After Halloween, a Real Market Scare
- Rickards on three market shocks coming in mid-November
- (Two of the three have never occurred together before)
- Trade-war jitters return (say it ain’t so!)
- Fed soothes markets as inflation stays (mostly) dormant
- CNBC gives airtime to “de-dollarization”
- Setting the record straight on taxing Social Security benefits.
Here’s a financial Halloween scare — albeit one that won’t hit full force for another three weeks.
“The week of Nov. 16–22 promises to be the most dangerous period for investors since the 2008 global financial crisis,” says our macro guru Jim Rickards.
Jim makes this call using the same methods he used to predict the two big political/market shocks of 2016 — a “yes” vote on the Brexit referendum in Great Britain and the election of Donald Trump.
(The first of those two was especially profitable for his premium-level readers — a gain of 129% in three days.)
He relies in part on Bayes’ theorem, formulated by the 18th-century Englishman Thomas Bayes.
“Bayes’ theorem is a critical tool for solving problems where little or no initial information is available,” says Jim.
You start with a hypothesis… then as new information comes in, you continually test the hypothesis against it. “The formula is widely used in intelligence analysis,” says Jim. “We have begun applying it as a predictive analytic tool in capital markets forecasting.”
So how does Bayes’ theorem figure into Jim’s outlook for danger come mid-November?
Jim believes the week starting Saturday, Nov. 16, will bring a terrible trio of events.
The first is a breakdown in U.S.-China trade talks. As you might have heard, Donald Trump and Xi Jinping are due to sign a “phase one” trade deal that week. “Judging by the volatility of talks since negotiations began,” says Jim, “there’s a good chance the deal will fall apart before then.”
Jim issued that outlook to readers of Rickards’ Strategic Intelligence on Tuesday… and this morning there’s a new development that throws the whole “trade process” into a cocked hat.
The signing was supposed to take place during a summit of the Asia-Pacific Economic Cooperation, or APEC, forum in Santiago, Chile.
But within the last few hours came word that Chile’s government is canceling the summit; Santiago is a tinderbox right now as Chileans are lashing out against an increase in bus and train fares. Most of the protests have been peaceful, but sporadic violence has killed at least 20 people. Not a good setting for a gathering of global heads of state.
Any event like the signing of a major trade deal is a carefully stage-managed affair. So in addition to all the outstanding issues with the deal itself, now there’s the matter of finding an alternative venue for the photo-op.
“Bad news on any front of the trade war has been met with a negative reaction from Wall Street,” Jim reminds us.
The other wild cards in this Nov. 16–22 window are two events that “haven’t overlapped before in the nation’s history,” according to the Washington, D.C,. insider rag Roll Call.
We’re talking about a mashup of a “partial government shutdown”… with impeachment.
A shutdown is due to begin Thursday, Nov. 21, unless Congress and the White House can come to terms on a budget for the 2020 fiscal year — which began on Oct. 1.
Up until a few days ago, conventional wisdom said Congress would just pass another “continuing resolution” to keep the lights on and kick the proverbial can.
“Yet that’s far from a sure thing given the Trump-Pelosi animosity and the bitterness around impeachment,” Jim pointed out to his readers. “Trump might just decide that a shutdown is a good way to show House Speaker Nancy Pelosi who’s boss and fire up his base.”
Sure enough, Senate Minority Leader Chuck Schumer said Tuesday, “I’m increasingly worried that President Trump may want to shut down the government again because of impeachment.”
Says Jim, “A shutdown would be devastating for the stock market.”
And impeachment itself is on a fast track now — a vote might well come the day after the shutdown kicks in.
As you’re likely aware, the House voted 232-196 this morning to give a formal go-ahead to impeachment hearings that have already been underway for weeks.
“House Democrats’ goal is to impeach Trump before the Thanksgiving recess,” says Jim. “The likely date for an impeachment vote is therefore Friday, Nov. 22.
“Fears of an alternative, less business-friendly Democratic administration — amplified by the recent strength of Sen. Elizabeth Warren, who has moved ahead of Joe Biden in some polls — could cause markets to plummet. Trump will be acquitted by the Senate in a trial but markets hate one thing: uncertainty. Major volatility could follow.”
How to prepare? “This is a good time to lighten up on equity exposure,” says Jim, “and reallocate to bonds, cash and gold.”
As interest rates continue to decline, “U.S. Treasury notes, especially the 10-year note, are in a sweet spot and can produce significant capital gains before year-end. High-grade corporate bonds from rock-solid issuers like Exxon Mobil, IBM and Apple can produce slightly higher yields without much credit risk.”
Meanwhile, cash in the form of short-dated T-bills will give you protection in case falling inflation rates turn into outright deflation. “An allocation of perhaps 30% of a portfolio to cash would be prudent in these highly uncertain times.”
And finally, a 10% portfolio allocation to gold is ideal to take advantage of where Jim sees gold going from here: “The bear market in gold was over in 2015. The new bull market in gold is still in its early stages. A gold price of $2,000 per ounce in 2020 and $5,000 per ounce by 2021 are well within reach.”
[Ed. note: Jim’s unique brand of analysis can not only protect you from uncertainty and volatility. It can also hand you staggering gains in a time frame of weeks or even days when you apply a very precise strategy, working in part off Bayes’ theorem.
Gee, what was it Jim was just saying about Wall Street reacting badly to trade-war headlines?
Bloomberg reported early this morning that Chinese officials are doubtful about any long-term trade talks beyond the phase-one level. “They remain concerned,” we’re told, “about President Donald Trump’s impulsive nature and the risk he may back out of even the limited deal both sides say they want to sign in the coming weeks.”
And with that, the safety trade is in play…
- The S&P 500 has shed 13 points from yesterday’s record close of 3,046
- Treasuries are rallying, pushing yields down; at last check the 10-year was yielding 1.71%, a three-week low
- Gold is back above $1,500, the bid at last check $1,508.
What a turnabout from yesterday, when all three of those asset classes rallied after the latest moves by the Federal Reserve.
To no one’s surprise, the Fed dropped its benchmark fed funds rate another quarter percentage point. But in both the statement and Chairman Jerome Powell’s press conference, the Fed made clear that this is the last cut for now. That’s three total since July.
If the Fed actually sticks to its guns, the three cuts would in fact amount to the 1998-style “midcycle adjustment” Powell promised in July — and fuel for the decade-long economic expansion to go on a while longer, however weakly.
In addition, traders took heart from Powell’s pledge that the Fed would not return to rate increases unless inflation starts to heat up again…
And there’s no sign of “heating up” in the Fed’s preferred inflation gauge, out this morning.
“Core PCE” it’s called. It was pancake-flat for the month of September, in contrast with expectations for a 0.1% increase. Year over year, core PCE inflation is running 1.7% — down from the month before and short of the Fed’s 2% target.
The same report also shows modest growth in personal income and even more modest growth in consumer spending. “This report is soft and on the weak side of the Federal Reserve’s outlook for the economy,” says a summary from Econoday.
That said, it’s way too soon to declare a fourth rate cut is in the cards at the next Fed meeting in six weeks. The Fed is back to being “data dependent” now, and there’s a ton of incoming data between now and then — including the monthly jobs report tomorrow.
[If you’re wondering: Reporters asked little, and Powell said even less, about the Fed’s ongoing repo rescue.]
The stock sell-off today comes despite strong earnings across the board.
Despite a slew of negative headlines, Facebook delivered a “beat” and shares are up 2.3% today. Even more noteworthy is Apple, which is making up for slowing iPhone sales growth with other gadgets and subscription services — fulfillment of our Zach Scheidt’s long-term outlook for the company. AAPL is up nearly 2% as we write.
Perhaps the most interesting earnings report today comes from Wisconsin-based Generac — maker of electric-power generators. Demand is booming in light of the ongoing planned power outages in California. GNRC is up 3.5% at last check.
Other movers include Fiat Chrysler — up 4.3% after word of a planned merger with the French maker of Peugeot and Citroën vehicles.
Another straw in the “de-dollarization” winds: CNBC gave airtime this week to a think-tank type who says “very powerful countries” have a strong “motivation to de-dollarize.”
The network interviewed Anne Korin from the Institute for the Analysis of Global Security. She said the dollar’s status as the globe’s reserve currency is under threat from not only China and Russia, but even the European Union.
“We don’t know what’s going to come next, but what we do know is that the current situation is unsustainable,” Korin said. “You have a growing club of countries — very powerful countries.”
For Europe, the turning point was the return of U.S. sanctions against Iran 18 months ago. “Europe wants to do business with Iran. It doesn’t want to be subject to U.S. law for doing business with Iran, right? Nobody wants to be picked up at an airport for doing business with countries that the U.S. isn’t happy that they’re doing business with.”
That means nations have a “very, very strong motivation” to ditch the dollar.
Of course, this is old hat if you’ve been reading The 5: We’ve been on the de-dollarization beat for more than five years. But as we’ve said before, when it starts going mainstream, there’s something happening here.
To the mailbag, where a couple of sharp-eyed readers help us set the record straight.
On Monday we stepped in it when describing how the IRS calculates how much of your Social Security benefits are subject to income tax.
As one reader writes: "Per the IRS regs, in determining 'provisional income' for purposes of determining what portion of your SSA benefits may be taxable, you must ADD in ‘any tax-exempt interest received. Therefore, Beau Henderson is incorrect when he says the income from tax-free municipal bonds is not included in your provisional income.
“Therefore, Beau Henderson’s following statement, as regards municipal bonds, is incorrect: 'You can also plan ahead by putting money into tax-free investment vehicles like municipal bonds and Roth IRAs. 'The income you receive from these investments is not included in your provisional income.'"
The 5: Beau Henderson replies:
“This is why I love my readers, because they keep me on my toes. Sometimes even the experts make mistakes. So let’s turn the mistake into a learning opportunity…
“‘Provisional income’ includes 100% of the earnings from your work, pension plan payments, dividends and interest from regular investments, withdrawals from IRA and 401(k) plans AND interest from municipal bonds.
“It also includes 50% of the Social Security benefits paid in the year.
“While the income from municipal bonds is income-tax-free, it still must be included in the Social Security ‘provisional income’ test. So it could trigger part of your Social Security benefit to be taxed as ordinary income.
“So the sentence should have read as follows:
“‘You can also plan ahead by putting money into tax-free investment vehicles like cash-value life insurance policies and Roth IRAs. The income you receive from these investments is not included in your provisional income.’
“The best part about having a Roth IRA is that you can take unlimited distributions without ever creating any tax impact on your Social Security benefits.
“Thanks for writing in!”
And thanks to Beau for the emendation.
The 5 Min. Forecast
P.S. In a recent interview, Jim Rickards revealed the details of a CIA project in which he was intimately involved — and which the CIA long ago abandoned.
And there's an unexpected twist… This powerful predictive tool could give everyday Americans a chance to collect thousands of dollars a week.