With our current political climate, the EU punishing Britain for Brexit, tariffs, trade wars, the Fed raising rates, record government deficits and whatever hysteria the media can create - the crystal ball is full of clutter.
How should investors approach 2019?
We've assembled a terrific group of highly regarded experts with excellent track records. Readers want me to use them more proactively for our benefit.
Most New Year predictions are amusing but offer little actionable advice.
Our contributors are on top of their market - held accountable by their readers. When they peer into the future their perspective is how their clients can prosper financially - yet invest safely.
I contacted the dean of the group, Chuck Butler. He is my mentor and I am grateful for all the help he has given us.
DENNIS : Chuck, thanks again for your time. 2019 has a lot of contrasting variables. Let's break them down and discuss them individually.
Despite warning signs that the economy is slowing, the Fed seems hell-bent on raising rates - until something breaks. You are the best fed-watcher I know. What do you expect in 2019?
CHUCK : Thanks again Dennis for allowing me to give your readers my opinions.
I've long said that: I'm a Fed Watcher, I'm a Fed Watcher, watching the Fed do wrong… The Fed is hell bent and whiskey bound to hike rates, giving them enough room to cut when the recession arrives. Rate hikes will continue in 2019 until the recession hits us.
Here is the math… Historically, the average interest rate at the start of a recession is 6.5% and the average amount of rate cut during a recession is 4%.
We are nowhere close to those numbers. Our current rate is 2.25%, soon to be 2.50%. If the Fed continues at the same pace - a year from now, we'll be at 3.50%. That's nowhere near where they need to be to fight a recession. I have thoughts about where that will lead us when the recession hits us.
DENNIS : Where might it take us? Inflation seems to be rising despite the phony numbers from the Bureau of Labor Statistics (BLS). Interest rates are rising, which should make the dollar more attractive, hurting exports.
Do you see the fed changing course or slowing down? What markets do you see as vulnerable? Are there markets that grow during these times?
CHUCK : When the recession does hit (I think it's late in 2019) the Fed will begin to reverse their course on rate hikes. I know you fear politics will come into play. Who knows their real motivation?
When the dust settles, we will be back at zero percent interest rates. If things get worse, we could see negative interest rates and more Quantitative Easing.
Historically stocks do not perform well during recessions. I expect a very deep bear market.
My thoughts -- The next recession will be worse than 2007/08, because:
-- The Too Big To Fail Banks have gotten bigger, with no changes to their previous motives.
-- Interest rates aren't high enough to combat it.
-- Leveraged loans of Corporations are HUGE.
-- Debt in this country is much larger than in 2007.
-- The derivatives are greater than they were in 2007.
Unfortunately, no markets grow under these circumstances. Stocks historically have performed very badly during a recession, and bonds see plenty of selling as investors bring home money and hunker down.
Even Gold sees selling during this period, but - and that's a Big But - things will eventually get so bad that Gold will be the savior, and so during the period of selling, one should look to buy Gold at a cheaper price.
Cash is king during a recession, period! Everyone wants to hunker down, and not spend - making things worse. Which causes me to fear we're in deep dookie come the next recession.
Always expect the Fed to continue to bail out the banks.
DENNIS : Let's talk tariffs. I feel tariffs are a good short-term tool if they re-open trade negotiations like NAFTA. Many pundits warn, over the long haul, trade wars can end in shooting wars.
What do you see on the tariff front? Can our readers profit by understanding what is going on?
CHUCK : I've read the same thing about how long Trade Wars have turned into shooting wars. Let's hope it doesn't come to that. Tariffs are not good for any country involved.
No one wins in nuclear war as we learned in the movie War Games (1983), and no one wins in a Trade War.
The Chinese are combating the export tariffs by depreciating their currency, which will eventually invite inflation into the country. In the U.S. the tariffs placed on Chinese goods (which U.S. consumers can't seem to get enough of) cause them to become more expensive. That will slow down spending in the U.S., which is an economic driver.
The only thing I see as something investors might want to look at are the companies that benefit from the tariffs, like steel; but only as a short-term investment . A deep recession will negatively affect all stocks.
DENNIS : All the issues so far, interest rates, inflation and tariffs will affect the value of our dollar. We encourage investors to diversify their nest egg into several currencies - which is your specialty.
What do you see for 2019? What should our readers hold? Are there any you recommend we lighten up on?
CHUCK : Well, I've already talked about how stocks perform. If you're hell bent on keeping your stocks, please make sure that you keep your stop losses on those stocks up to date.
I've long been a follower of Harry Markowitz and the Modern Portfolio Theory (MPT). Markowitz believed that a diversified investment portfolio was best suited for all. And in that diversified investment portfolio were asset classes that people normally didn't think of, like currencies and precious metals.
And in the Great Recession of 2007/08, the Markowitz MPT was tested and passed as the best portfolio to survive the recession.
So, with Harry Markowitz as my guide, I would look to diversify your investment portfolio. using the Markowitz MPT as a guide.
Unfortunately, there are few brokers out there recommending metals, foreign currencies, or holding stocks denominated in different currencies. Investors must stay on top of things.
DENNIS : The political class pretends to care about budget deficits, complaining - when they are out of power. The current theme is tax cuts are causing the deficit to rise - but neither political party ever cuts spending.
President Trump proposed another tax cut. The democrat leadership wants to raise taxes. What do you see happening? Is there anything readers should look for if it looks like one side will prevail?
CHUCK : There is so much chaos in the U.S. Gov't these days, especially after the latest election, I expect a lot of gridlock for the next two years. We can expect that nothing gets done - accompanied by media hysteria and finger-pointing.
The US Debt Clock shows our debt is $21+ Trillion, and Unfunded Liabilities are $115+ Trillion. Professor Lawrence Kotlikoff says that the total debt of the U.S. tops $200 Trillion. The first month of the new US fiscal year saw a deficit of $105 Billion. Expect FY 2019 to go well over $1 trillion again.
There are a couple ways the government can deal with their debt mess. They can cut spending - fat chance of that happening - or they can depreciate the dollar hoping to inflate the deficit away…
And with that in mind, I always ask people one question… Got Gold?
DENNIS : Nice lead to my last question. We've encouraged readers to hold part of their nest egg in gold. Have you changed your recommendations in that regard?
CHUCK : I've always been considered a Gold Bug, and I won't change my mind on that one iota… I asked the question, Got Gold? I don't mean to be flippant…I'm serious about that… people need to hold Gold as a store of wealth, and it will remain that as long as you live .
Today no one can tell you 100% that they know what's going to happen in the future. I've given you my opinion, based on fundamentals and history, but there's no sure-fire answer, given the way things are today. And with that in mind, I'll ask once more… Got Gold?
Thanks again for inviting me.
DENNIS : Thank you again, Chuck.
UPDATE : As Chuck predicted, Fed Chairman Powell announced another rate hike.
In October Powell said:
"…. We're gradually moving to a place where they (interest rates) will be neutral. We may go past neutral, but we're a long way from neutral at this point…."
His recent remarks paint a different picture:
"Interest rates are…just below the…level that would be neutral for the economy - that is, neither speeding up nor slowing down growth."
We caught up in a heck of a hurry. Will the next rate hike be the final nail in the boom economy coffin?
Seniors, savers, and investors can't afford to be blindsided like they were last time.
You can enter a bull market late and still make money. If you exit a bear market, even a little late, you can lose a lot of money!
Wolf Richter recently wrote :
"…. 438 stocks among the 2,051 or so stocks traded on the New York Stock Exchange (NYSE) have plunged between 40% and 94% from their 52-week highs.
This does not include any stocks traded on the Nasdaq."
21% of the market is down between 40% and 94%. Time for caution!
Keep your stop losses tight. Those with gold and cash will fare better than most.
This article originally appeared on MillerOnTheMoney.com .