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.

Cheers,

Rod

Posted in Socionomics | Comments Off

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.

Cheers,

Rod

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Posted in Essential Essays, Surviving Tough Times | Comments Off

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:

THE RULES OF ADVENTURE

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

Cheers,

Rod

Posted in Essential Essays, Surviving Tough Times | Comments Off

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?

Cheers,

Rod

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

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.

Cheers,

Rod

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

http://www.nytimes.com/2014/07/28/opinion/paul-krugman-tax-avoidance-du-jour-inversion.html

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.

Cheers,

Rod

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

Essay on a Boring Subject

This is gonna suck: 538 words about another frickin’ bubble in the debt market. I would rather eat glass than even think about it. If you feel the same, just peer at the chart below and then head off for the beach (whence I shall very shortly be).

Bank Loans

Believe me, it was torture, but yesterday I made myself wade through the Executive Summary of the Spring 2014 Semiannual Risk Perspective, issued by the Office of the Comptroller of the Currency. Gloomy reading.

While damning the economy with faint praise (economic fundamentals showed modest…blah, blah, blah), the tone of the report was harsh on bank lending, which has gone through the roof this year without resulting in economic growth, as lending standards have fallen back to the risky levels of 2007.

Two of the biggest borrowing sectors today are the oil fracking industry and companies owned by the private equity guys. The frackers are on an awful treadmill. Well life for fracked wells is so short, the drillers can’t pay off the loans on many wells before they go dry, so they keep borrowing both to pay previous loans and to keep drilling. This is a death spiral in the making, destined to leave your bank loaded with non-performing loans at the first sign of a drop in oil prices. At least the drillers are trying to do something good for the country.

The private equity guys, on the other hand, are doing things that ought to get them taken out to the parking lot and shot. Writing about these guys makes me want to punch a hole in the drywall, so I won’t. You can read about their practices at the link at the end of this essay.

At the end of a market cycle, they make leveraged loans with their companies, which means they get bankers to loan them money against company assets that are already pledged against loans. The purpose of these loans is to pay themselves rich dividends, even while saddling an already debt encumbered company with unnecessary debt. You would think company owners (and their dumbass bankers) would be more cautious. Not in these cases. Private equity investors milk the companies they buy for all they can. If the company goes bust, tough bananas. They are already out with handsome returns themselves.

Not one bit of value has been added to the companies, but at the next downturn you can be sure there will be banks stuck with bad loans looking for a taxpayer bailout.

The Comptroller of the currency is not happy, but he has no power to reign in the banking industry. The Fed seems to be encouraging this madness. And it is irksome to be reminded that market tops are confirmed when bankers are falling all over themselves lending money to people who will not be able to pay it back.

Meantime, President Obama sends me an e-mail extolling his job creation and economic growth, while the CEO of Wal-Mart says shoppers aren’t returning at the pace one might expect years after the recession peaked, despite data showing this growth (Market Watch, July 9, 2014). What’s the real story?

Told you this was a bummer of a read.

Cheers,

Rod

Article on private equity practices:

http://www.boiseweekly.com/boise/lbo-no-more/Content?oid=1013667 .

 

Posted in Economy, On Markets | Comments Off

Meditation on How Things Work

Everything is new. And we are living among events so singular
that old people have no more knowledge of them,
are no more habituated to them,
and have no more experience of them than young people.

We are all novices, because everything is new

—Joseph Joubert, 1797

Take the telephone, now. Used to be a heavy black object made of Polyoxybenzylmethylenglycolanhydride-Bakelite, for short. Early plastic. Portable, so long as you didn’t take it any further than the length of the cord that attached it to the wall. Go beyond that and you broke your connection to the world.

telephones

Remarkable device. Once, in Mexico City, while home from college on Spring break, I called my girlfriend all the way in New Orleans. Great connection, but my Dad nearly had a heart attack when he got the phone bill.

The phone I have now is housed in new plastic. Polycarbonate. It’s a smartphone and it is not attached to anything. Kids take this for granted. I do not see how the damn thing works without being wired to a wall. But it does, and I can call my grandkids in Costa Rica for practically nothing.

iPhone

This is comic book stuff. Dick Tracy had his 2-way wrist radio, but I knew that was make believe. And it gets even more bizarre: I buy a car the other day and the salesman “pairs” my phone to something called Bluetooth in the vehicle. Now, when somebody calls I don’t even take it out of my pocket. I talk to the air and whoever is calling answers back somewhere in the dashboard.

According to the manufacturer, I can do 1 million other things with the phone. Just download the 1 million thingies they call “apps” and I’m good. I promise I’ll do this, just as soon as I have time.

We do adapt, and we do swiftly take all this amazing technology for granted. And when the rate of innovation is accelerated like now, we can easily believe this implies an ever growing economy. Would that it were so.

Innovation is the result of tinkering. It goes on all the time. When it happens during bad times, it goes unnoticed. During good times, and especially during financial bubbles when optimism is high, it is held to be the reason the economy cannot fail. But it can, and does.

The governing factor in the economy is not innovation. It is human behavior, which is cyclical. The cycle is immutable because, as my Marine Corps gunnery sergeant used to say, human beings are the most fucked up people in the world. Not happy leaving well enough alone, we eventually overreach.

The cycle plays out, approximately, as shirtsleeves to shirtsleeves in three generations. The generation that came into the workforce late in the Great Depression had to roll up their sleeves and dig the country out of the disaster they inherited. That was the Greatest (luckiest) Generation. They, in turn, passed a debt free, vibrant, growing economy on to their kids, the boomers.

The boomers’ have been in charge for the last thirty years. Look around: is there anything of importance besides your smartphone that is not totally, irretrievably fucked up? Unprecedented debt weighs the economy down, policymaking in the nation’s dysfunctional capital serves big corporations, big banks, and big government. The rest of the country sucks wind.

It’s all coming down. The function of bear markets is housecleaning. Boomers will be broke and out of power by the end of the decade. Their kids will be the third generation, the one that takes the brunt of a final collapse in the nation’s affairs.

The millenials, already beset by the effects of the long mismanagement of the country, will be the ones to roll up their sleeves and change the world. They will be asserting themselves politically by the 2020 elections. What seems politically impossible today, will happen then. The millenials will stage a radical grassroots uprising. The jerk-off toadies of big money that inhabit the halls of power will be thrown out of office.

The millenials will be the next Greatest (luckiest) Generation. They will fix things. The rest of us can benefit by holding cash in our investment portfolios now so we can get back in when, along about 2016, the situation looks the worst.

After that, the millenials will engineer an astounding recovery in the economy and the markets.

Gonna be fabulous.

Cheers,

Rod

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

Posted in Human Condition: Variations | Comments Off

A Stealth Top

People think today’s market conditions are normal,
because a benign present is always considered normal.
But it’s not normal. It’s unprecedented.

—Bob Prechter, Elliott Wave Theorist, June 20, 2014

On Monday, trader pal Dick Diamond e-mailed: “Boring. Nothing to do but wait…” The intraday chart of the S&P 500 was flat, matching the uncommon stillness of the ocean at dawn that morning when Cindy and I strolled the boardwalk. Traders hate this calm. We make our living in volatile markets, and this past month our rice bowls have been half empty for lack of opportunity.

On Tuesday the condition abruptly changed. The diagonal triangles-exhaustion patterns-that had been forming in the major averages since April had completed and the throw-overs that followed reversed, generating reliable signals that the long advance in the bear market contra rally since March 2009 was finally over. The textbook says, “If there is a throw-over, the ensuing reaction could be breath-takingly fast (EWP, page 194). We shall see.

Throw-over

As is typical at this type of ending, no one thinks anything is amiss. Quite the opposite. My friend Malcolm sends me a link to a market analyst who says the market can continue to rise for ten more years. This forecast matches those of the brokerage firms I survey. All of them make their forecasts based on what they see in the streets right now:

The economy paints a seemingly encouraging picture: car sales are up, home sales are better than they’ve been in years, retailers are not complaining (but have you noticed that the big stores are featuring 40-50% off everything in the store almost everyday?) There is remodeling, demolishing and rebuilding on every street in my neighborhood. So, what’s your problem, Rod?

Simply this: That’s how all tops look. And, to my gimlet eye, there is a great deal of rot beneath the surface. To begin, the entire rally since March 2009 has been technically weak, with narrowing breadth and contracting volume. Margin debt has exploded and both public and professional sentiment exhibits aggressive euphoria here at the top. In every respect, the rally has been a phony, and the buyers have been in denial about the intractable weaknesses in the economy. It adds up to a “B” wave-a reaction to the primary trend, which is down. Investors are in peril.

Most dangerous of  all is the bubble in the junk bond market. The public’s hunger for yield has them snapping up junk bond funds in unprecedented amounts. Demand is so high that junk bonds can come to market successfully bearing record low interest rates. There is no risk premium built into these investments.

During the next wave down-the most devastating part of the bear market-junk bond issuers will default on the interest and the bonds will collapse, leaving large holes in the portfolios of millions of retirees. Reminds me of the tale about the advice the Baron Von Rothschild supposedly gave his heirs while on his deathbed: “Never buy bad bonds in good times.” Apocryphal or not, the crowd is going to be sorry they weren’t privy to that wisdom.

It is time to play defense.

Cheers,

Rod

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

Triviata

Keep hopeful, it’s a chore

—Margaret Atwood

 Market Notes:

The VIX’ll scare the pants off ya.

The VIX-the Volatility Index-measures the implied volatility of the S&P 500 Index over the next 30 days. Often called the Fear Index, it screams up sharply when traders are caught in a market plunge they didn’t expect (being numbnuts, they never expect a market plunge at tops). The index registered an all time high of 150 during the 1987 crash. In 2008 it spiked to 80. After crashes, it slithers back down below 40, settling down around 20 towards the end of a prolonged rise when traders are fully invested, complacent, and vulnerable.

I was kibitzing with my mentor, Dick Diamond one session back in the late nineties. The market looked toppy then. “The VIX is at twenty,” he said, “it doesn’t get any lower than that. Something sizeable on the downside is due here.” And he was right.

Well, that sucker is not just down to 20 now. It’s closed at 10.85  yesterday. There is absolutely no fear amongst the trading crowd, which, unfailingly sets us up for a crash.

The VIX joins a passel of indicators that are so outrageously overbought, we should be storing potted meat in bomb shelters about now.

People I’m Not Speaking To This Year:

Wal-Mart’s pusillanimous board of directors, for rewarding the CEO with compensation exceeding $20 million last year for pursuing the policy of paying employees humiliatingly low wages, resulting in their dependence on food stamps and other government subsidies to get by, costing taxpayers 0ver $900,000 a year per average superstore according to IBISWorld, an independent market research firm.

Last November, The Cleveland Plain Dealer reported a Wal-Mart in Canton Ohio organized a food drive for its employees. “Please Donate Food Items Here, so Associates in Need Can Enjoy Thanksgiving Dinner,” read signs affixed to the tablecloths on tables outside the store. Sick.

Cheers,

Rod

Posted in On Markets | Comments Off