The End of Everything

Well, it’s a long road to wisdom
But it’s a short road to being ignored

—The Lumineers

It’s January 2, 2014. The Dow Jones Industrial Average opens the year at 16,500, does a swan dive down to 15,390 in early February and the big bank trader loads up. He keeps buying during the year, hitting it hard on every dip, using all the leverage at his disposal. On September 19 the Dow closes at 17, 279 and his equity position is up $72 million on the year. He is mentally spending the $10 million bonus coming to him at yearend. Twenty trading days later the Dow closes at 16,143. He has to liquidate heavily to meet a monster margin call and his equity position is now negative $15 million. Speed kills. No bonus unless he makes it up. He doesn’t make it up, it goes without saying. Moreover, before 2015 is half way over his entire trading department is shut down and he is looking for another line of work.

The trading life at big banks is brutal, mostly because few traders know what they’re doing. They trade the firm’s capital, so they plunge to maximize their bonuses. Senior managers know even less. A trader gets on a lucky run and, just when they should be reigning him in, they give him more trading capital. It’s usually over quick, and the shareholder pays, or, if it’s a big enough hickey, the taxpayer.

The average 401k investor will lose, too, but she won’t catch on right away. She’ll likely be down by half by mid 2015. It’ll keep her up nights, even though her advisor holds her hand and assures her time is her best ally. Hang in there, he says, it’ll come back. Except it doesn’t. By mid 2016 she has lost 20 years of accumulated contributions. She should be retiring this year. It’s a bitter pill.

A Grand Supercycle bear market is all encompassing. No investment class survives. Perhaps the most depressing of all is real estate. It becomes more and more illiquid as the depression progresses. Both commercial and residential properties lose revenues as tenants go through hard times. Keeping properties rented, even collecting rents from occupied properties becomes a nightmare. Neighborhoods, even high end areas, decline. The fabulous Boston back bay, home to some of the wealthiest families, became a flop house neighborhood in the thirties and did not get re-gentrified until the nineties. Investment real estate will fall 80% or more in value and will not recover in the lifetime of the present owners or their heirs.

All of this happened in the aftermath of the crash of the thirties, and that was only a Supercycle bear market. This is a bigger deal, if you can imagine it. The only thing that will hold its value is cash.



No one should consider any part of this presentation as a recommendation to buy or sell any securities whatsoever.

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On the Ass-Backwards Crowd

I’m just tryin’ to make the right mistake

—The Band

Buy Low

U. S. Dollar

dollar now

Sell High

U. S. Stock Market

Dow Jones Ave now

Isn’t that what we’re supposed to do? Perversely, your  advisors want you to do the opposite. The banks/brokerage houses I survey are uniformly bullish on the market, citing a “great economic recovery underway.” The same suits are bearish on the dollar, insisting on the imminent return of inflation, owing to the Fed’s insane money printing.

Taking the last argument first, money printing by the central banks of the world has been going on a very long time. Where’s the inflation? Japan is in deflation, Europe is almost there, and the Fed is now worrying about the same here. My argument has been that social mood governs consumption which drives price. Consumption globally is in decline. Look at gas sales, the best proxy for the general level of economic activity:

Retail Gas Sales

gas retail sales

By every metric, the recovery in the economy since 2009 has been little more than a puny bounce, and an uneven one at that. Such as it is, it is still being fueled by debt. The next pops we will hear will be the bursting of the college loan and the sub-prime auto loan bubbles in an economy which cannot produce enough middle class jobs to provide decent work for those borrowers to pay off the loans.

Elliott Wave analysis projects a crashing stock market and a strong dollar. Given that the world will be desperate for cash to buy groceries and service debts, I like the green stuff.



No one should consider any part of this presentation as a recommendation to buy or sell any securities whatsoever.

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Staring at the Charts

They say that souls have no sex;
of course they do


Here’s stocks:


Flying high, and unless we zoom in super close, we see no evidence of a change in direction.

Here’s the economy:

The unemployment rate dropped to 5.9% last week. But the labor participation rate dropped to a thirty-six year low. While 232,000 people did find jobs,  315,000 people dropped out of the labor force, increasing the total number of people who have stopped trying to get work to over 6 million (data from Zero Hedge 10/3/14).

people not in the labor force

The Civilian Employment to Population Ratio gives no encouragement, either:

civilian employment

The real unemployment rate, then, is north of 10%, probably way north.

Here’s Copper:


Copper’s importance as a basic material in the economy makes it a key indicator. It is highly correlated with employment. If copper starts to rise, employment will too. Both are going nowhere.

Stocks should be leading the economy up. They are not. Why the divergence?

It’s a speculative, last gasp phony rally, that’s why.

The big driver in the market in this year has been the use of borrowed money-the classic end game in a bubble. Margin buying by speculators is at record levels. So are corporate stock buybacks, largely funded with leveraged loans, the worst kind for balance sheets.

A stock buyback is a late stage strategy to pump up a company’s stock when management can’t find anything productive to put money in. Business prospects aren’t good enough to warrant investing in the business, but managers want the stock to go up so they can exercise their stock options profitably.

This is called “returning value to the shareholder,” presumably in the form of a higher stock price.  It never works. A slumping economy eventually pulls the stock down. The managers got their short term benefit and the shareholder is stuck with crashing shares in a stock with unnecessary leverage in the balance sheet. Total waste.

It’s October, when the goblins often pay a nasty visit to the stock market. If stocks are down big this month it will only be the beginning of a painful period for fully invested shareholders.



No one should consider any part of this presentation as a recommendation to buy or sell any securities whatsoever.

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No Looking Back

All I say is by way of discourse, and nothing by way of advice.
I should not speak so boldly if it were my due to be believed


The principal role of the market analyst is, or ought to be, identifying tops and bottoms. Armed with this knowledge, the investor can deal with the uncertainty of the markets by putting the probabilities in his favor.

Bottoms are easy. There comes a point when the data clearly indicates a universal perception of risk. There is no longer any risk because the players, fully convinced of risk, have acted and liquidated. No one left to sell. Time to buy.

Tops, on the other hand, are the devil’s device, created to frustrate the best of analysts. This is because the optimism that drove the market to its obviously overvalued levels will not go away. It dies a slow death, also frustrating the knowledgeable investor who has long since liquidated and stands on the sidelines for what feels like an eternity, looking like a damn fool.

The Elliott Wave Principle is, I believe, the most efficacious tool for forecasting tops and bottoms because it provides the analyst with a perspective on the oscillations in degrees of trend. In other words, a Supercycle top implies one degree of downside risk, whereas a Grand Supercycle top has greater magnitude, which prepares the investor for greater risk. Good as it is, it nevertheless is no less frustrating than any other method at important tops.

The present is a case in point: the secondary rally, the one that sets up the final decline into the ultimate lows, can retrace anywhere from 50 to 138% of the first decline (EWP, page 89), and it is really guesswork all the way up. “Are we there, yet?” will be asked every week, and there will often be plausible reasons to say, “Yes, this looks to be it!”

Thus, top picking by Wave analysts has been going on since the market crashed to the first bottom in March 2009. And for long suffering sideline investors, yet another moment has arrived to hear Wave analysts say, “This is it (maybe).”

The September 19 closing high of 17,279.74 in the Dow Jones Industrial Average was two points shy of 17,280, a 138% retracement of the 2007-09 drop. Time, price, sentiment, valuation and momentum all align to give us the final top, which managed to take up all of the potential in the studies. The decline since then appears to have been an impulse wave and the rally on Friday looks to be part of a normal reaction which should run out of steam somewhere between 17,200 and the top.

This is a good time, then, to review what the Elliott Wave Principle tells us we should expect over the next 7-10 years:

1) A bear market of Grand Supercycle dimension which will take the Dow Jones Industrial Average all the way back to the area of the 1929 top: 400, a 98% loss of value. No stock, not even Apple, or Wal-Mart will survive.

2) A depression more severe than the Great Depression of the 1930s, bringing on crashing values in all asset classes, including real estate and commodities.

3) Civil unrest, and pressure for radical political change.

I can see two ways to manage an end run around this period:

1) Hold cash, as it will gain astronomically versus the crashing values of stocks, bonds and real estate,

2) Hang loose, maintaining a good attitude during the duress, recognizing that out of this awful period the markets and the nation will recover and come back stronger than ever. We always have.



No one should consider any part of this presentation as a recommendation to buy or sell any securities whatsoever.

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On the Coming Great Improvement

The great rising nations of vast populations
held the fate of the world in their hands but hardly seemed to care

—Roger Cohen 9/15/14

Would you choose to live in a country in which:

The prosperity of the last thirty years is based on a vast expansion of credit, which is straining households and governments to the breaking point?

The credit expansion has relied largely on the shadow banking system which is unregulated and subject to systemic collapse?

The infrastructure-roads, bridges, ports, airports, public transportation systems-is antiquated and decrepit?

Citizens have little say over government policies that favor cronies (corporate and government elites)?

General health has declined over the same period: thirty-four percent of the population is obese and 9% suffer from diabetes?

The demographic headwinds put a terrible damper on growth as the number of people in the workforce declines and the number of retirees, voluntarily or otherwise, balloons?

Don’t want to go there? Tough luck. Every country in the Western world and most, including China, in the East have most if not all of these ills. Singapore appears to be the exception. Have a safe trip.

For the second time in 300 years, the world is in an impossible mess. Nothing in the interim, not even the Great Depression, has been this severe or seemed as intractable. Worse, there’s no reasonable place to hide.

Viewed dispassionately, the civilized world is not fixable, and that is great news.

The house at 4201 Mockingbird Lane in my village was built in the early sixties. Various cosmetic projects were done over the years, but the basic structure remained unchanged and has fallen into disrepair and disuse. It sold for a stupid price during the bubble, and now the bank is finally ready to let it go and write off the loss.

The new buyer is not going to get a fixer-upper. The property is a teardown. It will be taken down to the slab and, as has happened in several other instances in the neighborhood, a beautiful modern new home will go up. The reason? This little village is a pristine jewel, and a joy to live in.

The U.S. is not a fixer-upper either. A community of willing compromisers, interested principally in the common good is required to fix a nation with our ills, and the power to do this resides presently in the hands of corporate, financial and political elites who see no benefit for themselves in this. The country is a teardown, all the way to the foundation.

It will begin with all out asset deflation, as the underpinning debt, beginning with the leverage in the hedge fund industry, craters and brings down stocks, real estate, commodities and, for a while, gold.

Politicians, who get unjust credit for a growing economy, will be properly blamed for the collapse. They will be a big part of the teardown, as will principals in the financial and corporate sectors. The nation’s elites will lose power, as citizens, who have too long been apathetic, storm the halls of Congress demanding change.

The second phase of the bear market that will force the teardown has taken a long time to get started. For various reasons, it looks to be nigh. The first rule in The Rules of Adventure (scroll two essays down from here) is Perceive, believe. We will be living through the teardown, which will last longer than I had thought. With the extension of the “B” wave rally since March of ’09 to the present, we now have to expect that 2016, when three big cycles bottom, will only be the first bottom. Time and price in the Elliott Wave Principle studies now take the most probable bottom out to 2021 plus or minus one year.

Can’t say I’m thrilled about that. I’ll be 82. The plan, then, is to keep myself from getting negative during the bad part, so I can encourage my kids and my grandkids to take advantage of the values when the time comes.

Why? because this country has good bones, as they say in real estate. The renewed nation will be better than ever.



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On the Inevitability of Change

If something cannot go on forever,
it will stop

–Herb Stein

The U.S. stock market does its death defying dance in the face of underlying weaknesses in the system. Europe is now preoccupied with the technical bankruptcy of its major banks, and we should not be far behind. Calamity hasn’t arrived yet, but entropy-the state of dysfunction and disorder in our social system-should not be ignored.

The political climate stinks for the majority, and the sons of bitches that have the money and the power are implacable in their drive to keep it. There will be no negotiating a better arrangement. Dismemberment is the historic endgame in plutocracies. The editors of The Economist argue in their new book, The Fourth Revolution, that political upheaval of some kind is coming in the free world.  However it proceeds, there is bound to be great difficulty associated with it.

I’ve held that the next economic crisis will be far more severe than anything the country has ever experienced. We do well to look at the harshest environment we can to prepare our mindset for this eventuality.

Kum Do, a particularly brutal martial art from Korea, is a fight to the death with very sharp swords (today it is practiced with bamboo sticks). Student warriors are taught to avoid what are called “The four Poisons of the Mind.” These are Fear, Confusion, Hesitation and Surprise. We should take this to heart.

The latter of these poisons gets my attention right now. We are most likely to be surprised when we think we know what’s going to happen next. I’m in that position. Could I be surprised? It has already happened. The first leg down in the Grand Supercycle Bear Market began in 2000 and didn’t bottom until 2009, taking a lot longer than I expected. The counter trend rally has also taken a lot longer than I expected. Am I wrong about the premise of a bear market of cataclysmic degree?

No. The 2000 top was, by all measures, the most rampantly speculative in 200 years. The secondary top in 2007 was, in many ways, more vulnerable. The present peak not only features great financial weakness, but also an assault on the political underpinnings of our society. The excesses that were generated in this massive, multiyear top still burden the global economy. An equally massive bear market is a requirement to clean them out.

It will be the majority-the very great majority of investors and their advisors that will be surprised and unprepared for the turmoil that is coming.

The unanswerable question is how this plays out. Even if we do have a handle on the risk in the system, we have no idea how this will affect us.

Professional firefighter, Peter Leschack said, “…in emergency operations, you must not merely tolerate uncertainty, you must savor it. Or you won’t last long. The most efficient preparation is a general mental, physical, and professional readiness nurtured over years of training and experience. You live to live. Preparing is itself an activity and action is preparation.”

In short, there won’t be a predetermined game plan. We’ll have to be flexible, suit up every day and come to the game prepared to call an audible.






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When Getting Pissed Off Is A Good Thing

A false sense of security
is the only kind here is

–M. Meade

Well, you can wait around, but eventually you’ll do a hard stare at the economy and realize that the next ten years are going to suck unless you happen to have ten million bucks in a bank in the Caymans.

Absent that, next best is to free yourself from the notion that any aspect of your financial life will be reliably available when the tough times arrive. This would include the twenty-year career job you gave your life to, your successful professional practice, your business, the security of your pension, your Social Security, or the collection of fine tchotchkes bequeathed to you by your great aunt. Losing your emotional dependency on what you have heretofore taken for granted will set you up for survival.

This is something to think about now. In just nine days in July, the market lost all of the gains since January 1st.  If this is the beginning of the final plunge into the Grand Supercycle lows expected two years from now, then, after a rally of some kind to fool the crowd, the market and the economy will crash hard. The burst of business activity everyone has enjoyed of late will have been the end of semi-good times.

Next up will be a rapid descent into a global depression, followed by years of sub-par growth.

Everyone of us will have big adjustments to make. Some will drastically downsize their business or professional practice. Some will lose jobs or keep them by accepting deep pay cuts. Entrepreneurs will hustle to get new enterprises going as their existing businesses crater. Retirees will experience shrinking retirement incomes as pension plans go broke.

Survival does not mean getting guns and gold and canned goods and heading for the mountains. It means becoming familiar with a process and, when the moment arrives, using the process to move with alacrity into the new reality to get through it in good shape.

Frightening it will be, but getting through it could be deeply satisfying if we followed rules that Laurence Gonzales found to be common to the survivors he profiled in his essential book, Deep Survival, Who Lives, Who Dies and why.

Here, excerpted from the book, are a set of rules that were derived from experiences of true adventurers. The principles apply to virtually all situations of extreme duress. Gonzales writes “I believe everyone should learn about the basic survival skills and the survivor’s frame of mind, because they come in handy when the trappings of civilization (or even the financial or emotional support) that we take for granted drop away for whatever reason.”

They will seem overly dramatic to you now. They won’t be if what I am forecasting comes to pass:


1. Perceive, believe (look, see, believe). Even in the initial crisis, survivors’ perceptions and cognitive functions keep working. They might notice the details and may even find some humorous or beautiful. If there is any denial, it is counterbalanced by a solid belief in the clear evidence of their senses. They immediately begin to recognize, acknowledge, and even accept the reality of their situation. “I’ve broken my leg, that’s it. I’m dead,” as Joe Simpson (chapter 13) put it. They may initially blame forces outside themselves, too; but very quickly dismiss that tactic and recognize that everything, good and bad, emanates from within. They see opportunity, even good, in their situation. They move through denial, anger, bargaining, depression, and acceptance very rapidly. They “go inside.” Bear in mind, though, that many people, such as Debbie Kiley (chapter 11), may have to struggle for a time before they get there.

2. Stay calm (use humor, use fear to focus). In the initial crisis, survivors are making use of fear, not being ruled by it. Their fear often feels like and turns into anger, and that motivates them and makes them sharper. They understand at a deep level about being cool and are ever on guard against the mutiny of too much emotion. They keep their sense of humor and therefore keep calm.

3. Think/analyze/plan (get organized; set up small, manageable tasks). Survivors quickly organize, set up routines, and institute discipline. In successful group survival situations, a leader emerges often from the least likely candidate. They push away thoughts that their situation is hopeless. A rational voice emerges and is often actually heard, which takes control of the situation. Survivors perceive that as being split into two people and they “obey” the rational one. It begins with the paradox of seeing reality—how hopeless it would seem to an outside observer—but acting with the expectation of success.

4. Take correct, decisive action (be bold and cautious while carrying out tasks). Survivors are able to transform thought into action. They are willing to take risks to save themselves and others. They are able to break down very large jobs into small, manageable tasks. They set attainable goals and develop short term plans to reach them. They are meticulous about doing those tasks well. They deal with what is within their power from moment to moment, hour to hour, day to day. They leave the rest behind.

5. Celebrate your successes (take joy in completing tasks). Survivors take great joy from even the smallest successes. That is an important step in creating an ongoing feeling of motivation and preventing the descent into hopelessness. It also provides release from the unspeakable stress of a true survival situation.

6. Count your blessings (be grateful—you’re alive). This is how survivors become rescuers instead of victims. There is always someone else they are helping more than themselves, even if that someone is not present. One survivor I spoke to, Yossi Ghinsberg, who was lost for weeks in the Bolivian jungle, hallucinated about a beautiful companion with whom he slept with each night as he traveled. Everything he did, he did for her.

7. Play (sing, play mind games, recite poetry, count anything, do mathematical problems in your head). Since the brain and its wiring appear to be the determining factor in survival, this is an argument for expanding and refining it. The more you have learned and experienced of art, music, poetry, literature, philosophy, mathematics and so on, the more resources you will have to fall back on. Just as survivors use patterns and rhythm to move forward in the survival voyage, they use the deeper activities of the intellect to stimulate, calm, and entertain the mind. Counting becomes important, too, and reciting poetry or even a mantra can calm the frantic mind. Movement becomes dance. One survivor who had to walk a long way counted his steps, one hundred at a time, and dedicated each hundred to another person he cared about.Stockdale cites “love of poetry” as an important quality for enduring. “You thirst to remember,” he wrote. “The clutter of all the trivia evaporates from your consciousness and with care you can make deep excursions into past recollections….Verses were hoarded and gone over each day….The person who came into this experiment with reams of already memorized poetry was the bearer of great gifts.”Survivors often cling to talismans. They search for meaning, and the more you know already, the deeper the meaning. They engage the crisis almost as a game. They discover the flow of the expert performer, in whom emotion and thought balance each other in producing action. ”Careful, careful,” they say. But they act joyfully and decisively. Playing also leads to invention, and invention may lead to a new technique, strategy, or a piece of equipment that could save you.

8. See the beauty (remember: it’s a vision quest). Survivors are attuned to the wonder of the world. The appreciation of beauty, the feeling of awe, opens the senses. When you see something beautiful, your pupils actually dilate. This appreciation not only relieves stress and creates strong motivations, but it allows you to take in new information more effectively.

9. Believe that you will succeed (develop a deep conviction that you’ll live). All the practices just described lead to this point: Survivors consolidate their personalities and fix their determination. Survivors admonish themselves to make no more mistakes, to be very careful, and to do their very best. They become convinced they will prevail if they do those things.

10. Surrender (let go of your fear of dying: “put away the pain). Survivors manage pain well. Lauren Elder (chapter 13), who walked out of the Sierra Nevada after surviving a plane crash, wrote that she “stored away the information, My arm is broken.” That sort of thinking is what John Leach calls “resignation without giving up. It is survival by surrender.” Joe Simpson recognized that he would probably die. But it had ceased to bother him, and so he went ahead and crawled off the mountain anyway.

11. Do whatever is necessary (be determined; have the will and the skill). Survivors have meta-knowledge: They know their abilities and do not over- or underestimate them. They believe that anything is possible and act accordingly. Play leads to invention, which leads to trying something that might have seemed impossible. When the plane in which Lauren Elder was flying hit the top of a ridge above 12,000 feet, it would have seemed impossible that she could get off alive. She did it anyway, including having to down-climb vertical rock faces with a broken arm. Survivors don’t expect or even hope to be rescued. They are coldly rational about using the world, obtaining what they need, doing what they have to do.

12. Never give up (let nothing break your spirit). There is always one more thing you can do. Survivors are not easily frustrated. They are not discouraged by setbacks. They accept that the environment (or the business climate or their health) is constantly changing. They pick themselves up and start the entire process over again, breaking it down into manageable bits. Survivors always have a clear reason for going on. They keep their spirits up by developing an alternate world made up of rich memories to which they can escape. They mine their memory for whatever will keep them occupied. They come to embrace the world in which they find themselves and see opportunity in adversity. In the aftermath, survivors learn from and are grateful for the experience they’ve had.

13. (My Rule): Get the book. Read Laurence Gonzales for his magnificent prose, uplifting true stories of surviving, and meticulous research on what gets us through bad times.

Deep Survival



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Hard-hearted Market


Don’t gamble; take all your savings and buy some good stock
and hold it until it goes up, then sell it.
If it don’t go up, don’t buy it.

–Will Rogers

The man had just retired and he began investing with me by depositing a certificate for several hundred shares of his company stock in an account at my firm. “How would you like to get your dividends,” I asked? “Quickly,” he replied.

No problem, and it was a good situation for him.  This was during the 1974 bear market and the stock was cheap. The 6 1/2 % current yield was well above the historical norm for a growth stock. The company raised the dividend most years, so he was building his portfolio with a blue chip stock with a reasonable current return and the prospect of growing income in the future.

Like many of my clients, the fellow was a middle management retiree with assets to invest for income to supplement his pension and social security. AAA bonds were yielding 7-8%, and the local electric utility’s stock bore a dividend close to 10%. It was a good time for the middle class to retire.

How things change. Many people retiring now must depend almost entirely on their 401k for retirement income, making for great uncertainty and, in today’s market, negligible current returns available in high grade investments. By my reckoning, a million dollar portfolio can be expected to produce about $35,000 in income from blue chip stocks and bonds. Slim pickings, and probably a third as much as a middle class couple needs in retirement.

It breaks my heart when I hear how folks are coping. Desperation and/or naiveté has them doing things that are bound to end badly. A lady told me recently that, speaking to her advisor, she said, “I’ve been eating hamburger long enough, young man. I want you to see to it that I eat steak now.”

This might be a problem. The market doesn’t care what the lady wants. Available returns are what they are. If she doesn’t have a lot of dough, the advisor may have to use sketchy methods to get the dream income she hankers for. That usually means trouble down the road.

Two of the most dangerous income producing strategies I hear about today are systematic withdrawals and  junk bonds. Both are catastrophes waiting to happen .

A systematic withdrawal is a set amount paid out of a retirement account at regular intervals, with the difference between the income in the account and the amount of the withdrawal to be covered by liquidating principal. The rationale for the strategy is that the historical rate of growth in the assets has exceeded the amount of the withdrawal. This is nonsense. Stocks and bonds are grossly overvalued and poised for severe declines in the next few years. The withdrawals will exacerbate the loss of value in the account, making it very difficult, if not impossible to recover.

Junk bonds are even worse. In a depression, they will default on their interest payments and lose all their value.

The strategy Cindy and I are pursuing is to remain in cash equivalents and try to not retire until after the bear market bottoms. When stocks hit bottom in 1932, the dividend yield on the blue chip Dow Jones Industrial Average was 17.35%. The bear market underway now is of one degree greater in severity than the ’29-’32 market, so I would expect the yield to be north of seventeen percent when we buy. Right now, it still looks as if the market will bottom with the cycle lows due in about two years.

The tricky part is that, right after we get in, we expect the dividends to disappear for a time. Stocks will have crashed in anticipation of dividend cuts, which are part of what happens in a depression. But they run back up smartly, starting almost immediately after the cuts are announced. The Dow Jones Industrial Average rose 400% between 1932 and 1937. By then, dividends were being restored, but if you waited until 1937 to buy, the huge rise in stock prices meant you only got a 3.63% yield starting out. Gotta buy ‘em when they’re selling ‘em.

You didn’t think this was going to be easy, did you?



No one should consider any part of this presentation as a recommendation to buy or sell any securities whatsoever.


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On Stock Buy-backs and In(per)versions

CORPORATISM, per The Urban Dictionary

A politico-economic system in which most power is held by large corporations,
often mistakenly called capitalism. This is the current governing system of most of the world.

usage: Man, that ain’t capitalism. Look at all advantages the big multinationals get. Subsidies and all that shit. What you got is some motherfucking corporatism

Dilbert Stock Splits

Are corporate managers stupid, bad investors or cunning? You be the judge.

The question comes to mind because, with the market high and valuations stretched, corporate stock buy-backs are going at a record pace. This happened during the top in 2006-07. When stocks were on the bargain table in ’08-’09, corporations sat on their hands (Birinyi Assoc., March 2014). We know it is typical of ordinary investors to be most apt to buy at tops, but wouldn’t you expect these guys to know their companies well enough to buy low and sell high?

Corporate stock buy-backs, often as not, are done with borrowed money. The buy-back reduces the number of shares outstanding and adds debt to the balance sheet. The rationale managers use for this strategy is called “enhancing shareholder value.” Really? Earnings do look better when spread between fewer shares. So short term, the perception of greater share value may run the already extended stock price up a bit, but who benefits?

1) Managers will be able to exercise their stock options profitably, and 2) their banksters will generate millions in advisory fees, commissions for executing the stock purchases, and loan underwriting fees.

Shareholders get nada. When the stock (inevitably) collapses, they are stuck with a company loaded with unnecessary debt. If the primary constituency of corporate management is the shareholder,  we have to come down with the view that managers are shrewdly getting away with murder.

On the evidence, corporate managers these days spend more time on financial legerdemain than on their basic business. Inversions are a current enthusiasm. Under certain circumstances, a company can restructure itself and have its headquarters in another nation without altering any of  its operations. If you are out of the market, buy-backs might not concern you. On the other hand, inversions should bother hell out of you.

Inversions are a huge tax dodge*. Walgreen’s, for example is about to become a Swiss corporation. Without altering any of its operations, it pays Swiss taxes, which are at a lower rate than in the U. S. There are certainly a lot of apologists who will say U. S. corporate tax rates are too high. Nevertheless, the result is that a company will continue to benefit from U. S. Government provided services (infrastructure, national security, due process, etc.) while shifting the tax burden for those services onto others–you and me. It is estimated that the revenue lost to the IRS will exceed $20 billion over the next 10 years (WSJ, July 14).

We should not be surprised that  the provenance of this scurrilous financial ploy is the Wall Street banking industry. They are the guys  who generate millions in fees from their advice and help in executing the tactic.

 Is there anything, you might ask, that can alter the culture of greed and self-interest that pervades the cohort entrusted with the management of our most important enterprises?

There is–a bear market. History tells us that the more nefarious the corporate culture, the bigger the bear. One is coming to your neighborhood soon.



*Copy and paste this link in your browser for more on corporate inversions:

Posted in On Markets, Socionomics | Comments Off

On Preparedness

My leaky roof is no concern to me,
the sun is shining 

“Hey Dad,” Daughter #1 writes, “What is up with Money Markets right now? I have heard something about them being riskier than before. Most of our IRAs and 401Ks are in Money Market now. Is there a better choice?”

Good question. Money market funds are designed to serve two purposes: preservation of capital and liquidity. The funds’ assets are short term loans to governments and institutions. The loans, commonly known as commercial paper, have maturities of thirty to one hundred days. With maturities this short, there is little if any price fluctuation, and the fund can refrain from reinvesting the proceeds of maturing loans to allow cash to come into the portfolio to meet the liquidity requirements of investors.

The higher the quality of the commercial paper, the safer the fund. As is normal, the higher the quality of the fund, the lower the fund’s yield. Because Cindy and I want maximum capital preservation and maximum liquidity, we accept lower yields. These days, that means practically no yield.

That’s OK with us because we are holding these funds to reinvest in stocks at a market low. That low promises to come during a systemic failure in the financial markets. During a period like that, anything with even a whiff of risk will cause problems for the investor.

Money market investors got a big scare in 2008 when one of the riskier funds had  a series of defaults in the fund and stopped cash redemptions to their investors. This caused a panic throughout the money market industry, with thousands of investors staging a run on their funds. For the most part, the mutual fund companies met the rush of redemptions with their own capital. Next time might not be so easy. I want to be prepared for total panic in the next crash.

The best option is to buy 90 and 180 day Treasury bills through a brokerage account. This is usually not an option for 401k accounts, which is the case for Cindy’s 401k. I reviewed the portfolio of her money market fund a couple of years ago, looking for an aggregate rating on the paper of P1.5 (Google FRB Commercial Paper Ratings for info). I felt it was OK then, but will look at it again. We may transfer a part of that account to an IRA she has at Vanguard so she can buy Treasuries.

The SEC has just established some new rules in an attempt to “protect” money market investors in the event of a systemic breakdown in the markets. They include requiring a 10 day delay for redemptions and a 2% redemption charge. That’s not even a half-way good idea. Restricting my liquidity just when I want the access to switch to stocks is exactly what I don’t want. And, forget about a redemption charge.

Obviously, the time to insure our liquidity is now, before things get dicey.



No one should consider any part of this presentation as a recommendation to buy or sell any securities whatsoever.

Posted in On Markets | Comments Off