RANCHO SANTANA, NICARAGUA – This is a big day in Washington.
First, the pols will welcome the new senator from the great state of Alabama.
As every sentient being on the planet now knows, Roy Moore lost. Too bad his opponent couldn’t lose, too.
Second, and more pregnant with mischief, Fed chief Janet Yellen will appear before Congress. She will say the economy is doing well and that America’s central bank, in its wisdom, can continue its program of “normalization.”
That is, the Fed will try to undo the damage it has done by walking back gently from some of the lowest interest rates in history.
We have a suggestion: Ms. Yellen should dress in a black, hooded cloak and carry a scythe.
Then she could sing her lines in a low, menacing voice: “Oooooh, cannot ye see? Your time has come. And ye must come with me.”
Ms. Yellen is announcing the forthcoming death of the biggest boom in history. What kind of boom was it? That is today’s subject.
We’re down on the Pacific coast of Nicaragua to attend a family wedding.
Getting ready, there are about 30 workmen finishing up the landscaping and the new guest cottage.
Bang, whack, wrrrring… boom, boom, boom. Sunup to sundown, they’re getting the job done.
Here’s a photo of the guest cottage.
Bill’s guest cottage on the Nicaraguan coast
Nicaragua is a great place for a vacation. But we’re still on the job…
Today, a Brazilian reality TV show crew, following a group of young women surfers as they travel around the world, has set up its cameras on the beach in front of us.
They, and we, are watching the bikini-clad young women in the foaming surf.
What were we saying?
Oh, yes… We’re still on the job…
A boom built on fake money creates fake wealth. Real wealth requires time, sacrifice, work, savings, and forbearance.
You can’t fake it. You can’t just print up some “money” and pretend to be rich.
But the latest figures tell us that Americans are richer than ever… with $97 trillion of household wealth – up from $18 trillion in 1987.
What kind of wealth is it? We wonder… Real or fake? Here today, but gone tomorrow?
The physical universe may run according to laws that can be discovered. Over the years, we learn more about how it works… and we are able to do more with it.
But the universe of man is subtler, more cyclical, and much more squirrelly. Built of crooked timber, it operates on myths and moral laws that can’t be fully understood by the rational mind.
One generation learns; the next forgets.
People go to monasteries to try to figure it out. Like Leonard Cohen, they take an oath of silence and spend years trying to understand how it all works.
And then, when they come back, they say something enigmatic: “A wet bird never flies at night.”
“What does that mean?” you ask.
“I don’t know… Beats me.”
The financial world is somewhere in between: part granite-hard laws and steel-like reality… and part hocus-pocus, hustle, and make believe.
Our job here at the Diary is to try to sort them out…
Over the last few weeks, we’ve looked at bitcoin.
What manner of beast is it? Fish or fowl?
We knoweth not. It pretends to be money. But as we learned from our math-whiz son yesterday, money is only something you recognize ex post facto.
Real money isn’t a matter of declaration or intention; it’s a matter of fact. If people use seashells as money… seashells are money.
But if a government says its paper is money, well… maybe it is and maybe it isn’t.
And what about today’s dollar?
It has bid up the price of stocks for the last 37 years. Bonds have been going up, too… for about the same length of time. And the economy has been growing with only infrequent interruption.
But this long boom has been built on what we call “fake money.”
New readers ask: What’s fake about our money?
Tomorrow, we’ll haul the dollar up out of the depths, like a sea monster… and lay it out on the deck so we can get a good look at it.
Then we will see what this new money really is… before it starts to stink.
Editor’s Note: Bill’s been sending us pictures from his Nicaraguan estate. Today, he shares his view of the Pacific coastline.
The view from Bill’s guest cottage
By Jeff Clark, Editor, Jeff Clark’s Market Minute
The S&P 500 is trading at new all-time highs. The index is up more than 18% for the year. It’s up almost 4% in just the past month alone.
There’s no doubt the bull market is alive and well.
But I can’t shake the feeling that the bulls are being set up on this recent move.
Things are just too comfortable. It seems no one is concerned about any possible downside. Everyone in the financial media is “buy, buy, buy.” There’s hardly ever a mention of risk.
Oh sure, we get the obligatory reference to the highest P/E valuation ever. But it’s shrugged off. “The new tax bill changes everything,” they say.
I’m not so sure.
Traders should be defensive here. There are just too many warning signs in the recent action. For starters, the Nasdaq is lagging. It hasn’t confirmed the recent high in the S&P 500.
Semiconductor stocks – which are usually market leaders – are lagging badly as well. The VanEck Vectors Semiconductor ETF (SMH) is still 8% below its November high.
VIX options are pricing in a much higher VIX over the next day and the next month. Plus, the chart of the VIX looks to me like it’s poised for a sharp move higher.
All of the technical indicators on the intraday charts of the S&P are overbought.
I’m not even including the speculative action in bitcoin in the discussion yet.
Yes… it’s Christmas time – which is a hugely bullish seasonal time of the year. Normally, I’m looking to buy stocks on weakness during this season.
But I’m not about to buy anything here (except gold stocks). I just have an uneasy feeling about things. I’d rather stay sidelined and miss the extension of the recent stock market rally – if it happens.
Maybe I’ll look back a few weeks from now and wish I had told folks to get aggressive on the long side, lever up their positions, and try to make the most money possible as the stock market extends its rally into the end of the year.
But then again, maybe I’ll be glad we sidestepped whatever carnage the Market Gods might throw at us over the next few weeks.
From my perspective, whatever that’s worth, I just don’t like the look and feel of things right now. I’d rather miss out on the potential gains of an overpriced market – one that still might race higher into the end of the year – than suffer the consequences of buying overpriced stocks in an extended market.
Holding a large percentage of cash is a good thing right now.
– Jeff Clark
P.S. Each day in my free e-letter, the Market Minute, I take a look at the trends taking shape in the market… and show you how to prepare for the trading day ahead.
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In the mailbag, taxes and bitcoin remain popular topics…
You state in your opening that you are uncertain what the tax reform package will demonstrate, but a few sentences later, you bite the bit and say that with the reforms, there will be a $1.8 trillion deficit. How can you know this? Seems to me we should wait until some of the dust has cleared before we shout at the sun.
– Alex H.
Lashing out again without substantiated facts, just opinions. How about giving us resources and sources behind those opinions, Bill? Dodd-Frank is onerous and it’s being dealt with. But it also is there as a firewall for when derivatives implode and all global finance is destroyed and it’s also why bitcoin is rising. Those folks see the coming collapse.
Mind you, I think bitcoin exacerbates the problem and is itself a black swan. Also, you can’t convert bitcoin to cash. Period. It’s a trap. Hotel California. You can enter, but you can’t leave.
– Patrick V.
Legendary speculator Doug Casey has seen gains as high as 721%, 928%, and even 2,154%.
But he recently told us about what could be “the biggest speculation in history.” Doug gives all the details in a free masterclass training seminar tomorrow. Reserve your spot here.