Shorting Gold AND the Yen - Leadlock
August 2016
Shorting Gold AND the Yen — By Charles Sizemore, Portfolio Manager
Dear Reader, It’s finally time to short gold. I gave you the signal in your July 18 issue of 5 Day Forecast (that’s why it’s important you read those emails every Monday!). But if you missed that, or haven’t already… Action to take: Sell short the SPDR Gold Shares ETF (NYSEArca: GLD) at market. Set an initial stop loss at $145. Note: shorting GLD is the easiest and most direct way to profit from a falling gold price. And it’s the most liquid. This is the position I will track in our Boom & Bust model portfolio. But if you’re investing via an IRA or cannot short in your account, you could consider buying an inverse gold ETF such as the Deutsche Bank Gold Short ETN (NYSEArca: DGZ). I’m not the biggest fan of inverse ETFs, and I won’t be tracking this for performance purposes. But if you simply can’t short GLD due to account limitations, then buying DGZ is an acceptable alternative. I laid out my case for shorting gold in the May issue of Boom & Bust, and I encourage you to thumb through that issue before placing this trade. But I’ll review some of the major points this month, because it’s important you understand why we’re shorting gold. This is not merely a short-term speculative trade. This is part of a much larger deflationary macro trend. Our income plays — particularly the Nuveen Floating Rate Income Fund (NYSE: JFR) and Annaly Capital Management (NYSE: NLY) — are part of this same theme. So, to review, I recommend we short gold for three primary reasons:
Inside This Issue:
1. Gold is an inflation hedge at a time when deflation is a far greater threat.
There Will Be Helicopter Money...........5
The Least Bad Option...........................3
2. Gold fails in its role as a crisis hedge.
Send the Pigs to Slaughter...................6
3. The dollar’s days are not numbered.
Do Your Damn Job!.............................11
Let’s start with inflation… “Core” consumer price inflation, which excludes volatile food and energy prices, is running at a 2.2% clip, which is the highest it’s been since 2012. In a vacuum, that would suggest “normal”
Editors Harry Dent, Rodney Johnson and Charles Sizemore
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inflation. But casting the net a little wider, you get a very different picture. Labor force participation is scraping along at lows last seen in the mid-1970s… an era when most married women didn’t work outside of the home and thus didn’t participate in the formal workforce. The fact that we are back at those levels tells us that the job market is a lot worse than the headline unemployment numbers would suggest. Higher-educated Americans in mid-career — and if you’re reading Boom & Bust, you likely fall under this category — have a great, vibrant job market. But Joe and Jane Sixpack haven’t kept up, and neither have many young millennials. Technology is also keeping a lid on prices and wages. I recently had to drop off my car at a mechanic shop on the other side of Dallas. It was a 30-minute Uber ride back to my office that cost me less than $16. I seriously have no idea how the trip made economic sense for the driver. Not that I’m complaining, mind you, but I use it as an example. And I could rattle on for pages and pages giving other examples of technology flattening costs. But the biggest and most immediate deflationary force is actually coming from outside U.S. borders. The core inflation rate in the Eurozone is running at just 0.90%... teetering on outright deflation. And in Japan, while prices have been firming up a little over the past five months, the economy is officially in deflation. The core inflation rate is running at -0.4%. If you really want to see the biggest warning sign of all that deflation rather than inflation is the threat we should worry about, look at global bond yields. About 30% of all global government bonds now sport negative yields. In Switzerland, the entire yield curve — from the overnight rate to the 30-year bond yield — is negative. Yes, I know that central banks are distorting bond prices. I get that. But if inflation was a real threat, we wouldn’t have negative yields on this level. And it makes no sense to buy expensive inflation insurance in the form of gold. Now let’s talk crisis hedging… 2 Boom & Bust
A Risk Asset Just Like Anything Else Gold is a quirky asset that doesn’t fit the mold of other financial assets. It’s more insurance than investment in the sense that it doesn’t generally do a whole lot when times are good and the financial markets are stable. It’s an asset you buy in the hopes that it will zig when the rest of your portfolio zags. You buy gold for that proverbial “just in case.” But while gold has a reputation as a crisis hedge, it’s really not a particularly good one. Gold rallies leading up to a crisis… but when the crisis actually hits, gold becomes a risk asset like anything else. This was clearly the case in 2008. Between March 17, 2008 and its trough on November 12, 2008, the SPDR Gold Shares ETF — the most popular way for ordinary investors to buy gold — fell by just more than 30%. Now, I don’t know about you, but I’m not a big fan of insurance that doesn’t pay off when you actually need it. I’d be a little annoyed if I paid my homeowners’ insurance for years only to find out that the policy wouldn’t pay off if my house actually burned down. But that’s what you get with gold today in the era of financialization. I know, I know. Gold has been a valuable asset for millennia and has seen many a paper asset rise and fall. Yada yada. But because gold now trades like a stock via the SPDR Gold Shares and other ETFs, it’s become more tightly correlated to the stock market. So rather than be a hedge against stock market volatility, gold has essentially just become another stock. If you want to own a little gold in a safe deposit box… or in your sock drawer, for that matter… I say go for it. Perhaps it’s just the Texan in me, but I like the idea of having a little wealth completely off the books for the same reason I think it’s a decent idea to own a gun or two off the books: “just in case.” But please don’t consider gold as a part of your investment portfolio. It’s a lousy hedge when you actually need it most. This brings me to my last point: that the dollar is very much alive and well. In fact, it’s the cleanest dirty shirt among world currencies. www.dentresearch.com
The Least Bad Option The traditionally safest currency — the Swiss franc — is systematically being destroyed by the Swiss government via negative interest rates and aggressive selling of francs on the open market. And frankly, I don’t blame them. The franc had gotten so expensive relative to the euro that it was hollowing out the Swiss economy. Destroying the franc was the least bad option. Speaking of the euro, it’s questionable whether the common currency will survive long term, as the Brexit very well might have set into motion the eventual disintegration of the European Union as we know it today. But even in the short term, prospects for the euro aren’t great. European Central Bank (ECB) President Mario Draghi has pushed the euro equivalent of the Fed funds rate to -0.40% and has indicated that he might send it even lower. Plus, Europe is facing yet another banking crisis… this time in Italy… that will likely require some sort of confidence-sapping bailout from the ECB. And topping it off are the two years of Brexit negotiations to come… which are such a wild card that I can’t say with any certainty at all how that will shake out. The yen? We’re actually shorting the yen, and I’ll go into more detail on that shortly. But suffice it to say, if you think the yen can legitimately be a safer alternative to the dollar, you are as mad as a hatter. Canada and Australia both have healthier economies and higher interest rates than the rest of the developed world, but I wouldn’t count on either of these currencies as an alternative. Both are essentially commodities plays and are highly dependent on exports to China. And Canada in particular looks to be at major risk of a housing bust. So, in a world in which no currency is managed particularly well, the dollar is definitely the least bad option. “Least bad” doesn’t mean “good,” mind you. But given the competition, the dollar looks downright stellar. All of which is why we're shorting gold. Action to take: Sell short the SPDR Gold Shares www.dentresearch.com
ETF (NYSEArca: GLD) at market. Set an initial stop loss at $145. This brings me to my second recommendation this month. Not only are we shorting gold, we’re also shorting the yen. I sent the initial trade alert out to you in July 25's 5 Day Forecast. If you missed that email, or have not yet done so... Action to take: Buy the ProShares UltraShort Yen ETF (NYSEArca: YCS) at market. Set a stop loss at $55.00. Just a little earlier, I mentioned that I wasn’t the biggest fan of inverse ETFs. Well… I’m not. But when it comes to trading currencies, this is by far the easiest way to do it. Most retail brokerage accounts don’t allow you to trade in multiple currencies, so an inverse ETF like YCS is really the only option for most investors. If you understand currencies and want to dabble in the FX market, go for it. But for our tracking purposes here, I’m going to track the ProShares UltraShort Yen ETF in our model portfolio.
3 Reasons Why the Yen is Heading Back Down Long-time readers will no doubt be familiar with this play. Adam first recommended it in the August 2012 issue, and we held it until getting stopped out in February of this year. We made over 90% on the yen short, which is pretty remarkable for a boring currency trade. The yen has historically been the main funding currency for the “carry trade.” In plain English this means that aggressive traders borrow heavily in low-yielding yen and use the proceeds to buy higheryielding currencies, bonds and other assets in other countries. In addition to being a cheap source of credit, traders also benefit from the near-constant depreciation of the yen. Think of it like this: I borrow in yen at effectively 0% and use the proceeds to buy a dollar-denominated bond paying 2% that matures in one year. During that year, the yen drops by 5% against the dollar. My total return would end up being 7%. Boom & Bust 3
Well, that’s how it’s supposed to work. But lately, the yen has been stubbornly strong. The exchange rate sat at around 120 yen to the dollar for most of 2015. But when the market got wobbly in 2016, the yen started to get a lot stronger. That same dollar that bought 120 yen at the end of last year only bought about 100 yen as of mid-July. This begs the question: why? There is no simple, concise answer. But from what I can see, the yen’s strength has been due to a handful of factors. I think a lot of traders scaled back their carry trades early this year, which meant they had to buy yen to close out their short positions. This buying fed on itself, causing more traders to cover their shorts as the yen went higher. At the same time, the dollar stayed strong in 2015 in the belief that the Fed would be raising rates aggressively in 2016 (all else equal, higher inflationadjusted interest rates mean a stronger currency). When it became obvious that the Fed wouldn’t be raising rates nearly as aggressively as Wall Street previously thought, expectations for the dollar came down. Dollar weakness meant yen strength. And finally, we have to remember that no market goes straight up or straight down. The yen spent most of 2012, 2013 and 2014 in free fall. Some of the strength we’ve seen in 2016 is just the usual ebb and flow of markets. Well, I believe that the yen’s rally is over… or that it will be very shortly. I’ve said it many times before and I’ll say it again here: the yen is eventually going to zero. Japan appears stable today. But under the surface, the foundations are cracking… and eventually the entire thing is going to come crashing down. My bearish bet on the yen is based on several factors, any of which alone would be enough to sink a currency:
pushing the yen lower… and are pulling out all the stops to make it happen. • And the country is dying. Its population gets smaller with every passing year. Let’s delve into each one of these in turn…
Banana-Republic Style Debt and Deficits I won’t even bother mentioning Japan’s personal and corporate debts because, frankly, the government debt is so scary by itself that the others really don’t matter much.
Japan’s Debt Is On Another Level Government Debt-to-GDP Ratios 240% 220% 200% 180% 160% 140% 120% 100%
Japan
Greece
Italy
U.S.
SOURCE: International Monetary Fund
Japan’s government debt now accounts for 230% of GDP. To put that into perspective, Greece — the country that started the European sovereign debt crisis — has debt equal to “only” 177% of GDP. Italy has debts of 133%. America’s debts of 104% of GDP almost makes Uncle Sam look fiscally responsible by comparison. Almost. Furthermore, Japan is adding to that massive debt load daily. Its latest annual budget deficit figures put it at 6% of GDP, and it has averaged around 8% per year since 2008.
• Japan is the most heavily indebted country in the world… more than even Greece or Italy.
So, the most heavily-indebted country in the world is adding to its debts at a rate of 6%-8% per year. Anyone else see that as being a problem?
• Its government and central bank are dedicated to
With banana-republic-style debt and deficits, you’d
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expect Japan’s bond yields to be soaring through the roof. Yet the Japanese 10-year bond yield is actually negative right now and has been near zero for years. You might wonder who in their right mind is buying Japanese government bonds at these prices. Well, the answer would be: no one… except for the Bank of Japan (BoJ). The BoJ buys about 90% of all new Japanese government bonds issued and will soon own over half of all Japanese government debt. At the current pace of purchases, the BoJ will run out of bonds to buy in less than a decade. It will literally own the entire government debt of Japan. That means that Japanese bond prices are essentially whatever the Bank of Japan says they are. So it shouldn’t be surprising that yields have stayed as low as they have. But what IS surprising is that the yen hasn’t completely fallen out of bed. What Japan is doing today is the modern-day equivalent of printing money, a la Weimar Germany. Today, central bankers don’t print physical currency. They just create it out of nothing and “lend” it to the government with the understanding that it will never be repaid. But let’s pretend for a moment that Japan’s finances were more or less in good order. It wouldn’t matter. Japan would still be headed for economic collapse due to its dismal demographic picture.
Deaths Outnumbering Births I’m writing this just days after Japan reported its largest population fall since records began in 1968. Deaths now outnumber births. The population has now fallen for seven consecutive years… and it won’t be reversed any time soon. How can I be so sure of that? Again, demographics. Fully a quarter of Japanese citizens are aged 65 or older, and the number of women of childbearing age is shrinking. At this point, simple math is working against Japan. The country's current population is about 126 million. In another 50 years, it will barely be 80 million assuming current birthrates hold. www.dentresearch.com
Japan’s Shrinking Population millions 130 125 120 115 110 105 100 95 90 85 80 75 2015
2020
2025
2030
2035
2040
2045
2050
2055
2060
SOURCE: Japan National Institute of Population and Social Security Research
Even keeping the population at 100 million — something the Abe administration has pledged to do — would mean that Japanese women of childbearing age would have to increase the birthrate by nearly 50%. Given that 60% of Japanese women between the ages are 25 and 30 are still unmarried, that seems a little unlikely. How, exactly, does a consumer-based economy grow when there are fewer consumers with every passing year? The short answer is that it doesn’t. Demographics have doomed Japan. If the country were to have a Reagan or Thatcher-style revolution, it wouldn’t matter at this point. It’s too late. Japan’s debt and demographic issues make the yen a safe short. They all but guarantee the Japanese economy eventually implodes. But as with all things in the markets, timing matters. As Keynes said, markets can stay irrational longer than you can stay solvent. So, why short the yen now?
Repeat After Me: “Helicopter Money” It looks like Japan’s monetary tinkering is about to get thrown into overdrive. Former Fed chairman, “Helicopter” Ben Bernanke, visited Japan in mid-July Boom & Bust 5
to teach his Japanese counterparts a thing or two about dumping money out of helicopters. I’m joking… but not really. Bernanke reportedly recommended that the Japanese government finance itself with perpetual zero-coupon debt provided by the Bank of Japan. Stop and think about that for a minute. Perpetual zero-coupon debt. That means debt that never matures… and pays no interest. It would literally mean that the Bank of Japan would create new money and then immediately gift it to the government. Now, to be fair, this is not official Japanese policy… at least not yet. It was simply a policy idea floated by a former central bank governor to a current central bank governor. But it shows that the Bank of Japan is desperate and willing to do just about anything to halt the deflation ravaging the country. This means that, at a minimum, we’re likely to see another aggressive round of monetary easing by the Bank of Japan. If anything will stop the appreciation
of the yen we’ve seen this year, this would be it. My price target on the yen is something nebulous here. As I said earlier, I truly believe that, ultimately, the yen will be worth nothing. As in literally nothing. You will eventually see Japanese citizens heating their homes by burning yen in the fireplace. But that is a long-term trade. In the meantime, I think returns of 50%-75% in the ProShares UltraShort Yen ETF over the next two or three years is possible and likely. Action to take: Buy the ProShares UltraShort Yen ETF (NYSEArca: YCS) at market. Set a stop loss at $55. Remember, this is a leveraged fund. If the yen sinks by 5%, we make roughly 10%. That means to hit 50%-75% returns, we’d need to see depreciation of the yen of something in the ballpark of 25%-37%. That’s a big move for a currency. But given the problems Japan faces, I consider it more than reasonable. There you have it: how we’re going to profit off gold’s next leg down and the collapse of the yen! Now I'm going to hand over to Rodney. You'd better sit down for this one...
A Tale of the Pigs, the Pachyderms, the Equines and the Asinine Whoever Is Elected President in November Needs to Send the Pigs to Slaughter By Rodney Johnson, Editor
B
LACK lives matter. Blue lives matter. All lives matter.
We’ll “build a wall.” Keep our borders open. Pro-choice. Pro-life. Anti-Muslim. Anti-terrorism. Guns kill people. People kill people. Are you mad yet? It doesn’t matter where you fall on the political 6 Boom & Bust
spectrum, chances are one of these issues, if not several of them, really gets under your skin. When protesters from the “other side” scream and yell, it makes you mad enough to kick the television! I have my own views on each of these topics, and I get just as angry as the next person. However, I recognize that there are thoughtful (if misguided) people who hold the opposite opinion. But lost in all the partisan noise over hot-button issues is something else that really gets me angry. Our www.dentresearch.com
elected federal officials are absolutely failing to do the most basic part of their job — running the country. The Congressional Pig book — the muchanticipated annual report from Citizens Against Government Waste — yet again proves that regardless of who is president, the donkeys and the elephants in D.C. keep spending our hard-earned money on the most asinine of causes.
is a specific example of how our government wastes money every single day… and no one in Washington seems to care. As you can see in this chart, today our government runs a deficit of almost $500 billion. That’s smaller than recent years, but still bigger than at any time before 2008 going all the way back to WWII!
Annual Deficits of the U.S. Federal Government
Consider how the U.S. government stores data… Like businesses, the federal government sets up data centers. Also like businesses, different departments set up their own data centers, which wastes money. We had 432 data centers in 1999. By 2010, the number had ballooned to more than 1,100. Under the current administration, in 2010 the nation’s Chief Information Officer, Vivek Kundra, introduced a program to cut the number down to size. The overlapping infrastructure was costly on several fronts, including the original building investment, electrical use and maintenance, not to mention the headcount required to keep everything going. Kundra’s study of federal data centers revealed that not much of the capacity of any one data center was in use, and there was little reuse among agencies. In 2009, the Office of Management and Budget estimated utilization rates as low as 5% across federal data centers. Different departments chose to run their own data centers, no matter what the cost, rather than sharing facilities with other agencies. Kundra’s goal was to cut the number of data centers by 800, a 73% reduction, by 2015. It didn’t quite happen that way. Federal agencies reported 11,700 data centers in 2015. That’s 2,000 more than in 2014, and over 10,000 more than there were in 2010 when Kundra started the initiative to reduce the number. David Powner, the Information Technology Director for the General Accountability Office, estimates that closing just 2,000 unnecessary data centers would save $5 billion per year. That’s real money! This isn’t a gray issue, or some point on the ethical spectrum that changes from person to person. This www.dentresearch.com
$400 $200 $0 -$200 -$400 -$600 -$800 -$1,000 -$1,200 -$1,400 -$1,600 2000
2003
2006
2009
2012
2015
SOURCE: Congressional Budget Office
To make it worse, the recent deficits are so “small” because the Fed is sending almost $100 billion per year to the U.S. Treasury from the interest on its portfolio, and the U.S. government charged taxes on healthcare for several years before providing any benefits. The Congressional Budget Office projects worse deficits in the years to come, and if our forecasts at Dent Research are correct, the actual numbers could be over $1 trillion! Breaking this habit of deficit spending will be difficult, and it can’t be done by committee. Someone has to lead the charge. There has to be a person that works as an agent of change from the status quo. Luckily, the position already has a name. It’s the President of the United States.
Spare Us the Platitudes and Promises As the leader of the Free World, the president is arguably the most powerful person on the planet, commanding the fiercest military that has honed its craft through 14 years of war. Boom & Bust 7
On the domestic side, the president is the chief administrator of the government. That’s why it’s called the Administration. His or her job is to execute the laws Congress passes, and oversee the nation’s revenue and expenditures. It sounds boring but, as we’ve seen all too often, this is where the rubber meets the road. In setting the regulatory direction of the national agencies and sending bills to Congress, in addition to furthering his own initiatives, the president can attack wasteful spending and work to reverse economically harmful laws. As the November presidential election gets closer, now is the time for the two candidates to outline the concrete steps they will take in their first hundred days to help the economy. Forget the vague pledges on priorities, like fairness and equality. Those notions sound great but mean very little. We don’t need more rhetoric on who is good and who is bad, or empty promises about giveaways. These messages might excite some crowds, but they don’t do anything to grow the economy, reduce barriers to starting businesses, or help Americans keep more of their money in their pockets. We need specific action plans… now. It’s been eight years since the economic Winter Season started, as the boomers moved from spenders to savers in 2008…
The Generational Spending Wave Immigration-Adjusted Births Lagged for Peak Spending Millions 5.0 4.5 4.0 3.5 3.0 2.5 1953 1963 1973 1983 1993 2003 2013 2023 2033 2043 2053 2063 SOURCE: U.S. Census Bureau
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We’ve got at least four more years, if not another seven, before demographics help push us into the next expansion. By then, most of the boomers will be retired and the millennials will be working their way up their own spending wave, raising children and spending money. As the economy expands, it will cover a lot of ills. But before then, we’ve got to deal with where we are today. In our current low-growth environment, wasteful government spending and missed business opportunities create a bigger drag on the economy than they normally would. Cutting wasteful spending and creating more business opportunities can provide a bigger boost than normal. In an effort to help the presidential candidates in this effort, I’ve outlined just a few programs worthy of the axe (or that should be implemented) and a couple of laws that should be repealed.
Puerto Rico Has A Pervasive Disability In addition to cutting off support for goat milk truffle confectioners so that we have lower deficits and potentially lower taxes, the candidates could also direct the Social Security Administration to take regional differences into consideration when determining if applicants are disabled. It might sound odd that living in one part of the country versus another would affect a person’s ability to work, but it makes sense when the skill in question is language. The Social Security Administration’s Puerto Rico office considers an applicant’s ability to speak English when assessing disability. If the applicant can’t read, write, understand, or speak English, then he’s well on his way to a monthly check. Never mind that the dominant language of the U.S. territory is Spanish. In a spot check, the Office of the Inspector General of the Social Security Administration found over 200 cases where a lack of proficiency in English contributed to a ruling that the applicant was disabled. The estimated total annual cost to taxpayers is at least $2 million, and will go on for the rest of their lives. www.dentresearch.com
Clearly this is idiotic, since more than 90% of islanders claim proficiency in Spanish, one of the official languages of the Commonwealth, and just over 80% claim a lack of proficiency in English. It’s made worse by the fact that not knowing a language is not a disability in the first place, it’s a hindrance. Instead of providing a monthly check forever, how about buying each person a copy of Rosetta Stone’s English Language Program? Instead of $1,000 every month it would be $400 just once! If they choose to learn the language, good for them. If they don’t, it really doesn’t matter since they live in Puerto Rico where Spanish is an official language.
Boondoggle HQ Of course the military is famous for wasting money. Right now we spend just over $100 million per year to maintain and heat unused buildings in Afghanistan. This includes buildings that American troops occupied but left behind, along with buildings that were built but never occupied by anyone. One such building is dubbed “Boondoggle HQ” by ProPublica (the independent, non-profit newsroom). It cost $25 million to build even though the military didn’t want it and three generals tried to kill it. The worst part? The general who approved the construction was eventually appointed as the Army’s Inspector General. He’s in charge of identifying waste, fraud, and abuse. These examples are small potatoes, a few million here and a few million there. But if the candidates start the cost-cutting trend then agency heads would take notice, and hopefully start trimming the fat in their own domains. Of course, if finding new ways to save money is just too hard, the candidates could always highlight existing cost-saving programs… and pledge to actually enforce them. It would be great if both candidates got behind the Federal Data Center Consolidation Initiative. These are just a few examples of wasteful spending and unfulfilled cost-cutting. Congress used to have a spending watchdog, www.dentresearch.com
Senator Tom Coburn from Oklahoma, but he retired in 2014. Senator Jeff Flake from Arizona took up the charge, and put together a book of wasteful spending for fiscal year 2015, The Farce Awakens. Hopefully Sen. Flake will keep at it, identifying shameful wastes of taxpayer dollars until we finally get some relief.
An Act That Costs Us $200 Million a Year As I mentioned above, our presidential candidates’ specific action plans don’t have to be limited to just cutting idiotic spending (although there’s more than enough room to swing the sickle there). They could also pledge to repeal obsolete laws that inhibit business, starting with the Jones Act and the Davis-Bacon Act. These laws don’t have a place in today’s economy. Passed in 1920, the Jones Act requires that goods shipped between two U.S. ports must be on U.S. flagged ships that were constructed in the U.S., are owned by U.S. entities, and are manned by crews that are at least 75% American. The goal was to guard U.S. shipbuilders against foreign competition so that, in the case of war, there would be an available commercial fleet for the Navy to commandeer. That concern was perfectly valid… in the 1920s. Clearly we live in different economic and geopolitical times. Back then, shipping was the most efficient way to move goods between two coastal areas. But that was before this little thing called the Interstate Highway System was built. While shipping remains efficient for very large or bulk cargoes, much of what we move around the nation goes by truck or rail. Also, in the 96 years since the law was passed, the shipping industry and manufacturing in general have undergone major upheavals. While some ships are built in the U.S., most are built in foreign markets, particularly in South Korea and China. The combination of falling cargo between U.S. ports and ship building moving overseas has greatly reduced the number of ships that qualify under the Jones Act. Instead of keeping a healthy supply of commercial vessels on hand, the number of qualifying boats has fallen from 1,072 in 1955 to just 90 today. Boom & Bust 9
You might think that with so few boats there is little call for shipping between U.S. ports, but that’s not the case. Shippers would love to have more availability, but it’s now so expensive to build, maintain, and operate a ship with these qualifications, not many shipping companies are willing to take it on. The boats that do qualify are expensive to hire and must be scheduled months in advance. The cost of a Jones Act eligible ship can run two to three times more than foreign competitors. Some shippers are slaves to the process, while others simply choose alternative goods. In some instances, there’s no ship available at all. This exact issue recently arose when New Jersey officials couldn’t find a Jones Act eligible vessel to ship salt from Maine ahead of a winter storm. The head of the New Jersey Department of Transportation noted: “I’ve got a shipload of salt, 400 miles from here. The only thing that we’ve been able to define as an American flag vessel would take us a month to get the salt here when I can have the salt here in a day and a half.” While some state officials might be frustrated, others simply throw their hands up in surrender, such as those in Puerto Rico and Hawaii.
Over the last decade the U.S. has become the top natural gas producer in the world. The price of the clean-burning fuel has plummeted, and natural-gas fired electric plants are all the rage. At least on the mainland. Puerto Rico’s electric authority (PREPA) would love to migrate from dirty, oil-powered electric plants to natural gas, but it faces a unique problem. The U.S. territory can’t get the fuel from the mainland because no Jones Act eligible ship capable of carrying liquefied natural gas exists. If PREPA wants natural gas, it must import it from foreign countries, where the price is higher. Supporters of the Jones Act point out that if foreign vessels worked in domestic shipping they would have to comply with U.S. laws, driving up costs and cutting into the perceived cost-savings. That stands to reason, but it doesn’t change the fact that without competition the domestic shipping industry has become inefficient and cost prohibitive. Giving buyers and sellers other alternatives for shipping, or in some cases any means of shipping at all, can’t make the costs higher, so why not open things up to market forces? If Jones Act eligible ships win out, then so be it.
The Federal Reserve Bank of New York found that it costs about $3,063 to ship a twenty-foot container of dry goods from the U.S. East Coast to Puerto Rico, while it cost about half as much — $1,504 — to ship the same container a similar distance to the Dominican Republic. Representatives of the Puerto Rico Farm Bureau report that due to the rate difference between Jones Act carriers and foreign competitors, farmers and ranchers on the island choose foreign brands of feed and fertilizer that can be delivered cheaper.
And there’s no doubt that ship building will continue in the U.S., as it does right now. Shipyards turn out boats consistently, they just aren’t flagged under U.S. owners or used in the U.S. So the skills of ship building will remain even after the Jones Act is repealed.
Apparently things are even worse on the other coast. Senator Sam Slom of Hawaii noted that shipping a 40-foot container from L.A. to Shanghai runs $790. Sending that same container from L.A. to Honolulu will set you back $8,700. It costs 10 times more to send the container a shorter distance!
Adding $11 Bn to the U.S. Deficit
Shipping dry goods might be more expensive, and scheduling can be a hassle, but at least it’s still possible. 10 Boom & Bust
The World Economic Forum estimates the Jones Act costs the U.S. economy $200 million per year, while others have suggested the cost is north of $1 billion. Either way, it’s time for this act to be sent to the bottom of the ocean.
The Davis-Bacon Act (DBA) also stifles competition, albeit from a different angle. This one costs the U.S. taxpayers money, and should be on the list of items the presidential candidates pledge to kill in their first hundred days. www.dentresearch.com
The DBA requires that federal construction projects pay prevailing wages wherever the projects are located. It seems counter-intuitive that workers would take less than the going rate to work on a project, but this is where the history of the act has a part to play. In the late 1920s, constituents in Congressman Davis’ district were alarmed that migrant workers from Southern states were taking jobs on federal projects for low pay, thereby driving down wages. Davis proposed a prevailing wage act in 1927, but it didn’t go anywhere. The bill gained traction once the Depression started, and was signed into law in 1931 as a way to fight deflation. Since that time, Congress has passed the Fair Labor Standards Act and other laws to address working conditions including pay, but the DBA remains on the books, wreaking havoc wherever federal projects loom. Part of the problem stems from identifying prevailing wages. The government conducts a voluntary survey, relying on businesses to turn in their wage data. This favors large, organized firms and labor forces, typically controlled by unions, which have the most to lose. Another issue is that wages tend to be “sticky.” While it’s easy to give everyone a bump in pay when times are good, it’s hard to cut everyone’s income if projects dry up. However, in lean times, businesses can easily offer the next potential employee lower wages than are paid to current workers to reflect the business environment. Unless wages have been flat for some time, the DBA specifically sticks the U.S. government, and thereby U.S. taxpayers, with artificially high costs for projects. The Heritage Foundation estimates that the DBA increases project costs by 22%, and in 2011 alone added almost $11 billion to the U.S. deficit. Since we already have workforce regulations and laws covering wage practices, the only practical effect of the DBA is to protect artificially high wages from competition. So here’s our call to Hillary Clinton and Donald Trump… www.dentresearch.com
Do Your Job! Instead of offering lofty principles, mushy promises, and tear-jerking stories on issues that divide us, outline how you’d actually do the job of administering the country. Show your managerial prowess by trimming nonsensical programs and removing unnecessary impediments to business. Our personal taxes might not fall, but maybe the taxes we pay would be better spent, and the deficit might even grow less rapidly. And maybe our children will have better opportunities to reach their own goals while paying lower taxes in the years ahead. That’s what I’d like, but it’s not what I expect. Instead, it’s more likely that Harry Dent’s social forecasts from 20 years ago will be proven correct… In times of prolonged economic stress, politicians and central bankers won’t bite the bullet. They won’t accept short-term pain in return for long-term gains. Instead, they’ll work to protect special interest groups and government budgets in the name of keeping people working and stopping any social unrest. Taxes will rise, not fall, and business regulations will increase, not drop. We’ll get plenty of platitudes and promises over the next three months, but few specifics. And the promises we do get will be aimed at spending more, not less. This will leave me and you in the same quandary we’ve faced for years: how to invest our money for growth, while paying attention to the growing economic storm that threatens to crash down on us at any time. That’s exactly what we plan for in the Boom & Bust model portfolio, where we work to identify shortterm profit opportunities while recognizing the longterm risk in the markets. This year we’ve been heavy on defensive positions because we think there’s a lot more risk than opportunity in the markets. Boom & Bust 11
Boom & Bust Portfolio Investment Ticker
Entry Added
Buy Price
Current Price
Stop Total Total Loss Dividends Returns
Call
BOOM PORTFOLIO Albemarle Corporation
ALB/NYSE
6/1/16
$79.68
$86.20
$65.00
$0.31
8.57%
Buy - At Market
HCP, Inc.
HCP/NYSE
3/30/16
$32.44
$39.08
$26.00
$0.58
22.24%
Buy - At Market
Annaly Capital Management
NLY/NYSE
2/26/16
$10.18
$10.82
$8.70
$0.64
12.53%
Buy - At Market
Nuveen Floating Rate Income Fund
JFR/NYSE
11/26/15
$9.95
$10.61
$9.00
$0.48
11.49%
Buy - At Market
Long SPY/ Short EEM
SPY/NYSEArca 9/15/14
$198.80 $216.65
$9.49
SPY/NYSEArca 9/15/14
$198.80 $216.65
$9.49
UUP/NYSEArca
10/25/11
$21.51
$25.17
$24.00
—
17.02%
Buy up to $26
SPDR Gold Shares (Short)
GLD/NYSEArca
7/18/16
$127.04
$125.47 $145.00
—
1.24%
Short - At Market
ProShares UltraShort Yen ETN
YCS/NYSEArca
7/25/16
$66.55
$66.52
—
-0.05%
Buy - At Market
Long SPY/ Short FXI
PowerShares DB USD Index Bullish ETF
14.17% Hold EEM/NYSEArca 9/15/14 $43.57 $35.61 $1.60 10.87% Hold FXI/NYSEArca 9/15/14 $40.37 $35.37 $1.77
BUST PORTFOLIO
$55.00
NOTES: The Boom & Bust Portfolio is an equally-weighted strategy and does not include dealing charges to purchase or sell securities, if any. Taxes are not included in total return calculations. “Total return” includes gains from price appreciation, dividend payments, interest payments, and stock splits. Securities listed on non-U.S. exchanges; total return also includes any change in the value of the underlying currency versus the U.S. dollar. For transparency sake, we want you to know that we have an advertising relationship with EverBank. As such, we may receive fees if you choose to invest in their products. Stop-losses: The Boom & Bust Portfolio maintains stop-losses on every stock, ETF and bond recommendation; stop-losses are not exercised for mutual funds unless otherwise noted. Sources for price data: Yahoo! Finance (finance.yahoo.com), Financial Times Portfolio Service (www.ft.com), TradeNet (www.trade-net.ch/EN), and websites maintained by securities issuers. Senior Editor............................................................ Harry S. Dent Senior Editor............................................................ Rodney Johnson Portfolio Manager................................................. Charles Sizemore
Publisher................................................................... Shannon Sands Managing Editor.................................................... Teresa van den Barselaar
Boom & Bust is published 12 times per year for US$99/year by Delray Publishing, 55 NE 5th Ave., Suite 200, Delray Beach, FL 33483 USA. For information about your membership, contact Member Services at 888-211-2215 or fax 561-272-5427. Contact us at www.dentresearch.com/contact-us. All Rights Reserved. Protected by copyright laws of the United States and international treaties. This Newsletter may only be used pursuant to the subscription agreement and any reproduction, copying, or redistribution (electronic or otherwise, including on the worldwide web), in whole or in part, is strictly prohibited without the express written permission of Delray Publishing. LEGAL NOTICE: This work is based on SEC filings, current events, interviews, corporate press releases and what we’ve learned as financial journalists. It may contain errors and you shouldn’t make any investment decision based solely on what you read here. It’s your money and your responsibility. The information herein is not intended to be personal legal or investment advice and may not be appropriate or applicable for all readers. If personal advice is needed, the services of a qualified legal, investment or tax professional should be sought. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication or 72 hours after the mailing of printed-only publication prior to following an initial recommendation.
12 Boom & Bust
www.dentresearch.com
Shorting Gold AND the Yen — By Charles Sizemore, Portfolio Manager
Dear Reader, It’s finally time to short gold. I gave you the signal in your July 18 issue of 5 Day Forecast (that’s why it’s important you read those emails every Monday!). But if you missed that, or haven’t already… Action to take: Sell short the SPDR Gold Shares ETF (NYSEArca: GLD) at market. Set an initial stop loss at $145. Note: shorting GLD is the easiest and most direct way to profit from a falling gold price. And it’s the most liquid. This is the position I will track in our Boom & Bust model portfolio. But if you’re investing via an IRA or cannot short in your account, you could consider buying an inverse gold ETF such as the Deutsche Bank Gold Short ETN (NYSEArca: DGZ). I’m not the biggest fan of inverse ETFs, and I won’t be tracking this for performance purposes. But if you simply can’t short GLD due to account limitations, then buying DGZ is an acceptable alternative. I laid out my case for shorting gold in the May issue of Boom & Bust, and I encourage you to thumb through that issue before placing this trade. But I’ll review some of the major points this month, because it’s important you understand why we’re shorting gold. This is not merely a short-term speculative trade. This is part of a much larger deflationary macro trend. Our income plays — particularly the Nuveen Floating Rate Income Fund (NYSE: JFR) and Annaly Capital Management (NYSE: NLY) — are part of this same theme. So, to review, I recommend we short gold for three primary reasons:
Inside This Issue:
1. Gold is an inflation hedge at a time when deflation is a far greater threat.
There Will Be Helicopter Money...........5
The Least Bad Option...........................3
2. Gold fails in its role as a crisis hedge.
Send the Pigs to Slaughter...................6
3. The dollar’s days are not numbered.
Do Your Damn Job!.............................11
Let’s start with inflation… “Core” consumer price inflation, which excludes volatile food and energy prices, is running at a 2.2% clip, which is the highest it’s been since 2012. In a vacuum, that would suggest “normal”
Editors Harry Dent, Rodney Johnson and Charles Sizemore
www.dentresearch.com
inflation. But casting the net a little wider, you get a very different picture. Labor force participation is scraping along at lows last seen in the mid-1970s… an era when most married women didn’t work outside of the home and thus didn’t participate in the formal workforce. The fact that we are back at those levels tells us that the job market is a lot worse than the headline unemployment numbers would suggest. Higher-educated Americans in mid-career — and if you’re reading Boom & Bust, you likely fall under this category — have a great, vibrant job market. But Joe and Jane Sixpack haven’t kept up, and neither have many young millennials. Technology is also keeping a lid on prices and wages. I recently had to drop off my car at a mechanic shop on the other side of Dallas. It was a 30-minute Uber ride back to my office that cost me less than $16. I seriously have no idea how the trip made economic sense for the driver. Not that I’m complaining, mind you, but I use it as an example. And I could rattle on for pages and pages giving other examples of technology flattening costs. But the biggest and most immediate deflationary force is actually coming from outside U.S. borders. The core inflation rate in the Eurozone is running at just 0.90%... teetering on outright deflation. And in Japan, while prices have been firming up a little over the past five months, the economy is officially in deflation. The core inflation rate is running at -0.4%. If you really want to see the biggest warning sign of all that deflation rather than inflation is the threat we should worry about, look at global bond yields. About 30% of all global government bonds now sport negative yields. In Switzerland, the entire yield curve — from the overnight rate to the 30-year bond yield — is negative. Yes, I know that central banks are distorting bond prices. I get that. But if inflation was a real threat, we wouldn’t have negative yields on this level. And it makes no sense to buy expensive inflation insurance in the form of gold. Now let’s talk crisis hedging… 2 Boom & Bust
A Risk Asset Just Like Anything Else Gold is a quirky asset that doesn’t fit the mold of other financial assets. It’s more insurance than investment in the sense that it doesn’t generally do a whole lot when times are good and the financial markets are stable. It’s an asset you buy in the hopes that it will zig when the rest of your portfolio zags. You buy gold for that proverbial “just in case.” But while gold has a reputation as a crisis hedge, it’s really not a particularly good one. Gold rallies leading up to a crisis… but when the crisis actually hits, gold becomes a risk asset like anything else. This was clearly the case in 2008. Between March 17, 2008 and its trough on November 12, 2008, the SPDR Gold Shares ETF — the most popular way for ordinary investors to buy gold — fell by just more than 30%. Now, I don’t know about you, but I’m not a big fan of insurance that doesn’t pay off when you actually need it. I’d be a little annoyed if I paid my homeowners’ insurance for years only to find out that the policy wouldn’t pay off if my house actually burned down. But that’s what you get with gold today in the era of financialization. I know, I know. Gold has been a valuable asset for millennia and has seen many a paper asset rise and fall. Yada yada. But because gold now trades like a stock via the SPDR Gold Shares and other ETFs, it’s become more tightly correlated to the stock market. So rather than be a hedge against stock market volatility, gold has essentially just become another stock. If you want to own a little gold in a safe deposit box… or in your sock drawer, for that matter… I say go for it. Perhaps it’s just the Texan in me, but I like the idea of having a little wealth completely off the books for the same reason I think it’s a decent idea to own a gun or two off the books: “just in case.” But please don’t consider gold as a part of your investment portfolio. It’s a lousy hedge when you actually need it most. This brings me to my last point: that the dollar is very much alive and well. In fact, it’s the cleanest dirty shirt among world currencies. www.dentresearch.com
The Least Bad Option The traditionally safest currency — the Swiss franc — is systematically being destroyed by the Swiss government via negative interest rates and aggressive selling of francs on the open market. And frankly, I don’t blame them. The franc had gotten so expensive relative to the euro that it was hollowing out the Swiss economy. Destroying the franc was the least bad option. Speaking of the euro, it’s questionable whether the common currency will survive long term, as the Brexit very well might have set into motion the eventual disintegration of the European Union as we know it today. But even in the short term, prospects for the euro aren’t great. European Central Bank (ECB) President Mario Draghi has pushed the euro equivalent of the Fed funds rate to -0.40% and has indicated that he might send it even lower. Plus, Europe is facing yet another banking crisis… this time in Italy… that will likely require some sort of confidence-sapping bailout from the ECB. And topping it off are the two years of Brexit negotiations to come… which are such a wild card that I can’t say with any certainty at all how that will shake out. The yen? We’re actually shorting the yen, and I’ll go into more detail on that shortly. But suffice it to say, if you think the yen can legitimately be a safer alternative to the dollar, you are as mad as a hatter. Canada and Australia both have healthier economies and higher interest rates than the rest of the developed world, but I wouldn’t count on either of these currencies as an alternative. Both are essentially commodities plays and are highly dependent on exports to China. And Canada in particular looks to be at major risk of a housing bust. So, in a world in which no currency is managed particularly well, the dollar is definitely the least bad option. “Least bad” doesn’t mean “good,” mind you. But given the competition, the dollar looks downright stellar. All of which is why we're shorting gold. Action to take: Sell short the SPDR Gold Shares www.dentresearch.com
ETF (NYSEArca: GLD) at market. Set an initial stop loss at $145. This brings me to my second recommendation this month. Not only are we shorting gold, we’re also shorting the yen. I sent the initial trade alert out to you in July 25's 5 Day Forecast. If you missed that email, or have not yet done so... Action to take: Buy the ProShares UltraShort Yen ETF (NYSEArca: YCS) at market. Set a stop loss at $55.00. Just a little earlier, I mentioned that I wasn’t the biggest fan of inverse ETFs. Well… I’m not. But when it comes to trading currencies, this is by far the easiest way to do it. Most retail brokerage accounts don’t allow you to trade in multiple currencies, so an inverse ETF like YCS is really the only option for most investors. If you understand currencies and want to dabble in the FX market, go for it. But for our tracking purposes here, I’m going to track the ProShares UltraShort Yen ETF in our model portfolio.
3 Reasons Why the Yen is Heading Back Down Long-time readers will no doubt be familiar with this play. Adam first recommended it in the August 2012 issue, and we held it until getting stopped out in February of this year. We made over 90% on the yen short, which is pretty remarkable for a boring currency trade. The yen has historically been the main funding currency for the “carry trade.” In plain English this means that aggressive traders borrow heavily in low-yielding yen and use the proceeds to buy higheryielding currencies, bonds and other assets in other countries. In addition to being a cheap source of credit, traders also benefit from the near-constant depreciation of the yen. Think of it like this: I borrow in yen at effectively 0% and use the proceeds to buy a dollar-denominated bond paying 2% that matures in one year. During that year, the yen drops by 5% against the dollar. My total return would end up being 7%. Boom & Bust 3
Well, that’s how it’s supposed to work. But lately, the yen has been stubbornly strong. The exchange rate sat at around 120 yen to the dollar for most of 2015. But when the market got wobbly in 2016, the yen started to get a lot stronger. That same dollar that bought 120 yen at the end of last year only bought about 100 yen as of mid-July. This begs the question: why? There is no simple, concise answer. But from what I can see, the yen’s strength has been due to a handful of factors. I think a lot of traders scaled back their carry trades early this year, which meant they had to buy yen to close out their short positions. This buying fed on itself, causing more traders to cover their shorts as the yen went higher. At the same time, the dollar stayed strong in 2015 in the belief that the Fed would be raising rates aggressively in 2016 (all else equal, higher inflationadjusted interest rates mean a stronger currency). When it became obvious that the Fed wouldn’t be raising rates nearly as aggressively as Wall Street previously thought, expectations for the dollar came down. Dollar weakness meant yen strength. And finally, we have to remember that no market goes straight up or straight down. The yen spent most of 2012, 2013 and 2014 in free fall. Some of the strength we’ve seen in 2016 is just the usual ebb and flow of markets. Well, I believe that the yen’s rally is over… or that it will be very shortly. I’ve said it many times before and I’ll say it again here: the yen is eventually going to zero. Japan appears stable today. But under the surface, the foundations are cracking… and eventually the entire thing is going to come crashing down. My bearish bet on the yen is based on several factors, any of which alone would be enough to sink a currency:
pushing the yen lower… and are pulling out all the stops to make it happen. • And the country is dying. Its population gets smaller with every passing year. Let’s delve into each one of these in turn…
Banana-Republic Style Debt and Deficits I won’t even bother mentioning Japan’s personal and corporate debts because, frankly, the government debt is so scary by itself that the others really don’t matter much.
Japan’s Debt Is On Another Level Government Debt-to-GDP Ratios 240% 220% 200% 180% 160% 140% 120% 100%
Japan
Greece
Italy
U.S.
SOURCE: International Monetary Fund
Japan’s government debt now accounts for 230% of GDP. To put that into perspective, Greece — the country that started the European sovereign debt crisis — has debt equal to “only” 177% of GDP. Italy has debts of 133%. America’s debts of 104% of GDP almost makes Uncle Sam look fiscally responsible by comparison. Almost. Furthermore, Japan is adding to that massive debt load daily. Its latest annual budget deficit figures put it at 6% of GDP, and it has averaged around 8% per year since 2008.
• Japan is the most heavily indebted country in the world… more than even Greece or Italy.
So, the most heavily-indebted country in the world is adding to its debts at a rate of 6%-8% per year. Anyone else see that as being a problem?
• Its government and central bank are dedicated to
With banana-republic-style debt and deficits, you’d
4 Boom & Bust
www.dentresearch.com
expect Japan’s bond yields to be soaring through the roof. Yet the Japanese 10-year bond yield is actually negative right now and has been near zero for years. You might wonder who in their right mind is buying Japanese government bonds at these prices. Well, the answer would be: no one… except for the Bank of Japan (BoJ). The BoJ buys about 90% of all new Japanese government bonds issued and will soon own over half of all Japanese government debt. At the current pace of purchases, the BoJ will run out of bonds to buy in less than a decade. It will literally own the entire government debt of Japan. That means that Japanese bond prices are essentially whatever the Bank of Japan says they are. So it shouldn’t be surprising that yields have stayed as low as they have. But what IS surprising is that the yen hasn’t completely fallen out of bed. What Japan is doing today is the modern-day equivalent of printing money, a la Weimar Germany. Today, central bankers don’t print physical currency. They just create it out of nothing and “lend” it to the government with the understanding that it will never be repaid. But let’s pretend for a moment that Japan’s finances were more or less in good order. It wouldn’t matter. Japan would still be headed for economic collapse due to its dismal demographic picture.
Deaths Outnumbering Births I’m writing this just days after Japan reported its largest population fall since records began in 1968. Deaths now outnumber births. The population has now fallen for seven consecutive years… and it won’t be reversed any time soon. How can I be so sure of that? Again, demographics. Fully a quarter of Japanese citizens are aged 65 or older, and the number of women of childbearing age is shrinking. At this point, simple math is working against Japan. The country's current population is about 126 million. In another 50 years, it will barely be 80 million assuming current birthrates hold. www.dentresearch.com
Japan’s Shrinking Population millions 130 125 120 115 110 105 100 95 90 85 80 75 2015
2020
2025
2030
2035
2040
2045
2050
2055
2060
SOURCE: Japan National Institute of Population and Social Security Research
Even keeping the population at 100 million — something the Abe administration has pledged to do — would mean that Japanese women of childbearing age would have to increase the birthrate by nearly 50%. Given that 60% of Japanese women between the ages are 25 and 30 are still unmarried, that seems a little unlikely. How, exactly, does a consumer-based economy grow when there are fewer consumers with every passing year? The short answer is that it doesn’t. Demographics have doomed Japan. If the country were to have a Reagan or Thatcher-style revolution, it wouldn’t matter at this point. It’s too late. Japan’s debt and demographic issues make the yen a safe short. They all but guarantee the Japanese economy eventually implodes. But as with all things in the markets, timing matters. As Keynes said, markets can stay irrational longer than you can stay solvent. So, why short the yen now?
Repeat After Me: “Helicopter Money” It looks like Japan’s monetary tinkering is about to get thrown into overdrive. Former Fed chairman, “Helicopter” Ben Bernanke, visited Japan in mid-July Boom & Bust 5
to teach his Japanese counterparts a thing or two about dumping money out of helicopters. I’m joking… but not really. Bernanke reportedly recommended that the Japanese government finance itself with perpetual zero-coupon debt provided by the Bank of Japan. Stop and think about that for a minute. Perpetual zero-coupon debt. That means debt that never matures… and pays no interest. It would literally mean that the Bank of Japan would create new money and then immediately gift it to the government. Now, to be fair, this is not official Japanese policy… at least not yet. It was simply a policy idea floated by a former central bank governor to a current central bank governor. But it shows that the Bank of Japan is desperate and willing to do just about anything to halt the deflation ravaging the country. This means that, at a minimum, we’re likely to see another aggressive round of monetary easing by the Bank of Japan. If anything will stop the appreciation
of the yen we’ve seen this year, this would be it. My price target on the yen is something nebulous here. As I said earlier, I truly believe that, ultimately, the yen will be worth nothing. As in literally nothing. You will eventually see Japanese citizens heating their homes by burning yen in the fireplace. But that is a long-term trade. In the meantime, I think returns of 50%-75% in the ProShares UltraShort Yen ETF over the next two or three years is possible and likely. Action to take: Buy the ProShares UltraShort Yen ETF (NYSEArca: YCS) at market. Set a stop loss at $55. Remember, this is a leveraged fund. If the yen sinks by 5%, we make roughly 10%. That means to hit 50%-75% returns, we’d need to see depreciation of the yen of something in the ballpark of 25%-37%. That’s a big move for a currency. But given the problems Japan faces, I consider it more than reasonable. There you have it: how we’re going to profit off gold’s next leg down and the collapse of the yen! Now I'm going to hand over to Rodney. You'd better sit down for this one...
A Tale of the Pigs, the Pachyderms, the Equines and the Asinine Whoever Is Elected President in November Needs to Send the Pigs to Slaughter By Rodney Johnson, Editor
B
LACK lives matter. Blue lives matter. All lives matter.
We’ll “build a wall.” Keep our borders open. Pro-choice. Pro-life. Anti-Muslim. Anti-terrorism. Guns kill people. People kill people. Are you mad yet? It doesn’t matter where you fall on the political 6 Boom & Bust
spectrum, chances are one of these issues, if not several of them, really gets under your skin. When protesters from the “other side” scream and yell, it makes you mad enough to kick the television! I have my own views on each of these topics, and I get just as angry as the next person. However, I recognize that there are thoughtful (if misguided) people who hold the opposite opinion. But lost in all the partisan noise over hot-button issues is something else that really gets me angry. Our www.dentresearch.com
elected federal officials are absolutely failing to do the most basic part of their job — running the country. The Congressional Pig book — the muchanticipated annual report from Citizens Against Government Waste — yet again proves that regardless of who is president, the donkeys and the elephants in D.C. keep spending our hard-earned money on the most asinine of causes.
is a specific example of how our government wastes money every single day… and no one in Washington seems to care. As you can see in this chart, today our government runs a deficit of almost $500 billion. That’s smaller than recent years, but still bigger than at any time before 2008 going all the way back to WWII!
Annual Deficits of the U.S. Federal Government
Consider how the U.S. government stores data… Like businesses, the federal government sets up data centers. Also like businesses, different departments set up their own data centers, which wastes money. We had 432 data centers in 1999. By 2010, the number had ballooned to more than 1,100. Under the current administration, in 2010 the nation’s Chief Information Officer, Vivek Kundra, introduced a program to cut the number down to size. The overlapping infrastructure was costly on several fronts, including the original building investment, electrical use and maintenance, not to mention the headcount required to keep everything going. Kundra’s study of federal data centers revealed that not much of the capacity of any one data center was in use, and there was little reuse among agencies. In 2009, the Office of Management and Budget estimated utilization rates as low as 5% across federal data centers. Different departments chose to run their own data centers, no matter what the cost, rather than sharing facilities with other agencies. Kundra’s goal was to cut the number of data centers by 800, a 73% reduction, by 2015. It didn’t quite happen that way. Federal agencies reported 11,700 data centers in 2015. That’s 2,000 more than in 2014, and over 10,000 more than there were in 2010 when Kundra started the initiative to reduce the number. David Powner, the Information Technology Director for the General Accountability Office, estimates that closing just 2,000 unnecessary data centers would save $5 billion per year. That’s real money! This isn’t a gray issue, or some point on the ethical spectrum that changes from person to person. This www.dentresearch.com
$400 $200 $0 -$200 -$400 -$600 -$800 -$1,000 -$1,200 -$1,400 -$1,600 2000
2003
2006
2009
2012
2015
SOURCE: Congressional Budget Office
To make it worse, the recent deficits are so “small” because the Fed is sending almost $100 billion per year to the U.S. Treasury from the interest on its portfolio, and the U.S. government charged taxes on healthcare for several years before providing any benefits. The Congressional Budget Office projects worse deficits in the years to come, and if our forecasts at Dent Research are correct, the actual numbers could be over $1 trillion! Breaking this habit of deficit spending will be difficult, and it can’t be done by committee. Someone has to lead the charge. There has to be a person that works as an agent of change from the status quo. Luckily, the position already has a name. It’s the President of the United States.
Spare Us the Platitudes and Promises As the leader of the Free World, the president is arguably the most powerful person on the planet, commanding the fiercest military that has honed its craft through 14 years of war. Boom & Bust 7
On the domestic side, the president is the chief administrator of the government. That’s why it’s called the Administration. His or her job is to execute the laws Congress passes, and oversee the nation’s revenue and expenditures. It sounds boring but, as we’ve seen all too often, this is where the rubber meets the road. In setting the regulatory direction of the national agencies and sending bills to Congress, in addition to furthering his own initiatives, the president can attack wasteful spending and work to reverse economically harmful laws. As the November presidential election gets closer, now is the time for the two candidates to outline the concrete steps they will take in their first hundred days to help the economy. Forget the vague pledges on priorities, like fairness and equality. Those notions sound great but mean very little. We don’t need more rhetoric on who is good and who is bad, or empty promises about giveaways. These messages might excite some crowds, but they don’t do anything to grow the economy, reduce barriers to starting businesses, or help Americans keep more of their money in their pockets. We need specific action plans… now. It’s been eight years since the economic Winter Season started, as the boomers moved from spenders to savers in 2008…
The Generational Spending Wave Immigration-Adjusted Births Lagged for Peak Spending Millions 5.0 4.5 4.0 3.5 3.0 2.5 1953 1963 1973 1983 1993 2003 2013 2023 2033 2043 2053 2063 SOURCE: U.S. Census Bureau
8 Boom & Bust
We’ve got at least four more years, if not another seven, before demographics help push us into the next expansion. By then, most of the boomers will be retired and the millennials will be working their way up their own spending wave, raising children and spending money. As the economy expands, it will cover a lot of ills. But before then, we’ve got to deal with where we are today. In our current low-growth environment, wasteful government spending and missed business opportunities create a bigger drag on the economy than they normally would. Cutting wasteful spending and creating more business opportunities can provide a bigger boost than normal. In an effort to help the presidential candidates in this effort, I’ve outlined just a few programs worthy of the axe (or that should be implemented) and a couple of laws that should be repealed.
Puerto Rico Has A Pervasive Disability In addition to cutting off support for goat milk truffle confectioners so that we have lower deficits and potentially lower taxes, the candidates could also direct the Social Security Administration to take regional differences into consideration when determining if applicants are disabled. It might sound odd that living in one part of the country versus another would affect a person’s ability to work, but it makes sense when the skill in question is language. The Social Security Administration’s Puerto Rico office considers an applicant’s ability to speak English when assessing disability. If the applicant can’t read, write, understand, or speak English, then he’s well on his way to a monthly check. Never mind that the dominant language of the U.S. territory is Spanish. In a spot check, the Office of the Inspector General of the Social Security Administration found over 200 cases where a lack of proficiency in English contributed to a ruling that the applicant was disabled. The estimated total annual cost to taxpayers is at least $2 million, and will go on for the rest of their lives. www.dentresearch.com
Clearly this is idiotic, since more than 90% of islanders claim proficiency in Spanish, one of the official languages of the Commonwealth, and just over 80% claim a lack of proficiency in English. It’s made worse by the fact that not knowing a language is not a disability in the first place, it’s a hindrance. Instead of providing a monthly check forever, how about buying each person a copy of Rosetta Stone’s English Language Program? Instead of $1,000 every month it would be $400 just once! If they choose to learn the language, good for them. If they don’t, it really doesn’t matter since they live in Puerto Rico where Spanish is an official language.
Boondoggle HQ Of course the military is famous for wasting money. Right now we spend just over $100 million per year to maintain and heat unused buildings in Afghanistan. This includes buildings that American troops occupied but left behind, along with buildings that were built but never occupied by anyone. One such building is dubbed “Boondoggle HQ” by ProPublica (the independent, non-profit newsroom). It cost $25 million to build even though the military didn’t want it and three generals tried to kill it. The worst part? The general who approved the construction was eventually appointed as the Army’s Inspector General. He’s in charge of identifying waste, fraud, and abuse. These examples are small potatoes, a few million here and a few million there. But if the candidates start the cost-cutting trend then agency heads would take notice, and hopefully start trimming the fat in their own domains. Of course, if finding new ways to save money is just too hard, the candidates could always highlight existing cost-saving programs… and pledge to actually enforce them. It would be great if both candidates got behind the Federal Data Center Consolidation Initiative. These are just a few examples of wasteful spending and unfulfilled cost-cutting. Congress used to have a spending watchdog, www.dentresearch.com
Senator Tom Coburn from Oklahoma, but he retired in 2014. Senator Jeff Flake from Arizona took up the charge, and put together a book of wasteful spending for fiscal year 2015, The Farce Awakens. Hopefully Sen. Flake will keep at it, identifying shameful wastes of taxpayer dollars until we finally get some relief.
An Act That Costs Us $200 Million a Year As I mentioned above, our presidential candidates’ specific action plans don’t have to be limited to just cutting idiotic spending (although there’s more than enough room to swing the sickle there). They could also pledge to repeal obsolete laws that inhibit business, starting with the Jones Act and the Davis-Bacon Act. These laws don’t have a place in today’s economy. Passed in 1920, the Jones Act requires that goods shipped between two U.S. ports must be on U.S. flagged ships that were constructed in the U.S., are owned by U.S. entities, and are manned by crews that are at least 75% American. The goal was to guard U.S. shipbuilders against foreign competition so that, in the case of war, there would be an available commercial fleet for the Navy to commandeer. That concern was perfectly valid… in the 1920s. Clearly we live in different economic and geopolitical times. Back then, shipping was the most efficient way to move goods between two coastal areas. But that was before this little thing called the Interstate Highway System was built. While shipping remains efficient for very large or bulk cargoes, much of what we move around the nation goes by truck or rail. Also, in the 96 years since the law was passed, the shipping industry and manufacturing in general have undergone major upheavals. While some ships are built in the U.S., most are built in foreign markets, particularly in South Korea and China. The combination of falling cargo between U.S. ports and ship building moving overseas has greatly reduced the number of ships that qualify under the Jones Act. Instead of keeping a healthy supply of commercial vessels on hand, the number of qualifying boats has fallen from 1,072 in 1955 to just 90 today. Boom & Bust 9
You might think that with so few boats there is little call for shipping between U.S. ports, but that’s not the case. Shippers would love to have more availability, but it’s now so expensive to build, maintain, and operate a ship with these qualifications, not many shipping companies are willing to take it on. The boats that do qualify are expensive to hire and must be scheduled months in advance. The cost of a Jones Act eligible ship can run two to three times more than foreign competitors. Some shippers are slaves to the process, while others simply choose alternative goods. In some instances, there’s no ship available at all. This exact issue recently arose when New Jersey officials couldn’t find a Jones Act eligible vessel to ship salt from Maine ahead of a winter storm. The head of the New Jersey Department of Transportation noted: “I’ve got a shipload of salt, 400 miles from here. The only thing that we’ve been able to define as an American flag vessel would take us a month to get the salt here when I can have the salt here in a day and a half.” While some state officials might be frustrated, others simply throw their hands up in surrender, such as those in Puerto Rico and Hawaii.
Over the last decade the U.S. has become the top natural gas producer in the world. The price of the clean-burning fuel has plummeted, and natural-gas fired electric plants are all the rage. At least on the mainland. Puerto Rico’s electric authority (PREPA) would love to migrate from dirty, oil-powered electric plants to natural gas, but it faces a unique problem. The U.S. territory can’t get the fuel from the mainland because no Jones Act eligible ship capable of carrying liquefied natural gas exists. If PREPA wants natural gas, it must import it from foreign countries, where the price is higher. Supporters of the Jones Act point out that if foreign vessels worked in domestic shipping they would have to comply with U.S. laws, driving up costs and cutting into the perceived cost-savings. That stands to reason, but it doesn’t change the fact that without competition the domestic shipping industry has become inefficient and cost prohibitive. Giving buyers and sellers other alternatives for shipping, or in some cases any means of shipping at all, can’t make the costs higher, so why not open things up to market forces? If Jones Act eligible ships win out, then so be it.
The Federal Reserve Bank of New York found that it costs about $3,063 to ship a twenty-foot container of dry goods from the U.S. East Coast to Puerto Rico, while it cost about half as much — $1,504 — to ship the same container a similar distance to the Dominican Republic. Representatives of the Puerto Rico Farm Bureau report that due to the rate difference between Jones Act carriers and foreign competitors, farmers and ranchers on the island choose foreign brands of feed and fertilizer that can be delivered cheaper.
And there’s no doubt that ship building will continue in the U.S., as it does right now. Shipyards turn out boats consistently, they just aren’t flagged under U.S. owners or used in the U.S. So the skills of ship building will remain even after the Jones Act is repealed.
Apparently things are even worse on the other coast. Senator Sam Slom of Hawaii noted that shipping a 40-foot container from L.A. to Shanghai runs $790. Sending that same container from L.A. to Honolulu will set you back $8,700. It costs 10 times more to send the container a shorter distance!
Adding $11 Bn to the U.S. Deficit
Shipping dry goods might be more expensive, and scheduling can be a hassle, but at least it’s still possible. 10 Boom & Bust
The World Economic Forum estimates the Jones Act costs the U.S. economy $200 million per year, while others have suggested the cost is north of $1 billion. Either way, it’s time for this act to be sent to the bottom of the ocean.
The Davis-Bacon Act (DBA) also stifles competition, albeit from a different angle. This one costs the U.S. taxpayers money, and should be on the list of items the presidential candidates pledge to kill in their first hundred days. www.dentresearch.com
The DBA requires that federal construction projects pay prevailing wages wherever the projects are located. It seems counter-intuitive that workers would take less than the going rate to work on a project, but this is where the history of the act has a part to play. In the late 1920s, constituents in Congressman Davis’ district were alarmed that migrant workers from Southern states were taking jobs on federal projects for low pay, thereby driving down wages. Davis proposed a prevailing wage act in 1927, but it didn’t go anywhere. The bill gained traction once the Depression started, and was signed into law in 1931 as a way to fight deflation. Since that time, Congress has passed the Fair Labor Standards Act and other laws to address working conditions including pay, but the DBA remains on the books, wreaking havoc wherever federal projects loom. Part of the problem stems from identifying prevailing wages. The government conducts a voluntary survey, relying on businesses to turn in their wage data. This favors large, organized firms and labor forces, typically controlled by unions, which have the most to lose. Another issue is that wages tend to be “sticky.” While it’s easy to give everyone a bump in pay when times are good, it’s hard to cut everyone’s income if projects dry up. However, in lean times, businesses can easily offer the next potential employee lower wages than are paid to current workers to reflect the business environment. Unless wages have been flat for some time, the DBA specifically sticks the U.S. government, and thereby U.S. taxpayers, with artificially high costs for projects. The Heritage Foundation estimates that the DBA increases project costs by 22%, and in 2011 alone added almost $11 billion to the U.S. deficit. Since we already have workforce regulations and laws covering wage practices, the only practical effect of the DBA is to protect artificially high wages from competition. So here’s our call to Hillary Clinton and Donald Trump… www.dentresearch.com
Do Your Job! Instead of offering lofty principles, mushy promises, and tear-jerking stories on issues that divide us, outline how you’d actually do the job of administering the country. Show your managerial prowess by trimming nonsensical programs and removing unnecessary impediments to business. Our personal taxes might not fall, but maybe the taxes we pay would be better spent, and the deficit might even grow less rapidly. And maybe our children will have better opportunities to reach their own goals while paying lower taxes in the years ahead. That’s what I’d like, but it’s not what I expect. Instead, it’s more likely that Harry Dent’s social forecasts from 20 years ago will be proven correct… In times of prolonged economic stress, politicians and central bankers won’t bite the bullet. They won’t accept short-term pain in return for long-term gains. Instead, they’ll work to protect special interest groups and government budgets in the name of keeping people working and stopping any social unrest. Taxes will rise, not fall, and business regulations will increase, not drop. We’ll get plenty of platitudes and promises over the next three months, but few specifics. And the promises we do get will be aimed at spending more, not less. This will leave me and you in the same quandary we’ve faced for years: how to invest our money for growth, while paying attention to the growing economic storm that threatens to crash down on us at any time. That’s exactly what we plan for in the Boom & Bust model portfolio, where we work to identify shortterm profit opportunities while recognizing the longterm risk in the markets. This year we’ve been heavy on defensive positions because we think there’s a lot more risk than opportunity in the markets. Boom & Bust 11
Boom & Bust Portfolio Investment Ticker
Entry Added
Buy Price
Current Price
Stop Total Total Loss Dividends Returns
Call
BOOM PORTFOLIO Albemarle Corporation
ALB/NYSE
6/1/16
$79.68
$86.20
$65.00
$0.31
8.57%
Buy - At Market
HCP, Inc.
HCP/NYSE
3/30/16
$32.44
$39.08
$26.00
$0.58
22.24%
Buy - At Market
Annaly Capital Management
NLY/NYSE
2/26/16
$10.18
$10.82
$8.70
$0.64
12.53%
Buy - At Market
Nuveen Floating Rate Income Fund
JFR/NYSE
11/26/15
$9.95
$10.61
$9.00
$0.48
11.49%
Buy - At Market
Long SPY/ Short EEM
SPY/NYSEArca 9/15/14
$198.80 $216.65
$9.49
SPY/NYSEArca 9/15/14
$198.80 $216.65
$9.49
UUP/NYSEArca
10/25/11
$21.51
$25.17
$24.00
—
17.02%
Buy up to $26
SPDR Gold Shares (Short)
GLD/NYSEArca
7/18/16
$127.04
$125.47 $145.00
—
1.24%
Short - At Market
ProShares UltraShort Yen ETN
YCS/NYSEArca
7/25/16
$66.55
$66.52
—
-0.05%
Buy - At Market
Long SPY/ Short FXI
PowerShares DB USD Index Bullish ETF
14.17% Hold EEM/NYSEArca 9/15/14 $43.57 $35.61 $1.60 10.87% Hold FXI/NYSEArca 9/15/14 $40.37 $35.37 $1.77
BUST PORTFOLIO
$55.00
NOTES: The Boom & Bust Portfolio is an equally-weighted strategy and does not include dealing charges to purchase or sell securities, if any. Taxes are not included in total return calculations. “Total return” includes gains from price appreciation, dividend payments, interest payments, and stock splits. Securities listed on non-U.S. exchanges; total return also includes any change in the value of the underlying currency versus the U.S. dollar. For transparency sake, we want you to know that we have an advertising relationship with EverBank. As such, we may receive fees if you choose to invest in their products. Stop-losses: The Boom & Bust Portfolio maintains stop-losses on every stock, ETF and bond recommendation; stop-losses are not exercised for mutual funds unless otherwise noted. Sources for price data: Yahoo! Finance (finance.yahoo.com), Financial Times Portfolio Service (www.ft.com), TradeNet (www.trade-net.ch/EN), and websites maintained by securities issuers. Senior Editor............................................................ Harry S. Dent Senior Editor............................................................ Rodney Johnson Portfolio Manager................................................. Charles Sizemore
Publisher................................................................... Shannon Sands Managing Editor.................................................... Teresa van den Barselaar
Boom & Bust is published 12 times per year for US$99/year by Delray Publishing, 55 NE 5th Ave., Suite 200, Delray Beach, FL 33483 USA. For information about your membership, contact Member Services at 888-211-2215 or fax 561-272-5427. Contact us at www.dentresearch.com/contact-us. All Rights Reserved. Protected by copyright laws of the United States and international treaties. This Newsletter may only be used pursuant to the subscription agreement and any reproduction, copying, or redistribution (electronic or otherwise, including on the worldwide web), in whole or in part, is strictly prohibited without the express written permission of Delray Publishing. LEGAL NOTICE: This work is based on SEC filings, current events, interviews, corporate press releases and what we’ve learned as financial journalists. It may contain errors and you shouldn’t make any investment decision based solely on what you read here. It’s your money and your responsibility. The information herein is not intended to be personal legal or investment advice and may not be appropriate or applicable for all readers. If personal advice is needed, the services of a qualified legal, investment or tax professional should be sought. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication or 72 hours after the mailing of printed-only publication prior to following an initial recommendation.
12 Boom & Bust
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