Someone Is Spending Your Pension Money

By John Mauldin 

“Retirement is like a long vacation in Las Vegas. The goal is to enjoy it to the fullest, but not so fully that you run out of money.”– Jonathan Clements

“In retirement, only money and symptoms are consequential.”– Mason Cooley

Retirement is every worker’s dream, even if your dream would have you keep doing the work you love. You still want the financial freedom that lets you work for love instead of money. This is a relatively new dream. The notion of spending the last years of your life in relative relaxation came about only in the last century or two. Before then, the overwhelming number of people had little choice but to work as long as they physically could. Then they died, usually in short order. That’s still how it is in many places in the world.

Retirement is a new phenomenon because it is expensive. Our various labor-saving machines make it possible at least to aspire to having a long, happy retirement. Plenty of us still won’t reach the goal. The data on those who have actually saved enough to maintain their lifestyle without having to work is truly depressing reading. Living on Social Security and possibly income from a reverse mortgage is limited living at best.

In this issue, I’ll build on what we said in the last two weeks on affordable healthcare and potentially longer lifespans. Retirement is not nearly as attractive if all we can look forward to is years of sickness and penury. We are going to talk about the slow motion train wreck now taking shape in pension funds that is going to put pressure on many people who think they have retirement covered.

Please feel free to forward this to those who might be expecting their pension funds to cover them for the next 30 or 40 years. Cutting to the chase, US pension funds are seriously underfunded and may need an extra $10 trillion in 20 years. This is a somewhat controversial letter, but I like to think I’m being realistic. Or at least I’m trying.

The Transformation Project
But first, let me update you on the progress on my next book, Investing in an Age of Transformation, which will explore the changes ahead in our society over the next 20 years, along with their implications for investing. Our immediate future promises far more than just a lot of fast paced, fun technological change.

There are many almost inevitable demographic, geopolitical, educational, sociological, and political changes ahead, not to mention the rapidly evolving future of work that are going to significantly impact markets and our lives. I hope to be able to look at as much of what will be happening as possible. I believe that the fundamentals of investing are going to morph over the next 10 to 15 to 20 years.

I mentioned a few weeks ago at the end of one of my letters that I was looking for a few potential interns and/or volunteer research assistants to help me with the book. I was expecting 8 to 10 responses and got well over 100. Well over. I asked people to send me resumes, and I was really pleased with the quality of the potential assistance. I realize that there is an opportunity to do so much more than simply write another book about the future.

What I have done is write a longer outline for the book, detailing about 25 separate chapters. I’d like to put together small teams for each of these chapters that will not only do in-depth research on their particular areas but will also make their work available to be posted upon publication of the book. We’re going to create separate Transformation Indexes for many of the chapters, which will certainly be a valuable resource and a challenge for investors. And now let’s look at what pension funds are going to look like over the next 20 years.

Midwestern Train Wreck
Four months ago we discussed the ongoing public pension train wreck in Illinois (see Live and Let Die). I was not optimistic that the situation would improve, and indeed it has not. The governor and legislature are still deadlocked over the state’s spending priorities. Illinois still has no budget for the fiscal year that began on July 1. Fitch Ratings downgraded the state’s credit rating last week. It’s a mess.

Because of the deadlock, Illinois is facing a serious cash flow crisis. Feeling like you’ve hit the jackpot through the Illinois lottery? Think again. State officials announced Wednesday that winners who are due to receive more than $600 won’t get their money until the state’s ongoing budget impasse is resolved. Players who win up to $600 can still collect their winnings at local retailers. More than $288 million is waiting to be paid out. For now the winners just have an IOU and no interest on their money (Fox).

As messy as the Illinois situation is, none of us should gloat. Many of our own states and cities are not in much better shape. In fact, the political gridlock actually forced Illinois into accomplishing something other states should try. Illinois has not issued any new bond debt since May 2014. Can many other states say that?

Unfortunately, that may be the best we can say about Illinois. The state delayed a $560 million payment to its pension funds for November and may have to delay or reduce another contribution due in December.

Illinois and many other states and local governments are in this mess because their politicians made impossible to keep promises to public workers. The factors that made them so impossible apply to everyone else, too. More people are retiring. Investment returns aren’t meeting expectations. Healthcare costs are rising. Other government spending is out of control.

Nonetheless, the pension problem is the thorniest one. State and local governments spent years waving generous retirement benefits in front of workers. The workers quite naturally accepted the offers. I doubt many stopped to wonder if their state or city could keep its end of the deal. Of course, it could. It’s the government.

Although state governments have many powers, creating money from thin air is, alas, not one of them. You have to be in Washington to do that. Now that the bills are coming due, the state’s’ inability to keep their word is becoming obvious. Now, I’m sure that many talented people spent years doing good work for Illinois. That’s not the issue here. The fault lies with politicians who generously promised money they didn’t have and presumed it would magically appear later.

On the other hand, retired public workers need to realize they can’t squeeze blood from a turnip. Yes, the courts are saying Illinois must keep its pension promises. But the courts can’t create money where none exists. At best, they can force the state to change its priorities. If pension benefits are sacrosanct, the money won’t be available for other public services. Taxes will have to go up or other essential services will not be performed. This is certainly not good for the citizens of Illinois. As things get worse, people will begin to move.

What happens then? Citizens will grow tired of substandard services and high taxes. They can avoid both by moving out of the state. The exodus may be starting. Crain’s Chicago Business reports: High end house  hunters in Burr Ridge have 100 reasons to be happy. But for sellers, that’s a depressing number. The southwest suburb has 100 homes on the market for at least $1 million, more than seven times the number of homes in that price range – 14 – that have sold in Burr Ridge in the past six months.

The town has the biggest glut by far of $1 million-plus homes in the Chicago suburbs, according to a Crain’s analysis. “It's been disquietingly slow, brutally slow, getting these sold,” said Linda Feinstein, the broker-owner of ReMax Signature Homes in neighboring Hinsdale. “It feels like the brakes have been on for months.”

We don’t know why these people want to sell their homes, of course, but they may be the smart ones.

They’re getting ahead of the crowd – or trying to. Think Detroit. I have visited there a few times over the last year, and the suburbs are really quite pleasant (except in the dead of winter, when I’d definitely rather be in Texas). But those who moved out of the city of Detroit and into the suburbs many decades ago had a choice, because Michigan’s finances weren’t massively out of whack. I’ve been to Hinsdale. It’s a charming community and quite upscale. It is an easy train commute to downtown Chicago.

Look at it this way: with what you know about Illinois public finances, would you really want to move into the state and buy an expensive home right now? I sure wouldn’t. That sharply reduces the number of potential homebuyers. The result will be lower home prices. I’m not predicting Illinois will end up like Detroit…...but I don’t rule it out, either. Further, more and more cities and counties around the country are going to be looking like Chicago. Wherever you buy a home, you really should investigate the financial soundness of the state and the city or town.

Pension Math Review
Political folly is not the only problem. Illinois and everyone else saving for retirement – including you and me – make some giant assumptions. Between ZIRP and assorted other economic distortions, it is harder than ever to count on a reasonable real return over a long period. Small changes make a big difference. Pension managers used to think they could average 8% after inflation over two decades or more. At that rate, a million dollars invested today turns into $4.7 million in 20 years. If $4.7 million is exactly the amount you need to fund that year’s obligations, you’re in good shape.

What happens if you average only 7% over that 20 year period? You’ll have $3.9 million. That is only 83% of the amount you counted on. At 6% returns you will be only 68% funded. At 5%, you have only 57% of what you need. At 4%, you will be only 47% of the way there.

To continue reading this article from Thoughts from the Frontline – a free weekly publication by John Mauldin, renowned financial expert, best-selling author, and Chairman of Mauldin Economics – please click here.

The article Thoughts from the Frontline: Someone Is Spending Your Pension Money was originally published at mauldineconomics.com.

Get our latest FREE eBook "Understanding Options"....Just Click Here!

Another Government Ponzi Scheme Starts to Crack - Do You Depend on It?

By Nick Giambruno

Government employees get to do a lot of things that would land an ordinary citizen in prison. For example, it’s legal for them to threaten and commit offensive, rather than defensive, violence. They can take property from others without their consent. They spy on anyone’s email and bank accounts whenever they please. They go into trillions of dollars in debt and then stick the unborn with the bill. They counterfeit the currency. They lie with misleading statistics and use accounting wizardry no business could get away.

And this just scratches the surface…...

The U.S. government also gets to run a special type of Ponzi scheme. According to the Merriam-Webster dictionary a Ponzi scheme is.....An investment swindle in which some early investors are paid off with money put up by later ones in order to encourage more and bigger risks.

In the private sector, people who run Ponzi schemes are rightly punished for their fraud. But when the government runs a Ponzi scheme, something very different happens. It’s no secret that the Social Security system is effectively one giant Ponzi scheme.

Actually, I think it’s worse. That’s because the government uses force and the threat of force to coerce people into it. People don’t have the option to opt out. They either pay the tax for Social Security or someone with a gun will show up sooner or later. I imagine Bernie Madoff’s firm would have lasted a lot longer had he been able to operate this way.

This whole practice is particularly egregious for young people. They have no chance at collecting the future benefits the government has promised to them. But they’re hardly the only people that are going to be disappointed in the system, which will eventually break down.

There are simply too many people cashing out at the top and not enough people paying in… even with the government’s coercion. That’s a function of demographics, but also the economic reality in which there are fewer people with quality jobs for the government to sink its fangs into. I expect both of those trends to increase and strain the system.

Actually, it’s already starting to happen.

Recently, the government announced that there would be no Social Security benefit increase next year. That’s only happened twice before in the past 40 years. You see, the government links Social Security benefit increases to their own measure of inflation. If the government says “no inflation” then there are no benefit increases. It’s like letting a student grade his own paper.

So it’s no surprise that the official definition of inflation is not reflective of the real increases in the costs of living most people feel. Medical care costs are skyrocketing. Rent and food prices are reaching record highs in many areas. Electricity and utility costs are soaring. Taxes, of course, are going nowhere but up.

But the government says there’s no shred of inflation. In actuality, it amounts to a stealth decrease in benefits.
One reason for this is that they constantly change the way they calculate inflation so as to understate it. Free market analysts have long documented this sham. If you take a global view, it’s easy to see that fudging official inflation statistics is standard operating procedure for most governments.

Incidentally, governments and the financial media don’t even understand what inflation is in the first place.
To them, inflation means an increase in prices. But that is not at all how the word was originally used. Inflation initially meant an increase in the supply of money and nothing else. Rising prices were a consequent of inflation, not inflation itself.

It’s not being overly fussy to insist on the word’s proper usage. It’s actually an important distinction. The perversion of its usage has only helped proponents of big government. To use “inflation” to mean a rise in prices confuses cause and effect. More importantly, it also deflects attention away from the real source of the problem…central bank money printing. And that problem shows no signs of abating. In fact, I think the opposite is the case. The money printing is just getting started.

At least this is what we should prudently expect as long as the U.S. government needs to finance its astronomical spending, fueled by welfare and warfare policies. As long as the government spends money, it will find some way to make you pay for it - either through direct taxation, money printing, or debt (which represents deferred taxation/money printing).

It’s as simple as that.

Like most other governments that get into financial trouble, I think they’ll opt for the easy option…money printing. This has tremendous implications for your financial security. Central banks are playing with fire and are risking a currency catastrophe.

Most people have no idea what really happens when a currency collapses, let alone how to prepare. How will you protect your savings in the event of a currency crisis? This video we just released will show you exactly how. Click here to watch it now.

The article was originally published at internationalman.com.

Get our latest FREE eBook "Understanding Options"....Just Click Here!

The Government’s Fun with (Inflation) Numbers

By Tony Sagami

My normally super sweet baby sister barked at me like an angry dog when I told her that there simply isn’t any inflation in the US. “You need to go to the grocery store with me. You are completely out of touch with reality,” she snapped.   Geez. Excuse me!

My sister, however, should know. She has two boys—one teenager and one college student that still lives at home—with big appetites, so she spends a lot of time and money at her local grocery store.

The topic came up because of the latest Producer Price Index (PPI) numbers from the Labor Department, which said that prices at the wholesale level actually declined by 0.5% in September. Over the last 12 months through September, the PPI has dropped by 1.1%... that’s the eighth consecutive 12-month decrease in the index.

Even if you exclude food and energy—the so-called core prices were down 0.3% in September.
Is my sister crazy? That depends on whether you believe the government’s heavily massaged numbers or people like my sister and farmers. Here’s what I mean. While the Labor Department was spitting out its PPI numbers, the Wisconsin Farm Bureau Federation (WFBF) begged to differ.




The Wisconsin Farm Bureau Federation tracks the prices of key agricultural commodities that most American households use every day. Sure, the price of a gallon of milk may be slightly different in Texas than in Wisconsin… but not by that much, and the price trends are usually very similar.

Well, according to the WFBF, the prices of basic grocery staples are rising.

The bureau tracks the cost of 16 widely used food items to come up with its Marketbasket index. The newest semi annual survey of the 16 items rose to $53.37, up $1.41 or 2.7% compared with one year ago.
Nine of the 16 items surveyed increased in price while six decreased in price compared with WFBF’s 2015 spring survey. One item, apples, was unchanged.

“The survey’s meat items are the heaviest price pullers. As high-value items, they influence our survey’s overall price even if they only change slightly,” said Casey Langan of the WFBF. So my baby sister was right!

Moreover, the WFBF doesn’t have an ax to grind when it comes to inflation. It is simply reporting the prices of a static basket of commonly used food items. I don’t bring this up to prove how smart my sister is. Heck, any housewife in America could have told you the same thing. Moreover, my sister also complained about big price increases for pharmaceutical drugs, college tuition, and services like dry cleaning and automotive repair.

My points are that (a) you should always look at government produced numbers with a skeptical eye, and (b) understand that the government, particularly the Federal Reserve, uses these heavily massaged numbers to justify its agenda. For example, the lower the cost of living, the less the US government has to pay out in cost of living adjustments for Social Security and federal pension recipients.

And when it comes to interest rates, the Federal Reserve has proven that it doesn’t want to raise interest rates—and it will happily use the latest PPI numbers to prove its point that inflation isn’t a problem.
Fed officials have said they want to be “reasonably confident” inflation will move toward their 2% target before they raise interest rates. The latest PPI numbers will keep rates at zero for at least the rest of 2015 and well into 2016.

Daniel Tarullo, a member of the Fed’s Board of Governors, said last week that the Federal Reserve should not increase interest rates this year. “Right now my expectation is—given where I think the economy would go—I wouldn’t expect it would be appropriate to raise rates.”

Fellow Fed Governor Lael Brainard echoed that view and made the case for more patience last Monday.
Bottom line: You should absolutely believe the Fed when it says that it will “remain highly accommodative for quite some time.”

If you’re an income-focused investor, that conclusion has gigantic implications for how you should invest your money, and if you’re keeping your money in short term CDs, T-bills, and money funds in anticipation of higher rates….. you are making a big mistake.

Try my monthly newsletter, Yield Shark, for stock recommendations with high yield and great potential upside—with a 90 day money back guarantee.

Tony Sagami

30 year market expert Tony Sagami leads the Yield Shark and Rational Bear advisories at Mauldin Economics. To learn more about Yield Shark and how it helps you maximize dividend income, click here.

To learn more about Rational Bear and how you can use it to benefit from falling stocks and sectors, click here.

The article Connecting the Dots: The Government’s Fun with (Inflation) Numbers was originally published at mauldineconomics.com.

Get our latest FREE eBook "Understanding Options"....Just Click Here!

This Unique Oil Stock is Offering A Huge Dividend Yield

By Justin Spittler

One of Casey Research's biggest calls this year is paying off.....…
In early August, E.B. Tucker, editor of The Casey Report, told subscribers how to profit from the world’s oversupply of oil. If you read financial newspapers for more than a week, you’ll notice that global oil production is near record highs. Last year, global oil output reached its highest level in at least twenty five years, according to the U.S. Energy Information Administration (EIA).

High oil prices were a big reason for the surge in production. Between 2011 and mid 2014, the price of oil hovered around $90/barrel. But oil peaked at $106 last June, and it’s been falling ever since. Today, a barrel of oil goes for about $45. Even though the price of oil has been cut in half, global oil production is still near all time highs. The Organization of the Petroleum Exporting Countries (OPEC), a cartel of 12 oil producing nations, is still pumping a record amount of oil. And it plans to increase production next year. In the U.S., oil supplies are still about 100 million barrels above their five year average.

E.B. explains why some countries have no choice but to keep pumping oil.....

Oil is the foundation of many countries’ economies. Take Venezuela, for example. Venezuela produces over 2.5 million barrels per day (BPD) of oil. Oil exports make up half of the country’s economic output. The country is so dependent on oil that cutting production would be economic suicide. This is happening across the globe. Giant state run oil companies continue to pump because it’s the only way for these countries to make money. This is why global oil production has not fallen even though the price of oil has been cut in half. In many areas, production has actually increased.

The extra oil has weighed on oil prices......
Weak oil prices have hammered virtually all oil companies…including the biggest oil companies on the planet. Profits for ExxonMobil (XOM), the largest U.S. oil company, fell 52% during the second quarter due to weak oil prices. Its stock is now down 24% since oil peaked last summer. Chevron (CVX), America’s second biggest oil company, earned its lowest profit in twelve years during the second quarter. Its stock price is down 34% since last summer’s peak. The entire industry is struggling. XOP, an ETF that holds the largest oil explorers and producers, has dropped 52% over the same period.

But oil tanker companies are making more money than they have in seven years...…
Unlike oil producers, oil tanker companies don’t need high oil prices to make big profits. That’s because they make money based on how much oil they move. Their revenues aren’t directly tied to the price of oil.
On Monday, Bloomberg Business explained why oil tankers are making the most money they’ve made in years. The world’s biggest crude oil tankers earned more than $100,000 a day for the first time since 2008. Ships hauling two million barrel cargoes of Saudi Arabian crude to Japan, a benchmark route, earned $104,256 a day, a level last seen in July 2008, according to data on Friday from the Baltic Exchange in London. The rate was a 13 percent gain from Thursday.

Casey Research’s favorite oil tanker company is cashing in on higher shipping rates...…
On August 13, E.B. Tucker told readers of The Casey Report about a company called Euronav (EURN).
According to E.B., Euronav is the best oil tanker company in the world. The company has one of the newest and largest fleets on the planet. Euronav’s sales more than doubled during the first half of the year.

The company’s EBITDA (earnings before taxes, interest, and accounting charges) quadrupled. And because Euronav’s policy is to pay out at least 80% of its profits as dividends, the company doubled its dividend payment last quarter.

Investors who acted on E.B.’s recommendation have already pocketed a 5% quarterly dividend. Based on its last two dividends, Euronav is paying an annualized yield of 12%. That’s not bad considering 10 Treasuries pay just 2.07% right now. Euronav’s stock is up big too. It has gained 15% in the past month alone...while the S&P just gained 1%.

E.B. thinks Euronav is just getting started.....

Euronav’s stock price has rocketed in recent weeks, but it’s going to go much higher. Euronav is a great business and the economics of shipping oil are improving. The market hasn’t fully caught on to how good things are in the industry right now. Shipping rates are ripping higher, but the supply of ships can’t keep up with demand. The largest supertankers can carry 2 million barrels of oil at a time. They measure three football fields long. These ships take years to build and cost about $100 million each. Shipping rates should stay high as the world works through this huge oil glut.

It’s a great time to own shipping companies. And Euronav is the best of the bunch. Euronav has shot up since E.B. recommended it, but the buying window hasn’t closed. In fact, Euronav is still below E.B.’s “buy under” price of $17.50. You can learn more about Euronav by taking The Casey Report for a risk free spin today. You’ll also learn about E.B.’s other top investment ideas, including a unique way to profit from the “digital revolution” in money. Click here to get started.

The article This Unique Oil Stock is Offering A Huge Dividend Yield was originally published at caseyresearch.com.

Get our latest FREE eBook "Understanding Options"....Just Click Here!

The Options Market Has Changed and Here's Why

As you know, bigger changes in the market bring potential for bigger profits. This isn’t a new concept. However, I bring it up because our trading partner Doc Severson just released a new video tutorial detailing a major change making its way through the options.

Check This Out

In fact, Doc, a world renowned Options trader, traveled to Chicago to get a first hand account of what’s happening. And here’s why his trip is important to you:

He discovered that the big institutional investors aren’t gaining an advantage this time. Instead, the change underway is bringing a unique advantage to retail traders like you and me. About time, right? But unfortunately, too many traders are using strategies that don’t match today’s market conditions.

That’s why you must watch Doc’s presentation right away. He’s showing you how to adapt, so you can make a consistent weekly income as a trader and prepare for today’s “new normal” market. Doc gives you the full scoop in this tutorial.

Click here to watch....and of course it's free.

See you in the markets,
Ray @ The Crude Oil Trader

P.S. What we’ve seen lately with how the global economy has affected U.S. markets is only part of the story....Get the full story here.

The Real Reason for the Refugee Crisis You Won’t Hear About in the Media

By Nick Giambruno

There’s a meme going around that the refugee crisis in Europe (the largest since World War II) is part of a secret plot to subvert the West. I completely understand why the locals in any country wouldn’t be happy about waves of foreigners pouring in. Especially if they’re poor, unskilled, and not likely to assimilate.

It leads to huge problems. Infrastructure gets strained. More people are sucking at the teat of the welfare system. The unwelcome newcomers compete for bottom of the ladder jobs. Things easily turn nasty and then turn violent. But the idea that the refugee crisis in Europe is part of a hidden agenda - rather than a predictable outcome - strikes me as strange. And it’s a notion that conveniently deflects blame away from the people and factors that deserve it.

Interventions Destabilize the Middle East

The civil war in Syria has turned the country into a refugee maker. Syria’s neighbors have reached their physical limit on their ability to absorb refugees. That’s one of the reasons so many are heading to the West. Lebanon has received over 1 million Syrian refugees. That’s an enormous number for a country with a population of only 4 million - a 25% increase. Jordan and Turkey also have millions of Syrian refugees.

They’re saturated.

The number of refugees heading to the West, by contrast, is in the hundreds of thousands. So far. But it’s not just Syria that’s sending refugees. Many more come from Iraq and Afghanistan, two other countries shattered by bungled Western military interventions. Then there are the refugees from Libya. A country the media and political establishment would rather forget because it represents another disastrous military decision. Actually, it’s not just Libyan refugees. It’s refugees from all of Africa who are using Libya as a transit point to reach Europe.

Before his overthrow by NATO, Muammar Gaddafi had an agreement with Italy, which is directly to Libya’s north, across the Mediterranean Sea. Gaddafi agreed to prevent refugees heading for Europe from using Libya as a transit point. It was an arrangement that worked. So it’s no shocker that when NATO helped a coalition of ambitious rebels overthrow the Gaddafi government, the refugee floodgates opened.
When there’s war, there are refugees. It’s a predictable outcome.

It’s like kicking a bees’ nest and being surprised that bees fly out. Nobody should be surprised when that happens. And nobody should be surprised that people are fleeing war zones in Libya, Syria, Iraq, and Afghanistan.

If Western governments didn’t want a refugee crisis, they shouldn’t have been so eager to topple those governments and destabilize those countries. The refugees should camp out in the backyards of the individuals who run those governments. I also have to mention the Saudis. They were very much involved in the Libyan war. They’ve also devoted themselves to ousting the Assad government in Syria, for geopolitical and sectarian reasons.

Then there’s the war in Yemen that the Saudis have sponsored. It’s another mess the media doesn’t discuss often. But it will likely produce even more refugees. The Saudis make no secret about not welcoming refugees, even though the Kingdom is a primary instigator of the wars that are forcing people to flee their homelands. One reason is the Saudis don’t want more people leeching off their welfare system, especially amid budget crunches from lower oil prices.

This brings up another interesting point. For the first time in decades, observers are calling into question the viability of the Saudi currency peg of 3.75 riyals per US dollar. The Saudi government spends a ton of money on welfare to keep its citizens sedated. But with lower oil prices cutting deep into government revenue, there’s less money to spend on welfare. Then there’s the cost of the wars in Yemen and Syria.

There’s a serious crunch in the Saudi budget. They’ve only been able to stay afloat by draining their foreign exchange reserves. That threatens their currency peg. The next clue that there’s trouble is Saudi officials telling the media that the currency peg is fine and there’s nothing to worry about. An official government denial is almost always a sign of the opposite. It’s like the old saying…“believe nothing until it has been officially denied.”

If there were a convenient way to short the Saudi riyal, I would do it in a heartbeat.

Don’t Give the Welfare State a Pass

It’s no coincidence that the refugees are flowing to the countries with the most generous welfare benefits, especially Germany and the Scandinavian nations. If there weren’t so many freebies in these countries, there wouldn’t be so many refugees showing up to collect them.

The whole refugee crisis was easily predictable. It was the foreseeable consequence of shortsighted interventions in the Middle East and the welfare state policies of nearby Europe. Instead of facing facts, blaming it all on a scheme to subvert the West conveniently deflects any responsibility from the authors of the mess.

If the individuals who run Western governments really wanted to solve the refugee problem, they would throttle way back on welfare state policies and then stay out of the Middle East free for all. It’s really as simple as that. But don’t count on the mainstream media to figure this out. They effectively operate as an organ of the State. I bet they’ll keep prescribing more of the same bad medicine that caused this crisis to begin with.

This will help to cover the tracks of the real perpetrators, and it will obscure other real problems. I expect the media to ramp up the “blame the foreigner” sentiment, as it helps the US and EU governments distract the anger of their citizens from the sputtering economy and the shrinking of their civil liberties. From the politicians’ perspective, it’s a win win. But it’s a lose lose for citizens hoping for accountable government.

And this brings up another uncomfortable truth for Americans and Europeans. The way the political and economic winds are blowing, things could get much worse. Central banks around the globe have created the biggest financial bubble in world history. The social and political implications of this bubble bursting are even more dangerous than the financial consequences.

An economic depression and currency inflation (perhaps hyperinflation) are very much in the cards. These things rarely lead to anything but bigger government, less freedom, and shrinking prosperity. Sometimes they lead to much worse.

One day the shoe could be on the other foot. We could see American and European refugees fleeing to South America or other havens to escape the problems in their home countries. It would be an ironic twist.
Now, this outcome isn’t inevitable. But the chance it will happen isn’t zero, either, and the risk seems to grow each day.

Because of these enormous risks in the financial system, we’ve published a groundbreaking, step by step manual that sets out the three essential measures all Americans should take right now to protect themselves and their families.

These measures are easy and straightforward to implement. You just need to understand what they are and how they keep you safe. New York Times best selling author Doug Casey and his team describe how you can do it all from home. And there’s still time to get it done without extraordinary cost or effort.

Normally, this get it done manual retails for $99. But I believe it’s so important for you to act now to protect yourself and your family that I’ve arranged for anyone who is a resident of the U.S. to get a free copy.

Click here to secure your free copy now.

The article was originally published at internationalman.com.

Get our latest FREE eBook "Understanding Options"....Just Click Here!

How the Chinese Will Establish a New Financial Order

By Porter Stansberry

For many years now, it’s been clear that China would soon be pull­ing the strings in the U.S. financial system. In 2015, the American people owe the Chinese government nearly $1.5 trillion.

I know big numbers don’t mean much to most people, but keep in mind… this tab is now hundreds of billions of dollars more than what the U.S. government collects in ALL income taxes (both cor­porate and individual) each year. It’s basically a sum we can never, ever hope to repay – at least, not by normal means.
Of course, the Chinese aren’t stupid. They realize we are both trapped.

We are stuck with an enormous debt we can never realistically repay… And the Chinese are trapped with an outstanding loan they can neither get rid of, nor hope to collect. So the Chinese govern­ment is now taking a secret and somewhat radical approach.

China has recently put into place a covert plan to get back as much of its money as possible – by extracting colossal sums from both the United States government and ordinary citizens, like you and me.

The Chinese “State Administration of Foreign Exchange” (SAFE) is now engaged in a full fledged currency war with the United States. The ultimate goal – as the Chinese have publicly stated – is to cre­ate a new dominant world currency, dislodge the U.S. dollar from its current reserve role, and recover as much of the $1.5 trillion the U.S. government has borrowed as possible.

Lucky for us, we know what’s going to happen. And we even have a pretty good idea of how it will all unfold. How do we know so much? Well, this isn’t the first time the U.S. has tried to stiff its foreign creditors.

Most Americans probably don’t remember this, but our last big currency war took place in the 1960s. Back then, French President Charles de Gaulle denounced the U.S. government’s policy of print­ing overvalued U.S. dollars to pay for its trade deficits… which allowed U.S. companies to buy European assets with dollars that were artificially held up in value by a gold peg that was nothing more than an accounting fiction.

So de Gaulle took action...…

In 1965, he took $150 million of his country’s dollar reserves and redeemed the paper currency for U.S. gold from Ft. Knox. De Gaulle even offered to send the French Navy to escort the gold back to France.

Today, this gold is worth about $12 billion.

Keep in mind… this occurred during a time when foreign govern­ments could legally redeem their paper dollars for gold, but U.S. citizens could not. And France was not the only nation to do this, Spain soon re­deemed $60 million of U.S. dollar reserves for gold, and many other nations followed suit. By March 1968, gold was flowing out of the United States at an alarming rate.

By 1950, U.S. depositories held more gold than had ever been assembled in one place in world history (roughly 702 million ounces). But to manipulate our currency, the U.S. government was willing to give away more than half of the country’s gold. It’s estimated that during the 1950s and early 1970s, we essentially gave away about two thirds of our nation’s gold reserves, around 400 million ounces, all because the U.S. government was trying to defend the U.S. dollar at a fixed rate of $35 per ounce of gold.

In short, we gave away 400 million ounces of gold and got $14 billion in exchange. Today, that same gold would be worth $620 billion, a 4,330% difference. Incredibly stupid, wouldn’t you agree? This blunder cost the U.S. much of its gold hoard. When the history books are finally written, this chapter will go down as one of our nation’s most incompetent political blunders. Of course, as is typical with politicians, they managed to make a bad situation even worse.

The root cause of the weakness in the U.S. dollar was easy to understand. Americans were consuming far more than they were producing. You could see this by looking at our government’s annual deficits, which were larger than ever and growing… thanks to the gigantic new welfare programs and the Vietnam “police ac­tion.” You could also see this by looking at our trade deficit, which continued to get bigger and bigger, forecasting a dramatic drop (eventually) in the value of the U.S. dollar.

Of course, economic realities are never foremost on the minds of politicians – especially not Richard Nixon’s. On August 15, 1971, he went on live television before the most popular show in Ameri­ca (Bonanza) and announced a new plan. The U.S. gold window would close effective immediately – and no nation or individual anywhere in the world would be allowed to exchange U.S. dollars for gold. The president announced a 10% surtax on ALL imports!

Such tariffs never accomplish much in terms of actually altering the balance of trade, as our trading partners simply put matching charges on our exports. So what actually happens is just less trade overall, which slows the whole global economy, making the impact of inflation worse. Of course, Nixon pitched these moves as patriotic, saying: “I am determined that the American dollar must never again be a hos­tage in the hands of international speculators.”

The “sheeple” cheered, as they always do whenever something is done to “stop the speculators.” But the joke was on them. Within two years, America was in its worst recession since WWII… with an oil crisis, skyrocketing unemployment, a 30% drop in the stock market, and soaring inflation. Instead of becoming richer, millions of Americans got a lot poorer, practically overnight.

And that brings us to today…..
Roughly 40 years later, the United States is in the middle of anoth­er currency war. But this time, our main adversary is not Europe. It’s China. And this time, the situation is far more serious. Our nation and our economy are already in an extremely fragile state. In the 1960s, the American economy was growing rapidly, with decades of expansion still to come. That’s not the case today.

This new currency war with China will wreak absolute havoc on the lives of millions of ordinary Americans, much sooner than most people think. It’s critical over the next few years for you to understand exactly what the Chinese are doing, why they are doing it, and the near certain outcome.
Regards,
Porter Stansberry

(This is an adaptation of an article that was originally published in Porter's Investment Advisory.)
Editor’s Note: Because this risk and others have made our financial system a house of cards, we’ve published a groundbreaking step by step manual on how to survive, and even prosper, during the next financial crisis.

In this book, New York Times best selling author Doug Casey and his team describe the three ESSENTIAL steps every American should take right now to protect themselves and their family.
These steps are easy and straightforward to implement.

You can do all of these from home, with very little effort. Normally, this book retails for $99. But I believe this book is so important, especially right now, that I’ve arranged a way for US residents to get a free copy. Click here to secure your copy.

The article was originally published at internationalman.com.

Get our latest FREE eBook "Understanding Options"....Just Click Here!

Mrs. Magoo, Deflation, and Commodity Woes

By Tony Sagami 

Did you read my September 22 issue? Or my July 14 column? If you did, you could have avoided the downdraft that has pulled down stocks all across the transportation sector or even made a bundle, like the 100% gain my Rational Bear subscribers made by buying put options on Seaspan Corporation, the largest container shipping company in the world.

Don’t worry, though. Transportation stocks still have a long ways to fall, so it’s not too late to sell any trucking, shipping, or railroad stock you may own—or profit from their continued fall through shorting, put options, or inverse ETFs. This chart of the Dow Jones Transportation Average validates my negative outlook on all things transportation and shows why we’ve been so successful betting against the “movers” of the US economy.

However, the bear market for transportation stocks is far from finished.

Federal Express Crashes and Burns

Federal Express, which is the single largest weighting of the Dow Jones Transportation Average at 11.6%, delivered a trifecta of misery:

1. Missed on revenues
    
2. Missed on earnings
    
3. Lowered 2016 guidance

I’m not talking about a small miss either. FedEx reported profits of $2.26 per share, well below the $2.46 Wall Street was expecting. Moreover, the company should benefit from having one extra day in the quarter, which makes the results even more disappointing.

What’s the problem?

“Weak industry demand,” according to FedEx. By the way, both Federal Express and United Parcel Service are good barometers of overall consumer spending/confidence, so that should tell you something about the (deteriorating) state of the US economy. Oh, and Federal Express announced that it will increase its rates by an average of 4.9% beginning in January 2015. Yeah, I bet that rate increase will really help with that already weak demand. The decline is even more troublesome when you consider that gasoline/diesel prices have fallen like a rock this year.

Speaking of Falling Commodity Prices

Oil, which dropped by 23% in the third quarter, isn’t the only commodity that’s falling like a rock.

• Copper prices plunged to a six-year low.
   
• Aluminum prices have also dropped to a six year low.

• Coal prices have fallen 40% since the start of 2014.
   
• Minerals aren’t the only commodities that are dropping. Sugar hit a 7-year low in August.

Commodities across the board are lower; the Thomson Reuters CoreCommodity CRB Index of 19 commodities was down 15% for the quarter and 31% over the last 12 months. Since peaking in 2008, the CRB Index is down 60%.

That’s why anybody and anything associated with the commodity food chain has been a terrible place to invest your money. Just last week:

Connecting the Dots #1: Caterpillar announced that it was going to lay off 4,000 to 5,000 people this year. That number could reach 10,000 by the end of 2016, and the company may close more than 20 plants. Layoffs are nothing new at Caterpillar—the company has reduced its total workforce by 31,000 workers since 2012.

The problem is lousy sales. Caterpillar just told Wall Street to lower its revenues forecast for 2016 by $1 billion. $1 billion!

How bad does the future have to look for a company to suddenly decide that it is going to lose $1 billion in sales? “We are facing a convergence of challenging marketplace conditions in key regions and industry sectors, namely in mining and energy,” said Doug Oberhelman, Caterpillar chairman and CEO.

Like the layoffs, vanishing sales are nothing new. 2015 is the third year in a row of shrinking sales, and 2016 will be the fourth. Caterpillar, by the way, isn’t the only heavy-equipment company in deep trouble.

Connecting the Dots #2: Last week, UK construction machinery firm and Caterpillar competitor JCB announced that it will cut 400 jobs, or 6% of its workforce, because of a massive slowdown in business in Russia, China, and Brazil.

“In the first six months of the year, the market in Russia has dropped by 70%, Brazil by 36%, and China by 47%,”said JCB CEO Graeme Macdonald. Caterpillar, the world’s biggest maker of earthmoving equipment, cut its full-year 2015 forecast in part because of the slowdown in China and Brazil.

Connecting the Dots #3: BHP Billiton announced that it is chopping its capital expenditure budget again to $8.5 billion, a stunning $10 billion below its 2013 peak. Moreover, BHP Billiton currently only has four projects in the works, two of which are almost complete, compared to 18 developments it had going just two years ago.

Overall, the mining industry—according to SNL Metals and Mining—is going to spend $70 billion less in 2015 less than it did in 2012. And in case you think metals prices are going to rebound, consider that the previous bear market for mining lasted from 1997 to 2002, which suggests at least another two years of shrinking budgets and pain.

Repeat After Me!

I have said this many, many times before, but repeat after me.....ZIRP (zero interest rate policy) and QE are DEFLATIONARY!

The reason is that cheap (almost free) money encourages over-investment as well as keeping zombie companies alive that should have gone out of business. Both of those forces are highly deflationary, and unless you think that Mrs. Magoo (Janet Yellen) is going to aggressively start jacking up interest rates, you better adjust your portfolio for years and years and years of deflation.

While the rest of the investment world has been struggling, here at Rational Bear, we’ve been doing just fine.

Here are the results of six recent trades: 38% return from puts on an oil services fund, 16.6% return from an ETF that shorts industry sectors, 200% return from puts on an auction house, 50% return from puts on a jeweler, 50% return from puts on a social media giant and 100% return from puts on a container shipping company.

And we still have more irons in the fire. It’s time to be bearish, so I suggest you give Rational Bear a try—like it or your money back.

Tony Sagami

30 year market expert Tony Sagami leads the Yield Shark and Rational Bear advisories at Mauldin Economics. To learn more about Yield Shark and how it helps you maximize dividend income, click here.

To learn more about Rational Bear and how you can use it to benefit from falling stocks and sectors, click here.

The article Connecting the Dots: Mrs. Magoo, Deflation, and Commodity Woes was originally published at mauldineconomics.com.

Get our latest FREE eBook "Understanding Options"....Just Click Here!

Use Yogi Berra's Trading Advice and be Prepared for a 40% Drop?

The recently late Yogi Berra said, "We're lost, but we're making good time." That sums up the market. No one, including the Fed, knows where we are or where we're going, but they all think we are on track. The reality is "recession watch" has begun. A recession will mean a full blown bear market and a 40% drop in the stock market.

Bruce Marshall has traded through a lot of recessions - 1993, 1998, 2001, 2007, and the financial collapse of 08/09. Bruce recently answered this question, "what is the one strategy you can't live without in a bear market?" Bruce said, "A low risk, high reward trade I love in a bear market is a bear calendar spread." The best part is Bruce has a detailed step by step strategy for this trade.

Get the Strategy Here 

In this class Bruce will share:

  *  How to profit from the huge swings in volatility

  *  How to structure a trade to take advantage of gap downs in the market

  *  How to structure a trade to get a positive theta decay on your bearish trades

  *  Step by step how to put on and take off the trade with profit targets

  *  How to avoid the common mistakes in trading a down market

      Click Here to Get in the Class

      Over the next few years expect the markets to decline and unemployment to rise.

You can either sit back and ride the recession out or you can be one of the few that profit from it.

                            Click Here to Profit from the Coming Bear Market

The live class is Wednesday night October 7th from 8 - 10 pm and there is limited seating so get your reserved spot asap. I'll be attending as a participant along side with you. I am really looking forward to this class.

Click Here for Access

Good Trading,
Ray C. Parrish
aka the Crude Oil Trader

P.S. Don't get sucked into the media hyped rally. Whether you're a short term or long term trader you need to know what the road ahead looks like. There are many newbie traders who have never traded in a recession. They wouldn't know a recession if they fell face first into one. Don't let anyone lull you into a false sense of security.

Let Bruce show you how to set up this Bearish Calendar Spread so you can profit in this environment.

Get the Class Here

Recession Watch

By John Mauldin 

“Growth is never by mere chance; it is the result of forces working together.”– J.C. Penney

“Strength and growth come only through continuous effort and struggle.”– Napoleon Hill

“We’re lost, but we’re making good time.”– Yogi Berra

The Yogi Berra quote above, which was brought to my attention this week, seems an apt description of where the markets and the economy are today. Nobody is quite sure where we are or where we’re going, but we all seem to think we’re going to get there soon.

I think it’s pretty much a given that we’re in for a cyclical bear market in the coming quarters. The question is, will it be 1998 or 2001/2007? Will the recovery look V shaped, or will it drag out? Remember, there is always a recovery. But at the same time, there is always a recession out in front of us; and that fact of life is what makes for long and difficult recoveries, not to mention very deep bear markets.

The problem is that our most reliable indicator for a recession is no longer available to us. The Federal Reserve did a study, which has been replicated. They looked at 26 indicators with regard to their reliability in predicting a recession. There was only one that was accurate all the time, and that was an inverted yield curve of a particular length and depth. Interestingly, it worked almost a year in advance. The inverted yield curve indicator worked very well the last two recessions; but now, with the Federal Reserve holding interest rates at the zero bound, it is simply impossible to get a negative yield curve.

Understand, an inverted yield curve does not cause a recession. It is simply an indicator that an economy is under stress. So now we are in an environment where we can look only at “predictive” indicators that are not 100% reliable. Actually, most are not even close. Some indicators have predicted seven out of the last four recessions. Some never trigger at all.

Recession Watch
All that said, looking at data from the last few weeks suggests that we need to be on “recession watch.” Global GDP is clearly slowing down, and the data we are getting from the US suggests that we are going to see a serious falloff in GDP over the next few quarters. I want to look at the recent (very disappointing) employment numbers, earnings forecasts (and some funny accounting), credit spreads, total leverage in the system, and the overall environment where credit, which has been the fuel for growth, is under pressure. The totality of this data says that we have to be on alert for a recession, because a recession will mean a full-blown bear market (down at least 40%), rising unemployment, and (sadly) QE4.

The jobs report on Friday was just ugly. Private payrolls increased by just 118,000, which is about the minimum level needed for unemployment not to rise. Government payrolls added 24,000. There were serious downward revisions to the last two months, as well. August was taken down by 37,000 jobs, and July was reduced by 22,000. The last three months have averaged just 167,000 new jobs compared to 231,000 for the previous three months and 260,000 for the six months prior to that.

My friend David Rosenberg dug a little deeper into the numbers and noted: Adding insult to injury and revealing an even softer underbelly to this report was the contraction in the workweek to 34.5 hours from 34.6 hours in August, which is effectively equivalent to an added 348,000 job losses.

So take the headline number, tack on the downward revisions and the loss of labour input from the decline in the workweek, and the "real" payroll number was [a minus] 265,000. You read that right.

He added: “Have no doubt that if the contours of the job market continue on this recent surprising downward path… [m]arket chatter of QE four by March 2016 is going to be making the rounds.”
While the unemployment rate remained at 5.1%, it did so largely because of a significant drop in the labor participation rate, which is not a good way to enhance employment. Further, the U-6 unemployment number is still a rather depressing 10%. Those are the people who are working part-time but would like full time jobs, as well as discouraged and marginally attached workers. Very few part-time jobs pay enough to finance a middle class lifestyle.

Earnings Recession
Leo Kolivakis of Pension Pulse has a downbeat earnings season preview, aptly titled “A Looming Catastrophe Ahead?”

Analysts have been steadily cutting 3Q earnings projections, and those revisions threaten to make some richly priced stocks even more so. Thomson Reuters data shows analysts expect a 3.9% year over year decline in S&P 500 earnings. Expectations are falling for future quarters as well.

These expectations have some strategists talking about an “earnings recession.” Just as an economic recession is two consecutive quarters of falling GDP, an earnings recession is two consecutive quarters of falling corporate profits.

The headwinds are no mystery. China’s weaker import demand is hurting all kinds of companies, especially raw materials and infrastructure suppliers. Caterpillar (CAT) slashed its revenue forecast and announced 10,000 job cuts. That probably isn’t playing well in Peoria. Accompanying the falloff in Chinese demand is an increase in the number of containers coming into the US as the strong dollar allows us to buy more and sell less. Not a particularly useful combination.

I love this quote from a Reuters story: “How can we drive the market higher when all of these signals aren’t showing a lot of prosperity?” said Daniel Morgan, senior portfolio manager at Synovus Trust Company in Atlanta, Georgia, who cited earnings growth as one of the drivers of the market. As we all know, it is every portfolio manager’s job to “drive the market higher.” Daniel evidently wants to do his part.

Sadly, despite our best efforts, the stock market faces an uphill climb. More from Reuters: Even with the recent selloff, stocks are still expensive by some gauges. The S&P 500 Index is selling at roughly 16 times its expected earnings for the next 12 months, lower than this year's peak of 17.8 but higher than the historic mean of about 15. The index would have to drop to about 1,800 to bring valuations back to the long-term range. The S&P 500 closed at 1,931.34 on Friday [Sept 25].

Moreover, forward and trailing price-to-earnings ratios for the S&P 500 are converging, another sign of collapsing growth expectations. The trailing P/E stands at about 16.5, Thomson Reuters data shows. Last year at this time, the forward P/E was also 16 but the trailing was 17.6.

The last period of convergence was in 2009 when earnings were declining following the financial crisis. The Energy sector is the biggest drag on earnings, meaning that we now see analysts everywhere calculating estimates “ex energy.” I suppose this produces useful information, but if we are going to exclude the bottom outlier, shouldn’t we exclude the top outlier as well? Healthcare is carrying much of the earnings burden for S&P 500 stocks, but I have yet to see an ex healthcare or ex energy & healthcare estimate. A funny thing about earnings: they’ve been going up for the past year, even as top line revenue has not. Generally, those go hand in hand. What’s happening?

And for the answer I have a story. A few years ago I made an assumption as to how a new stream of income would be taxed. I made that assumption based on my knowledge of having had similar income in the ’80s and ’90s. It turned out the rules had changed, and I hit the end of the year owing what was for me a rather large sum, as I was also trying to finance and build my new apartment.

I told my tale of woe to my accountant, Darrell Cain, who obviously detected the distress in my voice. He smiled at me and said, “John, I have an elephant bullet.” He reached under the table and pulled out an imaginary elephant bullet. “This is a big bullet. But I only have one of them. Once you use this bullet you can never use it again. If another elephant comes down the road, there will be nothing you can do.”

And yes, there were some one time tax maneuvers that reduced my taxes to a manageable number. But as he said, those were a one time option.

There is no way to prove it, but I think corporate accountants have been using up their elephant bullets this past year, as corporations want to be able to maintain the fiction that earnings are rising, so that price to earnings ratios don’t come under stress and cause stock prices to fall. You can move expenses from quarter to quarter, put off certain spending, recharacterize certain expenses one time, and so on. I deeply suspect we are going to find that some recent corporate earnings have been of the smoke and mirrors type.

Further, as I’ve written in previous letters, earnings forecasts are notoriously trend-following and typically miss the turns. If earnings are beginning to fall – and it appears they are – it is highly likely that earnings estimates will miss to the downside. If we slide into a recession at the same time, they will miss to the downside rather dramatically.

Is GDP Flatlining?
The Commerce Department will release its first estimate for 3Q US GDP on Thursday, Oct. 29. By then we will be in the thick of earnings season and will already know how many companies performed.

In the big picture, income (corporate or individual) can’t grow unless the economy grows. GDP may be a flawed way to measure economic growth, but it is the best tool we have. Blue chip estimates right now are that it ran at near a 2.5% annualized growth rate last quarter. However, the Atlanta Fed has sharply revised their GDP estimate for the third quarter down to under 1%. (See chart below.)

Will economic growth come into harmony with income growth? We know they have to meet eventually. At present, it appears GDP will stay in slow growth mode. That means it probably won’t be able to pull earnings up with it.

High-Yield – Rising Defaults
High yield spreads have been tightening and interest rates have been rising for some time. This is starting to cause some distress in the high yield (otherwise known as junk bond) market. My friend Steve Blumenthal has been following and timing the high yield market for 20 years. He recently wrote the following, which I’m going to blatantly cut and paste as it clearly depicts the level of distress in the high yield market.

If credit becomes more difficult to get, then growth is going to come under stress as well. I note that corporations that I think of as issuing higher quality debt are paying 10%. Thank you very much. Ten percent interest rates don’t seem to me to be very low.

To continue reading this article from Thoughts from the Frontline – a free weekly publication by John Mauldin, renowned financial expert, best selling author, and Chairman of Mauldin Economics – please click here.

The article Thoughts from the Frontline: Recession Watch was originally published at mauldineconomics.com.

Get our latest FREE eBook "Understanding Options"....Just Click Here!

This Weeks Class "Beginners Guide to Directional Income Trading Bear Markets"

With markets clearly moving into bear market territory our timing couldn't be better this week. We have our trading partner Bruce Marshall of Simpler Options showing us how the trading methods he is using during this "correction" in the market.

So join us this Wednesday, October 7th from 8:00 – 10:00 pm est.

Sign Up Here

In this training class Bruce will share.....

  *  How to profit from the huge swings in volatility

  *  How to structure a trade to take advantage of gap downs in the market

  *  How to structure a trade to get a positive theta decay on your bearish trades

  *  Step by step how to put on and take off the trade with profit targets

  *  How to avoid the common mistakes in trading a down market

  *  You will also receive an online recording after the class

There is limited seating for this event so Click Here to Get Your Seat ASAP

See you Wednesday night!
Ray C. Parrish
aka the Crude Oil Trader

Mike Seerys Weekly Recap of the Crude Oil, Natural Gas, Gold, Silver, Dollar and Coffee Markets

Traders reacted to a very bad monthly unemployment number pushing the U.S dollar sharply lower supporting many markets on Friday afternoon. So who better to have than our trading partner Mike Seery back to give our readers a recap of this weeks trading and help us put together a plan for the upcoming week. 

Crude oil futures in the November contract are trading below their 20 and 100 day moving average telling you that the short term trend is to the downside as prices have been consolidating in recent weeks settling last Friday in New York at 45.70 a barrel while currently trading at 45.10 down around $.60 for the trading week. Traders reacted to a very bad monthly unemployment number pushing the U.S dollar sharply lower supporting many markets this Friday afternoon as I’m recommending a short position if prices break 44.00 while placing your stop loss above the 10 day high which now stands at 47.15 risking around $1,600 per contract plus slippage and commission, as prices have not broken out at this point so keep a close eye as this as this could happen any minute.

Many of the commodity markets are mixed this Friday afternoon as a weak U.S dollar has supported many different markets as the S&P 500 is sharply lower and that’s usually a negative influence towards oil prices, but they are stuck in a consolidation and I don’t like to trade choppy markets so be patient and wait for the breakout to occur. Oil prices have been relatively volatile especially with the fact that Russia is bombing Syria sending prices sharply higher yesterday and then falling out of bed towards the end of the day, so make sure you respect this market placing the proper amount of contracts therefore respecting risk which is high at the current time.
Trend: Sideways
Chart Structure: Improving

"Beginners Guide to Directional Income Trading Bear Markets" with Bruce Marshall this Wednesday....Sign Up Now

Natural gas futures in the November contract settled last Friday in New York at 2.63 while currently trading at 2.43 hitting a 3 ½ year low as I’ve been recommending a short position from around the 2.70 level and if you took that trade continue to place your stop loss above the 10 day high which currently stands at 2.72 as the chart structure is poor at the current time due to the fact that prices continue to move lower.

Mild temperatures in the Midwestern part of the United States is causing demand problems therefore putting pressure on short term prices as the next major level of support is around 2.25 and if that is broken we can retest the 2012 lows around 2.00 in my opinion as the trend is your friend and this trend is getting stronger to the downside on a weekly basis.

At the time of the recommendation the chart structure was outstanding and was one of the main reasons I took that trade, however if you have missed this trade the chart structure is poor as the risk is too high as you have missed the boat so look at other markets that are beginning to trend. If you take a look at the weekly chart pattern natural gas has broken out of major consolidation as I’m looking to add more positions to this trade once the chart structure tightens up which will take another week or so.
Trend: Lower
Chart Structure: Poor

Gold futures in the December contract settled last Friday in New York at 1,145 an ounce while currently trading at 1,131 down about $14 this week but reacting sharply higher today on a poor monthly unemployment number but continuing its long term down trend while trading below its 20 and 100 day moving average retesting major support at 1,100 near an eight week low as I’m currently sitting on the sidelines as this market remains choppy with poor chart structure.

I still see no reason to own gold currently as the risk/reward is not your favor so look at other markets that are starting to trend. Gold prices had a significant rally in the month of August bottoming out around 1,080 then rallying to 1,170 which was impressive in my opinion due to short covering and a flight to quality as the stock market has experienced volatility in recent weeks sending money out of stocks and into gold as a safe haven, but things have settled down putting short term pressure on gold.

As I’ve talked about in many previous blogs I am a trend follower and I do not like to trade choppy markets because they are extremely difficult in my opinion so avoid this market at the current time and wait for better chart structure to develop before entering.
Trend: Lower
Chart Structure: Poor

Silver futures in the December contract settled last Friday in New York at 15.11 an ounce while currently trading at 15.00 down about $.10 reacting sharply higher due to a poor monthly unemployment number today continuing its remarkable choppy trend over the last several months as prices are right near a four week low.

At the current time I’m sitting on the sidelines as I hate trade choppy markets as prices are still trading below their 20 and 100 day moving average telling you that the short term trend is to the downside and the long term down trend is still intact in my opinion as this market has been frustrating as prices seem to go nowhere.

I’ll keep a close eye and wait for better chart structure to develop as platinum prices hit another contract low and I think that will continue to pressure silver, but I will wait for a breakout to occur as the 10 day high is too far away risking too much money at the current time so be patient as the trend clearly remains bearish.

The U.S dollar has remained strong throughout 2015 as that’s put pressure on the precious metals and many other commodities as I think the U.S dollar is about to breakout to the upside and if that does occur look for silver prices to possibly head back down to the $13 level.
Trend: Lower
Chart Structure: Poor

The dollar index futures in the December contract are trading above their 20 day and right at their 100 day average telling you that the trend has turned to the upside as I’m currently sitting on the sidelines waiting for a breakout above 96.88 to occur before entering a bullish position while then placing your stop loss at the 10 day low which would be 95.57.

The dollar settled last Friday at 96.43 while currently trading at 96.45 basically unchanged for the trading week as investors are awaiting the monthly unemployment number which will be released this morning at 7:30 sending high volatility back into this market. I have not traded the dollar index for quite some time but when I do see excellent chart structure coupled with a solid risk/reward situation I will trade the market, but at this point patience is the key waiting for the true breakout to occur before entering as we could be entering a bullish position any day now.
Trend: Mixed
Chart Structure: Improving

Coffee futures in the December contract are trading above their 20 day but still below their 100 day moving average telling you that the short term trend is mixed as I was recommending a short position getting stopped out last Friday around the 122 level as I’m now sitting on the sidelines waiting for another trend to develop as I have been stopped out of the last two recommendations. Coffee settled last Friday at 122.70 a pound while currently trading at 121 down slightly for the trading week with very low volatility as prices are still right near a 4 week high waiting for some fresh fundamental news to dictate short term price action.

Generally speaking coffee is one of the most volatile commodities historically speaking, but with low volatility at the current time as prices have been going sideways for the last month or so, but a new trend could be developing as prices look to be bottoming out around this level in my opinion. The Brazilian Real has stabilized against the U.S dollar in the past week and that’s also helped push up coffee prices here in the short term, but only time will tell to see if that trend remains, but I expect high volatility to emerge in the coming months.
Trend: Higher
Chart Structure: Solid

Mike has been a senior analyst for close to 15 years and has extensive knowledge of all of the commodity and option markets. Get more of Mike's calls on this Weeks Commodity Markets


Make sure you get our latest FREE eBook "Understanding Options"....Just Click Here!

By John Mauldin 

There is presently a bull market in complacency. There are very few alarm bells going off anywhere; and frankly, in reaction to my own personal complacency, I have my antenna up for whatever it is I might be missing that would indicate an approaching recession.

It was very easy to call the last two recessions well in advance because we had inverted yield curves. In the US at least, that phenomenon has a perfect track record of predicting recessions. The problem now is that, with the Federal Reserve holding the short end of the curve at the zero bound, there is no way we can get an inverted yield curve, come hell or high water. For the record, inverted yield curves do not cause recessions, they simply indicate that something is seriously out of whack with the economy. Typically, a recession shows up three to four quarters later.

I know from my correspondence and conversations that I am not the only one who is concerned with the general complacency in the markets. But then, we’ve had this “bull market in complacency” for two years and things have generally improved, albeit at a slower pace in the current quarter.

With that background in mind, the generally bullish team at GaveKal has published two short essays with a rather negative, if not ominous, tone. Given that we are entering the month of October, known for market turbulence, I thought I would make these essays this week’s Outside the Box. One is from Pierre Gave, and the other is from Charles Gave. It is not terribly surprising to me that Charles can get bearish, but Pierre is usually a rather optimistic person, as is the rest of the team.

I was in Toronto for two back-to-back speeches before rushing back home this morning. I hope you’re having a great week. So now, remove sharp objects from your vicinity and peruse this week’s Outside the Box.

Your enjoying the cooler weather analyst,

John Mauldin

Stay Ahead of the Latest Tech News and Investing Trends...

Click here to sign up for Patrick Cox’s free daily tech news digest.

Each day, you get the three tech news stories with the biggest potential impact.

A Worrying Set Of Signals

By Pierre Gave
Regular readers will know that we keep a battery of indicators to gauge, among other things, economic activity, inflationary pressure, risk appetite and asset valuations. Most of the time this dashboard offers mixed messages, which is not hugely helpful to the investment process. Yet from time to time, the data pack points unambiguously in a single direction and experience tells us that such confluences are worth watching. We are today at such a point, and the worry is that each indicator is flashing red.

Growth: The three main indices of global growth have fallen into negative territory: (i) the Q-indicator (a diffusion index of leading indicators), (ii) our diffusion index of OECD leading indicators, and (iii) our index of economically-sensitive market prices. Also Charles’s US recession indicator is sitting right on a key threshold (see charts for all these indicators in the web version).

Inflation: Our main P-indicator is at a maximum negative with the diffusion index of US CPI components seemingly in the process of rolling over; this puts it in negative territory for the first time this year.

Risk appetite: The Gavekal velocity indicator is negative which is not surprising given weak market sentiment in recent weeks. What worries us more is the widening of interest rate spreads—at the long end of the curve, the spread between US corporate bonds rated Baa and treasuries is at its widest since 2009; at the short-end, the TED spread is back at levels seen at the height of the eurozone crisis in 2012, while the Libor-OIS spread is at a post-2008 high. Moreover, all momentum indicators for the main equity markets are at maximum negative, which has not been seen since the 2013 “taper tantrum”.

These weak readings are especially concerning, as in recent years, it has been the second half of the year when both the market and growth has picked up. We see three main explanations for these ill tidings:

1) Bottoming out: If our indicators are all near a maximum negative, surely the bottom must be in view? The contrarian in us wants to believe that a sentiment shift is around the corner. After all, most risk-assets are oversold and markets would be cheered by confirmation that the US economy remains on track, China is not hitting the wall and the renminbi devaluation was a one-off move. If this occurs, then a strong counter-trend rally should ramp up in time for Christmas.

2) Traditional indicators becoming irrelevant: Perhaps we should no longer pay much attention to fundamental indicators. After all, most are geared towards an industrial economy rather than the modern service sector, which has become the main growth driver. In the US, industrial production represents less than 10% of output, while in China, the investment slowdown is structural in nature. The funny thing is that employment numbers everywhere seem to be coming in better than expected. In this view of things, either major economies are experiencing a huge drop in labor productivity, or our indicators need a major refresh (see Long Live US Productivity!).

3) Central banks out of ammunition: The most worrying explanation for the simultaneous decline in our indicators is that air is gushing out of the monetary balloon. After more than six years of near zero interest rates, asset prices have seen huge rises, but investment in productive assets remains scarce.

Instead, leverage has run up across the globe. According to the Bank for International Settlements’ recently released quarterly review, developed economies have seen total debt (state and private) rise to 265% of GDP, compared to 229% in 2007. In emerging economies, that ratio is 167% of GDP, compared to 117% in 2007 (over the period China’s debt has risen from 153 to 235% of GDP). The problem with such big debt piles is that it is hard to raise interest rates without derailing growth.

Perhaps it is not surprising that in recent weeks the Federal Reserve has backed away from hiking rates, the European Central Bank has recommitted itself to easing and central banks in both Norway and Taiwan made surprise rate cuts. But if rates cannot be raised after six-years of rising asset prices and normalizing growth, when is a good time? And if central banks are prevented from reloading their ammunition, what will they deploy the next time the world economy hits the skids?

Hence we have two benign interpretations and one depressing one. Being optimists at heart, we want to believe that a combination of the first two options will play out. If so, then investors should be positioned for a counter-trend rally, at least in the short-term. Yet we are unsettled by the market’s muted response to the Fed’s dovish message. That would indicate that investors are leaning towards the third option. Hence, we prefer to stay protected and for now are not making a bold grab for falling knifes. At the very least, we seek more confirmation on the direction of travel.

Positioning For A US Recession

By Charles Gave
Since the end of last year I have been worried about an “unexpected” slowdown, or even recession, in the world’s developed economies (see Towards An OECD Recession In 2015). In order to monitor the situation on a daily basis, I built a new indicator of US economic activity which contains 17 components ranging from lumber prices and high-yield bond spreads to the inventory-to-sales ratio. It was necessary to construct such an indicator because six years of extreme monetary policy in the US (and other developed markets) has stripped “traditional” cyclical economic data of any real meaning (see Gauging The Chances Of A US Recession).

Understanding this diffusion index is straightforward. When the reading is positive, investors have little to worry about and should treat “dips” as a buying opportunity. When the reading is negative a US recession is a possibility. Should the reading fall below – 5 then it is time to get worried – on each occasion since 1981 that the indicator recorded such a level a US recession followed in fairly short order. At this point, my advice would generally be to buy the defensive team with a focus on long dated US bonds as a hedge. This is certainly not a time to buy equities on dips.

Today my indicator reads – 5 which points to a contraction in the US, and more generally the OECD. Such an outcome contrasts sharply with official US GDP data, which remains fairly strong. Pierre explored this discrepancy in yesterday’s Daily (see A Worrying Set Of Signals), so my point today is to offer specific portfolio construction advice in the event of a developed market contraction. My assumption in this note is simply that the US economy continues to slow. Hence, the aim is to outline an “anti-fragile” portfolio which will resist whatever brickbats are hurled at it.

During periods when the US economy has slowed, especially if it was “unexpected” by official economists, then equities have usually taken a beating while bonds have done well. For this reason, the chart below shows the S&P 500 divided by the price of a 30 year zero coupon treasury.

A few results are immediately clear:

• Equities should be owned when the indicator is positive.
   
• Bonds should be held when the indicator is negative.
   
• The ratio of equities to bonds (blue line) has since 1981 bottomed at about 50 on at least six occasions. Hence, even in periods when fundamentals were not favorable to equities (2003 and 2012) the indicator identified stock market investment as a decent bet. 
Today the ratio between the S&P 500 and long dated US zeros stands at 75. 

This suggests that shares will become a buy in the coming months if they underperform bonds by a chunky 33%. The condition could also be met if US equities remain unchanged, but 30 year treasury yields decline from their current 3% to about 2%. Alternatively, shares could fall sharply, or some combination in between. 


Notwithstanding the continued relative strength of headline US economic data, I would note that the OECD leading indicator for the US is negative on a YoY basis, while regional indicators continue to crater. The key investment conclusion from my recession indicator is that equity positions, which face risks from worsening economic fundamentals, should be hedged using bonds or upping the cash component.

Like Outside the Box?

Sign up today and get each new issue delivered free to your inbox. It's your opportunity to get the news John Mauldin thinks matters most to your finances.

The article Outside the Box: A Worrying Set Of Signals was originally published at mauldineconomics.com.

Get our latest FREE eBook "Understanding Options"....Just Click Here!