Turn on the TV… Listen to the radio… Open up a newspaper…
If you’ve done any of those things the last few weeks, you can’t help but notice that U.S.-China relations are growing more antagonistic by the day.
So far it’s mostly been a war of words… but what happens when words aren’t enough anymore? That’s the big question we tackle in this week’s Daily Cut mailbag.
But first let’s clear up a common point of confusion about technical analysis. The question comes from one of master trader Jeff Clark’s readers…
Reader question: I am a Delta Report subscriber. A question on something Jeff said in a Delta Direct update. At the end of that update, he said, “Even if the S&P makes a lower low, it will do so while creating significant positive divergence on many technical indicators.”
I don’t understand the statement. Could you teach me or refer to some other materials? Thank you.
– Thomas C. (Legacy Research member)
Jeff is traveling, so I’ll field this one…
Positive divergence – and also negative divergence – can seem complicated at first glance. I know because I also struggled to understand them until I asked Jeff to explain.
It’s actually quite simple…
The first thing to understand is that divergence simply means that an asset’s price is going in one direction, while its momentum indicators are going in the opposite direction. They’re diverging.
So, when price is heading down, and its indicators are trending up, this is positive divergence. It suggests the asset’s downward price trend will likely reverse to the upside.
On the flip side, when price is moving up, and its indicators are pointing down, this is negative divergence. It tells us the asset’s upward price movement is likely to reverse to the downside.
Hope that clears it up.
Moving on… a Palm Beach Letter subscriber wants some clarification regarding stop-losses. And Grant Wasylik, Teeka Tiwari’s right-hand man on the letter, has the answer…
Reader question: Why set no stop-loss limits for the Untouchable stocks in the portfolio?
– Mark T. (Legacy Research member)
Grant’s answer: Before I explain why we don’t use stop-losses with these stocks, it’s important to catch everyone up on the idea behind our “Untouchable stocks” strategy.
Here’s the basic gist…
Our Untouchables strategy selects stocks that rarely go down. If they do fall more than 10%, they bounce back quickly. They also have a track record of clobbering the market long-term.
The strategy focuses on stocks that soar when the market rises and only grudgingly give ground when it falls.
We looked for stocks that hadn’t dropped 10% or more in any calendar year since 2000. In other words, we wanted to find stocks that fought through each year without going down by double-digit percentages.
This is important because holding untouchable stocks like these will help you sleep at night.
You see, small losses aren’t a big deal. If your initial loss is 10%, you’ll need just an 11.1% gain to break even.
But big losses are catastrophic. It’s difficult to recoup them. If your initial loss is 50%, you’ll need a 100% gain to break even.
So that’s the strategy. It’s our take on the idea that the best offense is a strong defense. And I think you can see why we wouldn’t use stop-losses.
The Untouchable stocks are powerful, profit-generating machines. You don’t want to panic sell after a drawdown.
To take advantage of this strategy (including dividend reinvestment), we plan to hold these stocks for the long term. That’s why we don’t use stops on these positions.
Instead, we protect ourselves by allocating no more than 1%-2% of our portfolio to each position.
(We’re adding at least one more Untouchable stock to the portfolio in our next issue, due out September 5.)
Paid-up subscribers can read the full Palm Beach Letter issue on our first three Untouchable stock recommendations right here.
If you’re not a subscriber, here’s a deeper discussion of the strategy – including one of the stock names – in Teeka’s Palm Beach Daily.
Moving on… a question about investing in precious metals. And who better to answer than Dave Forest, our world-traveling geologist.
Reader question: Why isn’t platinum a better or as good an investment as gold?
– Judy B. (Legacy Research member)
Dave’s answer: Very astute question. I believe platinum may well be a better investment right now than gold.
My Casey Cost Curve analysis shows that few platinum mines on Earth are making significant profits at today’s price. That’s a classic setup for a supply squeeze and a major price rise.
The trick is, there are few investment vehicles that offer exposure to platinum.
My International Speculator subscribers have done well with Ivanhoe Mines, which is developing one of the world’s newest platinum mines. It’s up 35% since we added it to the portfolio in July 2018.
Apart from that, I’m keeping an eye out for other platinum plays that meet my investment criteria.
Next up in the mailbag… a follow-up to last week’s question and answer about the feds banning gold.
This time around, the focus is on cryptocurrencies. And Teeka, our world-renowned crypto expert, provides the insight…
Reader question: I have a question about cryptocurrency. There are lots of concerns around the potential for gold being banned/confiscated that were addressed in The Daily Cut, but I think the more serious threat is cryptocurrencies being outlawed or banned through regulations, etc. They threaten central banks and governments, so it would not surprise me.
What are your thoughts on the potential for governments to try and outlaw cryptocurrencies and blockchain projects? Is this a realistic risk?
I would be very interested in hearing an expert take on the subject.
– Brendan V. (Legacy Research member)
Teeka’s answer: Bitcoin is designed to be a truly decentralized network. It doesn’t rely on one central point of control.
This model makes the blockchain much more secure than the internet. You see, data isn’t stored in one location. Instead, it’s distributed across an entire network – making information much harder to hack…
Without getting too much into the weeds, no individual person runs the bitcoin blockchain. It’s peer-to-peer, with no intermediary.
Each node (computer) in the network retains a copy of the blockchain ledger. And the bitcoin blockchain has thousands of nodes across the world. So to kill bitcoin, a government would have to shut down every single one.
Remember, these nodes are in scores of countries. It’d take a concerted international effort – costing billions of dollars in resources and manpower – to destroy bitcoin. And if even a single node survives, it can restart the whole shebang.
Unlike Facebook, there’s no bitcoin corporate office the feds can raid… no CEO to haul in front of Congress or into court… and no central point of command you can behead.
Governments simply can’t browbeat bitcoin into submission.
Even China – with one of the more repressive governments in the world – has tried to ban bitcoin. Yet trading still flourishes there. Russia, Vietnam, and Colombia have all tried and failed, too.
And don’t just take our word for it. Even U.S. Representative Patrick McHenry says bitcoin is impervious to government influence. Here’s what he told CNBC last month:
I think there’s no capacity to kill bitcoin. Even the Chinese, with their firewall and their extreme intervention in their society could not kill bitcoin.
And now for our final Q&A of the week…
Bonner-Denning Letter coauthor Dan Denning reveals why China can’t use its “nuclear” option in a financial war against the U.S…
Reader question: What are the consequences if China starts to sell U.S. bonds? Have you written about this?
– Kai L. (Legacy Research member)
Dan’s answer: Intriguing question. And timely, too.
The short answer is that China would do more damage to itself (and the value of its foreign exchange reserves) by selling Treasurys in an attempt to drive U.S. interest rates up and weaken the U.S. economy and/or the dollar.
The longer answer sheds a bit more light on the real problem: U.S. debt is growing out of control. The biggest threat to the dollar is the U.S. government itself, not the Chinese Communist Party (CCP). But first…
The idea that China could dump U.S. Treasurys to attack the dollar – weaponize their Treasury holdings – has been around for a while.
I first encountered it in a chapter on financial warfare in a book called Unrestricted Warfare, authored by two retired military officers in the People’s Liberation Army (PLA).
You can read the whole thing if you like, but to save you the trouble, here’s the relevant passage:
Financial war is a form of non-military warfare which is just as terribly destructive as a bloody war, but in which no blood is actually shed. Financial warfare has now officially come to war’s center stage–a stage that for thousands of years has been occupied only by soldiers and weapons, with blood and death everywhere. We believe that before long, “financial warfare” will undoubtedly be an entry in the various types of dictionaries of official military jargon.
Selling U.S. bonds to crash the dollar isn’t specifically mentioned in the book. But you get the idea. Conduct total war by any means necessary to defeat your adversary without firing a shot.
The idea was floated again in May on Twitter by Hu Xijin. Hu is an editor for the Global Times, a state-run Chinese newspaper that’s seen as a mouthpiece for the CCP. In response to Trump’s tariffs, Hu tweeted the following:
Could China hurt the US (more than itself) by selling Treasuries to punish Trump for his tariffs? ‘I wouldn’t rule it out,’ said Bridgewater’s Ray Dalio when asked about in on CNBC. He said it would be a way to for China to inflict ‘maximum harm’ on the US but would also damage China. Others have referred to it as China’s ‘nuclear option’ in the trade war.
I used to take this view myself. In 2004, I published a report called “China’s Deliberate Attack on America.” In it, I showed how China might use its accumulation of U.S. Treasury bonds as leverage over the U.S.
At that time, China only had around $120 billion U.S. bonds. It now has $1.1 trillion. So arguably it has almost 10 times as much leverage as before. But by building up such a huge war chest of U.S. bonds, China has actually neutralized its secret weapon. It can’t hurt the U.S. without hurting itself.
Its foreign exchange reserves – comprised mostly of U.S. bonds – are how it “manages” its currency through the People’s Bank of China. If it dumps its dollars, it’s got no way of managing the currency.
Could China use its ownership of U.S. government bonds to wage financial warfare on the U.S.?
The answer, probably not, unless it decided its $1.1 trillion pile of bonds was worth less than some other economic or political goal (e.g., taking back Taiwan or cracking down on Hong Kong).
The real long-term problem for Americans isn’t China’s ownership of our bonds. It’s our own damn government and its own damnable pace of spending.
We’ve been living in a fake financial world since 1971, when Nixon ended the convertibility of the dollar into gold.
That’s all for today.
Have a nice weekend.
Regards,
James Wells
Director