American Consequences - October 2019

1929: Seems Like Tomorrow 'Melt Up' Opportunities AMERICAN CONSEQUENCES The Bear Market Almanac

I D E A S T H A T M A T T E R

E D I T E D B Y P . J . O ’ R O U R K E

PREPARE FOR A BEAR MARKET ON THEWAY UP... NOT ON THEWAY DOWN

 A COMING BEAR MARKET 

OCTOBER 2 0 1 9

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CONTENTS

OCTOBER 2019 : ISSUE 29 LOST? LOST? CLICK HERE

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60

38

42

OKAY WE’RE

32

64

36

TAXES

AMERICAN CONSEQUENCES

4 Inside This Issue

42 Can the U.S. and China Make a Deal? BY KEVIN RUDD

BY STEVEN LONGENECKER

6 Letter From the Editor BY P.J. O'ROURKE

46 'Melt Up' Opportunites

Editor in Chief: P.J. O’Rourke Editorial Director: Carli Flippen Publisher: Steven Longenecker Executive Editor: Buck Sexton Managing Editor: Laura Greaver Creative Director: Erica Wood Contributing Editors:

BY DR. STEVE SJUGGERUD

12 From Our Inbox

54 Argentina's Economic Tango BY KIM ISKYAN

16 1929: Sounds Like Yesterday, Seems Like Tomorrow BY GREG DIAMOND

60 Small-Business Men Get a Front-Row Seat for Everyday Life BY SALENA ZITO

21 The Bear Market Almanac BY DR. DAVID EIFRIG

Greg Diamond, Dr. David Eifrig, John Stossel, Terence P. Jeffrey, Nouriel Roubini, Kevin Rudd, Dr. Steve Sjuggerud, Kim Iskyan, Salena Zito

32 Wages War

64 The Final Word

BY JOHN STOSSEL

BY BUCK SEXTON

36 What You Pay the

66 Featured Contributors

Cartoon Director: Frank Stansberry General Manager: Jamison Miller Advertising: Ricky D'Andrea, Jill Peterson Editorial feedback: feedback@ americanconsequences.com

Government... Is it Worth It? BY TERENCE P. JEFFREY

38 Four Collision Courses for the Global Economy BY NOURIEL ROUBINI

American Consequences

3

INSIDE THIS ISSUE

Economist Nouriel Roubini examines four crisis collision courses for the global economy and former prime minister of Australia Kevin Rudd takes on the question can the U.S. and China make a deal? Investing writer Kim Iskyan tells us about his boots-on-the-ground research in Argentina, and why there’s opportunity in crisis... Political analyst Salena Zito highlights some small businesses and reminds us that the forces we thought were ripping us apart, haven’t... And for this month’s Final Word, Executive Editor Buck Sexton delves into what a 14th-century monk can teach us about impeachment. We’ve uploaded a PDF suitable for printing to our archive page. And tell us what you think at feedback@ americanconsequences.com. Regards, Steven Longenecker Publisher, American Consequences It is an axiom of American politics: If you value individual liberty and economic freedom, always pick the candidate with fewer ideas. P.J. O'Rourke

T he U.S. is currently in the midst of the longest-running bull market in history... So why did we put a bear on this month’s magazine cover? Because it can’t climb forever. And the best time to prepare financially is on the way up, not on the way down... Frequent American Consequences contributors Dr. David Eifrig and Dr. Steve Sjuggerud help us prepare with The Bear Market Almanac and ‘Melt Up’ Opportunities Are Knocking. Editor-in-Chief P.J. O’Rourke kicks things off with an un-flinching look at Elizabeth Warren’s campaign platform. Technical analyst Greg Diamond , CMT, offers an intriguing look at similarities between the stock market in 1929 and today (trouble could be on the horizon). Journalist John Stossel tackles the controversial minimum-wage debate... Americans are spending more on taxes than food, clothing, and health care combined. CNSnews chief Terence P. Jeffrey details this disparity.

Boiled down: The simplest explanation is usually the correct one. Buck Sexton

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October 2019

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a squint at the DEMOCRATIC NOMINATION CONTEST

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October 2019

LETTER FROM THE EDITOR

N ot long ago there were more But lately it’s looking like there are only two donkeys in the race for the 2020 Democratic nomination – Elizabeth Warren and Joe Biden. With Warren ahead by a nose (that she wants to poke into everything). Is Bernie Sanders still a serious contender? “Serious as a heart attack.” Unfortunately that phrase has taken on a new meaning for the old guy. I’m no kid myself and, in matters of personal health, I wish Bernie the best. But I also wish him farewell. Goodbye to you, you New Left leftover. Thus it’s time to take a closer look at the Warren and Biden campaign platforms. Democrats running for president than you could shake a stick at. (And they all wanted to tax the stick.)

One of them could win the White House. Both are leading Trump in head-to-head polls. (Although I have a feeling that Trump supporters use their phones to play catch with the dog when pollsters call.) But before we get into specifics let’s perform a rudimentary analysis called “Weigh the Bullshit” or “WBS.” What we do is we Google “Political positions of Elizabeth Warren” and “Political positions of Joe Biden” and print out their respective Wikipedia entries. Biden’s is 25 pages long but liberally interspersed with photos of Joe-Looking- Presidential and Joe-Being-Statesman-Like. It includes 151 reference notes. Warren’s is 42 pages of dense gray print with 251 reference notes.

And an Un-Flinching Look at Elizabeth Warren’s Campaign Platform

American Consequences

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LETTER FROM THE EDITOR

It is an axiom of American politics: If you value individual liberty and economic freedom, always pick the candidate with fewer ideas. So, this month, let’s go “first with the worst” and examine Warren’s ideas. And, gosh, does she have a lot of them. Just using the simple WBS metric, Warren is 68% more alarming than Biden. If that’s enough for you, consult the June 23, 2019 New York Times Magazine cover story by an admiring Emily Bazelton, titled “Elizabeth Warren Has an Answer for Everything.” The second column of the piece includes this chilling passage: “As a presidential candidate, Warren has rolled out proposal after proposal to rewrite the rules... On the trail she says, ‘I have a plan for that’ so often that it has turned into a T-shirt slogan.” As scary words go, “I have a plan for that” is right up there with, “Hold my beer and watch this!” Warren thinks we can improve our economy by returning personal and corporate income taxes to Clinton-era levels. Are higher taxes good for the economy? U.S. per capita GDP, adjusted for inflation: $44,314 in 1998, $57,821 now. Question answered. “ It is an axiom of American politics: If you value individual liberty and economic freedom, always pick the candidate with fewer ideas.

Warren also wants to impose a wealth tax on the net worth of individuals – 2% on net worth above $50 million and 3% on net worth above $1 billion. The current yield on 2-year U.S. Treasury bonds is 1.5%. For a conservatively invested billionaire that means a 200% tax on income on top of the income tax he or she is already paying. In anything except politics we’d call this “stealing.” And what about a modestly middle-class retired couple, living on Social Security, who, years ago, just happened to buy a little cabin and some land in a place that has been gentrified all to hell such as Aspen, Colorado? Now they’re worth $100 million whether they want to be or not. They’ll owe the IRS $1,000,000 a year for the rest of their lives. But don’t try to take the money and run. Warren proposes a 40% “exit tax” on expatriation of wealth exceeding $50 million. The island that Wall Street’s moneyed elite will be living on won’t be Grand Cayman, it will be Riker’s Island. Warren doesn’t seem to like rich people very much. (Never mind that, according to public financial disclosure forms, she and her husband have a net worth of between $4 million and $11 million.) But who Warren really has it in for are big corporations – maybe just because they’re big corporations. Nobody feels attraction to or affection for big corporations. Dissing them is, politically speaking, like swiping left on Matt Lauer’s dating app. Warren supports breaking up the tech giants – Google, Facebook, Amazon, etc. And these particular big corporations are even more

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October 2019

who put your Silverado’s tailgate on upside down (who’s out on strike anyway) will achieve compensation equity. And Warren thinks the federal minimum wage should be $22 an hour. The kid bagging groceries will be making $47,760 a year. And, no, damn it, don’t load the case of beer on top of the egg carton. Of course she favors universal single-payer health care or, as it’s properly called, “Health care that’s free – and worth it.” Plus subsidized universal childcare. I have several friends with children in their 30s who still need quite a bit of parental caretaking. My friends sincerely hope that Warren’s program will address the darn kids’ rent, car payments, and debit card overdrafts. Of course, Warren has all the predictable “woke” political positions on civil rights, women’s rights, gay rights, transgender rights, and every other kind of rights you ever heard of except for Second Amendment and property rights, which apparently go to sleep when somebody gets woke. Like any good lefty she supports campaign finance reform and wants to “take the money out of politics.” Although in the last three months she’s raised $24.6 million in campaign funds compared to the $15.2 million that less-lefty Joe Biden has raised. $24.6 million sounds like money to me. She also has the typical left/liberal views on abortion and the death penalty that, personally, I find deeply perplexing. I can understand the cold, pragmatic logic of being in favor of abortion and the death penalty.

unlovable than most. But, given Warren’s obvious economic ignorance, the way her break-up would work would be something like... There’s only one Dollar General store in your town. Warren would divide the business so that your town had four stores – each selling everything for 25 cents. And Warren favors a kind of “net neutrality” where Internet providers would be treated like public utilities. As if we didn’t have enough infrastructure problems with the public utilities we have now. And, anyway, I would argue that the Internet already is a public utility – a sewage system that runs backwards pumping crap into your laptop and phone. Warren wants to tax corporations’ global profits in addition to the U.S. taxes they already pay and no matter what other taxes they pay overseas. I guess the idea is to get U.S. investment out of the global marketplace and back home. But this is like shooting your neighbor’s cows in hope of getting more milk from your own. Warren has proposed that large corporations should be required to allow employees to elect 40% of corporate board members. And that’s how somebody’s brother-in-law wearing flip- flops, cargo shorts, and an Antonio Brown Patriot’s jersey ended up at the board table scratching his stomach and drinking a beer. You can’t blame the guy from the loading dock who nominated him. His wife had been on his ass for years to get her brother a job. She also proposes eliminating the “gender pay gap” with “Paycheck Fairness Act” legislation. Finally, Mary T. Barra, CEO of General Motors, and the guy on the assembly line

American Consequences

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LETTER FROM THE EDITOR

And I can understand the moral sense and consistency of being opposed to all killing whether it’s in an abortion clinic or on a death chamber gurney. What I can’t understand is people who condone the death of itty-bitty babies but think a school shooter should get a time out. However, I’m not here to psychoanalyze Elizabeth Warren. (Although in my opinion running for president is a symptom of psychosis in the first place.) I’m just here to briefly summarize her campaign platform and try to make reading that summary a little less painful. Yet, while we’re on the subject of people who do not seem to be perfectly psychologically stable, we should note that Warren is not the perfect “Anti-Trump.” She’s made a number of statements opposing free trade and actually agrees with Trump’s tariffs. She supports withdrawing troops from Syria and Afghanistan. (And deploying them in Boston, I guess. According to Wikipedia, “Warren has worked to protect “ So, although Warren has found a dunghill of left-wing economics to stand atop and crow, she is not a complete cock-a-doddle-doo.

military spending in her home state of Massachusetts.”) She also takes Trump-like stands on getting tough with China and negotiating with North Korea. And, at least by the standards of Ilhan Omar and Rashida Tlaib, she’s a fairly strong supporter of Israel. (With the usual sanctimonious “Two State Solution” noises.) She has not called for the forgiveness of all student-loan debt, though she has called for lower student loan interest rates and other forms of relief for scholars-in-hock. Once, years ago, in a book written with her daughter, she even expressed approval of school vouchers. She’s not an open-borders extremist. Yes, she’s against the Wall, for the Dreamers Act, wants border-crossing decriminalized, and deplores – not without reason, I may say – the conditions in migrant detention camps. But in 2013 she voted “Yea” on a Senate bill to toughen immigration laws. So, although Warren has found a dunghill of left-wing economics to stand atop and crow, she is not a complete cock-a-doddle-doo. Although there is one item on her agenda that does make you wonder. She wants climate- change regulation to be put under the control of the Department of Homeland Security. “Don’t worry about being late for your plane because of long lines at airport security, TSA has ordered good flying weather for the next three days!” Photos from AP

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October 2019

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FROM OUR INBOX

you probably know, Mike Duncan also did a great podcast series, The History of Rome , available on Apple Podcasts, covering Roman civilization “from founding to floundering.” Let us indeed hope that America doesn’t follow in Rome’s footsteps. One thing that we’ve got going for us is that we’ve dealt with a problem that Rome refused to face up to. We have established the basic property right of a person’s ownership of him or herself. The Romans were never able to free themselves from slavery. In the very period that you’re talking about, 73 B.C., Spartacus and his army of fellow escaped slaves almost put an end to the Roman Republic before the Caesars had a chance to. America may not have eliminated discrimination, inequality, or exploitation of vulnerable members of the labor force, but at least we spent our blood and treasure putting an end to legal slavery from 1861-1865. No true free market can exist without people being free. And free market forces, by fostering economic progress, expand people’s freedoms. This is why the Romans, although they had considerable technical knowledge and technical expertise, never produced any technology. Their market forces were undercut by a slave economy. Why invent labor-saving devices when labor is free? Slavery is not only morally repulsive, it is also economically idiotic. In this one respect, America is superior to Rome. Whether we’re superior in other respects is another question. For instance, are NFL team

Re: Our Newest Readers Weigh In

I just want to say thank you. I’m not sure why it took me so long to find this. – John R. P.J. O’Rourke comment: You’re welcome, John. And let me tell you why it took you so long to find American Consequences . Modern media is beset by a terrible “noise to signal” ratio. There are now so many different media providers attempting to get the attention of so many different media consumers (often in foolish, stupid, and highly partisan ways) that the result is not a “medium of communication,” but just static. But we’ll keep doing our best, trying to broadcast facts, logic, and common sense loud and clear. Re: What You’re Reading... I am reading The Storm Before the Storm by Mike Duncan. It looks at Rome from about 150 B.C. to the onset of the Caesars, the fall of the Republic. Disturbing parallels to us today: The importation of many slaves to do work cheaply cut out the ‘plebs’, the blue-collar middle class, set them adrift and made them manipulatable. The mores of political and social discussion started to break down. There were endless foreign wars. It goes on; the book is worth a read. Not saying the U.S. is where Rome was, but it gives food for thought. – Stan M. P.J. O’Rourke comment: That sounds like a must-read, Stan. I’m ordering it right now. As

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October 2019

through tax dollars paid for by everyone. No one would call out Sweden, the U.K., France, Germany, Norway, Italy or Spain as being communist countries. Why does the media and electorate continue to parade out the bogeyman? Fear of losing? I will suggest that today’s U.S. executive administration is closer to fascism and totalitarianism than any prior point in U.S. history. Where is the media voice now? – Ron P. Buck Sexton comment: Ron, we appreciate your comments. I think you’re responding to an argument that I haven’t made in the piece or perhaps are choosing to make your own case without regard to what anyone else has written. But there is room for a few points. The original socialists – including Marx

owners any improvement over the kind of people who fed Christians to the lions in the Colosseum? Re: Dems Win 2020... First, we must define ‘socialism’. All too often a partisan media and eagerly partisan electorate inappropriately defines ‘socialism’ as ‘communism’. I beg to differ, strongly, as do the field of candidates now embroiled in primary campaigning for the Democratic nomination. ‘Democratic socialism’, as many are apt to label the current thought trends, proposes to develop a comprehensive safety net for ALL citizens. Not just the 0.01%, not just for the politically connected, not just for

himself – referred to their program as socialism, and the Soviets, for example, considered themselves socialists. As to your contention that people are treating the Democrats as Communists, I’ll leave that to others. America already has a very large welfare state... All in, it’s about a trillion dollars a year of government spending. Half of health care spending is currently spent by the federal government. With that in mind, the proposals that Democrats are putting forward – single payer and the “Green New Deal” – are

those who happened to arrive on these shores before some imaginary gates were closed. Proceeding with the minor proposals thus far put forward by the Democratic party candidates does not invoke communism, fascism, dictatorship, or any other form of totalitarian governmental body. We need simply observe the success of democratic socialism in Canada and across Europe wherein healthcare is provided to everyone at an affordable cost borne by the government and funded

CHECK OUT OUR ONLINE ARCHIVE OF PAST ISSUES.

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FROM OUR INBOX

to “practice” medicine through your financial business. Such harm you are doing. – TB. David Eifrig comment: TB, I suggest you re- read our essay. We took the time to debunk the myth that hospital errors are a leading cause of death. Your kind of knee-jerk “protect all doctors” reaction is exactly why I left ophthalmology... And by the way, ophthalmology and neurosurgery are the toughest things to get into. It means good grades, scores, and hand skills. You’re cutting into a living human. That’s something most doctors still take seriously, but some are too flippant about it. That leads to mistakes. I’m so bored with ad hominem attacks from lazy doctors that don’t know the facts and evidence and then, worse than that, keep on making errors and killing people. Think about all the lives saved simply by employing a checklist in the OR – how many folks suffered because a surgeon’s ego couldn’t handle a checklist? As a physician yourself, you should know that we need to be held accountable. Patients should always research their doctors and do their homework about where to get the best care possible. “Do no harm” is a coda I still follow today. And although I no longer see patients, I’ve got my thumb on the pulse of the latest medical research. The only harm I would be doing is to not educate my readers about the real dangers of hospitals so that they can make the best, most informed decisions about their care.

major leaps toward socialism, and we should be honest about that as a country as we decide if we want to go even further down the path of central planning and statist control. Republican misinformation and scare tactics! The country will still have a successful capitalist economy and democratic governance system presumably protected by an increasingly conservative judiciary. It’s likely that the country will fare better under a Democrat than under an increasingly delusional President Trump. – Thomas W. Buck Sexton comment: Thomas, I’d ask you to read my comment above to Ron, and also ask you, in what way would a Democrat President be an improvement? The U.S. economy is the best it has been in decades. By all the numbers – unemployment, the stock market, labor participation – Trump is doing a better job than his recent predecessors. We also are not escalating or starting a major overseas military conflict. So how exactly should we expect a Democrat to do better? Fewer tweets, and braver climate-change speeches? Re: You’ve BeenWarned... Dave Eifrig... The harm you are doing in trying to discredit health care providers is vicious. You have been out of the medical field for so long and you are so out of touch. Being trained only as an eye doctor to begin with adds even more to your lack of medical expertise. You dropped out of the medical care system and should no longer be trying

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Send us a message, question, or criticism at feedback@americanconsequences.com. Buck Sexton comment: I am not a journalist, never have been, so at least you got that part right. I’m a commentary writer and a partisan analyst. But thank you for playing, let’s see if we have a door prize for you! is not an excuse for Trump to do anything wrong. That is a typical “what about-ism” and is below your usual standards. The problem as I see it is this: as surely as the Dems are jumping on a bandwagon, so are the Republicans and yourselves. If they should not do it, why should you? Remember, just because someone is anti- Trump, it does not mean they are a leftist. I am a Libertarian, and it is obvious to me that Trump is a liar and an idiot. Thanks – Keith J. Buck Sexton comment: Keith, your principles strike me as sound, but I would disagree with your assessment that the transcript was unnecessary. The specific words very much matter, and I think the White House managed to throw a wrench into Rep. Schiff’s plans by releasing the transcript so quickly and in full. Re: ‘Impeachment Mania’... It seems like the author of this e-mail is a political activist posing as a journalist. Pathetic. The President’s behavior is a very real problem and is getting worse every day. He is an erratic idiot and a cultural cancer, stoking divisions and hate to feed his cult- like base. Shame on you for your oblivious dismissal of the daily dumpster fire of a Presidency. – Not a Democrat.

Re: All-Out Political War...

I just finished reading your e-mail and totally agree with your facts concerning all the information about impeachment of our president. I totally agree that there is no wrong doing with the conversation between our president and the Ukrainian president. I believe that the speaker of the house Nancy Pelosi is so hell-bent in bringing our president down and no matter howmuch damage it is doing to our country she and the rest of her cronies of the Democratic party just don’t care because all they want is to get President Trump out of theWhite House. Thank you for sharing your e-mail with me and I will be passing this on with others who believe that this is another witch hunt. – JD Buck Sexton comment: JD, you are a smart man. Don’t let the media bludgeon you into abandoning your critical faculties, as they have with so many others. The Left and the Democratic party are engaged in an ongoing soft coup against the president, and anyone who doesn’t see it either isn’t paying attention or isn’t being honest. Hello good folks at AC. While I normally agree with most of the articles I read in your fine work, I think that you may have made some mistakes in your article on the impeachment inquiry. First, there was no reason to wait for the transcript, because Trump admitted to making the call already. Second, If Biden is complicit in a corruption, then yes he should be burned as well as Trump, but anything Biden may have done

American Consequences

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SOUNDS LIKE YESTERDAY, SEEMS LIKE TOMORROW

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October 2019

90 YEARS AGO, ITWAS FALL OF 1929. Men wore tailored suits and fedora hats, and ladies donned bob haircuts and flapper dresses. Ford’s Model T cars lined suburban streets.

Children worked on their homemade Halloween costumes, their parents unaware of the infamous tragedy about to hit the economy...

By Greg Diamond, CMT

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Dow Jones Industrial Average

400

August top

375

350 325 300 275 250 225

May top

Decline into first week of August

June bottom

200

Oct Nov Dec 1930

May Apr Mar Feb

Jul Jun

Sep Aug

W.D. Gann, a well-known technical finance trader, discovered this crucial 90-year pattern. History doesn’t always repeat, but it definitely rhymes… And this cycle should not be ignored . Aside from the nearly identical price and time patterns from 1929 and now, there was also a trade war during the late 1920s/early 1930s as well (the Smoot-Hawley Tariff Act). The similarities between 1929 and 2019 are incredible in many ways. The key to understanding why these cycles are important is that Gann observed parallels between what is happening then and now, the dates at major market turns, along with global events, trade wars, etc. Looking at the two charts, it is hard to dismiss the similarities. The trade war between the U.S. and China is now escalating, with additional tariffs set to be implemented by the U.S., and China is now threatening to retaliate as well. Let me be clear – I’m NOT looking for a

The Wall Street Crash of 1929 was the worst stock market decline in U.S. history. The Dow lost $30 billion in market value in just four days. Above is a chart of the legendary stock market crash that year... I want to highlight the timing in 1929. The market rallied into May, with a big correction that month and then a bottom in June. Then the market topped in August... You can see what happened afterwards. The stock market this year is tracing out to the same identical pattern in price and time as 90 years ago... The May high led to a big correction with a bottom in June and then a top in August. The first two weeks of August are historically a turning point to watch in the market. On average, the stock market performs the poorest during September, with the three leading indexes achieving their worst numbers during this month.

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October 2019

Dow Jones Industrial Average

27.0K 26.5K 26K 25.5K 25K 24.5K 24K 23.5K 23K 22.5K 22k

May top

August top

June bottom

Nov Dec 2019

Sep Aug Jul Jun Oct

May Apr Mar Feb

ride for equity investors – whether the rally continues a bit more or not. I’ve been scaling into equity put positions during the fall (October and November expirations) for this very reason and will continue to do so on strength, looking at December expirations and even beyond. In all my years studying and trading the markets, it is always the U.S. equity markets that are the last to “get the picture.” There are valid reasons for this – it is the strongest economy and has the best companies. But it is also the incessant focus on earnings, which are lagging indicators , that can lead the equity markets a bit higher when so many other signals are sending a warning. This looks to be the case yet again, now that earnings reports are complete, and the divergences are still intact. And the 90-year cycle is another indicator suggesting that trouble is on the horizon.

crash and I’m NOT expecting a depression or a repeat of what happened with the crash of 1929. This isn’t some doom-and-gloom, end- of-the-world claim... The point here is that the advance this year based on the 90-year cycle is nearly identical to the 1929 advance in both time and price, and what lies ahead is troubling . This simply provides me with more evidence that rallies should be sold, and it supports the round-trip market outlook. I have no doubt that the Federal Reserve will be forced to cut rates again (more than it prefers to), which will limit the downside within equity markets, but not before at least a 10% decline – or perhaps even more... This is all part of my round-trip market prediction. With earnings data complete and the trade war intensifying, there aren’t many catalysts to support the market before then. Calling exact market tops is difficult, but the evidence continues to pile up that the next month or two will be an uncomfortable

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October 2019

the bear market ALMANAC

By Dr. David Eifrig

WHAT TO THINK ABOUT ON THEWAY UP...

NOT ON THE WAY DOWN.

American Consequences

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the bear market ALMANAC

The first five days of January, too, act as an earlier warning. Now, those stats probably don’t matter. If the stock market tends to outperform every Tuesday in February historically, it’s likely just chance. There’s nothing behind it. But an almanac can collect a lot of useful information. It can confirm patterns that you thought may have existed and show you what you need to watch out for. Right now, you need to be planning for a bear market. A bear market, of course, is the label that traders use when stocks decline by 20% or more. But if you start fiddling with charts or spreadsheets, you’ll find that popular definition to be worth little. After all, is it only 20% from an all-time high? That’s not very useful in a period like the one after 2009, when stocks took nearly a decade to reach new highs. In spirit, we want to define a bear market as “ a period of prolonged negativity in the stock market, of such a magnitude that you’d like to have a plan in place to prepare for it .” In simple terms, if the market drops far, fast... or takes a lesser decline over a sustained period, then we’ll call that a bear market worth preparing for. So let’s see the bear markets... We applied that definition to the S&P 500 Index (rather than the Dow Jones Industrial Average) to get a broader gauge of the market. Here’s the chart of bear markets since 1940, and the table of bull and bear markets with their lengths and returns...

IT'S COMING...

The economy has started to show signs of stress. But with stocks near all-time highs you may not want to hear about bear markets or the next crash. But it’s coming... And you need to think about it on the way up... not on the way down. This problem plagues many people when they plan their finances. Our heads get filled with a hodgepodge of rules, strategies, and “facts” that were never proven by data. We end up with a lot of random ideas. And our natural tendency is to stitch things together in order to create coherent views. That’s one reason I love almanacs. For decades, I’ve enjoyed the Farmers’ Almanac and Jeffrey Hirsch’s Stock Trader’s Almanac . I’ve got a large collection of these going back to the 1980s. They are full of statistics and trivia about what markets have done in the past. Did you know that January tends to signal what will happen for the year? “Down” Januarys have led to a down market for the year with an 86.8% success rate since 1950, according to Hirsch’s almanac. (The market rose this January by 7.9%.)

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October 2019

S&P 500 Bear Markets Since 1940

-19.8%

1,000 1,500 2,000 2,500

-24.1%

-19.0%

-15.8%

-27.9%

-51.8%

-20.3%

500

-34.7%

-12.8%

-32.1%

-27.0%

In simple terms, if the market drops far, fast... or takes a lesser decline over a sustained period, then we’ll call that a bear market worth preparing for.

-23.3%

-39.7%

-23.0% -19.4%

-32.5%

1955 1950 1945

1965 1960

1970

1975

1985 1980

1995 1990

2015 2010 2005 2000

Ned Davis Research definition of bear market. Calculations on S&P 500 by Retirement Millionaire. Data source: Bloomberg

Bull Markets

Bear Markets

START

END

DAYS TOTAL RETURN

START

END

DAYS TOTAL RETURN

6/10/40

11/7/40

150

23.2%

11/7/40

4/28/42

537

-32.5% -23.0% -19.4% -27.0% -23.3%

4/28/42

5/29/46

1,492

128.7% 218.5%

5/29/46

5/19/47

355 446

5/19/47

8/2/56

3,363

8/2/56

10/22/57

10/22/57

12/12/61

1,512

74.9%

12/12/61

6/26/62

196

6/26/62

2/9/66

1,324

105.3% 42.2% 84.0% 132.9% 337.0%

2/9/66

10/7/66

240 543 630 622

10/7/66

11/29/68

784

11/29/68

5/26/70 10/3/74 8/12/82 12/4/87 10/11/90

-32.1%

5/26/70 10/3/74 8/12/82 12/4/87 10/11/90

1/11/73

961

1/11/73

-39.7%

11/28/80

2,248

11/28/80

-12.8%

8/25/87

1,839

8/25/87

101

-34.7% -20.3% -19.0% -24.1% -27.9% -51.8% -15.8% -19.8% -26.5% -23.7%

7/16/90 7/17/98 3/24/00

955

88.7%

7/16/90 7/17/98 3/24/00

87

2,836

383.8%

8/31/98

45

8/31/98

571

51.2%

9/21/01

546 278 517 157

9/21/01

1/4/02

105

25.3% 117.7% 107.4%

1/4/02

10/9/02 3/9/09 10/3/11 12/24/18

10/9/02 3/9/09 10/3/11 12/24/18

10/9/07

1,826

10/9/07

4/29/11

781

4/29/11

9/20/18

2,544

197.7%

9/20/18

95

?

AVERAGE

337

AVERAGE

1,456 1,408

132.4% 106.4%

MEDIAN

317

MEDIAN

American Consequences

23

the bear market ALMANAC

than two years from now, so you’re supposed to get a higher yield when you buy longer- term bonds to account for that risk. But sometimes the yield curve “inverts,” and shorter-term bonds pay better yields than long-term ones. This happens when investors expect lower interest rates, lower inflation, or even deflation in the future. These things would normally happen only if the economy gets bad. This “inverted yield curve” happened in late August... So, does the yield curve predict recessions and bear markets? It’s not a good sign. When we see a recession, it’s likely that it was preceded by a negative yield curve. However, the yield curve also gives a lot of false signals. Here’s what we can say for sure... the curve has inverted, and that means a bear market tends to come in the next few months. A recession follows a few months after that. At the same time, we have to recognize we are in a unique time for monetary policy. The Federal Reserve over the past few years has been raising short-term rates. That could make an inverted yield curve a weaker signal than it has been in the past. A DEBT COLLAPSE You can get a bear market without a debt crisis, but you can’t have a debt crisis without a bear market. Debt moves in cycles. When times are good, money is cheap. Lenders are willing to lend. As times stay good, lenders forget discipline

This tells us a few things... First, markets climb slowly and for a long time, then correct quickly. The bad times last about one-quarter of the duration of the good times. And one surprise jumped out at us... By our definition, the market decline that started last September qualified as a bear market. And then a new bull market was established from the market’s low on Christmas Eve 2018. With our bear markets defined, we can go on to explore when they happen and what you can do about them... WHEN THE BEAR ARRIVES If you follow any financial news, you’ve likely heard dire warnings about the “yield curve” predicting a recession ahead. This is an esoteric financial concept that you never hear about except when its value gets low and financial media need to gin up a headline. And you’ve likely never seen a full breakdown so you can judge its predictive power on its own. The yield curve is the difference between the yields on fixed-income securities maturing at different times. You can use any expiration dates you’d like, though some have emerged to be the standard benchmark. The most common is the difference between 10-year and two-year bonds. Normally, longer-dated bonds have higher yields than shorter-dated bonds. That’s called a “positively shaped yield curve.” The future 10 years from now is always more uncertain

24

October 2019

and convince themselves that times will always be good. They eventually lend to folks they shouldn’t lend to... on terms they shouldn’t accept. The worst loans are made at the best of times. When things turn – as the economy slows and sales drop – the credit cycle can turn violently

and lead to faster, bigger bear markets. Right now, plenty of businesses can’t pay back their debts when they come due. However, the market believes that they’ll be able to find a new round of borrowing to pay off that debt and move it down the line. But when the credit cycle turns, lending standards tighten.

The Yield Curve and GDP 10-Year 2-Year Curve

2%

1%

0%

-1%

8%

Real GDP growth

Shaded areas indicate recessions

6%

When things turn – as the economy slows and sales drop – the credit cycle can turn violently and lead to faster, bigger bear markets.

4%

2%

0%

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

2010

2013

2016

2019

Source: Federal Reserve Bank of St. Louis, Bureau of Economic Analysis, Retirement Millionaire

The Yield Curve and Bear Markets

2%

1%

0%

10-Year 2-Year Curve

-1%

1,000 1,500 2,000 2,500

S&P 500

500

Shaded areas indicate recessions

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

2010

2013

2016

2019

Source: Federal Reserve Bank of St. Louis, Bureau of Economic Analysis, Retirement Millionaire

American Consequences

25

the bear market ALMANAC

U.S. Corporate Debt

Debt problems can come from consumer, government, or corporate debt.

50%

Housing bubble

??

Tech bubble

Late-1980s boom

45%

40%

35%

30%

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

2010

2013

2016

2019

Source: Federal Reserve Bank of St. Louis

Indebted businesses can’t refinance, and those businesses go from profitable to bankrupt. Debt problems can come from consumer, government, or corporate debt. We’ll use corporate debt as our proxy here. We’re watching the debt cycle... What you should note is that the biggest bear markets come attached to the biggest downturns in the credit cycle. The late-1980s, dot-com, and housing bubbles led to some of the biggest declines in our bear market table. The ones in between are smaller. The first cracks in the credit cycle will show up here. The Federal Reserve reports that 2.8% of banks today are tightening standards for commercial borrowers, and 6.4% of banks are keeping a closer eye on consumers... despite the fact that most banks have been loosening standards since 2010.

PROTECTION BEFORE A BEAR MARKET COMES We’ll focus on three ways to protect your investments from a bear market... First, an impending bear market doesn’t mean you should sell all your stocks. Stocks have been the greatest wealth-building tool in all of history. But you might want to take a closer look at which ones you own. We looked at the 11 broad sectors of the market and their performances over the last six bear markets... As you can see, utilities, consumer staples, and health care stocks offer opportunities to safeguard your wealth. Aside from the global financial crisis, every other bear market has had some sectors that stayed near even, and some that even posted gains.

26

October 2019

On the flip side, if the bear market is coming, then you want to avoid financials, tech stocks, and the consumer-discretionary sector. It’s clear that holding safe sectors can pay off. In addition, gold is often referred to as a safe haven during bear markets. It makes sense... Gold is a physical asset and has been a store of value for thousands of years. Gold coins were minted for commerce beginning around 550 BC. No matter what happens to the economy, even if the banks collapse and our economic

structure goes down in spirals, gold will always have value. Investors like the safety of gold. The real knock against owning gold is that it’s not a productive asset. It doesn’t pay any yield. Your money just sits there, and that turns many folks away from it. But when the economy and the market start to become hazardous, owning gold helps investors sleep better at night. And since there’s only a finite supply of gold, a steady

Sector Performance During Bear Markets 7/16/1990 - 10/11/1990 7/17/1998 - 8/31/1998 3/24/2000 - 9/21/2001 1/4/2002 - 10/9/2002 10/9/2007 - 3/9/2009 4/29/2011 - 10/3/2011

Consumer Staples (22.8%) Health Care (10.3%)

Consumer Staples (-4.3%)

Consumer Staples (-31.2%) Health Care (-39.9%)

Utilities (-3%)

Utilities (-2.5%)

Utilities (-0.8%)

Consumer Staples (-6.9%) Telecom. (-10.7%)

Energy (-5.1%)

Telecom. (-10.3%)

Energy (-19.3%)

Telecom. (-8.6%)

Energy (-15.4%)

Utilities (6.4%)

Health Care (-21.7%)

Utilities (-45.9%)

Health Care (-13.3%) Consumer Staples (-14.1% )

Health Care (-16.3%) Consumer Staples (-1 6.8%)

Energy (-8.6%)

Materials (-25.9%)

Energy (-46.8%)

Health Care (-12.6%)

Financials (-11.6%)

S&P 500 (-27. 9%)

Telecom. (-50.7%)

Info. Tech. (-14.0%)

S&P 500 (-20.3%)

Materials (-1 8.8%)

Materials (-19.8%)

Financials (-30.7%) Consumer Disc. (-31. 4%) Industrials (-37.1%)

S&P 500 (-51. 8%)

S&P 500 (-15.8%) Consumer Disc. (-1 6.5%) Industrials (-26.8%)

Materials (-23.5%)

S&P 500 (-19.0%)

S&P 500 (-24.1% )

Info. Tech. (-53.0%) Consumer Disc. (-58.0%)

Industrials (-28.1%)

Industrials (-19.7%)

Industrials (-24.8%) Consumer Disc. (-34.9%) Telecom. (-44.4%)

Info. Tech. (-30.8%) Consumer Disc. (-31.6%) Financials (-33.4%)

Info. Tech. (-20.1%) Consumer Disc. (-20.7%) Financials (-28.6%)

Utilities (-47.0%)

Materials (-59.5%)

Energy (-28.4%)

Telecom. (-52.4%)

Industrials (-65.2%)

Materials (-29.4%)

Info. Tech. (-74.2%)

Info. Tech. (-55.0%)

Financials (-82.6%)

Financials (-31.1%)

Utilities Consumer Staples

Energy

Telecom Health Care

Materials

Financials

S&P 500 Info. Tech.

Consumer Disc.

Industrial

American Consequences

27

the bear market ALMANAC

an ounce of gold has been about equal to the price of a decent men’s suit. What really drives the price of gold is the currency it’s valued in. When the dollar is strong in relation to other currencies, the price of gold goes down. And when the dollar weakens, the price of gold goes up. With rising debt levels, investors may want fewer dollar-denominated bonds, which will reduce the demand for dollars. Also, with fears of slowing growth, the Federal Reserve may lower interest rates in the future to try and keep the economy afloat. That should cause the dollar to fall as well. If history proves to be true, gold should be a safe spot to park your money during the next big market drop. And to look at the most recent data, when the stock market dropped 19% from October to December, gold tacked on 12%... and went on to rally 24.3%. And finally, the third way to protect your investments against a bear market is to buy put options. By definition, put options are contracts that give buyers the right to sell a stock at a specified price. You can think of put options as a form of insurance against your portfolio. You pay a premium for it. And just like with home or flood insurance, you hope you never have to use it. But when there is a disaster, you’re happy you have it. The next chart shows the CBOE Volatility Index (“VIX”) – also known as the market’s “fear index” – and the monthly returns for the S&P 500.

demand keeps prices up. That’s why I like to call gold a “chaos hedge.” I’ve long maintained that part of your portfolio belongs in gold as protection for when things in the economy get ugly. Historically, the performance of gold proves that to be true.

Bear Markets

START

END S&P 500 TOTAL

RETURN GOLD RETURN

4/29/11

10/3/11 3/9/09 10/9/02

-15.80%

6%

10/9/07

-51.8%

25%

1/4/02

-27.9% -24.1%

14.7%

3/24/00 9/21/01

2.3%

7/17/98

8/31/98

-19%

-6.4% 6.8% 8.4%

7/16/90 10/11/90

-20.3% -34.7% -27.66%

8/25/87

12/4/87

AVERAGE:

8%

The price of gold has only gone down once in the past seven bear markets. The returns haven’t been spectacular, but eking out an 8% profit when other investors see their wealth get cut by a fourth is a win. The question is: Will gold hold up during the next bear market? First, it’s important to look at what really drives the price of gold. Gold is a commodity, but it’s different than other commodities. Unlike oil or platinum or soybeans, gold doesn’t have much real industrial use. You can’t build a skyscraper out of gold. It can’t warm your home at night. It’s just a globally accepted store of value. And gold’s real value doesn’t change. Throughout history,

28

October 2019

CBOE Volatility Index ($VIX) Spikes During Bear Markets

50%

Bear markets in gray

40%

30%

CBOE Volatility Index

20%

10%

3.0% 6.0% 9.0%

When folks are fearful and want put-option protection, the cost of protection increases dramatically...

0.0% -3.0% -6.0% -9.0% -12.0%

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019

The VIX is calculated by looking at how much people are paying for S&P 500 options expiring in the next two months. It gives us a sense of how wild investors expect the market swings to be over the next month or so. When folks are fearful and want put-option protection, the cost of protection increases dramatically... You can also see how a surge in volatility pushes up put premiums from the table below. The price of a put option on the S&P 500 can jump around 400% when volatility spikes. But buying puts costs you money if the bear market doesn’t come. That’s why you need to keep any hedges very small. The thought here isn’t to get rich off a bear market collapse... You just want a little bit (1% or 2%) to smooth out your returns.

PREPARE FOR THE NEXT BEAR With all this information about bear markets, what do we do? The prescription for survival is rather simple... Take a long-term view: If you have the luxury of investing for five or 10 years into the future, the next bear market will come and go before you need any cash. Make sure your mindset matches your time horizon, and don’t worry about what doesn’t matter. Diversify with bonds: You need some ballast to keep your portfolio steady in tough times. Bonds give you the opportunity to earn returns and have capital ready to deploy. All you need is a high-quality mutual fund or exchange-traded fund like iShares iBoxx Investment Grade Corporate Bond Fund (LQD) or something that may be available in your retirement account like the Vanguard Total Bond Market Index Fund (BND) or the

American Consequences

29

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