“Financial Earthquake”

I said this expression referring to the US election on my last appearance on BNN on December 6th.

Some might have accused me of exaggerating or hyperbole at the time. But as of last night the numbers are in and the move in the equity and bond market, worldwide, have been BIG!

Have a look at this chart by Deutsche Bank Research looking at the extent of the moves in both equities and bonds since the US presidential election on November 8th.

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That’s right, Deutsche Bank calculates that both equities and bonds have made/lost $3 trillion in market value EACH! Again, this is a worldwide estimate.

Over the last eight years, the central banks of the world have been reducing interest rates to zero (and negative) in much of the industrialized world. Also, they have been buying assets, sovereign government bonds, government backed mortgage bonds, high grade corporate bonds and equities with freshly printed money to ensure asset values are stable or even levitated to the point that valuations don’t make a whole lot of sense when doing traditional security analysis.

The central banks the world over wanted inflation and was willing to do non-traditional activities to achieve its goal but unfortunately little to no inflation was produced over the last eight years and the effect was lower and lower bond yields.

What to do, what to do? The central banks answer was MORE OF THE SAME! Engineer negative interest rates so holding cash would be a cost not only to the average consumer but also business. Force consumers to spend and businesses to invest in plant and equipment. And if you wanted to hold cash in your home safe, instead of being charged a negative interest rate on your cash pile in a bank account, well the government would just have to ban actual paper cash and go digital.

Further and further down the rabbit hole we go…

And then the US election happened changing ‘the game.’

What’s ‘the game’ you ask?

Inflation expectations!

Trump got elected and based on his rhetoric and pseudo promises i.e., a trillion to spend on infrastructure and fiscal deficits for the next ten years; the market has moved BIG TIME!

AND HE HASN’T EVEN TAKEN THE OATH OF OFFICE YET!

See the bond market, since election day, is telling you inflation is on the way…folks this is better than deflation and that’s what the bond market has been communicating loud and clear to all that will listen for the last few years.

The markets are now pricing in inflation expectations, thereby increasing interest rates in the bond market – that’s a good thing – along with stronger economic growth in the coming years for equities – another good thing. The markets are pricing in less financial regulation repression of the money-center banks in the future. The markets are pricing in increased earnings and dividends in the coming years with more credit creation, lending, and economic activity in the US economy as a whole.

It takes BIG credibility to move markets without fundamentals staring market participants in the face. And the market moves we have seen so far are enormous. Central bankers have been talking and acting for eight years and the markets have been not impressed. As a matter of fact one could make the case that financial repression has been WORSE with every act or spoken word by a central bank official. And with one man elected, in a surprise election result, did more to move markets than the ‘high priests’ of central banking.

You can say what you want about the Donald and the “Main Stream Press” has not held back in expressing their displeasure about the election results and his tweets, but the man, singlehandedly and without action… after all he still is President-elect, has moved markets in a unprecedented way and probably never seen before in financial history of the United States.

The markets are pricing in all this good economic news stuff in other countries as well. Yes, the US is the largest economic engine of world, but rarely have I seen the international markets change so positively and moved so much with one election and the ‘potential’ change in direction of a new government.

Yes, people think Trump is a blow-hard. Yes, people can’t stand that he is now the President-elect of the United States. Yes, many of the ‘elites’ have criticized his various stances on economic matters and foreign policy. But I think it’s possible that he has UNDERPLAYED his impact on the worldwide financial markets that have moved TRILLIONS of dollars of market value merely on ‘expectations’ – the RIGHT EXPECTATIONS OF PUBLIC POLICY – of what his presidency will deliver. Yes, the Donald, in my humble opinion, is being ‘modest’ or ‘understated’ on his positive impact on US and world financial markets… Well so far anyway!

When will the ‘Main Stream Press’ give him kudos for this amazing and positive move in the markets?

I guess when hell freezes over…

My View on the Trump Win! (Part 2)

Do you know how much China’s Xi Jinping is worth? I’ve seen estimates of $200 billion or more.

Do you know how much Vladimir Putin is worth? Again, I’ve seen estimates of $50 -$60 billion.

Well, the way I see it America just elected is own billionaire!

Trump put his wealth at the beginning of his presidential run at $18 billion. While sipping on Diet Coke – Trump is a teetotaler – with these two world leaders, he will be a poor man in the group.

And let’s be frank the perceived strong leaders of the world, like Xi Jinping and Russia’s Putin run authoritarian regimes. And that’s what people want! Their approval ratings from their respective peoples are sky high.

You maybe surprised by this but have a look at the chart below created by World Value Survey. Since the 1990s people the world over have been leaning to more authoritarian rule.

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Democracy, especially in the US and Europe, has become synonymous with political deadlock, and divided government and the people want to get things done, people want security and be taken care of.

Social scientist Talcott Parsons back in the 1950s stated that every social system goes through four phases, each having to deal with the supply and demand for social order over a sequential period of time spanning 80 years or so. Starting in the first phase, both the demand and supply of social order are high. In order words, everyone wants social order, and new institutions are built to offer that order. Early in the 20th century, after WW II, we started and built international institutions like the United Nations, and the IMF. And decided and built the world monetary system with the Bretton Woods conference. In the second phase, the supply of order is high, but the demand by the people for social order plummets. Long hair and free love were introduced in the late 1960’s famously eroding social order of the day as people wanted personal and individual freedoms. In the third phase, the demand for social order remains low, but the supply of order is also low. This occurred back in the 1990s and into the 00’s. Federal Reserve Chairman Alan Greenspan was called ‘Maestro’, for over looking a booming economy when the “Boomer” generation was fully employed, when optimism and the American economy soared. Individual freedoms were respected with little help needed from government. In the fourth phase, which unquestionably is the time period we have now entered, supply of order remains low, but the demand for social order rises. People want more social order, demand better financial outcomes. The people want to put up walls, protect what they have and demand more help and control from government over their everyday lives.

Can democracy, at this time, deliver social order fast enough to keep up with the demand for social order by the people?

No matter what issue came up on the campaign trail, Donald Trump said that he and he alone would ‘fix it’ and when pressed on details, he didn’t give any! And that was O.K. for much of America!

Yes, Trump is a bigot, dishonest and a promise-breaker as David Brooks said the week of the US election in the “New York Times.” And why not throw in sexual transgressor as well, as we all listened to the ‘hot mike’ of Trump speaking to Billy Bush ten years ago. But America didn’t care because in my opinion this election was about economics and not character.

And I will go a step further.

Who, in the field of economics today, is the bright light? The star economist we can all look up to in the likes of Milton Friedman, John Maynard Keynes or Canada’s own Robert Mundell. Who has the answers on what levers to push and pull to lead the Western world out of this current economic malaise that we have been stuck in since the GFC (Great Financial Crisis) of 2008?

When you reflect back on past presidents there was always an economist, with the ‘big brain’ that had the president’s ear on economic matters. John Kennedy had Walter Heller and his famous guidance on supply side tax cuts. Ronald Reagan had Arthur Laffer and Robert Mundell. Bill Clinton had the much-heralded team of Alan Greenspan, Larry Summers and businessman Robert Rubin (Time magazine called these three “The Committee To Save The World”)

Did George W. Bush have an economic thought guru? Nobody jumps out at me. What about Barack Obama? Again, nothing!

Maybe this is why we are in so much economic trouble?

Maybe, just maybe a bright light will emerge. See Trump during the presidential campaign argued for $5.3 trillion dollars in deficit fiscal spending over the next ten years as scored by the Congressional Budget Office (CBO). This equates to 2% of annual GDP growth over the coming years. (Interestingly Hillary’s economic plan when scored by the same CBO would have been negative or contractionary for US economic growth!)

That’s right, the Donald is going to go full throttle on fiscal spending. Who is the architect or brain behind this suggestion…we don’t know yet – maybe Trump himself – but governments are certainly looking at fiscal policy to jump-start their economically slow economies, worldwide. During the campaign Trump was proposing $1 Trillion in infrastructure spending alone including roads, bridges and transportation hubs to get America moving again, economically and literally.

And America said, “Sign me up!”

Maybe just maybe that’s what America voted on…economic growth, and not Hillary’s more of the same, or worse. And Trump was just the messenger, as imperfect vehicle he happens to be!

What I’m expecting, and seems the stock market is expecting as well, is the Donald will hit the ground running after his inauguration with some simple acts that will show everyone worldwide that America is back to business. Including…

  1. A quick resolution on taxing the offshore profits of America’s multi-national corporations. There’s some $2.5 trillion of corporate cash just sitting in offshore countries sitting idle and not working in the US economy. With a stroke of a pen, that money can come back home and be put to work. The Democrats – principally Mr. Obama – didn’t want to make this deal to repatriate these funds at a low, maybe one time tax rate, but this is a crazy situation that must be resolved.
  2. And talking about taxes, Trump will finally do away with the 15% carried interest rule for hedge fund billionaires. This he promised in his campaign. Both Republican and Democrats bowed to the their respective moneyed special interests that the hedge fund billionaires played like a violin. Trump being an outsider can kill this hideous provision of the tax act that has allowed billionaires to only pay 15% tax on their earned income.
  3. The “Too Big To Fail” banks have to go back to the business of lending and extending credit to the US economy and not be stifled by various regulators – see my blog on Bank of America and Citigroup here. I’m not saying repeal Dodd-Frank, but it must be revised to help not impede, the big money center banks, to get back to business in assisting industry and consumers with expanding and starting new businesses. We have flogged these banks long enough. Nobody is obviously going to jail for perceived financial crimes of the GFC. The past is the past. Let’s get on with business!
  4. We need a president who can talk to big business. Cajole and give confidence to major business leaders that America is open for business. President Trump can go a long way to make the CEO Roundtable believe that the role of government is there to help not hinder. Capital spending by US corporations has fallen off a cliff. No company has the confidence to build a factory, hire workers and contemplate expansion. Trump can and will, in my estimation, give the green light for corporate America to start feeling good about themselves and see a future that is brighter than today. This is imperative if America is going to grow in the future.
  5. America needs to redirect itself from the 5 wars – per Peter Thiel: Syria, Yemen, Libya, Somalia and Iraq – that are currently going on. Is there anything to gain here? China doesn’t even bother with the Muslim world in terms of its military, but it’s there to invest! Precious treasure and too much blood has and is currently being spent with no victory in sight over the last ten years – just endless violence and hardship for all. If potential terrorists had a decent job and a family to support would they be so quick to strap on a suicide vest to end their precious and extraordinary lives.
  6. The American People need a helping hand. Spend anytime in the US, and unless you’re in some compound somewhere sunny and warm, you can’t help but see poverty and homelessness everywhere. As Peter Thiel referenced in his speech to the National Press Club, 64% of Americans over the age of 55 only have one years’ worth of savings and half of all Americans don’t have $400 in savings, if needed, for an unexpected emergency. This is crazy and unacceptable in a rich country such as the US. Obviously something is seriously wrong here and must be fixed.

Conclusion

America needs its economy to grow and flourish. Mr. Trump is certainly controversial figure, but maybe he can do enough things to get America out of this current political deadlock that can create the supply of social order that the American people are craving.

Maybe, just maybe Trump was elected to be an authoritarian centrist. To straddle Republicans and Democrats on throny issues that has bogged down government in the past. Just maybe Trump and his business negotiating skills can thread the proverbial needle and win the day.

We can all hope that this is the case… fingers’ crossed!

Bank of America and Citigroup “Coming Out of the Blue”!

It’s been eight years…almost nine!

But something remarkable happened on election night in the financial markets. America’s two biggest money-center banks, representing $4 trillion in assets, both had a positive transit of EBV-3.

And have continued to rally.

Before we get to our Model Price charts, let me set the table with this one chart produced by RBC Capital Markets showing how little, in comparison to deposits, the commercial banks in America have been lending relative to the cheap funding of their deposit base.

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America has been starved of credit. One has to go back to the 1970s, and in the recession of the 70’s to see how little the banks are lending into the US economy. I guess all owe a debt of gratitude to the US Federal Reserve for being historically so accommodative that this lack of lending didn’t lead to the ‘Great Depression of 2008-16’.

Without credit, without bank lending economic expansion is truly impossible. You have to be impressed that US GDP has been crawling along at 1 to 2 percent especially without lending or credit creation. And don’t let me started on the US Federal Government ‘shutdown’ and budget sequester that stalled the US economy even further.

And think of what additional measures, along with dropping interest rates to generational lows, the US Federal Reserve has been doing over the last eight years; printing more than $4 trillion of money, in the form of Quantitative Easing (QE), and this money is just sitting around in excess reserves. That’s right, high-powered government created money just sitting around and not being lent out to a credit starved US economy. Yep, America’s biggest banks are happy collecting 0.25% from the US Fed instead of lending it out at higher rates.

Crazy situation. Some would call it a stalemate between business and government with the American population caught in the middle. Well, let’s just say the bottom 95 percent, the top 5 percent have been doing well thank you very much.

Until election night!

Let’s look at another couple of charts on what’s been going on.

First, here is a chart showing average compounded annual growth rate of the S&P 500 companies by industry from 2013 to 2016.

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I have highlighted the financials subgroup and their rate of annual compounded growth over the last three years. As you can see ‘Financials’ have CONTRACTED growth of a negative 2.7%. If your financials, as a group, are not growing FUNDAMENTALLY, your economy is not growing.

This needs to change!

This is also an interesting chart showing what bank stocks have done after an election of first-term presidents since 1928…and the Trump rally has been the largest going back almost 90 years.

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I think something is going on here…

Model Price Charts

Bank of America

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Here is the weekly price bar chart of the positive transit of EBV-3 or as we call it, “Coming Out of the Blue.” This chart is from our ‘Model Price’ app tool on Facebook.

A positive transit of EBV-3 is significant to Model Price Theory (MPT) because the market is communicating that the balance sheet of the company has value or better still the stated audited value of the assets of the company are not impaired. This is real-time, this is objective and black and white. Actionable.

Not only did BAC-us have a positive transit of EBV-3 but also a positive transit of EBV-2 in the first week of December and as the below Model Price (MP) shows a valuation high for the last 8 years!

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The All-Important Leverage Ratio

Banks are different beasts compared to an ordinary operating companies and it’s amazing that MPT is so accommodative to value both financial institutions and ordinary companies in terms of our Economic Book Value and Model Price calculations.

Another simple metric to valuating banks and financial institutions is looking at the ratio of assets to capital. Currently, Bank of America has a leverage of assets to capital of 8.13 times that is certainly the lowest this ratio has been looking back to 2000. The highest this ratio has been in 15.35 back in 2003 and going into the financial crisis of 2007 this ratio was a low and reasonable 11.69. This helped BAC not only survive the Great Financial Crisis (GFC) but helped common shareholders not lose as much as other big money center banks.

If Bank of America can grow this leverage…from the current 8.13 times to even 10 or higher this will not only increase earnings for this bank but also inject much needed credit into the US economy.

Citigroup

Model Price Chart

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Here is the weekly chart of the positive transit of EBV-3 or as we call it, “Coming Out of the Blue.”

Again, this is significant.

This money center bank was ‘rocked’ in the GFC. Back in 2000 and 2007 this bank was trading over $600 a share!

And as you can see from our long-term MP chart since 2008 the stock price hasn’t been a ‘barn burner.’

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Looking at the leverage, the ratio of assets versus capital, Citigroup currently has a ratio of 7.85 times. In 2007, Citi’s ratio going into the financial crisis was 19.21x! So you can see why this huge financial had such a hard time during the GFC.

Like Bank of America if Citigroup can grow this leverage…

And by the way, Canada’s own Royal Bank, which many believe is one of the best managed bank in the world, has an asset leverage of 17x!

Potential Dividend Increases

This is big. And I think everyone is missing this…

Certainly over the last three or so years, the Federal Reserve has had final say on whether banks, especially ‘Too Big To Fail’ (TBTF) banks – like Citi and B of A can increase their dividends. And the US Fed has been saying, “NO”!

Bank of America will pay out a puny 30 cents a share this year, yielding investors 1.30% at current prices. Citi will pay out 64 cents, netting investors 1%. Back in 2007 Bank of America was paying out $2.40 a share and Citi a huge $21.60!

Yes, I agree we are not going back to 2007, in terms of dividend payouts anytime soon but with historic low levels of leverage, assets versus capital, and a big change in the political landscape, regulators – such as the US Fed – will perhaps look at dividend payouts differently when Mr. Trump is in the White House.

Conclusion

Since election night, over a month ago, US financials have been on a tear and probably with good reason. If the US economy is going to grow, credit creation must be apart of the solution. With Mr. Trump’s election the market is anticipating that big changes are in the offing for the financial sector. With some very simple revisions to the Dodd Frank Bill, the largest financials, the money-center banks, will be able to extend credit, increase leverage resulting in substantial increases of earnings and dividends.

The banks are like the sun in a capitalist solar system. Without them, there is no growth, no capitalism. If Mr. Trump’s administration can stop the repression/persecution of this industry, trillions could be released to a credit starved country and economic growth will soar.

The market is already anticipating this, hopefully it won’t be disappointed!

Fake News

It’s always been with us…since the dawn of man.

But I have to say the business news industry must have been the first to create fake news!

Business news is mostly subjective, biased, and error ridden and the real news, the news liberal elites have been complaining about most in the last two weeks; since the US election, is essentially the same thing…just that business news has been faking it longer.

Financial news has been faked for the last twenty some years. Want an example, what about this whole Buy/Hold/Sell thing? “Goldman raises the shares of General Electric to a ‘Buy’.” What does this really mean? Is this news? Is it actionable? Is it serving the public good? Or is it an Goldman analyst having a meeting with the top brass of GE the next day and wanted a favorable meeting. Are they’re looking for a piece of GE’s investment banking business and somehow this fake rating change signals a positive business story to all stakeholders and a business media audience.

And the most useless of all the explanations, the so-called expert explanation of why the market went up or down on a particular day. Wow, have you ever heard a so-called expert say; “Yes, the market went down today, but it really didn’t mean anything!”

And I can safely predict in the next quarter, 400 of the 500 S&P 500 companies will beat earnings expectations by a penny, to great fanfare. Really, is this meaningful? Are company managements proffering to the fake news as well? And after the initial seconds of their news release and flurry of activity in a company’s stock price, one has to ask does this penny ‘beat’ mean anything at all?

So ‘everyday news’ seems to catching up to business news in terms of being irrelevant and the elites are pissed. They had control, they paid each other homage and speaking fees and the grand circle-jerk would go round and round.

But this US presidential election seems to have did something. The elites that I have been listening to, in the past, don’t seem credible anymore. And the three newspapers that I subscribe to the “New York Times,” “The Financial Times,” and the “Wall Street Journal” now seem tainted to me. They are now ‘out of step’ and angry that Trump is using Twitter to communicate his message and not through the media behemoths that had a monopoly, that could filter a president’s message and shade the corners so that the message could be colored liberal or conservative for public distribution. These once mighty news organizations have been reduced to recopying Trump’s tweets! Really, why not go on Twitter and here from the man himself…he has close to 17 million followers as I write this. Isn’t this the future…a President using social media? A President who can speak directly to his following even at 3 in the morning! And what will newspapers do…print out his Tweets some 24 to 48 hours later? Showing again how much further behind the curve they really are.

But I digress…

Do you want something that is objective at least in the business news area?

Black and white!

I can’t help you in the regular news but I can with business news.

How?

Model Price app

See it’s math based. Objective. And gives you actionable buy/sell/hold analysis that can help your net worth and because wealthy people live longer than the poor, this app can actually extend your life!

See most of the time, stock prices move up and down…this we all know. And most of the time it can be a meaningless activity. After all, as the great J.P. Morgan once said stock prices do ‘fluctuate.’ And this makes sense according to Model Price Theory (MPT) because stock prices can and will fluctuate between our EBV zones. And they can do this for years on end.

But sometimes there are transits – both positive and negative. Where stock prices can cross our EBV lines and with this event the market is communicating to you that a change in fundamentals has either occurred or will occur in the future.

This app does something that no other finance analysis does, place two independent sources of information on one chart or interface. Most if not all financial analysis is statistical or regression based. In order words if the past holds true then this should happen in the future. But regression analysis doesn’t make investors the BIG money from my experience. We need a different way, a different way of thinking about security analysis to make BIG money – we need Model Price!

So stop reading the business news. Stop looking at your financial channel looking for answers. It isn’t there!

Fake news is all around us now, and a way of life and we all have to be careful in what we look at or read. The elites and traditional media news purveyors are upset about Mr. Trump’s victory and are predicting disaster everyday.

But as I’m writing this our Model Price app, our math, is saying something else.

My View on the Trump Win! (Part 1)

First, a few quotes:

Well, ladies and gentlemen, we’re not here to indulge in fantasy, but in political and economic reality. America, America has become a second-rate power. …

The point is, ladies and gentleman, that greed – for lack of a better word – is good.

Greed is right.

Greed is works.

Greed clarifies, cuts through, and captures the essence of the evolutionary spirit.

Greed, in all of its forms – greed for life, for money, for love, knowledge – has marked the upward surge of mankind.

And greed – you mark my words – will not only save Teldar Paper, but that other malfunctioning corporation called the USA.

– Gordon Gekko – from the movie “Wall Street”

In the US, there was a political failure insofar as the system did not adequately represent the traditional working class. The Republican party was dominated by corporate America and its allies who had profited handsomely from globalization, while the Democratic party had become the party of identity politics: a coalition of women, African-Americans, Hispanics, environmentalists, and the LGBT community, that lost its focus on economic issues.

– Francis Fukuyama

You have to look at the bigger picture!

You have to think geopolitically, because we are losing. And if we don’t change, if we don’t awake up, we will have lost to authoritarianism, fascism or a capitalistic form of communism.

Do I have your interest?

Because as I write this our open democracy, free press and market based ‘capitalistic’ economy is failing. It’s failing to provide jobs. It’s failing to provide people hope and a better future for their children. And in America, we have had divided government who can’t agree on anything and is getting nothing done to help the very people who think their system of government is the best in the world. Well, on election night all this changed. America elected its own form of authoritarian government to get things done…to get the US economy moving again. We need to grow again, economically speaking, because we (the western world) are in a race, a competition if you will with the very forces that we think of, in the western world, as evil or non-optimal.

And if you hate Trump, if you despise who and what he is, I get it. But if someone doesn’t shake things up, divert us out of the status quo, and grab control away from the very elites who are slowly but surely killing the very hard fought freedoms we all love and enjoy, the other system of government; the fascists, the curious mix of communism with capitalism will ultimately win the day.

Yes, Trump is imperfect. He is not ideal. But history will judge him differently is my bet. He is a change agent…not a Republican, not a Democrat. He has been elected to jump over all the petty politics and do the right things…economically. We need massive fiscal policy. The Western world needs massive fiscal policy to get people, especially young people, working again. The Western world needs a shot of adrenaline from years of fiscal austerity since the ‘Great Financial Crisis’ (GFC) of 2008. If we make the necessary upgrades and building of infrastructure, which we desperately need, these fixed assets can and will serve generations to come. And to show worldwide that our democratic system of government, that our free press and freedom of people is the best system in the world that other countries not only should emulate but create.

I believe the financial press has this wrong. I believe the ‘elites’ are focused on the wrong things. We are in a global battle of political systems and currently we are losing. Yes, our Western system of government won over communism back in the early 1990s, but what has it done for us lately? Since the 2008 ‘Great Financial Crisis’ (GFC) how has the western world done economically compared to China, Middle East and South Pacific authoritarian countries – Singapore’s of the world; down right awful!

Have a look at this chart and judge for yourselves. This shows different countries of the world, the western world, and what different generations segmented in decade of birth think about democracy. Our system of government…

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We need to change this attitude. Our forefathers (and mothers) have fought and sacrificed much hardship to make sure our western system of government was and is the best of the best.

Would we fight a World War to preserve our way of life today? Do you feel countries of the world want open democracies that today are so divided politically? Where young people of western democracies not only have no jobs or under-employed and living in their parents basement but also are signing up to join ISIS to fight the very life and freedoms we all enjoy.

This is crazy and must stop!

“One Belt, One Road”

Do you know what this is?

Well let me tell you. Better still have a look at this map created by the “Economist” magazine.

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Do you know anything about Eurasia?

Well, its big and very populated – which China, India and Russia are apart. It encompasses over 90 countries and has over 5 billion people. Zbigniew Brzezinski, Jimmy Carter’s National Security Advisor, wrote a book back in 1997 called “The Grand Chessboard” in which he states whoever controls Eurasia controls the world.

And China formed the AIIB – The Asian Infrastructure Investment Bank – some years ago to help finance trillions of infrastructure spending in linking Eurasia together called the One Belt and One Road. This AIIB was set up to compete directly with the US lead World Bank. The United Kingdom shocked its allies by agreeing to be an initial financial sponsor and have ‘original’ membership status against strong US protest. Canada has yet to decide on what to do, but suffice to say this would mean big bucks to Canadian industry and I’m sure the US is pressuring Ottawa not to join AIIB’s ranks. But with the US not providing expansionary growth like China’s leadership in developing ‘One Belt, One Road’, Canada and other countries will likely be signing up for the AIIB in the future.

Interestingly, Harvard’s Linda Bilmes estimates US wars in Iraq and Afghanistan cost $4 to $6 trillion. That’s the same range HSBC expects for China’s investment in ‘One Belt and One Road.’

In this one example, think of the malinvestment by the leader of the free world versus the juxtaposition of China’s capital investment future ambitions. Think of the potential growth prospects and the shifting of superpower status from the US to China not to mention the RMB (renminbi) being the reserve currency of the world!

We all have to realize, especially the citizens of the US, that we are not “exceptional,” as Peter Thiel told us in his speech at the National Press Club in his support of Donald Trump. We are all “normal,” and we have to stop doing stupid things like engage in the current 5 wars the US is now engaged in and start spending treasure on rebuilding America and not fighting endless wars with no victory in sight.

I maybe wrong on Trump and what he does. But you have to admit he has a chance of doing something so different. So unexpected in comparison to Hillary, that maybe, just maybe, America and the western world has a chance of not only surviving the future but will prove again, as it did in the early 20th century that open democracy and a market based economy with individual press freedom is the surviving and emulated political institution the world over.

In my opinion we no longer can dither, to misspend resources and be politically correct. We in the western world need to focus, prioritize and not only secure our financial futures but also hold up our political institutions to the world, and be an example they are the best in the world. We are inclusive, we are growing and an example to the world that free people in functioning democracies are the best ways for societies to organize.

And America has elected a man, a strong unpartisan figure to do unpopular things. To break political deadlock. To use the instrument of government to openly spend money and to give workers higher wages. A man to incentivize industry to build plant and equipment to meet increasing demand that today is dormant or at best lacklustre.

Yes, he will be unpopular in almost all ‘elite’ circles…but sometimes even open democratizes need a push. A strong leader who will do the unpopular things no matter what. And we certainly haven’t had a leader like this probably since Dwight D. Eisenhower or better yet Douglas MacArthur. So it will be unpopular and unfamiliar for all concerned say the least.

We needed a reset and middle America elected a man to press the reset button. And maybe he has enough ability, maybe through Twitter, to focus America on the job at hand. Obama wanted to shift America’s interest from the Middle East to Asia in his much hyped ‘Pivot to Asia’ foreign policy speech but nothing has been done except a few words and symbolic gestures. Was it a coincidence that Donald Trump’s first international leader meeting, in Trump Tower, the week of the US election was Prime Minister Abe of Japan? I think not! My impression is Prime Minister Abe knows what is at stake and he spent no time, and with great urgency for an initial meeting with the new president-to-be without the pomp and circumstance of a formal state visit.

More to come.

I’m Back

I’m back and pumped!

Yes, I took a sabbatical from blogging over the last little while to effect some changes in my life. First, because of a red-hot Toronto real estate market my wife and I put our ‘downsize’ housing plan into action. Selling the big and cash draining primary residence to a bidding frenzy at the same time getting architectural plans and applying for municipal permits of a secondary property we purchased some 10 years ago.

At the same time, I was impacted by some physical ailments. Yes, we are all getting older but you don’t appreciate your health until it’s impacted by something no doctor can seem to diagnose. But I’m better now!

So after selling our house, going through and throwing away all your stuff – thank you Marie Kondo – moving to a rental and going through the painful process of municipal permits and initiating construction; life is getting back to normal. And my desire to blog has never been stronger.

And Thank You Americans for Electing Donald Trump!

Folks, I will be blunt here. We were all dying…economically. How do I know? Countries of the world producing about 25 percent of global economic output had negative interest rates. Think about this for a second. Negative interest rates! How many economic textbooks do you think have been written since the dawn of man, some 10,000 years ago, have a chapter, page or a sentence about negative interest rates? None that I have found.

You can’t have capitalism without a cost of capital. You can’t have a functioning economy without capital investment and a banking system that rather sit on excess reserves and not issue credit to those businesses wanting to expand and hire additional workers.

That’s right, everything in our economic world was slowly and surely dying until something big happened on election night.

Call me crazy but I see it… I see it in the equity markets. I see it in the bond markets. A financial earthquake has occurred, which is a good thing, and we are at the very beginning of a special economic run that comes along very infrequently in a lifetime and I want to blog about this. I want to make sure everyone who is interested in Model Price Theory (MPT) gets on the bandwagon. The fruit is hanging so low, on big bountiful trees, that making returns on specific equities that have done nothing for the past 8 years is the easiest thing that one can do.

And the financial press will not get what is going on, which is typical. They will worry about raising interest rates – MPT tells us raising interest rates will very be bullish for equities – and the impact on business and consumers with high debt levels. They will also freak out about rising and unsustainable sovereign debt levels of individual countries and the bad things that could happen. Yes, they could in the long term but in the short term – the next 5 to 7 years – there will be huge positive effects both on corporate profits and normalization of the world economy.

Yes, the Donald is a racist, xenophobic pig. I get it. But America was going to go the tubes economically and we needed to go down a different track. Things needed to be shaken up! America needs to feel good again. American business needs to feel confident again. AMERICA IS NOW THE UNDERDOG IN A WORLD THAT WILL BE DOMINATED BY CHINA AND OTHER COUNTRIES FORMING THE ONE BELT, ONE ROAD. (More on One Belt, One Road in later blog posts if you don’t know what I’m talking about.)

The elites were killing us like the elites of Europe. In one election, albeit a very important one, this has changed the equation…totally.

And for the better.

I’m so excited and as I said ‘pumped.’ I now have a reason to be positive about the future for my children and my future grandchildren. I see a runway for the normalization of financial markets and growth for future generations where I saw none before.

Harsh, I know but realistic.

And you should be ‘pumped’ as well.

I will be expounding more on why you should be ‘pumped’ in the coming blog posts. The economic game has changed and hopefully by looking at our Model Price charts and learning more about Model Price Theory (MPT) you can see this great upcoming period unfolding and profit in real time.

Talk to you soon.

 

I’m on Market Call!

On Thursday, April 14th, 2016, I will be on Market Call on BNN (Canadian Business Show) 1:00 pm – 2:00 pm (eastern standard) with Andy Bell.

Take this opportunity, open our Model Price Facebook application and follow along while I’m on the show answering viewer’s questions about individual stocks.

Would you say anything different based on your interpretation of Model Price Theory (MPT) and chart? You can make your comments via Facebook.

Should be fun!

modelprice

Model Price Question #4

Facebook Comment (from our Model Price Facebook app)

Brian, I read your latest blog with great interest. I’ve been reading some articles recently on what’s being called “the great unwinding”. It centres on the underlying fact that Global debt is increasing at a much more rapid rate than expansion of Global GDP, countries are trying to narrow the gap through various means. Seems to me the trickle down effect always ends up on the doorstep of individual households. Governments, central banks & corporations have many tools at their disposal to unwind. What can Joe & Jane average do to unwind when they are so overleveraged? When I hear commentators on BNN talk about real estate and they encourage people to buy at any cost (paraphrasing) simply because rates are low, I really start to wonder where all this is going! Thanks again for making MP available, it has been an invaluable tool for me in terms of knowledge, making $ and keeping what I have safe.

From ModelPrice Guy

OK, it’s Friday afternoon, Master’s weekend, and I’m working on my S&P/TSX Composite blog but this subject is more fun…so with a little ADD, I will give you my 2 cents worth on this subject.

I am incredibly optimistic about the future and our kids and grandkids well being. Yes, I think legacy companies and debt will be an issue but we are on the verge of creating whole new industries and jobs that will leap over everything and anything man has created since we have been on this planet. That’s right, I think there will be a reset in equity prices, a retracement back to the lows, that we saw back in March 2009, and this will be one of the biggest buying opportunities for the next 20 plus years. So you better be ready, because this buying opportunity could happen anytime and not last long.

Hogwash you say. Well consider these three things while Jordan Spieth wins the Master’s this weekend.

Artificial Intelligence – Google’s computers (AI) just won at ‘Go’! OK, the worlds leading Go player won 1 game out of 5. And like chess, soon the computer (AI) won’t lose any games. AI is here and it will impact our way of life forever. And its possibilities are endless in the fields of finance, drugs, medical, hell, we might as well say everything. Today this may be a novelty but tomorrow it will show up in everything we do, giving us a productivity miracle that mankind hasn’t seen since the 1820s.

Global Warming – Did anyone notice the temperature in February? It was not only the warmest monthly temperature on record but it completely smashed all records by the widest margin. Global warming is exponential not linear! When the world’s leading countries got together in Paris to talk strategies about lessening our carbon footprint both the scientific community and politicians agreed that a 2 degree Celsius warming would cause huge global dislocations. Well folks, maybe you don’t know this but we are at 1.38 degrees of warming so far. Climate change is going to happen but there lies the great economic potential. Carbon will have to be left in the ground because as a human species we can’t use it anymore. Why do you think Saudi Arabia is pumping all the oil they can? They figure, and correctly, that they will be left with oil reserves in the ground in the foreseeable future when the world, together as one, will not let the Saudi’s (or anyone else) pump oil someday. So with every barrel they sell today they are at least getting something, instead of nothing. But alternative energy will be an economic boom for those willing to participate. US coal companies had a market capitalization of $45 billion three years ago, now it’s only $2 billion and we used the largest amount of coal as a global energy source worldwide in 2015. Oil companies of today face the same future, it’s only a matter of time.

Debt – Central Banking – Banking, Finance Industry – Yes, debt is at an all time high. And yes, central banks around the world have the wrong monetary policy. This is going to change.

Debt – A huge amount of debt is, in my opinion, located in legacy companies/industries that are slowly dying. Take Tesla (TSLA) versus General Motors (GM). GM has debt of $155 billion dollars with a market capitalization of $45 billion. TSLA has debt of $7 billion with a market capitalization of $34 billion. Mr. Musk could snap his fingers on this Friday afternoon and eliminate his debt by issuing stock at a huge valuation compared to GM’s. GM…will probably die, longer-term, with bondholders owning the company. Debt will have to be written-off, as bondholders will get something on the dollar. This will happen to every company/industry that doesn’t have a future. And as we head past 2020 there will be a lot of legacy debt, and assets for that matter, that will have questionable value.

Central Banking – Please consider all the economic textbooks ever written in the history of man, not one, has a chapter or even a paragraph on negative interest rates. That’s why the men and women of the main central banks of the world are academics. They have to figure out a way to restore or reset the monetary system, where interest rates are normalized and credit is functioning the way it was before the financial crash of 2008. Sure they could fail, but what if they succeed? Can you imagine the worldwide equity rally? And conversely, the bond market crash, if and when this happens. This most certainly would be a major buying opportunity as I’m sure the equities would be pounded (crash) temporarily as interest rates normalized. This will happen sometime in our future but I have full confidence that these men and women can figure this monetary conundrum – negative interest rates – out.

Banking, Finance Industry – Will never be the same again. The market is already telling you this. Yes, Citigroup/Bank of America are in the ‘Blue’, below EBV-3. It’s time we broke up these ‘too big to fail banks’ and find others ways to issue credit to the economy. At their worst they were criminal organizations extracting too much economic rent from the real economy. They need to be ‘disintermediated’ and in this high technology world alternative platforms could be easily designed offering lower costs and full transparency to all participants. For instance, credit as well as loans could be provided by peer-to-peer apps. Call it the Uber of loans were I have capital and lend this capital to people with a FICO score of 700 and in my own neighbourhood or across the country. As these big banks are broken up thousands of smaller specialized shops could/will be founded and staffed by people that would do a better job with lower costs.

Yes, call me an optimist. The ‘Great Unwinding’ will happen but for the benefit of everyone. It’s a great time to be live!

This is the world as I see it, on a Friday afternoon, Master’s weekend.

 

April 2016 – Monthly S&P 500 Market Strategy Update

 

The year 2016 started with the cold hand of deflation on all global markets and then it lifted: Sending global equity markets to gains, from the lows, that we haven’t seen since the 1930s.

Crazy times.

As I have outlined in my January and February 2016 blogs I believed the markets were focused on two big issues – Chinese renminbi peg to the US dollar and the Federal Reserve (Fed).

I also stated that over time we should have clarification or better yet answers to these two central questions.

Well since my last update these two issues came into better focus or more benign to what investors were thinking coming into 2016. Go figure…

Renminbi (RMB) Currency Peg

Not only did the brouhaha over a possible devaluation of the RMB calm down but we actually witnessed a small strengthening of the RMB against the US dollar in the month of March.

Huh?

That’s right. With a strengthening of the RMB against the US dollar the bears or traders expecting devaluation were last seen scurrying a hasty retreat. As I commented in my February comments (here), I believed China would NOT devalue the RMB against the US dollar and so far, one month later, that prediction looks sound. Of course, and likely, these bear raids will continue for sometime in the future adding to the variability of global markets so we better get use to it.

And once it became obvious the PBOC – China’s central bank – would not devalue the ‘risk-on’ trade was on sending low priced shares and previously hard hit emerging economies, including Canada, up for big gains intra-quarter.

US Federal Reserve

In hindsight, and after two and a half years of talking tough, the US Fed hiked interest rates in December just when global economic growth was slowing down.

Yes, great timing ladies and gentlemen!

Anyway for much of the quarter, and a mystery to financial markets globally, the governors still talked tough and signaled more interest rates hikes – as much as four hikes for 2016 – in the face of clear evidence that slower US economic growth was occurring.

Much to the relief of the financial markets, Janet Yellen – Chairwoman of the Federal Reserve – in a speech during the last week in March simply stated the obvious; in that she and the board of the Federal Reserve indeed observed the same economic slowdown, as the market participants, and that future interest rate hikes would be moderated or no interest rates will be seen for the foreseeable future.

Again, market participants breathed a sign of relief knowing that the Fed was truly data dependent and the data pointed to a slowing down in the global economy.

Model Price Chart

Let’s have a look at our Model Price chart for the S&P 500 Index:

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S&P 500 Index Model Price Chart with EBV Levels and Weekly Price Bars

 

As a reminder we aggregate all companies in the S&P 500 Index into one chart on a market capitalized basis (like the S&P 500 Index itself), so we can see where the market – S&P 500 – is trading relative to its EBV lines.

As you can observe the US equity market, as defined by the S&P 500 closed April 5th at 2045.17. If the market rallied to EBV+4 (2202) this would represent a gain of some 8%. If the market corrected back to EBV+3 (1760) investors would be suffering Index losses of almost 14%.

For people new to Model Price Theory [MPT] the index value or equity price can move within an EBV zone with no real consequence. However when a transit occurs – index value or equity price crosses one of our parallel lines – our EBV line, either positive or negative this gives Model Price users a signal that fundamentals are improving or deteriorating, respectively.

Model Price Comments

What is interesting to me is that the S&P 500 index didn’t retreat all the way back to EBV+3 back in January. As you can see this index hit 1810 twice, first in January and then in February with a subsequent rally into March. The only conclusion I can come to as to why the market didn’t need to go to its support level – EBV+3 – is the market internals are strong and healthy. I know this flies in the face of the bad business news we constantly hear, but really, traders tried to sell the S&P 500 hard, twice, and it rallied both times without coming close to EBV+3.

Impressive, yes?

So we are now getting to the top of the zone between EBV+3 and EBV+4. Yes, we are getting close to the top of the zone…and we may stay there for a while with the Chinese RMB peg devaluation rumours on hold as well as further Federal Reserve tightening or interest rate increases.

We have now been in this zone between EBV+3 and EBV+4 for three years now – the original positive transit happening back in May 2013 (here) – with no sign that either of a positive or negative transit. That’s right, we trade up to the top of the zone and then correct to the lower portion of the same zone. And we could be hear for a while longer, within this EBV zone,  as global fundamentals and possible central bank action is contemplated and enacted.

Conclusion

Well that was one interesting quarter. And with 2016 being a US election year, with both sides of the ticket – Republican and Democrat – having issues trying to get a clear leader to represent either party for a November election. Maybe where the future fireworks or volatility will be in the political arena instead of the financial markets for the balance of 2016. But either way the S&P 500 index is certainly comfortable within the zone of EBV+3 and EBV+4 and will probably be here for sometime in the future.

10 Things I Did Differently in the Crash of 2008; That I Didn’t Do in 1987 and 2000 – Reblog

I will be on Market Call tomorrow, March 9, 2016 and I will be referencing this blog so I thought I would reblog it here for the convenience of BNN’s viewers to read. Yes, it was seven years ago that the S&P 500 Index hit its financial crisis low and hasn’t look back. These were my thoughts, my internal analysis, of what transpired and lessons that I learned. I hope these thoughts will help others who went through this difficult experience and help them prepare for any possible crashes that may lie in our future.

(Five years ago.  It hardly seems possible that 5 years ago the S&P 500 Index hit an intraday low of 666, on March 9th, 2009, the mark of the beast – coincidence, I think NOT.  Officially, I have now lived through three equity market crashes of 1987, 2000 and 2008.  Each ‘market event’ has taken their own personal toll on my soul in the same way as others in the industry.  My goal here is write something personal.  I did some things in the last crash – 2008 – that I learned from the other two.  Allow me to examine my scar tissue long since healed but visible in its own way.)

They don’t tell you about the pain.  Physical pain.  When you are nauseous and you can actually feel the cortisol levels spiking in your body – that’s bad by the way.

Blood pressure?  Off the charts!

Welcome to the field of finance.  Do professors talk to students about what happens physically when their market positions severely go against them in MBA School?  Do they simulate calls where students call their best clients or better still their own mother and father explaining they lost millions of dollars on their best recommendations and they won’t have the retirement they had always dreamed of?

Probably not, is my guess.  Even if they did it’s hard, if not impossible, to simulate this feeling in some ‘Ivory Tower’ setting where everything is knowable and risk can be calculated.

(I know personally a handful of brokers who had to make this brutal call to their parents.  After I overheard two tearful calls after the 1987 crash, I always shied away and never did handle my parents investment account, as little as it was!)

That’s what wrong with the movie “The Wolf of Wall Street” – which I reluctantly watched while on my last vacation. Jordan Belfort, the protagonist, was shown to be all hype, drugs and sex.  Antidotes and crude stories never make this movie very interesting – we in the finance business have our own share of stories as well.  But the movie never tells you why he acted this way?  My interruption, for what’s it worth, is the physical and mental pain Mr. Belfort felt when losing his blue-collar clients money.  Even though in Mr. Belfort’s case, he and his firm lost their clients money on purpose!  Only a true psychopath, like Bernie Madoff, could steal people’s money – especially Jewish (like himself) clients’ money – and not feel anything.

Want more proof!

The website ZeroHedge has been keeping a tally on suicides of traders/bankers over the last while including one that occurred early Thursday morning, February 13th, last week, by one Mr. Edmund Reilly.  Mr. Reilly (47) – trader/banker jumped in front of the Long Island Rail Road (LIRR) Commuter train at 6 am.    ZeroHedge’s tally is up to 10 recent souls!

Why so gloomy?  Have you never read anything about the dark side of the financial business?  Don’t get me wrong I do love what I do.  I have professed my love for equities in this blog “Why do stocks go up and down?” here.  Similarly I have also professed my hate for the business “Blowing Up the Financial Business” here.

With any endeavor one pursues whether sport, career or that special someone there is heartache.  It comes with the territory.  Starting in early 2008 – Martin Luther King Day to be exact, I knew it was highly probable I was about to enter my third ‘market event’.  Here are the 10 things I did differently based on the knowledge and experience that I learned from the previous two ‘market dislocations’ to survive this on coming financial tsunami.

1.  Anticipate, don’t react to the market or stock price in or of itself.  Always ask “What if” questions.

This is where Model Price Theory (MPT) came to my rescue.  I was not flying blind.  Actually this is an apt metaphor because some days I felt like I was in a cockpit of an airplane using only the instrumentation, blocking out all the financial noise both in the financial press and television.  A negative transit was a negative transit, simple and don’t over think it!  I could look at the next EBV level down – from EBV+6 to EBV+5 – and get a sense both in terms of dollars and percentages where the next possible support level would be.  Also stocks having negative transits of EBV-3, or “Going into the Blue” was an easy sell signal.

Our Index charts (S&P 500 and TSX Composite) were invaluable.  We had Index Model Price charts for the above indices going back to 1980.  There wasn’t a day that didn’t go by in 2008 and 2009 that I didn’t consult these charts and asked, “What if” questions.  I had a SELL strategy for each negative transit.  More importantly I had a BUY strategy for each major index support EBV level.

Technical and fundamental analysis, were no use to me when every stock on the board is falling!  At least EBV levels gave me a sense of certainty in a very uncertain world.

2.  Visualization

Elite Athletes do it, why not investment managers.  On the front of our Acker Finley website we place the performance of both public mutual funds we manage – Canadian and US.

Throughout 2008 and 2009, believe it or not, I visualized our future five-year rate of return chart (the future 5 years from the date of the market bottom) on our Acker Finley website, comparing our investment performance versus our selected benchmark after the market bottom, wherever that market bottom eventually would have happened.

Here is our performance chart, screen captured, from our website as of March 10, 2014.  This chart shows our performance for the Acker Finley Select US Value 50 Fund (costs and fees included) versus the S&P 500 Index (Total Return in Canadian $) over a five-year period beginning March 9, 2009.  I visualized this performance chart over 5 years ago and it came true!

Voila_Capture 2014-03-11_10-02-33_AM

Daily Performance of the Acker Finley Select US Value 50 Fund (CDN$) over 5 years compared to the S&P 500 Index (Total Return in Canadian $)

Visualization the future 5 years, back 5 years ago, helped keep everything in perspective, especially being fully invested if and when the bottom occurred.  If we were not fully invested when the market hit its bottom this chart would be totally different (far worse) including (probably) underperforming our benchmark over the last 5 years.

3.  You can’t time the market so don’t!

You hear this all the time and its true!

The bottom of the US equity market occurred on March 9, 2009, five years ago.  Did we know this at the time?  Nope!  For this particular crash – 2008 – I was fully invested unlike previous crashes where I tried to time the market resulting in very unsatisfactory long-term rates of return and personal regrets that I didn’t purchase quality companies at generational low prices.  Yes, I could have minimized my physical and mental pain short-term by selling equity positions only to have anguish longer-term in not buying great assets at a discount.

(Maybe a partial explanation for the suicides mentioned earlier.  This US equity market has gone straight up since September 2011.  Who would have thought this would have happened with all the seemingly worldwide bearish economic news especially considering a US Federal government shutdown.  An equity investor may have guessed right on the timing of the ‘market crash’ but sitting out the ‘market recovery’ can be equally as painful.  Or how about selling and going to cash on March 9, 2009, realizing your losses, staying in cash and watching over a 5-year period US equities recapture previous highs.  Painful indeed!)

4.  Be prepared both mentally and physically.

Woody Allen said, “Showing up is 80 percent of life.  Sometimes it’s easier to hide home in bed.  I’ve done both.”  So have I.  Physiologically it is painful to me to have my net worth and more importantly my clients net worth reduced on a daily basis.  In past crashes I did hide underneath the covers, trying to avoid the pain – it didn’t work by the way.  For the crash of 2008, I came to work everyday.  Yes, I would start fresh and energized every morning only to go home after market hours drained and defeated (and poorer).  Knowing this behavioral grind from past market crashes, I increased substantially my physical workout schedule including switching my workout routine from the local gym to an Ashtanga Yoga Studio for a more complete and physical workout.  My alcohol consumption, which I would call moderate (red wine only), was reduced to sparingly and infrequent.  I faced each working day with bright clear eyes!

5.  Communicate with everybody…staff as well as clients.

Like a good marriage communication is key.  I took the time to communicate with everyone, from our valuable support staff answering the phones, executive team, to clients who called daily and especially the clients who you don’t hear from.  Everyone knows the financial markets are under stress so why add to peoples stress unnecessarily by being uncommunicative.  Talking drained my daily energy faster, a precious resource, but it needs to be done.

6.  Have empathy with clients who want to bail (sell) but you are running money for the silent majority.

For every client, you have to recognize they have different agendas and pain levels when equities start to head south.  The vocal clients get your attention and maybe too much of your focus.  Always do what’s best for everybody’s financial interest, to the best of your ability and not the few who you hear.  Short-term decision-making may boost your rates of return quickly – going to cash in a down market – and keep the vocal clients happy with the cost being exceptional long-term rates of returns for everyone.  Clients have shoes, they do walk from time to time, and it’s usually the vocal ones you tried to appease in the first place that are first in line out the door.

7.  Government and Central Bankers will work day and night, pushing and pulling every policy tool imaginable to right a sinking economy but sometimes it just takes time for new policies to work.

I observed in past crashes the Federal Reserve Board (FED) do extraordinary things to right financial markets in past crashes.  I have learned the FED has incredible powers with policy options – real and made up – and when the FED wants financial markets to go up, they go up!

Financial markets viewed from 40,000 feet are feedback mechanisms.  Good economic policy drives societal financial wealth upward.  Poor policy does the opposite.  Central bankers are the smartest people on the planet because we trust them with the most valuable piece of machinery on earth.  The “money-printing machine”.  Print too much money and we as a society have to deal with inflation.  Print too little and society would have to deal with deflation.  We, as a society, don’t hand this power over to a village idiot.  Mr. Ben Bernanke, in my opinion and others, was slow to respond to the unfolding financial crisis of late 2007 and 2008 but once he was on the case every monetary policy device was brought to bare.

Have faith in the “Greenspan, Bernanke, or Yellen Put”.  It’s real!  Or alternately your house is on fire.  You and your community know that the fire department is coming.  Whether they save your house is another matter entirely.  They are coming, we just don’t know when!

8.  Each crash had a different charactistic or theme.  Try and pick-up what is going on – some stocks going down faster than others – in the markets as fast as you can.  This is the key for capital preservation, if possible, and stock selection on the rebound.

Of the last three ‘market events’, each had a different footprint or reason for plunging equity values not necessarily tied to equities themself.  The result however was always the same – equities prices plunging appreciably worldwide.

The ‘Crash of 1987’ was about the value of the US dollar.  Both the US dollar and stocks went down significantly but it was the stock market that received all the media attention.  Once the US dollar stabilized, at a lower value, the stock market rallied to new highs two years later.

The ‘Crash of 2000’ was a valuation correction in the NASDAQ induced by the Federal Reserve (FED) – remember them – restricting monetary policy, and raising interest rates to 6.5%, to a point of negatively impacting the real economy.  Subsequently after the market crash, the FED came to the equity markets rescue and lowered interest and mortgage rates significantly leading to a housing boom and eventually lifting equity markets, at least the S&P 500 and Dow Jones, back to previous 2000 highs.

The ‘Crash of 2008’ was a garden variety ‘financial crises’ – where declining home values triggered substantial declines in an alphabet soup of newly devised fixed income financial products – CDO’s, Asset-backed SIV’s and Sub Prime Mortgage-back securities – bankrupting an over-leveraged regulated banking system including much of the unregulated shadow banking organizations.

For example, in the ‘Crash of 2008’, with the help of Model Price Theory (MPT), we were able to quickly observe that lower valuation and priced stocks faced the greatest risk in a deflationary world.  Ever-lower stock prices implied a real possibility of the company going out of business that was a precursor to an even lower future stock price.

This was a wrinkle never observed in the previous two crashes and hurt ‘Value Managers’ rates of return during the two years following the market bottom of March 9th, 2009.

9.  I instituted a two-part question when I thought about selling anything in the 2008 ‘Market Crash’.  “Why was I selling?” (Answer, probably to feel better) and more importantly “When would I repurchase the position or increase your asset allocation in equities?”

My first two market crashes – 1987 and 2000 – involved what I call one-dimensional selling.  Selling for selling sake.  It felt good in the moment.  At least I was doing something.  Protecting capital.  Only to see, you guessed it, the stock(s) you sold rally hard (higher) the next day.  I felt like a proverbial cork in the middle of the ocean.

This time around, I forced myself to answer two questions before I sold anything.  Why was I selling?  Whatever my answer, probably very rational – knowing my rationalization – the real answer was I just probably wanted to feel better, physiologically.

Knowing buying during a ‘market crash’ is much harder physiologically than selling, at least for me, I instituted a follow-on question to the “Why was I selling?” question.  I would ask myself “So big-shot ‘When do I buy?’”   The answer inevitably lead to the stock value or price the company was trading at, on that particular day!  So instead of feeling the need to sell, I felt better in that I was buying by not selling a high quality company at a discount to fair market value.  Yes, you read this right, buying by NOT selling.  Confusing, but it worked!

10.  Keep to your personality type.  Keep true to yourself.  Recognizing that ‘Market Crashes’ changes your daily route and forces you out of your comfort zone.

I have a procedural personality in context of the equity markets – I’m an accountant after all.  I like process.  Again my first two market crashes took me out of my comfort zone and who I was.  Declining markets seem to demand assimilating tick-by-tick news developments as well as rapidly changing stock prices – mostly down.  You’re on the edge of your seat trying to assimilate everything because that’s what you think the job entails.  With the help of Model Price Theory (MPT) I was able to largely keep to my personality type or mental makeup on track.  I say largely because on very active days and weeks the market does twist you into being something you’re not.  At least recognizing this is half the battle and a simple mental readjustment can be made to get me back on track.

Once I realized the potential of a market crash (2008) and future equity markets being non-procedural, I looked for ways to enhance my procedural goals away from equity markets.  Like how many gym visits did I achieve over a certain period of time that eventually evolved into learning the various Ashtanga Yoga positions that make up what is called the ‘Half Primary Series’ almost four years ago with daily practice.

Conclusion

Will there be another ‘market crash’ in my career, my lifetime?  Probably.  Will I be ready?  As we have seen in past crashes, severe equity market ‘corrections’ can be extraneous events impacting equities as a consequence.  Shit happens in this complicated interdependent world.  Financial excesses are built up; policy responses are thought out and implemented.  Capital excesses are wiped away, setting up the rebuilding phase all over again.

Yes, I made mistakes in the crash of 2008-09.  I was not perfect.   Can anybody be perfect when presented with a bunch of unknowns and much uncertainty is an open question.  But the fact remains, I have three ‘market events’ under my belt and I have learned much not only my physiological makeup but also another fact set of accumulated numbers, data, captured in my database – Model Price App – that will help me – and hopefully you a Model Price App user – ‘keep on top’ of the next market dislocation.

Thanks for listening.

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