Justin’s note: U.S. stocks continue their roller coaster ride. After its worst December since 1931, the S&P 500 stormed out of the gate in 2019… only to reverse course and drop another 2% today.

Now, we’re only three weeks into the new year, but this volatility is causing many readers to ask one simple question: “What’s in store for 2019?”

I know that Casey Report and Crisis Investing chief analyst Nick Giambruno has a lot to say on this topic. So I got him on the phone to find out what we can expect in the months ahead… and more importantly, how to prepare…


Justin: Nick, where do you see the stock market headed from here?

Nick Giambruno: Well, I think a most interesting observation is that the market is so heavily dependent on what the Federal Reserve does. Investors hang on the Fed’s every word, looking for clues, and desperately trying to cling to something that will show that they’re continuing the easy money.

This is not a sign of a strong market. It’s a sign of an economy addicted to cheap credit.

As you probably know, the Fed responded to the 2008 financial crisis with unprecedented amounts of easy money. It claimed it would “stimulate the economy.”

Just think of the $3.7 trillion in money-printing programs euphemistically called quantitative easing 1, 2, and 3. That money didn’t come from someone’s hard work and savings. The Fed simply created it out of thin air… and used it to buy bonds.

This pushed up the price of bonds and artificially suppressed interest rates to lows not seen at any other point in human history.

The Fed took interest rates to zero in 2008. It held them there until December 2015, or nearly seven years.

For perspective, the Fed inflated the housing bubble – which eventually caused the 2008 crisis – with about two years of 1% interest rates. It’s hard to fathom how much it distorted the economy with seven years of 0% interest rates.

Think of interest rates simply as the price of money. They have an enormous impact on banks, the real estate market, the auto industry, among others.

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It’s hard to think of a business that interest rates don’t affect in some meaningful way, either directly or indirectly.

That’s why interest rates are the most important price in all of capitalism.

Yet, they’re controlled by a politburo of central planners at the Federal Reserve, not set by the market like any other price.

It’s strange that so many people thoughtlessly accept this as “normal.” In reality, the Fed is engaged in a massive price-fixing scam… and nobody seems to care.

And the effects are certainly not benign.

The $3.7 trillion created by the Fed after 2008 ended up creating not just a housing bubble or a tech bubble, but an “everything bubble.”

And within the everything bubble, the bond market is where the biggest distortions are.

Justin: Can you explain how artificially low interest rates lifted the U.S. stock market?

Nick Giambruno: Corporations took advantage of these historically low borrowing costs by issuing mountains of debt.

All the easy money that corporations borrowed had to go somewhere.

They used a good portion of it to finance stock buybacks. That’s when a publicly traded company buys back its own shares.

Management at public companies usually receives a significant portion of its compensation in the form of stock options. Those options are more valuable when share prices are higher.

Further, if a company’s earnings don’t change, and the number of shares declines (from being bought back), its earnings per share – a key valuation metric – go up. This can make the company appear more valuable, even though it didn’t improve operationally.

In other words, these companies are not becoming more profitable. Management is simply using easy money to financially engineer higher valuations.

With stock market valuations nearing all-time highs, these companies are going deeper into debt to buy ridiculously overpriced stock.

Loading up on debt to buy outrageously expensive stock can only end in disaster for the shareholders of these companies.

Unfortunately, the fake money system incentivizes management to make decisions like this, especially since many corporate management types resemble characters from a Dilbert comic.

Since 2008, corporations have cumulatively purchased over $4.5 trillion worth of stock through buybacks. That represents about 15% of the market cap of the entire stock market.

In short, this is how the bond bubble helped inflate the stock bubble.

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Justin: What’s bringing the era of easy money to an end?

Nick Giambruno: The Fed is raising interest rates. It has been since the end of 2015. So they’ve been in a tightening cycle for a while.

Almost every Fed rate-hiking cycle ends in a crisis. Sometimes it starts abroad, but it always filters back to U.S. markets.

To be exact, 16 of the last 19 times the Fed made a series of interest rate hikes, some sort of crisis that tanked the stock market followed. That’s around 84% of the time.

It’s inevitable that all the malinvestment created by the trillions in easy money will get flushed, just like in previous cycles.

Justin: So it makes sense that investors are hanging onto the Fed’s every word.

Nick Giambruno: Unfortunately, yes. Given the Fed’s king-like power over the economy, they have to. I’d prefer the economy be more focused on people voluntarily exchanging products and services rather than the Fed’s destructive shenanigans. But as long as there is a central bank like the Fed, it’s simply too big of a factor for investors to ignore.

While the Fed is a huge factor in the bond market, it is not the only one. There are a lot of reasons to think interest rates are headed higher – which will help pop the “everything bubble” – independent of what the Fed does.

Justin: What other forces could cause rates to rise?

Nick Giambruno: There’s the federal government’s budget deficit, which is financed by the Treasury issuing more debt.

The U.S. Treasury issued over $1.3 trillion in new debt in 2018. That’s more than double the amount it issued in 2017.

Analysts expect the deficit to hit $1.5 trillion in 2019. And that figure assumes there’s no economic recession, which the U.S. economy is long overdue for.

If there’s even a mild recession, which would reduce tax revenue and drive the deficit higher, a $2 trillion deficit is a real possibility.

No matter what happens, trillion-dollar deficits will be the new normal. That means an avalanche of new Treasuries to finance them.

Even by the government’s own unrealistically rosy forecasts – which assume no recessions, wars, or other crises – the federal debt will continue to grow faster and faster. Within 10 years, it will hit nearly $35 trillion, up from $21.7 trillion today.

Who will buy all this paper?

It won’t be the Fed… It’s shrinking its balance sheet and trying to unload all the debt it bought from the post-2008 period.

Foreigners are also not buying as many Treasuries.

The governments of China and Japan are the two largest holders of U.S. Treasuries. Both have already started reducing their exposure to U.S. government debt.

As long as trade tensions linger, don’t expect China to help finance the deficit by buying Treasuries… at the very least.

Russia is also dumping U.S. Treasuries. From November 2017 to November 2018, it reduced its holdings by a staggering 86%, from $106 billion to just $14 billion.

Justin: Nick, you clearly aren’t bullish on stocks and bonds. What should investors be doing with their money then?

Nick Giambruno: Shorting a special segment of the bond market is one of the best ways to profit from the collapse of the bond super bubble. But ordinarily, it’s not a simple task for the average investor.

In The Casey Report, I share easy, one-click solutions to do this (and also to short stocks) that can be done from any ordinary brokerage account. You don’t need to do anything complex or be an expert trader.

Justin: Thanks for talking to me today, Nick.

Nick Giambruno: No problem.

Justin’s note: As Nick showed today, it’s time to be cautious. Stocks and bonds could be headed lower in 2019, and there are three things you should be doing today to protect your wealth:

  • Hold extra cash. This will cushion you against big losses should stocks keep falling. It will also give you “dry powder” to buy stocks when the next major buying opportunities arise.

  • Own physical gold. As we often point out, gold is real money. It has preserved wealth for centuries because it’s a unique asset. It’s durable, easily divisible, and easy to transport.

    It has also survived every major financial crisis in history. This makes it the ultimate safe-haven asset. Learn the best ways to buy and store it in our free special report: “The Gold Investor’s Guide.”

  • Read the “Ultimate Crisis Playbook.” We’ve compiled the best advice from all the editors and analysts from across our business. These are some of the brightest minds on the planet – and every entry is timely and extremely valuable for what lies ahead. With 109 pages full of tactical steps from our gurus, this market crash guide is designed not just to help you protect your wealth in the months ahead… but also to prosper. Download yours for free here.

If you’re not a Casey Report subscriber, now is the perfect time to sign up. By signing up today, you’ll get a free copy of Doug Casey’s newest book, Totally Incorrect Volume 2. Keep in mind, this book is so controversial, we may have to take this offer down soon. Go here to see why.

Reader Mailbag

As always, readers responded in droves to Doug Casey’s controversial thoughts on the government shutdown (catch up here and here)…

I must take exception to Mr. Casey’s criticism of the National Parks Service. He says the service should be “privatized,” that our national parks shouldn’t be run by the government anymore than Disneyland should. That is totally ridiculous! There’s no way the park system can be put in the same league with Disneyland, which is a theme park built for the amusement of visitors and their children.

The national parks weren’t set up for anybody’s entertainment. They were set up so people can commune with nature, so they can be exposed to the natural beauty of America’s parks and forests, so that they and their children (and, hopefully, their children’s children) will learn to respect nature and preserve it for future generations.

– Anonymous

If our park system was privatized, as Mr. Casey suggests, it would defeat the whole purpose of the system. Then the corporations would use the parks in their way only, and not in the way they were intended. They could do whatever they pleased with them no matter how unfair, just so long as they could profit from it, like, for example, cutting down all the trees, paving over the lands and building high rises, parking lots, shopping malls, or whatever. Privatization won’t protect or preserve our parks or our forests, it will DESTROY them, forever! It would be like that song by Joni Mitchell that says, “They paved paradise, and put up a parking lot.”

This is why, more than a century ago, President Theodore Roosevelt created the Park Service in the first place, to keep the logging companies from getting their hands on the forests and destroying them and the natural beauty around them.

I also take umbrage with Mr. Casey’s callous attitude towards the government shutdown, acting as if it were no big deal and even saying that he hopes it will go on for months. I’ll bet he wouldn’t feel that way if he were one of the many people who are now out of work because of the shutdown and can’t support themselves or their families, or are probably facing starvation and/or eviction.

This is another example of the mean-spirited feelings that conservatives like Mr. Casey have against those less fortunate than they are. They make Scrooge look generous!

– Michael

The shutdown only goes to show how little we need the government!

– Roni

Doug Casey says Israel gets $3 billion from USAID. It gets nothing.

Israel does get military aid, which must be spent in the U.S., and is an indirect way to funnel U.S. tax receipts to Lockheed, Northrop, etc.

But, hey, anti-Israel bashing is fashionable on both the right and the left, so why not join in – facts be damned!

– Scott

No talking heads, media, or government officials seem to mention anything about the fact that Congress, Senate, President, VP are all still receiving their paychecks. What a gross example of government at its worst!

A shutdown should automatically cut off the paychecks to those who are responsible. Of course this would not happen as those who make the laws and rules are always sure to protect themselves above all else.

– Rick

Regarding Mr. Casey’s views on the value of government.

If government is detrimental to economic growth then why are the Asian countries’ economies growing? In China or Singapore as an example government rules and regulations are far more intrusive than in the U.S. as they are in the prosperous countries of Sweden, Finland, Norway, Germany, etc. But as Mr. Casey would correctly point out if more government is the key to economic success then why did the USSR implode or why is North Korea a hellish economic basket case compared to the prosperous South Korea.

I agree that big government is not necessarily good government and in many cases the free market can deliver a service better. But what are the alternatives? Anarchy as each property owner becomes their own fiefdom and those without property are condemned to serfdom? Or perhaps one just looks at Somalia, Libya, Iraq, etc. as to what happens when the established political system collapses and what fills the vacuum that is left behind.

Should emergency management for example be a for profit mega corporation that only offer its services to people who could afford to buy their fee? Should drinking water standards be enforced only by the free market or a company’s trade secrets not be protected by the state? I can see where Mr. Casey’s juche ideology would work well in a small gated community of wealthy property owners but not everyone has the wealth to be totally self-reliant and not dependent on the services the state provides for quality of life, rule of law, etc.

Perhaps the question is, “what is the role of smart government in the 21st century that is needed to deal with the new global political, social and economic realities while ensuring the individual’s liberty, the rule of law and while creating the proper environment for economic prosperity that will benefit all its citizens.”

– Richard

I propose that there are two essential functions of government which cannot be reasonably be done by private enterprise.

  1. Protection of property rights. This means having a military to protect against property raiders from abroad, and a police force to protect people at home.

  2. Settlement of disputes. If a disagreement arises between two persons (and this includes companies), someone has to settle it – and be able to enforce its judgment by any means necessary.

– Robert

As always, if you have any questions or comments for the Dispatch, send them to us at [email protected].

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