Sea Change

By John Mauldin

Oct 13, 2014


You don’t need a weatherman
To know which way the wind blows.

Bob Dylan, “Subterranean Homesick Blues,” 1965
 

Full fathom five thy father lies.
Of his bones are coral made.
Those are pearls that were his eyes.
Nothing of him that doth fade,
But doth suffer a sea-change
Into something rich and strange.

William Shakespeare, The Tempest
 

Did you feel the economic weather change this week? The shift was subtle, like fall tippy-toeing in after a pleasant summer to surprise us, but I think we’ll look back and say this was the moment when that last grain of sand fell onto the sandpile, triggering many profound fingers of instability in a pile that has long been close to collapse. This is the grain of sand that sets off those long chains of volatility that have been gathering for the last five years, waiting to surprise us with the suddenness and violence of the avalanche they unleash.

I suppose the analogy sprang to mind as I stepped out onto my balcony this morning. Texas has been experiencing one of the most pleasant summers and incredibly wonderful falls in my memory. One of the conversations that seem to occur regularly among locals who have a few decades under their belts here, is just how truly remarkable the weather has been. So it was a bit of a surprise to step out and realize the air had turned brisk. In retrospect it shouldn’t have fazed me. The air has been turning brisk in Texas at some point in October for the six decades that my memory covers, and for quite a few additional millennia, I suspect.

But this week, as I worked through my ever-growing mountain of reading, I felt a similar awareness of a change in the economic climate. Like fall, I knew it was coming. In fact, I’ve been writing about it for years! But just as fall tells us that it’s time to get ready for winter, at least in more northerly climes, the portents of the moment suggest to me that it’s time to make sure our portfolios are ready for the change in season.
 

Sea Change
 

Shakespeare coined the marvelous term sea change in his play The Tempest.
 
Modern-day pundits are liable to apply the word to the relatively minor ebb and flow of events, but Shakespeare meant sea change as a truly transformative event, a metamorphosis of the very nature and substance of a man, by the sea.

In this week’s letter we’ll talk about the imminent arrival of a true financial sea change, the harbinger of which was some minor commentary this week about the economic climate. This letter is arriving to you a little later this week, as I had quite some difficulty writing it, because, while the signal event is rather easy to discuss, the follow-on consequences are myriad and require more in-depth analysis than I’ve been able to bring to them on short notice.

As I wrestled with what to write, I finally came to realize that this sea change is going to take multiple letters to properly describe. In fact, it might eventually take a book.

So, in a departure from my normal writing style, I am going to offer you a chapter-by-chapter outline for a book. As with all book outlines, it will be simply full of bones but without much meat on them, let alone dressed up with skin and clothing. I will probably even connect the bones in the wrong order and have to go back later and replace a leg bone with a rib, but that is what outlines are for.

There is clearly enough content suggested by this outline to carry us through the next several months; and given the importance of the subject, I expect to explore it fully with you. Whether it actually becomes a book, I cannot yet say.

I should note that much of what follows has grown out of in-depth conversations with my associate Worth Wray and our mutual friends. We’ve become convinced that the imbalances in the global economic system are such that the risks are high that another period of economic volatility like the Great Recession is not only likely but is now in the process of developing.

While this time will be different in terms of its causes and symptoms (as all such stressful periods differ from each other in many ways), there will be a rhyme and a rhythm that feels all too familiar. That should actually be good news to most readers, as the last 14 years have taught us a little bit about living through periods of economic volatility. You will get to use those skills you learned the hard way.

This will not be the end of the world if you prepare properly. In fact, there will be plenty of opportunities to take advantage of the coming volatility. If the weatherman tells you winter is coming, is he a prophet of doom? Or is it reasonable counsel that maybe we should get our winter clothes out?

Three caveats before we get started. One, I am often wrong but seldom in doubt. And while I will marshal facts and graphs aplenty to reinforce my arguments, I would encourage you to think through the counterfactuals presented by those who will aggressively disagree.

Two, while it goes without saying, you are responsible for your own decisions. It is easy for me to say that I think the bond market is going to go in a particular direction. I can even bet my personal portfolio on my beliefs. I can’t know your circumstances, but if you are similar to most investors, this is the time to make sure you have a truly balanced portfolio with serious risk management in the event of a sudden crisis.

Three, give me (and Worth, whom I am going to draft to write some letters) some time to develop the full range of our ideas. To follow on with my weather analogy, the air is just starting to get crisp, and winter is still a couple months away. Absent something extraordinary, we are not going to get snow and a blizzard in Dallas, Texas, tomorrow. We may still have some time to prepare, but at a minimum it is time to start your preparations. So with those caveats, let’s look at an outline for a potential book called Sea Change.
 

Prologue
 

I turned publicly bearish on gold in 1986. At the time (a former life in a galaxy far, far away), I was actually writing a newsletter on gold stocks and came to the conclusion that gold was going nowhere – and sold the letter. I was still bearish some 16 years later. Then, on March 1, 2002, I wrote in Thoughts from the Frontline that it was time to turn bullish on gold. Gold at that time was languishing around $300 an ounce, near its all-time bottom.

What drove that call? I thought that the future directions of gold and the dollar were joined at the hip. A bit over a year later I laid out the case for a much weaker dollar in a letter entitled “King Dollar Meets the Guillotine,” which later became the basis for a chapter in Bull’s Eye Investing. As the chart below shows, the dollar had risen relentlessly through the early Reagan years, doubling in value against the currencies of America’s global neighbors, causing exporters to grumble about US dollar policy.
 
Then the bottom fell out, as the dollar made new lows in 1992. From 1992 through 2002 the dollar recovered about half of its value, getting back to roughly where it was in 1967. Elsewhere about that time, I predicted that the euro, which was then at $0.88, would rise to $1.50 before falling back to parity over a very long period of time. I believe we are still on that journey.
 


 
One of the biggest drivers of economic fortunes in the global economy is the currency markets. The value of your trading currency affects every aspect of your business and investments. It is fundamental in nature.

While most Americans never even see a piece of foreign currency, every time we walk into Walmart, we are subject to the ebb and flow of global currency valuations, as are Europeans and indeed every person who participates in the movement of goods and services around the globe. In fact, globalization means that currency values are more important than ever. The world is more tightly interconnected now than it has ever been, which means that events which previously had no effect upon global affairs can trigger cascades of events that affect everyone.

I believe we are in the early stages of a profound currency-valuation sea change. I have lived through five major changes in the value of the dollar in the 45 years since Nixon closed the gold window. And while we are used to 40% to 50% moves in the stock market and other commodity prices happening in just a few years (or less), large movements in major trading currencies typically take many years, if not decades, to develop.

I believe we are in the opening act of a multi-year US dollar bull market.
 

Chapter 1 – The Boys Who Cry Wolf
 

We all know the story of the boy who cried “Wolf!” once too often. I have been pounding the table about a dollar bull market for about three years now. I see eyes roll when I speak at conferences around the world and boldly forecast that the dollar is going to get stronger than anyone in the room can possibly fathom. All the signs have been pointing to it, and indeed we’ve seen the dollar move upward in a rather herky-jerky fashion off the lows of 2010, but not in a way that has been all that dramatic (except, arguably, against the Japanese yen).

Indeed, the relative trading range of the dollar has been relatively constrained over the past six to seven years, pivoting around 80 on the DXY (symbol for the US dollar spot index).

This is in contrast to the true doom-and-gloomers, who are forecasting “the Demise of the Dollar.” At the same time, they are calling for an unseemly rise in interest rates, and many of them believe the Federal Reserve will push us over the brink into hyperinflation. Needless to say, then, you should buy massive amounts of gold and get your money out of the country.

I have had long conversations with many who believe in such a scenario. I call some of them close friends, even if we disagree on something as fundamental as the future of the dollar. I’ve come to the conclusion that their conviction is a lot like a religious belief.  I’m not going to change them, and so I make very little effort to try. So, fair and friendly warning: if you think the US dollar is headed to oblivion, you are not going to like this book outline or the next few months of my letter.

(Sidebar to those of you who, like me, own gold. You do not have to be a dollar bear to be constructive on gold and believe that it belongs in a diversified portfolio. But more on that front if we do a chapter on gold.)

Getting back to portents of winter, this week saw two side comments by Federal Reserve members that put a distinct chill in the air.

The first is from William Dudley, the president of the Federal Reserve Bank of New York and a permanent voting member on the FOMC. In a speech at Rensselaer Polytechnic Institute, he pushed back on the idea that it is time to raise rates. While acknowledging the relatively positive stance of the Federal Reserve in its forecast, he said:

While I believe that the risks around this consensus forecast are reasonably well balanced, I also believe that the likelihood that growth will be substantially stronger than the point forecast is probably relatively low

He went on to cite weaker than expected consumer spending and the expectation that consumer durable purchases will be weaker in the future (by which I assume he means automobiles, which have been on a blistering, back-to-the-all-time-high pace due to supereasy credit, much of it subprime and with durations beyond five years.) He faults mortgage lenders for the substandard housing recovery, as if the last massacre of lenders was not enough to scar their collective psyche for decades.

(Sadly, he might have a point. Somewhat humorously, Ben Bernanke tells us he was turned down for a mortgage because his income is somewhat unsteady. He did not fit the “check-the-box” protocol of his local mortgage lender. I sympathize. I was turned down multiple times earlier this year before finding willing lenders who actually competed for my business. My business life does not accord with a standard check-the-box mortgage. I read about another business owner who noted that any of his 300 employees could get a mortgage, but he could not because his income was not stable enough. Go figure.)

Each of Dudley’s points was covered in long paragraphs. And then he delivered a short, throwaway line that caught my attention. He cited the growth in the exchange value of the dollar over the last few months as a reason for downside risk. Really? Go back and look at the chart above and see the relatively minor dollar moves of the past few months. Why should dollar strength show up in a list of reasons for upcoming weakness in the US economy?

The next day saw the release of the minutes of the previous month’s FOMC meeting.

In the part labeled “Staff Review of the Financial Situation,” the staff mentioned “… responding in part to disappointing economic data abroad, the US dollar appreciated against most currencies over the inter-meeting period, including large appreciations against the euro, the yen, and the pound sterling.”

While there are precedents for the staff review to mention the dollar, it doesn’t happen often. (In January 2002 the staff notes included concern about the strength of the dollar. That concern went away rather quickly. Coincidence? Hat tip, Joan McCullough.) The strengthening dollar is clearly on the minds of the members and staff of the Federal Reserve. Hmmm…

The key here is to note that the strength of the dollar (or lack of it) is not traditionally a Federal Reserve concern. The relative value of the dollar is the purview of the US Treasury, while the Federal Reserve is responsible for maintaining stable purchasing power (interest rates and money supply, etc.). Both organizations are careful not to tread on the other’s territory.

What if we are at the beginning of another 10-year bull market in the dollar? Is it unthinkable that the value of the dollar could rise back to 120 on the index over that time?

Let’s look at that chart again:
 


 
From a very long-term perspective, 100 on that index is certainly a possibility, and 120 is not without precedent. But if the dollar rises to those levels, even in the very short-term, volatile patterns of the past, it changes everything it touches. And the value of the dollar touches everything. So let’s think about some of the consequences over the long term of a rising dollar.
 

Chapter 2 – A Monkey Wrench for the Fed
 

A rising dollar is almighty inconvenient for a Federal Reserve that would like to eventually raise interest rates. Multiple regional Fed presidents and Fed governors would really like to see inflation in the 2% range prior to raising rates.

A dollar that is rising against the currencies of our major trading partners is inherently disinflationary, if not outright deflationary. (Pay attention to how often that word deflation occurs in this outline.) The current inflation rate is 1.7%. The Dallas trimmed-mean PCE inflation rate was actually negative in August and has been falling for the last five months, more or less coinciding with the rising dollar.

The makeup of the Federal Reserve FOMC voting membership next year is going to be decidedly “dovish.” Dallas Fed President Richard Fisher will retire, and his voice will no longer be present. Yellen and the entire team (with two notable exceptions) have been out and about using the words data-dependent, with Minneapolis Fed President Kocherlakota arguing that raising rates anytime in 2015 would be a mistake.

Look at what Federal Reserve unemployment and inflation-rate predictions are as of September 17:


Fourteen of the 17 members of the Fed (including the 12 regional presidents) anticipate that rates will be raised in 2015.  Most observers think the first rate increase will happen at the June meeting.

What happens if unemployment continues to fall toward 5.5% and inflation drops below 1.5%? Can this Fed – not you or I, but the aggressively Keynesian members sitting on that board – justify raising rates if inflation is only 1.5% and falling? Which is the more important data number, unemployment or inflation? Or do they both need to click into place?

If the dollar were to continue to rise and thus allow Europe and Japan to export their deflation to the US, it is not clear that the Fed would raise rates in June.

A rise in the dollar from its current 85 on the DXY to 120 over the next six or seven years will throw a monkey wrench into the plans of the Federal Reserve.
 

Chapter 3 – Every Central Bank for Itself
 

A rising dollar presents all sorts of problems and opportunities for the central banks of the world. Japan has chosen the most aggressive monetary policy in the history of the world and will, I believe, work to see the value of the yen cut in half over time.

Notice in the chart below that it was only 20 years ago that the yen was at 250. It touched 150 less than eight years ago. Forty years ago it was at 357. Is it so unthinkable that the yen could retrace half that move? Not to the Japanese. That would take it into the range of 200 to the dollar.

I made the case for such a move in Endgame and doubled down on the prospects for Japan in Code Red. Japan is a bug in search of a windshield. The yen is embarked on a multi-year decline.
 


Europe would clearly like to see a weaker euro against the dollar and other major trading currencies. Ditto for almost every central bank in the world. But a rising dollar creates special problems for China and some emerging markets, problems we will look at in later chapters.

In an important speech on Saturday, October 11, Fed Vice-Chairman Stan Fischer outlined the mechanisms for the international transmission of monetary policy.
 
Fischer says the international effects of monetary policy “spill back” onto the US, and the central bank cannot make “sensible” choices without taking them into account.

[The U.S. economy and the economies of the rest of the world have important feedback effects on each other. To make coherent policy choices, we have to take these feedback effects into account.

He ended with an assurance to all that the Federal Reserve would provide liquidity to the world in the event of another crisis. Because it is in our interest, he says. This will be the ultimate test of game theory, where it might take years to find the Nash equilibrium.

The bottom line?

It’s every central bank for itself. No matter how much pleading there is from peripheral central banks, there will be no true coordination among the major central banks. (Hat tip to David Kotok for alerting me to Fischer’s speech as I was writing. He also pointed out that the unintended consequences of the feedback effect means that policymaking can be dangerous.)
 

Chapter 4 – The Man Behind the Euro Curtain
 

Was it only a few years ago that Mario Draghi uttered his famous line, “We will do whatever it takes”? Interest rates in Europe have collapsed since then, as the European bond markets believed that Mario had their back. He has not had to do anything of true significance to back up those words, and what he has done has been lackluster.

This week Mario was up on the stage in Washington DC, where he essentially said that the problems in Europe cannot be fixed by monetary policy but are fiscal and regulatory and require actions from governments, not from central banks. The Bundesbank has clearly held sway, at least so far as the prospects for European quantitative easing go. While Draghi hinted that he would like to do €1 trillion worth of QE, it is not clear exactly how he would go about that.

Mario is like the Wizard of Oz. He talks a good game and puts on a good show, but it is soon going to become apparent that he really doesn’t have any magic, at least not until the Germans allow him to open up his trunk of tricks. Right now they’re keeping it safely stowed away in Berlin.

German intransigence is going to precipitate a crisis in Europe. Italy has been in a recession. France is crossing into one. Spain is barely holding on. Even German exports are slowing. France and Italy are balking at meeting the 3% deficit targets mandated by the EU treaty. Germany has drawn a line in the sand; France and Italy fully intend to cross it. This should be interesting; but however it turns out, I don’t think it will be good for the euro.

How long can interest rates in Europe stay at the irrationally low levels where they are today? We touched on that question in past letters, so I won’t cover that ground again, other than to say negative interest rates in Ireland and France are as indicative of dysfunctional markets as anything one might postulate.

When Draghi loses the narrative, or his ability to simply jawbone the market to where he would like it to be, all hell is going to break loose in the European bond market. Exactly what will the safe-haven currency be? The Swiss can’t print enough francs. Even Norway doesn’t have that many kroner. It will be the US dollar. Implications in a later chapter.
 

Chapter 5 – The Wrong Side of the Trade
 

Close to 50% of sales and profits for the S&P 500 come from outside the US. A strong dollar will put a strain on those dollar-denominated profits. Not an insurmountable problem, as Japanese businesses have figured out how to thrive in a rising-yen environment for decades. But old US business dogs are going to have to learn new tricks in a rising-dollar world.

But a strong dollar is not just a problem for US exporters. It is particularly a problem for countries that are financed by the dollar carry trade. Multiple trillions of dollars have left the US courtesy of quantitative easing and have ended up financing all manner of trades and investments around the world. As long as the dollar is neutral or falling, that’s a good thing for dollar carry-trade investors.

If you are a Chinese businessman and you can borrow dollars (which you certainly can) and you believe that your government is going to make the yuan stronger over time, you will be able to pay back cheaper dollars and make the difference on the carry (the difference between what US bonds pay and returns that can be earned in China).

But what happens if the yuan begins to fall? That trade unwinds swiftly and negatively. And it unwinds at a time that is particularly inconvenient for China. Flood the market with too much money, and inflation becomes a problem. (The Chinese are in a different phase of the monetary cycle than the US is, so the problems are not the same.)

It is not just China. Those dollars have filtered into every nook and cranny of the world; and now, if those trades are unwound, investors and most specifically hedge funds are going to have to buy dollars to unwind their trades. That will force the dollar ever higher against various currencies; and while any one currency is not significant enough to create a structural difference that can impact global trade, together they will have a significant effect.

There is a crisis brewing in emerging markets. Most of the world’s hedge funds and investors are on the wrong side of the dollar trade. Unwinding that trade is going to be a bitch (that is a technical economics term). Worth Wray will be writing about that very topic in a few weeks. You do not want to miss that letter.
 

Chapter 6 – The Texas Carry Trade
 

A rising dollar is going to put pressure on oil prices in particular and on energy prices in general. And falling oil prices have a strong secondary effect on Federal Reserve interest-rate policy. Pay attention, there will be a quiz.

Over at The National Interest, Sam Rines of Chilton Capital writes that Texas has been the engine of growth for the US for the past five years:

Job creation might be a good place to start. Texas has created jobs – there is little arguing that point. For instance, we know the U.S. economy only recently gained back the jobs lost in the Great Recession. This is not true of Texas. While the United States dropped about 6 percent of employment, Texas lost 4 percent and recovered them all by August 2011 – nearly three years before the United States as a whole.

Here is where the numbers get interesting. From its peak in January 2008 through today, the United States has created only 750,000 jobs. Texas created over a million jobs during that same period – meaning that the rest of the country (RotC) is still short 300,000 jobs. During the recovery, job creation has been all Texas or – at the very least – disproportionately Texas.

Choosing a different starting point – for example, in the trough of job losses – changes the extremity of the story. And there are all sorts of reasons for this disparity between Texas and the rest of the country, most of which miss the main point. In a conversation with Worth, Rines called the disparity the Texas Carry Trade. I like that.

The Texas story is by and large an oil story. We are far more diversified that we were in the ’80s, but oil is clearly the driver. Texas has been at the forefront of job creation because our borders happen to contain the mostly inhospitable scrubland known as the Permian Basin in West Texas, not to mention the coastal plays and those in East Texas. Much (not all) of the growth in oil has come from horizontal drilling and fracking. And while there are enormous amounts of energy in Texas, it is not necessarily cheap energy – not like it was in the “good old days.”

Seventy-dollar oil considerably restrains the enthusiasm of Texas oil companies, let alone the banks and individuals that finance them.

And it is not just Texas companies. The Marcellus play in the Northeast is responsible for hundreds of thousands of jobs. And it’s much the same story all over the US. Oil has been a significant portion of the growth of US GDP for the past five years. If you take the massive oil boom away, the US looks a lot like Europe in terms of growth and job creation. Which is to say, anemic.

Seventy-dollar oil starts to show up in the unemployment rate, which makes it more difficult for the Federal Reserve to raise rates.

I was talking with Joe Goyne, president of Pegasus Bank in Dallas. He is one of those entrepreneurial bankers who actually analyzes a loan personally rather than letting some computer determine whether it fits the criteria. (The country would be better off with a lot more Joes running the banking industry, but that’s another story.) Joe’s customers are a who’s who of Dallas. We were discussing my convictions about a strong dollar and what that would do to the price of oil. Joe offered, “You won’t believe the pain in Dallas if oil falls to $60.” We went on to discuss some details.
 
Does $60 oil sound far-fetched? Joe and I both remember $15 oil. Texas has been through numerous oil busts. The running joke in the late ’80s was “Would the last person leaving Houston please turn out the lights?”

The late ’80s was an ugly time for Texas. Will the Saudis ever allow oil to dip below $60 again? Can they afford to cut their production that much? What will happen to Russia if Brent drops to $80, let alone $60? It’s not just Texas. And while the world might benefit from lower energy prices, they would create havoc in a few key regions.

And throw another monkey wrench in Federal Reserve policy. And in terms of the oil price, gods forbid that peace breaks out in the Middle East. But, sadly, given current circumstances, it doesn’t look like we have to worry about that.
 

Chapter 7 – The Bond Bull Comes Stampeding Back
 

Many of us in the US look at Europe and wonder how interest rates can fall to such insane levels. And the answer is that bond markets have rationales all their own. The unwinding of carry trades means the demand for dollars will rise just as the Federal Reserve cuts off the spigot. Some people look at Japan’s flooding the market with yen as an antidote and hope that the ECB, too, will soon start printing; but that is not going to reduce the demand for dollars to unwind the carry trade.

Whatever Japan and Europe do, the growth of global liquidity is still likely to fall over the next few years; and that is an inherently deflationary event, especially in dollar terms.

In addition, when – not if – there is a renewed crisis in Europe, the flight to safety is going to put pressure on the dollar and further downward pressure on US interest rates. While it is not altogether certain that China will have a major crisis – although reasonable economic historians would suggest that is the probable case – if it happens it will put further upward pressure on the dollar as a safe-haven currency.
 
God forbid those two events – crises in Europe and China – happen at the same time.

Our necks would snap at the severity of the acceleration in the value of the dollar.

The convergent crises would also trigger a global recession.

We’re going to see a return of the bond bull market with a vengeance. Almost the entire world has hedged its bets for a rising interest-rate environment and assumes a benign dollar market. Almost no one expects a falling interest-rate environment, yet that is precisely what we will get if the dollar continues to rise and we have a crisis or two.
 

Chapter 8 – The Third Leg of the Secular Bear Market
 

I was writing about secular bear markets in 1999. I was early to the party, as usual (although my friends will note that I’m often late to real-time, real-life parties). I noted in Bull’s Eye Investing that it typically takes three events to completely wash out a trend. We have had two significant corrections since April 2000, accompanied by two recessions. I think the next recession will give us that final third leg of the secular bear market, hard on the heels of another correction that tests (but maybe doesn’t quite touch) the lows of 2009.

At that point I will trade my secular bear beret for a snappy new secular bull Panama. And while we may see a significant correction out of the current volatility, I don’t think the final dénouement of the secular bear will come without a global recession.

Since most of you have been through this before, you can probably figure out what strategy you should choose; but I would suggest at least thinking about having some type of hedge/moving average/risk-dispersion strategy in your toolkit.

The point is to get through this next crucial phase with as much of your capital intact as possible, in order to be able to take advantage of the coming secular bull market, when it will be anchors aweigh. Remember, we always get through these things. It is almost never the end of the world, and betting on the end of the world is a losing proposition anyway. Specifics to come later (maddening, I know, but there are space limits).
 

Chapter 9 – Commodities in a Dollar Bull Market
 

This book outline is running a little long, but a quick word on commodities. In general, commodity prices are going to face downward pressure, at least in dollar terms. That includes copper, most of the base metals, oil, etc. Silver has clearly been in a very ugly bear market. I would continue to accumulate insurance gold, but I would invest in gold only in terms of yen or another depreciating currency.

Bear in mind that precious metals – along with other commodities – can and will fall precipitously in the event of a deflationary shock… although the inflationary effects of an aggressive central bank response may ultimately drive the yellow metal far above its current price.


 
Chapter 10 – The Return of Volatility
 

The final chapter and conclusion pretty much end as you would expect: the demise of monetary policy’s ability to soothe the soul of the markets and the return of volatility.
 
We hopefully get a full-fledged restructuring of the sovereign debt markets. The Fed and sister central banks will try the same tired tools they have been using. Except they have already been to the zero rate boundary and have wasted the opportunity they had to increase rates so that they could lower them later. Another round of quantitative easing? Quite possible if we get a true deflation scare or a global recession. But I don’t think it will have the same results. The unintended consequences and the unknown spillovers will only increase eventual volatility.

For new readers, I invite you to read my books (co-authored with Jonathan Tepper) Endgame and Code Red. They pretty much lay out the background you need in order to understand what will be happening in the future.
 
We are seeing the end of the debt supercycle and the beginning of currency wars. We’ll experience the throes of hyper-indebted nation-states trying to survive what they will see as irrational attacks by a bond market. “How can you not have faith in the government?
 
We are doing our best to try to make everything work out just fine. As long as you cooperate.” Which bond markets have a nasty habit of not doing. Oh, you can placate them in the short term, but ultimately they want to be paid back in risk-adjusted buying power. And that is the one currency that many nation-states will no longer have. Now without major reforms and a significant restructuring of the social order.

A final thought. Businesses will keep on doing what they do, in spite of the machinations of governments and monetary authorities. Entrepreneurs will adjust.
 
New inventions will be made. Over the medium term, life on earth will get better. I honestly do see a return of the secular bull market and a pretty cool third decade, an updated version of the Roaring Twenties. Only this time there will be no need for speakeasies. I fully intend to be around to enjoy it and am looking forward to being relatively optimistic about the future. I really don’t get much personal pleasure from writing these Debbie Downer letters. But my role is to not think about the world as it should be or as I want it to be, but to be as right as I can about the direction we are going. The ride could just be a little bumpier in the short term of the next few years. Fasten your seatbelts.

And for those of you looking for specific advice, let me point you to Jared Dillian, the new editor of my own Bull’s Eye Investor service. He has been finding ways to trade and invest in this market. Last Friday he wrote:

Guys, the price action has been bad for a while. And it is getting worse. The market is demonstrating repeatedly that it can’t hold its gains. In my 15 years of doing this, I’ve only seen worse price action twice: 2000, and 2007.

You can read about Jared and appreciate his baleful glare of a photo right here. Want to sit on a trading desk across from him? I want him on MY side of the table. See if you might want him in your corner as well.
 
 
Chicago, Athens (Texas), Boston, Geneva, and Atlanta
 

I have one more week to enjoy Dallas, and then I’m back on the road. I will go to Chicago for a speech, fly back to a meeting with Kyle Bass and his friends at the Barefoot Ranch in Athens, Texas, and then fly out to Boston to spend the weekend with Niall Ferguson and some of his friends at his annual briefing. I am sure I will be happily surfing mental stimulus overload that week. I fly from Boston to Geneva for a few days and then more or less directly to Atlanta for a day (board meeting), before heading back to Dallas.

Next Saturday is wedding day. It has been years since I’ve been to a wedding, and next Saturday I will go to two. I fly to Houston to watch my young associate, Mr. Worth Wray, tie the knot with his lovely fiancée, Adrienne. You have to admire a young man for playing above his weight class. He gets married in the morning, and that afternoon we fly back to Dallas to attend the wedding of David Tice’s daughter Abigail.

Next Monday evening I get to spend some time with Woody Brock here in Dallas before I launch my travels. I’ll be back in time for Halloween.

It’s time to hit the send button. I smell stir-fry chicken and vegetables simmering on the stove and need to find a piece of mindless entertainment with which to relax with family and friends. Have a great week,

Your ready to find his sweaters analyst,
John Mauldin
John Mauldin


Op-Ed Contributor

Getting Real About China

Wesley Clark: To Manage China, Fix America First

By WESLEY K. CLARK

OCT. 10, 2014                    
.

Credit Golden Cosmos                    
 
 
China’s harsh suppression of political dissent, from Hong Kong to Xinjiang, and its close ties to Russia, Iran and North Korea, have finally laid to rest the dream many Western leaders have had since the 1990s: that “constructive engagement” would eventually, inevitably lead to more openness and democracy.
 
Instead, the opposite has occurred: China is more confident, more assertive, and also more closed. Thirty-five years after Deng Xiaoping freed up the economy, the Communist Party is using material prosperity and nationalist ideology to maintain its legitimacy in the face of the wrenching social tensions. It has rejected both the move toward democracy and the acceptance of human and civil rights that Americans had hoped would emerge from China’s astonishing economic rise. Even more worrisome, China’s foreign policy relies on keenly calculated self-interest, at the expense of the international institutions, standards and obligations the United States has sought to champion. It increasingly views the United States as a rival and potential adversary.   
 
A People’s Liberation Army officer practiced conducting the military band before the opening of the 12th National People’s Congress, on March 5 in Beijing. Credit Wang Zhao/Agence France-Presse — Getty Images        
 
 
What went wrong?
 
In the late 1970s, when the United States and China fully normalized relations, Beijing sought a strategic partnership with Washington, to deter a perceived Soviet threat. By the late 1980s, China was unconcerned about the Soviets, though willing to listen and learn from the United States military.
 
The Chinese were especially impressed by our prowess in the 1991 Persian Gulf war. All the while, China built its agricultural, industrial and technological strength; military modernization was a second-tier priority. As late as 2005, China’s admiration for the United States — and awareness of its own rising power — were such that a young, well-connected Communist Party leader told me, “China knows that you and Britain were best friends, and Britain gave you leadership of the world; China wants to be America’s best friend, so you will give us leadership of the world.”
 
If there was a turning point in China’s assessment of America, it could be found in the financial crisis of 2008 and its aftermath. While still respectful of our military might, China began to see the United States as a failing system, with a debt-saddled economy and a dysfunctional government, vulnerable to being replaced as the world’s leader. In 2011, a well-placed Chinese associate told me that the country’s new leadership intended to dominate the South China Sea; that its regional rivals, like Vietnam, would bow to its ambitions or “be taught a lesson”; and that if the United States interfered, our assets would be targeted.
 
By 2013, this associate’s warnings had become even more ominous: “We can see your stealth aircraft”; “we have our own GPS and can shoot down yours”; “we know your technologies from all your companies and from NASA, because Chinese scientists work these for you”; “you will not have any military relations with the Philippines unless we allow it, because China provides them $3.5 billion per month in remittances through Hong Kong”; “Chinese shipyards are working 24 hours a day, seven days a week”; “more than 30 ships were launched between October 2012 and April 2013”; “by 2019 China will have four aircraft carriers deployed.”
 
China doesn’t seek conflict — it can achieve most of its goals by adroitly combining traditional diplomacy with its vast economic power. But neither will it avoid conflict. It has in the past used its military “pre-emptively” rather than defensively. A danger is that an ascendant China seeking recognition of its power and rights, will, whether deliberately or through miscalculation, spark conflict.
 
But the deeper strategic problem for America is China’s more fundamental challenge to the global architecture of trade, law and peaceful resolution of disputes that the United States and its allies created after World War II. China’s strategic rise — patient, nuanced and farsighted — threatens all of this. Just as the United States has sought the worldwide adoption of democratic values and American norms for international behavior, China will seek structures and relationships that support Communist Party rule at home, and its policy that countries should not intervene in one another’s affairs.
 
The ascendancy of naked and direct self-interest as an organizing principle would mean a fundamental weakening of Western institutions and values, including the rule of law. This would be a step backward, toward 19th-century ideas of the balance of power and spheres of influence. The question, as Henry A. Kissinger has framed it, is “whether China can work with us to create an international structure in which, perhaps for the first time in history, a rising state has been incorporated into an international system and strengthened peace and progress.”
 
In analyzing China, the United States must look beyond historical parallels. In scale, China’s economic growth, and the challenge it presents, is vastly greater than that of Japan in the 1980s. A century ago, Germany was an ascending power willing to wage war, but it never had the population or industrial capacity of the United States, or, until the 1930s, the leadership of a single political party, above the rule of law. Nor is China like the Soviet Union, economically isolated from the larger world. There is no historical precedent.
 
For over two decades, the American strategy toward China has balanced between “engagement” and “containment,” a version of American policy toward the Soviet Union during the Cold War. The Obama administration’s “pivot” to Asia, announced in late 2011, was perceived as being directed against China, a shift toward containment. The United States has not only shifted forces but also updated defense treaties as part of this pivot. The United States is negotiating the Trans-Pacific Partnership, an effort to create a large free-trade zone encompassing 11 other countries, but not China.
 
As China presses its territorial claims on the South China Sea and East China Sea more forcefully — including even a claim, in some quarters, of jurisdiction over Okinawa, where American forces are based — the United States is being drawn into regional controversies. In the past few years we have found ourselves courted by Japan, South Korea, Vietnam, the Philippines and other countries in the region, which are anxious for reassurance and support against China’s new assertiveness, but also wary of provoking it. It will be in China’s interest to force us progressively to choose, on issue after issue, between China and the interests of our allies in the region.
 
The United States will emphasize multilateral forums for resolving disputes through international law, and fulfill our commitments to allies. China, in contrast, views this international order and these formalized obligations as being heavily tilted against it.
 
We should be under no illusions about the difficult road ahead. China operates on a long-term vision, driven by its own interests. By some estimates, China’s gross domestic product could surpass that of the United States sometime in the next decade. By then, Chinese military strength — including aircraft carriers, land-based aviation, submarines, and ballistic missile technologies, all of which could be directed against American aircraft carriers in the East and South China Seas — will be formidable. Even without any military confrontation, the balance of power in the western Pacific will shape the Chinese predisposition to push, threaten or compromise.
 
The Chinese must understand that their expanding military capabilities have consequences. For example, the United States must not rule out the need to strengthen its ballistic missile defense system, as China rattles its intercontinental ballistic missile capabilities. We should be very candid in explaining this to the Chinese. China is closely observing events in Ukraine, and what our statements and actions there may mean for Asia. We must help China understand that a closer, more assertive alignment with Russia will only provoke the United States and our allies. The pivot to Asia makes sense, but must not come at the expense of our obligations to our allies in Europe and elsewhere.
 
Even more important, America must work to persuade China that its interests lie not in narrow self-aggrandizement, like expanding its territorial reach, but in assuming shared responsibility for global leadership, commensurate with its wealth and power. The institutions of global governance — the United Nations, the International Monetary Fund, the World Bank and the like — have not been perfect, but they remain the best framework for securing peace and prosperity around the world. A China that turns its back on these institutions will find itself isolated and defensive, no matter how great its economic and military might.
 
While Americans should hope that China embraces democracy and human rights in the long term, in the short run, we must accept that China has a right to its own system of government and its own standards for political legitimacy and social justice. The United States should insist that China, like every other member of the United Nations, abide by the Universal Declaration of Human Rights. We must help China see a distinction between its principle of “noninterference in internal matters of other states” and respect for basic human rights and dignity. (For our part, we must also demonstrate our own acceptance of the responsibilities of global leadership by, for example, joining the International Criminal Court and the United Nations Convention on the Law of the Sea.) But we cannot assume that political development in China will happen as quickly as Americans would like.
 
The view, increasingly prevalent in China, that it will inevitably replace the United States as the world’s leading power is far from assured. Our natural resources, the rule of law, our entrepreneurial culture, and our vast head start in higher education and science are strong factors in our favor. People from all over the world want to live and work in the United States — including wealthy Chinese. They seek the protection of our laws and the individual freedoms they find here. China does not provide these attractions.
 
If we are to retain our global leadership, and be a constructive, countervailing force as China rises, America needs a long-term strategic vision of our own: a strong, growing economy built on a foundation of energy independence; a vibrant, effective democracy; assertive, patient diplomacy backed by supportive allies; and a military capable of standing toe to toe with China in a crisis. With these pieces in place, we can succeed in helping China assume its rightful place as a global leader, and perhaps an equal of the United States, in a manner that promotes global prosperity and stability. Perhaps then China’s leaders will feel secure enough to grant real democracy to its people. But it will be a long journey.
 
 
Wesley K. Clark is a retired United States Army general, a former NATO supreme Allied commander in Europe and a consultant. He is the author, most recently, of “Don’t Wait for the Next War: A Strategy for American Growth and Global Leadership,” from which this essay is adapted. 


5 Shocking Forecasts
for 2015
In this report:

The terrifying truth that Washington won’t tell you and that the media doesn’t want you to know ...
 
Five deadly wounds that doom America to collapse in 2015 ...
 
PLUS five terrifying forecasts for the year ahead ...
 
And the actions you must take IMMEDIATELY to insulate your family and your money from Washington’s scheme to break you.
 
by LARRY EDELSON,
       Editor of Real Wealth Report

Dear Investor,

The frightening reality ...
  • 102 million working age Americans are now unemployed — a 36% increase since the year 2000 ...

  • The average duration of unemployment has nearly doubled since January 2009 — from 19.8 weeks to 37.1 weeks ...

  • 40% of those lucky enough to have a job earn less than $20,000 a year ...

  • Median household income has declined 5 years in a row ...


  • The rate of homeownership has declined 8 years in a row.


This is the new reality.

This is why hundreds of once-great American cities are transforming into rotting, decaying hellholes.

We never dreamed it could happen here. But it is happening. Right now, before our very eyes. And right here, in the United States of America.

If it hasn’t hit your hometown yet, it soon will.

But in this grim cloud of reality, there is a silver lining; and an important lesson to be learned ...

Every nation that’s met with this tragic fate suffered the same disease; one that slowly choked the life out of it before ltimately killing it ... And each left behind important clues  on how to survive a similar fate.

My name is Larry Edelson.

In a moment, I’ll share with you the inescapable proof of why America is now on the same road as nearly every global core economy before it ...

Why the “War on Terror” ... global, civil and regional wars ... and America’s grim financial state all but guarantee it ...

And why the actions you take now to protect yourself and profit — before this house of cards collapses around us — will determine how well your family will weather the coming financial cataclysm ... and also how rich you’ll be for decades to come.

But first, I think it’s important you know why you should listen to what I have to say ...

For more than 35 years, I’ve made studying the Great Depression of the 1930s and economic cycles — and trading the financial markets based on my knowledge of both — my passions in life.

What’s more, my work has been hugely profitable for my readers.

Since the early 1970s, I’ve successfully forecast nearly all the major turning points in the global financial markets, including:
  • The inflationary fires of the 1970s and the resulting surge in gold ...
  • The stock market crash of 1987 and its subsequent rally to new record highs three years later ...
  • The Persian Gulf War of 1990 and the S&L Crisis in the U.S. ...
  • The 10-year rocket blast in oil beginning in 1998 ...
  • The bursting of the tech stock bubble in 2000 that cost U.S. investors an estimated $6.5 trillion in losses ...
  • The 20-year bear market in precious metals ending in 2000 ...
  • The 2007 collapse in U.S. stocks that drove the S&P 500 56% lower  ...
  • The now nearly 14-year bear market in the purchasing power of the U.S. dollar ...
  • The rise of Asia that started in 2004 ...
  • And the great debt crisis, and crash, of 2008.

I’m not telling you any of this to boast; only to demonstrate that the financial intelligence I’m about to share with you is rooted in decades of thoughtful and, more often than not, accurate analysis.

If you were one of my readers, you could have profited handsomely from these major market shifts.

But not to worry: You and I are about to be presented with the greatest opportunities of our generation.

We will also be presented with the gravest investment dangers any of us have ever faced. And the moves you make now will make all the difference in how well you and your family weather this storm.

This is not about "getting rich" ... it's about YOUR SURVIVAL.

The injustices and travesties being perpetrated on us by our own government — the very people who swore an oath to protect and defend us — will likely make your blood boil, as it did mine.

There’s no doubt in my mind, America will survive the coming storm ... but there will also be many trials and tribulations along the way.

The days ahead will challenge us to the core. The dangers will be unprecedented. I expect riots and mass protests in the streets of America. I expect the fabric of our society to be stretched to its tearing point.

Why? Because the U.S. has suffered a number of deadly wounds since the dawn of the 21st century; each potentially fatal by itself ...

But taken together, they’ve significantly increased our nation’s decline.

Deadly Wound #1:  9/11 and the "War on Terror" mark  the beginning of the end for America

The horrific terrorist attacks of September 11, 2001 were more than a single, tragic footnote in our nation’s history.

They signaled a new era of mass global conflict and a Mount Everest-sized mountain of new debt for the United States.

The military campaigns in Afghanistan and Iraq have cost the U.S. nearly $2 trillion. And that’s a fraction of the ultimate price tag.

A new study by a Harvard researcher suggests these two wars alone could cost U.S. taxpayers $6 trillion — including medical care and benefits for wounded veterans, and repairs to a depleted military.

Six TRILLION dollars!

Sadly, it’s only going to get worse from here.

Since the 1980s, I’ve been studying the so-called “Cycles of War” — the natural rhythms that predispose societies to descend into chaos, hatred, civil and even international war.

They’re a kind of volatility index, measuring the cycles of mass human social unrest. What’s more, they are documented and scientifically proven.

I’ve researched over 14,000 wars spanning nearly 5,000 years of history, and let me tell you:

The war cycles are ramping up in a way that has not happened in at least 100 years!

In January of 2013, I released my war forecasts showing political turmoil was set to start rising substantially.

According to Wikipedia, since that time:

  • 201 terrorist attacks have been staged worldwide ...

  • In the Middle East, there are now eight countries officially at war involving 163 different militias, separatist and anarchic groups ...

  • In the Congo, Mali, Nigeria, Somalia and the Sudan — there are now 24 countries and 141 different groups involved in wars ...

  • In Europe, there are now eight countries involved in official wars involving 65 different groups of militias, guerrillas and separatists ...

  • In the Americas, war is taking root as well, where over five different Latin American countries are experiencing war-like conditions involving more than 25 separatist groups ...

All told, there are now a near record high of 60 countries involved in war involving 512 militias and separatist groups.

And my research shows the world is still on the cusp of a dramatic increase in geopolitical conflict and social unrest. No doubt Washington will drag us into countless more of these, and all at monumental cost.

For the next six years — until the cycles peak in 2020 — it’s time to batten down the hatches, to protect and grow your money like never before!

Deadly Wound #2    The Great Credit Crisis of 2008

More than $4 trillion of “funny money” — printed by the U.S. Federal Reserve ... European Central Bank ... Bank of Japan ... and Bank of England to bail out the world’s economies after the crash of 2008 — is now sloshing around the global banking system ...

And it’s a ticking time bomb of historic proportions for the U.S. bond market!

There are two chief reasons ...


FIRST, despite the Fed’s herculean efforts, long-term interest rates have still moved sharply higher.

After bottoming in July 2012, rates have zig-zagged from a low of 1.38 percent on the benchmark U.S. 10-year yield to 2.73 percent. That’s almost a doubling of the 10-year rate.

But it’s not just the 10-year interest rate that is rising. Rates on everything from 2-year to 30-year terms are soaring.
In 2013, 10-year Treasuries dropped 12 percent.

The bond market — junk bonds, Treasuries, mortgage bonds and so on — had its worst year in 14 years.

And by all accounts, the losses are far from over.

Now the Fed says it’s “tapering” — slowing the pace of money injected into the economy every month by a meager $20 billion — and even that small course correction is enough to drive interest rates still higher!

Imagine what will happen when the Fed is ultimately forced to truly end — or reverse — its money-printing madness.

The writing is on the wall:

Investors are starting to see that the U.S. sovereign bond market is the world’s biggest bubble — and it has to burst!

Investors no longer see the Fed as being able to stop rates from rising. Nor do they believe Washington will ever fix its terminally ill balance sheet.

Consequently, they no longer see U.S. sovereign bonds as a safe place to park their money. And they’re right.

No matter what the Fed says or does, it cannot control the free market.

When free market forces take over and decide the U.S. bond market is no longer a safe place to invest, it’s lights out for Treasuries.

And that’s exactly what is happening now.

SECOND, central bankers’ wild money-printing has created a veritable powder keg of inflationary pressures. The slightest spark could set it off like a gunpowder factory in a five alarm fire.

With so much "funny money" sloshing around global markets, rampant inflation is a serious threat.

But it hasn’t been a problem yet — and here’s why ...

Money printing in itself isn’t inflationary if investors and consumers don’t want to spend or borrow money. For years, the private sector — consumers, investors and businesses — have been retrenching.

So the majority of that money is sitting in commercial banks’ coffers.

It was designed to bail the banks out, and it did. But because loan demand is still soft, they’re not lending.

But now, as central banks raise rates, they’ll see precisely the opposite of what they intended ...

Credit and loan demand will surge — and the prices for everything from food and clothes, to rents and college tuition, to the most basic goods and services, will surge along with it!
Right now, consumer price inflation is in a long incubation stage.

But history proves that, once the first symptoms appear in the form of major price hikes on consumer goods, it will be far too late to reverse!

Deadly Wound #3:    China’s meteoric rise has now put it in the driver’s seat
Downtown China

China has awakened.

And just as Napoleon warned in 1803 — it’s about to shake the world to its foundations — starting with the United States.

Three billion of the world’s 7 billion people live in Asia. Anyone that thinks their newly awakened souls will stop desiring better lives for themselves, and their children, is sadly mistaken.

Asian demand will remain a strong force, even as the Western economies of Europe and the U.S. go down the drain.

And China is the poster child of Asian demand.

Even despite the global slowdown — and despite what the naysayers may tell you — China’s economy is still growing much faster than America’s is.


What most Americans do NOT know — what our media steadfastly refuses to admit — is China is already so rich and powerful, it can now DICTATE economic policy to the world, even to the United States of America.

I know; it’s hard to believe. Especially since many have been saying that China’s economic explosion is over.

But the numbers don’t lie: According to data from the International Monetary Funds’ World Economic Outlook Database, the U.S. economy grew an average of 1.7% per year from 2003 — 2013.

Meanwhile, China’s economy grew an average of 10.3% per year.

That’s more than SIX TIMES FASTER; fast enough to nearly DOUBLE the size of China’s already massive economy every decade!

But that's only the half of it ...

If you get to know a little more about both nations, China’s burgeoning economic power is even more unsettling.

Just consider ...


  • The Beijing government has approximately $5 trillion in debt; Washington has nearly $145 trillion in debt and obligations ..

  • The People’s Bank of China — the country’s central bank — now has nearly $4 trillion in its piggy bank, and its cash reserves are growing ever larger, month after month; Washington has almost no cash on hand to speak of ...

  • China’s total tax revenues are up nearly 10% from a year ago; Washington’s tax revenues are dramatically down due to the sluggish U.S. economy ...

  • China has over 800 million workers, nearly FIVES TIMES more than the 156 million workers in the U.S. ...

  • 97% of all Chinese workers are employed; 19 million U.S. workers are either unemployed or underemployed ...

  • In China’s urban areas, wages ROSE an estimated 10.7% in 2013 — and the increase was about double that in rural areas; inflation-adjusted wages for U.S. workers dropped 1.7%.

In the size of its economy and economic growth ... in science ... in technology ... in the scholarship of its students ... in the growth of its military ... in every conceivable area ...

China is ALREADY the world’s most dominant nation!

It gives me no pleasure to say this, but America has squandered its birthright. The age in which our nation led the world is over.

Of course, there’s another reason why China is now in a position to dictate economic policy to the United States:

Nearly 50% of EVERY dollar Washington spends today is borrowed money — much of it from China!

Without the billions Beijing loans Washington, the entire U.S. government would go bust.

Washington would become a virtual ghost town. Millions who count on government checks would be financially destroyed.

And make no mistake: The Chinese know they’re in the driver’s seat.

I can’t even begin to tell you how painful it is for me to tell you any of this.

I live and work in Asia, but I will remain an American citizen to my final breath. My sister, my brother and my three grown kids all live in the States. I want nothing but the best of everything for them and for my country.

If my nearly four decades as a financial analyst and historian have taught me anything, it’s that terrible things happen when we ignore reality ...

But if you grasp the reality that Beijing is now in charge, you’ll find it’s quite easy to insulate yourself — and even make a substantial sum in the process!

In a moment, I’ll show you how to do just that.

Deadly Wound #4: The 800-pound “Obamacare” gorilla has inflicted massive damage


Yes, the Affordable Care Act (Obamacare) has been beaten to a pulp.

So instead of talking about the more than 5 million Americans that have had their healthcare plans dropped so far ...

Or the Manhattan Institute’s analysis showing that health insurance premiums will rise dramatically — by as much as 99% for men and as much as 62% for women — with some groups rising by as much as 305% ...

Or that deductibles, co-insurance fees and out-of-pocket maximums are skyrocketing — running as high as $6,350 for a single person and $12,700 per family for some policies ...

 ... let’s just look at the bottom line numbers.

The Congressional Budget Office estimates Obamacare will cost U.S. taxpayers $1.798 trillion. Meanwhile, the Republican Senate Budget Committee says the CBO's estimates are overly optimistic and puts the true cost at $2.6 trillion.

Whoever you believe, Obamacare is expected to cost taxpayers between $1.8 and $2.6 trillion over the next 10 years.

This despite the fact the CBO study also found that just as many Americans will lack health coverage in 10 years as before the law was passed — even as two million fewer will be working than if the law hadn’t passed.

So let’s call a spade a spade ...

Obamacare is just another tax on hard-working Americans that are already stretched thin financially; and it’s the final nail in the coffin for a middle class that’s been systematically destroyed by the Obama administration.

It’s also yet another reason to take action right now to shield your wealth — and your family — from the massive storm that’s building!

Deadly Wound #5: America’s out-of-control welfare crisis is at nightmare proportions

In an interview with the Los Angeles Times in January of 1970, Ronald Reagan said, “Welfare’s purpose should be to eliminate, as far as possible, the need for its own existence.”

So he must surely be rolling over in his grave at the travesties of America’s bloated welfare state today.

In 1970, there were 4,340,000 — or roughly 1 in every 50 — Americans on food stamps. In 2013, the U.S. Department of Agriculture reported a record 47,636,000 — or 1 in every 6.6 — Americans on food stamps.

Let me put that another way: The number of Americans needing food stamps just to survive has increased nearly ELEVEN TIMES since the 1970s.
 

But it’s when you compare it to the 33,490,000 Americans on food stamps in 2009 that a shocking picture comes into razor-sharp focus:

The number of Americans on food stamps has skyrocketed a mind-boggling 42.2% in just five short years!

From a historical perspective, since Lyndon B. Johnson started the War on Poverty in 1964, the government has spent $21.5 trillion (inflation adjusted) to fund the growing list of roughly 80 welfare programs.

As Robert Rector — Senior Research Fellow for the Heritage Foundation — pointed out in Congressional testimony in April of 2012 ...

Welfare spending is nearly THREE TIMES the cost of all military wars in U.S. history from the Revolutionary War through the current war in Afghanistan.

 
New research from the Republican Senate Budget Committee shows the U.S. federal government spent $3.7 trillion on welfare just over the last 5 years.

That’s nearly FIVE TIMES greater than the $797.4 billion spent on NASA, education and all federal transportation projects combined.

Look: If this were merely remnants of the global downturn ... if there were serious plans in place to reel this insanity back in ... you might be able to sell me on the hope that things are improving.

But reality is a far better pitchman. And the fact is America’s welfare engine is just getting warmed up!

According to the President’s budget ...


Combined annual Federal and state spending on welfare programs will explode 80% by 2024 to $1.4 trillion per year — a total cost of $12.9 trillion over the next 10 years. 

This is despite the fact that welfare spending has already skyrocketed by more than 32% since President Obama took office ...

And despite the fact that current annual welfare costs are already twice the amount necessary to lift all Americans out of poverty ...

It’s still NOT improving the situation.

The latest U.S. Census Bureau report shows 46.5 million Americans are now living in poverty. For the first time since 1965, America’s poverty rate has remained at 15%, or above, for 3 consecutive years.

The fact of the matter is, our welfare state is growing by leaps-and-bounds, with NO end in sight.
Look: I’m not the paranoid type. I’m not an alarmist or one who sits around conjuring up conspiracies. Far from it.

But when I connect all the dots — from my studies on the war cycles ... to the history of how other great nations and empires have died by their own hand ... to what’s happening around the world and behind closed doors ...

And then I factor in what the markets are telling me ...

What the NSA spying says ...

What Obamacare and its 16,000 new IRS agents — who will be able to eavesdrop and stick their nose into everything you do — means ...

To what the big, savvy money is doing right now ...

I come to one conclusion:

The massively indebted governments of the U.S. and Europe are getting ready to tax you more — and even confiscate large portions of your wealth! Washington and Brussels want — no, they NEED — your money.

And they’re prepared to do everything possible to get their hands on it — even if it means sacrificing your family’s future; the future YOU worked so hard to build!

They’re engaging in financial repression, so they can pay their debts with lower interest rates, and their bills with cheaper currency ...

They’re spying on you like never before — not just here in the U.S., but also in Europe, hunting down as much of your income and wealth to tax ...

They’re engaging in capital controls, limiting the movement of your money  ...

They’re raising taxes, starting confiscation policies, slashing retirement and entitlement benefits, and more.

Consider this ...
  • The European Union (EU) has passed a financial tax to take effect this year on all stock and bond trades by any of its citizens worldwide ...

  • In France, tax rates on the rich have been raised to a whopping 75% and new and very tough reporting requirements have virtually shuttered the nation’s gold dealers, sending them packing. Try buying gold anywhere in France today. It’s almost impossible ...

  • In September of 2013, authorities in Poland confiscated bonds held in private pension funds without giving 1 cent of compensation to pension owners .

  • In March of 2013, EU finance ministers confiscated the wealth of all deposits above 100,000 euros in Cyprus banks — and they’ve now enacted legislation approving the confiscation of funds in any EU bank that goes down the drain!
Why should you care? As Europe goes, so goes the U.S. ...
  • In Washington, proposals are now under way behind closed doors to enact similar depositor “bail-in policies” for U.S. banks ...

  • Plus, I have it from a rock-solid source behind the scenes ... our leaders in Washington are seriously considering the 10 percent wealth tax that the International Monetary Fund recently proposed as a solution to pay off government debt. A tax that would be levied on every American citizen!
And here’s the real kicker:
  • According to another well-placed source, Washington is also seriously considering nationalizing part of, or all, IRAs and 401(k)s — a confiscation in disguise.
There’s no sugarcoating it: Our leaders are doing everything in their power to hunt down every penny of citizens’ wealth, no matter what the cost!

I see THREE major consequences of Washington’s — and other governments’ — efforts to track and tax your wealth:

First, it’s going to do exactly the opposite of what the government intends. It’s going to send more and more small-business transactions underground.

It’s going to create more and more barter. More attempts at private digital currencies like Bitcoin. It’s going to send money into hiding, to the extent possible these days.

Second, it’s going to send more and more money ― and assets ― offshore. Yes, any money you place offshore, any gold or silver bullion, needs to be reported to the IRS.

But that won’t stop money and precious metals from heading offshore. In the minds of most investors ― and I agree ― the further away from Washington’s reach your money and many of your assets are, the better.

Third, and most importantly, it’s going to have a mind-boggling effect on nearly all financial markets.

Namely, it’s going to drive capital in a way that is constantly seeking out what I call “portability and fungibility.”

Portable wealth is money and alternative assets that can be easily transported and more easily hidden from view. Examples: Artwork, diamonds, jewelry, gold and silver coins, numismatics, collectibles, rare books and more.

These kinds of assets not only hold their value for the super rich, but can be squirreled away, off the grid, from prying eyes and easily transported.

But portability does not stop there.

Portability can also be assets that are deemed non-confiscatable, such as stocks. Own a government bond and Washington knows you own it. Own a share in Apple and it’s unlikely Washington will subpoena Apple for a record of your shares.

Stocks ― and especially gold and silver ― are also fungible. When you need cash, digital or otherwise, stocks and gold and silver are easily converted back to a more easily used medium of exchange.

Portability and fungibility will be major forces behind the next bull leg higher in gold and silver. Ditto for stocks.
 
For many of the reasons I just mentioned, the U.S. equity markets are headed much higher over the long-term. Regardless of interest rates or corporate earnings or whatever happens to the U.S. economy.

Just like what happened between 1932 and 1937, when the market exploded 387% higher, even as the economy sunk further into a depression.

And that brings me to ...

Five major market forecasts that will make or break you in 2015.

2014 will go down in the history books as a year all hell started to break loose. A year when the world was turned upside down and everything you thought you knew about the markets was largely proven wrong.

New trends are emerging. Relationships between asset classes are changing. Geo-political turmoil is ramping up at a feverish pace. And there is more money to be made — and lost — than ever before!

In 2015, things will only get worse, I’m afraid. Here are my forecasts for the days ahead …  

                                    FORECAST #1:

The U.S. dollar’s last hurrah
 
While the U.S. dollar has not yet lost its global reserve status, it will. It’s etched in stone.
There is simply no way the U.S. dollar can remain the world’s sole global reserve currency when the emerging markets of Asia and Latin America are rising like zeniths.

There is simply no way that our country’s fiscal and monetary policy can be exported throughout the world when so many countries are gaining market share and contributing to global GDP like never before.

In a nutshell, the U.S. dollar as the sole global reserve currency simply isn’t fair to the rest of the world and it has to go.

But here’s the irony: Even as the dollar is destined to lose its singular reserve status — in a financial crisis, it’s still the reserve currency by default.

That means that when markets and economic systems go into turmoil, the dollar gets a shot in the arm as the rest of the world goes into “risk-off” mode, selling assets and parking their money in cash.

And with the back wall of the financial hurricane about to hit in 2015 — in Europe and in the U.S. — that means the dollar has one more Hail Mary pass, one more possible giant rally and last hurrah — before it resumes its long-term bear market.

Behind the curtain, the bankrupt, socialist-based Western governments of Europe and the U.S. are now beginning to hunt down every penny of their citizens’ wealth that they can find.
That’s disinflationary, plain and simple.

People everywhere are starting to hoard their wealth. That means cash and alternative assets are coming into play. And since the dollar is still the world’s reserve currency, it means a stronger dollar ahead.

As you might suspect, strength in the dollar in 2015 leads me to my next forecast ...

FORECAST #2:

  Gold and silver will soar
 

I don’t know anyone in the world that’s pegged the moves of gold as accurately as I have over the years. I have beaten the biggest names in the investment arena to the punch in gold, time and time again.

Had George Soros listened to me, he would have avoided the carnage that hit gold since 2011. Instead of selling his holdings when gold was trading at roughly $1,597, he would have been out of gold in the high $1,800 range.

Had John Paulson listened to me, he would have dumped his gold holdings at much higher prices and avoided as much as $1.5 billion in losses.

The bottom in gold is almost here, now, and I see it as a rare chance to double up on the precious metal ... and make a true fortune as it inevitably heads to somewhere north of $5,000 an ounce in the years ahead.

2015 will be the year gold and silver begin an awesome new leg to the upside. And it’s one that most investors will miss, simply because they do not understand the forces at play.

Now, my next area of major concern ...


FORECAST #3:

                The sovereign bond market is headed for disaster
 
This one is a no-brainier.

The governments of the U.S. and Europe are bankrupt. There’s simply no way they’ll ever make good on their outstanding bills — not to mention their promises of Social Security, health care, pension guarantees and more.

They won’t be able to inflate the debts away as so many expect, either.

It’s why they’re starting to hunt down citizens’ wealth. It’s why Washington and Brussels are now contemplating raising taxes yet again.

It’s why they are tracking money sent overseas and why you now have to report accounts that you have anywhere in the world.

But none of that will matter. In the end, there is no way the citizens of these countries will put up with it all. And as they are now finally realizing  ... yes indeed, their emperors have no clothes.

As a result, no matter how hard central banks work at keeping interest rates low, the sovereign bond markets of the U.S. and Europe are facing votes of “no confidence” from their investors and creditors ...

And the values of their sovereign debt instruments are destined to slip and slide substantially lower!

Of course, that leads us to ...

FORECAST #4:

    Europe — and the Euro — will collapse
 
Many think because Europe has been quiet lately, or because Germany’s economy is hanging in there, that the European sovereign debt crisis is kaput.

That view is dead wrong according to my models. That’s why the biggest surprise of all for 2015 will be the crumbling of the European Union and a collapse in the value of the euro.
As strong as the euro seems and as quiet as Europe’s crisis seems to be, it’s just the calm before the second phase of the storm.

The savvy money will soon begin to leave Europe’s banking system in droves, causing the euro to implode. As it does, the seeds of the destruction of the European Union will grow like weeds.


FORECAST #5:

  New global oil wars will guarantee that select energy stocks go beserk

There are at least a half dozen territorial disputes over oil and energy that have either already broken out or are about to break out overseas — in the Middle East, between China and Japan, China and its Southeast Asian neighbors; Russia and the former Soviet republics; Russia and East European countries and all over Africa, to name just a few.

A MAJOR civil war over oil is unfolding right now involving Iraq, Syria, al-Qaeda — and possibly Iran — that could end up making the decade-long Iraq War look like a minor skirmish by comparison.

This past summer, a little-known jihadist army known as the Islamic State of Iraq and Syria (ISIS) swept through the region, killing thousands of civilians and unarmed prisoners, as it pushed to gain control of virtually all the major oil refineries in Iraq.

Most of Iraq’s vital northern oil fields were completely shut down by the advance of the jihadist militias, cutting off one of the world’s most important sources of oil. Oil companies evacuated workers throughout the country.

Elsewhere, China is engaged in an escalating naval and air conflict with Japan over control of the Senkaku Islands, five uninhabited islets in the East China Sea. Reasson: The Senkakus have enough offshore oil and gas that they could supply all of China’s energy needs for the next 45 years!

Then there’s Russia seizing control of the Crimean Peninsula in early 2014. The Russian annexation instantly gave it access to underwater oil and gas resources of the Black Sea potentially worth trillions of dollars.

These and many other regional disputes over oil and energy are going to do three things:
First, they are going to drive the price of energy through the roof, triggering a bull market in energy investments like we haven’t seen in a decade.

Second, they will unleash the full fury of heavily armed, increasingly ruthless governments in the Middle East, Europe and Asia, some of which, as we’ve recently learned, are more than willing to practice mass murder to advance their goals.

Third — and most surprising of all — these new oil wars around the globe will coincide with the last stock market boom of our lifetimes — a boom in which only a few savvy investors will make vast fortunes.

As the bloody chaos in the Middle East and Asia spreads, hundreds of billions of dollars are about to come flooding into the safety of U.S. financial institutions, sending the prices of select energy stocks and other U.S.-based assets through the roof.

If you think energy is hot right now, just wait to see what happens as another Iraq war breaks out over access to oil supplies in the region … or if an oil war breaks out in Asia.

The price of oil could skyrocket, and energy investments could make you a fortune overnight.
During the first few years of the last Iraq War, oil company stocks did a moon shot.
  • Exxon skyrocketed 196.8%, from $32 to $95 a share.
  • Chevron gained 293.7% , going trom $32 to $126 a share.
  • And Conoco-Phillips gained 291.6%.
And those are just the big boys!

Mid-tier oil companies made their investors vast fortunes during the same period:
  • China’s Sinopec was up 418% between 2003 and 2007.
  • Noble Energy was up 494.4% …
  • And Hess did a moon shot, earning its investors a staggering 779% in just five years.
That’s enough to turn every $20,000 invested into $175,877 in just 60 months. At that rate, even a modest $100,000 portfolio could potentially grow into as much as $3.5 million!