The Inverted Yield Curve Sets up a Deflationary Boom
In today’s Market Talk, Amber Lancaster, Ian Dyer and I discuss:
- The Federal Reserve’s new dovish stance.
- The blockchain-based apps that are coming to your smartphone.
- Why the press seems to hate Tesla so much.
- The one big problem with Apple’s new business model.
- What the inverted yield curve means for the economy and the stocks we recommend.
March 25, 2019
Amber Lancaster: Welcome to this week’s Market Talk. I’m Amber Lancaster, joined by Paul Mampilly and Ian Dyer. Each week we look forward to sharing our viewpoints with you, our readers, and giving you insight into what’s on our radar.
Today’s outlook is for the week of March 25, 2019. I’ll begin by sharing what I’m watching and then we’ll hear from Ian and Paul. If you like what you hear and what you see with today’s Market Talk webinar, please feel free to subscribe to this channel or visit us at Bold Profits Daily, a Banyan Hill Publishing daily e-letter.
This past Friday’s inversion of the 10-year yield curve is a big topic of discussion amongst investors. Talk of a looming economic downturn inevitably comes up when an event like this happens. But we here at Bold Profits don’t foresee this inversion as a precursor for a financial market fallout anytime soon.
Here’s why. The economic baselines for the U.S. economy remain solid. This is supported by historically low unemployment, low inflation and the leading economic index released this past Thursday, which is a gauge of the overall economic health of the U.S. economy.
This index increased for the first time in five months, which signals continued steady overall economic growth for the U.S. economy. Another factor is the Fed. According to Bloomberg data, the Fed holds a larger amount of U.S. Treasuries compared to previous periods when the yield curve inverted. In turn, it downplays the relevance of the signal.
With that being said, we have a number of key economic releases to look forward to this week. As you can see in this graphic, housing starts for the month of February will be released on Tuesday. Surveyed economists are expecting 1.219 million homes.
The very important consumer confidence number for March will be released Tuesday, as well, at 10 am. Economists are anticipating a slight uptick to 132.1. Fourth quarter 2018 GDP revisions will be released on Thursday. Surveys are expecting a reading of 2.4%.
We’ll see initial jobless claims for the period ending March 23 on Thursday, as well. Rounding out the week, we can look forward to personal income and personal spending numbers on Friday. Both are expected to bounce higher to 0.3%.
On the Fed front, according to a polarity of economists recently surveyed by Bloomberg late last week, the Federal Reserve’s new dovish stance is getting monetary policy “about right.” As you can see in this graphic, one of the questions asked of the economists in the survey was: “How has your outlook for Fed interest rates policy changed by last week’s FOMC meeting?”
Out of the 37 respondents, 51% said the meeting lowered their estimates for Fed rates through 2020, while 49% said they’ll remain the same. And a notable 0% saw an increase in Fed rates.
On the technology front, there’s an interesting upcoming IPO for us to keep an eye on. Zoom Video Communications just filed paperwork with the SEC this past Friday, March 22, to go public on the Nasdaq as soon as next month. The best part about Zoom is that it’s a profitable company.
According to TechCrunch, the video conferencing company was recently valued at as much as $1 billion as of 2017. The company’s losses are shrinking steadily from $14 million in 2017 to just $7.5 million in year-ending January 2019. The company has more than doubled its revenue from 2017 to 2018 and has earned $330 million in revenue as of January 31 this year.
As seen in this graphic, Zoom helps businesses and organizations bring their teams together in a frictionless environment to get more done. Meetings, business instant messaging, video webinars, developer platforms — you name it, Zoom aims to cover it. Their easy, reliable cloud platform for video, voice, content sharing and chat is run across mobile devices, desktops, telephones and room systems.
Zoom’s customers include Uber, Pandora, Autodesk, Slack, Match.com, Ticketmaster, GoDaddy, Tech Micron and — full disclosure — us here at Bold Profits Daily. That’s how you’re watching us right now. It’s always good to see an IPO from a promising company that produces products you use successfully.
Lastly, as this graph shows you, our Disruptification Index simply put is going gangbusters year to date. It’s beating the S&P by more than double and trouncing the Dow by nearly triple. This is as of March 22 close in which we saw a downturn in the market. More specifically, the index is up 28.9% versus 9.3% on the Dow and 11.3% on the S&P 500.
As a reminder, our Disruptification Index consists of all the stocks we recommend to our subscribers across our numerous Bold Profits publications. If you want to learn more about our services and recommendations, type Bold Profits Daily into your search engine of choice to read more.
That’s why I’m watching. Ian, let’s hear from you. What are you watching this week?
Ian Dyer: Thank you, Amber.
First I want to talk a little bit about the big existing home sales number we saw come out last week. That was for the month of February. It was reported that existing home sales went up 11.8% in that month. This is a huge deal because that is the second-biggest gain for existing home sales since 1983. It’s been 36 years and we’ve only seen a gain this big one other time in that entire 36 years.
That’s very promising for the housing market. 5.51 in existing homes were sold in the month of February so that’s not even peak home-buying season. 41% of those houses had only been on the market for less than a month. People are listing their homes and there’s so much demand out there they are being sold almost right away.
I can attest to that because I recently sold a house and it only took about two and a half weeks between the time we listed it and the time we accepted an offer. That’s just firsthand experience from me that this housing market is on fire.
Once the spring and summer comes, we expect that to get even higher. The fact that millennials are really making an impact on the home-buying industry is huge. Right now, about 42% of new mortgages at the end of 2018 were from millennials.
They make up over 36% of the home-buying market and they are the biggest demographic right now in the United States. Millennials are having a big impact on the housing market and we expect these trends to continue. There are a number of economic underlying situations pushing it up.
For example, unemployment at 3.8% — that is historically low. It’s been about 50 years since we saw unemployment that low before this recent run we’ve seen. There’s also rising wages. Over the past year wages have gone up 3.4%. On a month-to-month basis it’s been 16 straight months that we’ve seen an increase in hourly wages.
In the past three years — 36 months — we’ve only seen two months where wages have gone down. People are making more money at a higher rate. There’s also low inflation — which is around 2% — so the hourly wages over the past year have almost doubled the inflation number.
People are making more money, the prices of goods is not going up as fast so they can afford to buy big-time purchases like houses. Of course, it’s also helped by the low interest rate market right now. On the housing front, we believe this trend is going to continue.
This could be a very long-term trend too because it’s generational. The millennials are really starting to make an impact now and this could happen for 10 to 15 years or even longer than that as millennials continue to come into the housing market.
Another thing I’m watching right now is blockchain technology has gone into the phone market. Now there are blockchain smartphones. We’ve seen a couple examples of this like the HTC Exodus and Samsung Galaxy S10 that’s about to come out. And this is a big deal because security has been a big problem, especially in the last few years.
Things like hacks, people have lost their social security numbers, emails and passwords have been compromised. There’s been a lot of cases of identity theft which can throw someone’s life out of control. People are worried about this. They want to keep their information secure.
There’s no better place to do that than blockchain. As you probably heard, the blockchain is a decentralized network. So even though there are millions of computers and phones on this network, the information stored on each one of these devices is only accessible through that device. It’s stored securely under an encrypted key that only the owner of that device has access to.
With the emergence of blockchain phones there’s also the emergence of decentralized apps, or dApps, that are programmed to put the information collected on the blockchain. The apps market is something that we have seen blow up over the past 10 years as apps became prevalent with the first iPhone 3G back in 2009.
Since then, the number of apps has gone from 500 to 2 million. There have been 200 billion downloads of apps worldwide. This new generation of apps we believe is just going to take over. This is important because the information in those apps is secure.
For example, there’s one called Numbers out there already, it’s on the HTC Exodus. It collects information like the number of steps you take, miles walked, hours slept — so it’s essentially a fitness and health app. But the information it takes is all completely private.
You can actually choose to sell it to advertisers or third parties who would otherwise just take it for free and distribute it to whoever they wanted to. With these new dApps, you can choose to sell it to them so you can make money from that. It’s a really enticing new technology we are seeing just start to break out.
That’s what I’m watching this week. Paul?
Paul Mampilly: Thanks, Ian. Great information from both of you. Welcome back, Amber.
I’m going to touch on a lot of things Ian and Amber raised. Let me start with what Amber said. There’s a lot of stuff out there about the inverted yield curve — “scary, scary, scary,” says everyone.
If you guys have been following us for a while when we were doing Winning Investor Daily, you’ll see that I made an update on the inverted yield curve and said, look, to me, the inverted yield curve is really a reflection of our times. I believe that what we are experiencing and are going to continue to experience is what we would call a deflationary boom. In that scenario, it would make sense for future rates to be lower than current rates.
Because that’s what an inverted yield curve means. In other words, where the interest rate for the 10-year bond is lower than the interest rate for the three-month treasury bill. In most people’s minds it makes sense if they are buying a 10-year bond they should receive a higher interest rate. However, that is only true if you make the assumption that prices are going to rise.
In a deflationary period, prices go down. So it makes sense that interest rates in the future would be lower than they are today. The other thing people ask is why would there be deflation today? This is what I believe, at least we have one piece of evidence that says that I’m onto something here, which is that if productivity increases you would have deflation.
In other words, you’re getting more with less. Here’s why I believe productivity is increasing and why I believe it’s going to continue increasing. It’s really what we invest in in Bold Profits Daily: it’s our megatrends. It’s Internet of Things, artificial intelligence, block chain, robotics, all of these incredible trends that shrink costs and make you more productive.
These megatrends really allow for productivity to increase where you get more with less. We got, just on cue almost, a solid signal of that. In the fourth quarter of 2018 we saw the biggest increase in productivity in eight years. In fact, I’ve actually made a previous Winning Investor Daily when we saw another sign last year that productivity was rising.
If you think about what we’re going through today, we have increasing employment, we have increasing wages — both of which were brought up by Ian — and we have increasing productivity. These are conditions for a boom. The only thing people ask is why prices are not going up. Because we have these unbelievable technologies that shrink costs.
When you invest in them, you get so much for your dollar, so much bang for your buck, that it reduces the prices.
These are the conditions that you have in a deflationary boom. That’s what I believe we have going and that’s what I believe is going to continue to happen. It’s one reason why I’m incredibly positive and optimistic for our stocks.
We are invested in what makes this happen. When I look at what’s going on I’m completely optimistic. I believe our scenario is playing out, which is why – as Amber pointed out — our Disruptification Index keeps blowing the S&P 500 away. Now, it will never do that every single day, or every single week or every single month.
Nonetheless, if you’re in our stocks, our performance analyst has shown me that our Profits Unlimited portfolio — equal weighted with about a three-year track record — is annualizing in excess of 20%. That’s because of what I just told you. Stick with Bold Profits stocks, stick with our services.
To cover some stocks that are in the news, Tesla is one that is always in the news. Some of you may have heard that Elon Musk and Tesla are being sued by the SEC. They would like him to stop tweeting. The thing about Tesla that few people know is that they have never spent a single dollar on marketing.
They have sold hundreds of thousands of cars around the world with no marketing, no advertising — none, zero. How do people find out about the Model 3 or the Model Y? Well, Elon Musk is so newsworthy he’s covered every day — whatever he says, whatever he does. In their defense of why he tweets, he actually gets so much free publicity for the company it would be a huge detriment to the company.
Elon Musk actually puts up an interest defense for his tweets. It’s likely he’ll get another slap on the wrist. Perhaps it will curtail him a little bit. However, he’s taking it to the SEC and I believe he has a case for what he’s saying…. Nothing he is saying is non-public information.
This is a really well-covered company. In addition to that, this is a company that is heavily shorted. In other words, people want this company to go down. I looked up this number. There are 26.9 million shares sold short against Tesla, which represents about three-and-a-half days’ worth of trading volume. That’s just immense.
That’s 21% of the total flow to the company. You can say there are a lot of people who want the stock down. For whatever reason — Ian, Amber and I have talked about this — the press hates Tesla. We stumble around trying to figure out why they hate them and we think it’s really what I mentioned earlier which is that Tesla spends nothing on advertising.
So why would they want to help these guys out? You might want to help GM or Ford out by writing some of these articles. People call that a conspiracy theory and OK, if that’s what you want to think. However, I think it’s valid to some extent.
Another company that is big in the news is Apple. All of you know if you have been following me for a while that I have been negative on Apple for three years now. I was wrong for about a year of it, it went up when I was negative, but now it’s starting to go down. Now they are going to have some big event that’s going to pull the screen apart and show you they have somehow magically changed into a services company.
They want you to stop focusing on their declining iPhone sales, their decline iPad sales, their declining sales of computers and now focus on the growth in their services business. However, there is just one problem with this entire scenario: The growth of the services businesses depends on them selling their devices.
In other words, they lock you into their services when they sell you an iPhone, an iPad or a computer. If those are in decline, it’s inevitable that in time their services are also going to go down. People are speculating if this is the moment to buy Apple because this is the moment they are going to transform themselves.
I would tell you from my vast study of companies that most companies are unable to do more than one thing very well. Apple is fabulous at making devices — or I should say was fabulous at making devices. They let some of that magic go away and I believe it’s going to go into decline. However, we’ll see what happens.
The final thing I want to bring up, which goes back to something Ian mentioned, is blockchain. Cisco Systems, which is the premier networking company around the world, released this incredible report. It really had some stunning facts. I’m going to put up a couple of charts on this.
You’ll see this on the first chart. It shows 83% of people making decisions really trust blockchain technology. Cisco expects 10% of global GDP, that’s $7.5 trillion with a T, to be on the blockchain by 2027.
I know some of you will say, “Paul, that’s a long way away.” I can tell you, financial markets anticipate. They will anticipate this and start to price this into stocks very quickly. Shorter term, Cisco says $9.7 billion will be on the blockchain by 2021. That’s being priced into stocks right now.
As you guys know, blockchain is one of our megatrends. We have multiple stocks that play on it. We’re unbelievably optimistic for this technology and the stocks that play on it. Check out our Profits Unlimited portfolio for the blockchain stocks and make sure you’re in them.
The report goes on to say why this is going to happen. I believe it makes sense. If you look at what causes problems in the global economy, transparency is a huge problem. The loss from transparency is $7.5 billion. The chart also shows that people pay as high as 30% interest rates just for the complexity of all these transactions related to trust and not knowing where things are.
If you are own a business and have accounts receivable it’s as much as 30% interest rates…which is a crazy high cost. If you can shrink that down to 1% or 2%, the profitability of your business is going to jump. That makes sense for a business to invest in block chain.
Finally, security. There’s going to be 20 billion devices on the Internet of Things and blockchain is the way to secure them. Take a look at our portfolio and get into blockchain.
That’s what I have. Back to you, Amber.
Amber: Thank you so much, Paul. Excellent update from both you and Ian. Thank you to our listeners and watchers for tuning in this week. We hope you have a wonderful week.
Last week, the yield curve inverted for the first time since 2007.
That means the interest rate for the 10-year bond is lower than the rate for the 3-month Treasury. And that’s very, very scary news to a lot of investors.
However, I’m seeing the conditions for a deflationary boom (which is a good thing!).
That’s because the incredible technological advances in recent years have made businesses much more productive while drastically shrinking costs.
Wages keep ticking up, and in the absence of inflation this is real growth. This means more money and cheaper goods.
And because cheaper goods come from higher productivity, it also means more profit for companies. It’s a bright future I see ahead!
The mega trends I focus on — the Internet of Things, artificial intelligence, blockchain, robotics — are only going to improve productivity even more in the years to come. And that’s why I’m incredibly positive and optimistic for our stocks.
We also talk about:
A profitable new company valued at as much as $1 billion filed its initial public offering on Friday. It more than double its revenue from 2017 to 2018, and its customers include Uber, Micron … and the Bold Profits team!
Last month, existing home sales had their second-biggest gain since 1983. We discuss the enormous mega trend that’s providing a huge boost to the housing market.
Cisco expects $9.7 billion to be stored on blockchain by 2021, with that number skyrocketing to $7.5 trillion by 2027. We talk about how the financial markets are reacting to this incredible development.
Editor, Profits Unlimited