James Dines: Have Summer Doldrums Begun?

Written by James Dines
Posted May 4, 2019

Publisher's Note: With stock indices getting back into all-time high territory, but a massive amount of contradictory economic indicators and outlooks, we turn to Mr. James Dines and his experience to take a cold, hard look at everything that's going on.

Read on for an excerpt from the latest edition of The Dines Letter to take advantage of Mr. Dines' analysis.

Call it like you see it,

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Nick Hodge

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Nick is the founder and president of the Outsider Club, and the investment director of the thousands-strong stock advisories, Early Advantage and Wall Street's Underground Profits. He also heads Nick’s Notebook, a private placement and alert service that has raised tens of millions of dollars of investment capital for resource, energy, cannabis, and medical technology companies. Co-author of two best-selling investment books, including Energy Investing for Dummies, his insights have been shared on news programs and in magazines and newspapers around the world. For more on Nick, take a look at his editor's page.

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"Opportunities are usually disguised as hard work, so most people don’t recognize them."
                                                                                                  Ann Landers

The word "ruminate" comes from the Latin verb ruminare, meaning, “to chew the cud,” as do cattle munching grass. Ruminants chew something more than once; so "ruminate" has come to mean, "pondering something continuously."

The S&P 500 average continues to claw its way higher, having just recovered the loss from September 2018. It is higher than where we had expected it to reach a top. We noted that the odds had shifted to a further rise to challenge the all-time highs, and that is what happened. What’s likely after that?

Even the new high still leaves the net result of a mostly flat market average for the last 15 months. The real question is: Will a new high be a brief blip, as was the S&P 500’s false upside breakout in August 2018? Or is a decisive upside breakout forming that would leave the long flat prices behind? Then the flat zone could be a base formation for a resumption of the long bull market. We keep in mind that there was a fear-inducing downside breakout by the S&P 500 last December (see chart at point “C”), a serious event that we do not overlook.

As we carefully ruminate over what the picture is telling us, we realize that the broad swathe of stocks is likewise generally flat. The mass psychology explaining this is that many investors’ portfolios have probably changed little on average from where they were a year ago. Meanwhile, the majority focuses on the imminent flood of quarterly earnings reports that will hopefully bring better financial news, although rising markets might have already discounted them. We conclude that short-term earnings reports are a distraction from whatever the reality is.

Our current considerations include:

Markets are fully priced, especially advances/declines indicators, which are up to overbought levels.

The market is again developing internal deterioration, and it’s becoming more difficult to make money on this S&P rally.

Entire industries have turned weak recently, including automotive, financial, insurance, and health care. Even hi-tech has been mixed, with the FAANG stocks still below their previous highs.

Defense stocks are unimpressive; oils are struggling to gain traction, near their recent lows; while raw materials groups are generally flat. China’s leading stocks have yet to reach their 2018 highs; however, we predicted China’s FAANGsters would rise (in our TDL of February 8, 2019), when the Shanghai Composite Index was within only 7% of its January 3, 2019 bottom. Now, suddenly the geniuses who had not foreseen China’s rally are declaring that its economy has gotten better; China’s economy has regained some popularity due to its “improved financial results.” That good news came from its recent “stimulus,” the code word for printing lots of Chinese pesos, but not a word about all its debt and shaky real estate, worries gone overnight — a true miracle? Nonetheless, we remain cautious about the truthfulness of China’s financial reporting.

A possible unexpected decline in U.S. interest rates, deployed to stimulate our economy for the upcoming elections, might impact stocks.

Something geopolitical might pop up and affect markets, such as a China trade deal, a North Korea breakthrough, or some U.S. election news. Also, Iran is threatening to close the Strait of Hormuz due to Trump’s clampdown on its oil sales; firmer crude oil prices now around $62/bbl for WTI and $71/bbl for Brent are thus artificial and could be reversed in an instant.

Even gold and silver has turned short-term flat, so no countertrend clue there. If anything, gold and silver have been edging slightly lower, which allows for overall markets countertrend slightly higher.

We have shepherded TDLers into buying pot and hemp stocks, as “The Original Cannabis Bug,” hoping that they would outperform no matter how markets fared. Also, while we still expect serious profits to be made in our favored pot and hemp stocks, some others in those groups might be turning flat, due to professional profit-taking or from competition within the industry.

The current surge of headline-grabbing initial public offerings (IPOs), such as ride-sharing companies, particularly after market rises, suggests markets are nearing a top. We would not be surprised at an IPO for people who like peace and quiet: a phoneless cord!

Also Greece’s five-year bond yields just fell below America’s, which is freakish. How could a country that recently emerged from bankruptcy justifiably be able to borrow at a lower cost (interest rate) than a superpower like America? And what does that tell us about the direction of interest rates? Proper rebalancing indicates lower interest rates at first, but then higher rates would return somewhere ahead.

We see no other prominent market forecaster calling out American economists’ claims that “There is no inflation.” Indeed, it was a wonderful surprise that the cover of Businessweek magazine (see bottom, right) on April 18, 2019 blared, “Is Inflation Dead?” They get credit for putting this overlooked topic on the cover. Inflation is a complex consideration for fellow ruminants to keep in mind.

Sensible consideration cannot properly begin without first defining the word “inflation.” Professionals consider inflation the equivalent of “higher prices,” whereas we define it as runaway overprinting of unbacked paper money causing more paper to chase the same goods and services, which results in higher prices by the law of supply and demand — of paper money that is. TDL’s contribution to economic theory is the correct definition of inflation, and that a sound currency, not abused by overprinting, is as important as a human’s bloodstream, which was one of the key points in our book The Invisible Crash.

Rather than accepting U.S. economists’ assertions of experiencing no inflation, our interpretation is different: We believe the world is in a slow-motion deflation, resulting from the overprinting of money to pay for mindless deficits. The U.S. just reported a Consumer Price Index of 1.9% (annual rate of change), only slightly higher than the monthly average of 1.75% over the last nine years, which confounds the WEE’s economists because they expected all their overprinting of paper money to result in rising prices. However, the CPI’s small change reflects the ordinary result of more paper chasing the same goods and services.

With inflation at a crest after a long rise, commodity prices remain stable, enabling up-momentum in stock prices, and hints at a deflation instead as economic growth and prices rise less speedily, TDL’s revolutionary contribution to business economics is that inflation is itself cyclical, that inflations do not continue rising forever as more paper is printed, but instead have a natural cycle of eventually falling into a deflation, from no other cause other than the folly’s exhaustion. We have studied the histories of past great inflations, and indeed, many just rolled over on their own. That’s what happened in 1929, when the inflation of the 1920s simply rolled over into the devastating deflation of the 1930s, a turn that has driven economists crazy ever since, trying to figure out what its causes were so that such calamities could be prevented in the future. A fool’s errand, so long as the money supply is rising, as it did after 1922, and it is currently again.

Another feature of that deflationary decline was that gold stocks soared, for example, during the 1929 crash. Everybody was too darned lazy to dig out prices of gold stocks during the historic 1929 crash, but we recall sneezing in dusty library stacks as we dug out those gold stocks’ numbers. We learned the lesson and shared it with our loyal TDLers. Seductive susurrations of printing unlimited amounts of paper money — FREE MONEY — start the folly. It’s been done before and has always ended in economic tragedy, as in Venezuela these days. Argentina is also vulnerable and needs to think more warily now.

Even Russia has been critical of the new “MMT” (Modern Monetary Theory), espoused by some U.S. politicians, which favors the faster overprinting of America’s dollars for anything politicians decide would be nice to have. Then, they tell us, when the extra cash floating around gets excessive, governments could simply raise taxes to prevent “inflation,” not using the word “hyperinflation” in their dream world. Even Putin lectured America about the risk of allowing the U.S. dollar to get into that trouble. That hurt, especially since Russia’s stock market has broken its downtrend line and is an uptrend.

Historically, near inflationary peaks, an accelerating increase of printing money has shifted a regular inflation to a hyperinflation, instead of the normal deflation to wipe out the unbacked paper money.

We are still groping for the true major trend, while patiently recommending holding our favorites.


James Dines is legendary for having made correct forecasts that were in complete contradiction to the rest of the financial community. He is the author of five highly regarded books, including "Goldbug!," in addition to his popular newsletter, The Dines Letter, and videotaped educational series. Dines' highly successful investment strategies have been praised by Barron's, Financial Times, Forbes, Moneyline, and The New York Times, among others.

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