Perma-Bulls and Pointy-Headed Academics

Posted On Feb 4, 2016 By Dave Gonigam

  • “Legendary” investing author pulls a 2016 market prediction from his posterior
  • How Wall Street’s “long run” wisdom can leave you broke…
  • … and the one thing you must do to survive the next crash
  • Currency shock update: The black box that’s Saudi Arabia’s Treasury holdings
  • Good news for once: Victim of the war on cash is vindicated in court
  • Dollar weakness moves markets… Jamaicans who laugh at American “freedom”… how the “fair tax” will be implemented (not as its supporters want)… and more!

“The stock market goes up and down. We could easily have another 50% crash,” says our new trend following maven Michael Covel. “Maybe more.”

Understand that’s not a prediction. Predictions aren’t Michael’s bag. But it’s a possibility.

For all the worries shaking up markets this year, mainstream “experts” rule out the possibility of a 50% crash.

Case in point: Wharton finance professor Jeremy Siegel. “I actually think we’re going to get 8–10% this year” in the stock market, he told CNBC recently. “I don’t think [this year] is gonna be all that bad.”

“Where’s that number coming from?” Michael asks rhetorically. “He literally pulled that number out of his hat. We know he’s just making that up.

“As far as I know, Siegel’s always bullish. Meaning he will never tell you to sell stocks.”

Indeed, he doesn’t. As you might be aware, Siegel wrote a book in 1994 called Stocks for the Long Run. It’s now in its fifth edition.

Siegel makes a huge deal about how stocks have returned an average 6.7% a year, after inflation, over the last 210 years.

Never mind that your investing time horizon is, well, something less than 210 years.

And Siegel is oblivious. “Seven percent per year [average] real returns on stocks is what I find over nearly two centuries,” he told BusinessWeek in May 2000. “I don’t see persuasive reasons why it should be any different from that over the intermediate run.”

Heh… Siegel gave that interview two months after the Nasdaq had peaked and the dot-com crash was underway in earnest. For the record, here’s what’s happened since…

15 Years

“Does that look like a 7% annual return to you?” Michael asks, again rhetorically. “How is Mr. Siegel’s recent call of 8–10% annual return this year any different than the call he made in 2000?”

Too, there’s the example of the Dow industrials in 1929 — which didn’t get back to breakeven until 1954, a quarter-century later.

“If you’re getting ready to retire, you can’t look at the stock market as an average,” Michael concludes.

“You can’t look at historical data and say, ‘Well, stocks on average go up 7–8%, so that’s what we should expect this year.’ That’s just asking for trouble.”

So forget the perma-bulls and pointy-headed academics. You need a strategy that can thrive whether 2016 ends with a 30% rally (like 2013) or a 50% crash. Or anything in between.

That’s what Michael’s trend following strategy is all about.

“These days,” he says, “I am so used to the concept of making money in up markets and down markets that I sometimes forget how foreign that very concept is for the average trader or investor.”

That’s because 20 years ago — before “dot-com crash” entered the popular lingo — Michael discovered the secret to making serious money was to chuck one of Wall Street’s cherished rules — “Buy low, sell high.”

His proprietary system has delivered gains of, for example, 433% on Accelerate Diagnostics… 626% on Hennessy Advisors… and 1,257% on Lithia Motors. Click here and Michael will walk you through how his system works.

To the markets today… where, like yesterday, it’s all about dollar weakness.

When we went to virtual press yesterday, it took $1.09 to equal one euro. As we write this morning, it takes nearly $1.12. That’s a big move in less than 24 hours.

What changed? New York Fed chief Bill Dudley — one of the three major powers at the Federal Reserve along with chair Janet Yellen and Vice Chair Stanley Fischer — gave a speech in which he said the Fed would have to take into account a weaker outlook for the global economy and tighter financial conditions.

Traders interpreted that to mean “no rate increase in March” and kicked the dollar to the curb.

It was the bond market that sniffed out this dollar weakness even before Dudley’s speech, says our currency counselor Chuck Butler at EverBank Global Markets. The yield on a 10-year Treasury tumbled from 1.97% on Tuesday to 1.8% early Wednesday.

“What this drop in bond yields is telling us,” says Chuck, “is that bond traders have seen enough of the weak economic data prints and are saying that the Fed can’t hike rates four times this year.”

The knock-on effects of this dollar weakness are big rallies in stocks… and commodities.

Late yesterday morning, the Dow had sunk below 16,000. As we write today, it’s above 16,400. Gold, meanwhile, has recaptured the $1,150 level for the first time since late October. Base metals are rallying too — copper at $2.13 a pound, the highest so far in 2016.

And crude has bounced hard. Yesterday morning, it was oscillating around $30. This morning, it’s hefted itself past $33.

The 10-year Treasury yield, meanwhile, has pushed back up to 1.89%.

“How much money does the United States owe Saudi Arabia? It’s a good question, and good luck finding the answer,” says Jim Rickards.

As you might recall, Jim made the bold forecast last month that Saudi Arabia is on track to set off a global market shock by devaluing the riyal — which is currently pegged to the U.S. dollar.

Now consider this: The amount of U.S. Treasury debt held by Saudi Arabia is not publicly disclosed. Bloomberg had an article a few days back spotlighting this “secret of the vast U.S. Treasury market, a holdover from an age of oil shortages and mighty petrodollars.”

The Treasury issues its Treasury International Capital (TIC) report each month, identifying the major foreign holders of Treasury debt. For years, China and Japan have been No. 1 and 2. Saudi Arabia, meanwhile, is lumped in with other “oil exporters” — a motley group that includes Ecuador and Indonesia.

“Only a handful of officials in Washington and Riyadh know the real number,” says Jim. “Why is that a big deal? Because Saudi Arabia is now dumping Treasuries to prop up its currency. Saudi needs the dollars to make up for low oil prices and huge budget deficits.”

But without disclosure each month of how much Treasury debt is held by Riyadh, it’s impossible to identify the precise moment when the Saudi princes will throw in the towel and devalue.

Still, Jim says it’s inevitable… and he’s keeping an eye out for other warning signs. He’ll keep us posted, both here and in his premium advisory Currency Wars Alert.

And now a rare victory in the war on cash: Lyndon McLellan is getting all his money back — plus interest and legal expenses.

In May 2014, the IRS seized $107,000 from the bank account of Mr. McLellan’s convenience store in North Carolina. The feds said his deposits were suspiciously small, as if he were trying to evade the reporting requirements for cash transactions of $10,000 or more. (Never mind, as we’ve pointed out before, that many small-business insurance policies don’t cover cash losses from a robbery or fire for more than $10,000.)

Later that year, the IRS and the Justice Department said they would no longer pursue such cases unless there was evidence of illegal activity. Despite the absence of such evidence in Mr. McLellan’s case, the feds refused to return his money.

In March 2015, the feds offered to return half the money — warning McLellan’s lawyer that publicizing the case would make the feds less inclined to settle. McClellan held firm, demanding it all. The feds relented in May. But McLellan still wanted interest and the $22,000 he shelled out for lawyers before the Institute for Justice took on the case pro bono.

This week, a federal judge dismissed the case with prejudice, meaning the feds can’t bring the case again… and McLellan can apply to be made whole under the Civil Asset Forfeiture Reform Act of 2000.

“Right on to the reader who changed banks!” writes one of our regulars, as reader interest in the war on cash remains high.

“I talked with my banker about this today. The cash transaction limit is $500, and he told me upfront it is a crackdown on terrorists. This is why nearly all transactions over $500 are being reported.

“Trying to end cash? I don’t think so, but that may also depend on how far a bank takes this. Some banks will be advised by their attorneys no doubt to crack down harder, but then many of us readers know some banks are about to fail for their fraudulent bookkeeping anyway! I feel very fortunate to use U.S. Bank. I can count on their honesty and the awesome customer service I receive! I would advise anyone to change banks if they feel their new cash policies are going too far!

“Years ago, I lived in St. Thomas in the U.S. Virgin Islands. I knew several Jamaicans who all loudly laughed at what the U.S. calls freedom. Of late, and especially today with the rankings you shared, I see now why they laughed! I just wish this information were higher in mainstream media! Our country is truly lacking in real-life education about everything!”

“Liked your solution for more new business formations,” a reader writes after yesterday’s episode.

“The self-employment tax dilemma could be solved for new and old businesses by embracing the ‘fair-tax,’ which does away with payroll taxes altogether. Hooray!

“Other benefits include neutralizing foreign tax shelters, taxing imports the same as domestic products and not taxing exports and offshore earnings. It would also reduce welfare costs as each household receives government checks equal to the tax on the first dollars earned up to the poverty level, whether working or not.

“Mike Huckabee, who campaigned on it, just dropped out of the race. It’s an idea that makes just too much sense to ever be considered by politicians who derive their power from the current system.”

The 5: We’re sure some form of national sales tax will be implemented somewhere down the line… but it’ll be done in addition to the byzantine system of income and payroll taxes.

Whatever president proposes it will do so during a time of perceived “national crisis.” Sure, it’ll hit the middle class and the poor harder than the wealthy… so it will be accompanied by sharply higher income taxes on the wealthy.

And the president will solemnly intone about “shared sacrifice.” Count on it…

Best regards,

Dave Gonigam
The 5 Min. Forecast

P.S. “Touché! Nice response in The 5,” says the fellow who wrote in yesterday expressing skepticism about our newest editor. The reader said he’d hold off on subscribing to Trend Following With Michael Covel until he’d established a track record within the newsletter. We responded here.

“I capitulated and signed on for the lifetime Trend Following With Michael Covel. Here’s to his goals for the service panning out!”

Thank you, sir, for the vote of confidence. As our fearless leader Addison Wiggin explained, we looked long and hard for a super-trader who could help readers through the inevitable bust that will follow the anemic Fed-fueled boom of recent years.

As long as you have the courage to ignore Wall Street’s standard buy-low-sell-high advice, you stand to prosper no matter what. Of course, Michael explains it better in his own words than we ever could.


Other Articles In 5 Min. Forecast