BALTIMORE – We are living in an Era of Busted Dreams.

The Bolivarian Revolution is just one of them.

When we left you yesterday, it looked like the government of Venezuela was in a fight for its life.

The Venezuelan economy is falling apart, with 1,300,000% inflation and a mass exodus of the population. And a political rival of President Nicolás Maduro has proclaimed himself the legitimate president and gotten almost immediate recognition from the U.S.

This provoked a countermove by Maduro, who gave U.S. diplomats 72 hours to get out of town. It also led to a show of force and solidarity by the country’s military – who stood shoulder to shoulder proclaiming their everlasting loyalty to Maduro.

They will stand by him until the end… or until they change their minds, whichever comes first.

The top brass has gotten rich from Maduro’s government; they get first dibs on oil revenues… and, some say, the illegal drug money, too.

Bloodsuckers, dictators, and the Deep State do not give up easily. They owe their power, money, and status to the incompetents currently running the country. They’re not about to stand aside and let another bunch of incompetents take it away.

But we’ll come back to that in a moment… and try to connect a few sordid dots…

Travel Plans

First, a quick update on our travel schedule. Our delightful sojourn in the USA amongst kith and kin is coming to a rapid end. On Sunday, we take off for Florida and Nicaragua.

The latter has its own busted dream, with the Ortega government holding on to power against widespread opposition. What the country doesn’t have is runaway inflation.

Curiously, it was an effort to protect the currency and the economy that touched off the current cycle of discontent. The Nicaraguan feds raised taxes!

Or, to be more precise, they upped contributions to the Social Security system in order to protect it from insolvency.

Which goes to show something. We’re just not sure what.

But we’ll give you a report from Nicaragua when we get there. The country has the most beautiful coast, and some of the friendliest people, in the world.

We’ve invested millions… and nearly a quarter of a century… developing a coastal enclave there, helping to make it a comfortable, modern, and agreeable place to live. It would be a shame to see it blow up.

But we don’t pretend to control events. We just watch… wait… and try to understand. Which is why we’re watching the action in Venezuela with keen interest. It’s not every day that we see a fake money system get what it deserves!

Edge of Chaos

Here was a rich country… the fourth-richest in the world in 1950. Now, it is on the edge of chaos, civil war, and starvation. How did that happen?

Are the Venezuelans stupid? Are they shiftless? Why did they allow a crackpot politician to ruin the country?

As for Mr. Chávez himself, now deceased, he was lively, intelligent, and charming, with a few quirky ideas… such as his belief that the moon landing never happened… and that 9/11 was an inside job (a view shared by many, both north and south of the Rio Grande).

But he was neither crazy nor dim.

As for the rest of the Venezuelans, the few we’ve known personally were among the smartest, best-educated, and most industrious people we’ve ever met. Now, they are living in Spain or Miami… forced to flee Caracas to avoid either the politics of it or the poverty.

So what gives? And what can we learn from it?

Rushing ahead: Watch out for fake money. First, it distorts prices, misleads investors, and lowers output.

Second, sharing it out among themselves and their cronies, the insiders use it to transfer wealth from those who earn it to those who steal it.

Third, fake money funds the expansion of government itself – bending more and more real resources towards unproductive government activities.

Finally, when the crisis comes, property remains… corporations may or may not survive… and real money is still valuable. But fake money becomes worthless.

Go for the Gap

Almost all Latin American countries have similar demographics; typically, they have a wide gap between rich and poor. The chasm is not merely financial. It is racial and social.

The upper classes are usually more “European” than the masses. This is a source of tension, of course. And mischief.

“Populist” leaders, such as Cuba’s Fidel Castro, Bolivia’s Evo Morales, Nicaragua’s Daniel Ortega… and even Argentina’s Juan Perón… go for the gap.

They speak to the poor and middle classes and use them to get control of their governments. Then, they reward the little guys with free housing, free food, free education, free medical care, or subsidized fuel. The big guys get contracts, bribes, and payoffs.

First, the populist leader comes into office promising to rob the rich. But after a few years, he and his friends are the rich. And the rest of the wealthy have either cozied up to them or fled the country.

Then, they turn to credit. But who would lend to a Latin American, socialist government? Most countries are protected, most of the time, by their own poverty. They just can’t afford too many giveaways.

But Venezuela had something the rest of them didn’t: collateral.

Venezuela floats on a sea of oil. It was the world’s fifth-largest oil exporter in 2000. The price was only $30 a barrel, but oil made up 85% of the country’s exports. And over the next seven years, the country was to enjoy a bonanza, as the price of oil rose nearly five times.

Then, in one especially knuckleheaded move, Chávez put a leftist professor in charge of the oil industry. And then, in 2015, the price of oil collapsed.

Now, the dream is busted. Chávez is gone. Maduro may be gone soon, too. It may not be the end of the Bolivarian Revolution. But the end can’t be too long in coming.

Regards,

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Bill

TRADING INSIGHT: HOW TO BUY STOCKS IN A BEAR MARKET

Editor’s Note: Today, we share another insight from master trader Jeff Clark. Like Bill, Jeff sees stocks headed lower over the long term. But that doesn’t mean Jeff’s sitting on the sidelines. Today, he shows why trading a bear market can be very profitable.


By Jeff Clark, Editor, Delta Report

Recently, I’ve been showing Diary readers why the long-term direction of U.S. stocks has shifted from bullish to bearish (catch up here and here).

So it may surprise you to learn that I’m still recommending trades to my readers. I get a lot of questions about this.

“Why on Earth,” a concerned reader asked recently, “would you even consider recommending buying any stock in a market you describe as bearish? After all, if the market is going to fall this year, then most stocks are going to fall with it…”

That’s a fair question. Most stocks are strongly correlated to the performance of the S&P 500. So, if the broad stock market falls in 2019 – as I’ve argued it will – then buying most stocks is going to be a mistake.

That seems logical. But it’s simplistic thinking.

You see, even in bear markets, there are lots of chances to profit by buying stocks. Back in 2008, for example, one of the best-performing strategies was to simply wait on the sidelines until the stock market reached historically oversold conditions – where the proverbial rubber band was stretched about as far as possible to the downside – and then buy stocks in anticipation of an oversold bounce.

The benefits of that strategy are obvious to anyone who had the courage to buy into the historic decline we experienced just before Christmas. The S&P rallied 320 points off of its Christmas Eve low. That’s a 13.6% gain in less than a month.

It’s certainly possible to profit by buying stocks in a bear market. Granted, you’re not always going to buy at the absolute bottom of a bear market decline, and you’re not always going to sell at the top of a rebound rally. But capturing half, or even one-third of that 13.6% move is a fabulous short-term gain.

Traders should have several opportunities to capture similar gains as we get further into 2019.

But the big-money moves… the trades I’m most excited to make this year… involve stocks that have a specific catalyst for a move higher.

Understand that when the stock market is falling, institutional money managers are desperate to find ideas where they can put money to work. Sitting in cash is not an option for them.

Investors are paying the institutions anywhere from 0.5% to 2% to manage their money. If cash is the best alternative – and cash pays about 2% right now – then why would anyone pay a management fee to someone for sitting in cash?

In a bull market, money managers have an easy job. They can pretty much buy anything, and the momentum of the bull will generate positive returns.

In a bear market, though, positive returns are tougher to come by. In order to keep their jobs and earn large bonuses, money managers need to do more work.

Most mutual funds don’t short stocks. So they can’t profit on declines. They have to look for stocks with the potential to rally even when the broad stock market is bearish.

That’s where regular investors have the edge.

You see… if you can recognize the catalyst for a move higher in a stock before the institutional money managers recognize it, then you have the opportunity to make outsized gains.

Get into the stock before the institutions, and then ride the stock higher as the institutions come around to your way of thinking.

The potential gains from this type of strategy are enormous in a bear market, where institutional money managers are desperate for profitable ideas.

That’s why I’m comfortable buying certain stocks in bear markets. I know that if I can spot an idea ahead of the institutions, and I can jump in front of their buying, it’s likely to be a profitable trade.

Precisely how do I spot a profitable idea?

I’ll share that with you tomorrow, when I step in as guest editor of Saturday’s Diary. Keep an eye on your inbox tomorrow morning.

– Jeff Clark

P.S. We’re quickly entering the best time to be a trader since 2008 – which was one of the most profitable years for my subscribers ever.

And tomorrow, January 26, I’m hosting a special presentation that’ll cover everything you need to know about this turning point… And how you can earn a fortune while most investors lose their shirts. Sign up right here.

FEATURED READS

How Maduro Keeps the Military Brass in Line
As Bill wrote above, Venezuela’s Nicolás Maduro is having his presidency directly challenged. For now, Maduro still has the military on his side. What does the president offer to keep the top brass in line? According to reports, it’s all the usual: drugs… power… and ill-gotten wealth.

Big Tech, Meet Big Brother
In China, the country’s “credit score” system keeps citizens in line by scoring them on how well they follow government dictates. How are the Chinese able to watch their citizens 24/7? You can thank Big Tech for that…

And read also…

Declare Your Digital Rights Today
Do you believe you should have a right to privacy? Do you believe that governments and Big Tech companies have no right to collect and mine your personal data without your explicit consent? If so, do something now. Declare your digital rights…

MAILBAG

In the mailbag, dear readers consider the plight of Venezuela

Socialism only works on paper. In the real world, incentive is the motivation. Why bust your ass and not get better off than the ne’er-do-well?

– Mark

In Venezuela, Hugo Chávez was a politician. In Italy, Benito Mussolini was a politician. In Germany, Adolf Hitler was a politician. In Russia, Joseph Stalin was a politician. In Japan, Hideki Tojo was a politician. All are examples of politicians at their worst. Politicians always gain supremacy via promises. The one who makes the most popular promises wins office. In this country, we have been blessed, for the most part, with more or less moderate politicians, who have tried to follow the promises of our founding fathers, as expressed in the Constitution.

Now, however, we seem to be in a battle for power by more radical politicians, bearing some of the hallmarks of the politicians mentioned in that first paragraph: Donald Trump and many Republicans on the right; Alexandria Ocasio-Cortez, Nancy Pelosi, and many Democrats on the left. This battle is currently playing out, and the result seems to be in doubt. Or is it? The politicians in paragraph one held power because they gained the backing of their nations’ militaries. Who has taken steps to gain the backing of the U.S. military and industrial complex? One guess.

– Charles B.

Meanwhile, should we tax the ultra-rich? After Wednesday’s Diary, “The Billionaire Backlash Is Coming,” dear readers take up the question…

While you’re correct about where the ill-gotten tax gains end up, you’re a bit off about high “income” taxes coming from the elite. The elite are well past the realm of ordinary income. Most people probably don’t understand how Warren Buffett’s secretary pays more “income” tax than he does, but some of us do. High marginal rates are more like direct thievery from the small business owners and upper-middle class by the elites. But alas, most of the rabble like me are under the illusion that those earning six-figure incomes are “wealthy” elites. The Swamp would go away if we repealed the 16th Amendment and returned to the gold standard.

– John N.

Taxing the rich at least gets the dough off them… what it’s then spent on depends on what kind of government you have. In 1945, in the UK, with a Labour government committed to change, it meant the birth of the National Health Service and a huge drop subsequently in both infant and adult mortality rates within a few years…

– Richard C.

In response to several of the readers who think a marginal tax rate of 70% or more is a good idea, they must have their heads examined. Taxation is theft. To have the government get the largesse from a high marginal tax rate is ludicrous. You have so eloquently explained why in today’s essay.

What happens to the money the feds tax away from the elite? Where does it go? Back to its rightful owners? Does it boost working-class wages? Does it buy a round of drinks at their neighborhood taverns or help repair their pickup trucks? It doesn’t? What? You say the feds hand it out to their friends… the insiders, the cronies, the zombies, and the elite?

– Girard P.

C’mon Bill, marginal tax rates are a hoax. The average EFFECTIVE tax is about the same for most taxpayers. The rich have ways to exploit legal loopholes in the tax code. We had 75% top tax rates in the 1950s, until JFK wisely lowered them. Shouldn’t that have resulted in a major loss of revenue? It didn’t. Quite the opposite. Same thing again after Reagan did the same… then Bush and DJT. But in all these cases, the economy and productivity rose. The opposite will happen if AOC’s ideas become reality. There won’t be increased revenue the feds can pass to their rich friends.

– Erich K.

When the common folk get really mad, they do stupid things. We’re watching Victoria on Masterpiece Theatre, and the French king just fled for his life, never to return. If the mob had gotten hold of him, it would have been “le guillotine,” as he was explaining to the 5-year-old future king of England. I’m not certain the über-rich could hire enough security to remain safe. Heck, the French king had an entire army and he wasn’t…

– Stephen B.

IN CASE YOU MISSED IT…

Are you ready for the coming crash?

Master trader Jeff Clark believes the bull market has ended. The bear is here.

Most investors will be wringing their hands. But smart traders have the opportunity to double their money again and again. Jeff will give all the details tomorrow in a one-time online event. Reserve your spot here.

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