The Most “Horrifying” Chart in the World

By Justin Spittler

Larry Fink is terrified. Fink runs BlackRock, the world’s largest asset manager. The company manages a whopping $5.1 trillion. That's more than Goldman Sachs, Bank of America, or Wells Fargo. It’s more than the annual economic output of Japan, the world’s third largest economy. This makes Fink one of the most powerful people on the planet. Obviously, you don’t climb to the top in Wall Street by being easily rattled. But right now, Fink’s nervous. He’s worried about “a lot of dark shadows that could impact the direction of the marketplace.”

Fink’s especially worried about consumer confidence.…
Consumer confidence measures how everyday people feel about the economy and their own financial situation. It’s subjective. You can’t measure it. That’s why some investors don’t take it seriously. But they should. After all, sentiment is what really drives stocks. It’s far more important than earnings, valuations, or the health of the economy. It’s why stocks can rally despite serious fundamental problems. According to a recent survey by the University of Michigan, consumer confidence has been climbing since 2011. It recently hit the highest level since 2004.

Americans have good reason to be confident.…
After all, we just elected our first “investor” president. Unlike Obama, Donald Trump wants to put American businesses first. He also wants to cut taxes, ease regulations, and rebuild American infrastructure. These policies should help U.S. companies and workers. That’s why Americans are so confident. It’s why the S&P 500 has rallied 9% since Election Day. It’s why the Dow Jones Industrial Average just topped 20,000 for the first time ever. You can clearly see Trump’s impact on stocks in the chart below. You’ll also notice that consumer confidence hasn’t been this high since just before the 2008–2009 financial crisis.

Thanks to Trump, greed is in the air again…
But this isn’t a good thing. It’s a warning sign. Today, consumer confidence is even higher than it was in 2007. And we all know how that ended. The S&P 500 plunged 57% over the next two years. The Russell 2000, which tracks 2,000 small U.S. stocks, dropped 60%.

Fink doesn't think you should be buying stocks right now.…
He explained why in a Yahoo! Finance investor event last week:

When consumer confidence was at the lowest, that was the low point of the equity market. You should be buying then. And now consumer confidence is high and the S&P 500 is very high. Maybe you should be selling now.

Fink’s not the only Wall Street legend who thinks this, either. Sir John Templeton, one of the greatest stock pickers ever, famously said:

Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.

This is why Fink thinks the chart above is “horrifying.” But that’s not the only thing keeping him up at night.

Fink says “we’re living in a bipolar world”.…

He continued:

In my conversations with CEOs in Europe and CEOs in the United States they may be very bullish about what may come but most business people are not investing today.

Some folks might find this confusing. After all, the stock market is supposed to reflect the health of the economy. But Dispatch readers know this hasn’t been the case lately. Since 2009, the U.S. economy has grown just 2% per year. That makes the current recovery one of the slowest on record. Meanwhile, stocks have been rallying for nearly eight years. That makes the current bull market one of the longest in U.S. history.

U.S. stocks are now incredibly expensive.…
Companies in the S&P 500 are trading at a cyclically adjusted price-to-earnings ratio (CAPE) of 28.9. That’s the highest level since the dot-com bubble. It means U.S. stocks are 73% more expensive than normal. And that’s just one measure. Last week, we showed you two other key metrics that prove how absurdly expensive U.S. stocks are today. In short, there’s not much upside in U.S. stocks, even if Trump can breathe life into the economy.

We recommend you take precautions today.…
You can get started by holding more cash and owning physical gold. Setting aside cash will help you avoid big losses if stocks crash. Gold will also help you weather the next financial crisis. That’s because gold is the ultimate safe haven asset. It’s survived everything from stock market crashes to full blown currency crises. It will survive the next financial crisis, too. To be clear, we aren’t saying U.S. stocks will crash this year or even the next. But these simple steps will protect you should the “unthinkable” happen.

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Chart of the Day

Silver is rallying. Today’s chart shows the performance of the iShares Silver Trust ETF (SLV), whichs tracks the price of silver. It’s the most active silver fund in the world. Every day, investors trade more than 9 million shares of SLV. This makes it a great way to track investor demand for silver. You can see in the chart below that SLV has been in a downtrend “channel” since last summer. A channel is a range that an asset trades in. The bottom line acts as support. The top line acts as resistance.

You can see SLV just “broke out” of this channel. It’s now in an uptrend. This tells us that silver should head higher in the near future. If you own silver, this is great news. If you don’t, now might be a good time to buy some. Just don’t wait too long. Silver could be headed much higher from here.

The article The Most “Horrifying” Chart in the World was originally published at caseyresearch.com.

Five Easy Ways to Make Your Finances Less Fragile

By Justin Spittler

A few days ago, we sat down with E.B. Tucker, editor of The Casey Report, to talk shop. The conversation was so good, we just had to share it with you. In the following interview, E.B. talks about how he manages his own money. As you’ll see, he has a unique, yet intuitive approach to investing, especially when it comes to asset allocation. We hope you find this conversation as useful as we did. Also, make sure you read until the end to learn about one of E.B.’s top speculations.

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Justin Spittler: I want to talk investment strategy. Could you tell us how you manage your own money?

E.B. Tucker: I like to break up my investments into buckets. I have about five of them. I have one for gold, one for permanent life insurance, one for real estate, and two for stocks. I don’t limit myself to a certain number of buckets. But I’ve had very good results looking at asset allocation this way.

J.S.: Can you tell us a little more about your “buckets”? Why do you break them up this way? What kind of assets go into each?

E.B.: First of all, the buckets change with life and market conditions. For example, I put most of my capital into a real estate bucket in 2009–2010. As you know, the U.S. housing market had just crashed. If you had the capital, you could buy some houses for next to nothing. And that’s exactly what I did.…

During that period, I bought six single-family homes. I bought one of them for just $10 per square foot. I spent another $10 per square foot fixing the place up, so I put about $20 per square foot all in. The guy before me paid $160 per square foot and ended up in foreclosure. He bought near the peak of the housing bubble. My timing was much better. Today, I’m not adding to my real estate bucket. There just aren’t that many great deals out there. This is key to how I invest. Rather than fight the market, I let it determine how I allocate my money.

J.S.: Can you tell us about some of your other buckets?

E.B.: Well, I have a bucket for gold. But I don’t view gold as an investment designed to make money. I see it as a key long term asset. When gold is cheap, I pour money into this asset. I don’t think about this bucket often. I just get the gold, vault it, and move on.

I also have a permanent life insurance bucket. This bucket is important because I have a few people that depend on me. If I die, they’re out of luck. So, I need to have life insurance. Specifically, I own a couple dividend-paying life insurance policies. A lot of people consider these terrible investments, but that’s because they don’t understand them.

You see, any extra money that I put in this bucket on top of the minimum annual premium grows 6% to 7% per year, tax free. If I don’t use the policy, over time I’ll have a fairly large amount of cash in that bucket that I spend, borrow from, or use to buy more life insurance. And, of course, if the worst does happen, my dependents receive a large death benefit. This money will help them get by in my absence.

J.S.: Interesting, it sounds like this bucket protects you and gives you flexibility.

E.B.: Exactly. The reason I invest this way is because it makes me less “fragile." Now, I still have plenty of exposure to rising asset prices in other buckets. But, if you’re smart about when and how much you add to each bucket, your “boring” buckets will eventually balance out your more speculative buckets. The result is a more stable financial situation without giving up the quest for profits. I like investing this way because I no longer worry about trying to maximize my profit on every trade or every time the market changes course.

J.S.: Let’s talk about your stock buckets next. I’m sure our readers would love to know what’s in your portfolio. 

E.B.: Sure. As I said earlier, I have two of them. One is for stocks I plan to hold for the long haul. I don’t trade these stocks often. I’m only a seller if something happens that changes the business landscape for one of the companies. I typically own between six and eight of these companies at any given time. One of my favorite long term holdings is a company that make crackers you buy at the gas station and pretzels that go well with beer. Last year, the company acquired a business that sells almonds and other nuts. It’s a great company. And it now pays me a decent yield of 3%, since I’ve owned the stock for a few years.

J.S.: What are some of your other long term stock holdings?

E.B.: I also have shares of one of the country’s best regional banks. And I own shares of one of America’s most iconic companies. This company is basically a drug dealer, peddling sugar and caffeine from small rented stores. You get the picture. Now, these aren’t the most exciting investments in the world but, over time, you see the value of owning rock solid American businesses.

You end up with companies that slowly capture market share from their competitors, invest money back into their businesses, and pay dividends. I don’t see how you can get hurt having this bucket represent 20% of your net worth. It’s also worth mentioning that I like to own these stocks in company sponsored dividend reinvestment plans.

Since these are long-term investments, I don’t want to log into a brokerage account and see them next to my trading positions every day. Holding them directly on the company’s books means all my dividends get reinvested into additional shares, usually at no cost. The final benefit is I don’t have to worry about my broker going bust. Holding shares directly registered with a company means there’s nobody standing between you and your investment.

J.S.: That leaves us with your speculation bucket. Can you tell us a little bit about this one?

E.B.: Ah, my favorite. I’ve done fairly well speculating. The key here is separating good speculations from bad ones. As a professional investor, a lot of opportunities come across my desk. Most of them aren’t worth my time. You have to pass on a lot of bad speculations before you find a great one.

J.S.: Can you tell us about one of your better speculations?

E.B.: At a lunch meeting with my banker in 2009, he told me about a company in town that invented a hurricane simulation machine. They placed a few in malls, shopping centers, arcades, and museums and charged $2 per customer. The test machines took in $4,000 to $5,000 per month. The company built each machine for around $12,000. The company had trouble getting a bank to lend it money. It was right after the financial crisis, after all.

I met with the company, saw the machine, and looked at their business plan. A few other investors and I funded the company. We bought preferred shares that paid a 20% dividend. We also received a portion of the company’s profits for the first two years, which boosted our initial returns. Seven and a half years later, I’m still collecting monthly checks from the company. I’ve more than doubled my money, and I could sell the shares anytime I want.

J.S.: Have you done any other speculations like this recently?

E.B.: Yes. Before I got into this business, I ran a gold fund for a few years. My former business partner from that fund just took his gold streaming and royalty company public. Our company policy does not allow me to share the name of the stock, since I own shares. I’m involved in that deal to the tune of about 1% of the company. I think there’s a realistic shot that I’ll make 5–10 times my money.

J.S.: Most people would kill to make that much on a single investment. Why are you so optimistic?

E.B.: I think it’s a good time to speculate on small gold and silver stocks. I especially like royalty and streaming companies like this one. They avoid the tremendous financial burdens that mining companies face.
I also look for companies that have a winning strategy but that are overlooked by the market. If these companies execute, my odds of success go up.

But you need to have cash on hand, or what some people call dry powder, to take advantage of these opportunities. That’s because great deals usually require quick action. When one of my speculations is a winner, I’ll take profits and put them into other buckets, depending on what looks good at the time. I almost never leave the entire profit in the bucket it came from.

J.S.: Got it. So, do you like to keep a certain percentage in each bucket at any given time? What rules, if any, do you follow?

E.B.: I don’t really follow a set of rules when it comes to asset allocation. That makes it hard to take advantage of huge opportunities when they appear. For example, I wouldn’t have invested in the Florida rental real estate market in 2009 and 2010 if I stuck to strict rules. When in doubt, you can divide new money equally between buckets. You can also sit on cash and wait for buying opportunities to present themselves.

J.S.: What kind of investments do you focus on in The Casey Report?

E.B.: That’s your most valuable question so far. In The Casey Report, we fill the long-term stock and speculative stock buckets. We try to predict what the investing world will be like one to two years down the road. We then buy stocks that will benefit most as the world changes. In stock investing, that’s the sweet spot where you find the most value in the shortest period of time.

Our goal is to beat the S&P 500 every year. We want our readers to have enough success to irritate their wealth manager. Hopefully, they can use that success and the lessons learned in The Casey Report to beat the market in their asset buckets.

J.S.: Thank you for your time, E.B.

E.B.: You’re welcome.

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In August, E.B. told his readers to buy a small North American mining company. At the time, few investors knew about the company. Its stock traded for less than $1. But E.B. said the stock wouldn’t fly under the radar for much longer…and he was exactly right.

In just four months, this stock has soared 115%. Normally, we wouldn’t encourage you to buy a stock after an explosive run like this. But E.B. recently went on record and said, “the stock doubled, it will double again.” To see why, watch this brand-new presentation. It talks about an event that E.B. says will take place exactly one month from today. If the event goes as expected, this stock should skyrocket again.

You can learn more about this event, including how to take advantage of it, by watching this FREE video.

The article Five Easy Ways to Make Your Finances Less Fragile was originally published at caseyresearch.com.

Why These Huge Bank Stocks Could Go to Zero

By Justin Spittler

Europe’s banking system looks like it’s about to implode. As you probably know, Europe has serious problems right now. Its economy is growing at its slowest pace in decades. Policymakers are now more desperate than ever and are on the verge of introducing more "stimulus" measures. And Great Britain just voted to leave the European Union (EU).

These are all major concerns. But Europe’s biggest problem is its banking system. Over the past year, the Euro STOXX Banks Index, which tracks Europe’s biggest banks, has plummeted 46%. Deutsche Bank (DB) and Credit Suisse (CS), two of Europe’s most important banks, are down 63%. Both are trading at all time lows. We've warned you to stay away from these stocks. As we explained two weeks ago, Europe’s banking system is a complete disaster.

And it’s only getting worse by the day..…

European bank stocks have crashed over the past couple days. Yesterday, every major European bank stock ended the day down. Several fell more than 5%. A few plunged more than 10%. These are giant declines. Remember, these banks are the pillars of Europe’s financial system. Today, we’ll explain why this banking crisis could reach you even if you don’t live in Europe. But first, let’s look at why European bank stocks are crashing.

Europe’s banking system has major problems..…
Europe’s economy is barely growing. And negative interest rates are killing European banks. Regular readers know negative rates are a radical government policy. The European Central Bank (ECB) introduced them in 2014, thinking they would “stimulate” Europe’s economy. You see, negative rates basically turn your bank account upside down.

Instead of earning interest on your money in the bank, you pay the bank to hold your money. The geniuses at the ECB thought they could force people to spend more money by “taxing” their savings. But Europeans aren’t spending more money right now. They’re pulling cash out of the banking system and sticking it under their mattresses…where negative rates can’t get to it.

Negative rates are also eating into European bank profits…
Today, the ECB’s key interest rate is at -0.4%. This means European banks must pay €4 for every €1,000 they keep with the ECB. That might not sound like much. But it’s a big problem for European banks that oversee trillions of euros. According to Bank of America (BAC), European banks could lose as much as €20 billion per year by 2018 if the ECB keeps rates where they are.

The Euro STOXX Banks Index plunged 2.8% on Monday..…
Yesterday, it fell another 4.9%. The selloff hit everywhere from Frankfurt to Milan. Spanish banking giant Santander closed the day down 5%. The Bank of Ireland fell 8%. And Commerzbank AG, one of Germany’s biggest lenders, fell 9% to a record low. Commerzbank’s stock plunged after it said negative rates were eating into its profits.

Meanwhile, Deutsche Bank and Credit Suisse fell 3.7% and 4.7%, respectively. Investors dumped these stocks after learning that both are going to be dropped from the Euro STOXX 50 index, Europe’s version of the Dow Jones Industrial Average.

Italian stocks fell even harder yesterday..…
UniCredit, Italy’s largest bank, fell 7% before trading on its stock was halted. Regulators stopped the stock from trading due to “concerns about its bad loan portfolio.” The stock has plunged 72% over the past year. Bank Popolare di Milano, another large Italian bank, fell 10%. And Banca Monte dei Paschi di Siena, Italy’s third biggest bank, plummeted 16%. Monte Paschi plunged after a banking watchdog said it was in the worst shape of all European banks. It’s down 85% over the past year.

Italy is ground zero of Europe’s banking crisis..…
Right now, Italy’s banks are sitting on about €360 billion in “bad” loans, or loans that trade for less than book value. That’s almost twice as many bad loans as Italian banks had in 2010. According to the Financial Times, bad loans now account for 18% of all of Italy’s loans. That’s more than four times as many bad loans as U.S. banks had during the worst of the 2008–2009 financial crisis.

Policymakers are scrambling to contain the crisis..…
Last month, the Italian government said it may pump €40 billion into its banking system to keep it from collapsing. A couple weeks later, Mario Draghi, who runs the ECB, said he would support a public bailout of Italy’s banking system. That’s when the government gives troubled banks money and makes taxpayers pay for it.

We said these emergency measures wouldn’t fix any of Italy’s problems. At best, they’ll buy the government time. Unfortunately, policymakers will almost certainly “do something” if Europe’s banking system continues to unravel.

The ECB could cut rates again, which would only make it harder for European banks to make money. It could also launch more quantitative easing (QE). That’s when a central bank creates money from nothing and pumps it into the financial system. Right now, the ECB is already “printing” €80 billion each month. But again, this hasn’t helped Europe’s stagnant economy one bit.

Whatever the ECB does next, you can bet it will only make things worse..…
As we've shown you many times, governments don’t fix problems. They only create them or make problems worse. If you understand this, you can make a lot of money betting that governments will do the wrong thing.

Casey Research founder Doug Casey explains:

The bad news is that governments act chaotically, spastically.
The beast jerks to the tugs on its strings held by various puppeteers. But while it’s often hard to predict price movements in the short term, the long term is a near certainty. You can bet confidently on the end results of chronic government monetary stupidity.

According to Doug, gold is the #1 way to protect yourself from government stupidity..…
That’s because gold is real money. It’s protected wealth for centuries because it’s unlike any other asset. It’s durable, easily divisible, and easy to transport. Unlike paper money, gold doesn’t lose value when the government prints money or uses negative interest rates.

These stupid and reckless actions push investors into gold. They can cause the price of gold to soar. This year, gold is up 27%. It’s trading at the highest level since 2014. But Doug says it could go much higher in the coming years. If Europe’s banking system continues to unravel, investors will panic. Fear could spread across the world like a wildfire. And gold, the ultimate safe haven, could shoot to the moon.
If you do one thing to protect yourself, own physical gold.

We also encourage you to watch this short video presentation.
It talks about a crisis that’s been brewing since the last financial crisis—one that's currently being fueled by government stupidity. The bad news is that we’re already in the early stages. The good news is that you still have time to seek shelter. You can learn about this coming crisis and how to protect yourself by watching this free video. We encourage all of our readers to do so. It’s one of the most important warnings we’ve ever issued. Click here to watch it.

Chart of the Day

Deutsche Bank’s stock is in free fall. You can see in today’s chart that Deutsche Bank has plummeted 75% since 2014. Yesterday, it hit a new all time low. If Deutsche Bank keeps falling, investors could lose faith in the financial system. And a panic could follow. At least, that’s what Jeffrey Gundlach thinks.

Regular readers know Gundlach is one of the world’s top investors. His firm, DoubleLine Capital, manages about $100 billion. Many investors call him the “Bond King,” a title that PIMCO founder Bill Gross held for years. Like us, Gundlach thinks Europe’s banking system is in serious trouble. And like us, he thinks European policymakers will spring into action if things start to get ugly. Reuters reported last month:

"Banks are dying and policymakers don’t know what to do," Gundlach said. "Watch Deutsche Bank shares go to single digits and people will start to panic… you'll see someone say, 'Someone is going to have to do something'."

Right now, Deutsche Bank is trading under $13. Less than three years ago, it traded close to $50. If Europe’s bank stocks continue to plunge, the ECB will likely “double down” on its easy money policies. This won’t repair Europe’s economy… It will destroy the euro, the currency that the ECB is supposed to defend.
This is why it’s so important that you “crash proof” your wealth today. Click here to learn how.

The article Why These Huge Bank Stocks Could Go to Zero was originally published at caseyresearch.com.

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Thoughts from the Frontline: Bubbles, Bubbles Everywhere

By John Mauldin

The difference between genius and stupidity is that genius has its limits.
– Albert Einstein

Genius is a rising stock market.
– John Kenneth Galbraith

Any plan conceived in moderation must fail when circumstances are set in extremes.
– Prince Metternich

You can almost feel it in the fall air (unless you are in the Southern Hemisphere). The froth and foam on markets of all shapes and sizes all over the world. It is an exhilarating feeling, and the pundits who populate the media outlets are bubbling over with it. There is nothing like a rising market to help lift our mood. Unless of course, as Prof. Kindleberger famously cautioned (see below), we are not participating in that rising market. Then we feel like losers. But what if the rising market is … a bubble? Are we smart enough to ride and then step aside before it bursts? Research says we all think that we are, yet we rarely demonstrate the actual ability.

This week we'll think about bubbles. Specifically, we'll have a look at part of the chapter on bubbles from my latest book, Code Red, which we launched last week. At the end of the letter, for your amusement, is a link to a short video of what you might hear if Jack Nicholson were playing the part of Ben Bernanke (or Janet Yellen?) on the witness stand, defending the extreme measures of central banks. A bit of a spoof, in good fun, but there is just enough there to make you wonder what if … and then smile. Economics can be so much fun if we let it.

I decided to use this part of the book when numerous references to bubbles popped into my inbox this week. When these bubbles finally burst, let no one exclaim that they were black swans, unforeseen events. Maybe because we have borne witness to so many crashes and bear markets in the past few decades, we have gotten better at discerning familiar patterns in the froth, reminiscent of past painful episodes.
Let me offer you three such bubble alerts that came my way today. The first is from my friend Doug Kass, who wrote:

I will address the issue of a stock market bubble next week, but here is a tease and fascinating piece of data: Since 1990, the P/E multiple of the S&P 500 has appreciated by about 2% a year; in 2013, the S&P's P/E has increased by 18%!

Then, from Jolly Olde London, comes one Toby Nangle, of Threadneedle Investments (you gotta love that name), who found the following chart, created a few years ago at the Bank of England. At least when Mervyn King was there they knew what they were doing. In looking at the chart, pay attention to the red line, which depicts real asset prices. As in they know they are creating a bubble in asset prices and are very aware of how it ends and proceed full speed ahead anyway. Damn those pesky torpedoes.

Toby remarks:

This is the only chart that I’ve found that outlines how an instigator of QE believes QE’s end will impact asset prices. The Bank of England published it in Q3 2011, and it tells the story of their expectation that while QE was in operation there would be a massive rise in real asset prices, but that this would dissipate and unwind over time, starting at the point at which the asset purchases were complete.

Oh, dear gods. Really? I can see my friends Nouriel Roubini or Marc Faber doing that chart, but the Bank of England? Really?!?

Then, continuing with our puckish thoughts, we look at stock market total margin debt (courtesy of those always puckish blokes at the Motley Fool). They wonder if, possibly, maybe, conceivably, perchance this is a warning sign?



And we won’t even go into the long list of stocks that are selling for large multiples, not of earnings but of SALES. As in dotcom-era valuations.

We make the case in Code Red that central banks are inflating bubbles everywhere, and that even though bubbles are unpredictable almost by definition, there are ways to benefit from them. So, without further ado, let’s look at what co-author Jonathan Tepper and I have to say about bubbles in Chapter 9.

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.

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