BALTIMORE – The Dow, the S&P 500, and the Nasdaq remain near record highs… and are up about 10% since Election Day.

Fed officials say they could raise interest rates “fairly soon.”

Blah… blah… blah…

Learning Machine

Remember, the economy is a learning machine. So is a person.

We’re not talking about the kind of faux “learning” you do in school. Much of that is negative – ideas, information, and skills that destroy or delay real learning.

In fact, some people stay in school to avoid learning.

Learning can be painful, humbling, and hard. And only win-win deals teach you  anything useful.

Economist Adam Smith described the process more than 250 years ago. Willing buyers and sellers discover what things are worth (what someone is willing to pay). This information directs – like an “invisible hand” – investors, producers, and consumers.

Result? More wealth (or, in other words, satisfaction).

This learning metaphor is more useful than we thought: How do you learn? By trying. When do you try? When you have to.

Why does extreme poverty persist in Baltimore and other places?

Because the feds pay people not to try… and not to learn.

Why do rich kids often get nowhere in life?

Because their parents give them money; they don’t have to figure things out for themselves. They spend; they don’t learn.

Why does the U.S. economy stagnate?

Because fewer people are learning. The zombies don’t have to learn. The cronies learn the worst lesson of all: that crime pays.

Win-Lose Deals

Today, smart mommas want their babies to grow up to be Washington lawyers or Wall Street bankers or crony hacks.

That’s where the stolen money is… and they know it. But that is not how an economy learns.

Those are win-lose deals forced onto people by regulations, legislation, and the fake-money system. Some people win; most people lose. Those who aren’t in on the larceny get stuck in lower-paying, lower-learning jobs.

They’re at the checkout counter at Sheetz gas stations in Virginia. Or clearing away trees from the power lines in Ohio.

Or they have no work at all…

Economist Nicholas Eberstadt at the American Enterprise Institute think tank:

Between 2000 and 2015, according to [government statistics office the Bureau of Economic Analysis], total paid hours of work in America increased by just 4% (as against a 35% increase for 1985-2000, the 15-year period immediately preceding this one). Over the 2000-2015 period, however, the adult civilian population rose by almost 18% – meaning that paid hours of work per adult civilian have plummeted by a shocking 12% thus far in our new American century.

What do you learn when they have no work to do?

Not much.

According to one study, unemployed adult Americans dedicate 2,000 hours to TV and the internet a year. You learn by satisfying demanding customers and impatient bosses; you learn nothing from watching TV or surfing the web.

Druggy Stupor

But it could be worse. And it probably is…

Our brother-in-law, a retired preacher, enlightened us.

“I couldn’t believe it. I’ve been telling everybody that we live way down here in the rural Virginia mountains… and how nice everyone is. It’s just like The Andy Griffith Show.

“But then the police showed up and arrested everyone in the house down the road. They were running a drug business. They had more than $100,000 in cash. Imagine… here in Nelson County.”

According to the DEA, in 2015, more Americans died from drug overdoses than from traffic accidents or guns. Washington spends trillions of taxpayer dollars to stop terrorists. But that year, Americans were 3,096 times more likely to kill themselves by drug overdose or suicide than to die in a terrorist attack.

The president’s Council of Economic Advisers tells us that about half of all working-age Americans without jobs are on some form of drug – either prescription or illegal.

Where do they get all these drugs?

From the feds, of course. Eberstadt continues:

Of the entire un-working prime-age male Anglo population in 2013, nearly three-fifths (57%) were reportedly collecting disability benefits from one or more government disability program in 2013… As [Sam Quinones’ book] Dreamland explains…

[The Medicaid card] pays for medicine – whatever pills a doctor deems that the insured patient needs. Among those who receive Medicaid cards are people on state welfare or on a federal disability program known as SSI [Supplemental Security Income]… If you could get a prescription from a willing doctor… Medicaid health-insurance cards paid for that prescription every month. For a three-dollar Medicaid co-pay, therefore, addicts got pills priced at thousands of dollars, with the difference paid for by U.S. and state taxpayers. A user could turn around and sell those pills, obtained for that three-dollar co-pay, for as much as ten thousand dollars on the street.

How much can you learn when you’re in a druggy stupor?

Probably not much.

Zombie Effect

Another place you can’t learn much is prison.

The U.S. has about 5% of the world’s population. But according to the International Centre for Prison Studies, it has about 22% of the world’s prison population. America has more people behind bars than any other nation – about 2.3 million souls.

Shuffling around their cells… following orders… what do they learn?

Fake money produces much the same prison-like zombie effect on the economy. It dulls the senses. It cushions the pain of failure. It lulls people into not trying.

Where’s the real learning done in an economy?

In new businesses. Those are the ones with the new ideas, new models, and new products. Each one is an experiment. If successful, they grow and hire people.

But the rate of new business formation in America has collapsed. It is now only about half of what it was in 1978. A recent World Bank study puts the US in 51st place for the ease of starting a business. That’s behind the Ivory Coast, Afghanistan, Ukraine… even France. By comparison, Canada ranks No. 2.

But there’s more to business than just starting one. The World Bank study also shows that the U.S. is still near the top in at least one category – “Getting Credit.”

Yes… when it comes to making fake money available to people who can’t afford to pay it back, the U.S. is still among the best.

But wait… The fake money flows to the big boys, not the startups. They use it to keep out entrepreneurs. And their revolving-door contacts in the regulatory agencies also help prevent competition.

Learning is stifled.

Regards,

Signature

Bill

 

Market Insight


BY Jeff Clark, Editor, Delta Report


Editor’s Note: Today, master options trader Jeff Clark reveals the third and final sign of a market crash. (Catch up on the first two in yesterday’s Market Insight.)


All that matters at this point is the price action.

Yesterday, I wrote about two of the three warning signs that ALWAYS flash before a stock market crisis. Today, we’ll look at the third warning sign, which won’t flash until the market’s price action turns lower.

Take a look at this chart of the S&P 500…

The blue line on the chart is the 20-month exponential moving average (EMA). It’s the line that separates bull markets and bear markets.

[Moving averages are used to gauge the general trend of a stock’s price by smoothing out the daily ups and downs.]

When the S&P 500 is trading above its 20-month EMA, stocks are in a bull market. When the index drops below the line, stocks are in a bear market.

Look at the red circles on the chart. Those indicate times when all three of the warning signals were flashing bright red. Interest rates had spiked higher. Margin debt had peaked at record levels. And the price action had turned bearish.

This is what happens before a stock market collapse.

It happened in 2001, and it happened in 2008. The S&P dropped 40% and 46%, respectively.

Notice, though, in both of those cases, investors had plenty of time to get out of the market. By the time the S&P 500 closed below its 20-month EMA, stocks were quite oversold and due for a “snapback” rally back up toward the 20-month EMA line.

That rally gave investors a chance to get out of their long positions and to establish short trades with a favorable risk/reward setup.

That’s why you don’t have to panic and rush to take precautions right now. Even after the third signal flashes, you’ll have a chance to get out of long positions and establish short trades when the market “snaps back.” That is, as long as you know what to look for.

These signals have been consistent for as long as I can remember. They flashed before the market crashed in 1987. They preceded the sharp sell-off in 1994. They triggered right as the dot-com balloon popped in 2001. And they gave traders plenty of warning before the financial crisis of 2008.

So, I was on the lookout for a crash when all of these warning signs came together back in January 2016 as well. We had a big spike in interest rates. Margin debt peaked. And the S&P 500 dipped below its 20-month EMA.

I turned bearish in January 2016. I told subscribers to wait for the inevitable oversold bounce in the stock market and to use that bounce to sell some long positions and enter a short trade.

We got that bounce. The S&P 500 rallied off of oversold conditions and ran right up to its 20-month EMA. So, we took some profits on long positions and we scaled into some short exposure.

But the market kept rallying. By the end of February, the S&P 500 was back above its 20-month EMA. The warning signs were wrong. The collapse never happened.

It was a false breakdown – proof that nothing ever works 100% of the time.

We took a small loss on our short position. Then we reversed course and traded stocks mostly from the long side in 2016. And we had a great year – generating annual returns above 100%.

Like I said earlier… all that matters is price action.

But I never take my eyes off the three signals. They’ve been right four of the five times they’ve flashed during my career. So, I’ll keep trading from the bullish side for now. But when price action breaks down, I’ll be quick to change to the short side.

Right now, the S&P 500 is well above its 20-month EMA. Stocks are still in a bull market.

So even though we have rising interest rates and record levels of margin debt, we don’t yet have price action that confirms the top is in place. We’re close… and we’re getting closer every day.

It’s time to be cautious about buying stocks, but it’s not time to sell stocks and start short selling just yet. Until the S&P 500 moves below its 20-month EMA, the bull market will keep going.

– Jeff Clark


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Mailbag

Bill’s insights into what really separates the rich from the poor continue to be among his most popular, if readers’ feedback is anything to go on…

Bill’s recent columns regarding honest money and win-win interactions are right on target, including today’s “What really separates the rich from the poor.”

Reminds me of some of the best of Ayn Rand – the ideal society is “…laissez-faire capitalism, where men deal with one another, not as victims and executioners, nor as masters and slaves, but as traders, by free, voluntary exchange to mutual benefit.”

– Nelson M.

It is with great pleasure that I connected with your website today. Your analysis is clean, straight to the point, and clearly written without excessive verbosity. Really great stuff! Thank you for putting it out there! I haven’t yet had time to read through more than just a few of your articles, but the one titled “What Really Separates the Rich from the Poor” is one of the first to catch my eye.

We are truly in a desperate situation, but the majority of folks (the zombies, in your parlance) are like the proverbial frog in the pot. And the market is not signaling them to jump out while they still can.

– Greg H.

Meanwhile, Bill’s update yesterday on the drought ravaging his ranch in Argentina prompted this response:

This message is for Bill regarding his drought stricken farm in Argentina. Bill, you are not alone in your plight. Syria lost 85% of its cattle in 2006 alone due to drought. Farming just about died the following year. It had severe economic and political consequences.

These things happen around the world, bringing entire nations to their knees.

– Barbara R.