Why we write The Daily Cut… Use this “chaos hedge” to protect your wealth… Do you have enough cash in your portfolio?… In the mailbag: “A little socialism is like being a little bit pregnant”…
Our mission at Legacy Research, as our cofounder Bill Bonner says, is to put our subscribers on the “right side of history.”
Bill is talking about major events that shape the markets.
They’re often money-making mega trends – such as the wave of cannabis legalization sweeping the globe… the end of federal prohibition of sports betting… or the electric vehicle revolution.
Each of these mega trends will gush profits for years… even decades.
But we’re also always on the lookout for wealth destroying trends such as the Fed’s bubble economics… the rise of socialism in America… and the inevitable flameouts of bull markets.
And right now, the end of the bull market that began nearly 10 years ago is our most immediate concern… along with what you can do to prepare for it.
It’s why, in today’s dispatch, we’re talking to Palm Beach Letter analyst Teeka Tiwari about how he’s helping his readers shore up their portfolios.
But that’s just an average. Stock markets can crash harder than that.
In the dot-com crash, for example, the S&P 500 plunged 49%.
And between 2007 and 2009 – the bear market that struck after the subprime mortgage market melted down – the index took a 57% peak-to-trough tumble.
Remember… If you take a 50% hit to your stock market portfolio, it takes a 100% gain to break even again. That’s a big ask – especially if you’re either in or nearing retirement.
It’s the longest stretch of rising stock prices since the end of World War II.
And although we can’t tell you precisely when the bear will strike, we can say with some certainty that what goes up will go down.
That makes now a great time to prepare for the coming bear.
We’re not saying you should panic-sell all your stocks. That’s never a good idea. But as Teeka explains below, you want to have some defensive plays in your overall portfolio mix.
Teeka – or “Big T,” as many of his subscribers call him – is best known as a pioneering investor in cryptocurrencies.
But he started his investing career in Wall Street. He was the youngest vice president at investment banking and trading firm Shearson Lehman Brothers. He later ran his own hedge fund.
And although he recommends our Palm Beach Letter readers hold a small basket of cryptos as speculations, he also recommends stocks… precious metals… and investments that produce reliable streams of income.
What’s important for Teeka is not what type of investment he recommends. It’s whether it helps him achieve his mission… which is to help Palm Beach Letter readers have a comfortable and dignified retirement.
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And as Teeka explains below in the second part of our 2019 Roundtable Series with him (see the sidebar below for our previous Roundtables) that means making sure you have plenty of downside protection in your portfolio.
Chris Lowe: Stocks have been in an overall uptrend going back to 2009. But we saw a big drop at the end of last year. What do you see ahead for stocks in 2019?
Teeka Tiwari: Last year was the worst year for stocks since the 2008 financial crisis. And December was the worst finish to a year since the Great Depression.
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2019 Roundtable Series In our Roundtables, we pin down the threats and opportunities our analysts across Legacy Research see this year and beyond. Catch up here:
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We’re certainly taking a more cautious approach to markets this year. I wouldn’t be at all surprised to see more volatility – aka, big price swings – like we saw over the holiday quarter. So we’re taking a more defensive approach in the recommended portfolio at The Palm Beach Letter.
As you know, I’ve been bullish on stocks since 2014. As a result, we’ve been focused on growth over the last couple of years at The Palm Beach Letter. That has really worked for us.
For instance, we closed out a position in Microchip Technology (MCHP), a company that makes microcontrollers, for a 65% gain last February. We booked another 65% win on chipmaker Maxim Integrated Products (MXIM) in October. And that same month, we closed out a position in chipmaker Nvidia (NVDA) for a 550% gain.
But there’s a pair of big-picture issues that have us concerned now. First, the trade war between the U.S. and China. Second, you have a lot of fear among investors over further interest rate hikes from the Fed.
Chris: Let’s go through these one by one. What’s your take on the trade war?
Teeka: Folks are worried about heavy tariffs on trade plunging us into recession, but I’m not worried. To me, it looks as though President Trump is trying to even the playing field. Otherwise he’d be putting tariffs on everything, rather than selectively on some goods. It’s something we should have done years ago.
But that’s not how many investors see it. And it’s important to know what the crowd is thinking… even if it’s proven wrong in the long run.
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Chris: But if the crowd is wrong in its assessment of the trade war, wouldn’t that make you bullish?
Teeka: At the end of the day, investors set stock prices. If enough of them are worried about the market tanking, for whatever reason, they’ll start to price that in. And it will become a self-fulfilling prophecy.
British economist John Maynard Keynes used the example back in the 1930s of a beauty contest. He imagined a beauty contest run by a newspaper. Contestants are asked to choose the six most attractive faces from 100 photos. Those who pick the most popular faces win a prize.
Now, you can go about this two ways. The first is to pick the six faces you find the most beautiful. But as Keynes pointed out, that’s a naïve approach.
If you really want to win the contest, you have to think about what kind of faces the majority of contestants will pick. You have to figure out what the public thinks… and make your selection based on that insight.
In Keynes’ beauty contest, you’re trying to judge the crowd. The same goes for the stock market. You have to try to figure out what the market is thinking and factor that into your own outlook.
When I look at the fundamentals of the economy, and of the stock market, I’m not too worried. But that’s my personal interpretation. Judging by all the turbulence last year, that’s not the view of most investors right now. And that’s what counts as we look ahead to the rest of 2019.
Chris: What about the threat of rising interest rates? Fed Chairman Jay Powell jacked up the Fed’s key interest rates four times in 2018. He’s put further rate hikes on pause… for now. But judging by last year’s stock market tantrum, investors aren’t going to like it if the Fed decides rates need to go higher.
Teeka: It’s hard to say what the Fed will do next. But as far as the fear of further rate hikes goes, it’s overblown. Interest rates are rising from an abnormally low level – zero – to a more normal level. It’s not that much of a headwind for stocks.
But over the short term, it doesn’t matter what I think. Most investors don’t see it that way. After Powell said last year – in the face of falling stock prices – that he was determined to keep hiking rates, investors threw their toys out of the pram. And we nearly ended up in a bear market.
I expect the same thing to happen again the next time the Fed raises rates. When enough investors are in the throes of a bad idea, they can do a lot of damage.
That’s a long way of saying that there are going to be better buying opportunities ahead. And you want to have dry powder to take advantage of those opportunities.
That’s because, as many of your readers will know, buying stocks when they are irrationally cheap is one of the most direct routes to market-beating returns.
We’re already 10 years into this bull market. The average bull market going back to the 1950s lasted about five years. So we’re closer to the end than the beginning of this theme park ride.
Chris: What do you recommend Legacy readers do right now to play more defense in their portfolios?
Teeka: At Palm Beach Letter, I recommend my readers keep at least 5% of their wealth in what I call “chaos hedges.” These are not investments. They’re assets you own as part of your overall portfolio mix to protect your downside in turbulent times.
Gold is one of the best chaos hedges. It tends to go up along with panic levels in the market. That panic could be by anything from an implosion of the world’s financial system… a stock market nosedive… even a war.
Chris: Are there other defensive plays you like other than gold?
Teeka: Yes, I also recommend my readers hold up to 10% of their wealth in U.S. dollar cash… or whatever their home currency is.
Holding cash is often seen as a purely defensive play. It’s a great way to shield your wealth from falling stocks. But cash also allows you to pick quality stocks selling at a bargain in a stock market panic.
Plus, cash allows you to pull the trigger on the perfect investment property… or a lucrative business opportunity that you discover.
Whatever it is, cash typically “meets the need” better than anything else. So it’s crucial to hold some… along with gold. And that’s especially in the late stages of a bull market.
Chris: Thanks for your time, Teeka.
Teeka: Anytime, Chris.
Chris here – We hope we’ve convinced you that now is a great time to make sure that your portfolio is prepared for when the next bear market strikes.
Two no-brainer ways to shore up your defenses is to follow Teeka’s advice and make sure you have cash and gold onboard.
But these are not the only measures you can take to protect your downside risk. Tomorrow, we’ll have more for you on what Teeka calls the stock market’s “untouchables.”
It’s an elite group of stocks that haven’t dropped more than 10% over the last 20 years. And that makes them the perfect stocks to own now.
So stay tuned.
As regular readers know, we’ve been keeping a close eye on the rise of rising Democratic Socialist star Alexandria-Ocasio Cortez (AOC).
People are losing their minds over the 29-year-old congresswoman from New York. They think she’s the vanguard of socialist forces in America.
But as we’ve been showing you here at the Cut… AOC is bringing up the rear. Socialism has roots in America that date back long before she was born.
It’s a point Legacy Research cofounder Bill Bonner hammered home in today’s issue of his Diary e-letter (catch up in full here)…
Americans are now among the most heavily policed people in the advanced world. There were three federal crimes in 1789; there are more than 4,000 today.
With so many laws, it is no wonder that so many break them. The U.S. has the largest prison population in the world – with 10 million picked up by its gendarmes annually and more than 2.2 million in its gulags (5 times as many as in 1970) – half of them for a made-up crime, involving marijuana.
Its government agents – using “civil forfeiture” rules – steal more wealth than common thieves.
Its armed troops garrison close to 800 foreign outposts and, in the last half century, are responsible for more deaths than Russia, Iran, North Korea… and the whole “Axis of Evil” put together. Barack Obama, like Stalin, personally approved each day’s assassination list.
And rather than rise up against their whip-masters, Americans say “thank you” to the TSA for rifling through their underwear!
That is the real state of the Union and perhaps the biggest busted dream of all: The American Dream has become an aging, heavily indebted empire struggling to hold onto its place in the world, led by a corrupt elite whose only real goal is to keep the juice flowing – to themselves.
President Trump in his State of the Union speech said, “We are born free, and we will stay free.” But have Americans preserved their freedom as he claims? Or is something more sinister going on?
Send your thoughts to [email protected]. We read every email we receive. And we love to feature reader comments in our regular mailbag sections.
Speaking of which…
The professors in colleges keep trotting out this failed economic system. You would think the disasters of the past would have put an end to this. But no, they keep thinking some pie-in-the-sky perfect system is possible. This in spite of Venezuela, Russia, Cuba, Vietnam, Cambodia, Ethiopia, China, and others.
The Chinese may have a robust economy but freedom is nonexistent and the state can erase you, as one of your correspondents found out. Russia is no longer communist/socialist but the people in charge run it like a drug gang.
The United States is not a great country because of socialism. Capitalism and personal freedom made us great. A little socialism is like being a little bit pregnant – wait a little while and it will get bigger.
– Larry P.
The cure for socialism is socialism. Deport all those who believe in socialism to live in Venezuela, starting with the ignoramus AOC. I’ll bet after just one month they’ll be begging to get back to America, never to speak of socialism again. Bernie Sanders was kicked out of a commune… for failing to do his share of the work!
– Bernand S.
Regards,
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Chris Lowe
February 12, 2019
Lisbon, Portugal