Via Casey Dailey Dispatch
It's an immediate threat to your wealth right now…and it's another sign we're headed for a major financial crisis. What we're covering today stems from the Fed's "monetary experiment" that began in 2008. As you may know, that year, the Fed dropped its key interest rate to effectively zero. It then started borrowing and printing trillions of dollars.
This experiment has been nothing short of a disaster. Over the past eight years, the Fed's pumped $3.5 trillion into our financial system. And our national debt has more than doubled.
Casey Research founder Doug Casey says the Fed has set us up for a massive financial crisis, one that will ultimately destroy the U.S. dollar:
These reckless policies have produced not just billions, but trillions in malinvestment that will inevitably be liquidated. This will lead us to an economic disaster that will in many ways dwarf the Great Depression of 1929–1946. Paper currencies will fall apart, as they have many times throughout history.
E.B. Tucker, editor of The Casey Report, agrees that the dollar will collapse eventually. But he says there's a more immediate threat to protect yourself against today.
• Deflation is a huge threat to your investments right now
Deflation is when prices for goods and services fall. It’s the opposite of inflation. To many people, deflation sounds like a good thing. After all, who wouldn’t want to pay less for food, clothing, and electronics?
While deflation can be good for consumers, it’s terrible for many businesses. It’s especially bad for businesses that have borrowed too much money. After all, deflation in the U.S. makes the dollar stronger, which makes it harder to pay back loans. For example, if a company borrows $100,000 and we get 5% deflation, it effectively has to pay back $105,000.
• E.B. says the Fed planted the seeds of deflation during the 2008 financial crisis
In 2008–2009, the Fed’s flawed thinking went like this: people are “hoarding” money instead of spending it. If we could just convince people to spend more money, the economy would recover.
So its solution was cheap money, lots of it. As we mentioned, the Fed printed massive sums of money and cut rates to zero, in hopes that it would jumpstart spending. It backfired. The chart below shows the “velocity" of the U.S. money supply, which measures how fast money changes hands. As you can see, velocity is at its lowest point since 1959.
• The Fed’s printed cash is not moving around the economy
E.B. explains why the Fed’s plan backfired:
Instead of being spent on goods and products, the Fed’s cheap money has been funneled into investments. Instead of buying more cars and houses like the Fed intended, folks bought more stocks and bonds.
With folks investing the new cheap money instead of spending it, the S&P 500 has more than tripled since 2009. Bond prices have hit record highs too. Meanwhile, the “real” economy is worse off in many ways. The U.S. economy is growing at its slowest pace since World War II. And the real median household income is about $2,500 lower today than it was in 2007.
• Thanks to rock-bottom interest rates, U.S. corporations have borrowed almost $10 trillion in the bond market since 2008
Last year, they borrowed a record $1.5 trillion. But like consumers, companies didn’t use the borrowed money to buy real, tangible things. They didn’t buy machinery, equipment, or anything else that would grow their businesses. Instead, they borrowed to buy other companies and their own stock on the open market, also known as a share buyback.
• Companies in the S&P 500 spent nearly $1 trillion on acquisitions and buybacks last year
That’s about $200 billion more than they spent on new machinery, equipment, and research and development. This is a big problem. A company can boost its earnings by buying other companies or its own stock. Neither actually improves the business. But they can make profits look bigger “on paper.”
Since the financial crisis, hundreds of giant corporations have used acquisitions and buybacks to hide problems. But those problems are becoming too big to ignore.
• U.S. capacity utilization is at its lowest level since the financial crisis
This metric measures the percentage of property, plant, and equipment that’s currently in use. A low number means a lot of factories are sitting idle, instead of producing goods. You can see in the chart below that U.S. capacity utilization is below 75% for the first time since 2008. This means nearly three out of every ten machines in the U.S. are sitting idle right now.
• Companies can’t raise prices easily when they have a lot of unused capacity
You see, if demand picks up, there’s an idle machine nearby whose owner is willing to put it to use. He’s just glad it’s being used. He’s definitely not in a position to charge more since there are several idle machines to choose from. In fact, it’s more likely he’ll undercut his competition just to have the work.
As we mentioned, deflation will hurt deeply indebted companies the most:
Companies that borrowed money during the Fed’s credit experiment will also be hit hard. For example, if a company borrowed $100 million to build a new factory, it has to repay that cheap money over 10 years. But its competitors sit with idle factories willing to produce at any price to avoid bankruptcy.
To compete, it has to drop prices, so it has less money coming in to pay its debts, and forget about profits.
• Profits for companies in the S&P 500 have fallen three straight quarters
They are on track to decline a fourth straight quarter. That hasn’t happened since the 2008–2009 financial crisis. These companies are also bleeding cash. Companies in the S&P 500 spent 108% of their operating income on dividends and buybacks during the fourth quarter.
According to investment research firm Yardeni Research, that’s the highest level since the 2008–2009 financial crisis, when corporate profits nosedived. Companies will have even less money for buybacks, acquisitions, and dividends when deflation arrives.
• There’s little reason to own U.S. stocks right now
E.B. is telling readers to hold cash and physical gold. A cash reserve will help you avoid losses if stocks fall. It will also allow you to buy stocks when they get cheaper. Holding physical gold is another simple way to avoid losses.
As we often remind you, gold is money. It’s preserved wealth for centuries because it has a unique set of qualities: It’s durable, easily divisible, and portable. Its value is intrinsic and recognized around the world. Investors buy it when they’re nervous about stocks or the economy. This year, gold is up 18%. It’s at its highest price in well over a year.
• E.B. isn’t out of stocks completely
E.B is investing in companies that can do well no matter what happens with the economy. And he’s found the ideal business to own during deflation. Earlier this month, he recommended a world-class licensing company that “caters to the masses.” The company owns dozens of popular American brands. But it doesn’t manufacture anything. Instead, it gets paid a cut every time one of its logos appears on a jacket or pair of shoes.
According to E.B., it’s the type of business you want to own during deflation: This is a great business model. The company makes money on every product sold. But it doesn’t bear any of the risk of running a factory or a retail store. The stock is also dirt cheap. It’s trading 83% below its 2014 high.
If you're concerned about the stock market like we are, we urge you to take action today. At minimum, we recommend you hold more cash than usual, own gold, and only invest in businesses you know can survive a major financial crisis.
For other ways to “crisis proof” your wealth, watch this short presentation. In it, E.B. explains why the coming crisis could cause stocks to plunge 50%, trigger a collapse of the banking system, and even provoke the government to ban cash outright. It’s one of the most important messages we will deliver all year.
Chart of the Day
The U.S. stock market is in its longest “dry spell” in two decades. Today’s chart shows the performance of the S&P 500 over the past year. You can see it’s now gone a whole year without setting a new high. You don’t often see this during bull markets. Bloomberg Markets reported over the weekend:
On Monday [Yesterday], the S&P 500 will extend its streak without a record to 253 trading days, matching the drought that lasted through February 1995. Only two other long-term rallies went without new highs for longer -- 272 days through 1984 and 361 days through 1961. Bull markets end when a benchmark index falls 20 percent from a record.
According to Bloomberg, this kind of “dry spell” usually marks the end of a bull market:
More often than not, such dry spells are ominous for equities. Among the 13 instances since 1946 that began with stocks going as long as they have now without posting new highs, 10 ended in bear markets. U.S. stocks are treading water right now. We encourage you to invest with caution.