CPA Gone Mad Issue 18
Disagreements are Good but Don’t Change the Plan
After two and a half days of sitting in a cold banquet hall at the Aria Las Vegas for the Stansberry Research Alliance Partners Conference, I had to go take a little walk after lunch.
And I wanted to go place a bet on the Dodgers. Which anyone who is a baseball fan knows, I lost as soon as Dave Roberts trotted Clayton Kershaw out of the bullpen.
It’s amazing how one of the greatest starting pitchers I’ve ever watched is so bad in the playoffs. And how with the season on the line, the manager brings him in out of the bullpen. But I digress …
As I walked back into the conference, Erez Kalir was on stage. Erez is CEO of Stansberry Asset Management, an investment manager that utilizes Stansberry’s research in developing strategies and portfolios.
I sat down and immediately perked up. Because it sounded as if Erez is explaining why President Trump will not be re-elected.
Anyone who has been reading my materials knows I don’t like most politicians. But I believe Trump will be re-elected. Mostly because he’s going to do everything in his power to push the market higher. See last month’s newsletter for more.
I was intrigued to hear this countering view. Because that’s what allows me to grow my knowledge and better prepare myself financially for all possible outcomes.
Erez goes on to explain that Trump basically won the election by flipping four states that Obama won: Michigan, Wisconsin, Ohio, and Pennsylvania. And it was fewer than a dozen counties across these four states that made the difference. A few hundred thousand people decided Trump’s win.
Erez continues that business owners in these counties are really being hurt by the trade war. Pennsylvania is down 8,300 jobs. And Wisconsin has lost more than 4,000 positions.
He shares an example of a business owner who voted for Trump in the last election. And has never voted for a Democrat. Who said he’ll vote for whoever the Democratic nominee becomes. Because his business has suffered drastically due to the trade wars.
I disagree with this premise, as I’ll share in a little while …
A Socialist President Immediately Drops the Market
Erez went on to share that he believes Elizabeth Warren will become the Democratic nominee.
And then he shared a quote from Stanley Drunkenmiller, who’s one of the most successful investment managers in recent times, whom he heard at the Economic Club of New York.
Over the past 30 years, Drunkenmiller has not had one down year in managing money. And Drunkenmiller is a centrist.
Erez shared that Drunkenmiller said, “If [President Trump] does lose, particularly if I’m wrong and a crazy beats him, it’s worth a lot of PE points. … How big a decline? I would say Sanders or Warren, maybe 30%. I think it would be as big as Reagan the other way.”
Erez then shared that Warren has specifically stated she’s going after private equity (PE), big tech, and health care/pharmaceutical companies.
As I mentioned in last month’s issue, one of the arguments for why we could have an extended inverted yield curve is that technological advancements and biological advancements are creating a deflationary boom.
Well, if Warren goes after breaking up these companies and hurting their profitability, that could derail that premise.
And why does PE matter?
PE has access to trillions of dollars to put to work in various investments as they become cheaper.
In fact, a partner from a large accounting firm and I have a friendly wager about when the next market crash will come. As you know, I’m targeting 2021.
This partner believes it will come later because PE firms have so much capital. They’re ready to pounce on any large drops in the market, effectively creating a stopgap in the market for a few years. And extending the horizon on how long this bull market will run.
If Warren goes after PE firms, this counterargument will go away. As the stopgap the partner believes PE firms will create in the market will be destroyed by Warren.
Erez shared, “You don’t have to necessarily believe Elizabeth Warren will be elected president in our country. You have to begin to ask yourself when the stock market will begin to price this in. … If you think there is even a 50% probability that she would be elected president, the stock market has to begin to price that in, and it surprises me that it hasn’t yet.”
Erez concluded by stating you need to begin preparing now and provides examples of how his investment fund is doing that. I’m not going into the details of how Erez mentions his firm is preparing for this outcome. That’s not the purpose of this letter. But if you have over $500,000 and want to invest in a fund, I suggest you check out Erez and SAM.
I tell you this story to get the point across that you should begin preparing now.
But I will share one last quote from Erez. “I don’t really want to scare you with this … I want you to do two things. First, save some of [your] hard-earned money and returns, and you can do this simply by taking money off the table … the easiest thing you can do is move out of these areas and move money to areas that are more boring or safer. The second thing you can do is take out a hedge basket.”
I couldn’t agree more with that statement. And that is my main mission with the last and this months’ newsletters. Prepare now so you can protect what you’ve earned!
Different Views Only Change Timing
Before I go further, let me share why I disagree with Erez’s premise on Trump not being re-elected.
First, if a trade deal gets done and the Fed keeps easy money flowing, the stock market will be soaring. And the business owners and previous Trump supporters will forget they were upset.
They’ll be sold on Trump thanking them for sticking with him while he finally made a good trade deal.
And since the trade deal is now done, their business will be booming. Effectively offsetting the losses that made them say they will vote for whoever is the Democratic nominee.
Second, anyone who voted for Trump the first time around is a conservative and at best just left of center.
If the trade war heats back up and these business owners are still feeling the heat as the election comes around, I’d totally believe they’d vote for Biden or Hillary, if she jumps in the race.
But any business owner who is a centrist or conservative is not going to vote for the socialist Warren.
Business owners in the key swing states of Michigan, Wisconsin, Pennsylvania, and Ohio know that socialism is horrible. They understand examples like Venezuela and how it takes wealthy countries and makes them poor countries.
Instead of redistributing from the wealthy to the poor, like Warren and Sanders say to persuade young people and people uneducated on examples of previous socialistic countries. Business owners know that what it really does is make everyone poorer.
The wealthy either leave or become much less wealthy, which is why they leave. They have the means to leave and will not sit around and become less wealthy. And the poor become drastically poor.
So not only do I think the business owners in the key swing states will change their minds once the trade war is resolved, I don’t believe there is any way they will vote for a socialist. Even if they are pissed off at Trump.
Here’s the thing though. Please go read the quotes from Erez again.
Whether I’m correct and Trump does get re-elected or whether Erez is correct and someone like Warren is elected, it doesn’t change my view.
It may change the horizon slightly, but it doesn’t change the view that you need to prepare for a market crash now. You can’t prepare once it’s already happened.
If someone like Warren wins and the market drops immediately like Drunkenmiller and Erez suggest. Or if Trump wins, due to creating a continuing market euphoria that causes a crash sometime in 2021-2023.
You should still be preparing now!
No Recession Until 2023 …
Now for the counterview. First, I’ll begin with a couple of other presenters. Then I’ll go into a conversation I had at a bar in Caesars’s with some random guy who argued with my view.
Joel Littman, chief investment strategist at Altimetry, gave an interesting counterview. Joel is a forensic accountant who looks at the “inconsistencies” between generally accepted accounting principles (GAAP) reported numbers and “real” numbers.
He offers a trading service that identifies these inconsistencies and offers trades that are predicting a move one way or another due to these variances.
During Joel’s presentation and in a subsequent article I shared on my Facebook page. He suggests that “there’s no chance for a recession without a credit crunch caused by borrowers who are stuck with debt they can’t refinance or retire.”
As you know from last month’s issue, I’m narrowing in on 2021 for the next market crash. I didn’t know this at the time I wrote that issue. But apparently Joel initially had been watching for 2021 as well. Due to this being when he projected companies’ debt obligations would begin to exceed their cash flows.
But during this presentation and that subsequent article, Joel’s now pushed out his projected timeline. The reason he’s pushing out his timeline is that borrowing costs for companies have fallen. And this is causing companies to refinance their debt.
With the Fed reversing course on rising interest rates, costs to refinance have dropped. Joel suggests this has caused companies to push out their debt maturities. And the debt maturity headwall he originally suggested would hit in 2021. Has now been pushed out to 2022 and beyond.
And he’s suggesting that with no debt maturity headwall in 2021, there’s no risk of a recession.
Joel’s extremely smart, so by no means do I want to say he’s wrong. I also don’t want to be subject of falling into the trap of saying “This time is different” and that’s why I disagree with him.
And just as soon as I finish writing those last two paragraphs, I’m going to sound like I am saying this time is different.
But remember what I wrote last month after attending the Legacy Investment Conference: “Quantitative easing, which is essentially printing money to buy more bonds, creates ‘counterfeit’ money that is driving these interest rates further down. More money available to buy bonds creates lower interest rates.”
And I wrote, “Foreign economies are doing much worse than the US economy. This moves capital to the US and drives down the US ten-year bond yield. This makes sense if you understand that Germany and Japan are issuing negative-interest rate bonds.”
So, I’m not trying to suggest Joel is wrong or that “this time is different.”
I’m just pointing out there may be other factors that are producing lower interest rates. Allowing corporations to refinance debt into the future that traditional models are not incorporating.
And this could create the appearance that the risk of the recession has been pushed out.
… Or A Recession Next Year
Now, since Joel is probably smarter than I am. And I may have sounded like I contradicted myself by describing how “this time is different.” I’ll let someone else who’s also probably smarter than me state a counterview.
Danielle DiMartino Booth, who spent nine years at the Federal Reserve Bank of Dallas, was also a presenter at the conference. And she provided us a letter from her firm, Quill Intelligence, where she is CEO and chief strategist.
This letter stated there’s a “clear disconnect between the unemployment rate and the probability of a US recession hitting … the metric is a simple calculation of the difference between the 3-month and 10-year Treasury yields …
“The bottom line, which has been garnering a bit of press recently, is that in postwar times, this spread has correctly predicted the last seven recessions, a flawless forecast. … We’ve depicted how rare it is to see the probability pierce the 40% level in the post-Greenspan era, one of increased central bank intrusions … there have been six other months in this 32-year span … where we’ve seen these levels, all of which preceded recession onset by 13 or fewer months …
“We can now add to this August 2019’s 41.1% peak read for this cycle.”
Either way, let’s say Joel is right and I’m wrong and Danielle DiMartino Booth is wrong. Because central bankers managed to defeat the historical mold.
And a recession and stock market crash won’t occur until 2022 or beyond (this is still within my range of timing; 2021 is only when I’m narrowing in on as a higher probability).
Arguing at the Bar
This brings me to my conversation at the bar.
I sat down at the bar and ordered a scotch to watch the end of the Astros/Rays game 5. I started chatting with the gentleman next to me who said he was there on business and asked why I was in Vegas.
Once I said an investment conference, he immediately asked me what the folks at the conference were recommending.
I told him, largely warning that a crash is on the horizon and that he should begin preparing by buying gold while it’s still cheap. And raising cash from stocks that have gotten extremely overvalued.
He scoffed at me. “I understand what you’re saying, but gold has done nothing over the last couple of years. And the market has kept going up.”
I told him, “I know the market has been going up. And I believe it’ll keep going up in the short term.”
He quickly interrupted me and said, “Right, so why would I want to give up those gains in the market to buy gold, which hasn’t gone anywhere?”
I responded, “Well, gold has gone up from its bottom in late 2015/early 2016 to $1,500 an ounce. And I believe it’s going to hit a new all-time high in the next year and keep rising from there.”
He scoffed at me again. “But what if you’re wrong. You’ll miss out on all the gains in the stock market. I agree the market is high and a drop will come eventually, but you don’t know when. And if it doesn’t come for several more years, you’ll miss out on those gains.”
I then said, “Okay, let’s say hypothetically the market continues to move up from now until 2023. And then it drops 80%. The total rise before it drops is another 25% from here.”
I asked him, “Do you have someone who’s going to ring a bell for you and tell you, at the exact top, to sell? Because if not, those gains you’re worried about missing out on that may come only count if you sell before the market falls 80%.”
This is where the conversation went sideways. I’m not sure whether he didn’t understand me or whether he was upset because I was debating his view. But as we parted, he did say, “I’ll have to think about what you said.”
This is the same point I keep trying to harp on to everyone I know. And essentially what Erez said in his one quote.
Of course, I don’t know when the market will crash. I can’t ever know the timing.
But neither can you. Any rise from here until the top only counts if you sell before the big drop.
Gains Don’t Matter If they’re Not Realized
If your 401(k) has gone straight up since 2009, it may continue to go up for the next several years. But at some point, it’s going to crash. And if you don’t sell before that crash, all those gains are lost. You’ll be worse off than you are now. Even though you saw those “paper gains.”
Ask your parents. They went through this in 2008. They saw huge paper gains leading up to the crash. But in 2009, their portfolio looked as if they never occurred.
And nobody is going to ring a bell for you. Telling you the top is here and you need to sell.
If the market goes up another 25% and then drops 80%, you’re still down big from today!
This is why I’m pounding the table that when you see clear signs of approaching a top, you begin preparing.
Not by selling all your stocks. But by beginning to trim them. And allocating a sufficient percentage of your portfolio to gold. So that way, if the crash does come before you get most of your stocks trimmed, the increase in gold will hedge and offset the losses in your stocks.
And allocate a large portion to cash so you can buy stocks when they are cheap.
Don’t go sell every stock you own. Go look at what has gone up the most. Trim it down so you can allocate 10% to 20% to gold.
Then set a time frame. Every six months or so, trim more and go into cash. That way, by 2021, your stock holdings are much lower. But if the market keeps going up, you still have some stocks.
And by 2023, maybe you’re down to only 20% stocks. If the crash happens anytime between now and then, you’ve prepared. And your portfolio will not suffer. It could actually prosper.
If you just “wait it out.” Assuming I’m wrong and Joel and the guy I debated with at the bar are correct. When will you sell your stocks and buy gold? When will you raise cash so you can buy stocks that will become really cheap?
You won’t, because if you aren’t listening to me now, when there is a market euphoria, your greed emotion won’t let you sell. I’m trying to help protect you from yourself.
And once the market starts crashing, you can’t get out and buy gold then. The price of insurance during a hurricane is extremely high. You need to buy the insurance before the hurricane.
And what if the markets freeze up and you can’t sell your stocks either? Then how good were those gains you stayed in for?
No matter who is right … no matter who wins the election … the time to prepare is now!!!
Take the Time to Prepare Your 401(k)
Everyone reading this newsletter should have a copy of my book, “Gen X & Millennials: Protect your Money and Prosper.” If not, please email me at feedback@coast2coastfinancial.com and I’ll send you a PDF version ASAP.
I know many of my readers have most of, if not all of, their investable assets in their 401(k). And their 401(k) may not have the option to buy the individual gold funds or stock funds I discussed in last month’s issue.
If this is the case for you, please do not use that as an excuse not to prepare. Go read Appendix 1 of my book again for various options you can try.
To make it easy, I’m going to post Appendix 1 from my book on CPAGoneMad.com right below this month’s newsletter, so you don’t have to go looking for it. I want everyone to begin preparing while “insurance” is still cheap. Before the hurricane hits.
The options discussed may sound hard, but they’re not! These brokerages want to keep your money, so they’ll be more than willing to help you find a solution. Just take 10-20 minutes and call them!
If none of those options work, contact your human resources department. Plead with them that you need to have the ability to allocate money to precious metals. Ask them to work on getting a precious metal fund added.
They can do this. They don’t because nobody asks them to.
To your health, wealth, and personal freedom!
Chad A. Walker, CPA, MBA