Having spent most of my professional career serving people with common sense and very competent critical thinkers such as engineers, accountants, entrepreneurs, medical professionals, etc, I understand the need to provide evidence of my views. Electronic delivery of newsletters makes it easy to provide source references, which you will find embedded throughout. I suggest reading it once with clicking on the various links and once without doing so, in whichever order you prefer. Taking some time between readings might be helpful, because there’s a lot to digest…and some “holiday cheer” might help wash it down. However you approach this holiday meal, I believe it will be worth your time and intellectual energy.
Setting the Table
One never knows whence inspiration will come, if ever. Recent financial market volatility and public knowledge of repeated private betrayals of trust by scoundrels like Bernie Madoff, Alan Stanford, Earl Jones and others have undermined the credibility of regulators who are supposed to protect investors against such frauds. With news of outrageous bonuses once again being paid to Wall Street “Banksters” and the bail-out of the Irish banks by its citizens, there is a legitimate crisis of trust amongst the public that is starting to go viral.
On December 14th, our professional association Advocis annual Christmas luncheon featured Mr. Preston Manning, who spoke eloquently about a 5-point framework for business ethics. Brilliant in its simplicity, his message was profound and principled inspiration. Imitation is the sincerest form of flattery…and what this 2011 Annual Forecast lacks in simplicity it hopefully makes up for in thoroughness. Mr. Manning’s framework:
1. Tell the Truth
2. Tell people what they need to hear, not just what they want to hear
3. Maintain objective ethical standards & avoid the slippery slope of moral relativism
4. Maintain complete congruence between your public and private persona
5. Do unto others as you would have done to you
Reflections on 2010
We can’t change the past, and we know it’s very unhealthy to get stuck in it. For those who are open to learning, history is full of wonderful lessons. Being completely honest about the quality of our own decisions can be gratifying or painful, depending on the results they produced. Accepting personal responsibility for our own decisions – good or bad – is a key ingredient in the recipe for enlightenment and happiness in all areas of our lives…which also leads to better decision making in the future. The key is setting our own ego aside and using critical thinking to learn from every experience in what James Dines calls The High State of Objective Observation.
Looking back twelve months at our 2010 Annual Forecast, we got several important things correct, including our estimate of equity markets peaking in May or possibly slightly earlier followed by a significant decline, possibly triggered by challenges in Greece but really based on fears of double dip recession. While we didn’t officially get the double dip (yet), the market certainly priced it in. Our portfolio managers kept pace with the rising markets from January to late April, and then did an outstanding job minimizing portfolio losses by exiting declining markets and finding respite in cash. I give our portfolio managers an 8.0 out of 10 for January to May, and 9.0 out of 10 from May to August 2010.
Starting in very late August, what was not understood at the time was the power of a small cadre of Hedge Funds and High Frequency Traders or other aggressive buyers who took their cue (nudge, wink, etc) from Ben Bernanke’s late August promise of a second round of “Quantitative Easing” (Money Printing: Part “Duh”). Using almost-free leverage, this tiny group caused a violent rally in equity markets (especially the US) in September and October. We remained correctly pessimistic about the economy, and along with most of the serious money managers around the world, our portfolio managers chose safety over irrational exuberance. While our clients did participate in these rising sectors, with the benefit of hindsight, our portfolio managers wish they would have allocated more cash into these rising markets in late August or early September. The result: client portfolios lagged benchmarks for the 9th and 10th months. My grade for these months: 6.0 out of 10.
Markets peaked again in early November then pulled back about 4%, giving our managers an intelligent entry point with more cash, resulting in portfolios outperforming their respective benchmarks. So far in December we’re tracking benchmarks nicely, so from November 1st to present they get a grade of 8.0 out of 10. My overall 2010 grade for our dedicated portfolio managers: 8.25 out of 10, mostly because they defaulted on the side of caution, which is precisely what we want them to do.
Naturally, we all would prefer seeing our portfolio stable during volatile markets AND grow dramatically with rising markets…that would be a perfect world. If forced to choose one over the other, the vast majority of clients would choose great downside risk management…when you do the math on the effects of big losses, the rational answer is obvious. It’s much easier to make up for lost time than lost capital, and you can still sleep at night.
Continuous Improvement
More important than their dramatic outperformance from May to July or their brief underperformance in September and October is how our portfolio managers respond to criticism. As a wealth management advisor who meets regularly with Clients, I receive unfiltered feedback of client attitudes and perceptions about portfolio performance. Our best interests are directly tied to clients’ portfolio values, so we are both philosophically and financially interested in optimizing client outcomes. I condense this feedback along with my own and deliver it directly to the decision makers without added sugar.
In stark contrast to the chest-thumping bravado that dominates the money business, our gifted team of managers openly accepts legitimate criticism and focuses on how to get better. Rather than being defensive or dismissive like the Armani gang, our team in Toronto has acknowledged where their decisions could have been better and sought multiple external perspectives on their processes. Since early November, countless hours were dedicated to reviewing their portfolio allocation decisions in late August and early September, leading to a key discovery: their suite of indicators are extremely reliable for identifying market peaks, but not as well-suited to signalling market bottoms. With this new learning, they have expanded their menu of market analytics and have emerged with a more robust and diverse framework to help them fully exploit market declines via limited-scale short positions, and better recognize bottoms. There are other significant enhancements also en route, which we will share in future client meetings and other communications. My confidence in their professionalism, integrity and commitment to continuous improvement: 10 out of 10.
Lessons Learned, and brought Forward
Hopefully 2010 has been a year of great learning for everyone, learning which will prove increasingly important as we look ahead to an even more challenging 2011. For those who think that everything is rosy in the world just because the equity markets rallied in the last four months, we candidly suggest to stop drinking the kool-aid offered by the mainstream press and the Investment Industry Establishment (IIE) who fund the media through paid advertising. The current drum-beating about recent performance of one sector or another is not only NOT a guarantee of future positive performance in these sectors, it’s much more likely to be a contrary indicator of future near-term results, based on Mass Psychology. Markets can make you rich slowly, and poor very quickly; real risk management is more important than ever.
On a net basis I am quietly optimistic about how our client portfolios will fare in 2011. My optimism is directly linked to the major risks that the financial world faces in the next 12 months…because crisis contains both danger and opportunity. Since our portfolio managers already do an exceptional job of minimizing portfolio declines through active management, and are now even better prepared to exploit future market declines, we embrace and welcome the challenges ahead. Because we know the end game, we can protect and grow client wealth. Clients are safe on board our ship, and healthy meals are served without added sugar. I’ll get more optimistic during the next downturn, when emotions are high and real risk is lower.
Appetizer: Questions to Consider
It’s widely understood that most humans do not listen to early warning signs because they want things to continue as they are. Please ask yourself and quietly answer the queries below:
Have you ever quietly contemplated what the financial crisis of 2008/9 really means in the big picture? Do you view these events as an anomaly or fluke, with little or no chance of repetition in the near term? Have you become immune to the warnings of future challenges simply because the equity markets in the US have returned to the pre-Lehman levels of September 2008? Do you believe that central bankers have the power to painlessly resolve our economic challenges through increases in money supply or open market intervention? Do you honestly think that the world’s financial issues are behind us and are you placated by the bullish optimism you hear right now? Have you grown impatient about recovery in your own portfolio, or perhaps become complacent about risk because you held all the way through the last downturn and have seen substantial recovery? In the interests of efficiency, if you think that everything is fine and that we’ll soon return to the way things were a few years ago….simply scroll to the bottom of this newsletter and hit “Safe Unsubscribe.” Otherwise, please read on.
In our view, the events of 2008/9 were our big warning shot and should serve as a wake-up call for all of us. Instead of reinforcing shaky public and household finances following the initial tremors, we seem to have collectively minimized the risks and returned to the same bad habits that caused the problems in the first place. Regardless of what happened to your portfolio in 2008/9, you will not be immune from the next round of risk – regardless of when it occurs – unless you have proper risk management in place.
The Main Course
Current equity market sentiment is dangerously optimistic: the % of bullish sentiment among professional traders has almost matched the all-time highest levels of October 2007, which coincided with the peak in global equity markets that same month. If we didn’t have a Christmas slowdown to step away from the market frenzy and catch our collective breath, I’d be concerned about major risks in the next couple weeks. Wall Street greed is also ramping up again, measured by Levels of margin debt outstanding. Additionally, very recent increases in U.S. equity mutual fund inflows are signaling caution because mutual fund investors represent the tail end of retail stock purchases, i.e. the
late money at the end of the greater fool chain. This is an incredibly reliable contrary indicator.
As we approach a new calendar year, Wall Street Analysts publish their full year profit expectations, and this year they are downright giddy about how great next year will be, which your author also interprets as a big red flag. Analysts are almost all paid by big firms that manage billions of client assets, and being realistic or pessimistic isn’t great for attracting or keeping clients. The sad reality is that this group is paid to tell the public good news they want to hear, not what they need to hear. In addition, when investors hear about these rosy one year targets, they forget that the anticipated growth never happens in a smooth linear fashion; there’s always risk along the way.
The major Wall Street firms have 2011 year end targets that range from 1,300 to 1,550, with a median target of 1,350 and mean target of 1,379. These targets are based on median aggregate earnings for these companies at $93 and the mean of $92. Analysts arrive at their earnings targets by extrapolating current trends within each industry segment, irrespective of possible changes in economic conditions. Is it possible that we actually do get there at some point in 2011? Yes. In fact, with overwhelming current bullishness, the peak is likely to be reached before the end of Q2 2011. It’s really a question of how high we climb before we drop; we think that peak level will be between 1,350 and 1,380, subject to real-time revisions, of course.
We never know with certainty when a particular downtrend will start, but I wouldn’t count on this current rally extending quite as long as last year (April 23, 2010). Your author also believes a shallow pullback or sideways correction within the current uptrend is likely to appear in the middle third of January – a kind of gut check before earnings season begins. This should set the stage for a final top that loses momentum between the end of March and mid-April 2011. Once the downturn begins the first significant level of both Technical and Fundamental support is in the neighborhood of 1,150 to 1,170, or about 15% lower than anticipated peak levels. There is also minor support at about 1,130, and if this doesn’t hold it’s because something fundamental has changed that is beyond the control of central planners to paper over with QE3 or whatever other ideas they can conjure up.
Groceries (et al) Gone Wild!
In addition to US equity markets, the other big beneficiary of QE2 has been Commodities, including oil, copper, silver, rice, sugar, cocoa, corn, wheat, et al. This has been hailed as a sign of the strength of the recovery, especially in China and India. A significant portion of the rise in Commodity prices (especially copper, thanks to JP Morgan Chase) has been driven by financial speculation, and less by increases in demand by end consumers. Your author also thinks that investors globally are seeking safe haven in valuable assets which are beyond the power of central bank printing presses. On balance, Commodity strength is more likely an anti-US Dollar trade than a sign of a genuine economic recovery.
While tax breaks translate into economic stimulus, rising prices of necessary commodities create an economic headwind. In this respect, the price of oil is a key factor. People will consume less chocolate as it gets more expensive but they still have to drive to or for work. Just as it did in 2008, a spiking oil price would act as a major tax increase and thereby be part of the recipe for choking off the current, exceptionally fragile growth in GDP. If this speculative fever continues, we could see a Q1 spike in oil to between $110 and $120, which various experienced analysts calculate as technical resistance and/or the point of demand destruction. The cure for high prices is high prices.
This is what your author thinks is going to happen, but what is most important is what does happen and how rapidly changes are made to portfolio allocations to reflect the new environment. Markets can stretch out gains for much longer than many rational people think, and they can turn southward with no notice whatsoever. Our philosophy is to ride the tide while it rises, but always be ready to go ashore before the major tidal change, lest your craft be dashed on the rocks of ruin. Those who blindly accept that happy days are here again and maintain/ pursue an aggressive or buy and hold strategy at this stage are destined to get pummeled in the next 12 to 18 months. The cold, hard reality of investment markets is that they do not care about us as individuals, and they always find a way to punish those whose decisions are dominated by naiveté, impatience, impulsiveness, fear or greed. Markets will do whatever they will do regardless of our own recent experience with investments and if you don’t already know who you are, the market is a very expensive place to find out.
Cleanse your Palate with some Higher Order Thinking
The higher the vantage point, the further one can see, i.e. your real horizon is truly further away. The challenge with climbing the mast up to the Crows Nest is that the volatility of the seas below is amplified, so you need to have a firm grip on the ropes that ensure your safety, the stomach to make the climb…and you need to know what to look for when you arrive in the perch. Having safely arrived, it’s always wise to buckle up for personal safety. I suggest you do the same.
Every society in recorded history has had a small number of “outliers” who think differently than most. In the realms of science, philosophy and religion these people were often labelled as heretics, enemies of the state, or even witches. Galileo, Socrates, Ghandi and Joan of Arc and countless others experienced the ire of the authorities when they refused to deny or change their ideas, theories or actions; it was usually a terminal sentence. Open-minded reviews of their ideas and actions over time usually results in history being much kinder to them than the authority figures who felt threatened at the time. Those who question and thereby challenge the status quo have always been treated rather harshly by the Establishment, who stand to benefit from keeping things as they are. If you’ve ever had a wild idea that you presented in class or at work, you may have experienced a mild version of this.
Your author personally experienced this over four years ago when he presented a complete blue print of an innovative investment management platform adapted from the sound principles of active management developed by Mr. James Dines. The idea was radical at the time: fuse together the disciplines of macro-economic, fundamental and technical analysis to time the purchase and sale of various asset classes. Maximize returns by buying out-of-favour securities with upside potential, patiently harvest the gains that the markets offer, and be happy to wait in cash for new opportunities even if it’s unpopular. Most importantly, minimize risk on every single investment held through the use of intelligently chosen and professionally executed Stop Loss Orders. The core philosophy of this platform was respect for every single dollar of client capital.
Your author spent countless hours designing and refining the idea before presenting it to the firm’s Executive team, but ultimately didn’t have credibility within either the Executive or the bureaucracy. Our CEO fancied himself an investment architect and only paid lip service to ideas from the field. Our own internal product development team declared they wouldn’t be the first to invest time or money in such a radical idea, especially because they couldn’t find a similar platform anywhere in North America to copy. “Besides, our current suite of buy and hold investment products will also protect clients. Our investments aren’t broken, so why waste money to fix them?” Famous last words that demonstrate that true innovation is a threat to the status quo.
Finding Safety in the Storm
Only a few blocks away from our Toronto head office, there was a quiet, brilliant and deeply-principled young innovator within one of the big banks. He had been developing and refining his very sophisticated investment program for nearly twenty years and was experiencing similar luck bringing his idea to life for clients. Much to my initial surprise, his program was based on the same core principles, even though he had never even heard of James Dines…despite the fact that Mr Dines was an early adopter of Dow Theory and one of the modern day fathers of the now-respected discipline of Technical Analysis. Your author found Larry Berman where the best secrets are kept: in the public eye, on Berman’s Call, the top-rated show on Business News Network (BNN). I connected with the ETF Capital Management team a couple weeks after Lehman Brothers failed in mid-September 2008, and only eight weeks after they had launched Larry’s new program. If I could change one thing in my professional life, it would be to have found them a few months earlier. Timing really is everything.
How society treats Innovators and Truth-tellers
Perhaps Mr. Berman didn’t know of Mr Dines because the latter had been fired from his job on Wall Street in the late 1960’s, publicly denigrated and even attacked by frivolous lawsuits. His “crime” at the time was refusing to retract his published view that the price of Gold would at least double from its then-fixed price of $35 USD per ounce after it was revealed that Richard Nixon would close the Gold Window at the U.S. Treasury on August 15, 1971. Mr Dines fought against going off the Gold Standard because he understood that politicians and central bankers could then easily steal from the public treasury through the printing press. I think the tipping point in Mr Dines’ fate came when he openly declared that the Gold Standard was being eliminated to allow the Federal Reserve to print money to buy US Treasury Bonds and thus fund the unpopular Vietnam War without having to overtly raise taxes. The truth hurts sometimes.
The term “Gold Bug” was itself originally coined to discredit Mr Dines and anyone else who dared to challenge the wisdom of Fiat Currencies and other modern financial wizardry. Mr. Richard Russell is another long-time outspoken and respected critic of un-backed paper currencies and fan of gold. Independently yet together, these two gentlemen pioneered the field of paid investment newsletters because they didn’t toe the line and couldn’t or wouldn’t work on Wall Street. Their hard work and sacrifice led to the creation of the first-ever research and views that were independent of the big Wall Street firms. Thank goodness they maintained the strength of their convictions and refused to deny or remain silent on the dirty secrets that they understood. How about their amazingly accurate calls on Gold, Silver, the Internet, Uranium and Rare Earth Elements?
Anyone who believes that major political and economic events are deliberately orchestrated to benefit certain special interest groups linked to The Establishment is openly scorned. Rarely do those accused of misconduct refute allegations with actual evidence. Instead, the accusers are inevitably labelled “conspiracy theorists” with smear campaigns focused on real or fabricated elements of their past, or merely their personal eccentricities. How different would history be if we had judged Einstein solely by his appearance? What if important people had ignored Adolph Hitler’s obvious charisma and looked objectively at his philosophy and underlying maniacal narcissism? These people remind us that we always need to think critically, and to judge controversial opinions on their intrinsic merits, not the person delivering the message.
As you can tell, your author is drawn to gifted and innovative thinkers and doers with a passion for finding the truth and better ways of doing things. These “truth-tellers” steadfastly refuse to give in to public or private pressure because their discoveries are unpopular or inconvenient. They often suffer personally for their refusal to deny what they know from evidence to be true. Your author is pleased to announce that our next Continuing Education Series event on Thursday February 24th 2011 will feature two of Canada’s brightest Truth-tellers…invitations to follow.
Understanding and Tolerating the New Normal
Increased market volatility is the new normal, which your author attributes to three primary reasons:
1) The broadest ever market participation in history,
2) Widespread rapid access to information about our globally integrated economy via technology, and
3) The fact that we are teetering on the edge of a forced “right sizing” of our “super-sized” lifestyles at the family and government levels.
Points 1) and 2) above facilitate the Mass Contagions of Fear and Greed. In reference to 3) above, we’ve been able to carry on these spending patterns we can’t afford because of the wide availability of credit, facilitated by the sheer magic of our Fiat Currency and fractional reserve banking systems. Those who think they can simply hide in GIC’s or bonds because “they’ve always been safe” are naively mistaken because the coming price inflation will rapidly destroy the purchasing power of fixed income assets.
Tough to Swallow: The End Game
If you’re serious about preserving and growing your portfolio’s purchasing power, you need to understand the end game. This might be a good time to refresh whatever you’re drinking. For more information on the very important issue of how Fiat Currencies work, I recommend that you find and read a copy of “The Creature from Jekyll Island” written by Edward Griffin in 1994. This book details the history of central banking in Europe and North America, with a special focus on the secret creation of the current US Federal Reserve Bank at a private resort on Jekyll Island, Georgia in late 1910. The most recent edition includes updates that help decipher what has really been happening in the global economy in the last 40, and especially the last 5 years. This book is controversial because it sheds light on processes and institutions who would prefer to continue working in the shadows. Your author has very recently obtained a few more copies and they are available for lending to Clients. You may or may not agree with Mr. Griffith’s final conclusions, but his historical recount of how the modern banking system was formed and the resulting “Bail-Out Nation” are extremely accurate. Only time will tell if his other dire predictions will come true, and I hope he is wrong about them. If you choose to ride this ride, buckle up!
Thirty years ago, when I first read about our banking system, almost everyone thought the ideas in this book were absurd, impossible and probably rooted in conspiratorial paranoia. Frankly, I doubted what I read, just as you may be right now. Today, more and more people are beginning to understand how the system really works, even the leaders in pop culture.
Tectonic Shifts are Coming
Over the last several years we’ve experienced some major tremors in our financial world, and we need to fully contemplate their meaning before returning to living the way we did before. Major structural changes appear to be on the horizon, and while we hope these changes will eventually lead to honest and lasting reform, there will be a lot of social and financial upheaval before we arrive. When we suggested a year ago that there would be increased public protests against necessary changes in public policy in places like Greece, some readers suggested your author was pretty pessimistic. Today, increasingly violent protests are becoming common in the UK, Greece, Italy, Ireland, France and soon to be Portugal, Spain and Belgium.
Just wait until German Chancellor Angela Merkel is forced to increase taxes and ask German public servants to work until 71 so their Greek counterparts can continue to retire at 57. Chancellor Merkel will eventually be faced with a pretty challenging dilemma: use her country’s manufacturing and export “uber-machine” to bail out the big banks of Europe or revert back to their own currency and leave the rest of the Eurozone to implode without them. In your author’s view, this ends badly for Ms Merkel, and the European Union is hurtling ever closer to its ultimate demise, probably before 2016. As Margaret Thatcher closed one famous diatribe in Parliament, “Socialism is great until you run out of other people’s money to spend.”
As noted above, our global economy and financial systems are more intimately connected than ever before. Every bank and government around the world has a tremendous amount at stake in Europe given the global cross-ownership of the debt of European governments and banks. The government of China is now openly providing financial support by buying Portuguese bonds. Because we rarely see the bullet that kills us, we’re not sure if imminent sovereign bail-outs will be the first domino to fall, or if it will be something else. Europe may very well be The Boy Who Cried Wolf, lulling global financial markets into a state of denial about the ultimate risks. We don’t know certain if 2011 will be the year that enough people lose confidence in our system, but there are credible non-Establishment thinkers who are openly musing about it.
The “Dirty Dozen” Laundry List
We never know with absolute certainty when or where risks are going to arise, and which -if any – of them will be “contained” versus going viral, i.e. spreading the Mass Contagion of Fear. The following is a brief summary of risks that could trigger the next downturn:
1) The Socialist basket case called Europe; see above for the tip of the iceberg
2) The bubble called China: questionable data, rampant over-development, rising food prices, delayed but necessary interest rate increases and a failed bond auction on Dec 23rd, 2010 while the western world focused on Christmas, etc.
3) US Federal government spending, with no hope of restraint in sight.
4) The current insolvency of many American state and local governments due to out-of-control bureaucracies, falling sales tax revenues, massive unfunded public sector pension liabilities, etc Defined Benefit Pensions are not as safe as most people think.
5) The US real estate market is still plagued by stubbornly high Unemployment, foreclosure fraud and threatened again by mortgage rates that are inching higher because of bond market weakness. The US Housing double dip is now started.
6) Continuation of imprudent household spending and debt levels in both the US AND Canada that result in consumption-dependent GDP simply grinding slowly downward.
7) Eventual revelations of the insolvency of major US financial institutions such as Bank of America and Wells Fargo...in addition to the 900 or more “zombie banks” in the US and Europe.
8) Eventual proof of long-suspected market manipulation, fraud, insider trading etc between bankster heavyweights Goldman Sachs, JP Morgan Chase, the Federal Reserve and the highest levels of the US government.
9) A major terrorist attack or other military action that creates the “justification” (read: political saleability) of yet another major war to spur manufacturing of the American military-industrial complex and “job creation” for young Americans. Unfortunately, wars are good for the economy in the short term and good war-time Presidents tend to get re-elected. Large scale sporting events look vulnerable. I pray that I am wrong about this.
10) An official downgrade of US Treasuries (probably not sooner than 2013) or an immediate continuation of the new secular rise in bond yields which increases the debt servicing costs of every debtor nation as it renews maturing debt. The US is more likely to default through monetization, resulting in eventual inflation and possible hyperinflation…which I sincerely hope I’m wrong about.
11) Increased scrutiny of the Bank of International Settlements (BIS), COMEX and the London Bullion Market Association (LBMA) including the consequences of “side accounts” and paper settlement of bullion transactions. Buy physical gold and silver while you can…as insurance.
12) Some other “Black Swan” event that appears without notice, and triggers a crisis of confidence.
Looking on the bright side of things, our modern financial system has been operating this way for many years, and just because we see the increasing risks does NOT necessarily mean it can’t continue for many years with only “minor” interruptions like the crash of 2008/9. Ride the tide while it rises. It really depends on how long the people running the show can keep the confidence of the “sheeple” and prevent them from panicking. For those of you beginning to despair or reach for another drink, you may want to scroll down to the last section entitled “At last…Dessert!”
The gradual fall of two empires
One of the most important ingredients in the economic sustainability of a nation or region is the size and overall health of its middle class. The extreme bonuses on Wall Street continue in stark contrast to stubbornly high unemployment and 43 million Americans on food stamps. The middle class is shrinking rapidly, and there is an obvious rising anger toward groups who continue to increase their personal wealth at the cost of others who are simply trying to live in a productive fashion. One thing is certain: the pace and magnitude of social polarization is accelerating, and social unrest is highly explosive. This is a dangerous trend. As Gerald Celente of the Trends Research Journal says, “when people have lost everything and feel they have nothing more to lose, they LOSE IT!”
You know an empire is really in trouble when its leaders are seen openly careening down the slippery slope of moral relativism. US President Barack Obama is now openly fighting for his own re-election in 2012, having capitulated rapidly in negotiations around extension of the Bush era tax cuts. The President managed to get an extension of Unemployment Benefits approved (throwing a bone to his voter base) but gave up on fighting FOR increased taxation of the ultra-wealthy to keep Republicans happy. The harshest criticism of Mr. Obama came from members of his own party. And who is left to pay for this increased largesse added to the public tab? The US taxpayer of course, but since politicians on both sides of the aisle generally lack the courage to do unpopular but necessary things, American taxpayers won’t see overt tax increases. They’ll pay for it through a continued devaluation of their paper currency which eventually shows itself in price inflation.
My second year Philosophy Professor Alan J. Hicks once said that “Unfettered capitalism and unfettered communism result in exactly the same thing: control of the wealth by the few.” I’m not sure which route we’re taking, since China and the US are exhibiting increasingly similar methodologies. Local populations are starting to get angry about the disparity between the rulers and the ruled; with each passing week we’re witnessing new public protests against necessary cutbacks to entitlement programs. Unfortunately, most humans don’t listen to early warnings. The cuts are harsh and sudden by necessity, because gradual changes are possible ONLY if you start long before hitting a crisis…too late!
Enter Ben Bernanke. I used to think that he was a benevolent and intelligent Academic doing a difficult job: presiding over the decline of an empire as its debt-laden fiat currency system finally implodes. Books will be written about the motivations and results of Mr. Bernanke’s decisions in future so I need not delve into excruciating detail here. Suffice it to say that Helicopter Ben has crash-landed at the bottom of the slippery slope of moral relativism with a resounding thud, with lots of fuel on board.
In March 2009 he went on 60 Minutes and told the nation that he would print money through a mechanism called Quantitative Easing and this helped re-assure market players that they’d be bailed out. On December 5, 2010 he once again went on 60 Minutes and told people that he’s genuinely concerned about the American economy but that he is “100% confident” that he can fix the financial and economic problems that ail America. He defended the necessity of renewed Quantitative Easing (QE2), but this time categorically denied that it should be characterized as “money printing.” Technically he’s correct because they don’t even bother printing it any more; they merely add to a few zeros to the appropriate electronic ledgers and conjure the currency out of thin air. “I guess it depends on what your definition of ‘Is’ is.” Those who know how the system works have been calling him a liar ever since. Your author will leave it to each reader to decide if Mr. Bernanke has lost his moral authority to preside over the world’s current reserve currency. At the very least, he’s looking pretty desperate.
There may be some hope for Ben personally, though, because his face and voice quivered the entire Dec 5th interview, betraying great discomfort with his own words. Showing emotion and being a bad liar are not great for the Chairman’s job security, so perhaps he will get replaced with a better one like former Treasury Secretary Hank Paulson or the current one Tim Geithner? If those guys are too busy playing Polo or shopping in Monaco, maybe Goldman Sachs or the IMF can spare someone.
As fantastic as it may sound, there’s an outside chance that Ben Bernanke won’t need a successor. Including the Federal Reserve, the US has had three different privately-owned central banks in its history, and the first two failed because they abused the power of the printing press. We’ve seen this movie before, only in black and white. There is a rapidly spreading distrust of the Federal Reserve south of our border: a recent Bloomberg poll reveals that 55% of Americans are in favour of abolishing the Federal Reserve. Maybe the third time will be lucky.
Cue boxing announcer with amazing “pipes”: “And the challenger in the Anti-Establishment corner, hailing from the 14th Congressional District of Texas, wearing star-spangled trunks and a cloak bearing the text of the US Constitution, please welcome 180 pounds of single-minded determination…let’s hear it for Dr Ron Paul!” He authored the book “End the Fed” and in January 2011 Dr. Paul will take over as Chairman of the House Financial Services Subcommittee on Domestic Monetary Policy. Ron Paul is anti-foreign war, anti-political-pork-barrelling and anti-fiat currency…just my kind of guy. Is this looking like David versus Goliath? Yes, so it won’t be long before the political smear campaign of Dr Paul begins in earnest…perhaps he’ll be labelled Anti-Semitic once again, especially if he tries to run for President in 2012. This will take a long time to play out, and I hope we don’t witness a repeat of the Warren Commission. In the mean time, LET’S GET READY TO RUMBLE!
Radio Free World!
Recent events with Wikileaks and the US Federal Communications Commission (FCC) introduction of a framework to regulate internet traffic (under the auspices of preventing large corporations from controlling content and access to it) have your author worried. The internet remains the last bastion of free speech, where content can be created, distributed and consumed very inexpensively by free thinkers and truth-tellers. This feels like the thin edge of the wedge.
At Last…Dessert!
By now you might be getting stressed by prolonged exposure to sobering facts and what you may perceive as my personal cynicism. Perhaps you’re feeling like the entire financial system is tilted against you and that you should be building a bunker, buying a generator and learning how to grow vegetables and raise livestock. While self-sufficiency is always a good thing, there are less disruptive ways to increase your financial wealth and protect your standard of living. Knowledge of how the system really works is the starting place, followed by practical implementation of systems that will help you benefit from the system…read on.
Seven Steps to Prospering in 2011 and Beyond
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1) Get your house in order: maximize employment income and savings, rationalize your lifestyle, pay off debt as rapidly as possible, educate yourself, understand your own limitations;
2) Hold investments while they are rising. Capital gains are the primary goal and yield/income is secondary. NEVER fall in love with any investment because of its income stream and stay objective;
3) Minimize losses by:
a. Diversifying across asset classes with upside potential and LIQUIDITY
b. Timing your purchases
c. Using stop loss orders for every single position
d. Hedging currency risk
e. Holding cash until your selected investments stop falling
f. Never been fully invested
4) Maximize gains by:
a. Tactically over-weighting your portfolio toward asset classes with greater upside potential and LIQUIDITY, especially companies with wealth in the ground (oil, gold and silver, rare earth elements)
b. Timing your purchases
c. Not limiting the upside potential of your individual positions; ride your winners as long as they rise and only harvest your gains when your positions break their uptrend
d. Using trailing stop loss orders to protect both gains and original capital
e. Never being fully invested
5) Learn about and benefit from Mass Psychology. Think critically and act nimbly. Fear, greed, envy and impatience are destructive to your wealth; patience, discipline and personal joy are accretive to both your wealth and general happiness.
6) Insure against the worst case scenario by owning some physical precious metals: bullion and/or coins. GOLD IS MONEY, SILVER IS BOTH MONEY AND AN INDUSTRIAL COMMODITY. Never store them at home, and maintain your confidentiality.
7) Actively pursue and cultivate your own personal health and happiness, including:
a. Understanding and living according to your values, beliefs and priorities;
b. Embracing an attitude of true gratitude for our prosperous and safe country;
c. Getting a thorough health assessment and addressing challenges before they develop into a crisis;
d. Sharing your knowledge of investment risks with people you care about, so they can financially protect themselves. This is good for them and you…pay it forward;
e. Getting actively involved in creating positive change where you can have maximum effect, whether it’s politics or volunteering in your community; and
f. Living compassionately, because this is living well.
If you are already a member of our Client Family, rest easy…we have you covered for points 1 to 5 above. Points 6 and 7 we all need to do for ourselves.
