interest” to accommodating government policy and spending. Big government proponents, on both the Left and the Right, silently endorsed the shift during the noise following the '08 crash (a.k.a. "the financial crisis.")

And so the QE epidemic began.

The Federal Reserve printed trillions of dollars of new money and laundered it through the Wall Street establishment, who under mandate from the U.S. central bank used 50% of the new money to purchase U.S. Treasury debt (to fund Obama’s frivolous spending agenda). The other half went somewhere other than its intended purpose, which was to support lending to American businesses to help the economy recover.

The reason for that is simple: interest rates were too low. There wasn’t enough incentive for banks to lend money to the American cause. So that money was exported overseas where interest rates were higher and provided bigger returns on investment. They are investment banks, after all. They chase ROI all over the globe, in every market. That is to say QE stifled U.S. growth and fueled a massive sovereign debt balloon that reaches every corner of the globe. 

How does that serve the “public interest" and achieve the Federal Reserve's stated goal?

Real GDP grew at 2.5% in 2010; a case could be made that QE unwinding should have begun then. But unemployment was still 9%. Okay, don’t unwind then – but at least stop printing money! 

But no, the Fed kept printing money and handing it to Wall Street until the program's end in 2014, when the unemployment rate was 6.2%, and thus way too late.

So why did the Fed print too much money for way too long?

Because President Obama was still in office and funding government deficits had become the Federal Reserve’s newly adopted mission. Under this direction the Fed works for the government’s interest, not the People’s interest.

Crisis conditions begin when establishments expand their power and control over people. The Federal Reserve gave birth to the QE technique in the wake of the ‘08 market crash and it was instantly lauded as the savior to the Great Recession; with it the Federal Reserve gained incredible power within government circles because it was they who would invent and deploy the mechanism (QE) to provide the president and congress a way to expand spending and borrowing without immediate consequence, and to do so off balance sheet and without transparency.

With QE the establishment created a time bomb that could be set to ignite at some future point when conditions were “right.” Economic activity, of course, had nothing to do with the decision to activate. Fundamentals have warranted unwinding QE for several years now. Instead, the Fed and their big government cohorts needed time to find a scapegoat to blame for the collateral damage caused by unwinding the QE effort.

Enter Trump.

According to our Federal Reserve – yes, the Nation’s Bank, and yes, the same one that didn’t see the last fiscal crisis coming – according to them, the “right” time to begin unwinding (igniting) the dreadfully abused QE program (the fuel to the time bomb) is in the first six months of a chaotic new anti-establishment administration with no legislative victories to improve economic standing or condition.

That is an example of the establishment protecting itself against invaders, which is exactly how many Democrats and Republicans view President Trump. Obama was one of them. Trump is the antithesis.

There are many on the Right who think former President Obama was inept, stupid, or something far less smart than what he actually is. That is an ignorant position. In fact, I don’t think there has ever been a “stupid” American president, certainly not one in my lifetime. And Obama was no exception.

Obama was a big government central planner who governed like a tyrant. But that doesn’t make him stupid. In fact, just a week or so ago he made an incredibly astute and profound comment regarding the Republican Party, saying something to the effect that ‘all of the sudden conservatives woke up and realized that they weren’t as conservative as they thought.’

Right on Mr. President. You have never been more right!

There are only a handful of truly free-market people serving in Congress, and many of those lack the real world experience needed to enact legislative policy that will create economic vitality. They just don’t get it. They’re lawyers, not business owners.

They need real world guidance and leadership.

Trump knows what to do but he cannot articulate it. He cannot convince people who disagree, and he cannot sway people who are unsure. That – not his stupid tweets – is the reason for his lack of Republican and moderate Democrat support.

Trump needs to put forth an argument that posers like Mitch McConnell cannot dispute in fear of exposing himself as the socialist that he is. Trump cannot dictate to him as Obama did to his Congress. For better or for worse, the Democrats always tow the Party line. Not so with Republicans. They always disagree with each other. Only strong leadership can unite them.

This is new territory for Donald Trump. He can’t fire Mitch McConnell or reassign him. The only way to deal with him is to have better ideas and a better advertising and communications operation. And I’m shocked that Trump doesn’t have a better marketing department than he has. People like Scaramucci can make it in private industry – but there is no rightful place for that kind in Washington DC. Putting people like that into important positions is, quite frankly, embarrassing.

The Trump chaos could almost have been expected. He has never operated an organization with 535 executives that have more power and control than he does. He probably feels like a caged beast, feverishly finding his way through a blind maze in search of a morsel of rotten meat. The job is probably more frustrating than anything he ever imagined.

The good thing is Trump is very competitive. He wants to win. He wants to succeed. He wants to be great, perhaps the greatest president in history. Trump has that kind of ego, like late New York Yankee owner George Steinbrenner had. People like them hate to lose, it kills them, and money is of no consequence. Winning is all that matters.

That kind of person is hard to beat. But still, the Yankees weren’t perfect, and Trump has lost his share. However, both the New York Yankee and Trump International organizations are expert marketeers. The Trump Administration, much to the contrary, is inept. 

Hard to believe.

Trump must move beyond the investigations and ignore them completely. He should act as if they don’t exist and are of no consequence. He shouldn’t even answer questions about them anymore. Out of sight out of mind. Inconsequential.

Next he should drop the effort to repeal Obamacare and instead destroy as much of it as possible; Democrats are willing to discuss changes. Walk from the table if Democrats aren't serious. But get something done if possible. If a bill signing event were to occur Trump should use it to promise the American people that the fight to fix healthcare isn’t over. It was just beginning, and would be taken up again after the mid-term elections.

And then move swiftly to tax reform.

G. W. Bush, another businessman that served the presidency, was much better at messaging and marketing than Trump has been thus far. Bush marketed his tax cut effort with an enticing angle: I want you to keep more of your money. You’re on a budget. The government should be on one too. The Bush plan was to reduce the rates of all tax brackets; therefore, all taxpayers would realize a tax break. That’s good positioning, good marketing.

And then Bush travelled all around the country beating the drum of his mantra to many different kinds of groups and associations in varying venues. That’s good advertising, good salesmanship.

Trump’s sales process is terrible. Now six months into his tenure I still don’t know where he stands on healthcare, what he wants to do, how, and why. I also don’t know what his specific tax policy is – and I closely follow the news and events of the day. That’s bad marketing and advertising. There’s no other way to put it.

The President needs a good message and a robust campaign to rally mass public support to push Republicans like Mitch McConnell and moderate Democrats into his fold. An army of We the People is the only way to defeat establishment politics.

Trump is in a street fight and the bad guys are winning. To win he must articulate positions and policies that would make the majority look foolish to deny. This can easily be done.

For instance, we know that the Federal Reserve is beginning to unwind its quantitative easing (QE) program and that it will cause interest rates and inflation to rise. That will cause a global slowdown that at some point will reach America’s shores. The Trump tax cuts have to be in effect before that happens otherwise tax cuts won’t happen. This Congress will never enact tax cuts at a time when tax revenues to the government are decreasing during a recession and stock market meltdown. Not happening.

The time to act is now.

Leaders must lead and therefore be out in front. Trump needs to inspire the necessity of tax cuts by explaining the Federal Reserve’s effort to unwind QE and its downstream effects. Variable rate mortgage rates will rise and homeowners will need the ability to pay for the increase. Higher interest rates will cause inflation (a.k.a. the price of goods) to also rise. Steep tax cuts across the board are required to cover the rising costs consumers will face – sooner rather than later. Time is short. The Fed’s unwinding effort is already underway.

To make things simple and speedy Trump should re-introduce the Reagan tax plan. It worked then, and it’ll work again. Besides, why recreate the wheel with an establishment Congress hell-bent on not getting anything done? For goodness sake, let Mitch McConnell – or any other Republican for that matter – vote against the Reagan tax plan. Go ahead, let me see it.

That’s the way Trump needs to play ball.

The president knows he has issues and he’s making changes. Great. The guy’s competitive. But time is slipping away. He needs some victories before the mid-term elections otherwise it could be a whitewash. And that would be bad. A Democrat controlled congress will produce five times the investigations and then even less will get done.

So that’s what investors face today: weak economic fundamentals, a stock market with valuations that make irrational exuberance seem mild, a president who can’t get anything done because he can’t articulate and market a winning message, and a completely corrupt government establishment (including the Federal Reserve) that is hell-bent on protecting their big government ideology at any cost – even if it comes at great expense to the American People and every investor located at every corner the world.

Caution: unwinding QE is the beginning of the beginning of the QE-boom going bust.

Stay tuned…

 The road to financial independence.

Back to Basics

Dan Calandro - Wednesday, July 05, 2017

Everyone likes justification for his or her cause. It is this need for validation that moves me to read every article detailing just how awful and corrupt the Wall Street establishment truly is. I know it all too well, of course. But even so those articles are read entirely and printed, and then added to a stack of similar proof. It’s a feel-good pile for me – proof that I am doing the right thing.

But that mountain of evidence serves another valuable purpose. In times like these when new news is so scarce and the markets are flat I refer to that heap of filth in search of inspiration. Reliable, as always, several of those articles will be featured in this blog whose central theme is very appropriate: Times like these are a great time to get back to the basics, back to the beginning, all the way back to Step 1.

Is your portfolio doing what it’s supposed to do?—Are you achieving your investment objectives? Can you retire comfortably on your current trajectory? Are you content with your risk exposure? What would happen to your portfolio should another major correction hit?—And how would such an event affect your retirement plan and timeline?

Market standstills are a great time to ask and answer those questions. Use the pause to re-evaluate your portfolio and its components, its performance and allocations, and the Market’s condition and prospects.

Investing is about building future wealth. In order to achieve desired future results investors must have an idea of what that future might look like. Success is near impossible without such consideration – a condition that incubates crisis. The first article from my collection highlights that very point.

In a Wall Street Journal piece entitled, Is There Really a Retirement-Savings Crisis?, the feature begins with a dismal announcement: “Social Security trust funds are expected to be depleted in 2034” and that the average person aged “55 to 64 has little more than $100,000 in retirement savings.”

At that point my mind was made-up. Yes, a retirement crisis does exist. But I read on anyway. It was feel good time.

The article quotes two experts with different views. One believed a crisis did indeed exist and the other didn’t. For people looking for actionable information from this article they received none. To use a military phrase, it is bad intelligence. The simple reason is that both expert positions fail to appreciate the accumulating burden of rising healthcare costs and its downstream effects.

We already know what happens when government gives free healthcare to a certain slice of the population: costs for everyone increase dramatically, choices deteriorate, and the government becomes a larger and more corruptive player in that Market (because they control a bigger piece of the market through funding, pricing, regulations and coverage mandates). Their overpowering presence creates more market dysfunction and higher prices.

Medicare, a program for which I am an ardent supporter, is a prime example of the kind of Market corruption government can inflict upon an industry by servicing just one small piece of a market. Consider first that the government never pays retail prices for any consumer good or service. So when they “insure” senior citizens they apply huge discounts to the stated prices of providers. This forces healthcare providers to make up the lost profits from other consumers, a.k.a. services to non-senior patients. This dynamic causes prices for everyone to rise – including the price for services to senior citizens.

Medicare is an entitlement program to seniors because they have paid for the insurance policy via a tax on lifetime earnings. Like Veteran healthcare (VA), Medicare is a valid and much needed federal program. Can anyone imagine what the free market would charge Granny and Grandpa for health insurance at the ripe old age of 75, or for a severely wounded Solider still in his or her 20’s?

In these cases government involvement in the market is required and just.

But that doesn’t also mean the government should pay steeply discounted prices. They should pay retail pricing to maintain price stability for all other consumers participating in the independent free market. Not doing so corrupts market dynamics at the most basic level (price). It is the beginning of socialized healthcare, as it takes money from some patients (via higher prices) to provide (discounted price) services to others.

The federal government has never served senior citizens or veterans well – Medicare and the VA are living proof. Until healthcare services for those two demographics are working perfectly the government has no right getting involved with services to any other market demographic – let alone the whole kit-and-caboodle.

Paying retail prices for Medicare services would do two important things. First, it would ensure better care for seniors because there would be more profit in those services. Second, paying retail prices would automatically restrain the central government from intruding on a larger section of the healthcare market because they wouldn’t have the resources to do it. The absence of such a constraint forces healthcare premiums steeply higher – and threatens the future of the entire system.

The Medicare program is bankrupt even without paying full retail. And somehow the solution from the boys and girls down in Washington DC is universal healthcare for everyone – something they have no chance to afford. In fact, you can already hear rumors about Medicare cuts in connection with Trump’s proposed tax cuts. In other words, politicians are willing to sacrifice Medicare for universal healthcare coverage for all, essentially a Medicare for all.

And what rational person believes that the future condition of the entire healthcare system will be in better shape than the horrid condition Medicare is in today?

In order to save Medicare and properly care for our veterans the government should increase spending to those two demographics to cover retail pricing and then cut every other dollar out of healthcare spending that isn’t dire need or necessity for the poor and disabled – another just government role. The free market must then be allowed to service the rest of us.—And it can (see: Gruber Acknowledges Supreme Letdown, for more.)

But sadly that doesn’t appear to be in the cards for today’s body politic. 

The end game to the gross and unconstitutional path the US government is on with regards to healthcare is a lifetime of increasing tax burdens, dramatically higher premiums to all consumers, and a much lower quality of healthcare service – not to mention massive new government debt. Deficits are already higher than ever before; and there is no end in sight. Solvency cannot sustain such a drain.

That said it is critically important for those planning for their retirements to expect severe increases to healthcare costs over the next 10 to 20 years – retirement age for many investors.

But neither knucklehead – excuse me, expert – in Is There Really a Retirement-Savings Crisis? gave the rising cost of healthcare its proper due. And that’s a real disservice to readers because the threat of rising healthcare costs will also deplete what’s left in Social Security, which isn’t nearly enough to cover obligations to lifetime taxpayers.

As the aforementioned article reveals Social Security will be tapped out in less than 20 years. It is only a matter of time until Social Security benefits (again, an entitlement for those who paid into the program for a lifetime) will be cut dramatically to “save” universal healthcare for all. Put another way, Social Security will be sacrificed to spare universal healthcare for the younger and less fortunate – you know, those who have many more election cycles left in life. What is more important, politicians will pose, money or health?

And health will win.

The sad part is that the American people – the parents and grandparents of today – are letting the children and Congress put the country into a bleak quid-pro-quo position. Dramatic alterations are necessary now to salvage the future. Otherwise the future will be very, very expensive.

A conservative investment approach is to plan for the worst and pray for the best. In other words, conservative investors should plan not only for a sharp rise in end of life healthcare Medicare costs (say triple the costs of today) but also for a steep decrease in annuities from the nation’s retirement account, Social Security, to occur in the next 20 years (say one-third of what could be expected today). Thanks again to universal healthcare coverage.

That’s an unfortunate, but reasonable, assessment based on history and the current political trajectory.

It is easy to deduce, therefore, that a-hundred-grand isn’t nearly enough to finance retirement for many people in many parts of this country. And when so many people cannot afford retirement up to their life expectancy, then yes, that’s a retirement savings crisis.

I knew it at hello.

It’s easy to get freaked out by that sorry notion. Many people take articles like the one above to their broker for assessment and advice. A healthy dose of caution is warranted when doing this, however. Brokers are like used car salespeople. They will say anything to make a sale. But don’t just take my word for it. In October 2016 the Wall Street Journal reiterated that fact in, We Put Financial Advisers to the Test – and They Failed.

There isn’t much new news here but there are some interesting tidbits to keep in mind must you deal with a broker or financial advisor. According to the article, research shows that advisers “seemed to exaggerate existing misconceptions…to sell more expensive and higher fee products,” and “appeared willing to make clients worse off in order to secure financial gain for themselves.”

Brokers are compensated on what they sell. High fee products are best for them and their Wall Street affiliate. So it’s only natural to figure that premium priced products would be high on their list of recommendations – whether or not they were in the best interests of their clients.

Yep. That’s them.

While this isn’t breaking news the author did put forth two ideas that I’d like to highlight. The first is ludicrous: “By the time you learn whether a retirement strategy was the right choice, it is usually too late to change it.”

That’s categorically incorrect – and quite stupid. It is never too late to assess performance and change to a better course. Never.

Indeed, no one can turn back the hands of time. What’s done is done. Even so, investors do have a choice. They can either stay the losing course and allow history to repeat itself, or they can take a completely different approach to make the most of the future.

The second point I’d like to examine from that article is this point: “Not surprisingly then, much research shows that a large fraction of the population is poorly prepared to make financial decisions by themselves. Typically, when faced with complex and important decisions we rely on trusted experts for advice.” The author then places brokers into the same realm as doctors and lawyers.

First things first...Brokers aren’t nearly that high on the professional totem pole. Doctors have to go to medical school after college and lawyers must attend post-grad law school. Brokers only need a high school diploma or GED to play ball in their park – and most lack the ability to understand a damn word that comes out of their very rehearsed mouths. Calling them “experts” is the worst of all false advertisements. They are more like actors in a theatrical production.

Regarding experts in general…they are just regular people doing a job for money. Doctors are confounded all the time; they mistreat and misdiagnose all too often. My grandfather called doctors “the great facilitators of death.” And heck, it was back in the year 1591 that William Shakespeare wrote his famous line, “The first thing we do, let’s kill all the lawyers.” He didn’t make that statement because only a couple of people had bad experiences with lawyers. It’s because bad lawyers are an epidemic -- then and now.  

Brokers and financial advisors are much lower in the pecking order than those two professions. If one-out-of-ten lawyers are good then one-out-of- a-thousand brokers might be worth the trouble. But they’re not the only culprits in the industry. On the periphery are the so-called experts quoted in almost every venue of the mass media. These people appear as impartial authorities when they too are just actors in the grand theatrical production that is Wall Street. All of them read off of the same script.

The second element in that article I’d like to highlight is both scary and validating: “a large fraction of the population is poorly prepared to make financial decisions by themselves.”

There is no way to save Medicare and Social Security – and the free market for that matter – without a population who can successfully invest to fund their retirement needs and desires. And it's scary that so many are incapable.

The rewarding part of that quote is that my mission in life is to educate that very large fraction of the American population. It is validation that my cause is right and necessary.

The feel good pile never disappoints.

Successful investing is easy to understand and simple to do. Beating the market indexes (a.k.a. success to many investors) appears difficult because virtually every “expert” fund manager fails to do it. More proof of this came on April 12, 2017 when the WSJ posted Indexes beat Stock Pickers Even Over 15 Years. This excerpt says it all, ‘“We often hear from active managers, ‘You need to measure us over a longer-term cycle,’” said Aye Soe, managing director of research and design at S&P Dow Jones Indices. ‘”Even over a full market cycle, which includes peaks and troughs, we still see the majority of active managers performing unfavorably against their benchmarks.”’

The only chance mutual fund investors have to change that dynamic is to actively buy them low and sell them high. Otherwise they will lose valuable time and money and leave little chance to recoup it – index fund or not.

Consider that after the market crashed in 2008 it took “the market” six years to regain its previous high. And since mutual funds rarely perform to the level of market indexes, it took them much longer to reclaim their previous highs. That could amount to ten years or more in a no growth condition.

It is impossible to overcome that kind of downtime while maintaining the passive practice of investing in mutual funds and taking whatever the Wall Street establishment ekes out.

Consider also that the average age of a mutual fund owner is 50 years young. If a correction happens now (and we are due one) many mutual fund owners will be knocking at the door of retirement when they finally regain losses incurred during the next correction. The poignant question to then ask is: Do you have enough money to retire now?

If not something must change.

If instead those investors had sold a portion of their mutual fund holdings high (before correction) and reinvested those dollars low (after correction) they would have transformed ten bad years into a decent decade.

Investors must be the masters of their own destiny. At the very least they must instruct action (to buy and sell) at strategic times to optimize gains and preserve capital. Otherwise it will not happen – index funds or not.

The 2008 crash also proved that fund managers don’t see their role as capital preservers, as most mutual fund values fell much worse than the market indexes did during correction. Fund managers see themselves as investors, not market timers. Sure they try to buy low and sell high. And yes many do so for valuation reasons. But they take those monies and reinvest it in other stocks that are under-valued according to their calculations. That’s just internal stuff that doesn’t change their overall investment posture. Mutual funds generally remain fully invested.

Full investment allocates nothing to capital preservation.

That is why investors must take an active lead role in strategic decisions regarding their investment plans, allocations, and risk posture. Brokers and financial advisors can’t be trusted.

Wall Street firms instruct brokers to do what is best for the establishment, which is not only to have their clients’ invest but to invest fully. In their collective opinion idle capital is a mortal sin, a waste of God’s grace. And so they infuse the erroneous concept that broadly diversified portfolios are the best means of mitigating risk and preserving capital. Invest, invest, invest, they preach. It’s the best way to face the tides.

So if you are relying on your broker to protect your nest-egg by recommending proactive measures at strategic moments then you are waiting for a tomorrow that never comes. Brokers are trained salespeople that think only as they are made to believe. And they are conditioned to believe that nearly 100% investment all the time is in the best interests of everybody – broker, firm, and client.

Broker and firm? Yes, of course. Nothing beats 100% of everything.

But for the client nothing could be further from the truth. The last two major corrections proved that many times over. 

It is important to appreciate that brokers are simply actors delivering prepared lines that the establishment writes. This point was driven home in a recent WSJ article entitled, As Interest Rates Rise, It May Be Time to Tweak the Portfolio. The article intends to provide advice for investors to consider in this higher interest rate environment. But to the contrary of sound advice the instruction presented in this article is nothing more than advertising lifted from the establishment’s playbill – “stay really diversified, find growth outside of the U.S., [and] watch investment costs.”

I can’t think of any worse advice to offer. Three reasons…

First, the expert featured in this article is a gentleman named Michael Macke of Petros Advisory Services (a broker), who explains that a very broad portfolio “should give you the highest odds of growing and protecting your wealth in retirement.” The article recommends investors to add a mutual fund that holds nearly 3,600 stocks to their collection of funds.

That’s classic Wall Street.

Good luck beating the market benchmarks with a basket of those kinds of funds. It’s too much diversification – so much so that it will cause below-average portfolio returns and sharper declines during corrections.

The “advice” given in this article, and many others like it, is put forth as facts when they are factually incorrect.  

Second, foreign markets are higher risk, more volatile, and inferior to the U.S. market. Consider that international mutual funds invest not in countries but continents – Europe, Asia, South America, etc. etc.

Want to invest in Germany? You can – but you must also take Greece, Italy, Spain, and France etc.

Want to invest in communism? Invest in China – along with India, Pakistan, Vietnam, and Hong Kong, etc.

Does any rational person actually believe that a collection of companies from those countries will outperform U.S. companies over the long term, say 10 or 15 years?  Is it possible to think such a portfolio would be less volatile? And can it be reasonably expected that those countries would survive the next financial crisis better than America?

Don’t put me in that bunch. I’d rather take my chances investing in the best and freest market in the world – one that I can see and touch, monitor and participate.

Furthermore, if professional funds managers underperform in the best market in the world (America) then they will most certainly underperform in foreign markets – where there is much more volatility and risk, and a greater amount of political and economic uncertainty. This not to mention the obvious prudence of not investing in anything investors can’t appreciate or grasp.

Doing anything blindly is risky.

Is such an approach (full investment and broad diversification that includes foreign investment) good for investors – or is it better for Wall Street firms trying to broker maximum capital on a global basis?

Articles of this kind are not information but advertisements worked into daily life like something from the Truman Show. The intent of the ads is to push investors to contact their brokers and financial advisors where they will hear the same kinds of things. Then all of the sudden the lies become facts that quickly morph into false reality – just as the establishment had calculated.

And no good sales pitch ends without the old, I’m looking out for you, line. The article mentioned above had one too. The final bit of advice left to investors was, “Watch Investing Costs…Fees Matter.”

What a joke that is.

People who preach that investment costs matter also believe that performance mediocrity is an absolute given. Fees, regardless of level, should never matter in the grand scheme of things. Think about it, if a fund charges an absurd amount, say 10%, but delivers 20% per year after fees then what does the fee really matter? What matters is the performance of the fund, which too many times is not worth the fee charged. Nevertheless, it is the performance, not the fee, which is the true issue.

No rational person can argue that if an investor is going to own mutual funds that index funds are the best way to go about it because they outperform all other mutual funds. There’s simply too much data to deny that claim.

But is the performance of index funds good enough – even if they are bought low and sold high – when considering the brewing retirement crisis?

The goal and purpose of LOSE YOUR BROKER NOT YOUR MONEY is to teach people successful investing strategies and tactics by showing them how easy it is to outperform any market index or mutual fund, and to do so with far less risk. With this knowledge in hand the "low-cost" index fund becomes very expensive, as the lost profit from not using the 15-51 method greatly outweighs the mere impact of fees.

In other words, why join them if you can beat them?

It was more than a hundred years ago that Charles Dow proved to the world that market diversification is possible with a small number of stocks. To this day his legendary Dow Jones Industrial Average still has only 30 stocks and remains synonymous with stock market activity; it is “the market,” and produces a trend-line most mutual funds never approach. It proves that a smaller portfolio is a better and more profitable model than is vast diversification via thousands of stock holdings.

Kick aside the fact that the S&P 500 has been consistently outperforming the Dow over the passed several years. This dynamic can falsely lead investors to feel as if they need more stocks to achieve greater returns. But that’s wrong. The S&P now owns the Dow Jones Industrial Average and they clearly want their index to outperform the Dow. There’s no other reason for a 500 stock portfolio to consistently beat a 30 stock assembly. The Dow’s problems are simply too easy to fix (see: What’s Wrong with the Dow, and How to Fix it). And the S&P guardians know it. To them bigger is better, so they sandbag the Dow to demonstrate its inferiority to their beloved S&P 500 index.

Unlike Dow theory my method proves that even in this day-and-age market diversification is possible with just 15 stocks. The 15-51 Indicator is a market portfolio designed and built to indicate stock market strength; in other words, to produce above-average stock market returns. To be successful it must produce a trend-line that mimics the movements of both the Dow and S&P 500.

The chart below shows the performance trends for all three stock market indexes since LOSE YOUR BROKER NOT YOUR MONEY was first published six years ago (July 4, 2011).

During this six-year timeframe the Dow Jones Industrial Average gained 69%, the S&P 500 added 81%, and the 15-51 Indicator surged 147% higher – and they all had the same rhythm of movement.

My investment philosophy is based on facts and common sense. For instance, there is no better way to preserve capital than not being all-in (fully invested). A cash reserve is a requirement to efficient and effective portfolio management. Like all investment decisions the appropriate amount of reserve is completely individual.

Approximately 70% of my portfolio is in cash as I sit and wait for the next major correction. I’ve been there for more than three years now, and before that my portfolio was 50% in cash for several years. Those were strategic decisions made by me for me. Profits have been locked in for years and not even the swiftest correction can take them away. That’s how to preserve capital.

I’m still in the stock market but not significantly. And that’s fine with me. The economy is limping along and Trump can’t get anything through Congress. Labor participation is still at 40-year lows and wage growth is sluggish and uneven. There’s absolutely no reason for stock prices to be valued this high.

The balance of my portfolio is in metals (gold and silver) to hedge my exposure to inflation and stock market correction.

At the heart of my perspective is the obvious fact that there is much more profit in buying low than by holding high. Cash should not be considered a moneymaker as an investment class. It is a mechanism to make money. Reserving capital now is the best way to profit greatly later.

Experts in the Wall Street establishment would view such a strategy and portfolio structure as blasphemy, an impossible approach to making money. Yet my portfolio consistently beats all of theirs – and with a fraction of the capital at risk.


Because my portfolio is better than theirs. It is smaller and easier to manage, and has minimal fees for on-line trading.

Below is the performance of my multiple asset class portfolio for the last ten years assuming a $100,000 starting investment (which happens to be the average dollar amount a mutual fund owner has at risk in the investment markets). The performance trend below does not include interest and dividends. 

So yes, I haven’t made too much money recently. And yes, I could have made much more money by being 100% in stocks (the 15-51 Indicator was up 345% during this time). But that’s not the point, purpose, or objective of my portfolio. My objective is to build wealth by tripling market returns with far less capital and with minimal downside risk to major corrections. And my portfolio does it.

During this ten-year period my three-asset-class portfolio produced three times the market averages did, 213% versus 71%, and did so with a fraction of the risk and a stockpile of cash.

The greatest benefit of the 15-51 method is that it facilitates capital preservation and risk mitigation by its ability to achieve superior stock market returns with less capital. This profit superiority affords the investor to bypass exposure to high-risk markets in hopes of higher returns. They aren’t needed. This simplifies a portfolio and makes it easier to construct and manage.—All of which are concepts the Wall Street establishment will never confirm or accept, offer or sell.

Trusting their “advice” is like handing Satan the key to your soul.

The validated facts are these: there is a retirement crisis in America; neither brokers or fund managers act strategically on investors’ behalf to maximize profits and preserve capital; they lie and mislead, and consistently produce below-average returns over 15 years or more.

The good news is that it is never too late to change course and that there is no better time than the present. Stocks are high and the central government is paralyzed. U.S. interest rates are poised to rise and that will start a fire overseas. Bonds and international mutual funds are high-risk gambles.

Times like these are perfect for getting back to basics. And the best place to start is with Step 1…

Stay tuned…

  The road to financial independence.

Stocks Pause for No Cause

Dan Calandro - Sunday, May 21, 2017

Wall Street woke-up at the wheel and tapped the brakes last week. Pessimism ruled the day on Wednesday when the market averages lost 2% and stock market strength gave up 5%. But by the time the week ended all three indicators edged just a half-point lower.

Why the brake check?

A dysfunctional central government caught Wall Street’s attention.

Think of the U.S. body politic right now – a weak and incompetent socialist Republican Party controls both houses of congress and a Republican president sits in the oval office. Yet all too often they seem outmatched in strength, intellect, and will as compared to the communist Democratic Party. As a result Trump's pro-growth agenda looks to be nothing more than a wet dream – a great fantasy that never actually happened. Excitement for a moment, only to be let down seconds later.

This dynamic has stunted stock market optimism. 

Think about what we have in front of us right now. Nothing is getting done. Investigations are everywhere. Democrats have called for a Trump impeachment. And a special prosecutor has been appointed. This prompted the American Left to compare today’s situation to Nixon and Watergate. And that’s just stupid. Today and 1972 have nothing in common.

For instance, when news broke that the Democratic National Committee was broken into and that President Nixon was connected to it, a special prosecutor was appointed to investigate the crimes (i.e. breaking and entering, burglary, vandalism, abuse of power, etc.). The salient points are self evident: First, it was obvious that a crime had been committed and that the crime was politically motivated. Second, the leader of the opposition Party (the obvious culprit to the break-in) was then Republican President Richard Nixon.

No such evidence of a crime exists with the issues surrounding Trump – with either Flynn or Comey – nothing. In fact, several senior Democrat congress-people have recently attested to that, including Senator Diane Feinstein who just reiterated that fact a few days ago. And as ranking member of the Senate Judiciary committee she ought to know.

So everyone agrees – no crime has been committed, and no crime is being investigated.

Truth be told only foreign powers are being investigated. But now that we know General Flynn had conversations with those Russians being spied upon, he is included in that investigation. That’s an obvious and totally expectable outcome. No big deal.

However, the fact that Flynn’s name was unmasked is a big deal, it’s dirty politics – and illegal. But that crime isn’t the focus of any investigation.

 What a joke.

The record of the appropriateness of the content Flynn discussed with the Russians will stand for itself. And trust me, the answer to that is already known. If Flynn did something seriously wrong the American people would have heard about it already. Think of all the time, effort, and money the Left is throwing out there to get that information. If something were out there they would already have it and reported it.

But they got nothing. And that lack of evidence isn’t enough to stop them from talking about a Trump impeachment.

Of course Flynn had every right to have discussions with the Russians, as he was to be Trump’s National Security Advisor when the administration took control after January 20, 2017. The mere act of having a conversation with the Russians wasn’t wrong or a crime, nor was it wrong or criminal to discuss sensitive security issues. That was the job Flynn was transitioning into.

And this nonsense about obstruction of justice is just another inappropriate political stunt. On May 1, 2017, Trump and Comey had a conversation in which the President allegedly asked the then FBI Director to make the Flynn case go away. Let’s say that’s a fact, Trump asked.

What’ wrong with that! Comey works for Trump. A boss can ask an underling a question. Comey said no. They’re both big boys. Move on.

Two days later Comey appeared before Congress and was asked multiple times if he ever received political pressure to stop an investigation? Comey said, “No.” every time. That was May 3, 2017.

No political pressure equates to no obstruction. There’s no other honest way to view it.

And isn’t it no surprise that the FBI Director who charged Hillary Clinton with several crimes only to conclude that “no reasonable prosecutor would ever prosecute” those crimes to also be the one to leak his private journal to the media?

The American Republic is under great threat.

The FBI cannot be a political entity. The leak of Comey’s private journal proves that Trump did the right thing in firing him. He was clearly a political operative. Firing Comey had nothing to do with him not dropping the Flynn case. That investigation goes on regardless of who is the Director of the FBI – as our most recent history proves. And to think that Trump fired Comey to hide his obstruction of justice is to believe that Comey was pressured to drop the case – but Comey himself denies that.  

Democrats who charge obstruction clearly don’t understand the concept and relationship of crimes to investigative protocol. And they also don’t understand the definition of “High Crimes and Misdemeanors.”

For instance, we heard nothing about obstruction of justice when former president Bill Clinton boarded the plane of Attorney General Loretta Lynch while his wife and then presidential candidate Hillary Clinton was under investigation for crimes she committed with classified information.

When the Obama administration illegally traded guns with narcotics dealers in Mexico that were ultimately turned on U.S. Border Patrol and resulted in the death of two agents, no special prosecutor was appointed to investigate the crimes that the “Fast and Furious” program conducted under the Obama administration and Attorney General Eric Holder.

No honest American wants corruption and scandal from either Party. And it is dishonest and corrupt to turn a blind eye to crimes made by members of only their affiliated Party.

But the point here is that crimes must be committed before investigations ensue; otherwise anyone can investigate anyone for no good reason. And that’s not how a free society works. It is a violation of our constitutional rights, the right to privacy, the concept of probable cause, and unlawful search and seizure, to name a few.

When only one Party investigates crimes and the other Party constantly rolls over even without a shred of evidence then a One-Party System isn’t far away.

That is not how our Republic was intended to operate.

Democrat intent is clear – create scandals out of thin air and demand investigations for all of them. This is an effort to paralyze the Trump agenda by burdening Congress with investigations rather than legislative effort, and by distorting public opinion. Their goal is to end 2017 with no significant legislative action so that they could do even less next year due to the impending mid-term elections. They will rally their base to vote to stop Trump, to impeach him – something they will need majorities in both houses of Congress to pull off.

What a mess it is – all of which is being driven by no evidence of a crime.

One thing about Democrats, they fight and fight hard, and they never give up. They stand united behind their president's agenda and actions even when they’re dead wrong and commit crimes. They have no moral compass within their own.

Republicans have no such standard. They are weak and fragmented, and fight like sissies. Senior Republican Senators McCain and Graham were early proponents of the investigations – lack of evidence notwithstanding. And now Senate Majority Leader Mitch McConnell says tax reform has to be “revenue neutral.” Isn’t that great policy from a “conservative”? In other words, McConnell doesn’t think there is a spending problem in a Washington DC even though U.S. central government spends more than the entire GDP of Germany each and every year – a practice started in the Obama era.

Communists and fascists fight for power. Socialists try to buy it. And free market capitalists compete to win it. That’s the difference.

This country has gotten so politically incorrect it’s dangerous. I pride myself on calling a spade a shovel. It’s clear, direct, and accurate. I call Democrats communists because it is a nice way to call them fascists. The descriptors are essentially interchangeable, however. Both have little regard for human life, universal civil rights, or the decency of civilized society. Neither accepts dissention, and both believe their way is the only way – all must fall in line or be destroyed.

No clearer proof of this was the “protest” that transpired on the campus of Cal Berkeley in late April 2017. Students there protested an invited guest of the University named, Milo Yiannopoulos’s. Milo describes himself as a “conservative gay guy.” Watch a video of the protest by clicking here[1].

By watching the video and knowing the speaker we know one thing for certain: this was a protest against Republican and/or Conservative thought. In other words this was a Democrat or Liberal protest – you know, the “tolerant” ones.

Here’s my observation. This is not a protest, it is not an example of free speech, and it is not a constitutional assembly. It is an illegal riot with a purpose to destroy opposing views – the polar opposite of free speech.

Destroying property is a crime. Violence towards others with a difference of opinion is a crime. Both are traits of riots. Riots are not granted constitutional rights. They are crimes. Peaceful assemblies are a constitutional right. Cal Berkeley wasn’t that.

So how do we describe these protestors? As Democrats? As Liberals?

The way I see it is that those two descriptors are of people who openly protest and speak their minds and are willing to discuss and debate topics of great importance. They look to find areas of agreement for a more perfect union.

Communists don’t do that. And neither do fascists.

Communists wear nicely pressed suits and fitted hats when they kill you. Fascists like to cover their faces.

At the Cal Berkeley riot many students wore black garb that covered everything but their eyes. Others wore plain cloths. Call them what you will. I call them fascists and communists, or fascist Liberals and communist Democrats. It is the most accurate way to refer to them – as is the socialist Republican Party.

Yet in the mass media we have to hear about how it was the students at Cal Berkeley exercising their constitutional right of free speech and right to assemble. Sure it got a little out of hand, but they’re kids.

Give me a break. You’re stupid if you believe that.

So you take those two failed Parties, a corrupt media, and add a lightning rod named Donald Trump and what you end up with is exactly what we have: a totally dysfunctional central government.

More and more it looks as if the Trump agenda will die on the vine -- for no good cause. Remember, stocks went on tear after Trump won the election on the prospects of him implementing a pro-growth agenda. It’s only natural for stocks to sell-off as the agenda gets relegated to just another misplaced dream.

Somebody had to say it.

Stay tuned…

  The road to financial independence.

[1] https://www.youtube.com/watch?v=DyC80feMcgU

GDP, The King

Dan Calandro - Tuesday, May 02, 2017

This could be the longest span of time between blogs since I began posting online articles more than six years ago. The reason for my silence is simple: nothing of any significance has happened.—And I never wanted to be one of those pundits who create nothing from nothing. Such a practice has a tendency of producing incoherent pieces that convey nothing of import or purpose, and generally creates confusion among the readership. And while that’s not my style – it is quite common in today’s omnipresent media. Take the case of Myles Udland of Yahoo Finance, for example.

In anticipation of the release of first quarter 2017 GDP numbers Mr. Udland posted an article on April 27, 2017 entitled, GDP – WHAT YOU NEED TO KNOW IN FRIDAY MARKETS – and never will you read a more worthless piece of garbage in your life. It is a good example of what is wrong with conventional investment news and correspondence.

To begin with the article opens with a fallacy: “The biggest economic report of President Donald Trump’s tenure is due out Friday: first quarter GDP.”

We all know that first quarter 2017 is the first economic report since President Trump took the oath of office. But “first” doesn’t automatically equate to “biggest.”

Is that petty?

I don’t think so. Which of Trump’s policies has been enacted by Congress to improve the condition of the stagnant economy?

Answer: none.

So you can say that Myles Udland lost me at hello.

To bolster his erroneous position Udland quotes a gentleman named Neil Dutta, an economist at Renaissance Macro – who should either resign from his post or sue Udland for defamation. Above a picture of Trump, Dutta is quoted, “The data are real, but the news is fake.”


Here’s Dutta’s explanation for his “fake” statement and the first quarter results, “The weakness [was] driven by soft consumption and a sharp inventory drawdown. However, underlying growth is considerably stronger.”


Soft consumption is the reason production was slow and inventories were depleted. Weak demand presented businesses with no good reason to ramp-up production and hold higher inventories – which they would have done if growth was “considerably stronger” – which it wasn’t.

The “data” Dutta is referring to is Gross Domestic Product (GDP) – which happens to be the best and most inclusive fundamental of economic activity. Dutta correctly calls it “real” but labels the reported numbers as “fake.” In that statement I’m not sure if Dutta was taking a potshot at Udland’s poor work or if he actually believes the economy is strong. The former would be valid; the latter is stupid.

From there Udland shifts to Global Chief Investment Officer of Fixed Income products at BlackRock financial, Rick Rieder, who’s position Udland summarized like this, “GDP simply does not capture technology and the changes this has wrought on the economy efficiently.”

That’s just silly. The definition of GDP was changed under the Obama administration to include technological investments. But forget about that for the moment. There’s a more salient point to highlight.

Udland’s synopsis of Rieder’s point was corroborated by this quote by Rieder himself, “Vehicle miles traveled are at [an] all-time record. Gasoline consumption, all-time record. Air miles traveled, all-time record. Auto sales running at 17.5 million cars [per year]. Meaning the number we get through GDP, it’s just not calculated right. And it just lags what’s changed in the way that the economy works today.”

First of all, every one of those items Rieder points out are actually included in the GDP calculation. And secondly, isn’t the reason cars and air travel are so prevalent in the world today because technology has advanced so greatly that those things are affordable to so many people?  And aren’t the technological advancements in shale oil drilling somewhat responsible for the drop in gasoline prices, which aids in higher consumption rates (demand)?

This pathetic piece comes to a staggering conclusion: “The challenges for policymakers and economists is figuring out how to best capture what works and what doesn’t in our modern economy. And GDP often falls short.”

I’m not quite sure how Udland can come to such a conclusion when he obviously doesn’t understand the definition of GDP, how the market works, and how technology factors into market dynamics. This, not to mention, that his conclusion has absolutely nothing to do with the title of his article.

No wonder there are so many confused investors in the world today.

First quarter 2017 GDP has followed the same lethargic pace of the last several years; Real GDP increased just .7%. But that is not indicative of a Trump economy. Trump has done nothing to change the direction of the economy, and so this first report can no way be the “biggest” of his tenure so far. Through the first quarter of 2017 Trump simply presided over the continuation of the Obama economy. If you wish to charge first quarter weakness to any one person then charge it to Mr. Obama; his policies still rule the land.

To find “big” economic news reports for President Trump in the first quarter I would point to decisions made by Big Auto to cancel plans to move production to foreign markets and to expand U.S. production, the approval of the Keystone Pipeline, and more recently, the easing of regulations to drill offshore and in the Arctic. Trump had a hand in these things, and at some point in the future they will have a positive effect on GDP – I stress: they will have a positive effect at some point in the future.

So yes it is true that GDP is limited, as it cannot account for positive changes happening in the marketplace until those changes start producing positive market activity. But that doesn’t mean GDP isn’t calculated right or is in some way fake or misleading. If the economy were strong GDP would reflect it. Fact.

But that doesn’t also mean that the stock market won’t provide a completely different message than GDP numbers reflect. The stock market can and does “price in” changes before they actually improve or diminish economic activity. This is the case in the stock market today.

Since Trump won the election stocks have gained 14%; gold is down 1% and yields have jumped 23%. See below.

These trends are consistent with the expectation of Trump policies being put into effect – which is looking more and more like a long shot everyday. His effort to repeal and replace Obamacare has already failed twice in the Republican controlled House; his budget has no chance of Congressional approval as both Parties hate much of his cost cutting plan, and his ambitious tax plan, which is good for markets, has the major obstacle of an opposition Party hell-bent on stopping everything Trump puts forth.

For the record, the biggest economic report that Trump will face in his first term is one that follows the implementation of his tax plan. Fair people will give his plan two quarters to take hold and start bearing fruit.

And if history provides any guidance, GDP growth will double in due course and tax revenues to the federal government will increase. That’s a dynamic that has repeated itself each and every time for the last 100 years. Calvin Coolidge, who presided over the economy of the roaring 20’s, benefited greatly from cutting taxes; as did John F. Kennedy, Ronald Reagan, and G.W. Bush.

So the question before us today is: Will Congress let Trump be the next presidential benefactor of a tax cutting plan?

On this day, if I were king three people would lose their jobs (Udland, Dutta, and Rieder) and Trump’s tax cut plan would go into effect and be retroactive to January 1, 2017. And then the king of all economic fundamentals, GDP, under its current make-up and definition, would predictably and reliably reflect what policymakers should have anticipated from the very beginning.

Growth and tax revenues up strongly, and stocks up sharply. 

Stay tuned…

 The road to financial independence.

Buck Buffett

Dan Calandro - Sunday, March 05, 2017

Stocks continue to adjust to the prospects of a significant Trump tax cut. Candidate Trump ran on reducing corporate income taxes from 35% to 15%, and decreasing the highest personal rate from 39.6% to 25%. The million dollar question still exists: What will President Trump be able to get through Congress – and when?

Speculation is that some sort of tax cut can be expected in late summer. But will tax cuts affect both corporate and personal taxpayers? And will they be as dramatic as candidate Trump advertised?

No one knows.

In any event, it is important to understand the dynamic of what Trump wants to implement. Let’s take the corporate income tax situation first.

Such a change (from 35% to 15%) represents roughly a 30% change in net earnings. That amounts to an according 24% decrease in P/E multiples. See illustration below.

Company A

35% Tax

15% Tax

Earnings Before Taxes






Net Income After Taxes



$Change in Net Earnings


% Change in Net Earnings


Share Price



Shares Outstanding



Earnings Per Share



Price/Earnings Multiple



Change in P/E Multiple


A mere change in tax rate made Company A much more profitable – and thus “cheaper” on a relative basis according to its P/E Multiple.

That’s why stocks have moved higher since the election.

While it’s easy to evaluate a corporate income tax change, the impact of a personal tax reduction isn’t so tangible. Moving the highest rate from 39.6% to 25% represents roughly a 37% tax decrease.—But that’s just for the highest tax bracket; less than 1% of all taxpayers.

The big question regarding Trump’s personal tax scheme is: What do all the tax brackets look like and how equitable are they?

For example, right now there are seven different tax brackets of which 140 million American taxpayers fall. Most Americans (31%) fall into the 15% tax bracket (before deductions).

The top 1% of taxpayers pay 40% of all taxes, and the top 10% pay 70% of the total tax bill. The top 50% of taxpayers pay 89% of all taxes and the bottom 50% pay just 11%. Thirty-seven million, or 27% of all taxpayers, don’t pay any income tax at all.—This, not to mention, that many Americans not only don’t pay taxes but receive a tax benefit (payment) from the IRS via the Earned Income Tax Credit. The EITC costs taxpayers approximately $65 billion per year.

It’s hard to describe this schematic as fair and equitable. Indeed, higher income earners should pay a higher share of the tax bill – but 70%???

The free-market system is driven by one thing: incentive. Provide incentive for people to work, and they will work. Incentivize workers to earn more, and they will work more.

Incentive paves the road to prosperity.

The Trump tax plan has to provide incentive to earners and discourage social welfare. If he does this, and creates a positive environment for job growth, stocks will go on an absolute tear.

More money via less tax payments is the best incentive for earners, and businesses and entrepreneurs to expand. It will lift GDP growth to Trump’s target of 5-6% and investors will applaud with even higher stocks valuations. 

To reform the tax code we as a country need to stop talking about arbitrary labels like “rich and poor” and define what the brackets actually mean and who fall into them. For instance, there are four classes of people: upper income, lower income, middle income, and poverty. Logic would dictate that there should be four according tax brackets.

To establish the highest rate we cannot look to national income averages for guidance; that would only lead to over-taxation to the highest earning territories of the American economy. For instance, to define “rich” as those earning $250,000 per year is erroneous and shortsighted – especially for those living and working in places like New York City. Remember, lowering healthcare costs is a major objective of the U.S. central government. To tax all New York doctors as “rich” is to raise the cost of healthcare in that area – along with all other areas with a similar economic dynamic, i.e. California, Illinois, Connecticut, and New Jersey, etc.

Instead, high-earning economic markets should set the bar for classifying taxable segments for federal tax purposes. Note: these segments are also usually confined to the highest taxing states.

A doctor earning $1 million in New York City is not rich. In fact, a higher federal income tax bill for this doctor automatically creates an according price increase for their services. This not to mention that once their cost of living, city taxes, state taxes, federal taxes, Social Security and Medicare, malpractice and payroll taxes are deducted, this doctor is nothing more than a middle class earner, taxed at the richest rate.

But let’s forget about that for a second. Let’s agree on defining upper income earners as those who earn $1 million per year or more. These people will pay the highest federal income tax rate (plus Social Security and Medicare, of course.)

Next we need to define the middle-income earners. This class must represent the largest number of U.S. taxpayers in the population because the middle class is what separates America from the rest of the world. A strong and vibrant middle class is essential to maintaining the American ideal. These people will be largest in number and pay the lion’s share of taxes to the federal government.

If we can agree that high-income earners start at $1 million income per year, then middle class earners must end there. Their starting income should be $100,000 per year. In other words, anything from $100k to $1 million should be taxed at the middle income tax rate.

No way should middle-income earners pay more than one day’s pay (20%) for federal income taxes. That’s outrageous. As is the case when high-income earners’ pay more than two day’s pay (40%). Remember, these taxpayers also pay state and local taxes as well, including sales and gasoline taxes, Social Security and Medicare.

Enough is enough already.

That said, middle-income earners should pay 15% federal tax (plus Social Security and Medicare); high-income earners should pay 25% (plus Social Security and Medicare). 

That’s fair.

Lower-income earners, those earning between $100,000 and the poverty level, should pay 5% (plus Social Security and Medicare.) This is consistent with the thought that all taxpayers should have some skin in the game –they should hate paying taxes but believe it is just, and for the collective good. After all, the military protects them too.

Poverty level people should pay zero federal income tax, because as the label suggests, they can’t afford it. They should pay Social Security and Medicare but hardship credits should be available to them on a limited, case-by-case basis. 

When tax rates move after establishing these brackets they should move together across the board. If the highest tax rate goes up by 10%, for example, then the lowest rate must increase by that same 10%. This will help minimize the effects of politically motivated class warfare – as will reducing the number of people not paying taxes, or people getting paid to not pay taxes.

The same tax bracket logic should then be applied to corporations. Why should companies the size of Warren Buffett’s Berkshire Hathaway pay the same corporate income tax rate as Mom and Pop Incorporated? That doesn’t make any sense.

High earning companies should pay 15%, middle-income earning companies should pay 10%, and small companies shall pay 5%.

In both classes, individual and corporations, loopholes need to be dramatically reduced and/or eliminated, and tax calculations need to be simplified. This would allow the federal government to significantly reduce IRS staffing and funding.

Also remember that corporations do not pay taxes – they collect them. The price of any good is defined as: Cost + Profit + Taxes. Lower taxes produce lower prices, which would provide further incentive for consumers to spend some of their tax savings. This would add needed lift to the economy – and employment.

If companies are selling more goods, and they are more profitable, they will require more workers. When business expands labor participation increases and wages expand. America sorely needs this dynamic.

And the performance of stocks shows that investors want it too.

According to a recent Wall Street Journal article, “Ordinary investors are buying low-cost exchange-traded funds at a record-breaking pace, adding fuel to the U.S. stock rally. Investors have poured $124 billion into ETFs in [the first two months of] 2017, the most aggressive start since the industry was founded 24 years ago.”

This news arrived on the heels of legendary investor Warren Buffett’s prediction that there is “no doubt” that he will win a bet that a collection of low cost index mutual funds would outperform a basket of hedge funds assembled by asset manager Protégé Partners. Buffett revealed the expectation in his recently released annual letter to shareholders.

The funny thing about this is that Buffett made his claim as if this was some kind of new revelation. Heck, it has been common knowledge since the industry began that the vast majority of professional funds managers fail to reach their stock market benchmark. My book opened with that fact back in 2011. But now that Buffet has finally joined on the concept is somehow novel. 

Buffett went on, “The bottom line: When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients,” – as if the fees, not poor portfolio construction, is the reason for their failure. 

Individual investors should know upfront that they will gain little by listening to Buffett, nor will his preaching’s enhance their investment acumen. Buffett is a has-been, a walking contradiction, a socialist in free-market clothing.

First, let me qualify the socialist element to that comment. Buffett gave a speech in Switzerland several years ago that condemned capitalism and embraced socialism. He has publically supported George Soros, endorsed Barack Obama, likes Bernie Sanders, and campaigned for Hillary Clinton while backing her plan to raise taxes on the middle class.

Birds of a feather flock together.

Second, in his most recent recommendation Buffett is pushing individual investors to low cost index funds. For the record, index funds – like all other mutual funds – are socialized investment products. They take capital from investors and spread it around the market in a broad, sweeping fashion. This decreases individual empowerment and mutes return.

Buffett’s recent annual report boasts a return for his company (Berkshire Hathaway) that greatly outpaces “market returns.” Such a track record earned him the “Oracle of Omaha” title. A chart comparing the returns of Berkshire Hathaway and the Dow Jones Industrial Average from 1995 to present is below. 

During this time Berkshire Hathaway more than doubled market returns, posting a 689% gain compared to a 307% advance by the Dow Jones Industrial Average.

That’s pretty good.

So let me ask this: Why would Buffett recommend that individuals invest in index funds instead of owning shares of his company? Berkshire Hathaway is a broadly diversified company, a pseudo mutual fund in its own right. The B shares of Berkshire Hathaway are only $175 per share, and very much affordable to every investor.

Answer: because Buffett is a socialist.

The difference between socialists like Buffett and free-marketeers like me are basic: He promotes market collectives and I advocate practices that empower individuals.

Socialists try to convince individuals that they are better off participating blindly in collectives, dependent on people “smarter” than themselves, to share costs and profits under the guise of “minimizing risk.” Yet they do the complete opposite in their own lives.

Buffett doesn’t blindly hand his investment capital over to others (unless he’s trying to win a meaningless bet, of course). He invests his own money, in companies that produce quality products and services – yet he recommends individuals should hand their money over to others and take whatever the market gives.

Unlike Buffett, I encourage individuals to educate themselves so that they can take control of their financial assets and invest in portfolios that produce exceptional returns with less risk. I contend that this is not only simple to do and understand, but easy to outperform experts and oracles alike (see my book for step-by-step instructions.)

A comparison between my 15-51 portfolio and Warren Buffett’s Berkshire Hathaway can be seen below. 

During this time my portfolio has gained an amazing 2,604% return – almost 4 times more than the Oracle’s portfolio.

So when it comes to investment, I say buck Buffett’s advice and build yourself a superior performing 15-51 portfolio.

It is...

 The road to financial independence.

Buckle Up

Dan Calandro - Sunday, January 22, 2017

It wasn’t long after Donald Trump gave one of the most unique inaugural addresses in the history of our great country that pundits like Chris Matthews and Rachel Maddow likened him to Hitler. I wonder if those two knuckleheads have ever read even a few pages of Mein Kampf.

To refute their utter nonsense I ask this: Would Hitler ever say, “When you open your heart to patriotism there is no room for prejudice,” as Trump did during his inaugural address?

Of course not.

And since when is placing America first a bad thing?

It’s hard to take the American Left seriously.

Several years ago I walked into a meeting in Chicago and an owner of the company was holding a bust of Thomas Jefferson. He was taping his favorite Jefferson quote to the base of it. Jefferson was his favorite he said, and then asked me what I thought of the icon. I said, “Jefferson was brilliant, a smart liberal.” He smiled and nodded.

The debates back then were for big, complicated issues. The banter between Hamilton and Jefferson on things like a national bank and currency were epic, brilliant arguments. And while Jefferson never shied away from dirty politics he never put forth a naked stance. Deep thought and legitimate tenets always backed his policy stances.

But that is not commonplace with today’s Left. Rarely to do They engage in debate of deep thought. Their way is always the correct way because They say so; and their opposition is always wrong because they always want some type of destruction – because They say it is so. Not because it is, in fact, so.

For example, because Trump and Republicans want to repeal the disaster that is Obamacare (simply look at its performance results for proof of failure) and replace it with something that could possibly work (see: Gruber Acknowledges Supreme Letdown for my 12 point plan) they are somehow illegitimate. But instead of legitimate policy debate Democrats resort to demagoguing their opposition with insidious one-line slogans like: Republicans want to “Make America Sick Again.”

Kool-Aid anyone?

Because they are liberal they can say whatever they want, regardless of factual basis, and without impunity.

But the other side can’t.

If someone merely disagreed with an Obama stance they were immediately labeled a racist. 

A difference of legitimate opinion does not a racist make.

For instance, if a person called Obama a communist then they would have instantly been labeled a racist. Yet according to Obama’s own words in the AUDACITY OF HOPE, he was greatly influenced by “the radicals, the communists.” It only stands to reason that if communists greatly influenced a person then that person might actually be a communist. Whether or not the person was an actual communist is irrelevant. The point is that an actual legitimate basis for the accusation exists.

And for the record, a person cannot be a racist if they believe Obama is a communist. An example of racism would be if a person believes that all black people are communists – and that their belief system is superior to communism. For instance, if a person believes that all black people are capitalists and that capitalism is an endearing position then that person is not a racist. They are a fan.

The far Left in America, the hypocrites that claim to be tolerant and inclusive, are the first to shout down opposing views and demean their opposition as stupid, racist, or fascist. When they lose they are the first to claim foul play, riot and destroy property, and pursue changes to protocol and law to destroy the opposition.

To intimidate with force rather than to persuade with fact and logic are tactics and practices of communist and/or fascist regimes. And governors who do not condemn such practices are either communists or supporters of communists.  

This, not to mention, that every major piece of major legislation passed in the Obama years was rammed through Congress by one authoritarian party and with no inclusion of the minority. That was when Democrat congressional positions included things like, “We won and you lost,” and “You have to pass the bill so you can find out what’s in it.”

A legitimate argument can be made that Democrats are the true communists or fascists practicing in America.

But instead Trump is being billed as that radical – and he has done none of those things or presided over an administration that has excluded the minority party from the legislative process. I’m not saying that Trump will or won’t do these things. I’m just saying that he hasn’t done them yet. So to call him “Hitlerian” like Chris Matthews did is liberalism at its worst – as is describing Trump’s address as “militant and dark,” as Rachael Maddow did.  

So why do I go down this ugly political road in an investment blog?

Because governments control markets – and this ladies and gentlemen is your government and its operating environment.

Trump had an extremely positive message for the America People, American jobs and industry, and American security. But implementing such an ambitious agenda will not be easy with an opposition Party that looks to be doubling down on their failed tactics and inferior agenda. This is not to mention that Trump also has to fight a pathetic and fragmented Republican Party who has sold out the American People so much over the last two decades that it won’t be easy breaking them out of their bad socialist habits.

Trump’s anti-establishment stance put both Democrats and Republicans on their heels at the inauguration. He blamed them both for the so many failures over the last two decades. Good for him. But that won’t make things easier.

Although Republicans should embrace Trump’s message and change their ways they might not. And if they don’t this can get really ugly, really fast; and then who knows how long much needed reform will take.

Investors must keep their eyes on what this new government is doing. It will set the course for stocks and correction.

I reiterate this condition because it is so very important…Trump’s policies if enacted as pitched will force the Federal Reserve to swiftly raise interest rates. That will strengthen the dollar – even though Trump has recently said that the dollar is already too strong. That’s a quagmire in-and-of-itself. In any event, it is these higher yields that will bring about the next major global reset. It will push European referendums to exit the EU and the Euro will collapse. And the crisis that will follow will infect the U.S. and investors all around the world.

That makes Trump’s first 100 days incredibly important – because it will be damn near impossible for him to get anything positive done once the next crisis hits. Democrats, of course, know this. That is why they are stalling confirmations on his cabinet selections, which of course will delay confirmation of Trump’s Supreme Court nominee.   

Investors should remain cautious and keep their antennas raised.

It might also be helpful to buckle up the seatbelt. This is going to be a rocky road.

Stay tuned…

  The road to financial independence.

The Million Dollar Question

Dan Calandro - Monday, January 02, 2017

The Dow Jones Industrial Average was last year's big winner; it posted a solid 13.4% gain in 2016. The S&P 500 added 9.5% for the year, and the 15-51 Strength Indicator recorded an 8.6% gain. All three market indicators ended the year more than 1% off their all-time highs, and more than half of their annual gains came after the November 8th election. There is little doubt stocks ended the year with much more optimism than when they started. See below.

The post election bounce was lead by Financials, who should reap huge benefits in a higher interest rate environment. Higher interest rates incentivize banks to lend; more loans equal more profit. And with the Trump promise of lower corporate taxes businesses will have more incentive to invest in growth and borrow. All of that helped to propel Financials upward by 18% in the final two months of the year.

The move in Financials particularly helped the performance of the Dow Jones Industrial Average, which has more financial stocks and a higher allocation to that market than does the 15-51 Indicator.

Healthcare stocks also surged late in the year, rising some 12% post-election. This in hopes Trump will deliver on his promise to repeal-and-replace Obamacare.

Let us pray.

Another market with a late year rally worth noting is the Defense and Aerospace sector, which added 10% in the final stretch. The rest of the market was spattered with solid single-digit gains.

So there you have it – investors sent a strong message after the election: Trump policies will be good for banks, healthcare companies and defense contractors.

Make of it what you will.

The highest performing Industry in 2016 was Industrial (19%) and the lowest was Financials, which even with the strong post-election performance only eked out a 1% gain for the year. A table of 2016 industry returns is below.

Even though the strong move in stocks stole the headlines, it wasn’t the mainline event for financial markets in 2016. Yields, once down 40% in the year, ended up 8% after a swift post-election reversal. Bond values and yields run in opposite directions.

Yields jumped 31% in the aftermath of the vote and, as expected, the Trump victory prompted the Federal Reserve to finally make another move at their December 2016 meeting. They raised the Fed Funds rate by another quarter-point.

This will be a continuing theme.

Gold ended a rocky 2016 up 8% and continued to take its lead from the stock market. The precious metal lost 10% since the Trump victory and ended the year 16% off its high. This, too, was to be expected. See below. 

To investors I say this: Forget about the stock market as a leading indicator and look to the bond market for future guidance. Yields are the real story. 

Below is an excerpt from SURVIVING THE NEXT CRASH

“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.”

A major problem still exists in Europe. Governments are going broke and the European Central Bank is getting tight. Greece can’t afford itself with historically low interest rates. The same goes for Italy, whose government is in turmoil. Add Portugal to the list, Cypress, etc. etc. – and then add the cherry on top, France. They’re in shambles, too. Higher interest rates will make all of their conditions worse.

Factual Note #1: Trump’s policies will force U.S. interest rates higher.

Factual Note #2: U.S. interest rates drive global rates.


“It’s hard to imagine how much longer the German people will continue transferring their hard earned taxed dollars to irresponsible countries like Greece, Italy, and Portugal, etc. etc…These are the things that break-up unions – currency unions, that is.”

Well it appears that that time is getting closer. After several failed bailout attempts the EU looks to be getting tired of the same old dog-and-pony show. This time around they are demanding member nations to implement reform and austerity measures before another emergency funding program is initiated. But those broke countries – those who either failed to implement austerity measures or implemented policies that made their conditions worse – are unwilling to accept EU dictate and German demands. They just want more money to fund their failed systems. 

And that is the crux of the matter.

At what point does Greece, originator of the EU-Exit movement, leave the Euro in order to reclaim their right and ability to print their own money and debt?

The EU won’t give them any more money. Are they to do nothing?  

The same goes for Italy.



The point is that once one country leaves the currency union others will follow. And then boom, crisis: the Euro collapses and the world undergoes a widespread debt and currency devaluation.

We haven’t even mentioned the many issues in emerging markets and the IMF’s many warnings. Higher interest rates will make that problem worse as well.

And then again there’s this scary point, also from SURVIVING THE NEXT CRASH

“This is not to mention that at some point the Federal Reserve will have to start removing some of the QE money from the economy to avoid hyper-inflation – and that’s going to be a real trick.”

Add the Trump tax cuts into this equation and it really gets tricky.

What a mess it will be.

Like I said when this dialogue began, forget about what the stock market is saying right now. Yields, while still low, are sounding an alarm. They are the most important indicator to watch.

And it is equally important to watch what the new President does. Governments control markets, and this is the biggest change in government we have probably ever seen, a change much bigger than the last one, from G.W. Bush to Obama.

That said, I’ll make one final note before ending this piece…

There is no way to know what the Trump will do once in office. We know what he campaigned on, and we know that he has already backed off some of those promises. Maybe that’s just transitional politics. Maybe not. It’s hard to figure for so many reasons. However what we do know is that his first hundred days will be critical, and very telling.

Perhaps the most ironic thing to come from the election is how both political Parties have claimed victory – the Republicans because a republican won the Electoral College, and the Democrats because Hillary won the popular vote.

But the Republican establishment did everything they could do to derail a Trump presidency. Conservative pundits like The Weekly Standard used all of their power and might to sabotage his chance of winning. Paul Ryan called him a racist and former President H.W. Bush endorsed the other side. As a result of the many establishment condemnations Trump raised little-to-no money and had a mere fraction of Hillary’s campaign budget.

And he won anyway.

The Republican Party, like Hillary Clinton and the rest of the Democrat elites, lost the 2016 election in resounding fashion.

And instead of realizing that they need real change the Parties each positioned the election results as a victory. Democrats threaten to obstruct Trump at every angle and Republicans say they are  “willing to work” with him – a position that purports both Parties as simply tolerating an outcome rather than reforming their misguided operations.

That could spell trouble.

Will the Republican Party with their socialist big-government tendencies fight Trump every step of the way, pissed that he spat in their faces and then smiled from the winner’s circle? Will they water down his campaign promises into useless clichés that accomplish nothing? Will they act swiftly and decisively as Obama and the Democrats did, or will they once again sellout the free-market system by cowering to minority propaganda that produces stupid things like auto-expiring tax cuts and bloated government regs like No Child Left Behind?

What will Trump do and how quickly will he get it done?

That is the million-dollar question.

Stay tuned…

 The road to financial independence.

Trump Wins and Stocks Rally -- What's Up with That?

Dan Calandro - Sunday, November 13, 2016

Well if I was correct in describing Britain’s epic Brexit vote as a modern day Lexington and Concord then the presidential vote of November 8th is today’s version of the Battle of Saratoga – an event where a bunch of rag-tag “deplorables” rose up and turned the tides on the establishment crown, a victory that provided a pivotal turning point in the war against overzealous government.

Sing glory!

Now I’m not saying that Trump was the perfect candidate, or the perfect general to lead freedom’s cause. Far from it. Instead he was simply the only other option to a corrupt establishment candidate who wanted to tax more, regulate more, and force more central government into the lives of individuals and enterprise. This year’s vote was not between two people but between two different approaches to Americanism, a quasi Socialist/Communist system versus a pseudo Capitalist/Socialist structure – and the freer model won the day.

It was a good day for Markets.

On the Monday before the election stocks rose 2% in anticipation of the Clinton win that polls were forecasting. During the daylight hours on Tuesday, Election Day, the expected Clinton victory “appeared certain” – with many pundits predicting a landslide win for her. Stocks rose another half percent on that condition.

And then night fell.

Little-by-little victory slipped through Hillary’s fingers like sand through the hourglass – first Florida, then Ohio, and then Iowa, Wisconsin – and OMG, Pennsylvania?!?

Game, set, and match.

Immediately following this new reality stock futures began trading down. In short order they were down 700 points, indicating a 5% drop in stock prices for Wednesday’s open. That was Tuesday night.

But by the time markets closed on the much-anticipated post-election session stock markets ended Wednesday up 1.4% – and then followed with another 1.2% upward move on Thursday. Friday added another positive fraction, and when it was all said and done the week ended with a strong 5% increase.

Like the polls, market speculation regarding the impact of the election was way off base.

The initial negative reaction to the Trump win was another spoiled-brat impulse by the Wall Street establishment. They associated the Trump victory with an end to easy money and programs like quantitative easing (QE), and they wanted to show their displeasure with it. So they traded that way and sent futures down.

But then two things happened.

First, Trump said he had no intention of firing current Federal Reserve chairwomen, and monetary dove, Janet Yellen. (If true, this would mark Trump’s first mistake as president (see: Issues be Damned)). In any event, the announcement provided Wall Street with a glimmer of hope that easy money would somehow continue, and that tighter money would happen in the most tempered fashion possible.

Second, the hypocrites on Wall Street finally realized that Trump’s domestic policies are actually good for business, investment, and consumers. That is good markets – and stocks. And so they swiftly reversed course and bid prices up higher. The Dow Jones Industrial Average ended the week at a new all-time high; while both the S&P 500 and 15-51 Indicator ended more than 1% of their previous highs. See below.

As mentioned in Strategies for the Winner, buying into a Trump dip would have been premature. In that same vein, buying into a Trump rally is equally as misguided, and way too late for the underlying market condition. Below is the same chart as the above except it includes activity for gold and yields. Their addition changed the chart’s scaling so all items could fit into the picture. See below.

The post-election stock move looks muted in this view -- but take a gander at the jump in yields and the slip in gold. Nothing mute about them. These sharp moves indicate a higher interest rate environment, which is a totally legitimate position. Consider this…

It is no secret that interest rates have been historically low for way too long. Along with Dodd-Frank and other ineffective and prohibitive regulations like Sarbanes-Oxley, interest rate policy has hindered lending and growth. Even though a normalized interest rate policy has been totally warranted and substantiated for a long time, a dovish Federal Reserve under Janet Yellen has been too scared to raise rates to a reasonable level in fear that it would be labeled as the one responsible for causing the next recession or financial crisis when the other shoe finally dropped. Yes, the Fed has talked a lot about raising rates. But because they didn’t have the courage to do it, they allowed bogus data to constantly talk them out of it. And the reason they were so wishy-washy is because they didn’t have a perfect excuse to raise rates, signals were always mixed, and they didn’t have someone or something else to blame if it all went wrong.

Enter President-elect Trump.

One of Trump’s big agenda items is a significant tax cut for businesses and individuals. If purchasing power were to increase quickly and considerably as Trump intends, the flood of new cash into the economy would cause a spike in inflation. That scares the Fed – even though they have been looking for higher inflation for a long time. Like the rest of the establishment world, the Fed simply wasn’t expecting Trump and his ambitious tax-cut plan to win the vote. If they had, interest rates would already be higher. (Count on a Fed move in December.)

The Federal Reserve raises interest rates to discourage borrowing and spending. They do so to control inflation, the general rise in prices. Prices rise when consumer demand increases. Tax cuts increase spending (a.k.a. consumer demand) because more money is available to consumers and businesses to circulate through the economy.

So now the Fed has to move interest rates higher to combat inflationary pressure inspired by the Trump tax plan. Unless, of course, they can convince Trump to slowly phase in his tax cuts like Volker did to Reagan. (That would be Trump’s second mistake as the new president.) But this has yet to be determined. 

That’s one reason I maintain a wait-and-see strategy to investment decisions at this point in time. It’s hard to figure what will actually happen in Trump’s first 100 days.

In any event, the Fed must act (which is the reason yields spiked and gold dropped post-election). But they are in a delicate position. Their inflation target is 2%. The current year inflation average is 1.4%. So they’re not far off. The Trump tax cuts are aggressive and can easily move that needle beyond the target. That said, interest rates need to move a lot higher, fast, and without causing panic – which has already begun. 

International Monetary Fund (IMF) chairwoman, Christine Lagarde, has been warning of a brewing financial crisis in emerging markets that would ultimately reach our shores for a long time. In Take it from Her, posted in February 2016, I said this….

a disturbing revelation came from Christine Lagarde, chairwoman of the International Monetary Fund (IMF), who made a public plea last week for world leaders to greatly increase the emergency funding mechanisms for the global economy. “While the safety net has expanded in size and coverage since the 2008 financial crisis, it has also become more fragmented and asymmetric.” She went on to say that foreign-exchange reserves, central bank credit lines, and the IMF’s own trillion-dollar war chest of reserves were inadequate to meet the growing vulnerabilities of the global economy.

And then several months later I said this in What to Believe

The International Monetary Fund (IMF) has been sounding the alarm about another global crisis brewing for a long time, and it has recently added more fuel to their fire. The IMF downgraded global economic growth again and reiterated their call for “urgent” action by the G20 to stabilize the fragile global economy. They noted that advanced economies [a.k.a. the U.S.] would get hit the hardest during the next crisis, and that that crisis will be driven by the intensification of bank distress in vulnerable economies.”

If you are a believer in Christine Lagarde’s warning, and I am, what do you think higher U.S. interest rates will do to emerging markets?

Emerging markets use foreign capital to fund their infrastructure needs, social security spending, and bank lending. When U.S. interest rates rise so do the rates for the rest of the world. Many emerging markets can’t afford themselves now. Higher rates will only make their problems worse. And it’s already coming to a head…

On November 12, 2016, just four days after the U.S. election, the Wall Street Journal posted an article on-line entitled, Donald Trump Win Has Investors Selling in Emerging Markets. I recommend reading the entire article, but below are some highlights:

  • Investors [were] expected to pour a net $157 billion into emerging markets by the end of the year…seeking relief from rock bottom yields prevailing elsewhere around the world. But Mr. Trump’s election has changed that calculus.
  • The dollar-denominated J.P. Morgan emerging-markets bond exchange-traded fun experienced its sharpest outflow on record on Thursday, with $300 million exiting the fund.
  • Emerging market stocks and bonds suffered about $2.4 billion in outflows over the past few weeks, with much of that cash exiting since the election
  • A fresh selloff rolled from Asia to Europe, Africa, and Latin America as the day progressed Friday. Stocks ended the day down 4% in Indonesia, while South Africa’s [stock] index fell by 2.3%. Argentina’s [stock] index tumbled 3.5%.
  • Currencies took a beating too. Even the Russian ruble, which held up in the election’s immediate aftermath, dropped by .6% against the U.S. dollar.
  • The South African [currency] fell by more than 1% against the [U.S. dollar]. The yield on the country’s sovereign bond maturing in 2026 rose to 9%
  • The Brazilian [currency’s] 5.3% decline against the dollar Thursday was the currency’s largest daily drop in five years.
  • The Mexican peso is down more that 12% since the election.
  • A 2% slump in Indonesia’s [currency] prompted intervention by the country’s central bank.
  • Countries including Mexico, Colombia and Brazil are just beginning to recover from expansionary fiscal policies that widened deficits, drove up inflation, and lowered growth. Many of these governments are suffering from low approval ratings as they enact painful budget cuts. Capital outflows could tip an already difficult balance in the wrong direction.
  • “People pulling money out will hit many emerging markets, particularly in Latin America, at a very weak moment.” [Kerner quote]

A reinvigorated and liberated American market offers the best returns available to stock market investors. As a consequence, investors shift capital from higher risk emerging market venues into American investments. 

Higher U.S. interest rates afford bond investors the opportunity to earn higher income without the increased risk associated with emerging market vehicles. So they remove capital from emerging markets and invest in U.S. debt instruments.

As emerging market debt becomes abundant their yields rise to attract capital; their stocks also sell-off with the worldwide rebalancing of capital. This causes mayhem for local governments, who find it harder and harder to raise capital, pay bills, and function as a legitimate custodian. And before you know it, governments fail and all hell breaks loose.

In Issues Be Damned, I said, “The next president will run into a burning building.” The above is that building, and the fire has already started.

Trump will be tested in relatively short order once in office, and his policies will be at the epicenter of debate. It won’t take long to find out how strong he is, and how committed he is to his limited government agenda. 

That’s why I caution investors on jumping into the stock market hysteria right now. No doubt, Trump promises to be better for stocks than Clinton projected. But neither of them, no matter what they did, could hold off this next onslaught. The seeds were sown a very long time ago, and have since developed an extremely deep root system that makes it impossible to remove without an inordinate amount of excruciating pain.

You can thank Yellen and Obama for that.

Bonds and fixed income investments continue to be high-risk assets, and even more so right now. Yields are still at historic lows and will most certainly be forced higher in the very near future. (Bond values fall when interest rates and yields rise.) A spike in inflation will cause rates to runaway higher.

Gold will continue to be confused for the foreseeable future as it struggles to determine whether higher interest rates are indicating a stronger currency and economy or higher inflation. I expect it will continue to take its cue from the stock market until a definite condition is certain; it will fall when stocks rise, and vice versa.

One last thing…this meltdown that is about to happen – it should have happened long ago. The market should have been allowed to recess as much as it needed in ’08 to completely correct. Instead an overzealous U.S. government led the world in a money and debt ponzi scheme that inflated the disastrous balloon that now looms over us. Like the last financial crisis, this next one could have easily been avoided. But again this time, government couldn’t control themselves.

I can already see Obama from his plush post-presidential office blaming Trump’s policies – and the free market system – for again causing a global financial disaster. If only Trump had followed his program the disaster in front never would have materialized, Obama is sure to say. It is Trump’s fault…that’s what you get when you vote for a reality TV star.

Can’t you just see it?

But Obama will again be wrong. 

Every government intervention causes a future problem.

Trump needs to be strong in the face of calamity. He must have faith in the free market system and resist the urge to re-inflate the balloon as Obama did. That will only kick the can down the road and bring us back to this very same spot in 8 to 10 years, when we will be saying the same things, and fighting the same fight.   

Reagan once said, “Freedom is never more than a generation away from extinction.”

The battle never ends.

Live free or die broke.

Stay tuned…

 The road to financial independence.

Strategies for the Winner

Dan Calandro - Sunday, November 06, 2016

This year’s presidential election reminds me so much of the run-up to the Brexit vote. Almost every academic scholar, political operative, and industrial leader is backing the establishment position, Hillary Clinton. And just like the stance to remain in the European Union, Hillary is ahead in the polls.

But will the establishment lose out again?

That is the question that has paralyzed U.S. markets. Stocks have moved but are flat this year. Bonds and gold have moved significantly and are up 22%. Bond values and yields run in opposite directions. See below.

Falling yields and rising gold values are indicators of economic weakness.

The establishment hates Trump, especially the political institution and Wall Street machine. The polls are tight but Hillary remains ahead, and according to some it appears that she is again pulling away.

Then why aren’t the markets raging with optimism?

Answer: Because no one truly believes the polls this time around – and because the Brexit vote is still fresh in the establishment’s memory.

The airwaves are filled with trading strategies revolving around the election results, and the one I’ve heard the most is to sell into a Hillary rally should she win, and buy into a Trump sell-off should he win.

To make an investment move strictly on election results is a silly thing to do.

Recall that the economy is weak – and yes, I know that the initial estimate for third quarter GDP growth came in at 2.9%. But that’s nothing to write home about. The growth rate has only averaged 1.7% this year – even with the supposed “robust” third quarter factored in. It is, after all, the worst recovery in 70 years.

Yet the stock market hasn’t cared. Stocks are now valued 31% higher than their twenty-year average relative to GDP and 19% higher than they were at the height of the housing boom, and 12% higher than at the top of the tech-boom.

That said, selling into a Hillary rally is a fine strategy if investors haven’t already acted and placed their portfolio on conservative footing – because we know what she will do once in office: more taxes, more regulation, and more big government. If the balloon hadn’t yet burst, it will; and when it does she will try to re-inflate with the same Obama template. And then it will replace the Obama recovery as the worst recovery in American history.

Can anyone say James Buchanan? (PS: Buchanan was the last Secretary of State to become president, and became possibly the worst president in history.)

So yes, selling into a Hillary rally is a good, albeit late, idea.

But to buy into a Trump dip is simply a blind gamble. Does anyone really know what Trump will in fact do should he win? He’s a self-proclaimed dealmaker and neither side likes him. What will he give up to get what?

The best strategy to employ if Trump wins is to wait and see what he gets done in his first 100 days. If he can get a good tax and spending plan through Congress and his administration is successful at cutting regulations and – pray to God – repealing Obamacare, then yes, there will be a good time to buy into a Trump presidency.

But when?

In SURVIVING THE NEXT CRASH I said that I would be shocked if Obama got out of office without a stock market correction taking place. Shockingly, it looks as if he will be that lucky. In addition, it looks as if President Obama will also have the fortune to duck recession. The reason for both of these resides at the very heart of this year’s election debate – corruption.

Quantitative easing (QE) and other easy money policies have funneled trillions of dollars into the Wall Street establishment that have enabled them to manipulate stock market activity to suit their needs – to facilitate their effort to lure skeptical capital off the sidelines. And there is no record of this kind activity, as programs like QE are not reflected in the official reports released by the Office of Budget and Management. It’s like it didn’t happen, and didn’t cost anything.

But it did, dearly.

President G.W. Bush spent $19 trillion over the course of his term, an amount Barak Obama called “unpatriotic” while running to replace him as president in 2008. Obama has spent more than $29 trillion and has added $10 trillion to the national debt – thanks to easy money policies like QE and a pathetic opposition party.

And for his epic central government spending and “investment” programs Obama has averaged only 1.5% real growth per year while GDP grew just $3.7 trillion in the eight years. Pitiful.

It appears then, that if you print enough money and throw it all around it is possible to avoid recession and stock market correction for one eight-year presidential term.

But there is no way to avoid it for two presidencies – or for another four years. 

There is no way the next president, whomever it turns out to be, will be allowed to spend what President Obama has spent in his eight-year term. National debt is 105% of GDP and debt has persisted above the level of GDP longer than at any other time in American history. That’s way too much – and yes, it is unpatriotic because it will bankrupt this nation.

Central government spending must be cut.

For this fiscal year tax receipts are expected to be $3.3 trillion and spending is planned to be $3.9 trillion, a $600 billion deficit. If that shortfall is cut in half (as in total spending is cut to $3.6 trillion) the U.S. will effectively slide into recession.

That is how fragile the situation is. 

But recessions are not always bad – especially if the recession is caused by the shrinkage of the federal government.

If Trump can cut spending, shrink the federal government, and cut all the bogus regulation, the economy will slide into recession and the stock market will sell-off. That’s a huge buying opportunity because the market will emerge much stronger than it has been, to a level not seen since the 1990’s.

So buying into an election dip if Trump wins in November is most certainly a premature investment move.

And if Hillary wins and Washington continues to act like it has for the last sixteen years then we as a country ought to go to the mattresses and wait for the war to end before making a significant investment move.

That is to say that the best strategies for this election cycle are a wait-and-see strategy for a Trump presidency and a hide-and-seek strategy for a Hillary administration.


Stay tuned…

 The road to financial independence.

Issues Be Damned

Dan Calandro - Monday, September 05, 2016

The American media has reduced the coming presidential election down to a simple sinister matter: whether Hillary Clinton is too corrupt or if Donald Trump is too crazy to be the next president. The answers to those positions are quite simply, yes and yes. Hillary has proven herself to be too corrupt; and indeed, Trump appears to be too crazy – or at the very least, the craziest this generation has ever experienced.

But so what? These two are all we have to choose from. One will be the next U.S. President, like it or not. Pick your poison. 

Like so many others before this vote will come down to who is the lesser of two evils. We have been here before – and yes, we have survived. But each time we make prosperity harder to achieve.

But it is what it is.

Voters now only have one legitimate course left to travel: to allow a candidate’s proposed solutions to major issues – not Party affiliations – determine where to cast the big vote. To allow a political Party to undermine policy positions is to not care about the future condition of the State. It is to prioritize the power of the Party over what's best for the People. And that position is totally misguided.

A legitimate vote has nothing to do with Party and all to do with positions and solutions to current problems that face the State.

That said, there are some that say if a person doesn’t vote then they have no say in how things go. I totally disagree with that premise. A no-vote is an action, and a legitimate action if both candidates are considered to be repulsive. A no-vote is a valid action of free expression.

NFL quarterback Colin Kaepernick exercised his free speech by not standing for the American National Anthem – an anthem that salutes a country that stands for the freedom for his right to sit through the Anthem and not get executed. Try to do that in Iran or Cuba. Russia or China. Kaepernick’s protest is misplaced. But in a free country a person is free to be stupid.

But to be fair, Colin has a right to sit it out. And so do voters who can’t stand Donald Trump or Hillary Clinton, those who can’t vote for either for whatever the reason. Those people should stay home and sit it out – just like Colin Kaepernick.

The way I see it this vote is one that should be fought out by the two extremes. And yes, if the ambitious middle wants to jump into the fray then by all means go for it. All votes are always welcome. But know upfront that this election is not for the faint of heart. It’s a dirty-ugly-street-fight. Tempers are high on both sides.

And maybe that’s good.

The next president will run into a burning building. The world is at war, militarily, ideologically, economically, and monetarily. The global economy is a wreck, and America’s isn’t much better.

An already low second quarter GDP number was recently revised lower. The U.S. is growing at a rate less than one percent per year and employment is weak. Wages are down. National debt is up and deficits are close to a trillion dollars each and every year. And it’s Trump versus Hillary.

The IMF is calling for urgent preventive action to avoid another financial disaster but the rest of the world think she’s crying wolf.[1]

Not me.

This is the worst recovery from recession in the history of our lives. By rights Hillary Clinton should have no chance to win. She stands on the same platform as Obama. To think that her performance would be anything near Obama’s is a pipedream. That method has nearly run its course. To do more of the same will have worse results and consequences. Nothing works forever.

And this is what this election should be about. Who identifies the key areas that are failing? And what’s the best course of action going forward? Corrupt or not. Crazy or not. Who has the best solutions?

Illegal immigration is without a doubt a huge issue for Americans. That’s why Trump struck such a powerful nerve by bringing it up as aggressively as he did. This is a major problem that threatens the well-being of the State.

Trump’s policy objective to build a wall sounds better than more new laws to many people because the U.S. already has a ton of immigration laws that aren’t being enforced. That makes it impossible for We the People to know whether or not what is already on the books can work. And furthermore, by not enforcing current laws gives the American people no assurance that more new laws will actually be enforced, and for any length of time.  A wall like the one Trump advocates represents an automatic method of enforcement, which is why so many Americans support it.

The Democrat position on immigration is purely political. They believe if they make immigration easy with an open border policy and then provide illegal migrants with free healthcare, welfare, education, housing, and the right to vote, that such action will guarantee the future success for the Democrat Party. Increasing their voter base in this manner, they believe, ensures their political dominance. Such a stance has nothing to do with making America better, stronger, or more fiscally responsible to her taxpayers – for if it did, Democrats would articulate such reasoning.

But immigration isn’t the only huge issue facing the American people. And for as long as the debate is reduced to whether Hillary is too corrupt and Trump is too crazy, other big issues will continue to be removed the debate. And that’s the real travesty because there is still plenty of room for these two candidates to separate themselves well beyond immigration and to lift the debate into something much more meaningful than what is currently had today.

For instance, the U.S. Federal Reserve has turned itself into an illegal hedge fund with absolutely no constitutional authority to do so. They say their balance sheet is worth approximately $5 trillion – more than four times the amount it was before the crash. But I’d be shocked if it wasn’t closer to $10 trillion. But heck, we’ll never know because the Fed can’t be audited. And that enables the problem to get worse.


Below is a recent quote from Janet Yellen, the Federal Reserve Chairwoman, who was discussing actions that the Fed could take during the next financial crisis and recession. (She seems to be expecting one too.)

“Though outside the narrow field of monetary policy, many possibilities in this arena are worth considering, including improving our educational system and investing more in worker training; promoting capital investment and research spending, both private and public; and looking for ways to reduce regulatory burdens while protecting important economic, financial, and social goals,” Yellen said[2].

Two questions: Who the hell does Janet Yellen think she is – and what does the Federal Reserve think they are???

Ladies and Gentlemen, these are not the roles and functions of an unelected group of private bankers! These are central government priorities and actions. These are policies that Americans must endorse or vote against.

We have a runaway Federal Reserve that must be reigned in. They are abusing their power and role; they have lost focus, and are devaluing money to a gross extent. And I don’t want to hear the lame argument that the U.S. dollar is doing well because it is strengthening against other global currencies. That’s happening because everything else is getting weaker. The dollar only looks stronger. It’s a paper tiger, otherwise, interest rates would be much higher than they are today and the Federal Reserve would be tightening monetary supply and not looking for ways to make it looser.

The Federal Reserve needs a complete and utter overhaul and Janet Yellen needs to be the first one to go. They need their scope tightened, their abilities reduced, and their budget cut.

Where do Hillary Clinton and Donald Trump stand on this?—That’s what We the People should be debating right now. These are the things our votes should be based on, corrupt or crazy notwithstanding.

But no, no one is talking about important issues like the runaway Fed. And the reason for that is simple: America has chosen two polarizing candidates for president and the media is enthralled with the polarizing elements of each. Issues be damned.

Stay tuned…

The road to financial independence.

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