The Rum Rebellion

US stocks sold off overnight. The Dow fell 1.5%, while the S&P 500 and the NASDAQ dropped 1.2%. Gold rallied back above US$1,500 an ounce.

Worryingly, the US 10-year bond yield fell sharply, to 1.64%. That’s its lowest level since October 2016. In other words, the bond market is telling you the US economy is slowing down. And now the equity market is finally starting to agree.

In Australia, the 10-year government bond yield recently fell below 1%. This is why the RBA is so keen to keep cutting official interest rates.

It’s trying to avoid a ‘yield inversion’. This is where long-term rates fall below short-term rates, a sign that the market thinks the economy is going into recession.

But central bankers are smarter than everyone else. So they lower the cash rate, to the point of insanity, to avoid recession. The central bankers think they have won. But the nature of the market cannot be easily outsmarted. It has patience beyond the average central bankers’ tenure.

I’ll leave the central bank bashing for another day. There will be plenty of opportunities.

Today, I want to show you how there’s plenty of room for nuance in this market. Just because everything is screwed up, doesn’t mean everything is screwed up, if you know what I mean.

For example, a few weeks ago, department store retailer David Jones came out with another asset value write-down. South African business Woolworths purchased the retailer for $2.2 billion in 2014. It now carries the value of David Jones on its books for $984 million.

But then you get a result like the one JB Hi Fi Ltd [ASX:JBH] delivered yesterday. Net profit increased a better than expected 7.1%. Revenues increased 3.2% and the full year dividend increased 7.6% too.

As a result, the share price rallied 7%. It’s now just a few cents shy of its all-time high reached in 2016.

That is where you have to be careful about extrapolating trends, or succumbing to confirmation bias. If you can look at data objectively, and not draw conclusions that simply are not there, you can make some money in this market, despite the economy having plenty of headwinds.

For example, JBH is one of the best, if not the best, retailer in the country. Department stores, on the other hand, are structurally challenged businesses. Just because David Jones is struggling, it doesn’t mean the whole sector is in trouble.

However, if JBH was in trouble, then you should be concerned about the whole sector. But it’s not. It’s doing well.

For example, look at the chart below. It shows JBH from 2009 to early 2012. Not coincidentally, rising interest rates during this time had an impact on the business.

With interest rates falling again in 2019, and tax cuts in the pipeline, sound retailers with good product offerings will do well. That’s why JBH is back up to all-time highs.

Harvey Norman Holdings Ltd [ASX:HVN] is another candidate. It’s a stock I have in my Crisis & Opportunity portfolio. As you can see in the chart below, interest rates have provided a solid boost to the stock this year.

The fact that both of these retailers are, at least in part, tied to the housing cycle, provides an additional boost.

The Australian housing market has turned. The worst is over. That’s helping demand and sentiment towards these stocks too.

The evidence is in stock prices everywhere. But I’ll just show you one. Yesterday, the share price of online real estate advertiser REA Group Ltd [ASX:REA] broke out to a new all-time high. That tells you volumes are picking up.

And the on the ground intel I’m getting tells me that buyers are back. You’ll hear more about this from me in the weeks ahead.

That aside, the point I’m trying to make here is that you shouldn’t lump all retailers in together. Department stores are no longer the bellwether stocks for the sector. They haven’t been for a long time.

But narratives can be seductive. If you have a bearish bias, it’s easy to latch onto a poor result from a household name like David Jones and just assume the conditions are the same for everyone.

But good investors understand there is nuance in the market. What’s affecting one company in the sector may not impact others in the same way.

That’s why I always consult the charts. They help to put your view into a non-biased perspective.

And right now, the charts of JBH and HVN are telling you the consumer is not as bad as you might think.

‘Consistently high-quality picks’

Consistently high-quality picks. The stocks you pick do not go up on recommendation and then go down with a thud never to return, instead they always have a gentle and sure rise as the story behind them unfold. They are of investment quality.

Charles

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A great revelation is at hand. The earth wobbles…the stars go dark: A great empire fades.

But before we turn to the extraordinary, let us linger on the mundane. Our weekend project was one we put off for 20 years — cleaning out the wine cellar.

Back in the old days, people drank a lot more wine than they do today. It was a stable food, a source of calories and nourishment that didn’t require refrigeration.

The wine here was never very good and was produced only for local consumption. But what it never achieved in quality it exceeded in volume; they made a lot of it.

In this part of France, for example, a working man in the 15^th Century drank four bottles of wine a day. And there is proof…the wooden barrels, still in our wine cellar.

This weekend, we vowed to clean it out. And we began by taking the doors off their hinges. The old wood was badly chewed and rotted around the edges. But it still held together, so we washed it, sanded it, put on an antifungal, anti-worm product, coated it with linseed oil, and finally painted it red to match the other farmyard woodwork.

It was relaxing work. And it gave us time to think about the insights of the last few weeks…

Sometimes they are forward-looking and expansive. Sometimes they retreat…just wanting to hold on to what they’ve got. Sometimes they grow and take chances; sometimes they correct mistakes, lick their wounds, and recuperate.

Stocks reflect an optimism about the future…a belief that you can participate in the march of progress, and that by trusting your savings to a group of people you don’t even know you will become wealthier.

Gold, on the other hand, is what you stick with when you’re afraid…when you fear that things are going in the wrong direction, or have gotten ahead of themselves. As Warren Buffett said of gold: ‘Gold is a way of going long on fear, and it has been a pretty good way of going long on fear from time to time.’

The ratio of the Dow stock prices to the gold price — the greed/fear index — gives us a good way to tell where we stand.

And priced in gold…the great bull market of 2009–2019 doesn’t look so great. Instead, it looks for all the world like a normal bear market bounce.

Typically, bear markets don’t take prices down in one fell swoop. Usually, there is a bounce or two…in which prices recover about 50% of their losses. Old-timers call it a ‘suckers’ rally’, because it lures unwary investors back into the market. They buy the dip and get buried when the bear market resumes.

The Dow traded at an all-time high of 40 ounces of gold in 1999. The Soviet Union had thrown in the towel. The internet promised faster growth with less capital requirement. The Clinton government had even produced budget surpluses (putting aside Social Security obligations).

And everywhere, American businesses, stocks, technologies, movies, culture — all were on top of the world.

It was also the tail end of the longest economic expansion on record and the greatest stock market boom ever.

Even then, it seemed like the peak of something. But what? Was it the end of the great boom that began after the Second World War? Was it the ‘end of history’?

Did it also mark Peak America…the beginning of the end of America’s great triumph?

In January 2000, stocks began to fall. And they fell hard. 11 years later, you could buy the Dow for only seven ounces of gold — an 80% loss in gold terms.

Then…the market bounced. At least, that is what it looks like. The Dow recovered to 22 ounces of gold in 2018 — about half what it had lost in the 2000–2011 downswing. And now, it appears to be headed down again.

If so…we can see the whole move in stocks from 2009–2019 as simply a standard, run-of-the-mill bear market suckers’ rally and not a new bull market at all.

Like the smell of a freshly baked madeleine to Proust, this insight triggered a waft of remembrances of things past; the aroma of it was so strong, so pure…so clear and true…all of a sudden, the sour contradictions and smelly confusions that have dogged us for the last 20 years floated away.

A booming stock market, for example, suggests that the economy is healthy…and that people are getting richer.

Why would people be going further and further into debt if they were actually getting wealthier?

Why would the US Government, too, be forced to borrow as if there were a national emergency…and why would the Fed cut rates if, as the president claims, this is the greatest economy ever?

And why would the manufacturing sector — the backbone of the economy — have lost 5.5 million jobs since 2000, when the Dow industrials doubled?

And why would Americans elect Donald Trump, whose campaign slogan in 2016 claimed that the nation had declined? (Make America Great AGAIN.)

And what sense did it make…that in such a great boom…the flower of American enterprise, the US stock market generally, and the Dow specifically, should be completely overshadowed by that barbarous relic…the thing that Warren Buffett despises because it has ‘no utility’ and ‘just sits there and looks at you’ — gold?

Yes, dear reader, maybe holding gold was not so fuddy-duddy foolish after all. If you had held the Dow stocks from 1999 to 2008, you gained about 20% in the run-up to the crash. Then, you lost nearly half your pile in the ‘08–‘09 crisis.

What followed, of course, was the most remarkable episode in US financial history, in which the Fed pumped in $3.6 trillion in new money…and dropped its key interest rate below zero and left it there for nearly the entire decade. That fake-out caused the Dow to more than triple from the ‘09 low…

Investors celebrated…and the Fed, desperate to keep the party going, cut rates even before another crisis came to light.

But what has all the hullabaloo wrought? Over 20 years — 1999 to 2019 — and despite more stimulus than the world had ever seen, the Dow rose only 143%.

If you held gold, on the other hand, you multiplied your money more than five times. It was not US industry that triumphed in the 21st Century. It was gold…old, dumb, immobile gold.

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If you sense that the markets are at some kind of tipping point, you need to read this vital book right now.

According to Vern Gowdie, what we’ve seen in recent weeks is just the beginning.

But the government and the financial sector are not sounding the alarm.

Their advice is that this is a ‘healthy correction’…and to continue investing into stock, property and bond markets.

But markets are threatening to unleash the financial equivalent of a Category 5 cyclone.

Vern’s book shows you how to build a ‘stay indoors’ investment portfolio.

It’s a certain asset allocation that is custom-designed to weather the coming downturn, which Vern labels the ‘Long Bust’, while it plays out.

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My consumer life cycle for real estate starts with apartments and multi-family homes for renters; that typically peaks around the age of marriage, which used to be age 26 for the boomers and now is age 28 (and rising) for millennials.

That has been one of the best segments in a roller-coaster bubble housing market that has made owning a home look much riskier, largely due to the rise of the millennials born by my rising wave of births definition, from 1976 into 1990.

That would create a rising wave of new households and renters from 2003 into 2018. But they aren’t peaking yet — and maybe won’t for quite a while.

First thing to note is that this younger group will extend the rental cycle in the downturn I’m anticipating from around 2020–2023/24 as they get even more scared to buy than young folks were during the Great Recession.

Under 35 buyers have to date bought at substantially lower rates than boomers and gen x did during the same ages. And millennials will only find themselves trailing the older generations even more as loans get harder to get and the markets swing downside again for a few years.

But more important, there is currently a new gang of renters riding into town: aging boomers. They have not saved enough for retirement, are increasingly down-sizing from larger homes now that they are empty nesters, and have seen scary volatility in housing markets for the first time in their life.

Damn…who would have thought. Renters 60 and older have grown the fastest, at 43% over the last decade.

From 2017 to 2035 they will double from 9.4 to 18.6 million, growing faster than the 35–59 age group, and even more so than the slowing rate of those younger than 35.

By 2035 seniors will grow to 33% of the rental market and under 35 will fall from 34% to 27%. Older people have different needs, like no stairs! Don’t make them get one of those tacky stair sliding seat units…please!

And where would you find the highest growth in such old fart retirees? In Arizona, Nevada, Florida and Texas — affordable and warmer retirement areas. But they are everywhere, as they have always been the biggest force at any age that their massive wave has moved into.

There are similar things going on in Australia, with the ABS noting that the percentage of older households still paying off a mortgage has tripled between 1995–96 and 2015–2016.

I suspect these numbers are now much higher after the housing market peaked in 2017–2018.

And what’s more, with a looming credit crunch in Australia, there could be a flood of older households that just throw in the towel, sell the home and rent for their remaining years.

Don’t get me wrong, the situation is far worse in the US when it comes to grandparents being forced into renting.

But as central bankers pour petrol on markets with low or negative interest rates, one begins to wonder whether there will be anything left for the next generation in terms of home ownership?

Harry S Dent’s

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According to a book by ‘financial Nostradamus’ Harry Dent, you shouldn’t lose sleep over an Australian recession. You should be worried about a Depression.

One-in-three unemployment…Australian house prices halving…real GDP nosediving 10% in a year…

How could that POSSIBLY happen?

Because, in the words of Dent:

‘The folly of central bank policies are about to become painfully clear. And the greatest bubble in modern history is about to finally burst — between now and late 2022.’

In his MUST-READ book Zero Hour, Dent shows his belief that we’re about to enter a global ‘Economic Winter’…one which could put Australia’s economy into deep freeze for five years or more…

He also shows how you could prepare for it, before it’s too late. To learn more, click here.