Executive Summary: Saving enables investment, growth and higher stock prices, not the other way around.
Deranged wag-the-dog strategies by the Fed lead to price distortion, speculation, malinvestment, and eventually a flight to safety in real assets, e.g., gold
Bonus: thoughts on the usefulness of trading courses
Length: medium, 15 minutes?
Quirks: references to “How an economy grows”, “Gödel Escher Bach”, Nobel Prizes 2016, topology, the value of knowledge
Real world, Ideal world, Mental model
I recently listened to an interview with the fascinating and brilliant physicist Sir Roger Penrose.
He touched upon his idea of how just a slight sliver of the field of mathematics is used in physics, and how a just as small a piece of physics is used to explain the chemical and physical processes in a brain that leads to consciousness, and finally how a tiny part of that consciousness is used to develop the world of mathematics.
mathematics/Platonic “ideal” world/philosophy
=> Actual world/physics/chemistry
=> Mental realm/perception/consciousness
What use can you or I possibly have of his musings?
Just being aware of the recursiveness of nature can enhance our understanding of the economy and financial markets.
And, thinking about the existence of a real, fundamental world every now and then can be refreshing after stumbling around in the hall of mirrors that make up the investing landscape these days. More about that and the current Nobel Prizes below.
Wag the dog
Central bankers, e.g., are hard at work exploiting confusion about cause and effect in the economy/banking/market complex:
– The last few years CBs have distorted various price signals, including interest rate levels and the yield curve. They have tried to make the tail wag the dog, by boosting asset prices in a deranged attempt to stimulate unwarranted exuberance and pull forward demand (leaving a black hole in the future).
They hope that debt-financed consumption will kick-start other, supposedly dormant, parts of the economy, thus stimulating enough growth to take care of the debt burden. Given that too much debt and pulled-forward consumption already lies behind the current economic woes, hoping more debt will solve the problem is of course beyond retarded.
The real relationship looks like this:
Save => Invest => Tools/Innovation
=> Increased productivity => Surplus
=> Invest/Produce/Consume or Save =>…
This virtuous cycle gives rise to ever increasing productivity, production and profits, creating the basis for savings, investments, higher economic growth, wealth and stock prices.
Surplus (profits, dividends, investment, growth)
=> Increasing stock prices (at constant valuation)
During this process there are also cycles of irrational exuberance, malinvestments and corrections/recessions. As long as they are identified in time and debts are not too large, they amount to minor cleansing periods and healthy restarts.
Unfortunately, somehow the US Federal Reserve was allowed to hijack the system. With increasing centralization of power, Greenspan, Bernanke and Yellen have focused their attention on masking the most important price signals of the underlying health of the economy, in order to:
…push asset prices higher in a futile attempt of creating a wealth effect,
that would lead to higher consumption and thus more investments in production and employment,
creating the growth and consumption power that could warrant the preceding run-up in stock prices (valuations instead of profits)
Some believe this chart reflects reality
Distorted price signals and speculation instead of wealth creation
What instead, quite predictably, has happened is that more and more resources have been directed toward financial speculation, stock buybacks etc., while real investments in productive assets and employees have dwindled (with the exception of robots and other means of automation, thanks to the low cost of financing those investments vs. taking on additional employees -or keeping the ones already on the payroll for that matter).
Central bankers have targeted interest rates and the yield curve to distort signals about the economy; and the gold price and inflation measures to distort signals about the health of the monetary system – including the value of fiat money.
The next step is the ban on cash, since negative rates just don’t work when you can hide your wealth from the authorities in the form of dollar bills (or gold, gems or bitcoins).
“The aim of the Kurodas and Yellens of the world, the DI*CKs / DY*Cks, is tantamount to stopping (hiding) global warming by manipulating thermometers” – heard here on the superb podcast MacroVoices I think.
Gold or not gold?
Anyway, this is not a post about Bug Out Locations, the merits of gold, Bitcoin or other alternative investments. I just want you to start thinking about everything in terms of recursivity, as in the phenomenal book Gödel Escher Bach by Douglas Hofstadter (e.g., food, environment, education, happiness, exercise, investing).
However, while on the topic of gold, just take a minute to think about what could happen to the demand for gold by criminals, if (when) 100-dollar bills and euro notes are outlawed. Gold doesn’t leave a digital trace, it’s easy to carry or hide, it’s resilient to weather and chemicals…
Personally, I’ve sold all my listed precious metal assets this summer, including GLD, GDX, PHYS and SLV. Instead I have invested in an unlisted Canadian company that buys gold production options from many different gold producers.
My exit strategy is to either list the company, sell it to a bigger company or to take delivery of the physical gold.
Alrighty then, since you ask… If everything is overvalued, rates are negative and some catalyst or other (falling profits, inflation, chance) topples the system (making banks intolerably risky), where would you, could you, put your money – whether a criminal or law abiding ordinary person? Did I hear gold?
I almost miss my clunky old Hublot Big Bang now. My Jack Ocean bracelet is more nimble but a little light on gold in comparison.
Investing is hot these days
It’s becoming more and more apparent that this bull cycle is long in the tooth. Everything seems to be related to investing in start-ups, IPOs, growth companies, dividend kings etc. Never before, except for a few brief moments before a major crash, has the willingness to accept risk been higher* – and the prospects for reasonable returns been lower.
* several gauges, including covenant-lite loans, debt levels, valuations, IPO/M&A activity etc
As the icing on the cake, there are courses on macro, investing, risk, technical analysis, derivatives and trading flourishing everywhere and by everybody it seems. By the way, the demand for my presence at various seminars is definitely a manifestation of the latter.
In defense of such courses I have the following to say: They are useless.
However, I still think you should go.
What? Wait. Why?
I think you should go to see what others are thinking, what others are teaching, their lines of reasoning. Then find your own style of fundamental and technical filters, while hopefully avoiding the very worst mistakes you pick up among other course attendees. In addition you might find some new friends or speaking partners. Anything works, except what doesn’t, as I stated in this post.
In line with the recursiveness of nature and of the economic/financial complex, there are important parallels to the world of macro trends, research, technical analysis and investing. They are all interconnected and feeding off each other.
– Actually, to a certain extent Harakiri Kuroda and Janus Yellen have got it right: you can wag the dog a little, for a while. As long as you ignore the exponential costs that follow.
Thus, study it all, just as Jesse Livermore in Reminiscences of a Stock Operator did, starting with technical analysis and proceeding to global macro strategies and cornering various commodity markets (btw, a friend of mine made a fortune cornering the white fish market back in the 1990s).
Just don’t think you understand it all or can control it (any of it). Remember that investing is mostly about psychological pain tolerance, and much less about mathematics, models and predictions. Please read the books Margin of Safety and The Most Important Thing for a deeper understanding of this crucial knowledge. Check out my other book recommendations here.
I’ll write a full post further down the road on how I think a newbie should tackle the markets, including what to pay attention to in macro, micro, momentum, trading, options, technical analysis etc. Not today.
“Do you remember when people thought TA patterns established decades ago were still relevant today, despite machine learning and rampant algo trading? That was fun”
By the way, have you seen anybody detailing the current likelihood (37%) of a certain pattern (flag) leading to a certain outcome (+/- >10%) or is it all just nostalgia and pretty drawings?
A final note on the Nobel Prizes this year. The physics prize referred to mathematical topology, the chemistry prize to another (shape) topology; and I often refer to life topology (a third notion meaning the schematical principles of a non-uniform and thus worthwhile life).
I would encourage you to pay attention to similar quirks of the language as well as the underlying reality. It’s a useful brain exercise that primes you to see things from other vantage points and could help you spot flaws in your reasoning.
In addition, the Nobel prizes serve as a well-needed reminder of the real world, as opposed to the la-la land of monetary policy, economics and stock valuations.
A macro course might very well be superficially useless, since you won’t be able to predict the economic trajectory afterward anyway; just as a trading course probably won’t help you identify better trades. Nevertheless, knowing what others think they know, and knowing what biases govern their decisions and what mistakes they are likely to make might prove valuable.
So, go, study their jargon, find others like you, accumulate as much peripheral knowledge as possible; and then find your own personal style of investing in terms of time horizon, preferred asset classes, risk level, short term tactics and longer term strategies. Are you a trader or an investor?
Oooof, so what was the message here really?!
- There is a real physical world out there, governed by fundamentals
- However, over periods shorter than a decade fundamentals can often be ignored altogether, in particular when the real world is deliberately hidden behind Potemkin facades
- I think such a decade is drawing to an end (thus the shorts and gold), but hey, what do I know; the future is unknowable
- Nevertheless, keep studying all aspects of markets, fundamentals, science, language and life, to more readily spot cracks in the facade before others – or to identify good buying opportunities where others dare not tread.
- Don’t forget to wear a high quality tin foil hat at all times to protect you from the authorities
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