DELRAY BEACH, FLORIDA – We’re down in Florida to meet a new grandchild.

It’s a different world down here – different from Ireland, Maryland, France, Argentina… our usual haunts.

Florida is flat. And barely above sea level. If the North Pole keeps warming, much of South Florida will be underwater soon.

The people here are different, too. They are either young, tanned, and taut… muscled and contoured. Or they are old, broken-down retirees. There don’t seem to be many in the middle… ordinary people, that is.

And they all seem to have a shorter outlook, as if they were aware that they will soon be swept away by the waves. People here are more eager to go out… to show off… and to spend money.

Cars, for example, are newer and cleaner than those you see on the streets of Baltimore. And they are bigger and flashier than those you see on the country roads of Ireland. Houses, too, at least along the coast here, are bigger and fancier.

There are also many more shops and restaurants here. Drive down almost any road and you’ll find strip malls, outlets, chain stores, and franchises everywhere… with dozens… hundreds… thousands of places to spend money.

With so much retail capacity to support, it is amazing that people have any money left.

And what will happen when the hurricane comes and the money disappears?

More Hair-Pulling

In the meantime, the taunting, tussling, and hair-pulling continues. Trump promised to punish General Motors (GM) for cutting losing operations. POTUS says he’ll even demand that old bailout money be repaid if GM goes through with its plan to cut 14,000 U.S. jobs.

And he told the Chinese how to run their business, too – insisting that they cut their tariffs on foreign-made autos.

Then, he claimed that “Mexico would pay for the wall,” just as he had promised during the election. Only, Mexico has no intention of paying for the wall. So he fudged, saying that it could be paid for from “savings” that come from something-or-other.

Real Battle

Off the political stage, the real battle has begun – the one that will affect all our lives for many years to come. From Bloomberg:

The U.S. posted the widest November budget deficit on record as spending doubled revenue.

Outlays jumped 18 percent to $411 billion last month, while receipts were little changed at $206 billion, the Treasury Department said in a monthly report on Thursday. That left a $205 billion shortfall, compared with a $139 billion gap a year earlier.

Dear readers will recall that deficits aren’t supposed to be increasing. The Christmas tax cut last year was advertised to stimulate growth; extra tax revenues would reduce deficits, we were told.

So far, the debt has gone up… and will more than likely double by 2018. Here’s Bloomberg again:

The Tax Cuts and Jobs Act that President Trump signed a year ago seems to have boosted economic growth in 2018. But there’s little evidence yet that it’s setting up the U.S. economy for faster growth over the longer term, which is what the White House and the legislation’s backers in Congress promised.

BOTTOM LINE – Trump and his backers in Congress promised tax cuts would boost the long-term growth potential of the U.S. economy. The data so far don’t support that claim.

Deficits Run Wild

U.S. debt is rising… about twice as fast as GDP.

And it will get worse. With a Democrat majority in the House, there is no way a broad program of spending cuts or tax increases could be passed. That leaves entitlements and military spending both running wild.

The Committee for a Responsible Budget estimates that we will see $2 trillion deficits by 2027.

But as we pointed out yesterday, this does not account for an economic recession. Come the next crisis… the problem will intensify. Tax revenues will plummet and calls to spend more money will grow louder. Deficits will grow to $2 trillion a year in 2019 or 2020.

What will happen then? Former Fed chief (the last honest one), Paul Volcker, 91, foretells the future:

Someday confidence is lost… Eventually, it breaks down…

…And then, the hurricane hits… and the country goes broke.

But at least the president isn’t worried about it. From The Fiscal Times:

As a candidate, Donald Trump said he could eliminate the national debt in eight years, largely by focusing on better trade deals. But in office, Trump has presided over a considerable increase in red ink, with annual deficits expected to surpass $1 trillion as soon as 2019. Overall debt is rising accordingly, with the national debt held by the public surpassing $16 trillion for the first time last week. Total debt outstanding is now approaching $22 trillion.

Trump isn’t too worried about it, though, The Daily Beast reports.

One early 2017 presentation by senior officials about the projected explosion in the debt was reportedly met with a blunt response by Trump: “Yeah, but I won’t be here.”

Maybe he won’t be here. And maybe we won’t either. Too bad for our new grandchild though.

Regards,

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Bill

INVESTING INSIGHT: BILL’S DOW-TO-GOLD TRADE EXPLAINED

Editor’s Note: Recently, Bill unveiled his “Dow-to-Gold” trade. Our editor showed how buying stocks when they are cheap relative to gold, and selling them when they get expensive relative to gold, can outperform a “buy and hold” strategy over the long haul.

Many dear readers had questions about how the trade worked. So today, we hand it over to Houston Molnar, assistant analyst with Bonner & Partners. As Houston shows below, Bill’s investing strategy would have avoided some of the worst crashes of the last century. And it would have doubled your returns in the process.

By Houston Molnar, Assistant Analyst, Bonner & Partners

Today, we take a step-by-step look at Bill’s Dow-to-Gold trade.

To start, let’s go over the rules of this long-term trade.

The Dow-to-Gold ratio is our guide for when to get in and out of stocks. When the ratio goes below 5, we buy equal shares in the Dow Jones Industrial Average index (the Dow). When the ratio goes above 15, we sell the Dow and buy gold.

In other words, when the entire Dow can be bought for five ounces of gold, we buy stocks. When it takes 15 ounces or more to buy the Dow, we sell stocks and buy gold.

Over the past 100 years, you would have made a total of six trades based on this strategy.

Chart

To give you a full breakdown of the trade, we start in January 1918 with 10 ounces of gold, which cost us $206.70 ($20.67 per ounce).

Note: Bill’s original calculations did not account for reinvested dividends from stocks purchased. But to give a fuller picture of the trade, the below calculations are based on the total return.

January 1918


Dow: 76.68 points
Gold: $20.67 per ounce
Dow-to-Gold Ratio: 3.7
Action: Sell Gold, Buy stocks

In January 1918, the Dow-to-Gold ratio is below five. Based on Bill’s rules above, we sell our 10 ounces of gold for $206.70 and invest in the Dow, which stood at 76.68 at the time.

February 1929


Dow: 310 points
Gold: $20.63 per ounce
Dow-to-Gold Ratio: 15
Action: Sell Stocks, Buy Gold

In February 1929, the Dow-to-Gold ratio hits 15. We sell our investment in stocks for $1,463. This is a return of 608% – including reinvested dividends – since our initial investment in 1918. [The return excluding dividends is 310%.]

We then take this capital and buy 71 ounces of gold, which is priced at $20.63 an ounce.

September 1931


Dow: 99.80 points
Gold: $20.63 per ounce
Dow-to-Gold Ratio: 5
Action: Sell Gold, Buy Stocks

Between 1929 and 1931, the price of gold doesn’t move. But by getting out of stocks in February 1929, we have avoided the worst stock market crash in history in October 1929.

Then, in September 1931, the Dow-to-Gold ratio falls below 5. We sell our 71 ounces of gold for $1,463.

We then buy the Dow in September 1931 when the index is at 99.80.

September 1958


Dow: 530 points
Gold: $35.10 per ounce
Dow-to-Gold Ratio: 15
Action: Sell Stocks, Buy Gold

In September 1958, the Dow-to-Gold ratio hits 15 once again. We sell our Dow shares, with the index at 530. This gives us $31,084, a return – including reinvested dividends – of 2,025% from 1931. [The return excluding dividends is 430%.]

We then buy 885.58 ounces of gold for $35.10 per ounce.

April 1974


Dow: 839.96 points
Gold: $169.50 per ounce
Dow-to-Gold Ratio: 5
Action: Sell Gold, Buy Stocks

In April 1974, the Dow-to-Gold ratio hits 5. It’s time to get back into stocks. We sell our 885.58 ounces of gold for $169.50 per ounce, which gives us $150,105.

We buy back into the Dow at the index level of 839.96.

July 1996-Present


Dow: 5729.98 points
Gold: $382
Dow-to-Gold Ratio: 15
Action: Sell Stocks, Buy Gold

In July 1996, the Dow-to-Gold ratio again hits 15 – time to sell stocks and buy gold.

We sell our Dow shares at an index level 5729.98 for $2.57 million. This is a 1,614% return – including reinvested dividends – from when we purchased the stocks in April 1974. [The return excluding dividends is 549%.]

We take this capital and buy 6,734 ounces of gold, priced at $382 an ounce.

By getting out of stocks and into gold in July 1996, we sit out the current bull market in U.S. stocks. But we also completely avoid the dot-com bust in 2000 and the crash of 2008.

We also get into gold right before gold’s bull run from 1999 to 2011. Our final gold ride from 1996 to present returns 226%. That turns our $2.57 million into $8.4 million.

From our $206.70 in 1918, we end up with $8.4 million a century later. That’s a total return of 4,058,169%. The annualized return on this strategy would have been 11.19%.

By comparison, a simple “buy-and-hold” investment in the Dow from 1918 to now would have yielded an annual return of 10.44% with dividends reinvested. The gain on this trade would have been $4.26 million.

Similarly, if we had held gold from 1918 to today, our original 10 ounces of gold would now be worth $12,310.

Bill’s strategy is based on a simple premise: You make money by buying stocks when they are cheap and selling them when they are expensive. And that’s how you turn $206 into $8.4 million over the long haul.

– Houston Molnar

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MAILBAG

In the mailbag, pointed words for our editor. Accusations that Bill is a “bonehead,” a “liberal democrat,” and “has lost perspective.”

Bill, you are a bonehead. Trump is just showing the American people what 95% of us already know – that Pelosi and Schumer are crooked. That is why they would rather have their talk off-camera. This president wants the American people to know what’s going on.


– Greg L.

Trump is right for this country. He stands up to liberal Democrats like you. And he can match wits with any of you, especially the likes of Nancy Pelosi. I wish he would have put it to Schumer even more by saying, “Chuck, why don’t you tell the truth and admit you don’t want border security?” And when Trump took control of the “show,” as you call it, both Pelosi and Schumer clearly said, “We should negotiate in private.” They could have continued “This is not going well.”


– Richard W.

I have been a subscriber to your letter and other services for some years now. For much of that time, I enjoyed the insight and thoughtfulness of Bill’s writing.

However, since Trump was elected, Bill has really lost perspective. I am sick to death of his heavy and insulting criticism of Trump. All of us in business in America had to put up with 8 years of the clown Obama, and the traitor Hillary, and Bill had no serious criticism of either one – maybe some disagreements, but nothing like what he heaps on Trump. I don’t know what your axe to grind is, Bill, but keep it to yourself – you are losing your base.


– Gary S.

A Note from Bill: We thought Hillary and Obama were scoundrels, too – and we said so. We noted that Obama was living in an “alternate universe.” And on Hillary, we said:

Hillary Clinton was clearly on the dark side. She favored more spending, both on social programs and military meddling. She was so deep in the pockets of lobbyists, big banks, and corporate America, there was no chance she could ever climb out.

Still, our reader has a point. We probably weren’t hard enough on them. We’ll probably feel that way about Trump, too.