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Wednesday, April 1, 2015

How to Invest - The Ugly Truth

I get some "normal people" types who don’t know what QE is or the difference between the Federal Reserve and the Federal government or a host of other acronyms and economic jargon…they ask for simple straight advice.  Buy or sell stock indexes at records, real estate nearing records in many markets, and what about gold and silver?  They intuitively know or sense things aren’t exactly logically adding up but they aren’t economic nerd types…so, they reach out to the nearest nerd who “knows stuff” and can quote a lot of numbers…They say, “what should I do to protect my savings and my family”?


I offer I'm no "professional" and I have no crystal ball...but then again I've nothing to sell you and I've no interest in slipping my hand into your wallet for my thoughts.   The following are just a quizzical mix of history and opinions of how to "invest" in a world where global credit creation is breaking down, meaning global demand is breaking down, meaning all the credit and leverage driven excess capacity around the world is set to hemorrhage until a balance can be found.  Read all about the spreading depression here.  http://econimica.blogspot.com/2015/03/are-seeds-of-depression-sprouting.html


In short, how to Invest in an Advanced American Ponzi?  Ahhhh, but why not simply jump ahead to the 400 level course, Japan, the leading light of Ponzi's.  Japan is the innovator of statist actions to counteract reality, and the US, EU, and one by one, the entire world is following Japan's lead.


My advice???

In short, I tell them, to some extent everything is rigged so, generally, they may choose to invest with the rigging or against the rigging.  Either buy what is rigged to fall, gold and silver (betting on the eventual downfall of the rigging), or buy what is rigged to rise...stocks, real estate, etc..  All major central banks rigging together is a powerful force not likely to fail without one hell of a fight or a schism among the central banks...either way, it's a fight that may end this year or perhaps not in our lifetime.


In long, I explain how Japan leads and the world follows.  How in Japan a growing, outsized, wealthier set of Japanese retiree's sell assets to the shrinking, smaller, poorer set of working age Japanese.  Since there is no way the working age set could buy the stocks or bonds or real estate at the prices the older group need to fund their retirement, then the central Bank of Japan (Japan’s version of the Federal Reserve) steps in and buys with money it creates on the spot (something the BOJ explains via means of cows and good tasting drinking water?)...then the BOJ effectively throws the "assets" in a black hole never to be seen again.  This reduces the outstanding number of shares, bonds, etc., pushing prices up and lowering the quantity of assets available to be sold.  This likewise encourages corporations to do the same with, in essence, free money. 


No problem for the BOJ as they can always digitally make more where that came from, and good times for stock and bond holders as the price of their remaining holdings rise.  Japan is more than happy to print more money as it helps to devalue their currency making Japanese exports more attractive (cheaper) to foreign buyers.  And the capper, Japan has been in a depression for some time...and now likewise, the global economy is entering a classical depression (insufficient credit leading to insufficient demand leading to massive overcapacity) so the only upside price driver is central bank buying...so central banks need not fear inflation or wage spirals.  However, the fear of hyperinflation should be very real.


Like previous Japanese hits, Godzilla and Pokémon (to name but a few), the rest of the world watches in horror but ultimately emulates Japan's problems and solutions.


Japan's problems were the greatest real estate bubble in history and an amazing stock bubble to boot along with debt for the ages…but most the losses in the subsequent collapse were ultimately owed to Japanese banks.  The Japanese government and BOJ didn’t want the banks to take the losses…so they didn’t.  Japans solution was banks allowed to pretend assets had 2x’s or 10x’s or 100x’s actual market values.  Interest rates were collapsed eventually to zero to allow all the bad debt to be refinanced at ever lower servicing costs.  The government stepped in to create nearly all new debt.  Japan spent massive amounts on infrastructure and other attempts to stimulate the Japanese economy.  This should all sound familiar and the fact it was all to no avail...again, should sound familiar.


The US, EU, and advanced economies worldwide are following Japanese “leadership” and following the same problem and "solution" sets.  Like modern day kamikazes the financial systems are taken to debt fueled bubble heights and then hurtled down to crash into the earth below.  But the debt isn’t destroyed, it is only transferred from the banks to the governments (or more correctly, to the tax payers and holders of the national currencies).  Asset valuations are raised to bubble heights again but economic activity does not follow.  The divergence only grows as the most grotesque "trickle-down 2.0" policies favor the dwindling minority of asset holders who hold the rapidly escalating majority of assets.  The Fed's balance sheet of $4.5 trillion along with the ECB's and BOJ's QE purchases will never be seen in the market again.


The administrations of these nations tell the populace majority that their well-being is dependent on the owners of assets (the wealthy) getting wealthier and spending their wealth.  The only trouble is this model has not and is not working.  Wages, job growth, capital expenditures have not surged and in fact continue to stagnate or decline.


So, if all this isn’t working but retirements and pensions need be funded and bank held real estate assets need be supported…central banks will do more.  They do and will buy bonds (previously covered here... http://econimica.blogspot.com/2015/03/brics-blink-or-more-correctly-wink-and.html), they do and will buy equities, they do and will buy real estate (who else would buy all those MBS's), and likely buy unlimited short positions in assets deemed vital not to be considered of value by the populace.  In short, they rig everything as a matter of "national security" since this is the term of anything beyond reproach.


Economic activity worldwide will continue declining and asset values will continue ascending.  This is a rigged and fraudulent “market”.  Is this the right solution?  Probably not.  Are there other options?  Probably, but real solutions come with, at a minimum, significant pain (but perhaps with a far greater eventual economic gain).  Still, “investors” have few true options (aside from storming the Marriner Eccles building) --- buy what is rigged to go down (on the hope central banks will fail), buy what is rigged to go up (and pray they don't fail), or straddle the fence with a foot in both camps.  Of course, leverage ratios (either way) are dependent on your belief in the duration and severity of the rigging.


But investors must invest with the knowledge that they, like Madoff’s investors, will one day come to find out all the numbers on their statements are fictitious.  Sadly, no unrigged option exists.  Although you don’t have to like (or can loathe) the Ponzi, you ultimately have no good choice but invest in or invest against the Ponzi.  You can buy severely rigged gold and silver in anticipation of their ultimate liberation…but since no one can fully explain the mechanism of their bondage (some claim the Japanese Yen is utilized in a global long / short pair trade with gold...i.e., the more Yen Japan prints, the stronger the dollar and lower the price of gold?!?), the agent of precious metals anticipated liberation is unknown.  Further, even if gold and silver were to see significant price moves, as they are fundamentally undervalued, the metals could still be confiscated, the gains devalued in a windfall tax, or a hundred other means to deny their holders an advantage.


So, don’t delude yourself by listening to economists, financial planner’s, or those spouting normalcy-bias utter garbage about positive fundamentals or growth around the corner.  These people seem to be who Upton Sinclair spoke of when he penned that “it is difficult to get a man to understand something, when his salary depends on his not understanding it”.  Likewise, don't be deluded that gold and silver are a "sure thing".  It's a very fair question if the average man holding precious metals will be rewarded for his abandonment of national currencies.


Understanding everything is propped up or held down in a rigged market is crucial.  Your only choice is to invest with the state or against the state.  If you buy some gold and silver, some day it may have great value but know you invest against the states wishes (and all that may come with such a "treasonous" act).  Or hold your nose and buy against fundamentals but with the state…with secure knowledge at some point sooner or later and one way or another, it will be worthless.  But until then, it’s likely the only thing to rise in value.  Invest in the central bank scheme or invest against it (or go the agnostic route and straddle the fence).  The average investor has no enviable options.

Of course, those 12 or 13 of you that want the really long answer are welcome to freely read my book, Fundamentally Flawed, chapter one posted here...
http://econimica.blogspot.com/2015/02/fundamentally-flawed-chapter-1-advanced.html




10 comments:

  1. "This likewise encourages corporations to do the same with, in essence, free money."

    Where is this 'money' coming from and what is it's 'price'?

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    Replies
    1. Corporations are issuing record debt, largely through bond issuance, at near record low yields. Some corporations, like Nestle, have recently even issued negative yielding debt.

      Good recap yesterday on ZH
      http://www.zerohedge.com/news/2015-04-01/companies-go-all-rate-hike-issue-record-debt-q1

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    2. Thanks for your reply.

      If we are talking about corporations issuing record debt, then 'my take' is that businesses and individuals are entering into freely negotiated contracts {or fund managers are 'persuading' their clients [earning commission] to buy corporate debt}.
      Rightly or wrongly they are freely 'choosing' to purchase the debt. The willingness of corporations to issue debt is because there is a demand for the debt even at, what appears to be, ridiculous yields?
      The money is only 'free' because people are willing to exchange their money for debt?

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    3. Yup - it's certainly free will of corporations to issue record debt and take advantage of record low yields...but the buyers of the debt have little choice...they are primarily institutional types (pensions, insurers, banks, etc.) that need 7.5% to 8.5% returns to meet their targets...they typically have regulations regarding the portfolios make-up and need bonds of certain qualities. Given the Treasury market has generally been made un-investable for those needing a fixed return (Fed and "foreign" bid have pretty much bought all the notes / bonds since '11 at yields no investor could suffer)...institutional buyers are left with no choice but to go with the best of the rest, corporates...and slowly either go bankrupt on safer issuance or literally risk it all to attempt to find their 8% returns.

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    4. Thanks for the information.

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  2. If your proposition was correct then economic crisis and stock market crashes simply would not exist.
    My guess is that leverage is now rampant and that investors are "all in".
    The illusion investors have that central banks will sustain asset prices and foster eternal prosperity is now widespread. Curiously 7 years after the market botton.
    Once the economy continues its natural deflating process and faces another recession then this illusion will probably vanish....giving birth to a new bearmarket.
    Cycles are normal processes which happen in nature.
    Best Regards
    Juan Pablo

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  3. I just wonder why all this money creation does not bring inflation or hyper inflation. The Germans had, when the printed money to pay to the rest of the world in 1929. Why it is different now?

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    Replies
    1. http://www.deflation.com/understanding-deflation/

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  4. The best investment I can think of is to buy consumables that have a long shelf life. You see a pair of your favorite running shoes on sale? Buy 10 pair and put them in your closet for future use. You see a deal on some canned salmon buy 10 cases or even 50 cases. They really don't have an expiration date and at least you know you will be eating over the next several years...

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  5. Nice post.Very useful for us.Thanks for sharing it.We have interesting information.

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