Big Trouble in Little Catalonia

This year is turning out to be a show-stopper in many respects: sports or economics or politics or weather, and in some cases, all four. Right now in California, we have the deadliest and probably the most costly wildfire in history still raging. And all that devastation was preceded by three major hurricanes in quick succession making landfall in the continental US at a cost of untold billions.

Those events have had a demonstrable effect on the U.S. economy with many experts blaming the loss of 20,000 jobs in the third quarter on the destruction left particularly in the path of Harvey and Maria. However, the billions of dollars in aid and in insurance claims around the country this year will likely spawn a resultant rebuilding effort that will have the opposite effect.

Meanwhile, the prospect of a tax reform package in Congress added to executive orders from President Trump on health care regulations have the stock market continuing its upward climb with no end in sight. The Dow most recently just broke through 23,000 on Tuesday, and it’s march toward what I’ve predicted to be a spike at least to 30,000 appears to be well within grasp.

All such stories are dominating the news. They’re loud news, meaning they drown out other stories for many with only limited time to listen, watch or read. One such headline holding my attention but being drowned out is from “across the pond.” I believe it is the most significant news we’ve had in months despite all the politically-driven charges & upheaval in Washington.

Catalonia is a small, quasi-independent province in Spain which has maintained a separate cultural heritage within the Iberian Peninsula for more than half a millennium When the marriage of Ferdinand II of Aragon and Isabella I of Castile united two competing kingdoms, Spain became unified. And over time, the Catalans gradually began to lose their culture and independence.

However, in recent decades, a resurgence of Catalan culture, pride and indignation at Spain’s lackluster political leadership and flagging economy have produced a perfect storm in which the province has spoken more boldly about the possibility of complete independence.

That soft rebellion reached a fevered pitch in the last few weeks when a referendum was conducted — against the will of the Spanish government in Madrid, which declared it illegal — wherein 90% of Catalan voters opted for independence. Since the vote and despite a crackdown by European Union police, the fervor for a formal declaration of independence by the Catalan parliament has increased. And talk of such a declaration has been met with dire threats from Madrid.

Why should we care much about what’s happening in Spain… or even this little part of Spain that you may have never heard of until just now? Because it’s a little “insider” peek at a much larger picture… a horror show if you will with an early act teasing at the carnage to come… while most of the world is distracted by louder news about sports, economics, politics & weather.

If you awoke tomorrow to headlines proclaiming: “The United States of America is teetering on collapse” how shocked would you be? You’d certainly feel blindsided. Where did this come from? How did this happen? Why didn’t I have some sense of this already? Imagine the mass panic. Imagine the massive fear. It’s almost an unthinkable concept. So brace yourself for my next sentence…

The European Union is ALREADY in a collapse scenario.

A major member is formally bailing out. Little pieces are wanting to declare independence and go their own way. Those on the dole will take all that they can get for as long as it is given. Those play country-sized loan officers do not have an endless well of reserves to loan. We can argue about freedom and justifiable levels of taxation and wasteful spending by the government, but at the end of the day one thing is clear: central governments must tax in order to pay both for what they are doing and for what they have committed to do in the future.

We need only look to Greece for a perfect example of what happens when a central government promises to pay for something and then runs out of money and can no longer afford it. Greek workers have for decades enjoyed early retirement buoyed by a fantastic pension system which guarantees those workers get to play golf and hang out for the latter third of their lives. All of this was paid for by taxes from the younger generations. The problem is that those older, retired workers didn’t have enough kids of their own. So naturally there aren’t enough taxpayers to fund the steep cost of pensions, not to mention the cost of government largesse.

So it quickly became inevitable a few years ago that the Greek central government began running out of tax revenue. That’s when they found themselves between a rock and a hard place. On the one hand, if you don’t continue paying pensions, you get riots and eventually revolution- which is what we saw on the television screens at the time. And on the other hand, if you don’t have enough revenue to pay for those pensions, you have no choice but to borrow. And that’s what they did.

Let’s jump out of the weeds now and combine the two concepts: demographics and economics. Just like that Greek scenario, what we have on our hands is a situation across Europe in which the populations expecting to receive promised benefits from their central government is the largest it has ever been in history. All the while, the ratio of people receiving benefits to those paying taxes to pay for those benefits is the smallest it has ever been. The former feels like they paid in to the system and are now ready to collect. The latter group is so small it doesn’t want- and maybe can’t- cover that big burden. When you are taxing 100 to give a pension to 20, it can be workable. When you are taxing 20 to give a pension to 100, it’s a dire situation, not easily resolved by typical means (higher taxes to the 20? cut pensions to the 100? Both?) It is a recipe for global financial disaster.

Now, leaders within the central governments aren’t entirely stupid. Math is math, and they know this is the situation. But political science and political will power don’t often meet. Congress knows we can’t afford the American retirement lifestyle any more than the Greeks, but leaders in Congress don’t have the will power to tell their constituents that we can’t afford to continue paying them benefits. After all, what elected leader wants to be voted out of office? [insert uncomfortable silence].

The Brexit (British Exit from the European Union) last year pulled the cornerstone out from under the already-flimsy foundation upon which the EU has rested for nearly 25 years. The three major economies shoring up that union were Germany, Great Britain and France (in that order). Now that three-legged stool is resting quite unsustainably on two legs.

The European Central Bank (the equivalent of the Federal Reserve in the U.S.) is doing its best to hide the numbers and kick the can down the road by lending ever more billions of dollars to the smaller ‘taker’ nations like Greece, Italy and Spain who cannot afford to keep running on their own. With the British now out of the equation, Germany and France are forced to shoulder the weight of all this debt on their own.

Imagine two strong men in a pool who can easily tread water on their own. Now imagine a half dozen weak men also in the pool who do not know how to swim. Naturally they’re going to grab onto the strong men in hopes of being saved from drowning. But eventually the strong will become exhausted from keeping themselves and the others afloat. And, yes, the result will be that they all drown. There are no life rafts to be thrown to them because everyone else in the global pool is either drowning or nearing exhaustion too.

The situation with Germany and France is deteriorating rapidly because they, too, are dealing with the exact same internal demographic vortex as in the U.S. So they’re coping with both internal and external pressure. It is completely unsustainable.

As a side note, why do you think Germany and France have been allowing all the Muslim immigrants and refugees to flood across their borders? Because they know what they’re not publicly admitting: they need more bodies (i.e workers and consumers) or they will die by demographic implosion. And that’s a sword that cuts both ways.

The result is that the EU is disintegrating before our very eyes and this is already creating- and will continue to create- global ripple effects. In the Asian Pacific, the second largest economy is Japan. If you thought the demographic situation in the U.S. and Europe was bad, think again. Japan’s fertility in 2014 was estimated at 1.4… and getting worse. The vast bulk of Japan’s exports are to Europe. But, as any businessman knows, when your largest buyer starts to fall on tough times, so goes the seller. So as the EU continues to falter, Japan will see a decline in exports because there are simply fewer consumers buying their stuff.

I predict that Japan will default on its debt as Europe falls further from its role as chief import partner. The Japanese have one quadrillion Yen in debt. Yes, a quadrillion Yen is a lot of money: in numbers, that 1,000,000,000,000,000 Yen. And here’s the ironic kicker: the Japanese culture is one that has always encouraged saving. They are the best savers in the world. The problem is that frugality kills an economy that is starving for consumer spending, which is why they have experienced consistent deflation for the last 15 years straight. So without spending domestically or internationally from Europe, Japan is a dead man walking. They will default on their insurmountable debt, which is 2.5 times the entire economy.

In China, which has a GDP of three times that of Japan’s, a similar phenomenon is happening. Through an equally dismal fertility rate, they lack a sufficient number of consumers to keep the domestic economy afloat, despite all efforts of a collective, Communist economy.

The only thing keeping China alive right now is exports to the U.S. And even with that reality in play, the China stock market took a 40% dive last year alone. That’s a correction which reveals what savvy investors already know: China’s economy is overvalued largely due to currency manipulation, which is their version of kicking the can down the road. Make things cheaper by printing more money so the world will continue buying Chinese wares. That is until the developed world can no longer continue buying anything.

Now, here’s where we find ourselves at a major crossroads. What do these foreign investors all over the world do when they see an entire economy become fundamentally flawed with a virus that infects every market? They yank their money and flee. To where? It must go to a safe haven? Where’s that? In spite of our own troubles, WE are generally viewed as the safest haven- the U.S.A. And THAT, my friends, is much of why the American markets are doing so well right now.

We’re not recovering from the 2008 Great Recession. We’re simply benefitting from the diseases & financial rot that is plaguing Europe and Asia. International investors are putting their money in the only safe haven left. And no doubt- they’re getting a great return on parking their money here. The U.S. markets have seen some greatest spikes and records in recent decades. Buoyed by the election of a very business- minded, pro-export, pro-protection president, investors believe the good times are back.

But what they either don’t know or are willfully ignoring is that the same demographic and national debt cancer is still eating away at the foundation. And there is absolutely no solution in sight.

So what we’re seeing right in front of our eyes is the building up of multiple bubbles that will dwarf the 2008 housing bubble in comparison. And when those bubbles pop, as they always do, there will be no international safety net to catch everyone because everyone will already be riding on hopes that the U.S. is that ultimate safety net… the safe haven of safe havens… the money market of last resort.

Meanwhile here, we’ll ride volatility caused by good news and bad news, good results & bad results, scandals and some stability, expansion & contraction, spin & spin & spin and some truth, and so on. I see big steps up and big slides down. We’ll flee our markets when it looks like it’s finally rolling over (which is likely to seem that way many times between here and DOW30K). And the fleeing (from seemingly worse situations) Euros and Yen will pour right in, buying up U.S. stocks, real estate, bonds, pretty much anything in which to park wealth in the ultimate safe haven. Volatility. Volatility. Volatility.

What I do NOT foresee: A smooth ride. I will- and do- bet big that the march from DOW23K to DOW30K will not be linear. This is not going to be sailing on a perfectly smooth lake. I foresee BIG swings- some measured in thousand point moves that won’t all be able to be spun as a freak “fat fingers” mistake. I would not be surprised to see us revisit a DOW in the teens again (about 3,000 points below the all-time record his this week). And I won’t be surprised to see DOW bull days just as spectacular. If you recall some of the hottest market days in 2008, you saw 700+ point swings up & down & up & down when the DOW was well south of where it is now. Obviously, a record high DOW repeating such events will simply amplify such swings.

Are you prepared to take good advantage of it? The bigger bull days and the bigger bear days? BOTH scenarios? Maybe you think you know a little but are not confident you know enough to actually put such knowledge to good- and profitable- use? If any of that resonates for you, reach out to me. Email me at Mike@MikeGaliga.com. My team & I are hard at work putting the finishing touches on a new operation to help individual investors just like you take full advantage of the wild volatility rapidly approaching all of us. Email me letting me know you want to learn and you’ll be the first I alert when our work is ready to be utilized. We’re here to help. Email me to let me know you want some of that help. There’s lots of money to be made in volatile markets. Let’s make it together.

Black Monday Cometh Again

One crucial task of the agile trader is keeping up with market-moving news. One little event anywhere in the world can throw gasoline on the hottest bullish fire OR send it plunging like a barrel over Niagara. In fact, in this ever-more-connected world, hot news- good or bad- may be the biggest catalyst for short-term gains or losses- bigger than traditional fuel like earnings reports, new product announcements and perhaps even FED decisions. Every day I’m consuming headlines like most people consume air. It’s a relentless global hunt for new, short-term profit opportunities that (sometimes distant) world events are presenting to stock & options traders.

To these well-seasoned, “been there and done that” eyes, the pile of evidence in support of the forecasts I’ve been sharing with you keeps building. And note: I work d*mn hard to keep subjectivity & bias out of such reviews, striving very hard to avoid the terrible amateur trap of seeing only what I want to see. I know compromising one’s objectivity is a massive killer of any good trading discipline, so I probably look for counterpoint harder than I look for point.

Nevertheless, I see it unfolding more & more… like the old tv shows & movie prop crystal balls going from smoky & foggy to an ever-clearer picture. Markets are predictable. Markets repeat events again and again and are driven by the same catalysts again and again. The trick to convert market smoke & fog to clarity or even near-certainty is knowing where to look, recognizing the patterns of the past and weaving that with the group sentiment of the present. Big volatility is coming… probably more than we’ve ever seen before. It’s going to be a wildly exciting ride to my medium-term forecast target of DOW 30K. Knowing when to profit on the big bull plays AND, perhaps more importantly, when to profit (not run & hide) on the big bear slides and you can make a fortune… FAST.

Haven’t we seen this movie before?

Yes! Yes we have. During the 1980s, we saw a similar boom in stock values with investors getting hyped up on the apparent record growth rally in the markets. And it was welcomed news after a dismal environment of stagflation with mortgage interest rates in the stratosphere.

But what happened toward the end of that movie? We experienced one of the worst stock market corrections in our nation’s history, second only to the crash that preceded the Great Depression. We remember that day as Black Monday when the Dow Jones dropped nearly 25% in a single day. That crash was precipitated by some market trends that are eerily similar to what we’re seeing today. You might be thinking, “Such as?..”

The Dow’s explosive growth had risen to over 2,700 that summer (remember when DOW 2,700 was a sky high measure of market success?), having closed at its height to a gain of 44% over the previous year. Similarly, we saw the crash presiged by unrest in OPEC with a bust in the oil markets of 50% the previous year. And of course there was unrest in the Middle East and elsewhere, which made market prices highly volatile.

Looking back at those events today, it’s a classic version needing to see the (catalyst) news in all of the right places… and separating noise from the news that would make- or shake- the markets. Does any of that sound familiar? It should because we have much the same conditions setting up here- in late 2017. And that’s why I perked up to the headline that trumpeted David Stockman’s criticism of President Trump’s new tax reform package.

Stockman was the Director of the Office of Management and Budget under the Reagan administration. So he knows what a Black Monday scenario looks like… because HE WAS THERE. And he’s doing the craziest of crazy things in modern politics: he’s calling a spade a spade. That’s something almost no other public figure dares to do: say what he REALLY foresees instead of spinning some almost canned PR message hoping the herd will keep right on ignoring reality. Just ignore that spade. Just keep throwing your money into the same pot. Just keep kicking that can a little further down the road. Oh boy! Haven’t we all seen this movie too many times before?

In a recent CNBC piece, Stockman is quoted with a prediction of as much as a 70% drop in stock prices. SEVENTY PERCENT! If that actually plays out, the DOW would be much closer to that record back in 1987 than the record in 2017. Take a moment and do the math yourself. Where is the DOW today? Multiple that by 0.3. Look at that result. Think about that result. Impossible? Where was it just about 10 years ago when we had the last market meltdown? Is the result and that reality really so far apart one could see it as an impossibility now?

Stockman explained that the economy sees a major correction around every eight years, give or take. It’s been more than that since the Great Recession. He detailed, “There is a correction every seven to eight years, and they tend to be anywhere from 40 to 70 percent. If you have to work for a living, get out of the casino because it’s a dangerous place.”

In the interview he explained the factors that might be creating an inevitable drop in the market. He goes on, “This is a bubble created by the Fed. We’re heading for higher yields. We are heading for a huge reset of pricing in the risk markets that’s been based on ultra-cheap yields that the central banks of the world created that are now going to go away because they’re telling you that they’re done.”

Perhaps worse than that is this other somewhat quiet discussion about unwinding the FED balance sheet. While that could mean a lot of things, I suspect a massive big buyer- perhaps the default buyer that has thrown much of the money at this market to drive it up to these incredible records is now wanting to STOP BUYING and start selling. What happens to any market when enthusiastic buyers become sellers? Only one thing happens there. You can count on it.

If that sounds familiar, it should. It’s essentially what I’ve been saying for months now. The prices of major stocks are hitting records every week which is creating artificial paper wealth that isn’t backed up by anything tangible. I really don’t think it’s the traditional buyers doing all this buying to push the markets higher & higher. I increasingly think it’s mostly ONE buyer- a holy mother of all buyers if you will- and even “she” has now formally communicated that “she” wants to wind down “her” purchasing and flip into selling off some of “her” holdings. Where does that go? Where is the only place that can go?

Yet market records are being realized almost on a weekly basis… and touted hard in every way they can be heard. The herd doesn’t (maybe can’t) listen that attentively… or doesn’t remember the past or recognize how the past repeats again and again… until… in hindsight, the “shoulda, coulda, wish I hads” are flying near the tail end of a swift crunch… or crash. The herd may hear a little bit of such warnings before the event… but fall prey to the much louder allure of “another record day…” perhaps throwing even more money into the pot to try to capitalize on the endless record days that are certainly going to come after this one. How often has ANY stock market gone up and up and up indefinitely? Exactly. “But it’s different this time.” Watch out!

Many people may discount this warning as just another conspiracy theory. Others will freak out and start pulling their investment dollars from the market. But the smart money sees such scenarios as opportunities. Agile investors will make the most of bull & bear by taking advantage of the tools that make money on BOTH. A great tool is also a dirt-cheap one: options. A call option buyer is making a relatively cheap, leveraged bet on a rising stock or market. A put option buyer is making a comparably cheap, leveraged bet on a falling stock or market. A shrewd & agile investor will buy & close call & put options interchangeably… like one is just as good as the other (and it is when used at the right time and in the right way).

Most investors & traders only see the markets through a singular (always bullish) lens. In other words, the only way they see to make money is on the rising side: buy a stock, stock moves bullishly, sell the stock & book a profit. There’s almost a dependency on a perpetual bull market for most people. However, the few that make the MOST money investing & trading work the other side too. They are not OUT doing nothing when the bull cedes the stage. A roaring bear is just as lucrative- often even more in many cases- when one is positioned to make money on such a move.

Do you know how? Do you have a good feel for vehicles like call & put options and how to use them to make money as this market rises AND when it’s falling too? Maybe you think you know a little but are not confident you know enough to actually put such knowledge to good- and profitable- use? If any of that resonates for you, speak up… right now. Email me at Mike@MikeGaliga.com. My team & I are hard at work developing some major new goodies to help individual investors just like you take full advantage of the wild volatility rapidly approaching all of us. Email me letting me know you want to learn and you’ll be the first I alert when our work is ready to be utilized. Don’t be a “shoulda, coulda, wish I had” ever again. My team & I are here to help. Let us.