| December 22, 2014 | Archives | Unsubscribe | | | | |  | | | The Santa Rally 2014, in the Harsh Light of History | | | - A reader calls "bah humbug" on the Santa rally...
- The dreaded K-wave makes a return… why electronic currencies help avoid hyperinflation...
- Then, Dave Gonigam addresses one reader's burning question: If the market is headed for an epic meltdown, shouldn't I cancel all my newsletter subscriptions?
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December 22, 2014  Dear Reader, The "Santa rally" came early last week. On Wednesday, the Fed announced it would be "patient" in raising interest rates. The S&P 500 and the Dow had their largest two-day gains since 2011. As we write today, all three of the major indexes in New York remain in the green. Gold, by contrast, is down $20, to $1,177. But we remain unsure how long this can go on. "Hyperinflation will always be a top-down phenomenon," writes a regular correspondent responding over the weekend to last week's discussion and helping us jump right into the heart of today's issue. "If government prints a ton of physical money, one will always end up with a hyperinflation. But it won't happen in a modern Western society that has mostly electronic money… "Deflation will always be a bottom-up phenomenon. It will not begin in earnest... unless the people start perceiving that prices will be lower in the future and postpone their purchases, which drives prices even lower over time. New technology, for example, is naturally deflationary over time. | "Deflation will always be a bottom-up phenomenon. It will not begin in earnest..." | "The government will never force this to happen. Nor do they want to. If they try, shortages will simply result because producers will not produce below cost."
Deflation arises spontaneously. Can a government try to counteract it with printing money? In a word, yes. At least for a while. And that's why we spend so much time wringing our hands here at The Daily Reckoning fretting over Fed policy, parsing press releases and generally poking fun at the media for doing the same.
C'mon, you have to admit you like doing it too. Today we use one of our favorite foils -- reader correspondence -- to give you some historical perspective and an excuse to continue engaging in your secret guilty pleasure. Consider it an early Christmas present. Heh.
"In response to the stagflation of the 1970s," our reader continues, "Congress passed a law in 1978 requiring full employment at low inflation and tasking the Federal Reserve with making that happen. The law was called Humphrey-Hawkins…  "Humphrey-Hawkins, the law, expired in the summer of 2000.
"But by that time, the powers-that-be decided that they liked the results of the enforcement of the law requiring full employment at low inflation up to that point. So much so that they decided to continue to enforce it as if nothing had changed."
The Fed was already in the habit of testifying before Congress twice a year. Rather than discontinue the practice of trying to achieve full employment and low inflation, they simply changed the name of the biannual congressional report to the Humphrey-Hawkins report.
Thus the Fed's "dual mandate" even to this day.
"But as the Fed itself has made clear many times," writes our reader, "the mandate for low inflation is a mandate to avoid both high inflation... and deflation. The U.S. economy nearly went into deflation in the early 2000s, but the Fed avoided it. And they've been fighting deflation ever since, especially since the downturn of 2008."
Our reader then goes on to put what's happening in context of the much-disputed Kondratiev waves. For context, the Kondratieff wave consists of four seasons: Spring (growth)
Summer (stagnation)
Autumn (plateau)
Winter (deflationary depression). In other words, even the economy has a life cycle you can easily identify. Here's a short film to lead you through the theory.  Despite the flood of reader mail we expect to receive following any mention of K-waves, the historical perspectives comes in handy when trying to put money printing and Fed policy into perspective.
"The Kondratieff wave has not been defeated or disproved," our reader defends the theory with more passion than we can muster right before Christmas. "Despite all appearances to the contrary in recent decades in the context of the enforcement of the Fed's dual mandate.
"The stagnation phase of our current Kondratieff wave was during the 1970s and resulted in Congress passing Humphrey-Hawkins in the first place. The Fed is now trying to avoid the deflationary depression at the end of the next cycle.
"The plateau phase of our current Kondratieff wave lasted from 1982-2000, which is longer than historical trends. The long plateau helped build all that momentum by the end of the 1990s. But we have been in the deflationary depression phase ever since.  An, umn, attempt to explain the Fed's influence on the autumnal plateau of the Kondratieff wave. "The Fed and Treasury have had to push harder and harder just to keep things going," especially in the last few years. They will eventually fail, and then we will have a much deeper deflationary depression than we would have had otherwise. "The simple reality is that to get to the growth phase of the next Kondratieff wave, the economy must go through the deflationary depression. It is necessary to clean out the accumulated imbalances of the previous phase… primarily debt. "The Fed is doing the opposite. And that is why we are not achieving high economic growth rates without high government deficits." "Every central bank in the First World except the Fed has a single mandate to avoid high inflation. They create money, mostly through electronic digits, and issue those digits through banks as loans. Loans have to be paid back. They are not hyperinflationary. "The reason central banks think they can get away with simply creating digits is because they believe they can keep the economy going forever. It is my contention they cannot. "When they learn they can't, there will be massive loan defaults and an implosion of the economy, and then the deflationary depression will be at hand." The first downturn was in 2008, our reader contends. But if you take Jim Rickards' point of view, the first downturn was really in 1998. This third strike is going to be a doozy. When it will happen, that remains to be seen… Regards, Addison Wiggin, The Daily Reckoning P.S. "It's worth pointing out that the U.S. dollar is already a digital 'cryptocurrency' for all intents and purposes," Jim Rickards writes in a discussion of Bitcoin in this month's issue of Strategic Intelligence. "While you may keep a few paper dollars in your wallet from time to time, the vast majority of dollar-denominated transactions, whether in currency or securities form, are conducted digitally. "You pay bills online, pay for purchases via credit card and receive direct deposits to your bank accounts all digitally. These transactions are all encrypted using the same coding techniques as Bitcoin. The difference is that ownership of your digital dollars is known to certain trusted counterparties such as our banks, brokers and credit card companies, whereas ownership of Bitcoin is known only to the user. Another difference is that dollars are issued by a central bank, the Federal Reserve, while Bitcoin is issued privately." P.P.S. It's also worth pointing out that discussions like today's tend to freak new readers out. Dave Gonigam and I spent a fair amount of time last week discussing the implications of a deflationary environment and Fed policies on your existing portfolio. He sums up our conclusion in a neat gift box with a tight bow on it below. | | | | | | | | | CIA Insider: "This Spooky New 'Money' Will Replace the Dollar"
A shocking new plan to replace the U.S. dollar as the world reserve currency has surfaced.
And it's coming straight from a trusted adviser to the Pentagon and director of national intelligence.
| | | | | | | | The Daily Reckoning Presents... The 5 Min. Forecast's Dave Gonigam makes a rare appearance in The Daily Reckoning. Having grappled with a tough question from a 47-year old single mom, we thought you'd appreciate his response…
****************************** | | | | "Can We Talk?" | | | | By Dave Gonigam | | |  "Do I need to cancel my subscription?" said the forthright letter from a reader. Fair warning: This is no ordinary Daily Reckoning missive. It will address only one topic -- it's that important. "I'm a newborn baby into the financial world," wrote the 47-year-old single mom. She's climbing out of bankruptcy after a divorce. "I have been saving lately, and even with my modest means, I'm ready to start investing." So she subscribed to one of our entry-level publications, Penny Stock Fortunes. "I was very excited about opening my first brokerage account following the information given in my subscription… until this morning." This was Sunday, December 15th. She opened 5 Things You Need to Know, a weekly roundup of our industry's best deals. The first one had the headline, "Rickards: Market Meltdown Imminent." "I read the whole thing," she said, "and my first instinct is to cancel my subscription -- because it doesn't look like it's a good idea to start investing in anything right now -- and possibly move to China. "If U.S. dollars are going to be just as good as toilet paper soon, isn't that what I should do?" | "If U.S. dollars are going to be just as good as toilet paper soon, isn't that what I should do?" | She said she's of Italian descent… so she knows a thing or two about the Roman Empire. "Is Mr. Rickards' report," she asked, "the announcement of the beginning of the end for the U.S.? If so, I'm out."
Then came the most cutting part: "Or… I shouldn't give much importance to what you guys put in your newsletter?
"I'm confused. Please help."
"I am disturbed that different editors take such contradicting strategies," writes another reader, a more experienced investor who subscribes to three of our publications.
"With Jim Rickards predicting the fall of the dollar/banks and the U.S. economy as we know it as early as March 2015, does it make any sense at all to buy the stocks recommended by Byron King (Military-Tech Alert) and Chris Mayer (Capital & Crisis) before the crash, while they are high?"
The follow-up questions were even more daunting...
"Should the dollar fail, how would the worth of stocks be calculated? Would they still hold their intrinsic value or be worthless because they were purchased and held with dollars?
"If the stock market shuts down while a different currency is invented, won't ALL companies' stock prices crash, because even government-contracted companies won't get paid?
"And how could we even buy the stocks predicted to rise in a crisis if the dollar fails and the market isn't open? Buy them with what, gold -- which Rickards suggests the government will confiscate?"
These are great questions from passionate, informed, engaged readers -- people we're proud to call our customers. | For the last three years, many of the ideas we published fell under a grand theme we called "a Tale of Two Americas." | I took up these questions over lunch last week with Addison. If you're a newer reader, you should know Addison launched Agora Financial in 2004. He created this e-letter in 1999 and founded the 5 Minute Forecast in 2007.
For the last three years, many of the ideas we published fell under a grand theme we called "a Tale of Two Americas."
Addison described it like this in our virtual pages on Jan. 24, 2012 -- "the contrast between the overwhelming rot penetrating governments and the financial system on the one hand... and the staggering entrepreneurial potential that can overcome the rot on the other."
That is, none of the problems that led to the Panic of 2008 had been fixed. But the innovation going on in America's biotech labs, in Silicon Valley, in the shale energy patch, was undeniable. You couldn't afford to pass up the opportunities. Our editors guided readers to gains of 266% on a firm with a treatment for ovarian cancer… 225% playing options on a shale oil producer… and a staggering 911% to date on Tesla Motors.
But as the calendar turns to 2015, the "Tale of Two Americas" theme is no longer adequate to explain the reality in front of us.
The innovators in America's shale patch are rethinking their business plans, with oil down more than 40% since June. The U.S. stock market keeps roaring up… but we've also had two violent downswings in less than three months. The fallout from events in Russia is sending tremors through currencies, bonds and other asset classes.
And as our Jim Rickards told us in this space back on Nov. 20, the global elites are signaling each other about an impending crisis. They're hiding behind euphemisms like "the potential for a buildup of excessive risk in financial markets"... but that's how they talk to each other so as not to alarm us rubes. | | | | | | |
| He spent 29 soul-crushing years behind the walls of the most feared and despised agency in the United States -- the IRS -- discovering every tax secret and investment strategy known to man. Until one day he vanished… Thanks to one little known discovery he made at the agency…he suddenly walked out and took an early retirement. Ever since, he's dedicated his life to exposing this secret the IRS would prefer you didn't know. A lot of people hate this man… but you'll love him after you SEE THIS. | | | | | | | | | So here's the first thing you must know today: Despite those warnings, Jim Rickards is not retreating to the hills with a five-year supply of ammo and Mountain House freeze-dried food.
"I travel, I give speeches, I still live my life," he tells us.
And so should you -- even if your net worth is a mere fraction of his.
So if you're a 47-year-old single mom, that means you don't move to China. And it means as a novice investor, you continue to follow the recommendations Jonas Elmerraji makes in Penny Stock Fortunes, as long as Jonas' ideas continue to ring true for you. His research is thorough and well-considered. He wouldn't be on our team if it weren't.
Which brings us to an inescapable fact about the financial publishing business: The most brilliant editors are a cantankerous bunch, opinionated as all get-out… and prone to disagreement.
Good editors are few and far between, but we attract them like moths to a flame -- for good reason.
A typical denizen of Wall Street is always answering to someone -- clients, advertisers, the board of directors. When he's not looking over his own back, he's kissing someone else's backside. If he thinks the stock or other security his firm is flogging is junk, he has to hold his tongue.
All those problems go away if he comes to work for us: He's beholden to no one. He can speak his mind. He can live where he likes -- the beach, the mountains, the small town where he grew up. Subscription revenue (from people just like you) is our industry's bread and butter, so as long as he speaks his truth and his truth resonates with his subscriber base, he's golden.
Here's the next thing you must know today: Even Jim Rickards says you have to be prepared for more than one possible outcome. | The Federal Reserve's post-2008 machinations are bound to lead to trouble sooner or later. | Hey, we never said this stuff was easy.
The Federal Reserve's post-2008 machinations are bound to lead to trouble sooner or later. But will that trouble be inflation, like in the 1970s (but maybe more extreme)… or deflation, like in the Great Depression?
"Be prepared for both," Jim advises.
That's exactly what Jim says Warren Buffett is doing. He owns tangible wealth in the form of the Burlington Northern Railroad -- the track, the surrounding land, the mineral rights to the land. It's a hard asset that moves other hard assets around -- grain, steel, coal, crude. That's powerful protection from inflation. (Gold serves the same function, if you can't afford a railroad.)
"But Buffett also has $55 billion in cash," Jim says. That's deflation protection -- and "dry powder" with which he can buy more businesses after a crash, when they're cheapest.
"You can't put all your bets on one side of the table."
So if you're a more experienced investor, subscribing to two or more one of our advisories, you might want to think about how the ideas you're reading fit into that matrix.
Chris Mayer is always looking for value like Warren Buffett, buying businesses when they're cheap (even in a stock market that's starting to look pricey, like today's). Byron King's military-tech recommendations stem from an ever-growing defense budget and the inflationary federal spending it requires.
All we're saying is this: Don't bail from our editors' stock recommendations because you get the idea every stock might go to zero and the world go Mad Max.
If that happens, then it will be time for a five-year supply of ammo and No. 10 Mountain House cans.
If you're really worried about that, there are other direct-marketing companies whose product lines are better suited to your needs.  If we feared the end of the world was nigh, we'd be selling body armor instead of newsletters... And a word of guidance to the most sophisticated level of reader we reach... If you're an experienced investor who's comfortable weighing the sometimes conflicting opinions of a dozen or so editors… if you have the time to devote to a range of compelling market analyses… if you're already subscribed to at least one of our higher-end services… we invite you to consider the Agora Financial Reserve. The Reserve includes nearly everything we publish -- stock advisories, trading services, options strategies. We know it's not for everyone, so we limit membership to no more than 1% of our readers. And we open membership only once or twice a year. Now is one of those times. Here's what makes the Reserve so valuable: The full cost for a year's subscription to a premium service like Military-Tech Alert is $2,500. Tack on three or four more services like that -- some people do -- and you're talking real money. Year after year. But the Reserve gives you lifetime access to nearly everything we produce -- the entry-level newsletters, the premium advisories, the elite trading services -- for a low one-time cost. And if you act during the current membership drive, you're guaranteed first-look access to Jim Rickards' two new trading services… well before we offer them to the general public. We're accepting new members between now and Sunday, Dec. 28. We invite you to examine the benefits and privileges that come with membership when you follow this link. Regards, Dave Gonigam for The Daily Reckoning P.S. A final thought: During Agora Financial's first year of existence, our firm took the audacious step of calling BS on the housing bubble. Understand we're talking 10 years ago this month. No one else was saying anything like that. It wasn't until February 2007 that the mainstream finally woke up when HSBC took a loss on some mortgage-backed securities. To make the declaration we did in December 2004 was to put the future and reputation of our fledgling business on the line. By the time the crisis was in full swing during 2008, some of our readers were drawing on our analysis to bag 462% gains in a matter of weeks -- while their friends and neighbors saw their brokerage accounts shriveling daily. We've surveyed the investment landscape in search of an equally obvious call to make now, 10 years later… but we've come up short. We won't stop trying; it's something we think about, one way or another, every day. At the same time, we'll keep doing what we've been doing… aiming to make your life better… assembling a team of the best analysts we can find... and presenting their ideas in the most accessible and compelling way we can. Thanks for your time today and your continued readership. | | | | | | | | |  Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer. | | | | | | | | | BE SURE TO ADD dr@dailyreckoning.com to your address book.
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