| July 26, 2014 | | | | | | | |  | | | | Rickards: Stock Market's on a Collision Course | | | | | - "This is the worst possible time for the everyday investor to get into the stock market," says Jim Rickards...
- Then we outline Jim's model portfolio… zeroing in on one component in particular...
- After that, Jim gives you concrete evidence showing "a stock market collapse is almost inevitable and is probably coming soon""...
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July 26, 2014  |
Peter Coyne, checking in from DR HQ…
"The stock market is a bubble," our friend Jim Rickards cautioned us when he paid a visit to DR headquarters last month. "This is about the worst possible time for the everyday investor to get into the stock market," he specified.
Roll your eyes if you think you've heard this before. But if you've read his newest book, The Death of Money, then you know Mr. Rickards has a way of turning common insights into valuable investment advice.
More on that in a second...
But first, can you tell us if this scenario sounds spot on?
Since the March 2009 low, you've watched stocks defy hyperinflationistas' crash calls to the tune of 197%.
From 2009-2012, your sideline seat was characterized by conviction and disbelief...
By the time the New Year's ball dropped in 2014, "bitterness" was more like it… as stocks booked their best returns in 18 years -- 30% for 2013.
Now daydreams of bull market riches that might've been… or may still be... fill your head.
If that's you, we empathize.
Alas, if you're chewing bull market cud, don't swallow. Not yet. First, listen to Rickards' argument...  It's true that average Americans really haven't participated in the rally," Jim explained to us. "You know, people like to say, 'Oh, well, the stock market has more than doubled since the low in March 2009.'
"It has, but it's more than doubled with enormous leverage and very little participation. Volumes are low, so you have a steeply rising stock market on very low volume with massive leverage. That is almost the definition of a bubble. And that bubble will burst.
"So investors who kinda jump in now, saying, 'Oh, gee, I missed the boat, I gotta get in.' But they're just setting themselves up for a fall. The everyday investor has to be very, very careful about stocks.
More valuable than the problem, though, is Jim's solution. For that, we have to think way back to our trip to Melbourne, Australia, in April. That's where we first made Mr. Rickards' acquaintance. We both attended the World War D investment conference, your editor as a curious market-watcher and Rickards a headliner.
"A model portfolio," he explained to the Aussies, "would be a sleeve of gold, fine art, land, cash and some equities."
Today, we'll just unpack the cash module, his simplest recommendation. In the coming weeks, we'll investigate the others.
Specifically, Jim recommends as much as a 20% allocation to cash. Hang on, suppress your anti-Fed angst.
Holding dollars, flimsy as they are, can be a wise deflationary hedge. Your purchasing power rises in that scenario. Second, it allows you to pivot into other asset classes when an attractive opportunity rears its head. | Holding dollars, flimsy as they are, can be a wise deflationary hedge. | But does it have to be dollars? What about pounds? Euros? Or something exotic like Thai bahts?
Lean in...
"My recommended currencies," revealed Jim, "are the euro… Singapore dollar… Korean won and Canadian dollar. I used to have the Australian dollar on that list but took it off last summer because the Reserve Bank of Australia joined the currency wars and set out to trash the Australian dollar.
"Daily Reckoning readers don't have to feel like a cork on the ocean," Jim told us as we parted ways. "There are strategies you can use to protect yourself."
More of those strategies to come in the following weeks…
In the meantime, read on for Jim's indictment of the current stock market rally. Below, he outlines why he believes "a stock market collapse is almost inevitable and is probably coming soon."
[Ed. note: We're working on an exciting project with Mr. Rickards. We can't reveal much about it right now, except to tell you we'll think you'll love it and to keep watching this space.] | | | | | | | | | | | | Underground Bank Could "Kill" Your Local ATM From New York to Sao Paulo to Hong Kong, cities around the world are installing an entire fleet of new ATMs, allowing millions of people to get cash from a new "underground bank." A venture capital firm predicted that the value of any "account" from this underground bank could increase by 500% by the end of 2014. | | | | | | | | | | | | | | Stock Market Reality Check | | | | by Jim Rickards | | | | |  |
Listening to mainstream market commentary on television and reading the financial press leaves one with the impression that the economic recovery is gaining strength and that stock market indices, at or near all-time highs, will go higher still.
The litany of market happy talk is impressive. The unemployment rate has dropped to 6.1%, down about 4 percentage points from its peak, and is expected to go lower in the months ahead. The economy created about 230,000 jobs per month in the first half of 2014, which brings the increase in jobs to nine million since the economic recovery began in mid-2009.
Interest rates remain low, which supports high asset valuations in stocks and housing. Inflation is tame and expectations about future inflation are well anchored. To hear the stock market bulls tell the story, all is right with the world.
But all is not right. In fact, the fundamentals of the U.S. economy are in awful condition and are getting worse. Almost everything about the happy talk story is superficial, and falls apart under scrutiny. There is an alternative narrative of bad news that is seldom discussed on mainstream business channels but is well known to analysts. When these adverse trends are taken into account one conclusion is inescapable.  |
The stock market and economic fundamentals are on a collision course. One or the other will have to swerve. Either the economy will have to improve rapidly and unexpectedly and reverse its fundamental weakness, or inflated stock values are heading for a precipitous fall. The evidence suggests that the latter is more likely.
The first weak link in the happy talk chain is the nature of job creation. For example, it was reported than 288,000 jobs were created in June. But full-time jobs declined by 523,000 while part time jobs increased by about 800,000. The widely reported increase in net jobs masked a disastrous loss of full-time jobs offset by a huge increase in part-time jobs. The part-time jobs offer fewer hours, lower pay and few benefits. They may be better than no job at all, but they are not the kind of jobs that will support discretionary consumer spending on which the economy relies for growth.
This trend in part-time jobs is not new. There are 7.5 million people working part-time on an involuntary basis compared to about 4.4 million doing so in 2007. This rise in part-time jobs is expected to continue because it is driven in part by Obamacare, which does not require coverage for part-time workers. Employers are aware of this and simply cut full-time jobs and replace them with part-timers to reduce insurance costs.
Nor is there any comfort in the declining unemployment rate. Much of the decline is attributable not to job creation but rather to the decline in the number of people looking for work. Once people stop looking for a job, they are no longer technically "unemployed" and the unemployment rate drops even though no job has been found. Secret Wealth-Builder of America's Richest People Did you know many of the richest people in America got rich in a very specific way? A way that, for the most part, has been the exclusive domain of the 1%. But now that's all changed. You can take advantage of their secret. As columnist Mort Zuckerman said, "You might as well say that the unemployment rate would be zero if everyone stopped looking for work." Only 62.8% of Americans participate in the workforce today -- the lowest level since 1978.
"The stock market and economic fundamentals are on a collision course."
The news gets worse. Not only is labor force participation low, and full-time employment collapsing, but the productivity of those working is now in decline. This decline in productivity is another drag on growth. The reason for it is even more disturbing. Productivity is declining because capital expenditure has slowed. Businesses are keeping up with demand by employing part-time workers instead of investing in the plant and equipment needed to make full-time workers more productive.
Not surprisingly, this triple-whammy of declining full-time jobs, declining productivity and slowing capital investment means that real wages are stagnant. If workers can't make more, they can't spend more without borrowing. Borrowing is more difficult because home equity has not recovered from the 2007 housing crash and lending standards are the most stringent in years. Companies won't invest in equipment if consumers can't spend. | Productivity is declining because capital expenditure has slowed. | The result is a death spiral of lower consumption, lower investment, declining productivity, stagnant wages, and underemployment all feeding on each other and making the overall economy weaker. This is the real reason for the shocking 2.9 percent decline in first quarter GDP. It was not the result of "cold weather," which by the way happens every winter.
There are other signs of ill health in labor markets. In a dynamic labor market, net job gains reflect large numbers of new jobs and lost jobs as employees confidently quit their jobs in the expectation of finding new ones. But evidence reported by Goldman Sachs and James Pethokoukis of the American Enterprise Institute shows that job turnover has declined sharply as employees are extremely reluctant to quit their jobs in an uncertain environment. This tends to lock-out the unemployed who lose job entry opportunities and to weaken wage growth as employees lose leverage to demand raises.
Labor force participation is unlikely to rise significantly partly because of generous benefits that provide an adequate lifestyle for those out of the labor force. The U.S. has over 50 million on food stamps, 11 million on disability, and millions more on extended unemployment benefits. Prospective loss of these benefits creates a high hurdle to motivate a return to the workforce.
The news from abroad is no better. China is slowing precipitously and may be on the brink of a credit collapse. European growth is near zero and even the mighty German economy, the locomotive of Europe, is slowing partly because of weaker demand from Ukraine, Russia and China.  |
Against this backdrop, mainstream voices are beginning to call U.S. financial markets a bubble. The New York Times recently featured a front page story with the title, Welcome to the Everything Boom, or Maybe the Everything Bubble.
The conservative Bank for International Settlements in Switzerland recently warned that stock markets had become "euphoric." Even Janet Yellen of the Federal Reserve, the institution with the worst record for spotting asset bubbles, said that valuations of some securities "appear stretched."
So, the conundrum is complete. Stock indices march to all-time highs while economic fundamentals fall apart. The two will be reconciled either with a spectacular turnaround in growth or a spectacular collapse in stock prices.
The problem is that a turnaround in growth can only come from structural reform, not money printing. Structural reform is the job of the White House and Congress, not the Federal Reserve.
Since the White House and Congress are barely speaking, no help should be expected from that direction. Therefore a stock market collapse is almost inevitable and is probably coming soon.
Regards,
Jim Rickards
for The Daily Reckoning | | | | | | |  James G. Rickards is an American lawyer, economist, and investment banker with 35 years of experience working in capital markets on Wall Street. He is the author of The New York Times bestseller Currency Wars, published in 2011. | | | | | | | BE SURE TO ADD dr@dailyreckoning.com to your address book.
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