Wednesday, June 22, 2016

Richard Duncan - How China's Hard Landing Will Impact The World

The following video provides a deep dive into what it happening with the Chinese economy and how it will impact the rest of the world. Richard Duncan is one of my favorite economists. His books transformed the way I think about the global economy and financial system.

If you want to fast forward, things get going about 4:50 into the video:

For more see: Bubbles Bloom Everywhere As The Systemic Crisis Builds Under The Surface

Tuesday, June 21, 2016

The Stock Market "Always" Bounces Back, Right?

A financial advisor makes their living by keeping as much of their client's money in the financial markets, at all times. They charge fees to manage clients money, manage mutual funds which charge fees, or both (they charge a fee to pick specific mutual funds their company owns which also charge a fee). 

If a company makes 1% on their AUM (assets under management), then their bottom line looks much better if their clients have $100,000,000 invested vs $50,000,000 invested. Therefore, it is the responsibility of the financial industry to (1) create narratives that explain why investors should always have money invested and (2) create a reason why they should use their company to invest the funds. 

One of the more popular stories you hear is; "do not worry, if you invest in the stock market, even if it at a peak in the market cycle, the market will always return to new highs and you will collect dividends along the way" (as long as you do not panic during the decline, pull your money, and stop the 1% gravy train of investment fees flowing to my company). The part in parenthesis is usually left out.  

Another fact usually not mentioned is markets can take a very, very long time to return back to their previous peak. In some cases they may never return again in the investor's lifetime. 

The DOW peaked in 1929, fell 89% and then took "only" 25 years to recover the losses. It should also be noted the DOW shifts the companies in the index. Some of the stocks in a market index can go bankrupt, which means they can never return to their previous highs. 

The Japanese market peaked in 1989 and is still well below the peak 27 years later. Some Japanese investors who purchased or held stocks during the late 1980's may not see their capital returned whole in their lifetime. 

Make sure you know how someone makes their living before you put 100% of your faith in their investment advice. For example, if a company makes 0.0% on the funds you hold in cash, precious metals, and residential real estate, how will that impact their investment advice? There is a reason advisors suggest holding a portfolio structured as some form of X% bonds and X% stocks; they make money on 100% of the portfolio. 

The same applies for other markets as well. If you ask a real estate broker if you should use $60,000 as a down payment to purchase a home or put it in the stock market, how are they likely to respond? How about a company that sells precious metals?

As you can probably tell, I do not work in the financial services industry. I work in the commercial real estate industry, and writing here is a hobby, not a job or a way to sell investment products to a client. Unfortunately, most of the financial market information you find online is presented by companies that have a vested interest in keeping a bullish undertone (there are very few weird people like me who write just because they enjoy it).  

Thursday, June 16, 2016

Swiss 30 Year Bonds Enter The Insane Asylum

Are you frustrated you can lend the German government your hard earned money, and pay them to hold it, for "only" 10 years? Does it bother you Japanese bonds are "only" negative out to 14 years? Have no fear! There is an investment alternative that has arrived which is even further out on the limb of absurdity. Enter the 30 year Switzerland government bond, which as of this morning has now moved negative.

You heard that correct. A simple investment today will provide you the opportunity to give the Swiss government your money and then pay them for 30 straight years. You can join all the other proud investors around the world currently holding bonds below the zero bound, a place I refer to as the insane asylum.

Meanwhile, the chart below made the rounds yesterday in the financial world, which shows a long term history of the 10 year government bond yield in Germany.

Investors may take comfort seeing yields also went to 0% back in 1922 - 1923, but a little context is important. What was happening in Germany during that time? Hyperinflation. The bond market was closed during that period so there was no yield. Every German government bond on the planet had a value of $0.0. Why? If the value of the paper currency in your hand was dropping by 10% or more per day, what would be the value of an I.O.U. of that paper 10 years into the future? Much, much less than used toilet paper.

Ironically, we will eventually shift back into that mindset at some point in the future. A tipping point will arrive when investors move from:

Greed: Yields will always continue to fall (even below zero) and we will receive capital gains on the value of the underlying bonds.

Concern: Yields bottom and investors realize the top may be in. At this point they will believe yields will only move up slightly, at a slow pace, and then remain at a permanently low trough.

Panic: The third phase will unfold in one of three ways:
 (A) Investors will collectively realize the governments they are lending their money are bankrupt and have no way to ever pay back the principal and interest with a currency of equal value in the future.
(B) Inflation picks up and investors demand a return (interest rate) high enough to compensate the natural loss of their purchasing power.
(C) Both A and B arrive simultaneously, as they did in Weimar Germany in 1922, and the worst case scenario becomes a reality for that country.

The question to ask yourself is; where will capital flow when it is flooding out of the bubble bond market? You want to position yourself today to be where capital will flow tomorrow, and do your best to not pay attention to the surrounding noise while you wait.

For more see: German 10 Year Bonds Enter The Insane Asylum

Wednesday, June 15, 2016

A Brief Thought On Guns In America

I don't own a gun and I've never fired one, so for me the charts below paint a picture of excess regarding Americans and gun ownership. However, I try to see things from other people's perspective before making comments on sensitive issues. I'm sure if someone had broken into my house in the past with the intention of causing my family harm, I would likely own a gun now and appreciate laws that allow me to do so.

From my perspective it seems as if we can find a middle ground; the right to bear arms should stay, but perhaps we should revisit the right to own mass killing weapons like assault rifles.

Tuesday, June 14, 2016

German 10 Year Bonds Enter The Insane Asylum

Investors were provided the "opportunity" during today's early hours of trading to purchase 10 year German government bonds at a negative yield. While yields have been hovering close to zero all week, investors can finally lend the German government their hard earned money for 10 years and pay the government to hold it

The bond market bubble shows no signs of slowing. Although we know this story will end in complete disaster it is fascinating to watch how low investors will bid these yields before the market implodes. Wondering what the next "Big Short" will be? It has arrived.