Seeing Through The Fire and Smoke

If you look at the headlines, it certainly looks grim.

• European stocks are at a 13-month low.

• Oil has hit lows not seen since 2003, and not only are the oil companies suffering, but the banks that are holding all those shale play loans are starting to sweat.

• Tech darling GoPro is laying off 7% of its workforce and restated its expectations for 2016 downward.

• Walmart, the world's largest retailer, is shuttering 264 stores, 154 stores in the US and affecting 10,000 US jobs.

• Federal Reserve hawk (pro interest rate increases) and Chairman of the Federal Reserve Bank of St. Louis James Bullard is now worried that low oil prices may hurt the economy and is backing off another rate increase.

• Inflation is down to 1.2% and with import prices lower, we're not 'importing' any inflation.

• Chinese stocks are off 15% so far this month, and off nearly 50% from their June 2015 highs.

Is it time to panic?

No. Bear in mind that the markets operate like nature. Where there is disadvantage, if you stay dispassionate and see events for what they are – instead of what should be or could be – you can find advantage.

A majestic tree falls in the forest and the animals and plants on the forest floor take advantage feeding on it and breaking it down for the good of the forest. Wolves keep elk populations in check. It's a natural balance.

The point is, a free, undistorted market is self-regulating and instead of worrying about the problems, it's best to figure out who benefits from the new situation.

For example, GoPro (the leader in the mini-digital camera revolution) is having a tough go of it but some of that may be the company's fault by expanding too rapidly, and not necessarily a harbinger of economic doom. But there's a very good chance that now that the high-flying stock has been laid low, companies like Apple or Google may see it as a worthy buy. This is healthy.

The problem really is that this isn't an unfettered market. The big corporate and financial interests have been rigging the game so that they could keep their advantage.

But in the long run, they won't be able to manipulate the markets forever and the game is already unraveling.

First the big companies bought back their stock to keep share prices artificially high. The way it works is, if there are fewer shares on the market, then each share is more valuable. But if you look at the stock chart, it just looks like the stocks are rising because the company is doing well. Complete illusion and major companies are still playing this shell game.

Then they started the merger and acquisition machine up to 'buy' growth because none existed. There's an old saying on Wall Street that if you can't find growth in the economy buy it. That means, if your company isn't growing, you buy another company and use the combination as a way to tell investors that you're still growing. This is what many companies continue to spend their huge pile of money on, not hiring workers or actually expanding. What this really does is usually throw people out of work and because the industry is consolidating, those workers have to find jobs elsewhere or take a cut in pay to stay in the industry because there is now less competition. Good for C-suite bonuses, bad for the economy. This scheme is now at the point of collapse in the biotech sector.

Now, corporations are cutting their 'fixed costs' to keep up the illusion that growth exists. Bluntly put, fixed costs are jobs. Walmart and GoPro are cutting their workforce, Caterpillar is doing it as well. And many other companies across most business sectors are either holding off hiring, hiring temps or cutting their workforce.

This is the final leg to go. And it might take a while, but we're now in the Great Repositioning. Everyone is scrambling to reposition for a slow to no-growth year - and it's ugly.

The undeniable fact is, everything reverts to the mean.

What this means for investors is you need to lighten up on any industrials, big financials or transports that you have. Rail and trucking aren't looking good this year and that means there are few goods to ship because there is lower demand. Regional banks are the choice in financials, but not yet.

Also stay away from the international markets. They're in bad shape.

Utilities may be in good shape, depending on the winter and whether the Fed raises again in the next quarter. Not worth the risk right now.

Energy is still too risky, although if you have some serious risk tolerance you can start to look at select midstream players and some small producers.

Your best bet is taking positions in silver and gold. Buy the bullion or just buy some ETFs. Buying gold or silver miners is a much higher risk way to play this trend. As this fixed market readjusts itself the metals will take off. It's likely to be a multi-year trend, so buying in now is a good choice. 

It May Just Be Time Again For Gold And Silver

Before the first week of the new year is in the books, the Chinese stock market has lost more than 14% and triggered circuit breakers that have led to the shortest trading day in the stock market's 25-year history.

As far as stocks are concerned, the Chinese market made huge gains – up over 100% - from early 2014 into early 2015. Then we had the selloff in the summer and the market came back again. Given the massive gains, it's not surprising that there's going to be a significant correction, circuit breakers or not.

The circuit breakers, which kick in if the market falls 7% during trading, will only slow the correction, not alleviate it. A 30% correction in the Chinese market still leaves it up 70% over the past two years.

The real issues aren't Chinese stocks. These are the 3 main issues as I see them:

1. The massive devaluation of the Chinese yuan against the dollar.
2. The effect this is going to have on Chinese dependent companies like Apple that are over represented in all US financial indexes.
3. The ultimate reckoning this will all have in the energy and transport sectors in the US, which will certainly send the financial sector reeling.

Each of these deserves its own space, so here I will talk broadly about the implications of this entire 3-part scenario playing out before I drill down into each part.

A Cheaper Yuan

Here's how the transmission mechanism works: The Chinese have begun to devalue the yuan against the dollar. That announcement from the Chinese central bank on Thursday is what set off the second massive selloff on the week.

The implications are that the Chinese economy is weaker than it appears and the move is to stimulate growth; and that Chinese businesses and citizens are now holding money that is worth less every day and most can do little about it because the yuan is not yet an openly traded currency.

The US Stock Connection

What that also means is companies like Apple (NASDAQ: AAPL) and Qualcomm (NASDAQ: QCOM) and GM (NYSE: GM) and everyone else looking to China as their main engine of growth are going to earn less money in China on the goods they sell, which will hurt earnings for the company as a whole. Plus, a weaker Chinese economy means less spending and economic expansion.

The slower economic expansion means less need for energy and commodities. That's why oil is down to 12-year lows again and dropping.

US Energy and Banking Problems

This will be another blow to the US energy sector, which needs higher prices than most of its global competition to produce oil profitably. And one area where we can see the problem clearly is in rail transportation numbers, since much of the oil from US shale fields is moved by rail.

Bank of America analyst Ken Hoexter has found that rail loads have fallen 5% year over year for 11 successive weeks, something not seen since 2009.

And the 3 largest drops by sector: coal, metals and ores, and oil, which are are all down by at least 26% year over year.

This is why the Dow Jones Transportation Index was off 20% in 2015 even with record low energy prices. If you're not moving goods, it doesn't matter how cheap the fuel is.

The other shoe to drop here is when the banks have to cover the losses of the US energy companies that go under. The banks have underwritten loans, junk bonds and any manner of investment vehicles into this sector of the years and now they're as exposed as they were during the mortgage debacle 8 years ago.

And in all this doom and gloom: One piece of good news is that gold hit a 9-week high last week. And silver is moving proportionally stronger than gold.

The Coming Hard Assets Rally

The flight to safety is on and gold should see a very good 2016. And as I've discussed in previous articles, silver is a leveraged play on the return to hard assets.

Given the fact that the Chinese prefer hard assets and that most individuals can't trade in the foreign exchange market, there will be a significant increase in gold demand in coming days and weeks.

How Cheap Oil Could Kill The Banks

Energy prices continue to wallow near decade lows, with no real visibility on when that might change.

And while that's good for consumers and businesses that rely on cheap fuel, it also tells a story about a weak global economy that doesn't seem to be getting any stronger. And there's a bigger shadow this energy issue casts.

There's plenty of oil out there and Iran is about to come on line, adding to the glut. And the US in another case of bizzaro-world counter intuitiveness, just lifted the 40-year ban on domestic oil exports.

Now US producers can export oil internationally.

What is the point? Well, in Washington, DC, that's precisely the point. You don't pass this kind of legislation when it's important to pass it, like when oil prices are high. You wait until no one is looking and no one cares – remember it's an election year, so there's no opposition - and it's sitting on the books when you want to use it.

Basically, it's a kickback to big oil companies from Congress for all their support, while no one is looking.

According to oil services firm Baker Hughes, there are 871 wells in operation

in the US right now; last year at this time there were 2266. I don't think US drillers will be exporting any time soon.

Also, there's a more disturbing implication for what this oil glut is doing. But it's not energy firms that are the prime targets; it's the banks.

On Maria Bartiromo's FOX Business show, a hedge fund manager was talking about how the next shoe to drop in the energy sector is the financial sector.

His prediction was that 25-30% of today's oil and gas companies will be bankrupt in the next 3 years. And the bag holders will be the banks that are holding their defaulted loans and lines of credit. And this is partly to blame for why the high-risk credit market is starting to fall apart.

But we're only at the tip of the iceberg. If the US loses all these energy sector firms we could see another collapse the size of the last financial crisis.

Given the bad shape most major banks are in even now, this could be a death blow for some of these 'institutions' and an economic tsunami for all of us.

The Debt Deception

I think it must be scandal fatigue at this point.

First it was the housing scandal that almost collapsed the entire global economy and from which we have yet to recover.

Then it was revealed that the same banks that caused that scandal – and were bailed out by all of us – doubled down in the obscure interest rate swap market. This LIBOR scandal was reported but outside the financial community and the geeks that follow it, it didn't make much noise.

So, here's the deal. LIBOR is a $379 trillion market. That's nearly 100 times bigger than the US economy. It has to do with virtually every interest rate on the planet. That means every loan, credit card and national debt on the planet is part of this scandal. But it's such 'inside pool' that most people don't grasp how massive this scandal has been. Or its long-term implications.

Then there's the admission that the gold markets have been manipulated.

And the silver markets.

And auto loans.

By whom? That's the most galling part. It's the same too big to fail players behind all these crooked schemes.

And the US government continues to allow them to get away with it. And individuals are ignorantly happy to keep their shoulder to the grindstone flashing the plastic for the newest iPhone.

At this point, the institutions that we couldn't let fail are now more powerful than ever. As Matt Taibi reports in an excellent article on the LIBOR scandal for Rolling Stone, the top 6 US banks now hold assets equivalent to 60% of the US GDP.

These are true robber barons in every sense of the words.

But it's what is below these scandals that is even more significant.

Most of us rarely stop to take in The Big Picture as it relates to the global financial picture. But the big financial institutions think about it every day, because they are building it.

And if we're not saying anything, they're going to continue to build it to their advantage.

It would be like hiring a contractor to build you a house. You trust the contractor will hire skilled labor, use quality materials and build it all to code. But the contractor is connected to the inspectors, gets kickbacks from his material suppliers and knows he can do sub-standard work with sub-standard materials and make a killing. You don't watch over him and after the house starts to fall apart the court tells you it's your fault for trusting the contractor.

This is where we are with the global financial system.

Much of the developed world is now not built on money – fiat currency, metals, bitcoin, wampum – it's built on debt. This infographic may help get your mind around what I'm talking about.

But here's the point:

There's about $15 trillion in the broadly defined currency markets of the world.

There's about $200 trillion of debt in the world markets.

And there's about $630 trillion of derivatives on that debt.

Cash is no longer king. Debt is. And the same people that control this $830 trillion in debt and derivatives are also fixing the interest rates.

There are few things that can help get you outside this massive financial tsunami. Go off the grid and wait. But it could take years more of manipulation, collusion and distortion before something big changes everything.

That's why it's increasingly important to stay informed and engaged in the big and the small issues. Become an economic survivalist. Learn the terrain, how to defend what you have and rely on your own training and discipline to thrive.

We're here to help get you there. And as the saying goes, the journey of 1000 miles begins with one step. Let's get moving.

Blame It On The Other Guy

Have you ever know someone who was so busy finding fault with others, they never bothered to see what their own problems were?

Judging by the start to the 2016 stock markets, it looks like the US market talking heads are just that person.

China lost 7% on the first trading day of 2016 and the the market had to shut down to make sure the bottom didn't fall out.

Then the contagion spread across the globe, finally ending up hammering US stock markets. And while all the headlines shrieked that China's tepid manufacturing numbers as well as Middle East turmoil were to blame, we're looking past the real culprit.

First, Chinese economic data isn't falling off a cliff. At least that's what most indicators would have us believe.

But a story out in Barron's dated January 5, 2016, and already posted online, likely has caused much of the stir in the US market, at least in the power offices on Wall St. It claims that the Chinese numbers are highly inflated and that most the Chinese economy is growing at around 4%, almost half its stated 7% GDP.

When Barron's publishes such a controversial piece, all the Street players have to react, simply to show that they read the piece and are duly impressed.

The problem is, it's an opinion. The view of the author, who is a senior economist at BNP Paribas bank is basically that the Chinese is transitioning from a developing manufacturing based economy to a more developed, diversified economy. And in that transition growth is getting hurt.

But even the article concludes it's not a death knell for China, or any of its trading partners for that matter. The problem is when these stories are released, they tend to rattle the chattering class and institutional players on the Street, whether they're valid or not. They don't really care where the markets are, because they make money when there's turmoil, not when markets are going up.

As for the Middle East turmoil argument. Please, there has been turmoil in the Middle East ever since oil was discovered there. That certainly isn't roiling markets.

The real issue under these flimsy excuses for the global market selloff is because the US economy is looking bad. As is Europe.

China's manufacturing sector is off because the US and Europe are not contracting to build things because people and companies are buying as much of those things. There's little supply when there's little demand.

We aren't hearing this narrative because the financial anchors and politicians are talking about how well the US is doing. And the most egregious example of this was when the Fed raised interest rates last month. There was very little in the US economy that supported an interest rate hike. But it's an election year, and it's downright American to be optimistic.

Inflation has been muted by low energy prices. Spending for the holidays was up but not by much. Wages are low and not expanding much.

And then there's the industrial and transportation side of the economy. No one really talks about these two massively important sectors.

The US Purchasing Managers Index (PMI, which indicates whether businesses plan on buying more goods to make more things) is down again for December. Orders hit their lowest mark since September 2009. And the equally important Institute for Supply Management (ISM) report also shows another drop in manufacturing.

Both reports indicate a slight but continued contraction (not expansion) of the US industrial sector. If companies are building more products it's because there's no demand. And if US manufacturing is getting hit, it's no surprise China is feeling it.

Add to this the the fact that the Dow Jones Transportation Index, a basket of the nation's top land, sea, rail and air carriers is off 20% in 2014 (and continuing that slide into 2016). The scary thing here is, most of the cost of transports is wrapped around fuel costs. With prices at decades lows, these companies still are losing ground.

So, the US manufacturing sector is in contraction, the transportation sector looks terrible, the industrial sector is in a full-fledged recession and the energy sector is being choked out of existence by Middle Eastern oil ministers. Oh, and the US dollar is a stratospheric levels making exports that much more difficult.

And China is the problem?

This in no time to be a hero and try to bottom fish bargains. Stay away from the markets for now. January is going to be highly volatile as all the big players now reposition for the coming year. And no one knows what to make of the coming year.

Keep your eye on the US economy and don't be led astray by the talking heads or optimistic factoids. Replacing high skilled workers with more low skilled workers isn't economic growth; it's a shell game.

Real estate, hard assets and the US dollar a good places to be right now.