Dan’s Blog

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.

Another Year's Gone By: 2015

Dan Calandro - Saturday, January 02, 2016

Stock market strength was humming along when December began; the 15-51 Indicator was up 9.5% for the year and at an all-time high (113,993). But then Janet Yellen raised interest rates and Santa Claus failed to deliver a rally. Though the 15-51 Indicator posted a respectable year-end gain (+6.3%), the other major market indexes ended in a whimper. The Dow Jones Industrial Average ended down -2.3% for the year and the S&P 500 lost a fraction (-.7%). See below.

While the 15-51 indicator performed well overall, performance by industry was all over the map. Of the seven total industries, four posted gains and three posted losses. The best performing industry was Technology (+22%) and the worst was Energy (-14%) --which stands to reason, as oil and gas prices are down some 50% in the past year or so.

But you don’t hear the clamoring to tax the hell out of energy companies now, do you?

According to some it’s okay for oil companies to earn substantially less money during these times but it’s not okay for them to make it up when things turn around. This mindset fails to appreciate the extensive amount of investment energy companies have to make and how risky those investments actually are.

It’s amazing how so many people fail to grasp how long it takes to procure oil, refine into a hundred different blends, and then distribute it throughout the entire country -- all the while navigating the most regulated operating environment in the global marketplace. They think it’s easy, and that it happens overnight -- which is so not the case. It is the painfully long lead-time to profit that makes oil companies so vulnerable to major price/cost fluctuations, both up and down, despite their sophisticated hedging strategies and tactics. And that’s what got them this year.

The performance for the other five industries shook out as such: Consumers Staples (+17%), Financials (+11%), Consumer Services (+9%), Industrials (-7%), and Basic (-8%).

Technology stocks in the 15-51 Indicator can be broken down into two classes: Personal (ie: Google) and Industrial (ie: Cummins). These two classes couldn’t have performed more differently in the year. Personal technology gained 38% in 2015 while Industrial technology lost -14%. Remember, the total industry grew at 22% f0r the year. Take a look at the dichotomy illustrated below.

The performance in this industry is a case in point for diversification. It proves that with solid construction you don’t have to be perfect with stock selection to still produce well above-average returns.

The dog in the above allocation was Cummins, which was down a significant 38% for the year. But I’m not worried about Cummins as a worthwhile investment -- even in the face of a wave of downgrades from major brokerage houses. Cummins is a solid company operating in a shoddy economy. Business investment was down significantly in 2015, and that’s a significant portion of Cummins’ business.  

Other 15-51 sectors to note for 2015 are: Healthcare up 17%, Retail added 8%, Consumer lending gained 19%, Automobiles advanced 8%, Apparel gained 30%, and Capital equipment lost -13%.

And if stocks ended the year in a whimper -- gold and bonds ended in a full blown bawling. Gold was down again this year (-11%) and yields increased by 15%. Bonds move in the opposite direction as yields. See below.

The coming year is a big one: the U.S. central bank is tightening money and raising interest rates while the rest of the world is doing the opposite; the fragile global economy continues to soften even though energy prices are at ten year lows; most of the world is at war; and America is gearing up for another hotly contested presidential election where the constituents are more angry at the ruling class than ever before in my lifetime.

Significant change is in the air.

As stated in SURVIVING THE NEXT CRASH, I would be shocked if a major correction didn’t ensue in 2016 or just as Obama leaves office. When that happens, the trends shown below will reverse. 

Gold corrected to the downside shortly after the economy recovered from recession, when at the same time stocks made a bold move to the upside -- bolder than both logic and reason would rightfully dictate. (But hey, that’s what corrections are made of.) Gold and stock values will again crisscross when correction takes flight (stocks down and gold up).

Yields remain at historic lows. The 10 Year T-Note is still only 2.25% and it hasn’t moved since the Fed finally raised rates a couple of weeks ago. If the economy was as strong as the mainstream wants us to believe the 10 Year would have been around 6% for years now. But no, it’s still in the basement.

In fact, yields won’t be able to get that high (6%) under positive economic condition this time around. The world can't handle it. Instead, yields must wait until the aftermath of the next hell -- when a global devaluation of money and debt brings about the mother of all corrections. It will be that adjustment that will force yields to levels not seen since the 70’s and 80's. Fed action will be impotent. 

And for those investors thinking that the stock market isn’t that overvalued -- maybe a little bit, but not that much -- beware! Remember how easy it is to manipulate the market indexes and how much free capital was given to the Wall Street establishment to do just that. Obama’s boom -- the QE boom -- has been used to inflate the stock market balloon so much further than ever before that the next bust has no choice but to be the worst one in history.  

Whatever causes a boom suffers the most during the according correction, like technology did during the Internet boom and housing did during the subprime financial crisis. 

The QE boom is a money and debt boom, so they will suffer the most during the next correction. And the stock market will again go for the ride -- this time downhill.

Those who have read my book know the 15-51 Indicator portfolio as well as I do. They know it is a good portfolio, not a great one. Its purpose, simply, is to indicate the performance of stock market strength, which it reliably does. That’s it.

But the 15-51 Indicator has another key benefit. Because the establishment or mass media does not cover it, the 15-51 Indicator is free from a majority of Wall Street’s manipulative efforts. In other words, they don’t care what the 15-51 Indicator is doing so they don’t purposely manipulate its trajectory. As a result, it provides the best gauge of stock market inflation actually present in the marketplace. See below.

The 15-51 Indicator has gained 380% during the Obama presidency, an average of 55% per year -- when economic growth has never risen to boom-like levels. In fact, GDP growth has been half the rate of the last two economic expansions. In other words, economic growth didn't push stock values up so high, inflation did. 

And you can thank QE and President Obama for that, and what comes next.

Stay tuned…

The road to financial independence.

What's Scaring the Fed?

Dan Calandro - Monday, December 07, 2015

November unemployment held steady at 5%, as 211,000 jobs were added in the month. The scuttlebutt now is that the “strong” jobs performance paves the way for the Federal Reserve to finally make a move and raise interest rates during their December ’15 meeting.

If we are to believe the mass media’s spin on this -- that the Federal Reserve suddenly has the qualifications to raise interest rates because unemployment came in at 5% for the second straight month -- then there isn’t anything we won’t believe.

The unemployment rate has averaged just 5.3% for that past twelve months. The economy has grown steadily year-over-year, albeit meekly, for several consecutive years. Banks have consistently tested to be solvent in a post-crash context, and the stock market has regained its footing after the scare China put into the world in August. Yields have jumped and gold remains weak -- consistent with a booming economy and strong dollar -- so all is hunky-dory, right?

Why, then, is the Federal Reserve so scared to raise its core interest rates?

Everyone knows that legitimate economic booms can easily handle higher interest rates while maintaining robust growth. So what’s the big deal now? Why is Fed chairwoman Janet Yellen so tentative to raise rates from nothing to a quarter-of-a-point?

First things first, it’s hard to consider that the number of jobs added and the unemployment rate are “strong” as long as labor participation remains at levels not seen since the 1970’s. To be specific, the last time participation in the labor force was as low as it is now (62.5) was during Carter’s malaise in October 1977. Since that time labor participation averaged 65 during the Reagan/H.W. Bush expansion, 67 during Clinton’s tech boom, and 66 during the housing boom under G.W. Bush.

That, along with the weakest post-recession GDP growth since the last Great War, makes Obama’s QE boom the worst performing expansion in modern history. And while that may initially sound like a political statement, “Obama’s QE boom” is actually a factual descriptor.

Consider that in the first seven years of his presidency, Barack Obama has received 100% of every budget element he has requested. Not even Clinton was so lucky. Therefore, the operating activity during Obama’s term is entirely his -- and he can’t blame Congress for spending frivolously, like G.W. Bush can and did.

So the Federal Budget deficits incurred under Obama’s tenure are his and his alone. He asked for them, and he got them, unencumbered. 

Recall the history and purpose of quantitative easing (QE)…

The Federal Reserve, a supposed non-partisan group, is charged with managing U.S. monetary supply and carrying out interest rate policy. They created and employed QE to keep interest rates low in the wake of the 2008 crash, when U.S. central government went on a historic spending spree that still hasn’t ceased to this day. The purpose of this spending effort was to artificially, and temporarily, lift the free market economy out of recession.

The byproducts of this massive government spending program was unprecedented budget deficits that in turn created an unprecedented amount of new government debt (a.k.a. U.S. Treasury Securities).

But there wasn’t enough demand to service that debt and keep interest rates low. So the Federal Reserve stepped in by printing new money. That new money was forced through Wall Street banks that were then mandated to buy U.S. Treasuries with a significant portion of the new money.

In essence, the Federal Reserve created new demand for U.S. Treasury securities by printing new money -- this to keep interest rates low -- because at the time global capital was frozen or dried up. So without the new Fed demand interest rates would have naturally risen to incentivize investors to buy U.S. Treasuries. But the Fed didn’t want that. They wanted low interest rates. And as the Obama administration continued to pile up massive trillion dollar deficits year after year, QE became the mechanism to fund his government.

Regardless of whether he started the practice or not, the QE boom is Obama’s -- just as the housing boom was G.W. Bush’s, and the tech boom was Clinton’s.

It might also be helpful to note again that the Obama administration has changed the definitions of many benchmark fundamentals, like the calculations for the unemployment rate and Gross Domestic Product. They did so to make things look better than they actually are -- to mislead the public -- because let’s face it, most people don't talk about the unemployment rate and tie it to labor participation in the same breath. As a result, a low unemployment rate like 5% serves as a litmus test for the entire labor market and economy -- 'at 5% everything must be good.'

But Fed chairwoman Janet Yellen knows the whole story. She knows labor is weak, economic growth and value are fragile; and she knows the quagmire that QE created. She knows the world is a mess and getting weaker and more unstable. And she also knows her interest rate move will have significant global consequences.

There’s no doubt Yellen is torn.

By rights the Fed should have moved years ago. According to government benchmarks unemployment has been under control for years; economic growth has been steady since recovery in 2010; and the Fed’s low interest rate policy had run its course several years ago, and has actually been hindering growth and lending since. But the Fed didn’t move. Not because it wasn’t good for America, but because they were scared of the global ramifications. And they are still scared today (see: THE FED’S MISPLACED PRIORITY for more info).

So the majority of the rate dilemma is that Obama’s QE boom has been all sizzle and no steak. It has failed to produce an economy that encourages work, profit, and investment. And unfortunately the world followed his lead, which is why the much of the world is suffering from the same kind of quandary -- regardless of a few seemingly strong fundamentals (like the unemployment rate).

But the heart of the issue is that so many central bankers in the world today believe that banks actually create jobs -- that somehow low interest rates are the pathway to long-term market viability -- and that cheap and easy money policies can actually lead to prosperity.

Indeed, every borrower wants cheap money -- but banks must be willing to lend at those low rates. Remember, banks no longer have to lend money to earn profits. They can instead focus their efforts in the more profitable areas of investment brokerage or insurance.

This is not to mention that many businesses have been unable to borrow money at these historically low rates due to the massive amount of industry consolidation that took place in the wake of the ’08 crash. This should not be overlooked as a significant growth impediment for the foreseeable future.

Think about it. Banks got much larger over the last several years, and as logic would infer, big-banks prefer to do business with big-businesses. But small and midsized businesses are the ones that fuel the vast majority of economic growth and viability. Yet consolidation has squeezed them out of the debt markets.

There are so many reasons for the economic fragility that is making the Fed so apprehensive, it is impossible to mention them all here. But there’s one more point I’d like to highlight before relating these conditions to investment activity.  

QE was a tool used to increase the size and scope of government under the guise of "helping" the economy fight the post-crash recession. When government increases at such a rapid pace, businesses get bigger through consolidation to balance the power in the marketplace. In a bigger world, individuals get smaller. They lose worth, opportunity, and independence.

For instance, in the wake of the ’08 crash government programs and regulations like TARP, HARP, and DODD-FRANK, propelled the financial industry into a wave of consolidation. That lead to local and community banks being sold off to bigger players because they found it impossible to compete in the environment created by big-government regulators -- which ultimately hurt individuals and small businesses.

The same thing is happening right now in the healthcare industry. The big-government program known as the Affordable Care Act or ObamaCare (which had nothing to do with care or making it affordable) has spurred a wave of consolidation throughout the industry: Aetna is planning to buy Humana, Anthem is seeking to buy Cigna, DaVita Healthcare Partners is buying the Everett Clinic, Walgreens is acquiring Rite-Aid, and Allergen is in a deal to merge with Pfizer, and the list goes on and on.  

And what is the individual left with?

Less options, worse coverage, and more costly premiums, co-pays, and deductibles.

All of this market chaos makes simple quarter-point interest rate decisions seem like rocket science -- even to the Fed. And that’s the same reason why the markets look so confused right now.

Let’s take it step by step.

An interest rate hike is a tightening monetary event -- a strengthening of the value of money, as dollars cost more to borrow, and dollars earn more interest on bank deposits. In other words, stronger dollars earn more money for their owners. Weaker dollars earn less.

In strong dollar environments, when economies are humming, and interest rates and stocks are rising, the value of gold (long a dollar hedge) falls. This dynamic is indicated in the short-term view below.

From this eleven-month view it looks as if the economy is entering a high growth condition accompanied by a strong dollar, as yields are up, gold is down, and the stock market looks poised to move higher.

But that’s not where we are in the cycle. The economy is slowing, yields are still at historic lows (the 10 Year Yield is at just 2.25%), gold has been in correction mode since 2011 (it’s just $1,083 an ounce, GLD is $104), and the Dow Jones Industrial Average is just 500 points off its all-time high (18,312). The actual trend is much more clearer in the wider view shown below.

If the Fed acts now it will once again be acting too late -- "the market" has topped out, the economic growth trend is weakening, sovereign states have accumulated way too much low interest debt that they cannot pay back, stocks are high, gold is low, and yields have a long way to go before they can be considered “normal.”  Raising them now will only push the next major correction closer to commencement -- and it’s going to be an ugly global nightmare that will cause a heck of a lot of pain for everybody -- especially with an empty medicine cabinet at the infirmary.

And that’s what scares the dickens out of Dr. Yellen and her hospital staff at the Fed.

Stay tuned…

The road to financial independence.™

The Stock Market's Costume

Dan Calandro - Sunday, November 01, 2015

Stock market strength has fully recovered from the corrective shortfall it experienced in August. The S&P 500 is still off 446 points, or 2.5% from its previous high, while the Dow Jones Industrial Average (just an abysmal performing portfolio, see: WHAT’S WRONG WITH THE DOW -- AND HOW TO FIX IT, for more info) remains 846 points off from its all-time high, or 3.7%. See below.

The benefits of 15-51 construction are abundant: it goes up faster and higher, corrects less, and recovers faster and higher than any other portfolio model. That makes it easier to make more money with less dollars at risk -- and isn’t that the objective?  But I digress…

As mentioned in previous blogs, START SPREADING THE NEWS and APPRECIATE THAT, the August correction was just the “first salvo in the next major corrective cycle.” I cautioned investors that “major market corrections like [the last one in 2008] take time to metastasize…” and reminded them that, “The first market rattle of the last major correction occurred in February of 2007 – eight months before the market topped, and eighteen months before the correction began its severe decline.”

I have pointed out many times how similar this stock market build-up is to the one that led to the ’08 crash. Another similarity can be seen again by how the stock market reacted after the first mini-correction of this cycle.

Take a look at the chart below; it shows how the Dow reacted after the first sign of trouble that hit the market in February 2007, when HSBC announced a surprise $4 billion charge related directly to subprime mortgage defaults. 

Just to remind you again, the Dow went on to hit its all-time high six months after this chart ends.--Not because the subprime mortgage dilemma went away but because media pundits and market “experts” rationalized that HSBC was just an “isolated situation” and that subprime defaults were not a systemic problem -- even though bank after bank continued to fail.

That’s a very similar condition to today. The mini-correction that occurred in August 2015 was largely driven by the dramatic slowdown in economic output in China that seems to have gone away just two months later -- at least where the stock market is concerned. Take a look at the chart below that shows how the Dow reacted after the mini-correction in August.

To draw a broad comparison to the two corrections, the Dow largely recovered to its previous high just two months after major negative news hit the market both times. Even though the 2015 mini-correction is choppier and more dramatic than the one in 2007, the timeframe and level of rebound are very similar. 

And just like in ‘07, this stock market recovery hasn’t been driven by a turnaround in Market condition. This is corroborated by the Wall Street Journal which recently pointed out, “An indicator of Chinese factory activity showed an unexpected contraction in October, denting hopes that the world's second-largest economy will post a fourth-quarter turnaround.”

It cannot be underestimated how important China was in the wake of the ’08 debacle. As central governments around the globe began spending ungodly amounts of money that they didn’t have, China was there to lend them a significant portion of that money. Today, China still has more than a trillion dollars of U.S. debt. Without Chinese demand for debt securities, it would have been much harder for world bankers to have kept interest rates low.

Explosive Chinese growth in the wake of the ’08 crash also helped a wide array of U.S. firms, from raw material suppliers, to consumer products companies, to professional service firms. Without Chinese demand lifting a substantial portion of the U.S. market, corporate profits, the job market, and the stock market, would have all taken much longer to recover.

Today that safety net is showing signs of wear, and can’t be counted on to bailout the world market the next time the mess hits the fan.

That’s a significant development.

And just like when the HSBC news hit the wire in February 2007, the Chinese problem of today isn’t an isolated situation and hasn’t gone away. Instead, the Chinese situation is emblematic of a weaker and more fragile global economy that is in dire need of freedom, leadership, and reform. Yet despite the absence of these enhancements, the stock market has swiftly recovered.

The lack of robust gain this year doesn’t mean that the stock market isn’t over-valued.

Consider that so far this year the Dow is down 1%, the S&P 500 is up 1%, and stock market strength via the 15-51 Indicator is up 8% -- but all three stock market indicators remain near all-time highs. The pitiful Dow, for instance, is off just 3.5% since its May 19, 2015, high (18,312). It’s bottom this year is 2,000 points lower than where the Dow stands today (15,666).  In other words, the stock market has largely regained the high valuation it lost when news of the economic slump in China hit the wire, making it seem like the Chinese news is isolated and no big deal.

Today’s stock market is a wolf in sheep’s clothing. Don’t be fooled by the costume! 

Take a look at these recent Wall Street Journal headlines:

  • U.S. Companies Warn of Slowing Economy
  • Retail Figures Mostly Disappoint
  • Consumers Spend Less Amid Soft Wage Gains
  • U.S. Employment Costs Rise, Suggesting New Wage Pressure
  • U.S. Consumer Spending Shows Caution

Add to this the recently released third quarter 2015 GDP metrics, where it was announced that 3rd quarter Real GDP growth came in at just 1.5% growth -- that’s 62% less than the rate posted in Q2, and 65% less than the rate during the same period of last year.

Weak and uneven growth is a staple of the Obama economy. In fact, never before in history has the stock market been so consistently strong with such a weak and fragile underlying economy.

Think about it this way…in the seven years of the Obama administration the stock market is up on average 11% per year; while Real GDP has averaged just 1.8% growth per year. Compare that to the first seven years of the Bush administration, when growth in Real GDP averaged 2.4% per year and the stock market averaged just 3.9%.

The stock market is so much more over-valued now than it was seven years into the Bush years it isn’t even funny. That’s the reason the mini-correction in August was so much more severe than the one in February 2007. (FYI, the Feb. ’07 correction trimmed 6% off the Dow Jones Industrial Average from its previous high, and the Aug. ’15 correction shaved 14% from the Dow’s previous high value.)

The more over-valued a market is the more severely it corrects. That’s just the way it goes.

And that’s the dynamic you can expect during the next major correction -- a sharper and more severe downward move followed by a slower and rockier road to recovery.

Stay tuned…

 The road to financial independence.

Appreciate That

Dan Calandro - Sunday, October 04, 2015

Not much has changed since START SPREADING THE NEWS was posted. The U.S. economy remains weak and uneven and the stock market reflects it. The Dow Jones Industrial Average is still off 10% from its all-time high (18,312) reached on May 19, 2015.  The Dow is down 8% so far this year and the S&P 500 has lost 5%. Only stock market strength is in positive territory for the year; the 15-51 Indicator is up 2%. See below.

The U.S. market is sloppy indeed -- but it’s in great condition compared to the rest of the world. Take a look at these recent WSJ headlines:

  • Economists React to the September Jobs Report: ‘Nothing Good to See Here’
  • Flat Personal Consumption Expenditure Latest Sign of Weak Inflation
  • What Do U.S. Economists Think of Official Chinese Statistics? ‘Only a Fool Would Believe Them’
  • Analysis: Global Turmoil Impacts U.S. Job Growth
  • Japan Sees Some Slowness in the Economy
  • Eurozone Producer Prices Fall Sharply
  • French Statistics Agency Forecasts 1.1% GDP Growth in 2015
  • Russia Lowers Ruble (their currency) Forecast
  • Fed’s Dudley: ‘A Long Way’ From Having Bubble Fighting Tool Kit

My goodness, the world is a mess. And it begins and ends with America.

President Obama came into office promising to drastically increase U.S. exports -- to be accomplished, no doubt, on a weak monetary policy platform. But the rest of the world followed suit and today U.S. exports are again at the low levels experienced at the bottom of the Great Recession.

Speaker of the House John Boehner resigned and his replacement looks to be just as stupid. Heir apparent, Majority Leader Kevin McCarthy, suggested that the Benghazi and email investigations into Hillary Clinton’s performance was more about politics than it was about finding facts and protecting national security.

It’s hard to take American government seriously. (Vladimir Putin certainly doesn’t -- but more on that in a bit.)

The slowdown in China shouldn’t be underestimated. It’s worse than the media’s spin and looser money polices haven’t helped. China is in a bad way, and when the global bubble bursts (which it will, of course) the world won’t be able to rely on its growth for a bailout.

Like China, both Japan and the Eurozone followed the American lead and implemented weak money policies like QE -- and, as predicted in these blogs, neither effort has produced sustained economic growth and/or moderate price inflation. Remember, steadily rising prices are a sign of economic strength. Falling prices indicate weakness.

Earnings of the S&P 500 grew less than 1% in the second quarter of this year and many analysts are predicting a 3% drop in third quarter earnings. As a business owner I can corroborate that projection. My company experienced its softest quarter of growth in the third quarter since the Great Recession.

The world economy is in shambles.

Indeed, a weakening global economy will produce fewer jobs, and fewer jobs will produce less consumer spending, which of course drags down global GDP. All of that translates into weaker corporate earnings, more stock market volatility, and lower price valuations. 

And none of this is to mention the status of global conflict and the weakening leadership position of the United States.

The Russian economy is a disaster, and Putin is unwilling to do what is necessary to turn it around. After all, free market policies are enemies of the State. As such, he turns to militaristic policies to build national pride and embolden his power structure. His seizure of Crimea, for instance, boosted his domestic standing substantially. And now he is making an even bolder statement in Syria.

It isn’t Russian involvement in Syria that is so striking but instead how Putin has gone about it. Under the guise of battling ISIS, he sent a three star Russian general into the U.S. Embassy in Iraq and told the Americans to remove their warplanes from Syria. In other words, get out; we are here now.

In approximately one hour after that meeting Russia began bombing positions inside Syria -- and many reports indicate that initial targets were not of ISIS but instead positions of the U.S. backed rebels.

That’s Putin spitting in Obama’s eye.

A weak America is not good for the world.

Neither is an emboldened Russia.

Over the years Russia has grown closer to Syria and Iran, who by the way, have assumed a much larger role in Syria with the reinvigorated Russian presence. Iran is a largely Shiite nation. Syria, though ruled by the Shiite Assad, is largely a Sunni populous. You see, the civil war in Syria is a religious war between Muslims -- Sunni and Shiite -- and Russia is on the Shiite side.

The Russian attempt here is to arrest Middle Eastern influence from the U.S. and prove Russia as a more appropriate and trustworthy ally for the region. 

They can succeed because the U.S. has a haphazard and confusing Middle Eastern position. Think of this...In Syria, America is supporting the Sunni’s on one hand but against the radical Sunni faction, ISIS, on the other. In other words, America is fighting against the Shiites halfheartedly. In Iraq, a largely Shiite country, America is fighting on the Shiite side along with Iranian affiliates in a fight against ISIS (Sunni). In yet another venue, American ally and major oil producer Saudi Arabia (largely Sunni) is fighting Shiites in Yemen (who are also backed by Iran) but Saudi Arabia has no legitimate U.S. support for the cause.

The Middle East, and America’s policy to it, is a total mess.

Yet oil is still just $45 a barrel, and gasoline prices are lower now than they were at the bottom of the Great Recession. Gold, too, is lower than logic would expect. But yields are on the right track for a Market environment like today. They’re still at rock bottom levels and falling. See below.

When things get scary -- and investors are scared right now -- there is increased demand for safe investments like U.S. Treasuries. That’s why I don’t expect U.S. yields to change significantly when the Fed finally decides to raise interest rates. 

Nothing spurs more demand for U.S. bonds like an impending crisis -- a crisis, by the way, that some Fed governors don’t feel capable to fight. And who could blame them? Sovereign debt is at unprecedented and unsustainable levels. During the next crisis governments won’t be able to print ungodly amounts of money and debt to leverage the economy out of recession like it did the last time -- and the Fed knows it.

That’s what makes the next crash so scary. Governments won’t be able to “stimulate” the economy through massive central planning spending; and they won’t be able to keep global yields and inflation low while they fight the good fight. China won’t be able to carry the global economy out of recession with booming growth. The Euro won't be able to survive, as major sections of the Eurozone will fail and bring about a global currency and debt devaluation. And the wars in the Middle East will expand.

Not pretty.

That’s the reason the stock market corrected so sharply in August. The environment is more risky and inching closer to major correction. That causes the stock trend to be more volatile, more dramatic, and less willing to test previous highs. See the difference below between the most recent downward correction versus all the previous ones in the most recent two years. 

It looks different because it is different. It was the first salvo in the next major corrective cycle. Appreciate that -- and SURVIVE THE NEXT CRASH.

Stay tuned…

The road to financial independence.

Start Spreading the News

Dan Calandro - Sunday, August 23, 2015

Stocks took a beating last week as all major stock market indexes (the Dow, S&P 500, and 15-51 Indicator) lost 6%. Stock market strength via the 15-51 Indicator is the only index still in positive territory for the year. It’s up 2% year-to-date even after this most recent correction. The Dow and S&P have lost 8% and 2%, respectively, so far this year.

Yields have also fallen by a sizeable amount in the past week, ending 7% lower. And even though gold added 4% in the last five trading days, it’s still down 2% for the year. Below is the ugly chart of year-to-date activity.


The Dow Jones Average hit its all-time high on May 19 of this year (18,312), and since then has dropped 1,853 points, or 10.1%. Some people define a 10% move as a “correction” and a 20% fall as a “Bear Market.” I find these arbitrary definitions not only confusing, but silly.

Corrections are simply a price condition that can happen at any time, in either direction (up or down), for any reason, and in any denomination – 5%, 10%, 20%, or 30%, etc. For instance, the S&P 500 moved 6% this week. That’s a correction – even though the S&P is down only 7.5% from its all-time high (2,131 reached on May 21, 2015). Anyone saying anything different is just being silly.

Bull and Bear Markets are much different than simple price corrections – they are market conditions. Bear Markets are when stock prices lead the market (a.k.a. the economy) downward. Bull Markets are when stock prices lead the economy higher. See the difference? Bear Markets relate downward stock prices to a receding economy, and Bull Markets tie upward prices to an expanding economy.

To better illustrate the difference between corrections and Market conditions we’ll use the run-up to the last major correction to make the point clear. Below is a chart that starts at year-end 2005 (the heat of the housing-boom) and extends to the essential bottom of the last major correction, February 2009. Three critical points are highlighted along the Dow’s trend-line during that time: the market’s top (indicated by a red square), a 13% downward correction from the top (signified by a red diamond), and a further 7% corrective move commencing a Bear Market (signified by a red circle). See below.


As you can see, the 13% downward move signified by the red diamond is clearly a negative price correction. And though it easily could have been called a Bear Market based on its trajectory (the Dow’s trend looked destined to lead the economy lower) confirmation of the Bear Market didn’t arrive until July 2008 (the red circle). That’s when the Dow crossed under the GDP trend-line. At the commencement of the Bear Market the Dow Average was coincidentally down 20% – but as you can see, prices continued to correct another 23% before reaching bottom. The whole move was a “correction” to the downside. It began in October 2007 and didn’t end until February 2009.

A Bear Market lasts for as long as the stock market averages underperform economic output as measured by the long-term GDP trend-line. In other words, the Bear Market doesn’t end until stocks start to consistently lead the economy higher (a.k.a. a Bull Market). This transition, from one type of market to another, is never an even process.  In fact, the stock market was littered with up and down corrections from the time the Bear Market arrived (July 2008) until it finally ended (around June 2013). See below.

Downward corrections do not always make Bear Markets just as upward corrections do not always make Bull Markets. For instance, it would be foolish to ascertain that the market move from March 2009 (the market bottom) to July 2010 (the first yellow diamond after the market bottom) was a Bull Market simply because stocks advanced from 6,148 to 10,772. At that point stocks were still 4,000 points off their high and well below the long-term trend-line of Nominal GDP. (The DJIA is a nominal trend-line.)

The yellow circle all the way to the right of the chart above is where the new Bull Market commenced (June 2013) – which is the point at which stocks began to consistently lead the economy (GDP) higher.

So why do I go through such great pains to make this point clear?

Because it is important to understand what happened last week. It was a simple price correction – and a minor one at that. Sure, six percent is a big move for a five-day trading week. No doubt about it. But it’s important to keep it in perspective. Last week’s 6% move was a minute event in the grand scheme of things. In fact, the Dow’s 10% correction is just as miniscule, a proverbial blip on the radar screen.

Consider that “the market” is still valued higher than the peaks of the tech and housing booms in Real terms – and the modern economy is nowhere as robust as they were. (This is explained more thoroughly in my new piece, SURVIVING THE NEXT CRASH, which can be downloaded for free on my homepage.) And, ironically, the Dow is currently trading at the same exact multiple as it traded to Nominal GDP in October 2007, just before the last major corrective cycle began. (How’s that for an eerie coincidence?)

The chart below drives this point home by bringing the above trend-line up to date. It’s a 10-year look from year-end 2005 to present day, August 21, 2015. This timeframe puts last week’s move into proper context. See below.

Last week’s 6% drop looks like no big deal in the chart above – and that’s an accurate assessment. And while last week’s move was an insignificant amount in the big picture, it was still a major warning signal. A move of that size in such a short amount of time is the equivalent to a quick, sharp chest pain. It should seize attention.

And the reason it should capture attention is because stocks should really be trading close to “fair value” – that’s 2,000 points from where the Dow stands today after the 6% correction – which would represent a 20% correction from its recent top. But that 20% move would not automatically present a Bear Market because stocks would be trading at fair value and above Nominal GDP’s long-term trend-line.

To be sure, however, a 20% correction can certainly indicate that a Bear Market is on the way. Recall the major issues facing the global economy. Growth has been consistently weak and uneven at all corners: China is in a shambles. Europe is a disaster. The Middle East is at constant war. Emerging markets are at high risk. And the fragile U.S. economy is producing frail growth and statistics that have been inflated by trillions of dollars of newly printed money via QE that has produced an abysmal ROI and amassed the largest amount of national debt ever recorded in world history.

That said, it is totally reasonable to expect stocks to continue downward and for a Bear Market to ensue. In fact, current market indicators and dynamics are acknowledging this threat.

Take oil, for instance. It is down below $40 per barrel for the first time since the heat of the Great Recession. The drop in oil is reflective of lower global demand and the unwillingness of producers to curb supply. Let us also not forget that terror organization ISIS uses oil proceeds to fund their war effort, as does global antagonist, Russia. These threats provide extra incentive to keep oil wells pumping and prices low. Add to this the specter of Iranian oil supplies flowing into world markets that were freed by the new nuclear agreement – and $30 per barrel seems almost impossible not to materialize.

Lower oil prices are a double-edged sword. While the economy likes the revenue savings to spread around other market sectors, and therefore provide economic benefit, the current dynamic is different. In this instance, lower oil prices indicate soft demand and economic weakness. In other words, consumers aren’t spreading savings from energy products to other sectors of the economy. This is corroborated by what’s happening in China.

China’s manufacturing base is shrinking and growth is slowing substantially, and in a surprise move last week, they abruptly devalued their currency in hopes to reverse their downward spiral. In other words, China made this move because internal economics are going south and global demand is weak. A devaluation of their currency, in theory, would make Chinese products cheaper and thus increase demand and growth.

But there’s a problem with that thinking. First, most world governments are also devaluing their currencies at the same time. This minimizes the potency of the Chinese move. And second, many Chinese suppliers are raising their prices in the face of their government’s currency devaluation, which also produces headwinds to the Chinese currency move. 

Again, currency games like this and QE cannot fix Market problems.

Perhaps that is the reason global stock markets are selling off and U.S. bond yields have dropped so dramatically. Remember, yields decrease when bond demand increases. The recent drop in yields (along with lower stocks prices) indicates a skittish investor populous migrating from risk to safety. Gold’s recent reversal corroborates that dynamic. See below.

The first market rattle of the last major correction occurred in February of 2007 – eight months before the market topped, and eighteen months before the correction began its severe decline.

Major market corrections like that take time to metastasize, which luckily gives investors plenty of time to act before it’s too late – that is, if investors are listening to what the markets are saying.

Last week was just the beginning – and the worst is yet to come.

Spread the word, and stay tuned…


The road to financial independence.™


What's Wrong with the Dow--and How to Fix It

Dan Calandro - Friday, August 07, 2015

The Dow Average has been anything but average recently. In fact, the S&P 500 has consistently outperformed it over the last one, two, five, and ten-year periods. That makes the Dow Jones Industrial Average a below-average portfolio.

What’s the problem?

Perhaps the greatest benefit of a small portfolio is its ability to turnaround quickly and provide rapid growth after corrections. As such, one would expect the Dow 30 to have greatly outperformed the 500 stocks of the S&P since the bottom of the last correction (March 2009). But that hasn’t happen. See below. 

During this six-plus-year period the S&P outperformed the Dow by 23 percentage points (189% versus 165%), or 4% per year. That’s absurd.

A 500 stock index should never consistently outperform a 30 stock portfolio. Never. Instead, the Dow’s performance should have been somewhere between the S&P 500 and the 15-51 Indicator (see below.)

The Dow, right now, should be somewhere over 21,000. Not only can it not get there, but it also can’t beat the S&P 500. Why?

The DJIA has structural issues, and more specifically, suffers from poor stock selection.  Think of this…

Of the Dow’s 30 components only 12 have outpaced the S&P 500 over the last year – and one-third of those are financial stocks (Goldman Sachs, Visa, Travelers Insurance Group, and JP Morgan Chase). In fact, the Dow currently has five financial stocks, which ranks that industry 4th in priority order. But because the financial industry accounts for the majority of the Dow’s gains, such an allocation signifies that the financial industry contributes 1/3 of all economic growth in America. That isn’t even close to being accurate indication.

The Dow’s highest ranked industry is technology, with 7 stocks that amount to approximately 23% of the entire Dow portfolio – and 5 of those seven stocks have underperformed the S&P by huge amounts (IBM, United Technologies, Microsoft, Intel, and Cisco Systems). As stated in my book, technology is about the future – and much of those five Dow tech-stocks are about the past. This industry clearly needs some updating.

In the Dow’s second ranked industry, consumer services, half of its components have consistently underperformed the S&P 500 (McDonalds, Wal-Mart, and Verizon) – as did 4 of the six consumer staples stocks (Coke, Johnson & Johnson, Procter & Gamble, and Merck). Needless to say, these industries also need some tender-loving care.

This is not to mention that all of the Dow’s energy and basic stocks have also failed to meet the S&P’s performance (ExxonMobil and Chevron, Caterpillar and DuPont, respectively.)

The Dow has become a pitiful collection of mediocrity, and the proverbial cherry on top is General Electric, the only original Dow component still remaining in the portfolio, which hasn’t sniffed a reasonable return since Jeff Immelt took office. He is clearly no Jack Welch.

Add them all up and a stunning 18 out of 30 stocks, or 60%, of the Dow’s components have underperformed an easy-to-beat S&P 500 index.

That’s an embarrassment.

It’s time for the people managing the Dow to make some drastic changes. It’s time to eliminate the redundancies and upgrade the portfolio’s brands and components. It’s time to put nostalgia aside and finally say goodbye to stalwart names like IBM and General Electric. Yes, they’ve been there for a long time. But who cares. Investment is a performance business – and the S&P 500 is kicking the Dow’s behind. (Again, there’s no good reason for a 500 stock index to consistently outperform a 30 stock portfolio.)

The main objective of LOSE YOUR BROKER NOT YOUR MONEY is to teach investors the art of portfolio construction and how to build a superior one. If investors understand the concepts of construction there is no portfolio on earth that they can’t fix and/or outperform. To demonstrate this I will use the techniques outlined in my book to make adjustments to the DJIA, creating in essence, my version of what the Dow should look like today.

Knowing that the Dow needs to upgrade itself to better reflect the modern day market, two technology moves are obvious – IBM and Cisco have to go. IBM will be replaced with a computer company for the modern era, Google (GOOGL), which will really bolster the personal computing segment (recall that Apple was added to the Dow earlier this year.) In addition, the Google move will make it easy to replace Cisco Systems with the multi-faceted Cummins Inc. (CMI), which would help diversify this industry by GDP spending class. 

In the consumer service industry, McDonalds, Wal-Mart, and Verizon, will be replaced by companies that better reflect the changing patterns of American spenders: Panera (PNRA), Costco (COST), and amazon.com (amzn) will be added.

Consumer staple Coke will be eliminated in favor of Church & Dwight (CHD) and superior pharmaceutical developer Gilead (GILD) will replace Merck.

The financial industry is a place that the Dow can upgrade by getting smaller. For instance, with Visa and Goldman Sachs in the portfolio there’s no reason to suffer with the poor long-term performance of American Express.  And as suggested earlier, the Dow currently has too many financial stocks. As a result Amex will be eliminated and not replaced.

In the industrial industry GE is out and Ford Motor Company is in, and with the extra slot created by eliminating Amex in the financial industry, conglomerate Parker-Hannifin (PH) will be added to expand this industry’s offering.

The choices the Dow’s managers have made for the energy industry is one of their most perplexing. I appreciate the wisdom of an integrated oil and gas company for the portfolio – but two of them? Having both ExxonMobil and Chevron is the epitome of redundancy. That duplication is eliminated in my version of the Dow Jones Average where Chevron gives way to Piedmont Natural Gas (PNY).

Those adjustments change 1/3 of the Dow’s components, 10 in all, and would upgrade and modernize the portfolio. And since the changes made preserved market allocations, my version of the Dow Average would remain a "market portfolio." The portfolio’s movements will prove that should it move in a "market-like" way.

Once again, the purpose of these changes is to elevate the Dow’s performance trend to where it should be – somewhere between the S&P 500 and the 15-51 Indicator.

The chart below shows my version of the Dow Jones Industrial Average placed among the other major market indexes (the current DJIA, S&P 500, and 15-51 Indicator). See below.

The changes made almost double the Dow’s output since the last market bottom in ’09 (294% versus 189%), and places the value right where it belongs – between the S&P 500 and the 15-51 Indicator – while continuing to move in a "market-like" way.

Building and/or fixing portfolios to achieve desired results is quite easy to do using the techniques of my award winning method.


Until next time...   


 The road to financial independence.

Happy 4th!

Dan Calandro - Saturday, July 04, 2015

It’s hard to believe that LOSE YOUR BROKER NOT YOUR MONEY was published four years ago today. Below are the results for the portfolio detailed on page 162 versus the major market indexes since publication.

4 Year Gain

15-51 portfolio        101%

DJIA                           39%

S&P 500                   55%



Happy 4th!

ShieldThe road to financial independence.™

Stay tuned…

Stability or Storm?

Dan Calandro - Sunday, June 14, 2015

Jun 14, 2015

The prices for stocks and gold continue to oscillate to nowhere. Both the Dow Jones Industrial Average and gold are flat for the year. While those two benchmarks haven’t produced any growth so far, stock market strength via the 15-51 Indicator has gained a respectable 5%. See below.


Now that may not look like much, but 5% in a no growth market is five times better than the average. It also might not look like much because of the way the chart is scaled, starting at 15,000 and topping out at 23,000. That’s for a reason to be shown a little later. The point to takeaway here is that all stock market indicators appeared to have based at a top value, and seem unable to build higher valuations. That’s because the economy can in no way substantiate them.

In the same vein, gold has based at a bottom valuation and seems unwilling to move significantly lower than its current value (the GLD is at $113.) Gold’s low valuation base can be seen more clearly in a chart with a longer timeframe. See below.


All of these trend lines have really flattened out over the past several months. Flattening trend-lines can be perceived two ways: as stability, or as the calm before the storm.

Stocks are indicating a no growth condition for the economy – or at best a growth rate that can’t substantiate higher stock valuations. Rightfully so. And while stock indices might appear stable, they are actually waiting for a trigger to move. Call it a calm before a storm. And where is that storm brewing? 

The bond market.

In an article entitled, Bond Yields Hit 2015 Highs Across Globe (June 10, 2015), the Wall Street Journal reported that Germany’s 10 Year yield has moved over 1% one percentThat’s big news, right?

Quietly, U.S. yields have also moved higher. Exactly two months ago the U.S. 10 year was at 1.85%. Today it’s at 2.4%. That upward move matches the 30% increase German yields have experienced. And though yields are rising, they still have a ton of room to go higher.

That’s that proverbial risk in bonds that has been mentioned in these blogs repeatedly, and most recently in, Just Ask the Greeks. Heck, you don’t have to be a rocket scientist to know that when global yields are just one point off their zero-percent bottom that they have no choice but to move higher.

When yields rise bond values fall.

And because yields have an infinite amount of space to move higher and just a point or two to move lower, bond values have and infinite amount of space to move lower and just a smidgeon of space to move higher. That’s what makes bonds such a high-risk proposition at this point in the cycle.

And why have yields moved so swiftly recently?

The world bond markets are reacting to the possibility of a major Greek default, again. And why hasn’t their problem gone away? Because the Greeks haven’t changed their operating model. They continue to burn bailout money without remedy. Every time a new agreement is reached between their creditors the problem temporarily goes away and global markets relax. Once the latest tranche of bailout money depletes, risk of default resurfaces and markets freak out – again.

A Greek default will most likely be followed by its departure from the Euro, and that will throw markets into a real tizzy.  Bond values, which run in an opposite direction of yields, are already erratic.  But investors haven’t seen anything yet. The chart below is on the same exact scale as the first one shown in this blog. This will help differentiate the perceived stability in stocks and gold versus the volatility in bonds. As stated previously, yields have been forced low via quantitative easing (QE). As a result of this prolonged artificial stimulus they have yet to find a natural base.


So here is what you have right now in the markets. Stocks and gold are flat and bond values are plummeting. Even so, bonds are not low here; and even though they are correcting doesn’t mean it is a time to buy them. They are high. And the reason they are high is because yields remain at historic lows.

The concept of Buying Low and Selling High doesn’t purport to doing so blindly. Bonds are correcting, indeed, but they are still high with much room to move lower. The same is true with stocks; they are high and have more room to move lower than higher.

Commodities that run contrary to monetary value are still low. That is to say that gold is as much of a buy at these levels as bonds are a sell. But like all investments, decisions to invest now in those kinds of markets must be long term in nature.

To put it plainly, these are the worst types of Market conditions to make money in. Everything is high risk, be it short or long term. The reason for that is the combination of extremely high valuations and a fragile underlying economy. And that won’t change until Market conditions change.

For investment, investment profit comes much easier when it is easy to make money in the marketplace – when unemployment is decreasing, labor participation is increasing, and wage growth is robust. That’s the way it goes.

Until then keep an ample amount of powder dry. It's cloudy out there and a storm is due.

Stay tuned…


ShieldThe road to financial independence.™

Just Ask the Greeks

Dan Calandro - Monday, May 18, 2015

There is a lot of confusion surrounding the bond market and yields, and there is one misnomer I feel compelled to address. A recent Wall Street Journal article entitled, U.S. Government Bonds Rise; Foreign Investors Pile into Auctions (May 14, 2015) highlights a common misconception about bonds. The author attempts to explain the recent pop in yields by citing strong demand for a recent 10 Year auction. They’re up 28% since their January low. See below.


But strong demand doesn’t cause yields to rise – it causes them to fall.  Recall that quantitative easing (QE) created new and additional bond demand in order to keep yields low – which it did. If the premise that strong demand causes yields to rise were true, QE would have raised yields not lowered them.  

Bond values fall when yields rise.

The article’s author opines, "Many investors see the [bond] selloff as a correction…They don’t expect bond yields to rise sharply given the tepid economic growth outlook …" To qualify his stance the author quotes a senior portfolio manager at Invesco Ltd. who said, "We still believe there are structural headwinds to the global economy," then the author adds, "which would contain a rise in bond yields."—And that’s the great misnomer.

To believe that yields are tied directly to economic performance – that is, weak economies produce low yields – is complete and utter foolishness. Take Greece for example; their economy is weak, and in fact, is in recession. Low yields are extremely helpful during recessions – yet their 1o year yield is 10.5% and their two year yield is 21%. An inverted yield curve is when short term yields are higher than long term yields. That’s where Greece is today – it’s inverted – despite their economy experiencing "structural headwinds."

Instead, yields are tied directly to the associated risk of default. Greece can’t afford itself and there is little doubt that they will fink on a substantial portion of their debts – the only question is when. That’s why short term lenders are demanding more than 20% interest to lend them money. They’re weak and risk of default is high, and so are their yields. In their case, a stronger economy would lower yields, as their risk of default would lessen. Not the other way around.

To invest in bonds right now is a risky proposition at the very least. To chase higher yields from borrowers like Greece is a fool’s game – and so not worth the associated risks. And at just a couple of bips above inflation, a 2% U.S. bond is just as risky. Sure American yields can dip down lower. Heck, Germany’s 10 year yield is around .67%. Indeed, bets can be placed on lower near term yields and perhaps money can be made. But that doesn’t mean the odds favor such a position.

In fact, the opposite is true. The odds for bonds are in the house’s favor because there is more room for yields to move up than down. To put it another way, there’s more room for bond values to fall rather than rise because yields remain at historic lows. In markets such as these, investors don’t buy U.S. bonds to make money. They buy them for safety and security. They buy them to not lose everything should the world fall apart.

That’s why foreign money is flooding into U.S. bonds. The United States has the greatest system of government, the strongest middle class on the planet, and is the only country to never fink on a loan obligation. And even though the U.S. is more than 100% leveraged (that is, there is more debt than economic output) risk of default is nil. For that reason U.S. yields will remain low as long as the Federal Reserve wants them low, and inflationary pressure remains mute. The level of economic output has little to do with it. After all, yields have been low in America since the Great Recession.

It’s a different story around the world. Countries like Greece are having a hard time raising money even though they offer high interest rates. But let’s face it, twenty percent interest payments aren’t worth a hill of beans if the checks don’t clear.  Greece needs a stronger economy, not a weaker one, to attract capital at lower rates.

Indeed, economic strength would prompt central bankers to raise interest rates. Such a move would be in hopes to slow growth and thwart inflation. But that’s much different from the Wall Street Journal’s pronouncement, that a sluggish global economy will contain high yields. The only thing a sluggish economy contains is prosperity. 

Just ask the Greeks. 

Stay tuned…


The road to financial independence.™

Recent Posts


Besides receiving periodic updates and alerts, subscribe to our email list and gain direct access to Dan Calandro, award winning author and inventor of the 15-51 system.™ Dan is the ultimate investment coach, and because he provides this service free of charge to his following, you can count on the most honest and unbiased investment advice offered in the industry.

  • Learn
  • Lose Your Broker
  • Knowledge is the foundation of success. Dan’s method is grounded in basic logic and common sense, and is backed by history, fact, and mathematic. It’s easy to understand, simple to use, and consistently produces superior results. Guaranteed.
  • Plan
  • Surviving the Next Crash
  • Having an action plan at the ready is a vital ingredient to transforming the next major correction into the greatest investment opportunity of your life. This captivating new piece is a great addendum to the book. Get it now for FREE!
  • Achieve
  • See the performance you can expect with the 15-51™ system! Dan’s portfolio routinely outperforms the markets by more than 600% over the long-term – and you can do it too! Click on the image to see the proof.
  • Support
  • Dan makes good on his chapter 8 guarantee by personally connecting with his readership to answer questions and coach members through the investment process.