|It's an immediate threat to your wealth right now…and it's another sign we're headed for a major financial crisis.What we're covering today stems from the Fed's "monetary experiment" that began in 2008.As you may know, that year, the Fed dropped its key interest rate to effectively zero. It then started borrowing and printing trillions of dollars.|
This experiment has been nothing short of a disaster.
Over the past eight years, the Fed's pumped $3.5 trillion into our financial system. And our national debt has more than doubled.
Casey Research founder Doug Casey says the Fed has set us up for a massive financial crisis…one that will ultimately destroy the U.S. dollar:
E.B. Tucker, editor of The Casey Report, agrees that the dollar will collapse eventually. But he says there's a more immediate threat to protect yourself against today…
Deflation is when prices for goods and services fall. It’s the opposite of inflation.
To many people, deflation sounds like a good thing. After all, who wouldn’t want to pay less for food, clothing, and electronics?
While deflation can be good for consumers, it’s terrible for many businesses. It’s especially bad for businesses that have borrowed too much money.
After all, deflation in the U.S. makes the dollar stronger, which makes it harder to pay back loans. For example, if a company borrows $100,000 and we get 5% deflation, it effectively has to pay back $105,000.
In 2008–2009, the Fed’s flawed thinking went like this: people are “hoarding” money instead of spending it. If we could just convince people to spend more money, the economy would recover.
So its solution was cheap money…lots of it. As we mentioned, the Fed printed massive sums of money and cut rates to zero, in hopes that it would jumpstart spending.
It backfired. The chart below shows the “velocity" of the U.S. money supply, which measures how fast money changes hands. As you can see, velocity is at its lowest point since 1959.
E.B. explains why the Fed’s plan backfired:
With folks investing the new cheap money instead of spending it, the S&P 500 has more than tripled since 2009. Bond prices have hit record highs too.
Meanwhile, the “real” economy is worse off in many ways. The U.S. economy is growing at its slowest pace since World War II. And the real median household income is about $2,500 lower today than it was in 2007.
Last year, they borrowed a record $1.5 trillion.
But like consumers, companies didn’t use the borrowed money to buy real, tangible things. They didn’t buy machinery, equipment, or anything else that would grow their businesses.
Instead, they borrowed to buy other companies and their own stock on the open market, also known as a share buyback.
That’s about $200 billion more than they spent on new machinery, equipment, and research and development.
This is a big problem.
A company can boost its earnings by buying other companies or its own stock. Neither actually improves the business. But they can make profits look bigger “on paper.”
Since the financial crisis, hundreds of giant corporations have used acquisitions and buybacks to hide problems. But those problems are becoming too big to ignore.
As we mentioned, deflation will hurt deeply indebted companies the most:
They are on track to decline a fourth straight quarter. That hasn’t happened since the 2008–2009 financial crisis.
These companies are also bleeding cash…
Companies in the S&P 500 spent 108% of their operating income on dividends and buybacks during the fourth quarter. According to investment research firm Yardeni Research, that’s the highest level since the 2008–2009 financial crisis…when corporate profits nosedived.
Companies will have even less money for buybacks, acquisitions, and dividends when deflation arrives.
E.B. is telling readers to hold cash and physical gold.
A cash reserve will help you avoid losses if stocks fall. It will also allow you to buy stocks when they get cheaper.
Holding physical gold is another simple way to avoid losses. As we often remind you, gold is money. It’s preserved wealth for centuries because it has a unique set of qualities: It’s durable, easily divisible, and portable. Its value is intrinsic and recognized around the world.
Investors buy it when they’re nervous about stocks or the economy. This year, gold is up 18%. It’s at its highest price in well over a year.
E.B is investing in companies that can do well no matter what happens with the economy. And he’s found the ideal business to own during deflation…
Earlier this month, he recommended a world-class licensing company that “caters to the masses.” The company owns dozens of popular American brands. But it doesn’t manufacture anything. Instead, it gets paid a cut every time one of its logos appears on a jacket or pair of shoes.
According to E.B., it’s the type of business you want to own during deflation:
The stock is also dirt cheap. It’s trading 83% below its 2014 high.
If you're concerned about the stock market like we are, we urge you to take action today. At minimum, we recommend you hold more cash than usual…own gold…and only invest in businesses you know can survive a major financial crisis.
For other ways to “crisis proof” your wealth, watch this short presentation. In it, E.B. explains why the coming crisis could cause stocks to plunge 50%...trigger a collapse of the banking system…and even provoke the government to ban cash outright. It’s one of the most important messages we will deliver all year. Click here to view this free video.
Chart of the Day
The U.S. stock market is in its longest “dry spell” in two decades…
Today’s chart shows the performance of the S&P 500 over the past year. You can see it’s now gone a whole year without setting a new high.
You don’t often see this during bull markets. Bloomberg Markets reported over the weekend:
According to Bloomberg, this kind of “dry spell” usually marks the end of a bull market:
U.S. stocks are treading water right now. We encourage you to invest with caution.