"Invincibility lies in the defense; the possibility of victory in attack." - Sun Tzu
Today is a short day for the markets due to the extended holiday that is Thanksgiving and as I am taking the day off this will also be a very short blog. But while it may be a short day for the markets and volumes are typically light it is very interesting to see the commodities markets under complete attack. Oil is down almost $8 a barrel or more than 10%, Natural Gas is down more than 6%, Copper is down more than 3%, Gold is down $29 or 2.50% and Silver is down $1.20 or more than 7%; and this is all today!
This is an all out route and while Gold and Silver have not broken down completely yet, Copper has now confirmed a downside bias and Crude oil has now fallen more than 40% in less than 6 months. The raw materials of Copper and Crude will feed into inflation numbers and start to exacerbate the issue of deflation. Furthermore their continued weakness points to a global economy that may be completely out of gas regardless of what the central bankers of the world do, but their response will no doubt be to throw more money at the issue. Interest rates will remain benign for a lot longer than anyone can imagine so finding places to invest your cash will be difficult. Make sure that you do not chase yield as the risks inherent in a low interest rate environment are still the same (if not higher) but the yield is reduced.
Looking ahead it seems clear that the near term concern of deflation is very real and this environment is treacherous for stocks particularly for companies saddled with debt (IBM springs to the top of the list). Be very cautious and try to bring your debt levels down to a minimum, build up cash and wait for the inevitable.
Happy Thanksgiving to all.
Friday, November 28, 2014
Friday, November 21, 2014
Mismanagement
"It's not the lack of money that kills our economy, it's the mismanagement of it." - TJ Anderson
In a follow on to the previous two blogs I had a very interesting infusion of thought from some of my readers and one in particular caught my attention. The discussion was in terms of the size of companies and governments and how this impacts not only returns and ultimately causes the failure of the institution. The question was is it really the size or is it mismanagement of the assets and in all honesty I believe that one is a factor of the other. The larger the business or government becomes the larger the influence of political posturing and by default the larger the mismanagement of the assets. There is less concern over shareholders or tax payers and more and more concern over personal payments and power, which ultimately leads to the company's or government's demise.
As an example investment and large banking institutions are so big that they are perceived as too big to fail. This brings into account morale hazard - the hazard associated with the management's lack of accountability. Should the bank fail then there is no impact to the management team other than a loss of their reputation and potentially their jobs (although in modern times it seems that losing the job is the best financial decision as there is usually a multi-million dollar payout to fire the person), but until then taking inordinate risks in order to maximize profits and their pay checks is the norm. This bubble is protected by the central bankers of the world as they step in to sort out the problem should they cause an economic shock wave. They are essentially playing with tax payer money so their personal risk is limited to the job loss while their upside is almost unlimited. In this kind of environment the main focus is on developing new products that will maximize returns without a concern for the risks imposed.
The authorities are expected to monitor these risks and impose laws to regulate these enterprises but they are always behind the market for the simple reason that they cannot keep up with the new financial developments and derivatives that are dreamed up daily by the wizards of the financial markets. While in the Bible the 12 apostles may have been enough to spread the word, there is no way that the 12 Federal Reserve Districts can keep ahead of the army of international bankers that test the limits and find holes in the system daily. Furthermore, regulations take time to be implemented and by the time these are in place the market normally has moved on having anticipated the crack down.
The side effect is small business. These companies have to operate under intense scrutiny, they do not have the resources to comply with all the new regulations that are supposed to keep large institutions under control but cripple their ability to operate, have limited access to investment dollars and are required to repay every dollar borrowed (unlike governments and large banks who just print more). For this reason they are masters at working on a shoe string budget and remain lean and efficient. Money lent to these companies is relatively risk free for the simple reason that the loan requirement is so small that if one business is lost the impact on the bank is small. As Donald Trump explained once that if you borrow $1 million then the bank owns you, but if you borrow $1 billion then you own the bank. Much the same with small business, while it is perceived that the risk to investing in them is high (and it is as many do not make it to year two, largely due to a lack of funding) the overall risk to the economy is low due to their small size.
The current system is therefore flawed in that not only is size the problem but there is no accountability for the actions of the large institutions. One way to solve this problem would be to adjust the method of pay. Instead of receiving a massive payment at the end of a good year it could be withheld for 5 or 10 years. If during this time period the bank ran into financial problems caused by the risk taking at the time of the bonus award the deferred payment would be used to offset the losses. In this way management might think twice about a risky bet to make a quick buck and may rather look out for the longstanding of the bank and its shareholders, not to mention the lowly tax payer!
In a follow on to the previous two blogs I had a very interesting infusion of thought from some of my readers and one in particular caught my attention. The discussion was in terms of the size of companies and governments and how this impacts not only returns and ultimately causes the failure of the institution. The question was is it really the size or is it mismanagement of the assets and in all honesty I believe that one is a factor of the other. The larger the business or government becomes the larger the influence of political posturing and by default the larger the mismanagement of the assets. There is less concern over shareholders or tax payers and more and more concern over personal payments and power, which ultimately leads to the company's or government's demise.
As an example investment and large banking institutions are so big that they are perceived as too big to fail. This brings into account morale hazard - the hazard associated with the management's lack of accountability. Should the bank fail then there is no impact to the management team other than a loss of their reputation and potentially their jobs (although in modern times it seems that losing the job is the best financial decision as there is usually a multi-million dollar payout to fire the person), but until then taking inordinate risks in order to maximize profits and their pay checks is the norm. This bubble is protected by the central bankers of the world as they step in to sort out the problem should they cause an economic shock wave. They are essentially playing with tax payer money so their personal risk is limited to the job loss while their upside is almost unlimited. In this kind of environment the main focus is on developing new products that will maximize returns without a concern for the risks imposed.
The authorities are expected to monitor these risks and impose laws to regulate these enterprises but they are always behind the market for the simple reason that they cannot keep up with the new financial developments and derivatives that are dreamed up daily by the wizards of the financial markets. While in the Bible the 12 apostles may have been enough to spread the word, there is no way that the 12 Federal Reserve Districts can keep ahead of the army of international bankers that test the limits and find holes in the system daily. Furthermore, regulations take time to be implemented and by the time these are in place the market normally has moved on having anticipated the crack down.
The side effect is small business. These companies have to operate under intense scrutiny, they do not have the resources to comply with all the new regulations that are supposed to keep large institutions under control but cripple their ability to operate, have limited access to investment dollars and are required to repay every dollar borrowed (unlike governments and large banks who just print more). For this reason they are masters at working on a shoe string budget and remain lean and efficient. Money lent to these companies is relatively risk free for the simple reason that the loan requirement is so small that if one business is lost the impact on the bank is small. As Donald Trump explained once that if you borrow $1 million then the bank owns you, but if you borrow $1 billion then you own the bank. Much the same with small business, while it is perceived that the risk to investing in them is high (and it is as many do not make it to year two, largely due to a lack of funding) the overall risk to the economy is low due to their small size.
The current system is therefore flawed in that not only is size the problem but there is no accountability for the actions of the large institutions. One way to solve this problem would be to adjust the method of pay. Instead of receiving a massive payment at the end of a good year it could be withheld for 5 or 10 years. If during this time period the bank ran into financial problems caused by the risk taking at the time of the bonus award the deferred payment would be used to offset the losses. In this way management might think twice about a risky bet to make a quick buck and may rather look out for the longstanding of the bank and its shareholders, not to mention the lowly tax payer!
Friday, November 14, 2014
The Problem with Size
"Likewise, government deficits are particularly concave to changes in economic conditions. Every additional deviation in, say, the unemployment rate - particularly when the government has debt - makes deficits incrementally worse. And financial leverage for a company has the same effect; you need to borrow more and more to get the same effect. Just as a Ponzi scheme." - Nassim Taleb "Antifragile"
As a follow on to last week's blog on Keynes, this blog will look at the other side to the argument which is normally based on the theories of the Austrian economist Ludwig von Mises. Mises concluded that printing money would never work for the simple reason that not only does more debt not solve the problem but unless you have the ability to clean the balance sheet up at a later date that every incremental increase in the level of debt from printing money out of thin air has a smaller and smaller impact on outcome. At some point in the future the amount of money required to have any impact is so large that the system collapses.
The issue is that the initial benefits are perceived to be linear rather than concave. On the surface if some money issued into the economy produces a decent effect then more must produce a larger effect in a linear fashion or a straight line - the more you add the more you receive in economic growth. This is a common fallacy and one that is truly debunked in the book Antifragile by Nassim Taleb. (Once again if you have not read this book then you really need to - or keep reading this blog as I will continue to beat the drum for him).
Size is the issue. As an example if everything was linear in the risk world then taking 50 jumps off stairs each one foot high would be the same as jumping off a 50 foot building. Obviously the impact on landing from the 50 foot jump would be far more severe (if not fatal) to the jumper than jumping one foot 50 times. The same can be seen in a mound of sand. You can keep adding bucket after bucket of sand but at some point the whole pile will collapse. That last grain of sand is all that is needed to dismantle the entire work of all the previous buckets that were piled on top of each other.
This philosophy can be used to show how size can destroy governments and businesses alike. Looking at the market the large banks are a big issue as if one goes they all go and the economy is gone. Lose a small regional bank and no-one is the worse off other than the few people that worked there. The FDIC can easily handle paying out depositors their funds and all goes back to normal quickly. If Bank of America goes under the problems are huge and the impact on the economy enormous. The theory goes that the government can and will step in to repair the damage but they are already leveraged to the maximum and are possibly the most inefficient group available to manage the problem.
Think about small business. Things get resolved quickly, there are no political debates or posturing (not always but mostly and if it is rife the business will fail) and new products and services are added quickly to take advantage of an opportunity. On the other side of the scale is large business which while able to take on global issues always sees the profit margin fall and the efficiency drop until there is a tipping point where the company size is ultimately its undoing.
The same for governments. The bigger they become the harder it is for them to shrink to a more manageable and efficient size. Feuds are rife and bureaucracy fosters inefficiency as the more inefficient you are the larger your budget and the more power you control. Become efficient and your budget and your power is cut. So the thought of a smaller efficient government that balances a budget is akin to asking a child if they would like another candy. Of course they would and of course the government size will continue to grow. The only time governments are reigned in is during times of crisis when they are forced to do their job and many lose theirs in a change of the political system.
Now last week I said that Keynes' theories of printing money and providing fiscal stimulus would work and it appears that I am now saying that they will not so let me clear that up. I believe that Keynes' theories would work if they were all done at once (money printing, shovel ready projects and tax reductions) and that once they were seen to stimulate the economy that the government would efficiently clean up their balance sheet and trim its size. In business language, push the product with marketing and then cut back to make sure that the profits flow and the debt level is paid down or off. The problem is, as I have detailed above, that the government will not balance its budget, nor will it cut its size and it is not using all three of the legs of the stool but only one or maybe two. Under this scenario the results are concave (see image below) in that the benefits are felt early but ultimately they are doomed to failure, it is just a matter of time.
As a follow on to last week's blog on Keynes, this blog will look at the other side to the argument which is normally based on the theories of the Austrian economist Ludwig von Mises. Mises concluded that printing money would never work for the simple reason that not only does more debt not solve the problem but unless you have the ability to clean the balance sheet up at a later date that every incremental increase in the level of debt from printing money out of thin air has a smaller and smaller impact on outcome. At some point in the future the amount of money required to have any impact is so large that the system collapses.
The issue is that the initial benefits are perceived to be linear rather than concave. On the surface if some money issued into the economy produces a decent effect then more must produce a larger effect in a linear fashion or a straight line - the more you add the more you receive in economic growth. This is a common fallacy and one that is truly debunked in the book Antifragile by Nassim Taleb. (Once again if you have not read this book then you really need to - or keep reading this blog as I will continue to beat the drum for him).
Size is the issue. As an example if everything was linear in the risk world then taking 50 jumps off stairs each one foot high would be the same as jumping off a 50 foot building. Obviously the impact on landing from the 50 foot jump would be far more severe (if not fatal) to the jumper than jumping one foot 50 times. The same can be seen in a mound of sand. You can keep adding bucket after bucket of sand but at some point the whole pile will collapse. That last grain of sand is all that is needed to dismantle the entire work of all the previous buckets that were piled on top of each other.
This philosophy can be used to show how size can destroy governments and businesses alike. Looking at the market the large banks are a big issue as if one goes they all go and the economy is gone. Lose a small regional bank and no-one is the worse off other than the few people that worked there. The FDIC can easily handle paying out depositors their funds and all goes back to normal quickly. If Bank of America goes under the problems are huge and the impact on the economy enormous. The theory goes that the government can and will step in to repair the damage but they are already leveraged to the maximum and are possibly the most inefficient group available to manage the problem.
Think about small business. Things get resolved quickly, there are no political debates or posturing (not always but mostly and if it is rife the business will fail) and new products and services are added quickly to take advantage of an opportunity. On the other side of the scale is large business which while able to take on global issues always sees the profit margin fall and the efficiency drop until there is a tipping point where the company size is ultimately its undoing.
The same for governments. The bigger they become the harder it is for them to shrink to a more manageable and efficient size. Feuds are rife and bureaucracy fosters inefficiency as the more inefficient you are the larger your budget and the more power you control. Become efficient and your budget and your power is cut. So the thought of a smaller efficient government that balances a budget is akin to asking a child if they would like another candy. Of course they would and of course the government size will continue to grow. The only time governments are reigned in is during times of crisis when they are forced to do their job and many lose theirs in a change of the political system.
Now last week I said that Keynes' theories of printing money and providing fiscal stimulus would work and it appears that I am now saying that they will not so let me clear that up. I believe that Keynes' theories would work if they were all done at once (money printing, shovel ready projects and tax reductions) and that once they were seen to stimulate the economy that the government would efficiently clean up their balance sheet and trim its size. In business language, push the product with marketing and then cut back to make sure that the profits flow and the debt level is paid down or off. The problem is, as I have detailed above, that the government will not balance its budget, nor will it cut its size and it is not using all three of the legs of the stool but only one or maybe two. Under this scenario the results are concave (see image below) in that the benefits are felt early but ultimately they are doomed to failure, it is just a matter of time.
Monday, November 10, 2014
Keynes Rules!
"The importance of money flows from it being a link between the present and the future>" - John Maynard Keynes
In an article in Business Week Keynes was listed as "The Man of the Moment". Keynes died in 1946 but his economic theories live on. He was the first to promote the idea of fiscal and monetary policy as a solution to economic turmoil. To summarize his ideas he said that during good economic times governments run surpluses and these surpluses should be spent during times of economic weakness to take up the slack from a weakened business environment. Using both fiscal (tax cuts and spending on shovel ready projects) and monetary (printing money and lowering interest rates) an economy can be stimulated. Once business picks back up the government can exit the market and recoup their investment through increased tax revenues.
It appears that the world's central bankers (German's aside) are bent on giving Keynes's theories one massive try. The interesting thing to me is that his theories encompass ALL of the aspects of stimulus not "some" of the inputs. Looking around the world then it is clear that while on the surface his principles are being used to "stimulate" the global economy when you dig deeper there are a number of things amiss and these missing pieces are undermining the efforts.
First let's take a look at Japan. While the world applauded their most recent money stimulus and government spending packages they failed to mention that Japan has already raised the consumption tax and is planning to raise it again. According to Keynes tax reductions are needed in addition to these other stimulus's and so while Japan is using two of the inputs the third is offsetting any perceived benefit.
Europe, the laggard of the group is barely using any stimulus other than monetary. The Germans are even against that but the problem is that fiscal policies remain under the tight constraint of the Eurozone parameters. This makes it near impossible for any of the countries that fall under the EU umbrella to stimulate beyond some monetary stimulus that they receive from the central bank and even this stimulus is becoming increasingly difficult to achieve.
The United States has definitely been the shinning star in terms of monetary policy having printed more than $4 trillion. However on the fiscal side there has been little in the way of shovel ready projects and the tax burden being felt by individuals and businesses is massive. Not only are the tax rates higher but with Obamacare in full force the cost of keeping full time employees is growing and is akin to an additional tax.
The final problem is that virtually none of the countries have had a budget surplus in decades (other than Germany). They were all in a hole before they began printing money and are now in an even bigger one. Furthermore the thought of them ever being able to balance their budgets seems impossible. The United States as an example has not only a huge deficit to fill but with Social Security and Medicare kicking in the chances of a balanced budget are slim to none.
So while it appears that Keynes rules the day, unfortunately his ideas are really nor being followed as if they were I have to believe we would be out of this mess instead of digging a deeper hole each and every day.
In an article in Business Week Keynes was listed as "The Man of the Moment". Keynes died in 1946 but his economic theories live on. He was the first to promote the idea of fiscal and monetary policy as a solution to economic turmoil. To summarize his ideas he said that during good economic times governments run surpluses and these surpluses should be spent during times of economic weakness to take up the slack from a weakened business environment. Using both fiscal (tax cuts and spending on shovel ready projects) and monetary (printing money and lowering interest rates) an economy can be stimulated. Once business picks back up the government can exit the market and recoup their investment through increased tax revenues.
It appears that the world's central bankers (German's aside) are bent on giving Keynes's theories one massive try. The interesting thing to me is that his theories encompass ALL of the aspects of stimulus not "some" of the inputs. Looking around the world then it is clear that while on the surface his principles are being used to "stimulate" the global economy when you dig deeper there are a number of things amiss and these missing pieces are undermining the efforts.
First let's take a look at Japan. While the world applauded their most recent money stimulus and government spending packages they failed to mention that Japan has already raised the consumption tax and is planning to raise it again. According to Keynes tax reductions are needed in addition to these other stimulus's and so while Japan is using two of the inputs the third is offsetting any perceived benefit.
Europe, the laggard of the group is barely using any stimulus other than monetary. The Germans are even against that but the problem is that fiscal policies remain under the tight constraint of the Eurozone parameters. This makes it near impossible for any of the countries that fall under the EU umbrella to stimulate beyond some monetary stimulus that they receive from the central bank and even this stimulus is becoming increasingly difficult to achieve.
The United States has definitely been the shinning star in terms of monetary policy having printed more than $4 trillion. However on the fiscal side there has been little in the way of shovel ready projects and the tax burden being felt by individuals and businesses is massive. Not only are the tax rates higher but with Obamacare in full force the cost of keeping full time employees is growing and is akin to an additional tax.
The final problem is that virtually none of the countries have had a budget surplus in decades (other than Germany). They were all in a hole before they began printing money and are now in an even bigger one. Furthermore the thought of them ever being able to balance their budgets seems impossible. The United States as an example has not only a huge deficit to fill but with Social Security and Medicare kicking in the chances of a balanced budget are slim to none.
So while it appears that Keynes rules the day, unfortunately his ideas are really nor being followed as if they were I have to believe we would be out of this mess instead of digging a deeper hole each and every day.
Friday, October 31, 2014
Dead Man's Party
"It's a dead man's party, who could ask for more, everybody's coming leave your body at the door, leave your body and soul at the door." - some of the lyrics to Oingo Boingo's song Dead Man's Party
Its Halloween today, one of my son's favorite days (he is Sherlock Holmes today), so I had to look up the origin of the day and it turns out as usual there is much debate on this topic. What is agreed upon is that it initiates the triduum of Allhallowtide which is the time in the liturgical year dedicated to remembering the dead. As spooky and scary is the theme of most Halloween parties I find it amusing that the scariest game in town right now are the global markets and by markets I am not just referring to the stock market I am including the commodity markets as well.
As of this moment the S&P 500 is breaking to new all-time highs, gold and silver are down 5.7% and 8.0% respectively in three days, oil has fallen more than 20% this year (a bear market) as have corn and soybeans, housing after an initial rally has seen its luster fade; all this while interest rates hover at multi-year lows. Fortunately I am completely agnostic to market movements so while I continue to prosper I can feel the workings of something larger than what appears on the surface lurking around.
Certainly with the price of oil and the grains falling it should relieve some of the stress on the consumer. I have to say that I am rather enjoying gasoline at $3.40 a gallon down from almost $5.00 a gallon a year or so ago. Business also seems to be picking up in most of the sectors that I am invested and overall 2014 is turning out to be a fairly good year for me so I am not complaining in the least. The Federal Reserve ended its quantitative easing this month and the stock market, rather than implode, is making new highs. Conventional wisdom it seems is out of the window as $4 trillion of stimulus has not produced inflation (in fact there is even talk of global deflation), the dollar continues to strengthen daily and interest rates are still exceedingly low. How is this even possible or are we at a dead man's party?
Never in the history of the globe has such a large amount of financial stimulus been tried and I am certain that the Federal Reserve officials are patting themselves on their backs right now. History seems to have been defeated and a new era of economic prosperity is upon us, or so they would have us all believe. What I will say is that for now it does seem to be working but while they have said that quantitative easing is over they are still stimulating the economy to the tune of $40 billion a month (roughly) in that they are not letting their balance sheet shrink. As they have a $4 trillion investment portfolio of debt roughly $40 billion is maturing each and every month and for now this is being reinvested.
Its Halloween today, one of my son's favorite days (he is Sherlock Holmes today), so I had to look up the origin of the day and it turns out as usual there is much debate on this topic. What is agreed upon is that it initiates the triduum of Allhallowtide which is the time in the liturgical year dedicated to remembering the dead. As spooky and scary is the theme of most Halloween parties I find it amusing that the scariest game in town right now are the global markets and by markets I am not just referring to the stock market I am including the commodity markets as well.
As of this moment the S&P 500 is breaking to new all-time highs, gold and silver are down 5.7% and 8.0% respectively in three days, oil has fallen more than 20% this year (a bear market) as have corn and soybeans, housing after an initial rally has seen its luster fade; all this while interest rates hover at multi-year lows. Fortunately I am completely agnostic to market movements so while I continue to prosper I can feel the workings of something larger than what appears on the surface lurking around.
Certainly with the price of oil and the grains falling it should relieve some of the stress on the consumer. I have to say that I am rather enjoying gasoline at $3.40 a gallon down from almost $5.00 a gallon a year or so ago. Business also seems to be picking up in most of the sectors that I am invested and overall 2014 is turning out to be a fairly good year for me so I am not complaining in the least. The Federal Reserve ended its quantitative easing this month and the stock market, rather than implode, is making new highs. Conventional wisdom it seems is out of the window as $4 trillion of stimulus has not produced inflation (in fact there is even talk of global deflation), the dollar continues to strengthen daily and interest rates are still exceedingly low. How is this even possible or are we at a dead man's party?
Never in the history of the globe has such a large amount of financial stimulus been tried and I am certain that the Federal Reserve officials are patting themselves on their backs right now. History seems to have been defeated and a new era of economic prosperity is upon us, or so they would have us all believe. What I will say is that for now it does seem to be working but while they have said that quantitative easing is over they are still stimulating the economy to the tune of $40 billion a month (roughly) in that they are not letting their balance sheet shrink. As they have a $4 trillion investment portfolio of debt roughly $40 billion is maturing each and every month and for now this is being reinvested.
With Europe still extremely weak, Japan in trouble and China
slowing down it is no wonder that the dollar is charging. This is more a
factor of external global weakness than a celebration of the economic policies
of the Federal Reserve. It once again appears that there is time to
reduce their $4 trillion portfolio and to me they should take this opportunity.
The reason that they will not is that the labor market is still weak and
there are fears that the rest of the world will export deflation. While I
can understand these concerns I believe that it is more important to take the
opportunity to put some powder back in the barrel for another time as it will
come and then it would be nice to have something to fall back on. For now
though let the dead man's party roll on, what do you say my dear Watson?
Friday, October 24, 2014
Paradise
"He that does good for good's sake seeks neither paradise not reward, but he is sure of both in the end." - William Penn
It is another perfect day in paradise here in San Diego. We have not had a day with temperature below 70F since May 27 and today is no exception. It will be total shock to the system when we have a day that breaks this streak and last night I had to actually pull a very light blanket on the bed around 3 am as it was a touch chilly! While this is all happening there is a growing problem - lack of water. Starting in November water restrictions will be in full force and this will impact many everyone from farmers to people watering their yards. As I look outside my window I can see massive digging equipment and trucks that are laying the pipeline for San Diego's desalinization plant water pipe so something is being done to alleviate the stress of the low water table but there are plenty opposed to the idea.
As these thoughts wander through my brain I am drawn to conclude that the stock market is much the same. On the surface everything seems absolutely perfect. The pesky volatility of last week has been replaced with "business as usual" as the market recovered most of the losses this week. In a meeting I had last night I was informed by the lieutenants leading the investment sales charge for some large institutions that all was good and that 18,000 on the Dow Jones Industrial Average was only a matter of time and could even happen by year end! That would be roughly 1,300 points higher from here or roughly 8% rally in two months. Reasons given for the rally to continue were that the economy is out of the woods, unemployment is falling, businesses are making a lot of money AND don't forget that it is the only game in town! With most individuals ignorant to the risks and believing this pitch is in no wonder so many lose their shirts in the market.
Taking a look at a chart of the market and it certainly looks like it could move that high in that short amount of time, so who am I to argue? The reason that I am not in the stock market is because I have always felt and do so now even more strongly that the current policies that have ignited the massive run in the market are the same policies that will be the undoing of the market. While I agree that some headway has been made, the amount of headway (or lack there of) is minimal for the amount of money that was thrown at the problem. The reason for the lack of headway is the same reason that is undermining the market's future and that is every dollar used to support the market is a wasted dollar and the impact of that dollar on driving the market higher becomes less and less with every new dollar printed. At some point the market will wake up to the fact that the whole thing is a fictitious game and will implode. Does this happen tomorrow or in a decade, I cannot tell you but what I do know is that there are alternatives in which to invest (which is what I have done) that are outside of the risk of the stock market and that should benefit from a market correction while continuing to produce great returns in the interim. Unfortunately the arm of sales people continue to promote only stocks and bonds and so most will be impacted by the unwinding of the great Federal Reserve experiment.
So to me the market is akin to San Diego's weather, on the surface it seems perfect (a direct line to infinity) but rain (volatility and a decent correction) is needed badly to right the situation. The problem is that investors are being sold on the idea that it will never rain and if it does that they will not get wet (they will either get out in time or the Federal Reserve will save them). Unless you are 8 years old and still believe that you can dodge rain I am here to say that if you are exposed to the stock market your chances of not getting wet are slim to none and once again you are being sold down the river as there is no magic here and the reality will hurt. Take the time to turn to alternatives, you will be glad that you did.
It is another perfect day in paradise here in San Diego. We have not had a day with temperature below 70F since May 27 and today is no exception. It will be total shock to the system when we have a day that breaks this streak and last night I had to actually pull a very light blanket on the bed around 3 am as it was a touch chilly! While this is all happening there is a growing problem - lack of water. Starting in November water restrictions will be in full force and this will impact many everyone from farmers to people watering their yards. As I look outside my window I can see massive digging equipment and trucks that are laying the pipeline for San Diego's desalinization plant water pipe so something is being done to alleviate the stress of the low water table but there are plenty opposed to the idea.
As these thoughts wander through my brain I am drawn to conclude that the stock market is much the same. On the surface everything seems absolutely perfect. The pesky volatility of last week has been replaced with "business as usual" as the market recovered most of the losses this week. In a meeting I had last night I was informed by the lieutenants leading the investment sales charge for some large institutions that all was good and that 18,000 on the Dow Jones Industrial Average was only a matter of time and could even happen by year end! That would be roughly 1,300 points higher from here or roughly 8% rally in two months. Reasons given for the rally to continue were that the economy is out of the woods, unemployment is falling, businesses are making a lot of money AND don't forget that it is the only game in town! With most individuals ignorant to the risks and believing this pitch is in no wonder so many lose their shirts in the market.
Taking a look at a chart of the market and it certainly looks like it could move that high in that short amount of time, so who am I to argue? The reason that I am not in the stock market is because I have always felt and do so now even more strongly that the current policies that have ignited the massive run in the market are the same policies that will be the undoing of the market. While I agree that some headway has been made, the amount of headway (or lack there of) is minimal for the amount of money that was thrown at the problem. The reason for the lack of headway is the same reason that is undermining the market's future and that is every dollar used to support the market is a wasted dollar and the impact of that dollar on driving the market higher becomes less and less with every new dollar printed. At some point the market will wake up to the fact that the whole thing is a fictitious game and will implode. Does this happen tomorrow or in a decade, I cannot tell you but what I do know is that there are alternatives in which to invest (which is what I have done) that are outside of the risk of the stock market and that should benefit from a market correction while continuing to produce great returns in the interim. Unfortunately the arm of sales people continue to promote only stocks and bonds and so most will be impacted by the unwinding of the great Federal Reserve experiment.
So to me the market is akin to San Diego's weather, on the surface it seems perfect (a direct line to infinity) but rain (volatility and a decent correction) is needed badly to right the situation. The problem is that investors are being sold on the idea that it will never rain and if it does that they will not get wet (they will either get out in time or the Federal Reserve will save them). Unless you are 8 years old and still believe that you can dodge rain I am here to say that if you are exposed to the stock market your chances of not getting wet are slim to none and once again you are being sold down the river as there is no magic here and the reality will hurt. Take the time to turn to alternatives, you will be glad that you did.
Friday, October 17, 2014
Volatility - Good or Bad?
"Well you see Norm, it's like this. A herd of buffalo can only move as fast as the slowest buffalo. And when the herd is hunted, it's the slowest and eakest ones at te back that are killed first. This natural selection is good for the herd as a whole, because the general speed and health of the whole group keeps improving by the regular killing of the weakest members. In much the same way, the human brain can only operate as fast as the slowest brain cells. Now, as we know, excessive intake of alcohol kills brain cells. But naturally, it attacks the slowest and weakest brain cells first. In this way, regular consumption of beer eliminates the weaker brain cells, making the brain a faster and more efficient machine. And that, Norm is why you always feel smarter after a few beers." - Buffalo Theory as explain by Cliff Clavin of the television show Cheers.
As we have all noticed the volatility in the stock market has increased dramatically in October. At one point the market had fallen more than 8% in less than a month and yet today it appears that the rally is still intact. With one day down the next up and most days with moves of more than 1% it is enough to scare anyone, the question then is what is this volatility telling us and is it good or bad?
Life is full of volatility; the daily ups and downs not to mention illnesses from which you recover or challenges that cause stress all normally result in a stronger individual both physically and mentally. Some time the volatility is so intense that the person never recovers but these cases are relatively rare. In general the human race has evolved by taking on the challenges of volatility, learning from these challenges and becoming stronger. As 21st century humans our bodies are immune to many diseases that killed many people in the early 1900's simply because nature passes along the antibodies from previous generations. Furthermore the volatility caused by new diseases has resulted in many medical breakthroughs along with significant improvements in cleanliness and treatment processes so for all intents and purposes volatility in nature is a good thing.
Turning to the economy it is human nature to try to smooth out volatility. The Federal Reserve is hell bent on giving businesses a smooth ride and making sure that everyone has jobs all the time. This goal unfortunately has the side effect of increasing the volatility. Certainly there are periods when volatility remains under control but this provides a false sense of security. During these periods businesses and individuals assume that the smooth ride will continue forever and invest accordingly. Risk is perceived to be insignificant so ever larger bets are made based on the false perception. For this reason when the dam wall breaks there is an increased level of volatility for which hardly anyone seems to be prepared. The lack of preparation creates significantly more volatility as companies and individuals are forced to exit investments en mass creating a route that is far larger than it would have been had the market been left to its own devices in the first place.
By removing the normal levels of market volatility there is increased stress on the system and hence there are major market collapses. Given the mantra of central bankers across the globe to erase volatility and given the large amounts of money being pumped daily into the globe by central bankers in an effort to calm volatility it is clear from the recent market gyrations that not all is healthy and that we may be in for a long period of turmoil. One thing that you can bet on is that the authorities are not going to stand aside and let volatility rear its ugly head without trying another futile round of quantitative easing. They will return with a "new" quick fix program, one that will create a bigger explosion at the end of the line.
For now however enjoy the fact that the United States markets are (at least for the moment) being left to their own devices and as you can see lower may be the order of the day. That said I would not be surprised to see the Federal Reserve step in once more if we enter a proper correction which is a mere 5% lower from here. The problem is that this support is futile and does not provide jobs but will create an even larger problem in the years ahead.
As we have all noticed the volatility in the stock market has increased dramatically in October. At one point the market had fallen more than 8% in less than a month and yet today it appears that the rally is still intact. With one day down the next up and most days with moves of more than 1% it is enough to scare anyone, the question then is what is this volatility telling us and is it good or bad?
Life is full of volatility; the daily ups and downs not to mention illnesses from which you recover or challenges that cause stress all normally result in a stronger individual both physically and mentally. Some time the volatility is so intense that the person never recovers but these cases are relatively rare. In general the human race has evolved by taking on the challenges of volatility, learning from these challenges and becoming stronger. As 21st century humans our bodies are immune to many diseases that killed many people in the early 1900's simply because nature passes along the antibodies from previous generations. Furthermore the volatility caused by new diseases has resulted in many medical breakthroughs along with significant improvements in cleanliness and treatment processes so for all intents and purposes volatility in nature is a good thing.
Turning to the economy it is human nature to try to smooth out volatility. The Federal Reserve is hell bent on giving businesses a smooth ride and making sure that everyone has jobs all the time. This goal unfortunately has the side effect of increasing the volatility. Certainly there are periods when volatility remains under control but this provides a false sense of security. During these periods businesses and individuals assume that the smooth ride will continue forever and invest accordingly. Risk is perceived to be insignificant so ever larger bets are made based on the false perception. For this reason when the dam wall breaks there is an increased level of volatility for which hardly anyone seems to be prepared. The lack of preparation creates significantly more volatility as companies and individuals are forced to exit investments en mass creating a route that is far larger than it would have been had the market been left to its own devices in the first place.
By removing the normal levels of market volatility there is increased stress on the system and hence there are major market collapses. Given the mantra of central bankers across the globe to erase volatility and given the large amounts of money being pumped daily into the globe by central bankers in an effort to calm volatility it is clear from the recent market gyrations that not all is healthy and that we may be in for a long period of turmoil. One thing that you can bet on is that the authorities are not going to stand aside and let volatility rear its ugly head without trying another futile round of quantitative easing. They will return with a "new" quick fix program, one that will create a bigger explosion at the end of the line.
For now however enjoy the fact that the United States markets are (at least for the moment) being left to their own devices and as you can see lower may be the order of the day. That said I would not be surprised to see the Federal Reserve step in once more if we enter a proper correction which is a mere 5% lower from here. The problem is that this support is futile and does not provide jobs but will create an even larger problem in the years ahead.
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