These pages contain what I believe is the most important and urgent market analysis you can get your hands on right now – at any price. And I am glad to arrange to get it to you for free.
But I promise this won’t be a case of “you get what you pay for.” A lot of people have been paying me a lot of money for many years for my advice. But now, given the state of the global markets and what’s about to happen, it’s urgent that I share my views with a broader audience of investors, and this gives me an opportunity to do that.
Look, as an active fund manager for 25 years, I’ve had to be right all the time; I have to take the world as it is, not as I would like it to be. It’s made me unpopular on Wall Street because I called the last two credit crises when everyone else on Wall Street was leading investors over the cliff. But being realistic makes me very good at my job. I was lauded by the Financial Times and many in the industry for predicting both crises and keeping my clients’ money safe.
Those of us who warned in 2007 that markets were heading for a fall were dismissed as Cassandras, just as we were treated when we issued similar warnings during the Internet Bubble that led to a spectacular crash in stocks and the credit markets in 2000-1.
Now I’m telling you that the same thing is about to happen again – and possibly worse.
Investors may be facing one of the biggest market collapses that they will see in their lifetimes, what I’m calling “The Super Crash.” And I truly believe this is just about your last chance to act now before it is too late.
As an individual investor, you have to formulate an accurate view of the world… determine what assets are going up and what are going down and why… and make some key adjustments to your portfolio ahead of time.
If you wait too long, it will be too late.
The current rally may have pushed the Dow over 20,000, but it is based on sentiment, not on fundamentals. Stocks are trading at valuations that have no relationship to reality. Federal debt already exceeds 100% of GDP and is likely to keep growing at more than $1 trillion per year. Short-term, we are riding an irrational bull market, and you can get my analysis and recommendations for that situation here. But longer-term, we are in a bubble and that bubble is going to explode….no matter what the talking heads on financial television tell you.
Our most recent correction occurred in Q1 2016, when stocks lost over 11% from their previous highs, but that’s nothing compared to what could happen if my fear of a $200 trillion credit collapse comes true.
That’s what Sure Money is about – protecting you and your money and teaching you how to profit from what’s coming.
Right now you need to know three things.
There’s only one way this market can end – with a Super Crash. There are five inevitable forces leading to the Super Crash: far too much debt, far too little economic growth, overvalued markets disconnected from reality, counterproductive monetary policy, and geopolitical instability. (See the sidebar on page 4 for a full rundown.) Exactly how and exactly when the Super Crash will happen remains uncertain. So does how far the markets will fall before hitting true bottom. I have my personal forecast that’s been on target so far, and I’ll share it with you below. But what’s certain is that this threatens to be an extinction-level event caused by $200 trillion in global debt that can never be repaid and will inflict serious damage on portfolios and retirement accounts.
It’s already started to happen. Summer 2015 offered a preview of what is coming. Puerto Rico’s insolvency, Greece’s default and humiliation by Europe (and Greece is about to default again!), China’s stock market collapse and desperate currency devaluation… these symptoms of a grossly over-leveraged world finally rocked U.S. markets in late August 2015, causing the biggest one-day drop on the Dow Jones Industrial Average in history. Right now, “Dow 20,000 fever” has disconnected us still further from the ugly underlying reality. But we’re not simply putting off the Super Crash; we’re actually making the ultimate crash worse by delaying the inevitable market adjustments that have to happen to correct large global imbalances that keep growing larger.
This is an opportunity, not the end of the world. Any time you have a market selloff, it is a reality check that resets markets and creates some great investment opportunities. That’s what the Super Crash is going to be. If you take the right steps to prepare for it, you’ll do fine – and even make a lot of money. But if you do nothing, you will get run over by the freight train that is rumbling down the tracks.
In the weeks ahead I’ll be guiding you through all of this. I’ll track the five inevitable forces behind the Super Crash. We’ll talk about the assets and investments that are going down – and which ones you need to sell or hedge before the collapse gains momentum. I’ll show you the portfolio allocation secrets my clients learn about every month. We’ll talk about what to do with cash – and the potential problem with money market funds. How you can earn safe income. Which bond funds and ETFs to buy, which ones to sell. And which stocks will make you money in the years ahead. Of course you need to own gold, but you’ll get my personal view on why and how. You’ll get it all.
But that’s not what matters today. First you need some immediate protection from the downside and some ways to position yourself for the upside from this market throttling. Yes, there is upside, if you know where to look.
But I urge you to act now.
This is going to happen sooner than most people think.
In fact, it’s already started.
The Five Inevitable Forces Behind the Super Crash
Inevitability #1: The 30-year “Debt Supercycle” is about to end.
Over the past 30 years, the world gorged out on debt in a massive “Debt Supercycle.” There is too much public and private sector debt in the United States, Europe, Asia, and the emerging markets. Today there is more than $200 trillion of total public and private debt outstanding in the world, with over $600 trillion in derivative contracts sitting on top of that, a veritable debt bomb lurking on global balance sheets waiting to explode. The U.S. national debt is $20 trillion and rising. In 2016, we’ll pay over $400 billion in interest on that debt. And we’ll make the payments by borrowing the money. An economy has to generate enough income to pay the interest on its debt. And today, the U.S. and global economy does not. Why? That leads me to the next point.
Inevitability #2: The global economy is stuck with sub-par growth.
The global economy doesn’t generate enough income to pay its debt because most of this debt wasn’t used to fund activities and assets that generate future streams of revenue. Instead, it paid for unproductive things like consumption, housing, stock buybacks, dividends, M&A and financial speculation. Economic growth since the financial crisis was based primarily on the growth of debt rather than the creation of income-generating and productive assets. The net result of more and more debt was less and less growth. Until the world learns how to grow other than through borrowing, it will be doomed to subpar growth.
Inevitability #3: The markets will crash – big.
After eight years of largely uninterrupted gains in stock prices from 2009 until today, the markets are overvalued by almost every measure and running on fumes. This is a byproduct of the Debt Supercycle. In a slow-growth world, corporate executives focused on stock buybacks to increase the value of their stock options. By spreading profits over fewer shares, they were able to increase earnings per share and make each share of stock worth more – even if it meant increasing debt in the process. If a company wasn’t generating enough extra cash to buy back stock, it simply borrowed the money at record low interest rates. Since 2009, U.S. corporations bought back more than $2 trillion in stock rather than investing in R&D, new plants and equipment, and creating new jobs. And in m cases they used borrowed money to do it. When companies run out of their own stock to buy, it will be one sign that the Debt Supercycle is coming to an end with a resounding crash.
Inevitability #4: Central banks won’t be able to rescue us this time.
Central banks are actively debauching the value of fiat currencies with QE and money-printing. Everybody’s buying power is being demolished. Inflation is raging. Deflation is a fairy tale that central bankers tell themselves at bedtime to justify their fear of raising interest rates because of the impact the truth would have on an over-indebted world. Meanwhile, they artificially suppressed interest rates to levels that render fixed investments certificates of confiscation in nominal and real (i.e. inflation-adjusted) terms. The government is effectively stealing savers’ money. All this was an attempt to stimulate growth, but now central banks have no cards left to play. We have reached “the terminal stage of monetary policy.” With interest rates barely above zero, and its balance sheet stuffed with debt, the Federal Reserve can’t do much more to stimulate growth or bail out markets when they collapse. The Fed already fatally mismanaged this credit cycle, and negligible 25-point rate hikes won’t change any of the underlying issues. Central bank policy has reached its limits. Other central banks (ECB, Bank of Japan) are trying to pick up the slack, but ultimately all of these programs are doomed to fail because they try to alleviate a debt trap by creating more debt.
Inevitability #5: There’s geopolitical trouble ahead.
Geopolitical instability is extremely dangerous for investors, yet markets act like the world is an oasis of stability. In fact, the world is a burning cauldron that could explode at any moment. War is raging across the Middle East, Eastern Europe, and parts of Africa. In the U.S., the southern border is a sieve while America’s inner cities are home to intolerable levels of poverty and violence as a result of five decades of failed progressive policies that are long overdue for reassessment. And in an epic foreign policy disaster, the Obama administration entered into an agreement with Iran that gave the largest state sponsor of terrorism $150 billion in sanctions relief and the ability to gain nuclear arms capability in return for nothing.
Moreover, Donald Trump’s presidency now adds a whole new layer of geopolitical instability. Trump is pro-business and pro-tax cuts but he’s also pro-chaos, and markets don’t like chaos. Many of Mr. Trump’s policy statements, regardless of their merit, are destabilizing and are better handled privately or diplomatically, not in the media. Markets crave stability and they’re not getting it from the President.
Mr. Trump constitutes a monumental policy shift, not just away from Obama but from all previous presidents. On foreign policy he is saying some very disruptive things as he breaks not only from Obama’s disastrous policies but also from George W. Bush’s failed policies of nation building in the Middle East. He is challenging the status quo on trade, which may prove to be enormously damaging to markets. And he may cut taxes as much as Reagan but would be doing so with the United States in a much weaker economic position than in the 1980s and little way to pay for it, resulting in much larger deficits that could freak out the bond market. We will have to wait and see.
So while the economy is as fragile as 1999 or 2007, the geopolitical landscape is as threatening as 1909 or 1939. Our business and political leaders are focused elsewhere, which is how conditions were allowed to deteriorate so badly. As one commentator said in early 2015, somewhere in the world there is an archduke waiting to be assassinated and set off a global conflagration. When that happens, markets are going to plunge. You cannot afford to ignore these risks or place your confidence in the people running our government. You need to protect yourself now.
I know this is all frightening. Most investors are likely to experience a much tougher road in the years ahead. But here’s the point…
The end of “Debt Supercycle” creates an inflection point with a host of ripple effects, and the risks are compounded by serious geopolitical instability. But I believe that today’s debt-fueled crisis also represents a tremendous opportunity for you to make money.
The Cracks Are Starting to Show
At the beginning of August 2015, China’s stock market bubble popped, Puerto Rico finally admitted it was insolvent and had no hope of repaying its $72 billion debt, and Greece was again on the verge of default and economic collapse.
Market liquidity was deteriorating by the day. ISIS was terrorizing the Middle East, home-grown terrorists were threatening Americans at home, and the Obama administration was pressuring Democrats to support the treasonous Iran nuclear deal over the opposition of a majority of Congress and the American people.
But despite these warning signs, markets were still cruising along as though everything was hunky-dory. I was warning my clients for months that a storm was coming and they should take steps to protect themselves, and it’s a good thing that I did.
Because suddenly everything changed.
During the week of August 17, stocks plunged 6% after China, a country even more leveraged than the United States, began to devalue its currency. That was an admission by China’s leaders that the country’s economy was in bigger trouble than people realized. That set off a chain reaction that’s still playing out.
On Monday, August 24, investors panicked and sent the Dow Jones Industrial Average down 1,100 points at the open. This move, which ended with the biggest one-day loss in history, was exacerbated by changes in market structure that increase volatility and reduce liquidity.
The Dow lost 1,300 points between Friday, August 21, and Tuesday, August 25, before recovering 1,000 of them on Wednesday and Thursday, August 26 and 27. Volatility was historic, with the Chicago Board Options Exchange Volatility Index (VIX) spiking to levels that we haven’t seen in years. After hitting 44 that day, the VIX settled down to close the week at 26.05, much higher than the average levels in the mid-teens that had prevailed over the last two years. On Tuesday, September 1, the Dow lost another 470 points, then rallied the next day.
After four years without a 10% correction, investors were given a much-needed reality check.
The markets rallied deceptively in October and November, erasing the August losses on the strength of just four stocks (I’ll come back to those in a minute). That’s just not sustainable… as 2016’s frightening open proved. In the first six weeks of that year, the Dow plunged over 2,000 points and the S&P 500 fell almost 250 before recovering.
Since then, we’ve been on a misleading upward trajectory, fueled by bullish sentiment and election hopes. Inexplicably, markets shrugged off signs of European economic stress after the Brexit vote and rejection of the Italian constitutional referendum – and finally reached all-time highs after Mr. Trump’s election.
Everyone wants to know what’s next.
As usual, Wall Street’s so-called “top strategists” remain consistently bullish. Barron’s didn’t even wait for the ink to dry on the Dow’s20,000 print before declaring in a new cover story: “Next Stop Dow 30,000.” On average, top bank strategists expect the S&P 500 to end 2017 at 2,337.
There is a Wall Street adage market predictions tell you more about the person making them than about the market. In the case of Wall Streeters who are paid to be bullish, their predictions are hardly worth the paper they are written on. But an objective look at the world around us strongly suggests that the current bullishness is misplaced and unsupported by the facts.
Where Do We Go from Here?
2017: Rather than produce a year-end target for the market for 2017, which is like shooting darts at a sparrow, I am forecasting a range for the S&P 500 of 1800/2400 which equates to ~20% downside and ~7% upside from the closing level of 2238 on December 30, 2016. This range is somewhat wider than last year’s 52-week trading range of 1810/2277 on the upside because are starting about 200 points higher than we did a year ago. I expect more volatility this year based on much greater policy and geopolitical uncertainty though central banks will keep suppressing volatility as much as they can. You can get my full analysis of this shorter-term, irrational bull market, as well as my profit recommendations, here.
2018-19: Longer-term, I am very bearish and want to make that very clear to you. A big sell-off across the board is more likely than a continuing rally in anything at this point. The smartest people I know – with very few exceptions – are very bearish. Only the consensus and Wall Street, which is paid to be bullish, is trying to make a case for things going up. If there is a Super Crash, it will turn into a deep recession because the Fed and other central banks are out of bullets. But I think it likely we may be looking at a multiyear bear market. None of the factors pressuring markets are going away – China, Europe, commodities, and slow global growth are here to stay. I remain convinced that we will see the Super Crash in the next several years.
Over the next decade: Markets are resilient. The world will not come to an end. Things will shake out; markets will reset. That will create a new set of investment opportunities across all asset classes – stocks, bonds, and commodities. The key will be knowing when the cycle turns toward recovery and where to put your money.
The Asset Classes:
What’s Going Up and What’s Going Down
Many financial advisors and Wall Street strategists will tell you to keep buying stocks and bonds long past the point where it makes sense to do so. They are already doing that. You can see them chirping on television about “buying opportunities” and “buying the dips.” They will keep telling you that the markets are safe, that the financial system is stable, and that you should just close your eyes and trust central bankers and government officials to do the right thing. These people would be selling tickets on the Titanic as it sailed through a field of icebergs.
Beware. These so-called “experts” are dangerous to your financial health.
These are the same people who told you to buy Internet stocks at the height of the Internet Bubble in 2000, and housing stocks at the top of the Housing Bubble in 2006-7. And these are the same stubborn bulls who are telling you today that the Dow is headed to 30,000 and it is safe to own ridiculously overvalued social media and biotech stocks.
There’s a natural allure to “up” markets, but the intoxicating effects of a bull market are not related to an investor’s need to invest and allocate money rationally based on specific goals.
While you can get some shorter-term, bull market profit recommendations here, I recommend you start building a serious bear market portfolio to protect yourself before the inevitable crash.
Now let’s tackle the asset classes.
Equities (Mostly Going Down)
Over the past seven years, equities have risen primarily because of the Fed. In fact, the rise in stock prices has almost exactly tracked the increase in the size of the Federal Reserve’s balance sheet.
As the Fed created more money out of thin air, a lot of it ended up propping up the stock market. But the Fed stopped growing its balance sheet in October 2014, and it is no coincidence that stocks have struggled ever since.
Still, as of Q1 2017, stock prices are still too high, particularly as seen through the valuations of several standard valuation measures, including one favored by Warren Buffett. His favorite measure of stock valuation, the ratio between the total market capitalization of the S&P 500 and Gross Domestic Product, is 1.25x, compared to an historical mean of 0.75x.
Another measure of stock valuations, the Shiller Cyclically-Adjusted P/E Ratio that measures stocks over a 10-year rolling period, is 28.4x versus a historical average of 16.6x.
These two measuring sticks show the market trading at 70% above its long-term value.
The whole Dow 20,000 frenzy is an exercise in chasing one’s tail. Like many things that capture the popular imagination, the Dow Jones Industrial Average is not what it seems. As economist extraordinaire David Rosenberg points out, if the eight companies that were replaced in the Dow since April 2004 had remained in the index, we would be reading about Dow 12,886, not Dow 20,000. Also, as a price weighted index, moves in certain stocks have an outsized impact on the Dow. For example, moves in Goldman Sachs Group (GS) have eight times the impact on the Dow as those of General Electric (GE). Goldman stock is up 60 points since the election and along with three other stocks is responsible for the entire rally in the Dow since Election Day. Many other overvalued and overleveraged stocks – particularly those in the retail sector, which I discuss below – are already starting to fall.
GOING DOWN
Two of the most highly respected investment strategists in the business, GMO and Research Affiliates, are projecting that U.S. stocks will generate zero returns over the next decade. Both firms suggest that only non-U.S. equities are likely to generate meaningful returns over the next decade, and even those returns are only projected to be in the mid-single digits.
The increasingly strained efforts of strategists to justify current prices illustrate how long-in-the-tooth the bull market has become. Just as early 2016 saw the S&P 500 drop sharply and then recover during the rest of the year (, the post-election rally may soon be a distant memory as the Trump administration confronts the reality of governing and the Federal Reserve inches up interest rates. Administration efforts to sharply reduce government spending, admirable as they are, will take a bite out of the U.S. economy and corporate profits. And an economy with nearly $50 of public and private sector debt will feel the effects of rising interest rates where every 1% rise increases interest expense by nearly $500 billion. Not all businesses will feel the effects evenly, however, which means investors will have to sharpen their pencils to separate winners from losers. In doing so, they must ignore Wall Street analysts and the financial media and think for themselves.
There are many ridiculously overvalued stocks that will plunge in value when the market finally comes to its senses. I intend to tell you how to avoid owning those stocks and even how to profit from them before they collapse.
Even before the crash begins, the cracks are already starting to show in the retail sector.
Retail Is The New Energy
Like the energy sector that collapsed in 2014-15, the retail sector is coming apart at the seams. The assault on department stores and other traditional retailers from ecommerce, price sensitive consumers and a tepid economy is destroying revenues and profits. Department store sales dropped $7.2 billion from 2001 to $12.7 billion today according to BMO’s Jack Ablin (and that’s nominal so in inflation-adjusted terms the drop is much more severe).
In addition to the continuing destruction of value at Sears Holdings Inc. (SHLD), several smaller chains such as Gander Mountain, Eastern Mountain Sports, Bob’s Stores and Wet Seal experienced poor holiday seasons that may push them into bankruptcy in the near future (Wet Seal actually filed recently). Macy’s (M) and J.C. Penney & Co. (JCP) continue to struggle and consumer products companies like GoPro, Inc. (GPRO) and Fitbit, Inc. (FIT) are in trouble. A combination of structural changes (i.e. the increasing dominance of e-commerce) and reluctant consumers is spelling doom for many products that were little more than fads (I mean, do you really need a wearables device to measure every burp?). Investors would do well to avoid exposure to the retail sector, and to use puts to profit on the short side.
Not a “Permabear”
At the beginning of both 2013 and 2014, I called for the S&P 500 to rise in the following 12 months, which it did. But in January 2015, after watching oil and the rest of the commodities complex collapse over the second half of 2014 in concert with China’s slowing economy and the demise of the weakest segment of the high yield bond market (CCC and B-rated bonds), I concluded that the end of the post-crisis bull market had arrived. Having correctly called the credit crisis of 2001/2 and the financial crisis of 2008/9, I saw similar warning signs suggesting that investors should protect their assets.
Right now, although I acknowledge that we are in a shorter-term bull market, I see the same warning signs on the horizon – especially for investors who believe markets can defy the headwinds that buffeted them in 2015 and continue to blow hard.
GOING UP
Nonetheless, there are still undervalued stocks that will benefit from important economic trends. My job in Sure Money is to find these opportunities and share them with you. For now, just recognize that there will be opportunities in equities even if we experience a crash. For instance, we can expect Trump to keep his promise to rebuild the military, which should help defense stocks like Raytheon Co. (RTN). In addition, financial stocks should benefit from less regulation and potential repeal of parts of Dodd-Frank, but higher interest rates will be a more important factor in their future profitability.
HOW TO PROFIT
First, get your asset allocation right.
Longer-term, investors should have no more than 30% of their portfolio invested in stocks right now, provided they are prepared to treat this as a “buy and hold” investment and are disciplined enough not to trade the portfolio. Investors who panicked and sold at the market low in March 2009 destroyed their returns. As David Rosenberg of Gluskin Sheff teaches, it is time “in” the market rather than “timing” the market that generates solid equity returns. This requires patience and discipline. Over long periods of time (decades), equities should continue to generate high-single-digit total rates of return (consisting of capital gains plus dividends). This is a lower allocation than most advisors recommend, but with stocks still overvalued and projected returns over the next decade so low, a reduced allocation is appropriate today.
Second, hedge this portion of your portfolio. There are multiple inexpensive ways to do this today, based on your personal allocations and risk tolerance.
Buy ProShares Short S&P 500 ETF (NYSEArca:SH).
If you have a high concentration of stocks in the Dow Jones Industrial Average in your portfolio, buy the ProShares Short Dow 30 ETF (NYSEArca:DOG).
If you have smaller-cap stocks in your portfolio, you can use the ProShares Short Russell 2000 ETF (NYSEArca:RWM).
Finally, if you are long in the tech-heavy Nasdaq, you can use the ProShares Short QQQ ETF (NYSEArca:PSQ).
Bonds (Going Down)
As overvalued as stocks are today, bonds are even more overvalued. In fact, they are in an epic bubble that is going to lay waste to investors. Central banks massively distorted global bond markets by buying back trillions of dollars of government debt.
Since 2008, the Federal Reserve has bought over $4 trillion of U.S. government debt. The ECB has repurchased over $1.1 trillion of European government debt, and the Bank of Japan is buying back trillions of dollars of Japanese government bonds (as well as stocks and ETFs). There are two results of these actions, neither of them good. First, interest rates were artificially lowered, and second, liquidity in government bond markets around the world dried up.
Today, investors are paid only 2.41% for the privilege of lending money to the U.S. government for 10 years and only 3.0% for lending them money for 30 years. On an inflation-adjusted basis, these are negative returns. In 2016, for the first time, the average yield on German government debt dropped below zero. Governments are effectively confiscating the capital of the people lending them money. Don’t be a fool and let them do that to you!
This farce is unsustainable. History teaches us that governments that printing trillions of dollars of money will ignite massive inflation that will cause bond prices to plunge and interest rates to spike up. Investors holding 10- and 30-year government bonds will get crushed in the years ahead. There is no reason to own these certificates of confiscation. Instead, I can show you how to profit from this massive destruction of wealth by the world’s governments.
HOW TO PROFIT
The best way to make money in bonds is to short bonds with an instrument like the ProShares UltraShort 20+ year Treasury ETF (NYSEArca:TBT) or selling short Vanguard Total Return International Bond ETF (BNDX). Timing is critical though the likelihood of these trades moving against you is small so putting them on now as a hedge is not a bad idea.
Currencies (Only One Is Going Up)
One of the biggest threats to all financial investments is that the currencies in which they are denominated are being actively devalued every day by the failed monetary policies of the world’s central banks and the complete absence of meaningful pro-growth fiscal policies. The only ways to protect yourself is to first diversify some of your assets out of paper currencies into gold and other tangible assets, and second, concentrate your paper holdings in the currency that will fare the best: the U.S. dollar.
GOING UP
While the value of all paper currencies will continue to be destroyed by central banks, the U.S. dollar should fare much better than the other major currencies.
To understand why this trend will continue, you must understand what is causing it in the first place: an historic divergence between central bank policies in the United States and the rest of the world. While the Fed has ended quantitative easing and began raising interest rates at the end of 2015 (albeit painfully slowly), the ECB and the Bank of Japan are moving in the opposite direction, initiating huge new bond-buying programs to lower interest rates in their markets. Both regions are dead set on cheapening their currencies against the dollar in order to stimulate economic growth and inflation, but inflation will only cheapen their currencies. As a result, the U.S. dollar should keep rising as global investors flee lower yielding currencies and flock to the higher yielding U.S. currency. The future of the euro and the yen remains bleak. The U.S. Dollar Index (DXY) is the key index to watch to monitor the strength of the dollar. The DXY broke a long-term trend line in December 2014 when it hit 95. Just as I predicted, in early November 2015, DXY closed above 98, a key resistance level. Keep an eye on the DXY – as of Q1 2017, it’s above 100 and likely to maintain this level, which will have deflationary consequences for global markets.
However, a note of caution is warranted on the dollar: The DXY ended January at 99.55, down sharply from its post-election high of 103.82. It lost about half its post-election gains after President Trump said the dollar was “too strong,” raising questions regarding whether the new administration will try to weaken the currency in order to aid American exports. Clearly a strong dollar, like higher interest rates, creates a headwind for the higher growth that the administration promises. Unlike previous presidents, Mr. Trump has no compunction about trashing his own currency, something that is going to take markets some getting used to. While I continue to believe that investors should maintain short euro and yen positions against the US Dollar, I would proceed cautiously because Mr. Trump could tweet a monkey wrench into this trade at any time. Talking down the dollar is extremely short-sighted on Mr. Trump’s part and hopefully he will come to realize that he should let global economic forces work themselves out. Those forces not only dictate a stronger dollar but in the long run are much stronger than anything a U.S. president can say.
GOING DOWN
The euro and the Japanese yen and Chinese yuan will suffer. Remember that a weaker yen sets off a currency war in Asia that forces China, North Korea, Vietnam and other export-driven nations to react by weakening their currencies. We live in an age of currency wars, but unfortunately the main casualty of all of these wars remain non-dollar currencies. And the main victor, as noted below, is gold.
HOW TO PROFIT
One way to invest in a stronger dollar is through the ProShares DB US Dollar Bullish ETF (NYSEArca:UUP). This ETF has its largest exposure to a weaker euro, followed by the yen and the British pound.
You can also target the euro by investing in ProShares Short Euro ETF (NYSEArca:EUFX).
I am reluctant to recommend leveraged ETFs (because they reset every night and have to be actively managed) and there are no ETFs that provide unleveraged short exposure to the yen, but you can sell short the Guggenheim Currency Shares Japanese Yen Trust ETF (NYSEArca:FXY) to gain short exposure to the yen.
Gold (Going Up)
The first thing to understand about gold is that it is a currency, not a commodity, in today’s world. But unlike all other currencies (with the exception of digital currencies such as bitcoin), it is the anti-fiat currency. While the dollar is likely to continue rising against the euro, the yen, the yuan and other currencies, the question remains what will happen to the value of the dollar itself in a world where the Federal Reserve makes no secret of its desire to destroy the value of the dollar by increasing inflation as its official policy. And the answer to that question is that it should decline against the value of gold and other tangible assets. The explosion in financial asset prices since the financial crisis is one manifestation of the destruction of the value of all fiat currencies including the dollar. Do you really think assets such as mega-houses or artistic masterpieces are suddenly worth tens or hundreds of millions of dollars? Of course not! Their rising prices are a reflection of the fact that the currencies in which they are bought and sold are worth less with every passing day! It is no accident that the wealthiest people in the world are shifting their money out of paper currencies into high-end real estate, collectibles, art, and similar tangible assets as a hedge against falling paper currencies. Eventually gold and other precious metals will follow this trend and appreciate sharply.
HOW TO PROFIT
In early 2017, gold is starting to recover from a bad year in 2016. In fact, the spot price of gold is up $100/oz. since year end on concerns that the Trump administration will blow out the budget trying to revive American growth. Long-term investors who are interested in protecting their wealth should use gold current low price as an opportunity to buy more of the anti-fiat currency.
I strongly believe that gold will eventually trade at several thousand dollars an ounce as the fiat currency standard is destroyed by central bankers and governments left with no other way of repaying the hundreds of trillions of dollars/euros/yen they borrowed other than by destroying the value of these debts.
Central banks have only begun to destroy the value of the dollar and other paper currencies. In the current global environment, where there is more than $200 trillion of global debt and $50-60 trillion of that resides in the United States alone (excluding unfunded future promises of hundreds of trillions of dollars), debasement of the US dollar is a certainty. Investors should continue to accumulate gold and save themselves.
The preferred way is to own physical gold through the purchase of coins and gold bars. Keep it in a safe place at home.
Beyond that, I recommend the Central Fund of Canada (NYSEMkt:CEF) and the Sprott Physical Gold Trust ETF (NYSEArca:PHYS). Both ETFs own both gold and silver and from time-to-time give you an opportunity to buy these precious metals at a discount to their spot price. The SPDR Gold Trust ETF (NYSEArca:GLD) is a third way to own gold but tends to attract more speculative fund flows than the other two.
In addition, I am recommending long plays on two gold mining ETFs: Global X Gold Explorers ETF (NYSEArca:GLDX) and Market Vectors Junior Gold Miners ETF (NYSEArca:GDXJ).
I am recommending the ETFs rather than individual stocks to mitigate the individual operating issues associated with individual companies. These are long-term picks that could easily take more than one year to work out because gold is a multiuser play. But gold miners still trade at extremely low valuations and are highly leveraged to higher gold prices. The price of gold has yet to reflect the debauchment of paper currencies, but wise investors understand that years from now gold will be worth thousands of dollars an ounce as the value of fiat currencies are destroyed by the world’s central banks.
We’ll be following all these ups, downs, and profit opportunities in the months ahead.
Sincerely.
Michael Lewitt
Editor, Sure Money