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.

The Coming Bubble and What’s Inflating It

In a previous report I discussed the phenomenon that is serving as the primary driver in an explosion in the U.S. stock market. And it is this explosion that I believe will take the Dow on to 30,000 before 2020. That phenomenon is the impending implosion of both the European and Asia markets which is forcing investor dollars to seek the only remaining refuge: the American market, the ultimate “safe haven” for the planet’s wealth when fear drives the owners of money to flee up to all other markets (including their own).

With the United Kingdom on the tail-end of its membership in the European Union, the EU is already reeling from the leading effects that investors foresee in trade and currency. Couple that ripple effect with the under-reported economic collapse of Southern Europe and what we’re looking at is a slow-motion death spiral.

The Asian market, which has been historically propped up by China and Japan, is undergoing a death-spiral of its own. Because both of those nations are suffering a demographic free-fall, there simply is not enough growth in population to sustain the sort of taxation that is required to maintain the social benefits that come naturally to socialist and communist regimes.

So when those investment dollars come to realize that there’s little to no upside in an entire market, they bail. And that’s why those regimes are getting so creative with currency manipulation in hopes that a devaluation strategy will encourage a larger trade imbalance to offset the void created by investor exodus.

And that will work for a while… but only for so long. As money from abroad continues to flood the American market, a false sense of expansion continues to feed the growth both U.S. investments and consumer spending. That spending is largely on imported goods, much of which is imported from Asia.

The problem with that is that the growth in exports from Asia simply cannot keep up with the rate of decline due to demographics. As the delta between those numbers grows, the exodus of investment dollars accelerates. And that’s when things in Asia get dire and American markets explode.

But wait, there’s more. What is also driving the growth in the U.S. stock market is the artificially low interest rates maintained by the Federal Reserve. Though the Fed raised the rate earlier this year, the rate is still nowhere near pre-Great Recession levels.

The effects of this policy are two-fold. First, it fuels growth in the very sector that caused the Great Recession in the first place: the housing market. Second, it creates a disincentive for investors to put their money in treasury bonds because there is simply no return. In short, what we’re creating is another massive bubble. How’s that for irony? A new and bigger bubble is forming precisely due to the mechanism put in place to ensure the previous bubble never happens again.

As they say, those who fail to learn from history are doomed to repeat it. And so we will. The question for us as investors is how we’re going to take advantage of this inevitable trend rather than being destroyed financially like so many folks in the Great Recession.

That’s why I’m so big on options. Among my trades in stocks is one that has seen an 80% growth in recent weeks. The option on that same stock has seen gains of over 2000%. In other words, a- say-

  • $10,000 investment in a stock that spikes 80% becomes $18,000… for a nice, quick $8,000 profit.
  • $10,000 investment in a specific option on that same stock spikes 2000% and becomes $200,000 for a $190,000 profit in the same amount of time.

Both opportunities are basically playing the very same bullish stock idea. The option on that stock just amplifies the gains. Every time, I’ve very, very bullish or bearish on a stock or index in the short-term, I take a good look at the options I can use to play the same opportunity.

In the recent trade, $8,000 is a nice return for such a short amount of time. Who can’t make good use of a sudden gain of $8,000. But $190,000 is game-changing. Where $8,000 might be able to help with a few mortgage or rent payments or pay for a portion of one of your children’s tuition fees, $190,000 might pay off the mortgage and/or cover ALL of the present & future tuition for up to all of your kids.

Now, not every trade works out so well but, modesty aside, I am pretty good at spotting stocks ready to move fast and move big. And that’s a formula for exciting stock investments and windfall options trading. I mean just think about it: one day, you invest a little money in a position and only a few weeks later you harvest $8K or $190K in profits from it. THAT’s trading that can really make a difference… without having to wait & hope for years and years, trying to get a whole account to show that much growth.

Where does options trading have the greatest potential? At times when stocks or even whole markets are making big moves up and down. Fast & big gains or losses are the options trader’s friend. The street name for that is volatility. And wow, do we have plenty of volatility in play now… and plenty more to come.

In the overall trend, I stand by my forecast of DOW 30K in the next few years. But between now and then, I expect great volatility. European & Asian market meltdowns will scare most investors but be lucrative opportunity for put buying option traders. The effects of those meltdowns on our market will cause spikes & crashes as the system absorbs them. Spikes & crashes are synonyms for the formula: big + fast = options profits.

I admit options trading isn’t for the faint of heart. The amplification effect on the underlying stock movement goes both ways, meaning upside & downside is amplified when stocks rise & fall. Just as those that take advantage of options expertise can enjoy much greater profits than investing in the stock itself ($190K > $8K), there’s always many more that try to play some kind of guess & hope game and realize steep losses.

Experience really counts with options. It’s because of the expertise I’ve built over many decades that I’ve been able to take advantage of those kinds of gains… again and again. As we move headlong into the coming American explosion (and ultimately the crash) and all the wild volatility between here & there, the opportunities are literally bigger than I can put into words…for those who know what they’re doing.

If you have some interest in learning how to use options, email me at mike@mikegaliga.com and I’ll be in touch about that very soon. If you have a desire to make more than you are making investing in funds or stocks, you owe it to yourself to at least take a look at how options can help you. Email me and I’ll help paint that picture well!

We’ve Seen This All Before

Right now, people are betting on how many hard-boiled eggs this market can eat in an hour. The “smart money” and the financial press is spinning 50 as completely impossible. The crowd seems to wholeheartedly agree. Place your bets now. And hint: bet wisely.

In previous reports I warned that the excitement among investors over a pro-trade Trump administration is driving an exuberance which is forcing the Dow to new records almost on a weekly basis. This is happening in spite of the underlying assets and financials not changing all that much since the Obama administration. Sure, employment numbers are looking much better, but those are just a function of business leaders increasing payroll based on the same attitudes driving the stock market.

This is precisely the sort of irrational trend I’ve been warning about that could take the Dow to as high at 30,000 in the very near term. And other financial institutions have begun to take notice of the same thing, albeit months too late. According to a recent Bloomberg story, “Analysts at the Wall Street behemoths cite signals including the breakdown of long-standing relationships between stocks, bonds and commodities as well as investors ignoring valuation fundamentals and data. It all means stock and credit markets are at risk of a painful drop.”

Pointing to the intramarket correlation factor — which describes the rise and fall of stock, bond and option prices in relations to each other — there is a growing phenomenon of a decoupling of those relationships wherein the price of trades continue to go up independently of each other.

So what’s driving them up if not the mutual increase in prices? The answer is really nothing but pure trader speculation. And now it’s even worse than that: it’s speculation on speculation. In other words, prices are increasing because investors continue to expect prices to increase.

That’s a very dangerous environment for markets because, again, there’s nothing solid underpinning that speculation. As Bloomberg points out, investors are seeking out “excuses to stay bullish,” which means they’re ignoring all the fundamentals which might otherwise bid them to exercise caution and restraint.

And what’s most concerning is that the charts are looking eerily similar to what they revealed in the run-up to 2007, which should give pause for concern to everyone. Anyone still remember 2007? All was rip-roaring great until it was not. Discussed in hindsight, 2007 was described as a bubble(s) bursting. Anyone see much mention of the word “bubble” in the modern press describing 2017? Not much. Instead- to me- it’s practically deja vu, looking like the return of the same kind of “irrational exuberance” before the bubble burst.

If it’s not obvious, I’ve been around for a while. Perhaps you have been too? We both know that direct experience is a great educator if we learn the lessons… and remember them. One of the things that makes me a profitable trader is a completely objective ability to call a spade a spade. I do not forget the past or readily subscribe to Wall Street spin of “…but it’s different this time.” Contrary analysis says that when just about everybody is buying and spinning any and all reasons to keep buying more, it only takes a little bit of selling to set off a correction. Just think about it: in any situation where there is almost all buyers and practically no sellers, which way do prices have to go? And when those buyers are finally just about all in?

Toward the ends of extreme scenarios like that, what do things look like? In the increasingly bullish scenario, everyone looks for just any additional reason to “buy more.” Good news supporting the cause is amplified and bad news is mostly ignored or “shrugged off” seems to be the most popular phrase spun in the investing press today. And that’s what things increasingly look like to me. The tangible stuff on which record markets should be built is mostly lacking. Fundamentals- that is BUSINESS fundamentals- are generally about the same as they were months ago. The business data that matters most isn’t painting any pictures that all is particularly great and gaining strength, except the SUBJECTIVE (aka massaged and/or amplified) data that helps support the cause of finding any reason to encourage buyers to buy more.

Where does this lead? We already know… because history has shown us again and again, and again. Where does this always lead?

Imagine yourself at an auction. A desirable item is up for bids. You want it. The guy next to you wants it. The lady next to him wants it. The whole room wants it. And they want it bad. The auctioneer is rolling and bids are fast & furious. How do all such auctions play out? No matter how much enthusiasm there is to own the item at the beginning of the auction, eventually the bidders start thinning out. Once someone bids up to as much as they have- they’re out (much like once investors are basically “all in”, they can’t “buy more” no matter how bullish they feel because there’s no more spare funds to use). The richer among them who still have some spare funds bid, push the “market” higher… and higher… and higher. A few around the room may start gasping in almost disbelief that “treasure” has been (irrationally) bid up to such a record high. And then those with the last remaining spare cash bid their final, “all in” bid. Going. “Anyone else (have any other spare cash to throw at this thing)?” Going? “This market is going to the moon. Better buy more now.” Going. “You don’t want to miss out on a market that is only going higher!” Going. “Anyone else? Anyone?” Sold!

Now think about the modestly different auction that is the stock market. The desirable item is only an idea of either “good returns” for the “half full” crowd or “don’t miss out” for the “half empties. The bidders are not bidding for just a single thing. ALL of them are going to “win” their own auction within THIS auction because the item for bid is available in practically unlimited supply (it’s just virtual pieces of paper stored in some computers on the exchanges. It is incredibly easy to make more virtual paper should all of the existing virtual paper get purchased). The perceived value in unlimited supply is mostly an idea that others will want to pay more for your virtual paper some time after you buy it at near record highs now. In other words, current fundamentals & data that underpin the value of the virtual paper is NOT supporting the idea that it will be worth more in the future. Instead, it’s mostly just the frothy enthusiasm of fellow bidders wanting to believe records will be broken again and again IN SPITE OF conflicting fundamentals and data… and throwing their spare cash at it because they are so convinced.

Perhaps it WILL be different this time?

Where have I seen that before?

And when the last buyer bids… and when the last of those with spare investable cash finally go all in such that there’s pretty much no one else to buy, what happens? What is the only thing that can happen when there’s no more money left to buy in? The auctioneer drops the hammer and proclaims “SOLD!” Beware that hammer.

One of my favorite movies of all time is a Paul Newman classic- Cool Hand Luke. If you haven’t seen it (or haven’t re-watched it in a while) I encourage you to let Newman and a terrific supporting cast entertain you for a couple hours as soon as you can spare those hours. In my opinion, it is truly an oldie but a goodie. Why can’t they make movies like that one anymore?

There’s a particularly relevant scene in that movie that illustrates this message. In the movie, Newman as Luke is basically an especially “cool cat” prisoner. In today’s movie-making mentality, he’s almost an amazing, mythical super-hero without a cape or mask and doesn’t even need any CGI special effects to work his wonders. He and a few friends set up an irrational- maybe impossible- task that he can eat 50 (that’s FIFTY!) boiled eggs in ONE hour.

I love the scene because it is a show within a show- the visible or public show that Luke will try to eat 50 eggs and the private show of how those who compelled by the “public” show can be exploited to make a few people richer. Even Luke’s closer friends in the movie initially scoff at the possibility to throw gas on that fire: “NOBODY can eat 50 eggs.” On cue(?), another suggests the monetary exploit by triggering bets among the public. And the game is on. The beginnings of the game (a clever setup?) goes something like this:

What you don’t see in that clip is the part that helps illustrate the point I’m making today. Shortly thereafter, the public show (Luke attempting to eat all those eggs) is underway. Everyone is enthralled and following this “market” closely. Even during the hour, bets continue to be placed. Luke’s close friends are taking the seemingly-crazy side that he can do it. Just about every other “buyer” is betting that he can’t. Bet (buyer) after bet (buyer) is stacking up against Luke but there’s still a little money sitting on the sidelines, not yet committed.

Well before 50, Luke stops eating. His belly is puffed out, full of eggs. He looks like he may have about reached his limit. He roams around the room. He seems almost sickly. It looks bad-to-worse for the “smart money.” There’s far too many eggs still to go in far too little time… and Luke already looks like he’s about to bust.

New bets fly. There’s just no way he can do it. And the show within the show culminates when Luke’s closest friend leans in and whispers that ALL available cash is now bet. There are no more buyers to be wooed. Every single prisoner is “all in.” The auctioneer’s hammer stands ready to fall.

What happens next? Luke’s appetite for eggs magically returns and he rapidly runs toward the record goal. If you haven’t seen this classic movie, let this be the point where you stop reading so I don’t spoil the final outcome of this scene for you. Assuming just about every reader has probably SEEN it, I’ll assume finishing the tale isn’t really a spoiler…

Luke- the “smart money” side of the market- wins and all the irrational gamblers (investors) on the wrong side of that bet lose. This particular “market” crashes as soon as the 50th egg goes down. All the buyer’s bought and only selling can follow. In this case the selling is represented by the “smart money” switching into a mode of loan officer: loaning the overly exuberant up to just minutes ago what was their own money back… with interest obligations of course. And a new game is afoot. And that game too is probably another that we all know too well if we can take a moment to recall history.

What happened before the 2007 bubble burst? Every “prisoner” was buying in with all they had. And what happened after the burst? About every “prisoner” was having to beg & borrow to find enough dollars to try to squeak by and/or recover from their losses. The “smart money” of 2007 didn’t even need to suffer through Luke’s bellyache.

As I watch these markets achieve record after record mostly on exuberance and hope more than anything very tangible, I see Luke playing his market, vacuuming in whatever spare cash can be sucked in. Sometimes he stops eating eggs and looks a little sickly to lull in some fence-sitters (“buy the pullbacks”). But the same game is in play. When everyone is just about “all in,” there’s only one way for the market to go. It won’t matter how bullish everyone will be at that point. Collective sentiment does not make markets go up, buying dollars push markets higher.

For those married to only bull-market momentum (that is, those who only know how to profit on a RISING stock market) their losses will be painful… AGAIN. For those that that know how to make money in both rising and falling markets, big moves up or down can be some of the most profitable trades of your life. While many will lose in a crash, there are a few that know how to make a lot of money quickly as stocks or markets crash.

Now, you may read this and think I am extremely bearish today. But that’s not true. WHAT I AM IS EXTREMELY EXCITED. Why? Because I developed my skills over my lifetime to make money both ways. In short, I LOVE volatility. Big swings up or down are especially profitable and it doesn’t really matter to my methods whether the markets rise or fall. What matters is anticipating those peaks and valleys and using the right kinds of trades to take maximum advantage of them. It doesn’t even have to be whole market movements either. The very best profits are in the individual stocks that can rise or fall much more dramatically than whole markets.

Does this mean I’m hoping markets will crash and people will lose a lot of money? Of course not! My work is always focused on trying to help everyone make more money. I hope everyone grows as rich as they possibly can. But hope doesn’t make markets only rise. And history shows markets never move in just one direction forever. When markets are at extremes, they NEVER just keep pushing the bar to greater extremes. They turn. They ALWAYS turn. So while I’ll HOPE- perhaps right with you- that no one ever loses another nickel in the markets again, we both know what will really happen, don’t we? This particular game is just not made to work like that. Most of those prisoners had to LOSE that bet so that the “smart money” could win.

Between here and DOW 30K, I anticipate plenty of lucrative volatility. Markets and stocks will roar higher and crash, over and over, and I look forward to helping my followers take great advantage of all of those events. My team and I are working on something- (to quote from Cool Hand Luke again) A “WORLD SHAKER” SOMETHING- to directly help my followers do just that. If you are interested in learning more, send me an email at: mike@mikegaliga.com and I’ll be in touch about that very soon. In the meantime, I’ll continue to offer broad views in this column AND welcome requests from you as to what topics you might like to see me cover in future editions- just send them to that same address.

Ask away, I LOVE to help people learn and prosper.

Surfing the Waves of the Coming Revolution

Elon Musk, CEO of Tesla Inc. (and of a half dozen other companies) made headlines this week with a prediction that the company will soon be worth as much as Apple. For those not familiar, Apple is the world’s most valuable corporation at roughly $750 billion (yes that’s with a ‘b’). And given the reality that Apple was considered on life support just fifteen years ago, it’s not at all outside of the realm of possibility that it could hit a trillion by 2020.

If we take a closer look under the hood of Musk’s statement, we can easily see the mechanics of why both of these predictions could become inevitable. In my previous reports I’ve projected that the Dow may likely blow past 20,000 and onto 30,000 by the end of the decade. And Musk’s comments reveal a few of the reasons why.

By any measure the so-called Information Revolution fundamentally changed the world in ways the Agricultural and Industrial Revolutions centuries before never could. It didn’t simply change the way we did things making them more efficient. It changed the speed, mode and manner of communication, and it did so on a global scale.

But all of that will be paled in comparison to the coming revolution, whatever we’ll end up calling it. This revolution will make the Information Revolution look like the Industrial Revolution before it in terms of the sheer number and breadth of things that will change. This revolution won’t simply change the way we do things; it will change the way we think and live.

Case in point is Musk’s explanation of what drives Tesla’s revolutionary auto manufacturing process. At first glance, Tesla is merely at the tip of the spear in terms of the green revolution by leading all other automakers in the successful building and marketing of fully electric cars (not to be confused with ‘hybrids’ which still partially run on gasoline).

But lying deep inside Tesla’s operations is a much more profound revolution. This operation does not simply rely on robots that build finely-tuned cars with precision beyond the capability of the human hand. This army of robots also requires sophisticated software that rivals the U.S. Defense Department, all of which is proprietary.

Now let’s move down the road a bit to any one of the top-tier software companies in Silicon Valley and ask them what’s next on the cutting edge of software development. What they’ll tell you is that in ten years, programmers won’t be writing software any longer. Artificial intelligence will be writing our software for us.

To put a finer point on it, imagine this: you work in a professional environment a decade from now and you need to create a new process to help you do your job. Today you’d open up some Microsoft Office application like Excel and start pecking away, itemizing a list of things to be done and so forth. But in ten years you’ll speak to your computer and tell it what you need to accomplish and how often you need it. The computer will build custom software specific to your request and then will ask you questions based on how you want it customized. So in a sense, everyone will be a computer programmer because virtually nothing in the developed world will be done without the aid of artificial intelligence.

If we let our minds run wild for just a minute or two, it’s easy to foresee how quickly and how profoundly our world will change. Now consider that the Internet wave gave way to some of largest economic booms (and busts) in our nation’s history. Imagine how big that boom will be when virtually everything we do changes and new companies are spawned to respond to the needs that are created by those changes.

And that’s just one of the many reasons I’ve been going out on a limb to predict the boom from 20,000 to 30,000. Entire economic sectors will explode or implode. And, as I’ve said before, rapid change yields lucrative investment opportunities. As this revolution unfolds, we’re going to see stocks and options become the surf boards on which investors ride huge waves. The key, however, will be in picking the right board.

Here’s a great example: Tesla stock is probably a safe bet, but betting on an auto-manufacturing ETF for example, would almost surely not be. Why? Because as transportation fundamentally changes with the growth of self-driving cars, Uber and a dozen other innovations, there will be some big losers who don’t respond to the changes quickly enough. Some will relentlessly cling to the old way of doing things, rebelling against the inevitable change in hopes that they can persist the status quo. Fighting this particular current will prove fruitless though as the money to be made in embracing the change is much greater than persisting the “same old, same old.”

The buggy makers talked down the “horseless carriage.” The candle & lantern makers put down the incandescent bulb. Slower forms of transportation tried to beat down newer faster forms of transportation. Traditional ovens vs. microwave ovens. Radio vs. television. Wired phones vs. cell phones vs. smart phones. Tape vs. discs vs. solid state vs. cloud. All of the well-established status quo eventually falls to the newer, faster, cheaper and/or better. It is inevitable. It is fundamental to how we evolve as a people and planet. Even our economic system depends on regular disruption to create new opportunities, new industries & new jobs.

This particular wave will be a monster. It’s effects will be far-reaching… devastating for some industries and amazing for others. But fundamentally, it will be comparable in it’s broad impacts similar to the internet, computers, electricity, fire or the wheel. It will empower many people to be able to do incredible things, leveraging human imagination & ingenuity in new, exciting, far-reaching ways. When I think biggest picture, I believe this will be akin to pushing a collective innovation accelerator… like being handed advanced technology from 50-100 years from now.

An innovation revolution of our own making is coming on fast. Taking advantage of that revolution as investors will require a laser focus to ride the best waves. I already see the early catalysts for such waves. Some companies, sectors & industries are going to roar higher and others are going to be supplanted. Big money is going to be made by taking advantage of both bull & bear opportunities as this plays out. It won’t be very long at all until I’m proclaiming “surf’s up!” Come surf with me.

BY POPULAR REQUEST: We’ve received many emails from readers asking Mike for more information about how to profit in increasingly volatile markets… especially in the details of how to profit when markets are falling. We have a deluxe special report in the proofing stages that we’ll soon be making available to everyone interested in learning these valuable, wealth-building approaches. Not only can you learn to make money in falling markets but the same concepts can help you protect a bullish-biased portfolio against sizable losses in corrections. If you are interested in being among the first to receive this FREE report, be sure to email Mike at Mike@MikeGaliga.com

Wars & Rumors of Wars

In recent posts I discussed my projections that the Dow will blow past 20,000 and move on to as much as 30,000 in the near future as foreign investment capital continues to seek shelter in the American markets. I also detailed that major global events will be the most likely triggers that could derail that climb and expose the fact that there’s nothing under-pinning those markets except fear of worse markets abroad.

Over the last week we’ve seen a few perfect micro-examples of exactly how that could happen. As the Syrian civil war has continued to rage on with no end in sight, the rhetoric coming out of the Trump White House represented a notable change from rhetoric on the campaign trail from candidate Trump. Running in contrast to an Obama administration which itself had reversed its position on foreign entanglements from Obama’s rhetoric on the campaign trail, candidate Trump sounded as isolationist as any candidate in recent memory. But that all changed roughly a week ago when nearly five dozen Tomahawk missiles were fired from a U.S. navy warship into Syria.

With tension still on high between the U.S. and Russia and with no obvious resolution in Syria, the remaining questions are whether and when the next event in the Middle East will be met with another U.S. response and whether Russia will make good on its promise to respond militarily to any new actions from the U.S. The mere prospect of additional actions have ignited a new Cold War.

To make matters worse, North Korea’s nuclear saber rattling reached a fevered pitch in the anticipation of its annual ‘Day of the Sun’ celebration in which it routinely test-fires ballistic missiles in its ongoing pursuit of intercontinental nuclear weapons. With a U.S. Navy carrier group sent to the region and reports of Navy SEAL groups on the ground as well, the prospect of regional war is as imminent as it was in the run up to the invasion of Iraq under President George W. Bush in 2003.

And just as we saw then we’ve seen the markets respond accordingly. Brent crude prices spiked in the days leading up to the attack on Syria and afterward. For anyone paying attention, profits on stock and options trades in fossil fuels were plentiful both on the front end and now on the back end this week with the opportunities to short those trades in front of the market micro-correction.

Depending on the timing, a similar escalation of military action running alongside the explosion of the Dow and other American markets would offer the same opportunities. In fact, a full-scale war, on the upside, and an ultimate ceasefire, on the downside, would offer massive profit baskets that pale last week’s opportunities in comparison.

As I explained previously, with fear and greed playing the critical role as primary drivers of investment decisions, global military instability creates opportunities like nothing else. This is true because military conflict shifts demand for fossil fuels and interrupts international trade agreements, both of which create huge ripple effects in secondary markets.

In the coming weeks I’ll be keeping a watchful eye on events in Venezuela, Syria and North Korea. Each of these hotspots present situations in which a massive shift in the status quo will be marked by market reactions within hours.

BY POPULAR REQUEST: We’ve received many emails from readers asking Mike for more information about how to profit in increasingly volatile markets… especially in the details of how to profit when markets are falling. We have a deluxe special report in the proofing stages that we’ll soon be making available to everyone interested in learning these valuable, wealth-building approaches. Not only can you learn to make money in falling markets but the same concepts can help you protect a bullish-biased portfolio against sizable losses in corrections. If you are interested in being among the first to receive this FREE report, be sure to email Mike at Mike@MikeGaliga.com

Nobody Goes There, It’s Too Crowded – PT2

In Part 1 of this blog post I concluded with a lesson to be learned in how bubbles form in markets as small investors begin piling into a rapid growth scenario and that seeing this play out is a good time to back up and take a broader look at what’s going on. Let’s dig a little deeper into how this sort of bubble forms — and finally bursts.

Isolate a quantity of ‘anything’. Buyers buying that ‘anything’ starts driving up the price. Profit-minded investors see opportunity and join in. Prices continue higher. More people notice and buy in. Prices go still higher. More investors see easy money and pile on. This can continue for a long time — as long as buyers keep buying. However, if just about everyone who can buy is “all in” there is no amount of new news, hype, lies, spin etc that can bring any more buying into that ‘anything’. All buyers and all investors are pretty much all in. So what happens? The price stops rising. Investors get bored and decide to exit to chase something else. And only a little bit of selling can start making the price slide. What was once the hottest investment available can appear to sour and then more start bailing out. And more. And more. The price dives for no real fundamental or technical (forecasting) reason. It’s just a simple case of no more buyers to buy and some seller’s selling.

This reminds me of the joke about the woman who asks a friend for her thoughts on the hot, new restaurant in town. The friend responds, “Nobody goes there; it’s too crowded.” Indeed, when a stock or a market or an economy get too crowded, it’s usually a good sign to get out. One never wants to be the last buyer buying or the last seller selling. Especially technical analysis has a very hard time with market turns. Generally technical indicators revolve around the trend so an upward trend technically implies a continuation up and vice versa. This is the quant-driven seduction that eventually motivates the masses to be “all in” or “all out.” Once buying or selling power is exhausted, the trend turns but the systems just can’t foresee that. Instead, it takes the art side of a good trader to “smell” the change based on past experiences in similar scenarios.

And that is the sort of phenomenon we see unfolding before us right now. Behold the record recently set by U.S. investors which no one is talking about: index funds. An index fund is very simply a mutual fund comprised of a collection of stocks from a single index like the S&P 500 or the Dow Jones.

In the first two months of this year, investors dumped a record $131 billion into index funds according to ETFGI, LLP. That’s roughly a third of the total invested in index funds for the entire year in 2016. That, my friends, is what looks a great deal like the beginnings of a bubble. But let’s dig a little deeper and look at why this happens.

Since the election of Donald Trump to the presidency, world markets have reacted sharply and quite positively. Trump’s campaign rhetoric was very pro-business, pro-growth, pro-investment. So naturally, investors and business managers alike responded with anticipation of growth. And investment activity generally follows public attitudes of those at the top of the investor food chain. By another name that might be called “piling in.”

At the bottom of that food chain are individual, “mom and pop” investors. These are folks who might have a few thousand dollars to move around in the market and who, concerned largely with retirement, react very quickly and violently to trends in the economy. So when newspaper headlines are awash with great news about job records and growth, their reaction is quite predictable. If markets and indexes are growing, the easy money is to throw cash at funds which they expect will act like a surf board and ride the wave. That might be called “even more piling in.”

The problem, as I’ve pointed out in previous blogs, is that emotional investors get spooked very easily. There’s a sort of herd mentality among less sophisticated investors who don’t handle money in large quantities on a daily basis. And even the “mom & pop” investors are not so far removed from the last market crash that they have forgotten how quickly record highs can plunge to painful lows. When I talk to such investors — and when readers like you email me — I get a clear sense of lingering skepticism about confidence in this market, the economy, etc. As the unemployment number has fallen back toward a historically typical range, do we really believe that all those people found full-time, (good) jobs? Did all those retail establishments that were snuffed out in the great recession come back or do their slots in local commercial real estate still have “for lease” signs out front?

So here we have a challenging situation of more and more investors piling in to try to ride the new wave (or bubble?) with many of them more sensitive and even lacking trust to do so with confidence. With that in mind, it only takes a small trigger to get folks to consider pulling their money out. And when a few begin pulling, a lot take notice; that’s when the bubble bursts. We’ve seen it before and it is inevitable we will see it again. Markets at record highs don’t keep on achieving higher highs forever and ever. Eventually, they must correct. They always have, and they likely always will.

Per “the trend is your friend”, the trend-driven systems will only project higher highs. Following them means buy, buy, buy. Just as the flip-driven RE bubble encouraged exactly the same. Pile in. Get yours. Don’t miss out. The Jones’ are making a fortune in these markets, so why not you too? Realize those gains. Make it faster. More-more-more! Hurry. Let’s kill the goose and get ALL of the gold at once.

And then the goose is dead. No more gold. No more buyers. Bubble is bursting. Bubble has burst. Run for the exits.

So what to do about this? I’m not arguing that there’s no money to be made on the way to the top. No one knows where the top really is. But rest assured the longer the ride, the closer to the top we are and the sooner the crash will come. That’s why it’s important to be very picky about the stocks and options you keep on the way up and even more strategic about preparing for the ride down. Those require two completely different strategies, but big money can be made both ways.

Prepare yourselves. That means learning how to make money when the markets are falling. Do you understand how to short stock? Do you understand put options? Inverse ETFs? Do you know which is likely to be best for your own risk profile? These are all topics to know or get to know…ASAP. If you don’t know these well, speak up by emailing me Mike@MikeGaliga.com and I can cover such knowledge in the near future.

In the meantime, while the fundamentals and technicals continue to encourage “buy, buy, buy” the art-side of my approach is growing caution. I smell a correction. There’s too many higher-highs at record levels for me to believe that records are just going to keep on coming. It never has before.

So do I think it’s time to sell now? No, my long-term views driven by science and art still forecasts DOW 30K in the next few years. But, in the shorter-term I’m more attracted to what might be called defensive or more bullet-proof investing opportunities. For instance, I’ve recently bought into in a very little-known robotics chip manufacturer. This company’s stock is already on pace to double in value in just a few months, and options on this stock are doing far better. No matter what the economy does, robotics technology is here to stay and will grow for the foreseeable future. Bullish plays in that kind of opportunity is where I want to take investing risks now.

If you believe record high markets do not automatically beget record high markets forever (if you lack enough life experience to know better, just take a look at any long-term chart of the DOW, S&P or similar, note record high points and then what follows soon thereafter), you might want to be thinking about those kinds of bear-resistant opportunities too. They facilitate continuing to ride the bull while lowering your risk exposure by focusing in on stocks likely be more resilient when the bear (correction) finally takes a big bite. Corrections tend to be fairly quick, often volatile and typically painful for those that are complacent or are lulled into a belief that bull markets are forever.

Again, if you would like me to delve into portfolio-protecting details, how to profit in bear markets and similar, email me at Mike@MikeGaliga.com I write these articles based on reader input & questions so let me know what you want to see or learn.

Nobody Goes There, It’s Too Crowded – PT1

Some of the smartest data crunchers and financial experts in the world have been among the most profoundly wrong when it comes to predicting what the markets will do in the short and long-term future. That’s because investing is as much about art as it is about science…intuition plus facts. If you are familiar with tech concepts like Moore’s Law or just apply some common sense of how the power of computing devices has amazingly evolved over the last 30+ years, one might conclude that a purely quant-based system is unlikely to ever get market forecasting right. I increasingly believe that to be the case.

Why? Because the markets are not purely driven by logic. There is no rigid formula that can always predict if a stock is going to rise or fall. I suspect the hunt for such a system is much like the cosmological hunt for the so-called “theory of everything” — a forever pursuit that never quite reaches a finish line…in spite of how smart our brightest intellects become and how rapidly the very best technology and tools they use evolves. It seems we should be about smart enough and well-equipped enough to solve both puzzles, but both may not be resolved with complex math alone. In short, both probably rely on more than can be deduced in formulaic computations.

With market forecasting, 1+1 can equal 3. Why? Because there is more to where things are going than just math, and even the most advanced AI algorithms have not yet been developed that completely factor in concepts like group emotions, sentiment, and “irrational exuberance”. How do I know this? As soon as anyone would have a perfect forecasting device, how long would it take them to become ruler of the financial world? Answer: almost no time at all. Do we have a sense of any such ruler now?

One may try to argue that the big banks play this role now, but there is competition there — no one bank is thoroughly dominating the others so much that it implies they have perfected a system. Could the owner of such a system hold back? They could, but that would conflict with a fundamental driver of all players in the markets: greed. Could a Goldman Sachs or Chase or Morgan Stanley resist the greed to make more money if all of their investments in cutting edge technology and the brightest brains had actually yielded a perfect system? I think not. Instead even Goldman, Chase and Morgan take their trading lumps from time to time.

Why? Again, there’s more to forecasting profitable plays than just logic-based algorithms. I am a firm believer that the best way to “beat the street” is to blend the fact and quant-oriented science one can apply to the task with the wisdom and experienced-driven art. Those who sell fundamental and technical analysis education products desperately want individual investors to believe that the path to profitable investing is entirely in finding a holy grail combination of technical indicators applied in some unique way. But I believe that’s seeing only a portion of a picture. And the whole picture depends on something as seemingly illogical as good “gut feel.”

Now, I believe there is a huge difference from random guessing, coin flipping, luck and chance and this kind of “gut feel.” For example, I would not encourage all investors to completely lean on their guts to make their investing decisions. This intuition I’m referring to is more about applying experience and leveraging wisdom from many years of observation. What makes a massive number of losers every day in the markets is not a bunch of naive people wild guessing about whether some stock is going to rise or fall. Some of them will have tried their very best, applying technically sound knowledge and leveraging systems to filter their investment selections from all possibilities down to a favored few. And yet, they still lose on some trades. Why? Because there’s more to it than fundamentals and technicals. And this wisdom and experience has its place (I actually believe at least an equal place with the fact-driven quant approaches).

I’m often asked how I would sum up my investing intuition and to what I would most credit my ability to make massive gains when so many are losing their shirts. And I boil it down mostly to a single attitude: watch what the masses do and then do the opposite. Many might tag this as being a contrarian and that basically fits. Make an assumption that the “herd” is wrong and act accordingly. Obviously making financial decisions is quite a bit more nuanced than that, but it’s one good bread rule to trade by — and one you should consider too. Think about the current investment picture. Where is the herd practically stampeding now?

Throughout the millennia as cultures and nations and technologies have changed radically, one thing has remained the same and will never change: human nature. And human nature reveals two driving sentiments in investing, fear and greed, which underpin nearly every emotional decision concerning money. It is eternal and the lessons that can be learned from the mistakes made by those who give in to fear and greed seem to be lost as one generation is replaced by the next.

How many people:

  • Know the ancient fable “The Goose That Laid the Golden Eggs”?
  • Know the moral of that story even from a young age? And yet,
  • Fail to apply it to their investing approach when they are old enough to know better?

So many of the “bubbles” referenced in the financial media reflect that. Just before the dramatic housing market collapse in the midst of the Great Recession, there was a massive bubble in which investors and homeowners wanted to jump in and ride the wave to a financial bonanza. They were not buying a home in which to live. They were not buying a home with an income goal by making it a rental. The game — the intoxication — was to buy a home with the intent to flip it (buy it, hold it for a while, then sell it at a higher price). And since it seemed to be working — even easily — for those early in that opportunity, more and more and more “investors” piled on.

The problem with bubbles is that few people realize, as they get high on the thrill of the ride, that they are in fact in a bubble. So when a bubble finally bursts — as all bubbles eventually do — it comes as a great shock to many of those involved. In short, individual investors see the wave swelling and greed compels them to jump in. As it reaches it’s climax- when they are killing that goose to try to get all of the gold at once- reality sets in. Then fear drives them to run for the hills after the crash, which makes the crash all the worse.

The lesson here is that when we see masses of individual investors and small advisers quickly buying up stocks, funds and ETFs, for instance, it’s probably a good time to stop and take a broader look at what everyone’s so excited about. Fundamentals and technicals may scream to keep riding the trend — just like they screamed to ride the Real Estate “flipping” trend barely a decade ago — but they are only right while more and more buyers keep piling in.

Stay tuned for Part 2 of this blog post as I delve a little deeper into how these bubbles form and ultimately go bust — and what you can do to prevent getting caught up in them. In the meantime, if you have particular questions about bubbles, stocks, options or topics you think I should cover, email me at mike@mikegaliga.com.

 

Between A Rock and A Hard Place

This week the members of the Federal Reserve Board met again to consider the nation’s monetary policy. And after years of multiple rounds of quantitative easing, rumors of a possible interest rate hike are finally more than mere speculation. The Fed’s decision to hike rates by 25 points is considered to be the first of many, which may lead to a full point.

Unexpectedly, markets responded as though the Fed had actually cut rates as investors, after a short selloff prior to the announcement, began buying again. And, but for some obvious profit-taking, they probably would have risen even further. This signals that the bullish mindset of most investors could stick around for awhile, which plays into my previous posts about a bubble scenario.

The problem with a rate hike by the Fed is that it puts them in a proverbial rock and hard place position. On the one hand, the U.S. is economy is exploding on the heels of the presidential election and the resultant pro-America policies of the Trump administration. And the Fed recognizes that the market is overly bullish and needs to cool down a bit to prevent another bubble like we saw leading up to the Great Recession. So a modest interest rate hike of 25 basis points is the obvious tool in the bag to achieve this.

On the other hand, the Board recognizes that the market generally responds very negatively after a rate hike is announced, particularly in markets that are directly impacted by interest rates such as the housing market. This means that if the Fed continues hiking rates, we’ll almost certainly see a drop in the markets this year. And it could threaten to completely undo the records set in recent weeks by the Dow.

But what’s worse about the prospect of a rate hike is two-fold. First, the Fed recognizes that the U.S. economy is still very much in recovery mode. Imagine a patient just emerging from massive heart surgery. While his recovery is looking great, if he starts rehabilitation exercises too soon, he could cause more damage than good. And that’s the sort of situation in which we find ourselves.

Second, as I’ve mentioned in previous posts, the major contributor to the massive uptick in the American markets are not internal fundamentals (those in many respects still remain weak) but external factors. The growing insolvency of the EU and the struggle of the Asian sectors are driving international investors to the U.S. in droves. This flood of money has fund managers in an unprecedented position where they are having difficulty finding enough investment vehicles to add to their portfolios.

This global instability has added to it the ongoing and increasingly uncertain situation with North Korea and Iran. One minor flare up on the international stage could throw everything off kilter.

Imagine a scenario in which days or weeks after the Fed hikes interest rates for a second or third time, North Korea fires a missile into South Korea. Dominoes in the Asian theater start to fall as allies are pulled into the conflict on either side. Japan cannot escape the conflict, which upsets the trade balance with the EU. China must come to the defense of a fellow Communist nation, and suddenly we have a very large regional conflict on our hands.

The uncertainty that follows such an event will drive the market down as investors seek safer havens for their dollars until things settle down. That’s how quickly a wildly bullish market can turn to the bears.

But this uncertainty also offers unique opportunities with stocks and options provided the key indicators are clear. Catching those opportunities just before a major drop or spike in global markets is what separates the men from the boys. And such a separation is coming very soon, one way or another.

This New Technology Will Change Everything…Again

In global macro-economics there are a million different things that can occur to profoundly affect exchanges around the world and how investors respond in their buying and selling behavior. In my most recent blog I detailed just a few of them as examples for why I believe the historic, record-setting Trump markets are due for a major correction. And now other trading experts are starting to say the same thing.

But every so often I like to pull back a bit and at take a microscope to key developments, usually in technology and processes, which mostly fly under the radar but which have the potential to profoundly change the way the developed world operates. Developments like these, if they ultimately go public, present massive opportunities to get in on the ‘ground floor’ as they say.

As an oil and gas attorney and former landman, I have a special place in my heart for energy development and exploration technology. And it’s not just for drilling and pumping but rather of energy development at-large, whether fossil-fuel based or alternative. And I have maintained for several years now that we’re on the cusp of a breaking point in which the battle for dominance between fossil fuels and alternative fuels will finally be over. And now I believe that point has come.

Global economic statistics demonstrate that as much as 60% of the world’s consumption of oil is due to gasoline production for combustion engines. In short, well over half of the oil used on the planet is for transportation. And with the recent oil glut over the last few years, the oil and gas industry has clawed its way back to solvency in the wake of over-supply and flagging demand.

The question on the astute investors’ minds is whether the oil and gas industry will ever see the sort of boom again with over $100 per barrel. I’ve argued for some time that the answer to that question is an unequivocal ‘no’. The problem is two-fold. First, technology and oil have a love-hate relationship. As new exploration technologies emerge which make oil exploration much cheaper, ever more exploration companies can afford to go into business, drill and pump oil and thus put more oil on the global market.

But therein lies the rub: more oil on the global market presents a classic supply and demand quandary. Greater supply means lower prices and therefore lower profits. And lower profits mean more oil and gas busts. And that’s why investors are looking for alternate energy sources. Not because oil is too expensive but because the long history of the oil and gas industry has been marked repeatedly by the boom and bust cycle like no other industry has.

What could be more stable than oil and gas? Not wind; it’s too sporadic and not efficient broad-based energy production. Salt-water and oceanic energy production is still too expensive and is also not efficient. But with new advancements in just the last couple years, solar energy production is finally reaching the point that was predicted decades ago.

New solar cells being developed in Australia, for instance, will offer the same energy development potential as a roof-top solar panel but in the space of just a few inches square. Similarly new solar roof tiles developed by Tesla cost roughly the same as a traditional asphalt roofing but with the added benefit that they generate electricity.

The greatest challenge, however, to solar energy production hasn’t been merely the efficiency of solar cells…it’s been the inefficiency and lack of capacity in energy storage via batteries. But that problem appears to be solved by the most likely of people.

For decades now the world has increasingly relied on batteries for our ever-growing wireless existence. And the convenience of wireless living rests on the back of battery storage capacity. When the lithium-ion battery was invented by engineer and professor at the University of Texas, John Goodenough, the world took a leap forward in that wireless existence. But lithium-ion batteries brought with them limitations of their own. In addition to having a relatively short lifespan after a certain number of cycles were exhausted, they also presented the threat of catching fire and even exploding.

But now Goodenough has solved the problem with his latest invention which I believe will change the world all over again. Goodenough has reinvented lithium-ion battery now with a solid-state technology which solves all the problems of its liquid-based predecessor. Using solid-state, glass electrolytes, the new battery will charge in a matter of minutes (or seconds in the case of mobile batteries), last longer, are non-combustible and have a much longer lifespan.

Why will this change the world? It’s simple. The greatest impediment to residential and commercial applications of solar energy production is storage and charging. But with Goodenough’s new lithium-ion technology, smaller batteries will store more energy, recharge faster, last longer and be much cheaper. Oil producers beware.

Googenough and his team are currently exploring opportunities to test the technology with companies who have the ability to make commercial applications. Translation: the new lithium-ion technology will be coming to a smartphone, electric car and home near you very soon. And when that happens, companies offering those batteries will see significant increase in related stocks and options.

This opportunity will be not unlike investing early in Ford Motor Company prior to the advent of the assembly line or in Bell Labs prior to the discovery of telephony. It will mark a major turning point in how the developed world consumes energy. And, take it from me, energy is what makes the world go ‘round.