Note from Tom: I hope you look back on this letter and recall it as one of the most important things you read this year. I want you to print it out and refer to it many times.
From Tom Dyson, founder, Palm Beach Research Group: 1,800 points.
That’s how much the Dow is down this year. That’s more than 10%. And we’re only 14 trading days into the year.
It’s the worst start to the year for the Dow in its history.
And no, oil’s collapse isn’t causing the stock market decline. Nor is China’s slowing economy. Nor are any of the other common explanations you’re seeing in the press.
This essay isn’t a series of my predictions or best guesses for the year ahead. It’s a simple observation drawn from obvious facts.
We’ve entered a credit deflation… otherwise known as a deflationary depression.
I call it…
The Great Unwinding
For the last 79 years, America has seen an inflationary boom. But this inflation is unique. Unlike most inflations in history, this one is based on credit inflation, NOT money inflation.
We’ve borrowed and borrowed and borrowed in dollars… cheap dollars… and we’ve exported them all over the world.
As my friend Doug Casey points out, the U.S. dollar is America’s most important export.
Total offshore borrowing of U.S. dollars has reached more than $9.6 trillion, according to the Bank of International Settlements. Emerging markets borrowed more than $3 trillion.
The chart below shows the exponential increase in borrowed U.S. dollars from the biggest emerging markets’ non-financial (i.e., non-bank) borrowers—in Brazil, China, and India.
The next chart shows foreign borrowers have exponentially increased their dollar-denominated debt since 2000.
But the most important indicator is the dollar itself.
Below, you can see this persistent downtrend in the dollar’s value since the 1970s—when Nixon cut the dollar’s link to gold.
Now these dollars were borrowed into existence, not printed. Borrowed money must be paid back some time. And that time is now…
King Dollar returns
We’re now unwinding the great inflation of the past 79 years.
That inflation involved borrowing cheap dollars and trading them for higher-return, higher-risk investments—often in foreign currencies. This caused the dollar’s value to fall.
To know we’re now deflating, you only need to watch the dollar rise. And that’s what’s been happening.
This is why:
The British pound just fell to six-year lows against the dollar…
The South African rand hit 16-year lows against the dollar…
The Hong Kong dollar is straining against the peg it’s had for 32 years…
Twenty countries have now seen the U.S. dollar appreciate by at least 50% over the past five years. These countries represent a total population of 2.2 billion people.
The Great Unwinding is having clear effects on the markets.
The Great Unwinding will be a drawn-out stagnation… not a crash or crisis.
(I could be wrong about this… we might see another version of 2008, but I doubt it.)
But the end result—the unwinding—is inevitable.
The unwinding is causing oil’s price to plummet. It’s down 70% since June 2014.
Copper, tin, nickel, aluminum, platinum, and many other commodities have hit multidecade lows. The Bloomberg Commodity Index, which tracks more than 20 commodities, is at its lowest level ever.
Brazil’s stock market is down 77% since 2011. Russia’s is down 70%. And China’s Shanghai Composite is down 44% in the last seven months alone.
Longtime readers have seen my warnings about this…
I warned foreign currencies would fall against the U.S. dollar. I alerted my readers that stocks and commodities—especially in riskier places like China—would suffer.
I just traveled to Venezuela, Colombia, Cuba, Mexico, and the U.K., where I observed the effects of The Great Unwinding firsthand.
Even the stock markets of the U.S., Britain, and other Western countries are succumbing to The Great Unwinding…
What to do now
Get into maximum defensive mode with your investments.
I’m not saying panic. But have a plan.
At PBRG, we take an “anti-fragile” approach to investing. Our approach helps you build and protect your wealth… both inside and outside the stock market… in up, down, and sideways markets.
We’re well set up to weather The Great Unwinding… or anything else the markets throw at us.
The main way we do this is through intelligent asset allocation.
Here’s where I stand on investing in the different classes now:
The stock market will be sensitive to a credit deflation. We’re entering a recession and the economy will contract.
At PBRG, we’ll be looking to invest in only three types of stocks:
High-quality businesses with long track records of paying dividends we can use for compounding. Best to wait for cheaper prices on these companies.
Companies with lots of cash and little debt. These companies will command a premium in the credit deflation.
Companies that benefit from a rising dollar and a contracting economy.
These are the fundamentals we rely on in our flagship newsletter, The Palm Beach Letter, and in The Legacy Portfolio.
We’ve done very well so far…
Since we launched Legacy, our recommendations are up 32.7% on average…
In The Palm Beach Letter, we’ve banked gains for readers of 112.48%, 147.44%, and 250.47%. And we’ve recommended income plays paying out 8.1%, 6.43%, 7.5%, 6.47%, and 8.7% interest…
We’ll continue recommending investments using the above stock-selection strategy.
Stick to cash-flowing real estate only. Real estate prices won’t appreciate.
But rental real estate is one of the best wealth generators available. As Mark has said:
The traditional asset allocation models don’t include rental real estate as an asset class. Many consider real estate too risky. And Wall Street can’t generate fees and commissions from real estate the way it can with stocks and bonds. So Wall Street doesn’t recommend it.
Mainstream advice on real estate is dangerous. The pundits recommend real estate at the wrong time. For example, it was popular from 2005 to 2008—just before the housing bubble popped.
As your general practitioner, it’s our duty to make sure you include real estate as an asset class and part of your wealth-building efforts.
Next to business ventures, the sector that’s contributed most to my net worth is real estate. Real estate—rental real estate bought for cash flow, in particular—is a good way to build wealth.
There’s no substitute for rental real estate in a well-diversified portfolio. It offers cash generation, diversification, and huge tax benefits.
That’s why we offer access to three cash-flow real estate strategies at PBRG:
(1) Justin Ford’s C.A.P. Cash Flow course and (2) “Real Estate Investing 101” in the Palm Beach Wealth Builders Club condense everything Mark and his brother, Justin, have learned about investing in real estate over the past 30 years. You can learn it in a single afternoon.
And in (3) the Palm Beach DealBook, accredited Infinity members are invited to join Justin and invest alongside him in private cash-flow real estate deals.
Gold won’t be a big winner… but it’s worth owning some. I mean physical gold and silver, not mining stocks.
I like gold and silver as an asset class because they serve as chaos hedges… insurance against a disaster.
This is the best place for your money right now. But make sure it’s safe. Spread it among a few banks and use some PBL ideas for holding cash. Always keep some physical cash within reach.
Holding cash gives you options. If the market takes an unexpected plunge and puts elite blue-chip stocks on sale, you need cash to take advantage and scoop them up.
If a prime piece of rental real estate hits the market, having cash on hand to act fast can be the difference between a deal or no deal.
Cash is also a safety hedge. You don’t know what life will throw at you, and having cash gives you options. So it’s critical to hold some cash. (Or at the very least, a cash alternative.)
The strategy we recommend—Income for Life—is one such alternative. It gives you ready access to cash whenever you need it.
And our options-trading service, Palm Beach Current Income, puts instant cash in your brokerage account. We’ve recommended 186 full-cycle trades so far… And 180 of them have been winners. That means anyone who’s invested in these trades has collected instant cash income 96.77% of the time.