092817 SVC Transcript
The Bauman Letter Weekly September 28, 2017 Transcript
Good morning, folks, and welcome to this week's Bauman Letter Weekly podcast. Ted Bauman reporting from Atlanta. I am fresh from the Total Wealth Symposium, which we held in Hollywood, Florida last week. Wow! What an event! Lot of people came. We had some very engaging discussions. And I think for first time, I really felt like we were in a good synchronization between those of us who work here at Banyan Hill and write about investing, and the feelings of the people on the ground, the people who read our newsletters. I think there's a very clear understanding now of the difference between sensible investing and just swinging for the fences and the need for hedging. All sorts of things came up in discussion, and I’m very pleased that people felt like we were giving them the value that they deserve when they buy one of our products. So I’m going to address a couple of questions that I received at the conference, but also the ones that I received by email and a few other tidbits that people have asked me directly. Given your past enthusiasm for Puerto Rico, do you have any comment on the situation after Hurricane Maria? Well, yes, I do. I am a big fan of the island of Puerto Rico. Not because I think it's just a beautiful place and that the people are very friendly and very nice to work with, but I think Puerto Rico has been very badly done by over the years. It is as much a part of the United States as any territory on the mainland, as any one of the 50 States. It is only different in the respect of a couple of very specific laws that don't give Puerto Ricans the full rights of American citizens. They cannot vote for a president. They cannot vote for a representative in Congress. But on the flipside, they don't pay any U.S. federal income taxes. I think that the current situation for Puerto Rico, before the hurricane, was untenable. Puerto Rico, I think, was desperate after the withdrawal of certain tax advantages that Congress had given it some decades ago. From the mid-2000s, Puerto Rico’s tax base, which relied a lot on manufacturers who had an incentive to work in Puerto Rico, just evaporated and no government can deal with that kind of decline in revenue on such a short notice without having to do something. That something was to borrow in the hope that it would be able to generate a new approach to strengthening its tax base. 1
Unfortunately, the combination of the island’s desperation and, quite frankly, the greed and recklessness of Wall Street lenders basically left everyone with a huge debt overhang. Another tradition is always to blame the borrower. And yes, the Puerto Rican government does have a lot of blame to bear here, but at the same time I think there is ample evidence that Wall Street lenders take it for granted that they will always have the government at their back, and that the government will always take preference for their needs over the needs of borrowers. As a result, I think they assumed that the government would essentially force Puerto Rico to repay these loans. So they made them in what I regard as a reckless matter. In other words, Wall Street lenders assumed that Puerto Rico would be forced to repay loans on almost any terms. And as a result, they made loans to the island and its government that they would've never made to anybody else. I think that's wrong. I think that's an example of government interference in the free market just as much as anything else. So Puerto Rico, as we know, was bankrupt before the hurricane. The hurricane has essentially destroyed … I won’t say everything on the island. That's what the press has been saying. I think the Hurricane Maria has essentially destroyed the basic infrastructure that is required for daily life to continue on a sustainable basis in Puerto Rico. Electricity is pretty much gone except for in some areas around San Juan. Drinking water systems have disintegrated. Tens of thousands of people are literally without homes. Their roofs ripped off. The level of devastation in Puerto Rico is really not very different from what we saw on islands like Barbuda and the Virgin Islands and places like that and St. Maarten during the Hurricane Irma. What astounds me is that it's being treated as if it was just a kind of a minor issue by the mainstream press. Puerto Rico is being treated as just another island in the Caribbean. Well folks, it’s not. It's an integral part of United States. Puerto Ricans are U.S. citizens as much as Texans or Floridians. They have served in our Armed Forces for over hundred years and there's no reason why they should be treated any differently from anybody else. I think that for me the critical question now is what is the federal government going to do to assist Puerto Rico in the very, very short term. There are people, literally, at risk of things like cholera and even starvation problem with the mountains. We would never tolerate this on the mainland and we shouldn't be tolerating in Puerto Rico. Having said that, I think that the likelihood is that we will see a very significant exodus from the island in the short term. Bear in mind that a lot of Puerto Ricans … actually there are more Puerto Ricans, people born in Puerto Rico but living on the mainland than there are living in Puerto Rico.
2
That means that families are represented in the United States. The family members in Puerto Rico, if they can afford a plane ticket to the States, can go and stay with them. My guess is that that's going to lead to a very significant decline in the population, probably by up to 20%, 30% ... maybe 40% over the next couple of months. Now that's obviously unsustainable. The island cannot continue to function under the circumstances unless it receives assistance. That is going to mean probably also writing off those loans to Wall Street. I know people will disagree with me on that. But honestly, I can't see how anything else could happen, because it’s just not feasible. Those loans will not be repaid. There's nothing to repay them with now. The island is essentially a desolated. So I think you know my sense is that right now is not the time to think about investing on the island or about taking advantage of its tax reforms. I think we should be paying very careful attention to what happens over the next six months to a year, because the pressure on Congress to do something about Puerto Rico’s status is going to increase dramatically. And that’s for two reasons. One, because the island has consistently expressed a preference for statehood for many years now. It’s clear that there really isn't any reason why it shouldn't be a state, except of course for political reasons. And one of those political reasons is that the island would probably return Democratic senators and Democratic congressmen. Even very conservative Puerto Ricans tend to be less right-wing than Republicans … today's Republicans anyway. So the problem is that if Puerto Ricans do leave en masse, as they seem prepared to do, the likelihood is that this would be a very large expansion of Puerto Rican populations in places like Florida, New York, New Jersey — where their historical concentrations. Those people have voting rights when they come to the United States. They will become part of the electorate when they come to the States. They will be able to vote for a president. They will be able to vote for Congress and Senate. You know if the Republicans look at this issue from all angles, they’ll realize it may actually be better for them to help Puerto Rico achieve statehood so that the people actually can go back to the island rather than packing voting districts with likely Democratic voters. I know that sounds cynical, but it's the truth. I think it’s something that we are going to a lot more about the next couple years. Second question: I worry about both where to invest safely and what segments of the market will be a hedge when the markets go to heck-in-a-handbasket. I want know what the telltale signs are that the market is going to drop. I don't get caught without a clue as to what is about to happen.
3
Well, you and everybody else. Many, many people at the Total Wealth Symposium raised issues like that. In my presentation, I spoke about one of my products, Alpha Stock Alert, which is somewhat similar to the Smart Money system. I pointed out that when you are close to retirement or in it, your investing strategy as a whole has to change. You have to reduce your exposure to high-risk investing. Most importantly, you need to have a hedging strategy in place. The only real hedging strategy is one that essentially takes you out of the market and puts you into something that will hold its value or move opposite to the market. Yes, you can hedge by buying into evergreen sectors. I think if you hold on to large Dow Jones industrial stocks, evergreen companies that that have maintained their value and have returns over many years. Yeah, they will bounce back and you'll get your money back. The problem is that during the 18 months to two years of the downturn, stock investments are going to have to climb back up again and you lose all that time that you could be earning income. It's important to hedge before the market crashes. You need to do it if you think the market is take a down turn. Move into cash. Move into gold. Move into a hedging position like the inverse ETF. Now this raises the question of how one knows that the market is likely crash. I've expressed in a number of occasions the view that the market is in a very dangerous situation. Let me just set out of the three that I think the most important. Valuations are higher than they've ever been in real terms. It’s hard to see how they could go any higher. Price-to-earnings ratios, which are basically the relationship between the price of the stock and the expected earnings of the company per share going forward, are at historically astronomical levels. The norm is around 18. As a ratio, we’re now about 30 or more. We’ve only been higher once before, but it was just before the 2000 dot-com bust. The second is that because of the cheapness of borrowing, especially for big institutional investors, the market right now is highly leveraged. People are borrowing money to buy stocks in the hope that they can make money on the spread between the cost of borrowing in the investment. That's called leveraging. The numbers right now on leveraging are really obscene. We have more margin debt now than I think that we have ever had it at any time previously in the U.S. the history. Often I say margin debt is like the rigging on a crossbow. With a crossbow, because of the pulley system, when you pull back the bow, it seems really easy. But when you release it, it has tremendous force in flinging the bolt. The same thing applies to the stock market leverage. One downturn happens and people have to liquidate their margin positions, that money or that attempt to liquidate the positions quickly leads to even more rapid declines in stocks than would be the case if we weren’t so leverage.
4
But probably the biggest concern for me is that even with the growth of market values and an index values, like the Standard & Poor's 500 Dow Jones Industrial, etc., in the last few weeks. Fewer and fewer firms are participating in that rally. I know there has been some decrease in the distance between the top firms and the rest of market in the last 10 days in particular. But I can't see that this is a sustainable situation where you have 60% of firms in the market, in some cases, are seeing their stock prices go down and only the ones at the top of seeing the prices go up. It’s not sustainable because the people who only work for those 60% of companies are the customers of the other 40%. If they lose, so to do the big companies eventually. So having said all that, I think one thing to consider is to look at my Alpha Stock Alert service. It is designed around indicators that have historically proven able to predict declines in the market. It has done so every time since the 2007 downturn. In back testing, it showed that every time the system predicts the downturn, it moves into hedging position by buying an inverse ETF of the Standard & Poor's 500. An inverse ETF goes up when the market goes down. You earn money when everyone else is losing. It’s critical to be in that position before the dip happens. I will tell you that right now the Alpha Stock Alert is in a hedging position. We're holding an inverse ETF on the Standard & Poor's 500, which means that we're anticipating a correction. We don't know when it's going happen. It is likely to happen, and I think that's the critical thing to bear in mind. Systems that have proven themselves able to correctly predicted downturn and adopt a hedging position before they happen, they exist and they're not foolproof. Nothing ever is. Nobody can ever say what the future is to do. But you need to play the odds in a situation like this, and the odds are heavily in favor of full investment strategies that have built-in hedging positions like the Alpha Stock Alert. Of course, there are others. There's a big difference between those who can afford to wait out the downturn and those of us who are near or in retirement can’t afford to do so. The last question is: Can you comment on the national debt and its long-term impact on the value of the dollar? There is a lot of misinformation out there quite frankly about our national debt and about the relationship between the national debt and in the dollar. The United States is pretty much alone in the world as being a country that can continue to print its own currency without having to have an immediate concern about the exchange rate with other countries. We've been doing so ever since 2008. The Federal Reserve has effectively printed a great deal of money and yet the dollar remains very strong. That is because the United States dollar is the reserve currency in the world and that allows the U.S. to do things other countries can’t do. Now that doesn't mean that I think that the government should be spending hand over fist or not trying to raise revenue. It does mean that the typical relationship that we hear about between 5
growth and currency and inflation. You know, the Weimer Republic in Germany or Zimbabwe or places like that, those are misleading examples. They do not apply in the United States situation. People are frankly saying that stuff to scare you. I don't see the consumer price inflation in the near future at all. I disagree fundamentally with people who say that were going to have an increase in inflation. In fact, we could use some inflation, because we’re perilously close to deflationary environment. The Federal Reserve wants to boost inflation too. However, I do think it's likely that the value of the dollar will decline. The problem is that it should, right? Because a stronger dollar means we tend as Americans tend to buy imports and that we don't export as much, which means that our balance of trade suffers. It also means that the consumer goods are extremely cheap, but there's a price to pay for that. Really cheap exports are one of the key things or imports rather one the key things that is preventing the growth of manufacturing jobs in this country. If the dollar is strong, we lose. So I'm somebody who just believes in a weaker dollar in the long term is a good thing. It would also help to tame some of the stock market excesses we’re seeing. That's why think it's important to have some of your portfolio in things like gold or in foreign currency-denominated investments, particularly things like the euro and so on. Because when you use a strong dollar to buy a cheap foreign stock, when dollar declines, the value of your holdings in foreign currency terms will increase. The value of your dividend earnings from those foreign stocks will also increase in dollar terms. It's a bargain-basement shopping time for foreign stocks. I think it's important to remember that just like I said previously about the hedging strategies you need to adopt with your U.S. investments, you also need to think about hedging internationally. The Bauman Letter is full of all kinds of suggestions on that, rare tangible assets, precious metals, and, of course, investments in foreign stock exchanges. That was enough for me from today. I’ve kind of gone on longer that I normally do. I will speak to you again next weekend. Happy investing!
Ted Bauman Editor, The Bauman Letter
6
Good morning, folks, and welcome to this week's Bauman Letter Weekly podcast. Ted Bauman reporting from Atlanta. I am fresh from the Total Wealth Symposium, which we held in Hollywood, Florida last week. Wow! What an event! Lot of people came. We had some very engaging discussions. And I think for first time, I really felt like we were in a good synchronization between those of us who work here at Banyan Hill and write about investing, and the feelings of the people on the ground, the people who read our newsletters. I think there's a very clear understanding now of the difference between sensible investing and just swinging for the fences and the need for hedging. All sorts of things came up in discussion, and I’m very pleased that people felt like we were giving them the value that they deserve when they buy one of our products. So I’m going to address a couple of questions that I received at the conference, but also the ones that I received by email and a few other tidbits that people have asked me directly. Given your past enthusiasm for Puerto Rico, do you have any comment on the situation after Hurricane Maria? Well, yes, I do. I am a big fan of the island of Puerto Rico. Not because I think it's just a beautiful place and that the people are very friendly and very nice to work with, but I think Puerto Rico has been very badly done by over the years. It is as much a part of the United States as any territory on the mainland, as any one of the 50 States. It is only different in the respect of a couple of very specific laws that don't give Puerto Ricans the full rights of American citizens. They cannot vote for a president. They cannot vote for a representative in Congress. But on the flipside, they don't pay any U.S. federal income taxes. I think that the current situation for Puerto Rico, before the hurricane, was untenable. Puerto Rico, I think, was desperate after the withdrawal of certain tax advantages that Congress had given it some decades ago. From the mid-2000s, Puerto Rico’s tax base, which relied a lot on manufacturers who had an incentive to work in Puerto Rico, just evaporated and no government can deal with that kind of decline in revenue on such a short notice without having to do something. That something was to borrow in the hope that it would be able to generate a new approach to strengthening its tax base. 1
Unfortunately, the combination of the island’s desperation and, quite frankly, the greed and recklessness of Wall Street lenders basically left everyone with a huge debt overhang. Another tradition is always to blame the borrower. And yes, the Puerto Rican government does have a lot of blame to bear here, but at the same time I think there is ample evidence that Wall Street lenders take it for granted that they will always have the government at their back, and that the government will always take preference for their needs over the needs of borrowers. As a result, I think they assumed that the government would essentially force Puerto Rico to repay these loans. So they made them in what I regard as a reckless matter. In other words, Wall Street lenders assumed that Puerto Rico would be forced to repay loans on almost any terms. And as a result, they made loans to the island and its government that they would've never made to anybody else. I think that's wrong. I think that's an example of government interference in the free market just as much as anything else. So Puerto Rico, as we know, was bankrupt before the hurricane. The hurricane has essentially destroyed … I won’t say everything on the island. That's what the press has been saying. I think the Hurricane Maria has essentially destroyed the basic infrastructure that is required for daily life to continue on a sustainable basis in Puerto Rico. Electricity is pretty much gone except for in some areas around San Juan. Drinking water systems have disintegrated. Tens of thousands of people are literally without homes. Their roofs ripped off. The level of devastation in Puerto Rico is really not very different from what we saw on islands like Barbuda and the Virgin Islands and places like that and St. Maarten during the Hurricane Irma. What astounds me is that it's being treated as if it was just a kind of a minor issue by the mainstream press. Puerto Rico is being treated as just another island in the Caribbean. Well folks, it’s not. It's an integral part of United States. Puerto Ricans are U.S. citizens as much as Texans or Floridians. They have served in our Armed Forces for over hundred years and there's no reason why they should be treated any differently from anybody else. I think that for me the critical question now is what is the federal government going to do to assist Puerto Rico in the very, very short term. There are people, literally, at risk of things like cholera and even starvation problem with the mountains. We would never tolerate this on the mainland and we shouldn't be tolerating in Puerto Rico. Having said that, I think that the likelihood is that we will see a very significant exodus from the island in the short term. Bear in mind that a lot of Puerto Ricans … actually there are more Puerto Ricans, people born in Puerto Rico but living on the mainland than there are living in Puerto Rico.
2
That means that families are represented in the United States. The family members in Puerto Rico, if they can afford a plane ticket to the States, can go and stay with them. My guess is that that's going to lead to a very significant decline in the population, probably by up to 20%, 30% ... maybe 40% over the next couple of months. Now that's obviously unsustainable. The island cannot continue to function under the circumstances unless it receives assistance. That is going to mean probably also writing off those loans to Wall Street. I know people will disagree with me on that. But honestly, I can't see how anything else could happen, because it’s just not feasible. Those loans will not be repaid. There's nothing to repay them with now. The island is essentially a desolated. So I think you know my sense is that right now is not the time to think about investing on the island or about taking advantage of its tax reforms. I think we should be paying very careful attention to what happens over the next six months to a year, because the pressure on Congress to do something about Puerto Rico’s status is going to increase dramatically. And that’s for two reasons. One, because the island has consistently expressed a preference for statehood for many years now. It’s clear that there really isn't any reason why it shouldn't be a state, except of course for political reasons. And one of those political reasons is that the island would probably return Democratic senators and Democratic congressmen. Even very conservative Puerto Ricans tend to be less right-wing than Republicans … today's Republicans anyway. So the problem is that if Puerto Ricans do leave en masse, as they seem prepared to do, the likelihood is that this would be a very large expansion of Puerto Rican populations in places like Florida, New York, New Jersey — where their historical concentrations. Those people have voting rights when they come to the United States. They will become part of the electorate when they come to the States. They will be able to vote for a president. They will be able to vote for Congress and Senate. You know if the Republicans look at this issue from all angles, they’ll realize it may actually be better for them to help Puerto Rico achieve statehood so that the people actually can go back to the island rather than packing voting districts with likely Democratic voters. I know that sounds cynical, but it's the truth. I think it’s something that we are going to a lot more about the next couple years. Second question: I worry about both where to invest safely and what segments of the market will be a hedge when the markets go to heck-in-a-handbasket. I want know what the telltale signs are that the market is going to drop. I don't get caught without a clue as to what is about to happen.
3
Well, you and everybody else. Many, many people at the Total Wealth Symposium raised issues like that. In my presentation, I spoke about one of my products, Alpha Stock Alert, which is somewhat similar to the Smart Money system. I pointed out that when you are close to retirement or in it, your investing strategy as a whole has to change. You have to reduce your exposure to high-risk investing. Most importantly, you need to have a hedging strategy in place. The only real hedging strategy is one that essentially takes you out of the market and puts you into something that will hold its value or move opposite to the market. Yes, you can hedge by buying into evergreen sectors. I think if you hold on to large Dow Jones industrial stocks, evergreen companies that that have maintained their value and have returns over many years. Yeah, they will bounce back and you'll get your money back. The problem is that during the 18 months to two years of the downturn, stock investments are going to have to climb back up again and you lose all that time that you could be earning income. It's important to hedge before the market crashes. You need to do it if you think the market is take a down turn. Move into cash. Move into gold. Move into a hedging position like the inverse ETF. Now this raises the question of how one knows that the market is likely crash. I've expressed in a number of occasions the view that the market is in a very dangerous situation. Let me just set out of the three that I think the most important. Valuations are higher than they've ever been in real terms. It’s hard to see how they could go any higher. Price-to-earnings ratios, which are basically the relationship between the price of the stock and the expected earnings of the company per share going forward, are at historically astronomical levels. The norm is around 18. As a ratio, we’re now about 30 or more. We’ve only been higher once before, but it was just before the 2000 dot-com bust. The second is that because of the cheapness of borrowing, especially for big institutional investors, the market right now is highly leveraged. People are borrowing money to buy stocks in the hope that they can make money on the spread between the cost of borrowing in the investment. That's called leveraging. The numbers right now on leveraging are really obscene. We have more margin debt now than I think that we have ever had it at any time previously in the U.S. the history. Often I say margin debt is like the rigging on a crossbow. With a crossbow, because of the pulley system, when you pull back the bow, it seems really easy. But when you release it, it has tremendous force in flinging the bolt. The same thing applies to the stock market leverage. One downturn happens and people have to liquidate their margin positions, that money or that attempt to liquidate the positions quickly leads to even more rapid declines in stocks than would be the case if we weren’t so leverage.
4
But probably the biggest concern for me is that even with the growth of market values and an index values, like the Standard & Poor's 500 Dow Jones Industrial, etc., in the last few weeks. Fewer and fewer firms are participating in that rally. I know there has been some decrease in the distance between the top firms and the rest of market in the last 10 days in particular. But I can't see that this is a sustainable situation where you have 60% of firms in the market, in some cases, are seeing their stock prices go down and only the ones at the top of seeing the prices go up. It’s not sustainable because the people who only work for those 60% of companies are the customers of the other 40%. If they lose, so to do the big companies eventually. So having said all that, I think one thing to consider is to look at my Alpha Stock Alert service. It is designed around indicators that have historically proven able to predict declines in the market. It has done so every time since the 2007 downturn. In back testing, it showed that every time the system predicts the downturn, it moves into hedging position by buying an inverse ETF of the Standard & Poor's 500. An inverse ETF goes up when the market goes down. You earn money when everyone else is losing. It’s critical to be in that position before the dip happens. I will tell you that right now the Alpha Stock Alert is in a hedging position. We're holding an inverse ETF on the Standard & Poor's 500, which means that we're anticipating a correction. We don't know when it's going happen. It is likely to happen, and I think that's the critical thing to bear in mind. Systems that have proven themselves able to correctly predicted downturn and adopt a hedging position before they happen, they exist and they're not foolproof. Nothing ever is. Nobody can ever say what the future is to do. But you need to play the odds in a situation like this, and the odds are heavily in favor of full investment strategies that have built-in hedging positions like the Alpha Stock Alert. Of course, there are others. There's a big difference between those who can afford to wait out the downturn and those of us who are near or in retirement can’t afford to do so. The last question is: Can you comment on the national debt and its long-term impact on the value of the dollar? There is a lot of misinformation out there quite frankly about our national debt and about the relationship between the national debt and in the dollar. The United States is pretty much alone in the world as being a country that can continue to print its own currency without having to have an immediate concern about the exchange rate with other countries. We've been doing so ever since 2008. The Federal Reserve has effectively printed a great deal of money and yet the dollar remains very strong. That is because the United States dollar is the reserve currency in the world and that allows the U.S. to do things other countries can’t do. Now that doesn't mean that I think that the government should be spending hand over fist or not trying to raise revenue. It does mean that the typical relationship that we hear about between 5
growth and currency and inflation. You know, the Weimer Republic in Germany or Zimbabwe or places like that, those are misleading examples. They do not apply in the United States situation. People are frankly saying that stuff to scare you. I don't see the consumer price inflation in the near future at all. I disagree fundamentally with people who say that were going to have an increase in inflation. In fact, we could use some inflation, because we’re perilously close to deflationary environment. The Federal Reserve wants to boost inflation too. However, I do think it's likely that the value of the dollar will decline. The problem is that it should, right? Because a stronger dollar means we tend as Americans tend to buy imports and that we don't export as much, which means that our balance of trade suffers. It also means that the consumer goods are extremely cheap, but there's a price to pay for that. Really cheap exports are one of the key things or imports rather one the key things that is preventing the growth of manufacturing jobs in this country. If the dollar is strong, we lose. So I'm somebody who just believes in a weaker dollar in the long term is a good thing. It would also help to tame some of the stock market excesses we’re seeing. That's why think it's important to have some of your portfolio in things like gold or in foreign currency-denominated investments, particularly things like the euro and so on. Because when you use a strong dollar to buy a cheap foreign stock, when dollar declines, the value of your holdings in foreign currency terms will increase. The value of your dividend earnings from those foreign stocks will also increase in dollar terms. It's a bargain-basement shopping time for foreign stocks. I think it's important to remember that just like I said previously about the hedging strategies you need to adopt with your U.S. investments, you also need to think about hedging internationally. The Bauman Letter is full of all kinds of suggestions on that, rare tangible assets, precious metals, and, of course, investments in foreign stock exchanges. That was enough for me from today. I’ve kind of gone on longer that I normally do. I will speak to you again next weekend. Happy investing!
Ted Bauman Editor, The Bauman Letter
6
