A Major Ominous Sign for Stocks

Rejoice, my friend – almost everyone who wants a job has one today!
This is good news, right?
Not for stock investors. It's actually terrible news for stocks… if you believe history repeats.
Let me explain…
The unemployment rate just hit a 17-year low of 4.1%. With the exception of the year 2000, that's actually the lowest unemployment rate in nearly 50 years.
But you remember what happened in 2000. We suffered through the greatest stock market bust of our lifetimes…
The Nasdaq Composite Index fell 56% in the 18-month period following the best unemployment number of my lifetime – 3.8% on April 30, 2000.
"But that was the tech bust, Steve," you might be thinking. And you're right. Plenty of factors led to the tech bust… And we've rarely seen anything so extreme. So was that an isolated incident?
Let's take a look at the other extreme lows in unemployment in the last 50 years, and see what happened to stock prices in the 18 months that followed…
Before today, the most recent low in the unemployment rate was 10 years ago… It hit a low of 4.4% on October 31, 2007. What happened to stock prices over the next 18 months? They fell 44%.
In the last 50 years, the only other period of unemployment lower than today was late 1968. Back then, the unemployment rate hit an extreme low of 3.4%. And over the next 18 months, stock prices fell by 30%.
All told, we've seen four "good" extremes in the unemployment rate in the last 50 years – four times when just about everyone who wanted a job could get one. In each of those cases, when unemployment finally hit its extreme low for that cycle, stocks prices crashed over the next 18 months.
Take a look:
Unemployment Rate
Stock Prices 18 Months Later
Does this mean that stocks will crash over the next 18 months? Does this mean that today's 4.1% is the ultimate low?
No… and no.
"But Steve, don't you keep talking about a stock market 'Melt Up?' And now you're talking about a dramatic fall in the markets? Doesn't that go against your Melt Up thesis?"
My friend, here's the deal… We are in the very late innings of the what could turn out to be the greatest stock market boom in our lifetimes.
Yes, I believe today's stock market boom will end with very big gains – the Melt Up. However, I'm going into it with my eyes open. I understand the risks. Markets do not go up indefinitely.
It's much better to know what can go wrong and when – and to guard against it – than it is to buy based on hope and blind faith.
We know it's getting late in this great bull market. But the important thing is, it's not too late to make good money – yet.
Someday in the not-too-distant future, we will live in a terrible time to be an investor… Stock prices could struggle for a decade or more.
When that time comes, we will be conservative. But that time isn't here yet…
Now – today – might be your last great moment to make big gains in the stock market. The window of opportunity is relatively short. But it's worth it…
Good investing,

Source: DailyWealth

Biotech Is a Screaming 'Melt Up' Buy Today

The biotech sector recently fell by 8% in three weeks.
I believe the bust is overdone. And now is a great moment to swoop in and buy…
Biotech was by far the best-performing sector in the last great "Melt Up," when stocks soared at the end of the 1990s bull market. And I expect it will perform well again as today's Melt Up starts to pick up steam…
The main thing most people remember from the great dot-com boom is that tech stocks soared.
But take a look at this chart… It shows that biotech stocks (as measured by the Nasdaq Biotechnology Index) dramatically outperformed tech stocks in the final months of the last great Melt Up.
The iShares Nasdaq Biotechnology Fund (IBB) has had a rough few weeks. It's down 8% from its most recent peak. Importantly, that has pushed biotech stocks to an "oversold extreme."
We measure "overbought" or "oversold" levels with the relative strength index ("RSI") – the typical indicator that tells us when an investment has moved too quickly to the upside or downside.
Last week, the RSI in biotech stocks fell to its second-lowest level in the last 10 years.
That begs the question – what happened after the MOST extreme level in the last 10 years?
Biotech stocks hit their biggest oversold extreme on August 8, 2011. After that, they shot up by more than 40% in just six months. You can see it for yourself in this chart…
Of course, longtime readers know I don't like to buy into a downtrend. I want to wait for the uptrend to confirm my idea before I get in.
Similarly, with the RSI, I don't want to buy when a stock (or fund) is oversold. That tells me it's hated… But the problem is, it can always get a lot more hated!
So I prefer to wait for an uptrend in the RSI, too… to wait for the oversold extreme to go away.
Fortunately, that's what we're seeing today. The oversold extreme appears to be gone in biotech. It looks like the downtrend might be over, and we could be right at the start of an uptrend. This chart shows the details…
This week, our True Wealth Systems computers went against what I'm telling you today. They said to sell biotech – and they're usually right.
But there are times when I disagree with our computers. This is one of those times. I'm willing to go against them today because I believe this is the right setup – one that's giving us a huge opportunity.
You know I'm a strong believer in what I call the Melt Up. And you know that biotech was a dramatic outperformer in the last great Melt Up. I expect biotech will be a great performer in this Melt Up, as well. So this mini-bust in biotech stocks gives us a great entry point…
This might be your last – and best! – chance to get into biotech stocks before they take off in the Melt Up.
Take advantage of it…
Good investing,

Source: DailyWealth

Why Millions of Americans Feel They Have Nothing to Lose

The Weekend Edition is pulled from the daily Stansberry Digest. The Digest comes free with a subscription to any of our premium products.
 There's no denying it…
Whether it's violent protests in major cities across the country… soaring rates of drug abuse and suicide… or even the recent national anthem controversy in the NFL, it's clear…
Something is wrong in America.
If you're like us, you can't open a newspaper or turn on the nightly news without feeling as though the fabric of civil society is being torn apart.
But recently, Porter introduced a controversial idea…
What if America's political and social upheaval wasn't quite what it seemed? What if these problems were a symptom of something much bigger… and much more important? As Porter explained last Saturday
When you watch the news and you see people rioting about race in Charlottesville, Virginia… when you see the inner cities burning in Baltimore… when you see more and more radicalized politics – like resurgent neo-Nazi groups, the rise of Black Lives Matter protests, and college students embracing violence to protest at any conservative speaker – what you're really seeing is the beginning of the "jubilee."
These protests may nominally be about race. Or about Donald Trump. But what they are really about is hopelessness. What they are really about is economics.

 Porter was talking about America's hidden debt crisis… You see, while most Americans believe our debt problems were "solved" during the 2008 financial crisis, you know better.
Yes, vast amounts of bad mortgage debt were wiped out. But American consumers – to say nothing of corporations or the government itself – never stopped borrowing. Our economy never really deleveraged.
In essence, we simply replaced mortgage debt with vast amounts of new consumer debt. Americans ran up their credit cards, bought fancy cars they couldn't really afford, and borrowed insane amounts of money for college degrees of questionable value. And Americans now hold more total debt than ever before in history.
 But it gets even worse…
Even during the peak of the housing bubble – when lenders issued lots of subprime mortgages without even checking a borrower's income – most mortgages were well collateralized. Even then, most people had the income required to pay the loan.
But that is not the case today. Most of this consumer debt has been concentrated in the poorest segments of our society. More from last Saturday's issue…
Credit Suisse Chief Global Strategist Jonathan Wilmot published some debt research that looked at debt-to-income ratios across different segments of the population. In the late 1980s, the 20% of Americans with the least amount of income held little debt, when measured against their income levels. Today, however, this segment of the population is the most in debt when measured against income.
The poorest Americans now hold debts in excess of 250% of their incomes, or about five times more debt than the wealthiest 20%.
This massive change in the character of our household debts came about because of "innovations" in lending – like subprime auto loans, payday lenders, and, most important, student loans. Today, total household debt is almost $13 trillion. That's higher than the previous all-time high of $12.6 trillion, set in the third quarter of 2008 – immediately prior to the last crisis.

In other words, a huge number of Americans have borrowed more money than they can ever dream of repaying… They have little of value to show for it. They have no way out. And they have no hope that things will get better.
So what you're seeing on the news is just the tip of the iceberg…
Tens of millions of angry Americans increasingly feel they have nothing to lose.
Worst of all, this is happening despite some of the lowest interest rates in history. Debt-service costs have never been cheaper.
But interest rates are already moving higher. How many more Americans will join the ranks of their fellow indebted citizens as these massive debts become more and more costly? What happens then?
 The likely "endgame" is clear…
Sooner or later, the U.S. government will have no choice but to appease these folks. They will wipe out these debts and redistribute trillions of dollars in the process. That's what Porter was describing when he referred to the "jubilee" in America.
Again, there's no denying this problem or the likely "solution." But Porter left one question unanswered… Why on Earth did so many people borrow so much money they have no hope of ever repaying?
You might assume it stems from a lack of personal responsibility, or a decline in moral standards in recent years. And that certainly played a role… A segment of society always exists that wants something for nothing.
But this doesn't explain how this problem could grow so large.
The real reason is something else…
Real wages for most Americans have been stagnant or falling for decades.
The real (adjusted for inflation) median household income in the U.S. has been flat since at least 1980. And even this figure is misleading, as there weren't as many families with two wage earners then as there are now.
In other words, despite the boom in the economy and financial assets over the past 30 years – which boosted the wealth and incomes of the richest Americans like never before – average Americans are actually worse off than they were decades ago. And they've been forced to borrow more and more simply to keep up.
 Now you may already be familiar with this fact…
But it's almost certain you don't know why this has happened. Again, the reason is simple. It's one most folks will never understand, though… and one you'll never hear an economist or government official admit.
The underlying economic cause is simply that wages are no longer connected to gains in productivity. Here's a chart based on research from the Economic Policy Institute that describes the problem. As you can see, productivity in this country grew nearly 250% between 1948 and 2014, but median wages only grew 109%…
You'll also notice that the divergence begins around 1971… the year President Richard Nixon removed the U.S. dollar from gold. Why? Because paper money doesn't transmit gains in productivity like real, sound money should.
In short, when the dollar was unlinked from gold, the government was granted the ability to create unlimited amounts of new money. But this money doesn't flow to everyone equally.
It is created in the banks, and then works its way through the financial system before eventually trickling down through the real economy. The result is that asset and consumer prices have risen far faster than wages.
Simply working harder – or working smarter – isn't benefiting employees anymore. On the other hand, Americans who own assets and businesses have seen their wealth soar over the last 40 years.
And it is this massive gap that is ultimately fueling today's problems.
 So where is this debt crisis and the jubilee taking us?
Porter just released a brand-new presentation detailing all of the facts and the inevitable consequences of our historic debts… and the measures our government will have to take to wipe them away.
Porter and his research team have put the finishing touches on a series of reports for their Stansberry's Investment Advisory subscribers that lay out all the tools individual investors need to protect themselves and their wealth from what's coming.
To see the presentation for yourself – and learn more about Stansberry's Investment Advisoryclick here.
Justin Brill
Editor's note: Have you heard of the jubilee? In short, it's a truly radical plan to "fix" what many perceive as America's biggest problems: racism, income disparity, poverty, and inequality. But Porter is one of the few expressing serious concern. He and his team recently launched a full investigation into what's coming next. Read their analysis right here.

Source: DailyWealth

Where's the Biggest Bubble?

Steve's note: Yesterday, my friend and colleague Porter Stansberry wrote that while stocks are rising, they're not at bubble levels. He says the bubble right now is in different assets… And it will cause a true panic when it bursts. Today, he explains how to shield yourself from these dangerous investments. I urge you to pay attention… And read on for details about an even bigger threat he's seeing in motion now…
Yesterday, I told you this bull market is hiding a huge risk. I told you that if you want to understand it, you must first spot the biggest bubble in the markets right now.
What financial asset has completely lost its grip with reality?
Only one kind of financial asset is trading at all-time levels…
Last month, I attended the speakers' dinner at the Grant's Interest Rate Observer fall conference in New York.
The room was filled with billionaires and a few folks who "only" manage billions. I had a long conversation with Frank Brosens, one of the founders of Taconic Capital, a major hedge fund. Brosens spent the 1980s serving as the head of risk arbitrage at investment bank Goldman Sachs, where he was a general partner.
At the conference, Brosens told the story of how his group made billions on the crash in 1987.
Back then, they perceived how the so-called "portfolio insurance" programs that were being sold (essentially dynamic put-buying) would lead to a cascade of selling in the stock market as too many market participants had adopted "pro-cyclical" strategies – meaning positions that tend to propel market reactions into overreactions – instead of "counter-cyclical" strategies.
You see, the guys buying the "portfolio insurance" didn't understand that not everyone can hedge their portfolios at the same time. Someone has to be willing to sell the put on the other side of the trade.
Brosens and his team started calculating what would happen in the event of a 5%-6% correction in the stock market as these trading programs kicked in, and they began buying massive amounts of put options at the same time. He explained that they calculated there would have to be a 25%-30% correction in the markets, based on the amount of puts that would be purchased.
Few people perceived this risk…
Almost nobody considered the fact that lots of insurance companies and pension funds had entered into pre-programmed dynamic hedging strategies. But these orders represented a gigantic "stop loss" point that was sitting just below the market. Trip over that level, and look out… Billions and billions of stocks would be dumped on the market. Everyone would try to exit at once.
Brosens' team did something brilliant. It began offering insurance firms an extra percentage point in annual return on their entire portfolio in exchange for the right to sell them a percentage point worth of stocks at the current (fixed) price.
The insurance firms were so excited about an extra point of return that they began to bid the deal higher. Soon, Goldman Sachs was getting three points' worth of stocks (at the current price, fixed) in exchange for only one point of extra return for the insurance companies.
You might not understand the math… but the impact of these deals was that Goldman would get a return of up to 300 times on its money if the stock market fell by a certain amount.
You know what happened next…
But you've probably forgotten why.
On Thursday, October 15, 1987, Iran hit a super tanker in the Persian Gulf with a Silkworm missile. The ship was U.S.-flagged and carrying crude oil bound for the U.S. market. On Friday, October 16, it happened again. Iran attacked another super tanker.
The market responded badly. Selling led to more selling… and then even more selling. The dynamic hedging programs were driving more and more money out of the market as it fell. The market fell more than 300 points by the end of that week, down about 12%.
The sell orders piled up over the following weekend as the London Stock Exchange didn't open because of a freak storm. A hurricane hit southern England and northern France. More and more investors began to panic. When trading opened in New York on Monday, October 19, it seemed as though the entire world wanted to sell stocks at virtually any price. The market crashed an incredible 22% in one day.
Brosens and his team at Goldman Sachs saw what was going to happen…
They were ready. And they made billions by hedging Goldman's other trading losses. They probably saved the firm.
Brosens explained to me at the conference that the exact same forces are now at work in the U.S. equity markets… thanks to massive bets against volatility.
The bubble in this market – the biggest bubble of them all – is the size and amount of bets against volatility.
These bets have made investors billions and billions of dollars as central banks' liquidity has crushed all measures of risk. Inexperienced investors have come to view this trade as a "can't-lose bet" in the same way firms believed that dynamic portfolio hedging could remove all risk from their equity investments back in the 1980s.
One anecdote making the rounds in the market today is about Seth Golden, a logistics manager at retail chain Target. He has made $12 million in the last five years by simply shorting volatility.
But it's not just these kinds of stories. The amount of capital betting on low volatility has driven the Volatility Index ("VIX") – the Chicago Board Options Exchange's measure of market volatility – to record lows. (Early last month, it closed at 9.19, its lowest closing level ever.)
For almost 30 years, this futures contract rarely closed below 10. In fact, that has only happened seven times before this year. But in 2017, the VIX has closed below 10 on 35 separate days.
This is by far the biggest bubble in the market
The biggest problem with this particular bubble is that these bets are all pro-cyclical. Folks in these positions can't hold them through a rough patch in the market. Instead, as the market falls, these investors must sell immediately. They are highly leveraged to the market.
Remember in May, when the S&P 500 Index fell just 1.8% over a few days? Volatility jumped almost 50% in that same period. One of the exchange-traded funds (ETFs) that investors are using to short volatility contains an interesting clause that few investors seem to have noticed: If volatility jumps more than 80%, the fund will liquidate with a net asset value of zero.
In other words, one day – who knows when – this fund, which holds billions in assets, will simply cease to exist. Investors won't lose a lotThey will lose everything.
Normally, that wouldn't worry me (or anyone else) too much…
What's different now is the size of the bets on volatility. This part of the market used to be only available to futures traders – generally large institutions. But beginning in 2011, ETFs allowed individuals to own these same futures, probably without really understanding what they own. Today, around $5 billion is invested in VIX-related ETFs.
There are two big problems with these investments that no one seems to understand… yet.
First, even though the nominal amount of money invested in these funds is small compared with the stock market as a whole, these funds are invested into highly leveraged, pro-cyclical futures. These are the exact same kind of instruments that led to the panic in 1987.
But an even bigger danger lies in these particular kinds of futures. VIX futures are only guaranteed to synchronize with the VIX index on the day they expire.
On any other day, supply and demand drive their value. Ergo, if investors panic and sell their ETFs, supply won't be able to keep up with demand, and the prices of these futures will become skewed. During a real panic, the value of these ETFs will evaporate, producing an even more exaggerated and leveraged impact.
One final thought…
Until 2003, it was impossible to trade futures contracts on the VIX. The CBOE eventually agreed to tweak its formula to allow market makers to build a futures contract that could be traded.
You'll never guess which investment bank pushed for these changes – Goldman Sachs, of course. Goldman also designed the new contract. This contract exists so that in periods of extreme selling pressure, Goldman can execute the kind of trade that Brosens had to set up with individual insurance companies.
If you're thinking about buying an inverse-volatility ETF, ask yourself this: Who would you rather be… an insurance company, or Frank Brosens?
Good investing,
Porter Stansberry
Editor's note: This is only part of the bigger picture. Porter has warned that very soon, a "Jubilee" is coming – a radical plan to "fix" America's debt crisis. This event will lead to civil unrest… and will turn the next crash into a national nightmare. That's why Porter and his team have laid out the ideal strategy to help you protect your portfolio – and even prosper – as it all unfolds. Click here to learn more.

Source: DailyWealth

What Will Cause the Next Crash

Steve's note: We're in the "Melt Up" phase of this bull market… And I want you to profit as stocks rise higher than anyone believes possible. But I also want you to prepare for what comes after the Melt Up. My friend and colleague Porter Stansberry, founder of Stansberry Research, believes that when the next crash comes, it could be the most chaotic yet. And in today's essay, he explains the forces that will put it in motion…
The current bull market is hiding a huge risk…
It's not inflation. It's not accounting fraud. It's not about overvalued stocks.
It's something that's so technical and so difficult to understand that regulators, individual investors, and even the most sophisticated institutions are missing it.
But this risk is HUGE. And it's staring us right in the face…
Today and tomorrow, I am going to tell you about this enormous threat to financial assets and explain why this is what will eventually destroy most of the wealth people believe they now hold in the stock market.
If you want to understand the biggest risk in finance today, you first have to spot the biggest bubble
Inflation is a poorly understood financial concept. It has nothing to do with price indexes (like the consumer price index or the producer price index). Belief in those measurement tools stems from the 1970s, when inflation flowed into hard assets and commodities.
The big inflation in the last bubble was in residential housing. That should have been obvious to everyone… But it wasn't because we don't call home prices rising much faster than incomes "inflation." We call it the "wealth effect." (Trust me, it's still inflation.)
So… what's the proper definition of inflation?
That's simple: Inflation is the creation of money and credit beyond the savings rate. We have a central bank that creates trillions of dollars of new money with the click of a computer mouse. These funds, produced without any savings, taxes, or increases to productivity, flow through government spending and mortgage finance.
But the government's spending on defense contractors, the medical community, the housing complex, and all of the associated "swamp creatures of the beltway" isn't the real problem. Those are only the first-order impacts of these policies.
You see, the real impact of this new money comes when it enters the banking system. Firms like JPMorgan Chase (JPM) can take $100 million in new government bonds (a reserve asset) and then lend out another $900 million or more in new commercial credit. That's how a real credit bubble is built… by the accumulation of trillions and trillions in new credit.
We've seen this credit inflation occur over and over, ever since we abandoned the gold standard in 1971…
Gold provided a physical limit to credit. Since gold reserves had to be mined, they couldn't merely be wished into existence.
As interest rates have moved lower and lower, the size and scope of the credit bubbles have become bigger and bigger. More borrowing can be financed thanks to the much lower borrowing costs.
Likewise, as interest rates have fallen, vastly more credit could be extended to the most marginal parts of society. Subprime lending only works when institutional credit is available at rates of less than 5% a year.
(Subprime borrowers typically default on 10% or more of these loans, and it's difficult to charge anyone more than 20% a year to borrow money. Ergo, for the business model to work, funding capital must be available at less than 5%, otherwise no operating margin is left to run the business and make a profit.)
Falling interest rates have made each bubble worse than the last…
The commercial real estate bubble of the late 1980s was tiny compared with the tech-stock bubble of 2000… which was less than one-tenth of the size of the mortgage credit bubble of 2007.
With institutional funding rates now close to zero – or in some cases, below zero – the current bubble will be the worst and most disruptive yet.
The next bust will feature far more civil unrest because it has largely been built upon the middle class and the poor.
This credit bubble has seen HUGE amounts of debt added to the accounts of major Western governments (middle-class taxpayers), students (student loans outstanding sit at more than $1.5 trillion), and subprime borrowers (auto loans and credit-card debt each total more than $1 trillion).
As the amount of debt that must be serviced continues to grow much faster than wages, it's simply a matter of time before defaults overwhelm the ability of creditors to pay. At that point, the cycle will reverse… And the crash will come.
None of this is new… or should be news to you…
We've been reporting on these facts for a long time, since we noticed auto lending in particular begin to get out of control back in 2014. Since 2008, the major Western economies have experienced massive inflation. At least $20 trillion has been created in new credit in the U.S. alone, counting new federal debt, new consumer debt, and new corporate debt.
So… in less than 10 years, we've created more new debt than what our entire economy produces in a year. That's an inflation that's bigger than any in our history outside of World War II.
Where has the money and credit gone?
Not into commodities. They've been in a bear market (until recently). Housing prices have rebounded, but they haven't gone crazy. And stocks have certainly gone up, but with a few notable exceptions – like electric-car maker Tesla (TSLA) – they aren't trading at bubble levels.
We have good reason to believe that the bond market (and junk bonds in particular) are trading at highly inflated prices… But that's more a function of the government's manipulation of interest rates than capital flows.
Tomorrow, I'll tell you where the biggest bubble is right now… and what it means for your portfolio.
Good investing,
Porter Stansberry
Editor's note: Porter and his team believe a "Debt Jubilee" is coming… an event that could "reset" the financial system, turning the next crash into a national nightmare. But with a few simple steps, you can position your portfolio to not only endure – but actually prosper – as it all unfolds. You can find all the details in their brand-new presentation. Click here to watch it now.

Source: DailyWealth

Why Japanese Stocks Could Soar 18% Over the Next Year

The Japanese stock market finished an incredible streak last week…
It was one of the most impressive runs we've ever seen. And it's been nearly 30 years since the Japanese market has come close to what just happened.
This amazing streak helped push Japanese stocks to multiyear highs. But history says the gains are just beginning.
Japanese stocks could soar 18% – and potentially even more – over the next year, thanks to this rare move.
Let me explain…
Longtime readers know we're bullish on Japan.
Just last week, my colleague Steve Sjuggerud explained that investors have pulled money out of Japanese stocks at a record pace.
That alone is a fanatically bullish sign. We like to buy assets that are "hated" by investors – that's often where you find the biggest winners. But it's not the only reason Japanese stocks are a great opportunity today…
The Japanese market just finished an amazing streak of gains. The last time we saw a streak like this one was in 1988.
Back then, Japanese stocks were in full-blown bubble mode. They had soared for the better part of a decade. But the gains weren't over…
The Japanese market went on to soar 56% over the next 22 months. And in the nearly three decades since that boom ended, the market still hasn't come back to its 1989 high.
So what just happened that rivals 1988?
Japanese stocks – as measured by the benchmark Nikkei 225 Index – recently moved higher for 16 straight trading sessions. They didn't have a losing day last month until October 25!
It's an amazing streak. You can see it highlighted in the chart below…
Japanese stocks are up 8% since the streak began. But history says the gains should continue.
Obviously, a streak of 16 up days doesn't happen often. So I looked at each time the Nikkei 225 moved higher for 10 or more consecutive trading days.
That has only happened 10 other times since 1970. And Japanese stocks soared after those instances. Here are the details…
After extreme
All periods
A streak of positive days is a fantastic predictor of future returns in Japan.
It has led to four times the typical six-month return and more than three times the typical one-year return. And it means gains of 10% in six months and 18% in one year are possible, starting now.
Even more impressive, Japanese stocks were positive 80% of the time both six months and a year after these extremes. So we have a high probability of big gains now.
Combine this with the fact that investors aren't interested… that they're pulling money OUT of Japanese stocks… and it's easy to see why Japanese stocks offer a fantastic opportunity today.
History says we could see gains of 18% over the next year. And that makes now a fantastic time to put money to work in Japan.
Good investing,
Brett Eversole

Source: DailyWealth