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Showing posts with label Economy. Show all posts
Showing posts with label Economy. Show all posts

14 March 2017

Stock Market Asymmetry and It's Implications



The dirty little secret of mainstream financial gurus.

Do you consider yourself an investor? Do you have a 401K or Defined Benefit retirement plan? Many people’s retirement funds are professionally managed and invested directly in stocks and bonds. Even if you never directly participate in the markets, you are affected by them, and your money isn’t as safe as mainstream financial advisors would have you believe.

Everyone knows you can take a loss in the market, as we have all been reminded the past few years. The critical omission is that this is guaranteed to happen. This post focuses on stock market asymmetry and what it means for the average investor.

Below is a chart I created plotting expected performance of the stock market versus actual for the past 80 years. The chart shows the total number of years the market was within 1, 2, or 3 standard deviations.


 


The chart illustrates the positive bias of the stock market. More importantly for this discussion, is the “fat tail” at the -3 sigma point. Normal Distribution would predict a -3 sigma event 1.8 years out of 80. However, there were actually 3 years when the market lost over 29.9% (3 standard deviations). Statisticians would argue this sample is not statistically valid due to the small sample size, and this argument is correct. However, it has been shown (by others) that this asymmetry holds no matter the time period. It is true for daily, minute and even tick values.

The stock market more closely follows a Power Law distribution rather than a Normal Distribution, but almost all common stock market tools, including the Black-Scholes option pricing model, use the Normal Distribution, ignoring the greater-than-expected risk of substantial losses. This is the dirty little secret of mainstream financial gurus.

 

The fact that the market does not follow Normal Distribution (the Bell Curve), has several important ramifications.

1.    In order to realize something near the 10.95% mean, market timing must be correct. Retirees do not have the flexibility of waiting +/- 15-20 years to achieve optimal entry-exit timing. If the market is in a much-greater-than-expected slump at retirement time, you lose. Survivors of the 1929 crash had to wait 40 years to recover their losses. Who can  postpone retirement an extra 40 years?

2.    The stock market is MUCH more unpredictable than commonly acknowledged or accounted for.

3.    Most investment mangers lose more money for their clients than they make. This sounds incredible but is true. Managers make a little bit of profit each year until a >3 Sigma event occurs (at a rate much higher than expected due to Power Law distribution of the market) and they lose more for their clients than they have ever made for them. I will try to elaborate on this proof in a future post.

4.    When mainstream financial experts claim you can expect x% return in the stock market over time, they can only mean one of two dishonest things; either “over time” really means an unknown (and unknowable) variable amount of time, or; they are citing a mythical Normal Distribution market.

5.    It is interesting to note, that in the financial gurus make-believe ND stock market world, Black Monday 1987 and the 2008 market meltdown are statistically impossible. Their models do not allow for these events yet they happened.

6.    Day trading is generally considered risky and perhaps much like gambling. The main reason is because optimal market timing is so important and it is infamously difficult to achieve. For investment and retirement funds the time period is the only difference. The importance of timing is exactly the same. Therefore, investing in a long term equities fund is fundamentally no different than the shadowy world of day trading.

There are better ways to invest that greatly decrease risk.



19 May 2013

Federal Reserve's Exit Strategy and What It Means for the Stock Market

"Federal Reserve officials have mapped out a strategy for winding down an unprecedented $85 billion-a-month bond-buying program meant to spur the economy an effort to preserve flexibility and manage highly unpredictable market expectations."

What does this mean? Why would the Federal Reserve reveal that they have "mapped a strategy" to stop their bond-buying binge?

First, the "what does it mean" question - nothing. It means nothing. No one expects the Fed to take any action in the immediate future.

The answer to the second question is more revealing; the Federal Reserve knows their policies have come to have a direct effect on the equity markets. This "leaked" bit of information was designed to gauge the reaction of the stock market to the inevitable end of the bond- buying program. The last thing they want is an overshoot to the downside in the market, so they are conducting research into possible actions to take. 

The great unknown is the effects of the ongoing currency war. The devaluation of the Yen makes the Fed's job infinitely more difficult by strengthening the dollar. It has also put immense pressure on the Eurogroup to act also.1

What to do?
I've been giving the warning that the current rise in the stock market is artificial and unsustainable. If you refuse to take my word for it, perhaps you would be interested in Bank of America's recently released strategy;

 1. Slow down of asset purchases
2. Slow down and then stop reinvestments
3. Raise short-term rates
4. Begin sell down of asset portfolios


1. I plan to do an article about the currency wars soon. The vast majority of people could care less about the price of money in Japan, but they should be very, very concerned, as it will have a profound effect on everyone.


08 May 2013

Inflation Drifts Below Target - Why This Isn't Good News

The Treasury and Federal Reserve have been reporting that the inflation rate is "running somewhat below" their target rate of 2.0%. n the latest Board meeting, the decision was made to continue the current policy of buying $85 billion a month in bonds, and there is speculation this amount may be raised. 

So, is "inflation below target a good thing? In short, no. First, let me point out that the "inflation rate" they are talking about isn't the same one you think you are familiar with. The Federal Reserve uses the  Personal Consumption Expenditures (PCE) price index. The rest of the country uses various flavors of the Consumer Price Index (CPI). The CPI is near worthless for the evaluation of everyday prices and the PCE is even worse. By the way, the real rate of inflation, using the pre-1980 methodology, is running almost 10%.

There are two factors that make the current situation dangerous. First, the Fed's purchase of massive quantities of bonds is artificially driving money into other investments such as equities. This is the primary reason for the recent rises in the stock market. It's not an economic recovery. It's a bubble. Secondly, the 4.4 trillion dollars the Fed has already "printed" is a significant inflationary pressure. Every month the Fed buys up more bonds raises the water level behind the inflation dam. Right now, the 4.4 trillion, and the tens of trillions held by foreign banks, and the tens of trillions converted to Eurodollars are not accounted for in the inflation equation. When the bond market collapses, these factors will come into play rapidly.

If you are in the stock market (most people are, either directly or indirectly through pension plans, etc) be aware that conventional advisers such as Dave Ramsey are lying to you when they say the stock market is a great long term investment strategy. It isn't. The history proves it. And right now is the most dangerous time to be in the market since 1928. Be ready to move quickly.


05 May 2013

The Reality of One World Government - It's Not A Theory



Many people are vaguely aware of the so-called One World Government “conspiracy”. While the idea has always been considered a fringe element, more and more people are suspecting that the idea contains some truth. They are correct.

Throughout history there have been men and groups of men who attempted, and sometimes succeeded, in establishing control over large portions of the earth’s population; Alexander the Great, Genghis Khan, the Romans, the Turks and many more. The desire to rule over one’s fellow man goes to the very essence of mankind

The One World Conspiracy has also been subject to what I call “Absurdity Poison”, a form of the informal Appeal to Ridicule fallacy. Put simply, the OWG idea has been poisoned by absurd extensions. Person A believes there is a movement to create a One World Government, Person B posits that the world is actually being run by a race of super intelligent reptiles. Person C dismisses the entire discussion based on the absurdity of Person B’s position. Person A’s argument, however true, is poisoned by Person B’s absurdity. No rational person wants to be associated with insanity, so they avoid the topic all together. This is a very strong propaganda technique. The best way to hide a truth is tell a greater lie.

There is a concerted, conscious effort to establish a worldwide unified government. But it isn’t being directed by super-intelligent reptiles, or immortal Jewish bankers who have been alive for hundreds of years. As improbable as it seems, the origins of the current quest for one government began with the United States itself.

The United States found itself the most powerful nation after the end of World War Two. Europe was in ruins and the assent of the great Japanese economy had been halted.  People in power in the U.S. at the time, including Cordell Hull, Harry Dexter White and of course Franklin Roosevelt (and later Harry Truman), knew that it was only a matter of time before Europe and the Asian countries regained their economic strength and would challenge America’s newfound power. Russia, although weakened, was also a direct threat to America’s supremacy. These men wanted to seize the opportunity to establish a new paradigm to ensure the U.S. remained in a position of supreme power.

The first step in the consolidation of The U.S.’s power came before the war was even over. In June 1944 the United Nations Monetary and Financial Conference, better known now as “Bretton Woods” was held. This conference created the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD) (now the World Bank). In summary, these institutions established the U.S. dollar as the world’s primary currency and allowed the U.S. to enjoy seigniorage and effectively “tax” or more accurately, steal from, the world’s economy. How this works is the subject of another article. The point being made here is this; The U.S took advantage of their brief authoritarian power at the end of WW2 to establish a world system that guaranteed that temporary power would became permanent.

To avoid being seen as just another opportunist country, the U.S. asserted its power through the United Nations, giving the impression that it was a series of world-wide agreements that enshrined The U.S. as the world’s preeminent power.

But they left a gaping hole.

While the U.S was concentrated on firmly taking control of the world’s money supply, in the spirit of “international cooperation” they allowed other countries equal power in the lesser institutions of the U.N.

It was in the “lesser U.N.” that the world’s elite saw their opportunity. In a long series of rulings, agreements and treaties, the sovereignty of all nations has been eroded. In the areas of trade, food, and even firearms, many of the actions of the U.N. are unstoppable by the U.S.

In order to exercise sovereignty over matters such as gun control and food labeling, the U.S. would be required to give up their control of the world’s money supply.

People wonder why the U.S. doesn’t leave the U.N. or ignore their anti-constitutional rulings. The simple reason is the U.S. is beholden to the U.N. because of its economic monopoly. Those in power, including every president since FDR know this. It is one of the reasons they all seem to be cut from the same cloth. They are all constrained by the same paradigm. One could say the U.S. has sold its soul.

In order to keep sovereignty the U.S. would have to give up its dependence on the advantages of seigniorage. The country would have to get its financial affairs in order and keep them that way. But this is unlikely to happen, and soon it will be a moot point. The other countries of the world have already established formidable power through the U.N. and are now working diligently to replace the Dollar. When that happens, the U.S. will be another third world country subject to the whims of the all-powerful elite, enjoying their rule from the halls of the U.N.

Make no mistake. One World government is a reality. There are elitists that believe they should rule over the lesser, common man. We have allowed our government to create the path for them to accomplish that goal.

20 April 2013

Hyperinflation Warning - The Eurodollar Menace



The existence of the Euro-dollar market increases the total amount of dollar balances
available to be held by nonbanks throughout the world for any given amount of money (currency plus deposits at Federal Reserve Banks) created by the Federal Reserve System. It does so by permitting a greater pyramiding on this base by the use of deposits at U.S. banks as prudential reserves for Euro-dollar deposits.
- Milton Friedman, Selected Papers, No. 34

Not to be confused with the Euro currency, the monetary unit of the Eurogroup, a Eurodollar is;

"U.S.-dollar denominated deposits at foreign banks or foreign branches of American banks. By locating outside of the United States, eurodollars escape regulation by the Federal Reserve Board."[1]

I present a simplistic scenario to explain the effects and dangers of the Eurodollar:

Suppose a country creates a currency as a medium of exchange. Let’s say they start with 1 million units. If they then create 1 million more units, it is reasonable to assume the value of each unit, both the existing ones and the new ones, are decreased by half. (The reciprocal of the total number of units). This is classic monetary inflation.

Original unit value = 1
Unit value after doubling the number of units = 0.5
Unit value after quadrupling the number of units = 0.25
…etc

Now suppose that the number of units is doubled, but all the new units “disappear”

Original number of units = 1 million
New units created = 1 million
Total number of units = 2 million
1 million units “disappear” – 1 million
Number of units in circulation = Still 1 million
Therefore, each unit value is still = 1, because the newly created units disappear and don’t have an effect on the value of the original units

This is what happens when U.S. dollars are created by the Federal Reserve and get converted to Eurodollars. Because of the U.S. dollar’s status as the world's reserve currency, other nations must convert (buy) U.S. dollars to conduct international trade. Some of these dollars are kept overseas and never return to the U.S. Just like in our example, they disappear.

This is a great deal for the U.S because it means it get goods essentially for free. As a nation, the U.S. can print dollars and trade them for imported goods. Because the dollars don’t come back, they do not cause inflation. It’s a free ride the country has been on since the end of the Second World War. This is the basis of America’s wealth. Not innovation, not the American work ethic; Trickery.

But in the end, the trick is on the U.S. All those Eurodollars didn’t really disappear. They are still out there. When the rest of the world decides to adopt a new reserve currency, a process that is well under way, they will no longer have a need for the 9.7 trillion dollars they now hold. The dollars will come flooding back into the U.S., inflation will quickly degenerate into hyper-inflation and the real losers will be those required to own dollars – the American taxpayer.

Are you prepared?


[1] http://www.investopedia.com/terms/e/eurodollar.asp

19 April 2013

What's Behind the Gold Price Plunge?

Since my time at REFCO (yes, that REFCO) I have maintained that gold is the most manipulated market in the world, behind fiat currencies of course. But what is going on with the dramatic price moves in gold lately?

First we need to examine what initiated the sell-off. It wasn't some world event or major development; the price move started after brokerage houses and Goldman Sachs notified private investors of an impending liquidation of gold by some large hedge funds. Has this happened? Not yet, and it probably won't.

Most of the price pressure has come from uncovered short futures positions. This isn't unusual in itself, considering the technical status and alleged overbought condition of the market. But we need to look at the bigger picture to get a clear understanding...

The Japanese have embarked on a qualitative easing campaign and the Federal Reserve is pressuring the Euro Zone to do the same. The answer to why, of course, is to prevent an uncontrolled crash of the Dollar because of the massive qualitative easing done by the Fed themselves in the past few years. There is an incredible amount of dollars out there that potentially represent a tremendous inflationary pressure. While the Federal Reserve tells their deflationary fairy tale on the one hand[1], on the other they are desperate to control the dollar. Gold presents a clear and present danger to the Fed's plan and so it is entirely likely they instructed Goldman Sachs and others to deflate gold.- Keep in mind, Goldman Sachs and the rest of the investment and fund houses will win no matter what. They are partners in crime with the Federal Reserve.

My advice -  I am not a "gold-bug" by any means. But ANY hard asset is better than dollars. If you have physical gold, hang on to it. Buy some if you have some extra funds, but don't tie up all your investment in it. The effort to prop up the dollar may get very ugly and gold volatility may go insane. If you have derivatives of any kind, and especially gold derivatives, you are gambling with your wealth. You might as well be at the casino.



[1] In a recent blog post, Gold Does Not Glitter, Paul Krugman tries to make the case that the gold price drop is proof there is no inflation danger.

14 April 2013

Hyperinflation Warning - Debt Phase Transition



The Federal Reserve has been “printing money” on a massive scale for the last several years in support of various stimulus programs; a process they now call Quantitive Easing, or QE. Keynesian theory allows that spending, even deficit spending, results in economic growth. And this has actually been the case during various periods in the 20th century. For example, increased spending during World War II resulted in a post-war economic boom. Keynesian theory supporters can point to several other examples. 
However, according to the Federal Reserve; 

"QE did not dramatically increase bank loans and the growth of broader monetary 
aggregates." 

What makes the current situation different? -  Economic growth is dependent on the utility of debt.



Let us consider the famous Widget Company. Say the Widget Company manufactures 100 widgets a day. They can take out a loan to buy additional or better equipment to increase their output to 500 widgets a day. Obviously then, the ability of the company to borrow money has some utility. If every dollar borrowed enables the company to earn more than a dollar, the Utility of Debt is said to be greater than 1.



Extrapolated to the entire economy, the same general principle applies. Historically every dollar created by the Federal Reserve has resulted in more than one dollar in increased economic activity. But there is a limit. Eventually a point is reached where the new dollar creates less than one dollar in new economic activity. This point was reached somewhere in the 1950’s. 





Debt Phase Transition is the term applied when the creation of a new dollar actually causes a contraction of economic activity. We have recently reached that point. We have reached a point of debt saturation. No amount of money creation (money printing) can cause economic recovery. Furthermore, the increase in money supply only makes the problem worse since each new dollar actually decreases activity. 

The only possible solution is the reduction of debt, and this can happen in only three possible ways – 1.) Repay the debt, 2.) Default the debt, and 3.) Erase the debt through hyperinflation.


It should be obvious that neither of the first two possibilities will ever happen. (If you do not agree, please see upcoming posts for proof.)



This leaves only hyperinflation. The massive amounts of money being put into the system has not caused inflation yet because it isn’t being used. Money Velocity is very low. (See chart below). But this money still exists, along with huge amounts that has been transferred out of the country because of our multi-decade trade imbalance. All of these excess dollars constitute a large reservoir that will flood the economy when the holders of these dollars decide to exchange them for something else – a process that has already begun.


At no time in the history of man and money has there been such a buildup of excess currency. The hyperinflation that must result will be unprecedented and will make previous hyperinflation events seem insignificant.



05 April 2013

BRICS Deliver Serious Blow To the U.S. Dollar

The 5th annual BRICS[1] Summit has wrapped up in Durban, South Africa, and an agreement was signed by the member countries to establish an international development bank to bypass the International Monetary Fund. More importantly, the agreement also provides for the establishment of a new currency to replace the dollar in international trade.

Since the so-called Bretton Woods System, established in 1944[2], the U.S. has enjoyed the benefits of being the worlds official reserve currency. This privilege has enabled the U.S. to prosper by creating an artificial demand for the dollar. With their new arrangement the BRICS countries have abandoned this convention.[3] 

BRICS nations comprise 20% of the global Direct Foreign Investment and this figure is set to rise dramatically. Trade among the group is expected to reach $500 billion in the next 7 years. The group also collectively holds 4.4 trillion USD in reserve. Since they, and presumably other third world countries who join them, will no longer have a need to buy dollars, this will remove a major foundation of the dollars strength. 

Why are they doing this? The short answer is; They are losing the currency wars. The U.S., Europe and Japan have lowered interest rates to near zero, putting extreme upside pressure on the BRICS currencies.

What does it mean to you? Again, the short answer; Inflation. And eventually hyper-inflation as all of the reserves are dumped, along with the trillions in market operations by the Federal Reserve in recent years, there will be a literal flood of dollars and no demand for them.


[1] BRICS is an acronym for Brazil, Russia, India, China and South Africa
[2] http://www.imf.org/external/about/histcoop.htm
[3] The Bretton Woods System was officially abandoned in 1971, but the U.S. dollar continued to be used as the worlds reserve currency. For a concise history see- footnote 2