Friday, November 15, 2013 Hitchhiker's VUE

General Information and Analysis

·         With Janet Yellen's testimony, the world moves closer to a financial showdown, and that may mean an economic collapse for the USA.  I'm not a doomsayer, but at some point in time, the debt will get to the place it cannot be paid.  Yes, it could be paid for my hyperinflation, but Ms. Yellen did not provide any insight how to drive inflation up, and no one asked her how to pay off the debt.  As we can observe, Japan is having no success at all in driving inflation up, and like the USA, BOJ is only driving the stock market (Nekke) up. 

·         The currency wars are playing out right before our eyes, with the only country that seems to have some sense of global domination being China.  We could very well see the complete collapse of the monetary system we now use in the world (FOREX markets).  At that point, I expect China to step in with a gold backed currency.  China will take over being the reserve currency by default (not by UN law probably).  Since they will back their currency with gold, everyone else will be forced to do the same.  Now if that was to happen, the Federal Reserve of the USA would no longer govern, and look for the rich elitists to leave the country before they are lynched.  However, that is many years away if it happens at all.

We Disagree About Investments:

I know you've observed it over and over.  You read newspapers, blogs, your friend's on Facebook (and all the political postings), and they disagree.  Today, I read one of my favorite gurus who made a compelling case for how fundamentally bad the US economy is.  He stated categorically that he would not be invested in the stock market at these overbought prices. 

I then looked at someone else I read, and has done extremely well during the "Great Recession", and he says exactly the opposite.  He argued to load up on low value excellently managed companies (and he knew just what ones, and he was willing to sell you that information for $2,000 per year). 

If you read and subscribe to newsletter, you've observed this.  Experts disagree when they are looking at the same data.  They look at the same chart, and interpret the meaning of the future based on the same chart (for example the DOW Jones Industrial average). 

Of course, you and I know that the markets are not really able to forecast-ed accurately.  The reason is simple.  Financial markets (and economies) are complex, interacting systems and human behavior is often irrational - not rational.  In turn, that leads to chaos and chaos theory.  Interactions can only have probability outcomes; not precise outcomes. 

 So what do we do when it seems every adviser you read seems to be in disagreement to some level. 

First, remember, forecasting and ultimately investing is not an exact science.  Even with the largest supercomputers on Wall Street, investors cannot know everything.  We can study the fundamentals of the business, and that is helpful in understanding factors such as revenues, debt, investment ratios and so-on.  It will not accurately forecast where the company will be next year.

Many analysts (including myself) look at trends.  The idea is momentum; where one assumes (more or less) a price in trend will have a higher probability of continuing the trend and not reversing it.  The other idea here is that price knows everything there is to know at that moment.  (Of course, if that was absolutely correct, price would not change would it?) 

The issue is that future valuations of commodities, bonds, stocks are not dependent on micro-events.  Macro-events (politics, wars, social upheaval and so-on) play a big role.  Trading in all the liquid markets 24 X 7 world-wide has evened the playing field, and it has also resulted in much human behavior entering the market (and HFT that tries to take advantage of those behaviors). 

In general then, I conclude that is why most investment experts underperform the markets over extended time periods no matter what they invest in.  It also explains why economists at the Federal Reserve bank are not infallible. 

Today, the disagreement extends over at least four key asset (and market) categories: stocks, energy - specifically oil, and gold.  The other major disagreement is over China's ability to grow.  Economists, however, disagree on every economy in the world, and they all disagree on how to manage fiat currencies. 

In actuality, the only thing to worry about as an investor is to learn how to invest such that the investment principle is protected from major events (another crash in the stock market like 2008 for example). 

The two major emotions that make it so difficult for the retail investor to profit:  Fear and Greed.

·         Fear - this is the mistake of not understand risk.  Retail investors do not ascertain risk.  They look for convincing arguments they believe that will make them wealthy (greed).  When their investments do not perform as expected, risk increases, and losses mount up, they face fear.  Then often they are immobilized.  The old gamblers emotion kicks in - if I can just break even I will get out.

·         Greed - this is also the mistake of not understanding risk.  They ask the question "What is the fastest way to get rich?"  They do not take profits, and they are sure the market (whatever they are invested in) will go to the moon.  There is an emotion that also gets mixed in: "needing to be right".  These are the people who are perennial gold bugs, perennial bears about stocks, the USA is going to fall tomorrow morning... 

ASSERTION:  Most retail investors do not have a systematic way of managing an investment.  They don't have an entry strategy, they don't have a risk strategy while in the trade, and they don't have a exit strategy. 

It then must follow, that an investor must be like a good business person: when apprised of significant risks to her company's growth insures against the risk.  Action characterizes the good business leader. 

Recognize the risk.  Assess the risk.  Find the most efficient way to insure against it. 

I will start up a new newsletter soon, that will deal with asset allocation to manage what may likely be a major downturn in the US economy after the elections in November 2014.  However, we will also hedge risk against the possibility of another bull market economy such as President Bill Clinton's presidency experienced (which was not just in the stock market, but reached many other asset classes). 

I've already discussed this in this blog, but let me set again the strategy I use for gold. 

Gold is a store of value against fear.  The fear manifests itself as fear of inflation or fear of major wars.  Rarely is gold a way to increase wealth (except in those events that drive gold, and those events are not predictable). 

I recommend everyone have gold and silver coins as part of their "start-over-again" funds.  This is a store of value that you use if any number of terrible events happen - collapse of the dollar, widespread bankruptcy of banks, major war, and so-on. 

I then recommend gold, not to be greedy, but to provide sensible insurance against disaster.  I recommend the amount of gold and silver coins is the least possible amount needed to survive economic Armageddon if it arrives in your life time.  Please take my advice: ignore all prophets of doom.  They have been around forever, and someday they will be prophetic.  In the meantime, gold and silver deserves a place in your portfolio.

US

Janet Yellen:

·         Janet Yellen spoke at the first round of her confirmation hearings.  In my opinion, she was smooth, consistent and unruffled by some tough questions about the destruction of the middle class in America.

·         She expertly dodged taking any new stand, and use the same kind of hidden terminology every Fed President has used before her.

·         There was not one thing in her message that suggests she supports tapering any time soon.

·         "I don't see at this point, in major sectors of asset prices, misalignments."  That is double speak for I don't see a stock market bubble now or anytime soon.  Readers, please remember, Dr. Bernanke did not see the housing bubble (and neither did Janet Yellen), Greenspan did not see the Tech Bubble. 

·         "It's important that we do what we can do to promote a very strong recovery. I'm important not to remove support, especially when the recovery is fragile and the tools available to monetary policy, should the economy falter, are limited given that short-term interest rates are at zero."  Janet Yellen...   That is also hidden speak, to state we are now limited in our tools, and that purchasing US debt is one of the few tools we have left. 

One Can Never forecast the weather accurately:

·         The result of Yellen's appearance is that the dollar fell overnight against every major currency.  This is belief that QE infinity will continue. 

·         The stock market (while overbought in every sense) will climb, and it will continue to climb until the debt ceiling must be addressed again.

·         At worst, the Christmas season should see choppy market, and more than likely a blow-off top before reacting to the US debt ceiling debacle as the US hits that brink.

Debt Ceiling USA

We, the People, are one day closer to the Federal Government reaching the debt ceiling.  To make you feel more comfortable, the Republicans have vowed they will never shut down the government again.  Sigh... They then took any tool they have to slow down the accumulation of debt, through it in the garbage, and burned it. 

Last year you and I knew the Debt Ceiling would be a problem in 2013.  Then along came some fancy new accounting shenanigans, and the new Secretary of Treasury used "extraordinary measures" to keep the government going without surpassing the debt ceiling.  (They kicked the can down the road.)  It was not until October that the debt ceiling had to be raised.  They both parties had to negotiate, since up until that time, there was no observable negotiation taking place between Congress and the White House.  

Canada

Eurozone

·         The Euro is making a large comeback today. 

·         Italy's trade balance was horrendous.  The forecast was for a 5.21 Billion Euro positive, and it came in .96B negative.  This will put pressure on Italy's rulers, and it will cause concern in Germany.  Not to worry, however.  Super Mario (ECB) has everyone's back.

·         The stablizing news came from Germany yesterday.  GDP was steady, and met forecasts.

Australia:

China

Japan