Dan’s Blog

Kudos to the Brits!

Dan Calandro - Sunday, June 26, 2016

The Brits had a chance to seize the world dialogue with their Brexit vote and they made the most of it. On Thursday, June 23, 2016, Liberty and Free Markets scored a major victory.

On that glorious day the British people voted to leave the European Union in spite of a well-choreographed full-court press inflicted by the establishment over the past several months, who wheeled out every major scholar, political operative (including Obama), and industrial leader (like JP Morgan Chase’s chairman and CEO, James Dimon), to convince the British people that bureaucratic oppression was better than the independent pursuit of prosperity.

Think about that for a second, in April 2016 the President of the United States argued before the British people that a supranational organization of unelected leaders non-responsive to the will of constituents is better than independence for those same constituents. In other words, it’s okay for unelected people to make laws that must be followed by people who not only don’t want those laws, have no way to repeal those laws, and have no way to petition a Congress or Parliament to change those laws. In other words, laws and procedures with no recourse for constituents is a better operating model than democracy. 

Obama advocated this.  

And if the Brits didn’t agree with King Obama? Well, then, they would just have to go “back in the queue” for trade deals.

The Brits, in the same spirit that liberated us in 1776, served Obama and his ilk the proverbial middle finger.

I join in their contempt.

My case for the ultimate collapse of the EU has always been: How long will the German taxpayer be willing to send their hard-earned cash to fund the Greek Nanny-State, and Portugal, and Cyprus, etc. etc.?

In SURVIVING THE NEXT CRASH[1], I said this…

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.

Friday’s 3.5% downward move in the stock market wasn’t just another wildcat move. It was a move based on something big – a major global event. The British exit from the Euro (a.k.a. “Brexit”) is the first in a series of events that will bring about the next major global reset. It is the beginning of the beginning, a modern day Lexington and Concord.

So what does this mean for the U.S. market, stocks and bonds, and all the other markets that drive global growth?

Not much. England will remain the serious market contender it has always been. Trade will not stop. Military alliance will not cease. And money will continue to flow throughout the world economy. But make no mistake, English succession is going to be a rough and bumpy road; if for no reason other than the EU will not allow it to be an easily travelled path. The EU is going to make it ugly and painful so to deter other member states from following Britain’s lead. An easy British exit would facilitate a mass exodus from the Euro – and the EU doesn’t want that.

But they can’t stop it.

The EU is rife with corruption. Big businesses and big government proponents pump billions of dollars through lobbyists to pass trade and immigration laws that only benefit themselves – the big bureaucracies, labor unions, and large multi-national corporations. The hell with the people is the way they operate because the people have no say, no vote, and no remedy. That is a blank check for corruption.

And the Brits rebelled. While they were the first, they won’t be the last.—And that’s what the markets reacted to on Friday, June 24, 2016. The uncertainty of what happens next.

Never before has a country left the Euro bloc – but already the Dutch are promising to be next. The Italian people are interested in a referendum on leaving, and let’s not forget about the Greeks, who started the movement with their talk of a “Grexit” when negotiating one of their many bailout packages.

So investors could expect a lot of volatility going forward, and I wouldn’t be surprised to see stocks test the lows reached in February 2016 and August 2015. Why not?

The International Monetary Fund (IMF) recently downgraded U.S. growth yet again, and market activity across Europe has been nothing better than lethargic. Chinese growth, the “cause” of the prior two aforementioned corrections, is still weak. Fiscal irresponsibility at the government level remains an epidemic, and the global body politic is in turmoil.

Even with Friday’s price drop stocks are flat this year, and valuations are still rich. There is a lot of room left to fall. Yields continue to drop in America, Germany, and Japan, as investors continue to seek shelter from the storm. And gold is on the rise, indicating a weakening economic and currency environment.


While the EU will make British succession difficult, I doubt they will so stupid as to isolate Great Britain from the rest of the region. That would be suicide. They need a solid relationship with England. Without it the entire Euro Zone is grossly weaker. And even the spiteful members of the EU who want to rip off the Band-Aid, like France, know it.

This puts the EU in a delicate quandary. They could only be so tough, and so accommodating.

Negotiations are going to be very theatrical and will no doubt rattle markets many times along the way. The EU will talk tough and act like a spoiled child who thinks they know better than their parents. And the reason for that is simple. The British vote was a complete and utter rebuke of them and their elitist policies and mentality.

Trump should feel good about that. After all, it is the same sentiment that propelled him to the Republican nomination. Trump has talked a lot about his candidacy being a movement. But that’s not accurate. Trump is not the movement. He is simply riding the wave of the movement, an anti-establishment watershed.

At times it may look like the Brits made a mistake while a new captain navigates their ship through a rough sea, but posterity will vindicate them when their ship makes it through the storm.  Until then, freedom, independence, and free markets shall serve as the beacon of light that guides them to prosperity. That combination always outperforms socialist dictatorships. 

Always.

The question is: Who will follow next?

Stay tuned…

 The road to financial independence.


[1] SURVIVING THE NEXT CRASH can be downloaded for free at www.loseyourbroker.com

How to Make Money -- and How to Keep It

Dan Calandro - Saturday, May 28, 2016

It’s been awhile since I’ve blogged but really nothing has changed. Persistent themes continue to play out.

The American economy – albeit the strongest in the world – continues to show signs of fracture. The most recent jobs report came in much weaker than expected and wage growth has consistently been described as “anemic” by all major accounts. National debt continues to balloon and the political landscape is in upheaval. And then, to top it all off, the initial estimate for first quarter market activity disappointed again, posting a paltry .5% gain. That rate was recently adjusted upward to .8% – still a poor number – which adds yet another notch to a long trend-line of weak and inconsistent growth.

At the same time foreign currencies have been gaining on the dollar. The Euro and Yen have shown particular strength, and the Wall Street Journal’s Dollar Index has lost 3% so far this year. This weak dollar dynamic arrives despite the expansion of easy money policies by these same foreign governments to combat weakening economic conditions there.

But gold is the real story. It’s up strongly in the year even after a recent decline. Its performance, along with yields, indicates weakness in the U.S. Year-to-date activity is shown below.

After falling sharply to begin the year stocks have seemed to regain footing. Following a strong performance last week (+2%), stocks are up 2.8% for the year. Gold is up big (14%) and yields are down significantly (18.5%). Together these metrics reflect the current Market condition – a weak dollar and a fragile economy.

Now, I have been blogging about the weak and uneven economy for a long time. But the stock market has completely disregarded that condition since it came onto the scene. See below.

Stock market strength via the 15-51 Indicator has gained an amazing 194% since the economy emerged from recession; the S&P 500 has added 83%; and the economy grew just 13% in Real terms. That’s a huge anomaly!

Consider the following facts…

Since emerging from recession in 2010, U.S. central government spending remained at levels never seen before, averaging a $1 Trillion deficit per year. Allow me to repeat that absurdity: U.S. central government continued to add $1 Trillion in national debt per year, every year, since recovering from recession.

That’s way too much government spending during a recovery!

During that same time the national debt increased by $6 Trillion while the economy gained just $3 Trillion. In other words, every incremental dollar of long-term U.S. debt produced only fifty-cents of short-term economic benefit. This doesn’t even consider the $7 Trillion of new money printed by the Federal Reserve via quantitative easing (QE).

Only in government can that be considered good policy.

In 2010 the ratio of national debt to GDP was 90%. Today it is 107%.

When Bill Clinton left office in 2000 the government’s share of the economy was 17%. It reached 19% under Bush, and today Obama has pushed it to 22%.

In Real terms, the Clinton economy averaged 3.9% growth per year, Bush’s averaged 2.1%, and Obama’s has averaged 1.4%. 

So there it is. The government is bigger, the free market is smaller – and growth is weaker.

That’s what domineering governments produce – just ask the Greeks.

So it is hard to argue the weakening position of the U.S. economy (more debt and less growth). But what about uneven?

Lets let the stock market illustrate that. But first, let’s define “the market” for some grounding.

My 15-51 portfolio is a market portfolio, meaning it taps into all major industries and is allocated in a similar manner as broader market measures, like the Dow Jones Industrial Average and S&P 500.  As a result it moves like those broader measures do. But because it is built with superior 15-51 construction it produces an above-average trend-line. This can be seen quite clearly in the chart below.

Okay, so my 15-51 portfolio moves in a market-like way because it is allocated similarly to “the market.” As a result, market allocations can be viewed through the lense of the 15-51 Indicator. Those allocations are shown below.

Solid economic expansions generally fire on all cylinders, meaning all industries contribute positively to growth. And technology usually leads the way, followed by the financiers of growth (financials) and the movers (energy) – all key ingredients to robust growth. Below is the current distribution of return on investment (ROI) by industry.

That’s the epitome of uneven -- and the definition of ass-backwards.

Consumer Staples, the largest industry gainer, represents need based spending. Need sustains market mediocrity. Want propels it to prosperity.

Technology, financials, and energy are staples of want driven markets. They are above-average performers in strong economies, and are bottom-level performers in weak economies (like today’s).

The strength in consumer Services is driven by healthcare inflation – something ObamaCare has been unable to correct. And the weakness in Basic is spread across many sectors, including automobiles, farm equipment, small engines and engine components – again, a sign of economic weakness.

The highest gaining industry is up 20% and the worst performing industry is down 16%. And four of the seven industries, or 54% of “the market”, fail to beat the average. Uneven is the word.

The highest risk and growth industry is producing one-quarter of the growth that the most conservative industry is producing. That’s ass-backwards.

Stocks are reflecting a weak and uneven economy because stocks are strong in need-based sectors and weak in want-based sectors – yet overall valuations are higher now than they were at the pinnacles of the tech and housing booms. That makes for an unsustainable level of inflation.

And that's the reason so many of us are expecting a severe stock market correction. Stocks simply don’t have the economic foundation to support current valuations.

It is important for this kind of dynamic to feed into an investor’s perspective when they establish or adjust their financial plans.

For instance, investors that have been using the 15-51 method for a long period of time have a completely different perspective than ones who have just started because they already have huge gains in the bank. As a result, it is easy for those investors to sit largely on the sidelines while they wait for the next major correction.

That’s not true for those just getting started. To those people I say this…

First, it is my firm belief that investors should never be all-in or all-out of the stock market. Second, investors should be appropriately allocated to the known conditions within the confines of their goals and risk tolerances.

As a gauge, for example, when it is apparent that stock values are high and the market is ripe for correction an investor’s stock allocation should represent an amount that they can withstand a 50% haircut for two to five years – because that can easily happen. The cash balance should be significant enough to at least double the stock market allocation at the buy point (low.) Triple is even better. This ensures a faster recovery.

Also, if a hedge allocation is employed, like gold, these values will rise when stocks are down. That may be a great opportunity to sell gold and reallocate some of those dollars to stocks. So it is possible then that an investor could add four or even five times the amount of their current stock allocation after correction.

The objective of stock market investing is to buy large quantities low and to sell them high in pieces along the path of recovery. And again, a comfortable cash allocation should always be present. There isn’t a need to go all-in with the superior ability of 15-51 construction.

My stock market posture is very conservative. Readers should know this when they consider my thoughts. I don’t mind missing the tops and bottoms, mostly because they are impossible to predict and it’s easy to get caught with your pants down if you try. But again, investors don’t need to have that psychic ability in order to earn robust investment returns.

To demonstrate these concepts in action, following is an investment simulation that begins at year-ended 2006, when the housing boom was in full gear. Valuations were high at that time – but remember the stock market didn’t reach its all-time high until October 2007. It crashed in the fall of 2008, but didn’t reach its bottom until March 2009. The economy emerged from recession in 2010, and stocks regained fair value in 2013.

In the following example (which can easily be applied to today and the near future), the portfolio was put on a conservative footing at the start of the period. At year-ended 2006 the allocations were as follows: Stocks 25%, Gold 25%, and Cash 50%.

My 15-51 Indicator will represent the stock portfolio; Gold is the GLD; and the cash balance is a non-income producing account, and cash is used only as a mechanism to make money – to buy low. Dividends have been omitted for the exercise, so the actual returns would have been larger than the results presented herein.

During the nine-year period from 2006 until present, there were three action points to reallocate and rebalance the portfolio, and they were triggered by market conditions and allocation anomalies.

After the conservative posture was established at year-ended 2006, the portfolio was reallocated for the first time in December 2008, when the Dow Jones Industrial Average bounced 1,000 points off its bottom – which wasn’t the true bottom (March 2009 was). The stock allocation was increased at that time, the gold allocation was maintained, and the cash balance was depleted to “buy low.”

The portfolio was adjusted again in February 2013 when stocks hit fair value. The stock allocation was also out of whack; it rose 10% above its target, a typical rebalancing trigger. To make the portfolio less aggressive, new target allocations were set lower for both stocks and gold. The cash allocation was increased.

The third and final adjustment came in November 2014 when stocks were considered “high” by any reasonable account – it wasn’t their highest point, however, that didn’t occur until the next year, in February 2015. A summary of how the allocations changed during these conditions is shown below.

Start

Correction

Fair Value

High

29-Dec-06

5-Dec-08

15-Feb-13

14-Nov-14

15-51i

25%

65%

50%

25%

Gold

25%

25%

15%

25%

Cash

50%

10%

35%

50%

As you can see, the stock allocation started low and ended low (25% of the total portfolio) – as both times stocks were considered high -- and never was the portfolio "fully invested."  And when stocks were considered low, the stock allocation rose to 65%. That’s the time to overweight in stocks.

But before I show you how the total portfolio performed, I want you to see how the stock trend looks with the buys and sells in it. See below.

Those sharp vertical lines represent the buys and sells, the additions and depletions of capital. Below are the gold and cash trends. (Note: the gold allocation only changed twice.)

Those charts show how capital was reallocated during the three action points. Again, this is done to achieve objectives – to buy low and sell high, and to appropriately balances risk tolerance and return, according to my investment values. Below is how the total portfolio performed compared to broader market measures.

The three-asset class portfolio produced a stunning 208% return – more than 4 times “the market’s” output (48% for the S&P 500, and 43% for the Dow Average).

In addition the portfolio had less risk, less volatility, and less downside. But most importantly it preserved, protected, and accumulated wealth. The ending cash balance was 50% more than what the entire portfolio started with nine years earlier – and it still has $160,000 invested in today’s market. See the table of allocations below.

29-Dec-06

5-Dec-08

15-Feb-13

14-Nov-14

27-May-16

Total Portfolio

$100,000

$102,972

$260,646

$297,618

$308,342

15-51i

$25,000

$66,932

$130,323

$74,405

$84,381

Gold

$25,000

$25,743

$39,097

$74,405

$75,152

Cash

$50,000

$10,297

$91,226

$148,809

$148,809

That’s how to make money – and, more importantly, how to keep it.

All it takes is a plan, multiple asset classes, superior 15-51 construction, and action.

It’s never too late to change to a better course.

Stay tuned...

 The road to financial independence.

The Real Problem

Dan Calandro - Monday, April 04, 2016

So there are two schools of thought. The first believes the economic problem in the world centers around the consumer and their inability to fully recover from the Great Recession. The economists in this camp, camp number one, believe that the low unemployment rate is bogus, the economy is fragile, and that another kind of subprime mortgage crisis is brewing under an unsuspecting global eye. The belief here is that consumers are either skittish to spend or tapped out, which explains why they haven’t propelled the new economy into a legitimate expansionary mode. Demand is the problem – fix it, and production and productivity will adjust, and GDP will improve accordingly.

And then there are the economists in camp number two, who recently concocted a new theory based on an “explosive job machine” that has returned world unemployment rates to pre-recession levels. These economists argue that “unemployment is a better indicator of global economic health than gross domestic product (GDP).”[1] It is their opinion that because unemployment is so “positive” the real problem is not global demand but rather “stunted potential due to aging populations and weak productivity”. Fix productivity, they believe, and wage growth will follow, and GDP will expand accordingly.

First things first. For the life of me I just can’t swallow the premise of camp number two’s theory – that the unemployment rate is a better indicator of economic activity than the economy itself (GDP). That’s just stupid to me. As unemployment benefits expire, people are forced to accept part-time work or lower paying jobs because the good jobs just aren’t there. This dynamic produces the current situation: lower unemployment rates, lower incomes, and thereby less demand, and lackluster GDP results. This has been a staple of this recovery ever since the beginning, when it was billed as a “jobless recovery.”

The unemployment rate is a farce; low labor participation and weak wage growth prove that. To base a theory on it is futile.

Second, productivity – defined as the effectiveness of productive effort, especially in industry, as measured in terms of the rate of output per unit of input – has nothing to do with the economic dilemma currently facing the world.

Take energy, for instance. The price of a barrel of oil is down $103 from it’s all-time high, an astonishing 74% drop in value. Knowing that every product or physical good transports to markets or consumers, and that all transport is driven by energy, economists in camp number two would like us to believe that the problem in energy is that energy companies aren’t productive enough.  

That’s silly. Lower global demand has driven energy prices lower, and productivity had nothing to do with it. Nothing.

But maybe economists in camp number two would argue that energy suppliers don’t need to be productive because there are so many energy producers. In other words, production of energy can be inefficient because there are so many inefficient producers – and even inefficient producers can over-supply markets because of their abundance. Over-supply, of course, brings about lower prices.

But wouldn’t increased productivity in the energy market bring about higher unemployment in that sector of the economy? And if energy suppliers needed fewer workers because productivity increased, wouldn’t that efficiency cause prices to fall even lower, and wouldn’t that dynamic ultimately produce even weaker GDP fundamentals?

The productivity theory to solving the world’s economic woes is as corrupt as the unemployment rate. But let’s put that fact aside for a moment and acquiesce to the idea that an increase in productivity would help the global economy out of its funk. Let’s just agree on that for the sake of argument.

Let me ask, Exactly what incentive do corporations have to increase productivity when demand is so weak?

International Monetary Fund chief, Christine Lagarde, is reportedly preparing to again downgrade global growth projections. Her words about the “fragile” global economy – it needs “urgent action” – and, in a joint statement along with the leaders of the top 20 economies, pledged to employ “all policy tools – monetary, fiscal, and structural” during the next global meltdown.

Why?—Because the world’s $78 Trillion economy isn’t productive enough?

Give me a break.

So what’s motivating the absurdity found in camp number two’s theory of productivity?—Their conclusion: “The message of the job market is that monetary policy is already succeeding.”

Puke.

The last market crash caught the majority of people by surprise because they failed to read the writing on the wall. Sadly, it is happening again.

The writing on the wall is clear. There will be another financial crisis –Take It From Herand the establishment will respond to it in a similar way as they did last time. It is “succeeding”, after all.

There will be more monetary nonsense next time around – more new money and more new sovereign debt to fund more central government planning and social engineering. You can bet on hearing, Well, it worked last time. Why not try it again?—Besides, Wall Street will be begging for it. (No one profits more from new money and debt than they do.)

The central government mantra during the next crisis will, again, be about saving the economy from insolvency and depression. And if the writing on the wall is any indication, their pitch for a new wave of “stimulus” spending will include measures to increase productivity – this to put people back to work earning higher-paying, full-time jobs – something that wasn’t done last time, when productivity was largely neglected. Productivity is the key, I’m sure they will say.

But that kind of central government planning won’t work again next time (see: Stocks, Politics, and Cocaine, for more). Besides, the least productive entity in the entire world is government. The more they do the less everything works.

So we can continue to be distracted with banter as to whether the “real economic problem” is productivity or weak global demand. Or we can talk about the real problem.

The real problem facing We the People, and investors, is the ever-expanding dominance of central governments over individuals and free markets. It is an epidemic. And it is a cancer.

That is the real threat to economic vitality and prosperity.

And until it is thwarted, neither demand nor productivity will correct.

Stay tuned…

 The road to financial independence.



[1] See Wall Street Journal article, Healthy Job Market at Odds with Global Gloom, by Greg Ip

The Best Investment Advice

Dan Calandro - Saturday, March 19, 2016

I don’t normally read the USA Today but was traveling on business and a complimentary copy appeared at the doorstep of my hotel room every morning. Interestingly, an article appeared in the March 15, 2016 edition that reaffirmed the foundation of my investment philosophy. The article entitled, Most Fund Managers Not Hot Shots, appeared with a subtitle caption, Study: 66% can’t match S&P results.

The 66% metric related to “actively managed” funds for a single year, 2015. But the study reveals that performance is even worse over longer periods of time. For instance, 84% of professional fund managers fall short of S&P results in the latest five-year period, and 82% underperform in the most recent ten-year period.

The article predictably pointed to a few common misconceptions, like, “Fees explain a lot of the long term underperformance,” and that 2015 was a particularly difficult year to pick stocks, as “The median stock did worse than the S&P 500 overall,” which led to the conclusion that investors are generally better off with low cost index funds that mimic the actions of broader market indices like the Dow Jones Industrial Average and S&P 500.

But is that good enough?

The Dow Jones Industrial Average has gained 68% over the last ten years. During that time inflation was 20%, leaving a net Dow return of 48%; or approximately 5% per year. That’s $5,000 in gain per year on a $100,000 investment.

That’s the best-case scenario for mutual fund owners. And while an annual 5% gain may initially sound good, it’s actually terrible. Think about it this way…

Over the course of a full year’s work (40 hours per week for 52 weeks) $5,000 amounts to just $2.40 per hour – an illegally-low paying job. The federal minimum wage is currently around seven bucks an hour.

The average household income for a mutual fund investor is $80,000 per year, or $38.46 per hour. That is to say that the average investor earns a total of $40.86 per hour ($38.46 on their labor, and $2.40 on their investments.) The gain on investment raises their annual income to $85,000 – a 6.5% bump.  

No doubt, the average investor can make money if their mutual funds match the Dow Jones Average over the long term. But again, is that good enough?  

Contrast that performance to those who make the most of their investment dollars by applying my easy to use 15-51™ method. Using the same 10-year period and $100,000 investment, my 15-51 portfolio returned 246% after inflation, or 25% per year. That amounts to $12.14 per hour for a full workweek – five times the going rate of the best mutual funds!

And with more than $25,000 in gain per year, the 15-51™ investment return raises the average investor’s annual income to $105,000 – a 32% boost in wealth!

You see, investment isn’t just about making money. It’s about maximizing the monetary worth of your hard-earned dollars. It’s about making the most from your money.

And who best to produce that wealth?

You.

Yes, you.

Now, I know it’s hard to believe that you can outperform every mutual fund manager on the planet. After all, Wall Street has spent billions convincing people that mere mortals aren't qualified to comprehend or perform the investment function successfully – and that message is reiterated all over the place.

It resurfaced again last week in a Wall Street Journal article entitled, The Three Worst Words of Stock-Market Advice: Trust Your Gut. At then end of that article, author Jason Zweig quoted a legendary value investor and Warren Buffet mentor. 

“No wonder the great analyst Benjamin Graham wrote in his book “The Intelligent Investor,” after which this column is named: “The investor’s chief problem — and even his worst enemy — is likely to be himself.”

Nothing could be further from the truth. The greatest asset every investor has is himself. His worst enemy is the Wall Street establishment.

All investment begins with investment in self. And as such, the investor’s chief problems are their failure to develop successful investment strategies and techniques, and their propensity to rely too heavily on a corrupt financial services industry, a.k.a. the Wall Street establishment.

Successful stock market investing – that is, greatly outperforming any major market index and therefore all professional fund managers – is easy to do and simple to comprehend.

The reason mutual funds fail to outperform major market indexes has nothing to do with fees or stock picking challenges. It’s because they’re not built to beat “the market.”

My 15-51 allocation method is designed and constructed specifically to outperform the stock market averages. It is above average in every respect. That’s why it consistently produces above average performance results. See the ten-year chart below.


My 15-51 portfolio has half the risk and produces six times more reward than any mutual fund or major market index. The entire portfolio, and complete step-by-step instructions of the investment process, can be found in my award winning effort, LOSE YOUR BROKER NOT YOUR MONEY. It’s easy to understand, simple to use, and consistently produces results that are far superior to anything available on the market today.—And no one stands be behind their method like I do. Readership is supported by me personally, right here, free of charge.

LOSE YOUR BROKER: It is the best advice you could ever take -- and the best investment you could ever make in your portfolio. 

  The road to financial independence.

Stocks, Politics, and Cocaine

Dan Calandro - Sunday, March 13, 2016

Major market indexes have posted four consecutive weeks of gains, and are now more than seven percent above their February lows.

What inspired the turnaround – was it an economic reversal, or a sign that revival was in the air? 

Truth be told, it was actually more bad news.

Weak global demand continued to plague global markets, as it again pulled the Eurozone back into a deflationary condition. While it is true that deflation isn’t always bad (the steep drop in computer prices during the 1990’s comes quickly to mind) the situation facing the Eurozone is the worst possible kind.

Unlike computers in the 1990’s, which paired robust market demand and greatly expanded supply to bring about lower prices, Eurozone deflation has been brought on by the dreadful combination of weakening demand and contracting supply, which has produced lower prices and persistently high unemployment. All of these have caused anemic monetary velocity in the Zone's marketplace.

There are many reasons monetary circulation stalls in an economy – and at the root of it are consumers and their unwillingness or inability to spend. Perhaps credit is tight or unavailable, or maybe jobs and wage growth haven’t been positive for an extended period of time. Or it could also be that consumers are using what little disposable income they have to pay down debts previously incurred. In any event, consumers are not optimistic about their future and are therefore unwilling or unable to spend. Such a dynamic forces producers to lower their prices to incentivize consumers to spend.

And if this bad kind of deflation is not treated properly it could promulgate a vicious cycle of contracting supply and rising unemployment, which leads to even lower prices, and in the worst case scenario, economic depression.

So you would think, as logic dictates, that Eurozone governments would specifically address the root of the problem (consumers) when formulating their solution this time around. But no, the Eurozone didn't do that. Instead they decided to do more of the same things that failed the last time deflation reared its ugly head there.

Last week the European Central Bank (ECB) drove its core interest rates further into negative territory, increased its quantitative easing (QE) effort by an additional 20 billion Euro, and announced a new cheap loan program that it “hopes” will be passed on to businesses and households.—Key word: hopes.

The reason they need hope is because those programs didn’t remedy the problem last time. Perhaps  they didn’t have enough hope back then. 

So sad.

The problem with big government programs is that they never get down to the individual – the main drivers of economic vitality. That’s why the stock market rallied since news of Eurozone deflation crossed the wire several weeks ago. The Wall Street establishment is a key benefactor of easy money policies like QE – so they bid “the market” higher to show their approval.

It’s interesting to note that this scheme is starting to wear thin in Germany, as their Central Bank finally disapproved of the ECB’s policy stance. They worry that persistent easy money efforts could ignite “a doom loop of expectations and disappointment.”   

Right on.

Central banks and monetary shell games cannot transform economic malaise into vitality – especially at this point in the cycle. All that is left for them to do now is spray perfume on a mountain of dirty laundry. Any benefit will be short lived – and that includes the recent bounce in stock prices.

You may recall that America invented the QE fiasco. The effort here did nothing but facilitate an irresponsible level of central government debt and deficit, inflate the stock market beyond reason, and inserted an ungodly amount of waste, corruption, and deception beyond anything the civilized world has ever experienced.

Let’s take a look at some pictures to corroborate those points.

First, America has never experienced a persistently high level of national debt in her history. Yes, there have been big presidential spenders in our history; and yes, national debt was elevated to more than 100% of GDP during World War II; but that condition lasted just three years. Below is a chart of the national debt since 1980. 


U.S. national debt has been greater than GDP for five consecutive years now, and according to President Obama’s most recent budget, that condition is projected to continue at least through 2021.

Since Obama took office national debt has increased 64%. Gross Domestic Product (GDP) increased just 28% during that same time. To put that dynamic another way, every $2.26 of new government debt produced only $1.00 of economic benefit.

Only in government can spending two bucks to get one be considered good or successful. And if President Obama had his way this nonsense would continue through 2021.

So where’s the other $1.26?

That’s your waste and corruption factor – can anyone say, Solyndra?

Speaking of fraud and deception, followers of this blog know that I often throw darts at the low unemployment rate, refuting it with the historically low labor participation rate. If the unemployment rate were truly low, labor participation would be high. But that isn’t the case. See below.


If the government were an honest broker then social programs for income assistance would have dropped along with unemployment compensation. But that hasn’t happened either. Take a look below.


As a side note, the above budget items do not include Social Security, Medicare, Medicaid, Veteran’s benefits, or government employee benefits. The trends above are simply supplemental income programs – and they are all higher now than they were before the recession began. And even though unemployment compensation has dropped (there is a mathematical formula for the elimination of those benefits) all other income security programs have remained elevated. Why?

Because the unemployment rate is a deceptive advertising metric that politicians use to put forth the notion of economic well-being and successful social engineering programs. But reality contradicts that notion. Obama’s social program agenda has actually discouraged employment and encouraged government dependence.

That’s not a recipe for prosperity. In fact, it’s the European model of socialism that has proven bankrupt time and again – just ask the Greeks.

So why would America and the entire Eurozone go so far down a path that can lead nowhere but to fiscal insolvency?

Two reasons.

First, that road emboldens the ruling class.

The largest threat to large government proponents – the socialists and communists – is a Free People.  Free people reduce the power and scope of government. Free people insist that free markets pave the way to prosperity because they are the most efficient, effective, and equitable mechanism of wealth redistribution because free market activity is driven by the purity of consumer freewill.

Large government proponents disagree; they believe free markets are unfair and unjust, and that individual consumers cannot appropriately decide the best uses for their money. They believe governors like themselves are smarter than everyone else, and therefore can spend money more justly than individuals. So to succeed in their plight they must minimize the freedom of individuals and enterprise and embolden themselves – the ruling class – and the central planning abilities of government.  

Second, the elitist mentality embodied by big government proponents precludes them from believing that they’re not smarter than every failed socialist before them. To put it another way, they fail to recognize that they can fail even though they are employing a failed socio-economic model – because they think that they can do it better, because they are smarter.

But let me ask, Do you think the Romans believed that they could fail before their empire actually collapsed?

Of course not. And the same is true with every empire in the history of man – none of them believed they could fail even though the socio-economic model they employed had a proven track record of failure. They thought they could do it better. And they were all wrong.

The solution in the Eurozone is not more central government interference. Printing more money to relieve more bad debts from failed states so that those same failed states can create more bad debts through more wasteful government spending and corruption won’t solve the problem again this time. It’d be stupid to think so.

The solutions for the Eurozone are the same for breaking America out of its funk. Stop the monetary ponzi schemes. Stop printing money and debt, and stop wasteful spending and corruption. And it’s also time to cut social welfare programs that inspire dependence on government.

It’s time to reverse course and incentivize people and enterprise to earn, spend, and invest. Cut taxes, shrink government, and eliminate all the bogus regulations that act as barriers to trade and business formation.

But today’s policies are the polar opposite of those throughout the world.

For example, a new set of economic numbers from China was released and they were worse than projected, but not as bad as they could have been. The numbers were helped by an increase in government stimulus spending – namely billions of dollars used to construct new production facilities.

How about that? China is building new production facilities even though their production is down significantly, and still declining, for several years running. That’s the big government central planning solution to falling production – build more production capacity to further lower prices in hopes that it will spur an increase in demand.

How foolish.

The answer there is the same as here and in Europe – liberate people, enterprise, and markets – but communist China can’t be expected to embrace that ideal. It’d be crazy to think so. But it does highlight the ideological difference between free market supporters and big government central planners.

One looks to empower people to solve market deficiencies, and the other hopes the ruling class inside government can do it. One relies on individual desire to fuel success and prosperity for all, and the other hopes that a manufactured equilibrium can achieve a stable mediocrity amongst all.

The world has never been so confused.

That’s why people like me are looking for someone on the world stage to make the winning argument – the free market argument – and one would think Trump to be that person. But all too often he comes across as a blathering idiot, repeating himself several times in a row while saying nothing of import or worth. It’s like he doesn’t understand what needs to be done and how to communicate it.

The same goes for Hillary Clinton.

But not so with Bernie Sanders. He knows exactly what he wants to do and is quite specific about it. And that’s the scary thing because he can’t possibly pay for his plan without a dramatic increase in taxes. Such a move would destroy the middle class and collapse the economy, and along with it, the American ideal.

Regardless of what politicians say, Middle Class workers always get screwed the worst. They don’t get QE money or income assistance, yet they always get stuck paying the tab for both.

That is not a positive environment for stocks.—But then again, that’s not what has been driving the recent rise in their valuations. It was the announcement of more free money that did it.

And QE will do it every time.

It is Wall Street's cocaine. 

Stay tuned…

 The road to financial independence.

Heading Our Way

Dan Calandro - Sunday, February 14, 2016

Scuttlebutt regarding the probability of an impending recession is swirling. Even I chimed in with last week’s blog, Take It From Her, If you join the millions who believe the stock market is a leading indicator of economic output you have to believe recession is on the horizon.”

Since that post several Wall Street Journal headlines crossed the wire that suggest my inference to be correct:

  • Economists Lower Growth Estimate Amid Rising Recession Risk
  • Economists, CEOs: Recession Risk Rising
  • Risk Grows of Markets Sparking Recession

Of course, these articles are filled with the same old stuff – one expert said chances of recession in the next twelve months have doubled, while another sees it at 21%. One index places the probability of a recession at 50%, while another bets 28%.

And of course the cause of recession also continued to be batted around – “Falling oil prices are bad news for 2016 growth,” one said; “Tightening financial conditions are a sizable worry,” said another; while a third amped up the vernacular, “The toxicity of the global economic environment continues to be a threat.” You may recall that “toxic” was widely used to describe the last financial crisis.

Two themes shouldn’t be overlooked: history often repeats, and recessions are cyclical.

The last major stock market correction was driven by poor monetary and fiscal policies that fueled massive inflation and debt that broke the backs of subprime consumers and the financial system.

Today, poor monetary and fiscal policies have once again fueled an ungodly spike of inflation and debt – though this time over-extended debt is largely concentrated at the institutional and establishment levels, and inflation is mostly present and visible in the stock market. However, those differences don’t mean a major correction and subsequent recession won’t be experienced. Instead it means they will change form.

For instance, in place of consumers and banks going broke, countries and institutions will fail. The stock market will correct but it will be worse – because the condition is worse.  A recession will occur but it will be deeper and longer than the previous because the problem is bigger and wider. The recovery will be harder and more painful because governments will have less tools and ability to combat the worsening market condition – not to mention that they will look to themselves as the solution and not to people and free markets.

The reason history often repeats is because people often make the same mistakes.

One of the WSJ articles mentioned above relays that since World War II the average economic expansion has lasted six years. The current expansion has lasted just about that, prompting one analyst to portray the status of this expansion as “in the bottom of the seventh [inning]” of its life expectancy.

Indeed, nothing lasts forever – and policies and market conditions are no exception. They are as cyclical as the seasons.

And another thing is just as certain: the exact moment a recession occurs is impossible to predict. But that divine skill is not required to invest successfully, nor is it essential to assess where we are in the cycle.

The stock market is a leading indicator of market activity because stock prices are updated to a moment’s news via daily trading. The stock market, therefore, reacts to softening economic trends in an instant – and long before economic data is released from the government. Remember, investors received the first estimate of market activity for the 4th quarter on January 29, 2016, one month after the December quarter closed.  This is not to mention that conventional thought defines a recession as two consecutive quarters (or 6 months) of negative growth, or contraction.

The point here is simple: if investors wait for a recession to be confirmed in order to make portfolio adjustments they will be acting way too late. That’s a surefire way to lose lots of money.

Instead, investors should look to a leading indicator for decision-making guidance.

Bull and Bear Markets are stock market terms, and expansion and recession are economic terms. A Bull Market is one where the stock market leads the economy upward (expansion); and a Bear Market is one where the stock market leads the economy downward (recession).

The stock market, as indicted by the Dow Jones Industrial Average and/or the S&P 500, has been an incredible predictor of recessionary trends. This can be seen quite clearly in a long-term trend comparison to economic activity via Gross Domestic Product (GDP). The chart below compares the stock market averages to GDP since the last stock market top, October 2007. See below.


The red ‘x’ indicates when economic expansion commenced after the last recession, approximately June 2010. The blue ‘x’ signifies the beginning of the Bull Market (approximately May 2013), as stock market activity regained its previous high and placed its trend-line above that of Real GDP. 

You can also see that the stock market averages have recently broken below the Nominal GDP trend-line and are headed for Real GDP. That’s an advanced warning of recession. In fact, for as long as I’ve been analyzing the stock market (25 years or so) every time the averages crossed under Real GDP a recession followed. It happened when the tech-boom went bust; and it happened when the housing boom collapsed.

And it is happening again right now, signifying a recessionary end to the QE boom – which according to the stock market, appears to be heading our way.

Stay tuned…

 The road to financial independence.

Take It From Her...

Dan Calandro - Sunday, February 07, 2016

The stock market continued to tremor last week. The driver this time was the employment situation; the new jobs report was to be released Friday morning.

Early in the week it was all speculation, and again the first four trading days sensed bad news with negative returns. But unlike last week there would be no silver bullet on Friday; stocks lost another point-and-a-half when the actual numbers were released and ended the week down more than two percent. So far this year stocks are down 8%, gold is up 11%, and yields have fallen 19%. See below.


On the surface the employment report looked good: the unemployment rate dropped below 5% (to 4.9%) for the first time since February 2008; the labor participation rate finally increased, albeit a miniscule .1% – but a positive development nevertheless; and wages posted their second largest gain of the “recovery,” increasing .5%. Wages have increased 2.5% year-over-year.

So why did stocks hit the skids?

Ah, the devil in the details. In the same report the Department of Labor adjusted December’s job gain down by 105,000, which almost wiped out the entire gain in January (151,000). That stings.

But a deeper look into the report shows a broader measure of unemployment – one that adds workers stuck in part-time jobs and those too discouraged to look for work – revealed that actually 9.9% of able persons are unemployed, and that rate hasn’t changed for months.

And yes, wages finally advanced, but the growth rate is well below the last expansion when increases of 3-to-4% were routine. And while the labor participation rate improved it’s still at lows not seen since the 1970’s.

So the jobs report wasn’t great – but what’s new? These kinds of smoke and mirror reports have been a consistent theme in this entire seven-year expansion. So I’m not so sure that the jobs report was what the stock market was reacting to last week.

Ever since the first major stock market shock was felt in August of last year I never thought it was a reaction to just one impetus, China. Like I said then, and a few times since, China was only a symbol of a much larger systemic problem; and that that problem will sooner or later come to an explosive head.

In that vein, 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.

I don’t know about you, but that doesn’t give me a warm and fuzzy feeling. 

Lagarde went on, “In both emerging and advanced economies, it may be helpful to reconsider tax policies – which have a built-in bias towards debt, largely through deductibility.”

First things first…the IMF is a crisis lender. They lend money to nation states that are failing and/or cannot raise money in the investment markets for whatever reason.

Second, urging large member states like the U.S. for additional capital contributions to add to the trillions already had in reserve tells you one thing – Lagarde is preparing for another big financial crisis.

Third, Lagarde sees that problem festering in the debt levels of emerging markets – and she should know. She works with these nations, they are her customers, and she knows their credit scores. That’s her business. And according to her, she doesn’t believe the IMF has enough money to cover their brewing mess – which she partially resolves with a “[reconsideration] of tax policies.”

Her tax philosophy is two-sided. First, by eliminating the tax deductibility of interest expense, entities (i.e. people, companies, and investment vehicles) will borrow less because the tax incentive is gone and borrowing becomes more expensive. In other words, changing the tax law would shrink or minimize the amount of debt emerging markets take on.

Second, by eliminating the tax deductibility of interest expense central governments of advanced economies will receive more tax revenues because the tax benefit is gone.

And what does Lagarde want advanced economies like the U.S. to do with that extra revenue?

Give it to the IMF, of course.

That’s right, Lagarde is proposing to increase taxes on constituents of one country to bailout another through a non-representative governing body (the IMF). Remember, the mortgage interest deduction is an interest expense deduction. If that goes away every homeowner in the U.S. will pay more taxes to bailout emerging markets all over the world.

Talk about taxation without representation.  

Think about this from the investment perspective for a second. American investors invest trillions of dollars in mutual funds, and unfortunately, too much of that money gets invested into mutual funds dedicated to emerging markets. So let’s say Lagarde is right and emerging markets get slammed during the next global crisis. American investors will lose trillions of dollars in investment value during the “crisis.” At the same time a portion of their tax dollars are transferred to the IMF, who then gives that money to the same emerging market.

In other words, the IMF reimburses the emerging market for mistakes it made and the American investor is left paying the tab – twice, once through investment loss and again via a tax transfer to the IMF.

When will the nonsense ever stop?

Pumping more money into failed economic and governing models is not the pathway to prosperity. Banks can’t create growth or vibrant economies. They are simply enablers if market conditions are right. And they’re not right now.

It seems that the answer to everything is always more government, more regulations and more taxes – before, during, and post crisis. Heck, it’s gotten to a point where a quasi governing body, the IMF, is politicking for higher taxes so it can redistribute more member state revenue. This is nuts.

Everyone is aware of the significant correction in the energy market. Oil has been in a two-year decline and it has hurt energy companies and their investors. All major players have reported drastically reduced profits, plans to cut staff, spending, and research and development – and their stocks are getting hammered. So what does our fearless leader do? That’s right, President Obama says the drop in oil prices makes room for an oil and gasoline tax hike.

How is that supposed to help the economy?

But this big government nonsense exists everywhere. For instance, we know that Lagarde sees trouble with emerging market economies and we know about the weakness in China. Add to those the European Union, who just this week cut their 2016 growth forecast to an anemic 1.7%. One day later the European Central Bank announced they would be ready to act, and act aggressively, as soon as March if their economies needed another puff of life.

There they go again. The economy stinks – print more money and encourage more central government deficit and irresponsible spending. It’s only a matter of time until tax hikes are the next solution over there too.

And just when you thought it was safe to go back into the water, Greece resurfaced again this week. “I fear we could be heading for bankruptcy and an exit from the euro,” said one Greek businessman last week. It’s the same old thing with them. They can’t afford themselves, they don’t want to cut any nanny-state benefits, and they’re begging for more bailout money from guess who? –The IMF.

What a vicious cycle.

So when will it end, and what will bring the end closer?

That is, in fact, the topic of a new debate in America, whether or not a recession is in the making; and if so, what will be the cause or warning signal.

Many point to the substantial correction in the aforementioned energy market as the guiding light. Some think the severity of its correction could tip the economy into recession, and others think that’s the furthest thing from reality. The latter is quick to point out that a rise, not a drop, in oil prices has preceded or accompanied every recession since the 1970’s. This compelled David Rosenberg, chief economist at Gluskin Sheff & Associates, to say, “I put the odds of a U.S. recession in the next year as close to zero as anything could be close to zero.”

Take that and bet your life on blue at the roulette table. 

Just as the rise in oil prices had nothing to do with the prior recessions noted above, low oil prices can’t fend off the next. Instead, the next recession will be driven by the same thing all others have been – falling global demand, which can be seen right now throughout the entire economy. Technology got slammed last week not because things are great. And the prices for corn and soybeans have dropped below their cost of production. None of this had anything to do with the price of oil. It’s because of lower demand, plain and simple.

Indeed, the collapse in oil will strain certain other sectors of the economy – banking and financial, labor, and steel, to name a few. But it cannot cause a broad-based economic recession all by itself.

Could it push an extremely weak and vulnerable economy over the edge?

Sure, why not.

There is so much weakness in the global economy it’s scary. In fact, that’s the influence behind the significant drop in yields for U.S. Treasuries. Investors are moving money from stocks to bonds, causing stock values to fall and bond values to rise. (Bond values move in the opposite direction as yields.) Investors are scared and seeking safety. That’s why gold has turned around. See below.


If you join the millions who believe the stock market is a leading indicator of economic output you have to believe recession is on the horizon. The stock market is down 11% in the most recent twelve months, and down 1% over the past two years. Falling yields, also a sign of economic weakness, have been on a consistent downward trend for two years, down some 38% during that time.

If the markets above are right and the U.S. slips into recession the world will certainly follow, and that’s when things get really ugly.

And that’s what Christine Lagarde is bracing her business for.

So take it from her and brace yours.

Stay tuned...

 The road to financial independence.

The Lost Message

Dan Calandro - Sunday, January 31, 2016

Friday, January 29, 2016, was anticipated to be a big day from the very beginning. That’s the day investors would get a first look at Gross Domestic Product (GDP) figures for the 4th quarter of 2015; they were to be released at 8.30am.

In anticipation of the GDP release stocks were sensing bad news. All major market indicators were down another 1% through the first four days of trading. But a funny thing happened on the way to Friday morning. While America slept the Bank of Japan made a surprise cut in interest rates – forcing them into negative territory (something they said they wouldn’t do). 

Negative interest rates work in reverse of normal interest rates. Normal interest rates pay depositors for keeping their money in banks. Negative interest rates charge depositors for keeping their money in banks.

The Bank of Japan now joins the European Union, Sweden, Denmark, and Switzerland, in their effort to charge institutional banks for deposits kept at their central banks. Negative interest rates are a central banking effort to coerce banks into lending – this, of course, in hopes of spurring economic activity and growth, and boosting inflation (prices rise in environments with increasing demand). 

Two things are certain: Negative interest rates are a sign of major economic weakness and extremely poor Market conditions; and, central banks are utterly incapable of compelling economic activity in depressed operating environments.

To think central planning is a cure to economic woes is a socialist concept – and that’s the problem with today’s markets.

Bernie Sanders is giving Hillary Clinton all she can handle in the Democrat nomination process for president. Sanders is a self-described “democratic socialist.” Many people don’t know what that label means, and in truth, it really doesn’t matter. Sanders is a communist.

How do I know?

First, if a politician calls himself a socialist then he is a communist because all politicians lie.

Second, Sanders is a proponent of a 90% federal income tax on the rich. According to Obama’s definition, “rich” is defined as anyone earning over $250,000 per year. If a rich person pays 90% federal income tax, and pays 7% state income tax (as where I live) and a 4% local tax (as where I live) then a rich person is not free, they are dependent on the state.

That's not socialism, Bernie. It’s communism.

But semantics aside, both are rooted in a big government, central planning ideal. Such a stance purports that only government can solve market problems, fulfill needs, and deliver performance.

That is where the trouble lies.

On Friday of last week U.S. Gross Domestic Product, the broadest measure of economic activity, was reported to be an abysmal .7% in 2015’s holiday fourth quarter. That's terrible, and consistent with the awful trend that has been a persistent theme in Obama’s, and every other, big government economy.

Yet the stock market surged on Friday, advancing 400 points, or 2.5% on the day. Stocks had been down 1% in the prior four days sensing that bad news was coming -- but good news for Wall Street arrived unexpectedly from the Far East. Japan was going to print more money, buy more junk bonds, and force interest rates into negative territory.

Only corrupt markets would applaud those developments.

If zero percent interest rates could not produce anything better than a 1% growth rate then why should anyone expect a -.25% interest rate to be any better?

Easy money is a drug that Wall Street is addicted to. It only helps big banks and institutional investors; and has little to no effect on economies.

Banks won’t lend and businesses and consumers won’t borrow at significant levels until Market conditions change. More big government policies, including monetary games like quantitative easing and negative interest rates, can’t and won’t do it.—And Wall Street knows it. But they don’t care, because they’re the ones that benefit from easy money policies.

See the problem here? Big governments implement policies that benefit large institutions, not individuals.

Investors invest to make money that they can keep.

The solutions to the ills that face world economies today are not quasi-socialist or communist policies. Instead, the solutions reside in free market principles – incentivize success and independence, not dependence through central planning.

Small government policies benefit individuals and individual investors – the main drivers of economic vitality.

To correct economic woes world governments need to throw out all the bogus regulations that are paralyzing free enterprise, terminate all big government programs that strip away individual freedom and foster dependence, empower the individual by drastically reducing income taxes for persons and enterprise, and dramatically reduce central government debt and deficit. These policies will work, as they always do, and would return the economy to a pro-growth position.

But no, we never hear such tried-and-true solutions offered by world leaders or would-be leaders in any Party – not even from Republicans – and it is so aggravating.

The problem in America today is that the Democrat Party is communist and the Republican Party is socialist. Both Parties are big government control freaks. How else could Republicans sound so stupid so often of the time while on the de facto winning side of the argument – free-markets, free-enterprise, and maximum individual Liberty?

And that’s why Trump has so much velocity in today’s political arena. People are pissed off at the establishment and want someone to tear it apart every which way – and many believe Trump is just the person to do it. To hell with the Parties, his supporters’ feel, Trump is for the people.

One more thing...no market can reach its full potential unless it is safe and secure. The only way to do that is to defeat radical Islam. This, too, can be done – but it must be approached with clarity and determination, from a position that can win.

Some on the left believe the greatest recruiting tool of radical Islam is calling the movement exactly what it is; others believe it could be stern policies such as the immigration stance put forth by Donald Trump. But neither is true.

The greatest recruiting tool Islamic Fascists have today is battlefield victory.

ISIS must suffer crushing, consecutive, and persistent defeats on the battlefield or nothing said will ever change their momentum.

The reason international terrorism looks to be winning the war on words and philosophy against the West is the same reason Bernie Sanders has so much mojo in America. Their opposition cannot clearly articulate the advantageous message of Liberty – because they don’t believe in it.

Again, Democrat, Republican, or establishment leaders in the European Union or Asia, are all advocates of big government, central planning, and social engineering edicts dictated by the ruling class.

Such a political position puts people in a quandary of picking which government to be ruled, or oppressed, by. Radical Islam portrays their governing position as strict Moslem doctrine. Much of the West puts forth a secular governing posture, a position many Moslems view as sinful.

In an attempt to oversimplify the very complex root of conflict over there, consider that Sunni’s believe that their leaders can be elected by a consensus of their community and Shiite’s believe leadership must be direct descendants of Muhammad. In other words, they will never agree to live peacefully under the other’s diktat. Knowing this, and witnessing the experiences of the last ten years, its’ clear that the West needs to adjust its position.

For instance, once the initial military engagement ended in Iraq the people of that country were forced by the U.S. to construct a new unity government and constitution. But the factions there didn’t want to unite, and that was the beginning of the insurgent turmoil there. Both sides, Sunni and Shiite, will always feel oppressed while living under the other’s rule. The sooner the West places this well-known fact into its equation the better off the world will be.

The issue over there is complex to say the least, and no solution would be easy and without bloodshed. But that’s not the point here. The point is to position the West in a better situation than it currently is – a place where it could possibly succeed instead of being doomed to a certain failure. After all, it is that failure that has allowed ISIS to gain such momentum.

To put it another way, the West automatically creates two enemies and a power vacuum when it forces two factions (Sunni and Shiite) to unite when they don’t want to.  It’s damn near impossible to succeed in such a position.

Instead the West should be positioning their stance as pro-freedom – that the people living in places like Syria and Iraq are free to choose how they live, worship, and work – territory-by-territory. The outcome will include Sunni areas, Shiite areas, and Kurdish areas, no doubt. And the map may change – but it should be the people living in those places that make those decisions.

How else can SUNNI’s be engaged to take up arms against ISIS (a Sunni group) unless those SUNNI’s know they are fighting for a piece of their land where they define its operating culture without external influence?

The West should empower and support those SUNNI’s in their fight for their right to territorial freedom. Then maybe, just maybe, success wouldn’t be so elusive.

Every major war ever fought has been over land and ideology, and freedom has won every one of them.

And no economy has ever failed because it was too free.

It’s a scary world when freedom is the lost message. 

This explains why markets are so corrupt, chaotic, and ass-backwards; and it also explains why stock markets go positive when economic news is negative.

Stay tuned…

The road to financial independence.

A Long Messy Road

Dan Calandro - Monday, January 18, 2016

Stocks continued their downward slide again last week, as all major stock market indicators ended down another 2%. This is the second time in just a few short months that stocks have made a sharp downward move into the 15,000’s – and again, the scuttlebutt is about China and the price of oil.

Every time the stock market goes into one of these funks some real absurdity hits the airwaves. For instance, I heard a well-known TV personality say that the drop in oil was “bad for the stock market but good for the economy” and then went on to explain how the drop in oil and gasoline has the effect of a huge tax cut to consumers, which helps the economy.

Really?

What about if consumers save that money? How does that help the economy?

And don’t companies that make products using petroleum based components and packaging save money just like consumers do?—And don’t they also save money by transporting those goods to markets with lower gasoline and diesel prices?—And wouldn’t that help, not hinder, profits and byproduct stock market valuations?

Volatile markets are like full moons on Friday the 13th – they bring out all the crazies and make the apparently intelligent seem somewhat obtuse. 

As is the case with China, the drop in oil prices is not the problem but instead a symbol of the problem at large. The reason for the falling value of oil is weak global demand and excess world supply. Indeed the slowdown in China is helping push oil prices lower, but that isn’t the whole story. Europe has been weak and getting weaker for a long time. The U.S. economy has been up and down like its stock market reflects. The rest of Asia, like Japan, has been unable to right their ship since the ’08 crash. And just like those markets, the weakness in oil didn’t transpire over night. It has been in a tailspin for years.

There’s no reason to make this more complicated than it has to be: Wal-Mart is closing 269 stores for poor performance – and most of them are in America. Perhaps it’s easy to shrug off Macys and Gap closing hundreds of stores – but Wal-Mart? Heck, you know things are bad when Wal-Mart is reeling.

And to beat the proverbial dead horse – Shouldn’t the two-plus-year drop in gasoline prices have helped Wal-Mart customers?  

There is little doubt that Wal-Mart has been slow to adapt to the changing dynamics of an on-line world, but retail sales fell .1% in the holiday month of December ‘15. That’s not just a company problem; it’s also a systemic problem. To put it plainly, consumers just aren’t spending the savings reaped from falling energy prices. The reason for that is simple: consumers are not optimistic about their future, their employment situation, and their financial status. If they were the economic trend would be much stronger, plain and simple.

Instead the stock market is reacting negatively to the Market incongruity of high valuations and tepid economic growth – a condition that has lingered for way too long. The only difference now is that institutional investors have woken up and smelled the coffee – for the second time in just a few months. See below.


This next week will be very interesting for the stock market and the kind of signal institutional investors send – because it is they who are responsible for much of the market’s volatility. 

For example, in a Wall Street Journal article entitled, Is the Market Right that the Fed is Wrong, the author presents a few “expert” opinions to make his case. First up is Ben Inker, billed as the “co-head of asset allocation at GMO, a money-management firm co-founded by Jeremy Grantham.” Maybe those names should mean something, but they don’t to me. I never heard of them nor could I pick either one of them out of a line-up. But I digress…

Inker rationalizes his bet, “The market is saying the economy is slowing quite considerably. If the market is right, [Fed officials] almost certainly won’t raise rates as much as they said during the December meeting.”

Okay, so he thinks the stock market is saying the economy is slowing. Great. Welcome to reality.

Inker goes on…“We’ve got this situation where the stock market has become fascinated with what the Federal Reserve does and really thinks the Federal Reserve is there to help the stock market. It could be that the Federal Reserve would like that relationship to change.”

Well the Fed should want that relationship to change – helping the stock market is not their job! But again I digress...

What Inker’s disjointed words are saying is exactly right. The economy is weak and weakening, and the Fed has inflated stock valuations with easy money policies like QE and low interest rates -- and Wall Street loves it. A reverse in Fed policy will deflate the stock market unless the economy can lift valuations – which it can’t. Higher interest rates will help America and hurt stock prices -- which Wall Street hates. 

So what will the Fed do – help America or Wall Street banks?

Inker isn't sure.

But it is Inker’s positioning that is perhaps the most interesting piece of his excerpts. Inker, a hedge fund guy, clearly wants the Fed to continue easy money. After all, that makes his job easier, and bonuses healthier. But he can’t be so self-serving in his presentation, so he purports that “the market” disagrees with the Fed’s view that the economy is getting stronger, which was part of the basis the Fed used to raise rates in December. Certainly little ole' Inker can’t tell the Fed what to do – but certainly the Fed must listen to a higher authority like “the market,” right?

Investors should understand that the majority of Wall Street wants easy money to continue. It has made their life easier, and very rewarding. They never want it to end. So they sell stocks in large blocks and drive prices down to show their displeasure of it ending. And when things turn into a real mess every broker under the sun will need a scapegoat – and that’s when they throw the Fed under the bus.

Don’t believe me? Here’s a prelude of what to expect in yet another excerpt from that very same Wall Street Journal article…

“The market does appear to now be pushing the Fed” away from raising rates, said Joseph LaVorgna, chief U.S. economist at Deutsche Bank AG. “History says the market will win out because it has the ability to cause the damage that the Fed and others desperately want to avoid, which is a recession.”

How about that? This clown LaVorgna puts forth the notion that a stock market correction can actually create a recession. Really??? How does it do that?

That is a cart-pulling-the-horse perspective.

Recessions cause stock market corrections, not the other way around. Price corrections can happen at any time and without a recession present – and they can be severe. It all depends on the amount of inflation  present in the stock market at that particular time.

LaVorgna's comment above foreshadows a Wall Street position of blaming the next major recession on the Federal Reserve's monetary policy -- triggered by a tightening of money that caused a major stock market correction which in turn then created a recession. That's ass-backwards thinking.

Boy it's frightening how much bad information is out there. 

How about this perspective, again from the same article…

“Much of the pervasive gloom hanging over the U.S. outlook is unwarranted,” Barclays Chief Economist Michael Gapen argued…noting that U.S. labor markets, which have been a reliable indicator of future economic growth, show no sign of weakness.

Really, Mikey? Have you taken a peek at the 40 year low labor participation rate? I’d consider that a slight indication.

When you read this stuff it’s easy to understand the volatility in the stock market. People in high places in the establishment have no clue what’s going on and could care less about reality. They spew any stupid piece of rhetoric to advance their portfolio’s agenda. For instance, I’d lay a wager that Gapen is betting against bonds, hence his need for higher interest rates. So he makes a stupid comment like the one above to substantiate his position. The same is true with Inker, who is obviously long stocks and short on bonds – that’s why he wants more easy money and low interest rates.

That’s another example why you can’t trust anything these knuckleheads (brokers and money managers) say. Their narrative is tied to what financial products they are trying to sell at the current moment. Absurdity inserted as needed.

The stock market is seriously over-valued. It should price correct before recession sets in. And then it should correct more when recession presents itself. And yes, Fed policy has been atrocious. But higher interest rates won't be the cause of the next recession. It'd be silly to think so. The problem now, and has been for a long time, is weak global demand.

This is going to be a long messy road.

Stay tuned…

 The road to financial independence.

When the Stars are Aligned

Dan Calandro - Saturday, January 09, 2016

The investment markets moved backwards like a rocket in the first week of 2016, prompting even the casual follower to consider: Is this a sign of things to come?

All major stock market indicators lost six percent in the week, and yields lost 7%. Gold gained 4%. See below.


Metaphor aside, the week’s activity sure looks like a sign to me.

Ironically, the week’s fallout mirrors the correction that occurred in August 2015 (stocks -6%, yields -7%, and gold +4%). And if you listen to the mass media we’re supposed to again believe that this week’s move was driven solely by China. (see, START SPREADING THE NEWS, for more info)

China is not the problem but instead a symbol of the problem at large. Since the ’08 crash almost every government on earth printed too much money, took on too much debt, and pissed it all away. The effort produced little more than weak-underlying economies that were over-leveraged. 

Yet the global remedy became more monetary shell games -- print even more, spend even more, and use the rest to inflate the stock market to put forth the facade that things have turned around and are now okay. To pay for it government raised taxes and manipulated interest and exchange rates to “help” exports remain price competitive.

Saudi Arabia is the most recent case in point. They are looking to break their longstanding peg to the U.S. dollar (to further devalue their currency) and initiate a domestic tax on gasoline to pay for central government spending programs. You know things are bad when Saudi Arabia has to tax its own people for, of all things, gasoline.

At some point institutional investors take reality into account -- and that’s when markets correct.

Yet so many people still point to how “well” America is doing compared to the rest of the world, as if that is some kind of safeguard to another meltdown. And it should be doing better. America has the best operating model in the universe -- even though the last two administrations have greatly altered that course. But just because it has a superior ideal doesn’t also mean that America is infallible, or immune to the global disease. After all, it was America who showed the world how to play the monetary shell game it invented, and how to inflate things to fleece markets and constituencies alike.

Truth be told, the global economy has never been solid since the housing market collapsed. That’s because strength in the Obama economy has never been driven by the consumer (the largest GDP component), which is the reason growth has been unreliable, weak and uneven. The reason for this is simple: labor participation is persistently low and wage growth is anemic -- two characteristics that greatly hinder economic vigor and sustainability.

Instead, those ills are masked by the “feel good” part of this economy -- lofty stock market valuations, which were driven by make believe demand created by quantitative easing (QE).

This has been a smoke and mirrors economy from the very beginning. And for those who don’t remember the real beginning of this crap game, it was a government program called TARP, which was launched during the “financial crisis” in 2008. That’s when easy money became in vogue.

In WHAT’S SCARING THE FED, many of the reasons the fractional raise in core interest rates took so much effort and deliberation were covered. But perhaps the most obvious issue wasn’t mentioned in that particular blog -- the critical matter of unwinding QE.

The Federal Reserve printed trillions of dollars of new money over the last several years and handed it to the Wall Street establishment. Conventional wisdom dictates that the Fed will someday have to remove a large portion of that money -- and that’s the real trick.

To do so the Fed can’t simply reverse the transaction it used to inject the new cash into the system (e.g. toxic assets for cash) because they don’t want banks to become more risky in the face of global crisis and recession (which would happen if toxic assets were transferred back to banks.) Instead, the Fed will have to sell U.S. Treasury securities to banks to remove the currency from bank balance sheets. In order to turn those securities back into cash, banks will have to sell those securities on the open market. And if there is insufficient demand for them market interest rates will move higher (to attract buyers) and banks will receive less cash for the securities that they just purchased from the Fed (because bond values fall when yields rise).

And this is how things will get away from the Fed.

Of course, they think they have it figured out. The Fed intends to unwind QE during the next crash, when the world is a mess and all major capital investors and governments around the world are looking for safety -- a.k.a. U.S. Treasury securities. They’re betting that it will be this increase in demand that will keep interest rates from getting away from them.

But there will be too much pressure behind their finger in the dike.

A spike in U.S. interest rates will shock the world. Emerging markets will take a dive and fragile governments (like Greece) will be pushed over the edge. World currencies will plummet, and the Euro will most likely collapse. American banks will again be stressed, as stock values and bond portfolios spiral out of control. And before you know it, boom! 

As mentioned in SURVIVING THE NEXT CRASH, major corrections generally occur at the end of presidencies when the chief executive has less control over fiscal and monetary policies. But it’s also usually because stock markets have risen so dramatically and unwarranted that valuations must be flushed out, and seemingly do so to clean the slate for the next presidential administration.

Let us not forget that the markets are way overdue for a good purging; the S&P 500 has averaged 19% gain per year since Obama took office. Nominal GDP has advanced just 3% per year under a new and expanded definition of market activity. Stock market strength via the 15-51 Indicator has gained 353%, or 51% per year, during the same time. That’s a crazy amount of inflation compared to GDP growth. Take a look below.


A friend said to me the other day, “Hey Dan, the stock market hasn’t gotten off to a start this bad since 1929.”

I replied, “Yeah, and it’ll probably end the same way too.”

Markets correct all the time, and sometimes the stars are aligned for a volatile year and one big APROPOS ENDING.

Expect it, plan for it, and capitalize on it.

Stay tuned…

  The road to financial independence.


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