Obfuscated Fundamentals and the Fed (and gold)

Executive Summary: Saving enables investment, growth and higher stock prices, not the other way around.

topology-2

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

wag-the-dog


Real world, Ideal world, Mental model

I recently listened to an interview with the fascinating and brilliant physicist Sir Roger Penrose.

platonic-world

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

=> mathematics

So what?

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).

Mario-Draghi-laughing

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)

how-an-economy-grows

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)

wealth_effect

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.

* Ingves/Yellen

Janet YellenIngves negative interest rates are FUN

 

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…

gold-criminals

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. 

the-jack-ocean


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.

trading-courses

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.

escher-penrose

– 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?

ta


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.

topology-1


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?


Summary

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

tin-foil-hat-2


Are you new to the site?

Apart from weekly articles on investing and health among other topics, there is a free e-book about 50 investment lessons waiting, if you sign up for my free newsletter. Go ahead, join tens of thousands of other seekers who seem to find value in my work. 

My guess is you and I are similar in many ways; curious, philosophical, looking for truth and happiness. The only material difference is perhaps that I’ve reached a later stage in life than you, which is exactly why my work may provide some utility for you.

I’m writing in order to spread my everyday insights about how to live a happy, healthy and wealthy life in modern society. All I ask of you is to help me in that endeavor – tell others about this site, share it in your social networks, if you think it’s worth sharing. Can you do that for me to keep this going?

FYI: I’m thinking about limiting the maximum number of subscribers, since MailChimp keeps increasing the price to maintain it. I recently deleted 1000+ subs that were too inactive, in an attempt to keep the list clean. Perhaps I’ll have to introduce some kind of latecomer fee sooner or later, or sell something. Well, that’s a question for a later day.

I’ve made a lot of mistakes in my investing career, probably more than most. That’s not least true of my private investments since I retired, in particular my bearish view of stock markets and my short position on the Swedish stock market since 2012-2013.

Nevertheless, or perhaps owing to my many mistakes, I’ve done a few big things right as well. That’s why I am in a position to write my articles and books. I sincerely hope they can be of use to you and others.


Read them, spread them. Help me help you.

Go forth and multiply my site visitors

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24 Comments

  1. Back when I was learning, I went to a lot of trading classes. They all claimed their indicator was the best. Since all indicators are derived from price action and volume, ultimately they are all very similar. But the classes have to claim theirs is unique and special, otherwise why would you buy from them?

    A VERY SMALL number teach tape reading, which is what a trader really needs.

    Perhaps the most interesting class I attended featured 2 floor traders actually showing in real time how they made trades, with their actual funds at stake. I was eager to see this because I was frustrated by all the competing techniques that used historical data for instruction. It actually turned out to be very boring. The market was pretty listless and the floor traders didn’t find any trades for over an hour.

    Near the end, they each took trades just out of desperation. One went long and one went short — same market same time. What I learned was really the best lesson of all. Experienced traders often just go by gut instincts. Even though they often disagree, they both make money because they have good exit strategies. If you let the winners run and cut off the losers fast, you can profit with less than 50% accuracy.

  2. I used to think savings was essential, the old accumulate capital model to wealth but listening/reading Deidre McCloskey made me realise it isnt sufficient or even necessary. Consider Uber. Intellectual idea using existing resources.. capital was created virtually ex nihilo.

    Or look at history, UK and Dutch had tiny capital base versus obvious contenders yet became fabulously wealthy in short order. Capital wasnt the key input.

    I would strongly recommend her books or listen to a few podcasts she gives.

    She is a free market/libertarian but more subtle thinker than the usual crowd.

    • Those avenues to riches are definitely worth considering. However, they are based on *taking* the riches made up of previous save-invest-innovate-produce cycles.

  3. Great post! I really look forward to this later post

    ” 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. “

  4. Riktigt intressant läsning Mikael!

    Hur går man tillväga om man skulle vara intresserad av att investera i det Kanadensiska guldbolaget tro?

    Tack

    • Du får vänta på nästa eventuella emission. Nu är det stängt. OBS också att du måsta vara en accredited investor som kan uppvisa om det var minst 1 eller 2 mUSD i finansiella investerbara tillgångar utöver primärbostad och vad det nu var.

      • Stort tack för ditt svar Mikael, ska ta en närmare titt på detta. Har du möjligtvis länk till företagets hemsida eller liknande där jag kan hitta mer info?

  5. Agree with the other comments, and this is one of your best posts so far.

    When writing about investing, please consider that most people do not have a lot of time to dedicate to complex investment strategies, and bankers make it unnecessarily difficult to understand for good reason. So they can profit from your ignorance.

    Over analysis can lead to paralysis, and in investments time and patience are your friends.

    I look forward to your advice.

  6. Very interesting :) Always much fun and inspiring to follow you Mikael. As Ludwig, I too, am looking forward to the later post.
    You are already aware that I exchange my local currency to Silver these days.
    I believe that the FED really have the aim to drag the system down. I simply cannot believe that they do not see what we see. This cannot be the truth, as you mentioned in the latest 25 Minutter, led Yellen, Bernanke and Schiffs enter a debate session.
    But really! What is wrong? How can they not see the end result? Every show of MacroVoices speaks the same. Everywhere that I look, it’s all the same. Maybe I am just looking in the wrong direction, but I simply cannot grasp the whole picture maybe. I need to bare in mind that I am only a newbie amateur startup school kid investor, with more depth than many. :)
    And again, maybe I just found a solid way to build up the strength again.
    Thank you for sharing all these thoughts!

  7. It does not appear that “Margin of Safety” is available for a reasonable price?

  8. Hi, about the mailchimp, maybe you should take a look in Weebly, they have a system of e-mail like mailchimp, maybe you can spent less.
    And remember: gold is money, everything else is credit.

  9. Great article (I don’t usually comment, but saw what you said on twitter about unsubs after this article, so I want to confirm it is indeed great).

  10. Hej Mikael! Jag tänkte börja med ArcticMed Omega-3, men undrar hur du gör när du doserar. Har tyvärr ingen diskmaskin, så det känns jobbigt att diska en extra matsked för hand varje dag. Kan man dosera med våg, alltså väga före och efter? Hur många gram ska man då ta? Samt hur viktigt är det att det blir exakt rätt antal gram?
    Tack för en bra blogg och podd.

    • Ej superviktigt. Ta en lien klunk om dagen och försök få en flaska att räcka en hel månad. Då blir det lagom.

  11. Pingback: Investing is easy

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