tag:blogger.com,1999:blog-18205258597395547842024-03-28T20:29:48.387-07:00GubbmintCheeseThoughts that require more than 140 characters from that nut @gubbmintcheese Gubbhttp://www.blogger.com/profile/00411147564595486174noreply@blogger.comBlogger31125tag:blogger.com,1999:blog-1820525859739554784.post-4860703226172594442018-03-11T19:35:00.003-07:002018-03-11T19:35:45.614-07:00US Growth is so strong it's rate increase worthy? Really?Is the Fed raising rates because of the "strong U.S. economy", or are they trying to get some wiggle room and slow down the market?<br />
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Consider this.. <br />
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<br />Gubbhttp://www.blogger.com/profile/00411147564595486174noreply@blogger.com9tag:blogger.com,1999:blog-1820525859739554784.post-11647145153101898862018-03-11T19:30:00.000-07:002018-03-14T11:29:52.344-07:00Using statistics to see growth, even when it's not there<!--[if gte mso 9]><xml>
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text Indent 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text Indent 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Block Text"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Hyperlink"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="FollowedHyperlink"/>
<w:LsdException Locked="false" Priority="22" QFormat="true" Name="Strong"/>
<w:LsdException Locked="false" Priority="20" QFormat="true" Name="Emphasis"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Document Map"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Plain Text"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="E-mail Signature"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Top of Form"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Bottom of Form"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Normal (Web)"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Acronym"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Address"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Cite"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Code"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Definition"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Keyboard"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Preformatted"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Sample"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Typewriter"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Variable"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Normal Table"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="annotation subject"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="No List"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Outline List 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Outline List 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Outline List 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Simple 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Simple 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Simple 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Classic 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Classic 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Classic 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Classic 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Colorful 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Colorful 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Colorful 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 6"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 7"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 8"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 6"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 7"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 8"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table 3D effects 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table 3D effects 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table 3D effects 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Contemporary"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Elegant"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Professional"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Subtle 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Subtle 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Web 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Web 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Web 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Balloon Text"/>
<w:LsdException Locked="false" Priority="39" Name="Table Grid"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Theme"/>
<w:LsdException Locked="false" SemiHidden="true" Name="Placeholder Text"/>
<w:LsdException Locked="false" Priority="1" QFormat="true" Name="No Spacing"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading"/>
<w:LsdException Locked="false" Priority="61" Name="Light List"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 1"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 1"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 1"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 1"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 1"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 1"/>
<w:LsdException Locked="false" SemiHidden="true" Name="Revision"/>
<w:LsdException Locked="false" Priority="34" QFormat="true"
Name="List Paragraph"/>
<w:LsdException Locked="false" Priority="29" QFormat="true" Name="Quote"/>
<w:LsdException Locked="false" Priority="30" QFormat="true"
Name="Intense Quote"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 1"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 1"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 1"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 1"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 1"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 1"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 1"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 1"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 2"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 2"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 2"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 2"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 2"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 2"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 2"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 2"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 2"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 2"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 2"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 2"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 2"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 2"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 3"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 3"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 3"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 3"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 3"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 3"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 3"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 3"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 3"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 3"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 3"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 3"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 3"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 3"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 4"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 4"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 4"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 4"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 4"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 4"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 4"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 4"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 4"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 4"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 4"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 4"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 4"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 4"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 5"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 5"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 5"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 5"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 5"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 5"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 5"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 5"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 5"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 5"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 5"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 5"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 5"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 5"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 6"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 6"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 6"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 6"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 6"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 6"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 6"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 6"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 6"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 6"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 6"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 6"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 6"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 6"/>
<w:LsdException Locked="false" Priority="19" QFormat="true"
Name="Subtle Emphasis"/>
<w:LsdException Locked="false" Priority="21" QFormat="true"
Name="Intense Emphasis"/>
<w:LsdException Locked="false" Priority="31" QFormat="true"
Name="Subtle Reference"/>
<w:LsdException Locked="false" Priority="32" QFormat="true"
Name="Intense Reference"/>
<w:LsdException Locked="false" Priority="33" QFormat="true" Name="Book Title"/>
<w:LsdException Locked="false" Priority="37" SemiHidden="true"
UnhideWhenUsed="true" Name="Bibliography"/>
<w:LsdException Locked="false" Priority="39" SemiHidden="true"
UnhideWhenUsed="true" QFormat="true" Name="TOC Heading"/>
<w:LsdException Locked="false" Priority="41" Name="Plain Table 1"/>
<w:LsdException Locked="false" Priority="42" Name="Plain Table 2"/>
<w:LsdException Locked="false" Priority="43" Name="Plain Table 3"/>
<w:LsdException Locked="false" Priority="44" Name="Plain Table 4"/>
<w:LsdException Locked="false" Priority="45" Name="Plain Table 5"/>
<w:LsdException Locked="false" Priority="40" Name="Grid Table Light"/>
<w:LsdException Locked="false" Priority="46" Name="Grid Table 1 Light"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark"/>
<w:LsdException Locked="false" Priority="51" Name="Grid Table 6 Colorful"/>
<w:LsdException Locked="false" Priority="52" Name="Grid Table 7 Colorful"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 1"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 1"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 1"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 1"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 1"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 1"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 1"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 2"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 2"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 2"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 2"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 2"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 2"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 2"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 3"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 3"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 3"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 3"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 3"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 3"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 3"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 4"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 4"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 4"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 4"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 4"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 4"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 4"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 5"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 5"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 5"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 5"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 5"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 5"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 5"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 6"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 6"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 6"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 6"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 6"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 6"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 6"/>
<w:LsdException Locked="false" Priority="46" Name="List Table 1 Light"/>
<w:LsdException Locked="false" Priority="47" Name="List Table 2"/>
<w:LsdException Locked="false" Priority="48" Name="List Table 3"/>
<w:LsdException Locked="false" Priority="49" Name="List Table 4"/>
<w:LsdException Locked="false" Priority="50" Name="List Table 5 Dark"/>
<w:LsdException Locked="false" Priority="51" Name="List Table 6 Colorful"/>
<w:LsdException Locked="false" Priority="52" Name="List Table 7 Colorful"/>
<w:LsdException Locked="false" Priority="46"
Name="List Table 1 Light Accent 1"/>
<w:LsdException Locked="false" Priority="47" Name="List Table 2 Accent 1"/>
<w:LsdException Locked="false" Priority="48" Name="List Table 3 Accent 1"/>
<w:LsdException Locked="false" Priority="49" Name="List Table 4 Accent 1"/>
<w:LsdException Locked="false" Priority="50" Name="List Table 5 Dark Accent 1"/>
<w:LsdException Locked="false" Priority="51"
Name="List Table 6 Colorful Accent 1"/>
<w:LsdException Locked="false" Priority="52"
Name="List Table 7 Colorful Accent 1"/>
<w:LsdException Locked="false" Priority="46"
Name="List Table 1 Light Accent 2"/>
<w:LsdException Locked="false" Priority="47" Name="List Table 2 Accent 2"/>
<w:LsdException Locked="false" Priority="48" Name="List Table 3 Accent 2"/>
<w:LsdException Locked="false" Priority="49" Name="List Table 4 Accent 2"/>
<w:LsdException Locked="false" Priority="50" Name="List Table 5 Dark Accent 2"/>
<w:LsdException Locked="false" Priority="51"
Name="List Table 6 Colorful Accent 2"/>
<w:LsdException Locked="false" Priority="52"
Name="List Table 7 Colorful Accent 2"/>
<w:LsdException Locked="false" Priority="46"
Name="List Table 1 Light Accent 3"/>
<w:LsdException Locked="false" Priority="47" Name="List Table 2 Accent 3"/>
<w:LsdException Locked="false" Priority="48" Name="List Table 3 Accent 3"/>
<w:LsdException Locked="false" Priority="49" Name="List Table 4 Accent 3"/>
<w:LsdException Locked="false" Priority="50" Name="List Table 5 Dark Accent 3"/>
<w:LsdException Locked="false" Priority="51"
Name="List Table 6 Colorful Accent 3"/>
<w:LsdException Locked="false" Priority="52"
Name="List Table 7 Colorful Accent 3"/>
<w:LsdException Locked="false" Priority="46"
Name="List Table 1 Light Accent 4"/>
<w:LsdException Locked="false" Priority="47" Name="List Table 2 Accent 4"/>
<w:LsdException Locked="false" Priority="48" Name="List Table 3 Accent 4"/>
<w:LsdException Locked="false" Priority="49" Name="List Table 4 Accent 4"/>
<w:LsdException Locked="false" Priority="50" Name="List Table 5 Dark Accent 4"/>
<w:LsdException Locked="false" Priority="51"
Name="List Table 6 Colorful Accent 4"/>
<w:LsdException Locked="false" Priority="52"
Name="List Table 7 Colorful Accent 4"/>
<w:LsdException Locked="false" Priority="46"
Name="List Table 1 Light Accent 5"/>
<w:LsdException Locked="false" Priority="47" Name="List Table 2 Accent 5"/>
<w:LsdException Locked="false" Priority="48" Name="List Table 3 Accent 5"/>
<w:LsdException Locked="false" Priority="49" Name="List Table 4 Accent 5"/>
<w:LsdException Locked="false" Priority="50" Name="List Table 5 Dark Accent 5"/>
<w:LsdException Locked="false" Priority="51"
Name="List Table 6 Colorful Accent 5"/>
<w:LsdException Locked="false" Priority="52"
Name="List Table 7 Colorful Accent 5"/>
<w:LsdException Locked="false" Priority="46"
Name="List Table 1 Light Accent 6"/>
<w:LsdException Locked="false" Priority="47" Name="List Table 2 Accent 6"/>
<w:LsdException Locked="false" Priority="48" Name="List Table 3 Accent 6"/>
<w:LsdException Locked="false" Priority="49" Name="List Table 4 Accent 6"/>
<w:LsdException Locked="false" Priority="50" Name="List Table 5 Dark Accent 6"/>
<w:LsdException Locked="false" Priority="51"
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Name="Block Text"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Hyperlink"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="FollowedHyperlink"/>
<w:LsdException Locked="false" Priority="22" QFormat="true" Name="Strong"/>
<w:LsdException Locked="false" Priority="20" QFormat="true" Name="Emphasis"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Document Map"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Plain Text"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="E-mail Signature"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Top of Form"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Bottom of Form"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Normal (Web)"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Acronym"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Address"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Cite"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Code"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Definition"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Keyboard"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Preformatted"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Sample"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Typewriter"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Variable"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Normal Table"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="annotation subject"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="No List"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Outline List 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Outline List 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Outline List 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Simple 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Simple 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Simple 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Classic 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Classic 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Classic 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Classic 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Colorful 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Colorful 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Colorful 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 6"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 7"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 8"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 6"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 7"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 8"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table 3D effects 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table 3D effects 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table 3D effects 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Contemporary"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Elegant"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Professional"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Subtle 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Subtle 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Web 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Web 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Web 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Balloon Text"/>
<w:LsdException Locked="false" Priority="39" Name="Table Grid"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Theme"/>
<w:LsdException Locked="false" SemiHidden="true" Name="Placeholder Text"/>
<w:LsdException Locked="false" Priority="1" QFormat="true" Name="No Spacing"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading"/>
<w:LsdException Locked="false" Priority="61" Name="Light List"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 1"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 1"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 1"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 1"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 1"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 1"/>
<w:LsdException Locked="false" SemiHidden="true" Name="Revision"/>
<w:LsdException Locked="false" Priority="34" QFormat="true"
Name="List Paragraph"/>
<w:LsdException Locked="false" Priority="29" QFormat="true" Name="Quote"/>
<w:LsdException Locked="false" Priority="30" QFormat="true"
Name="Intense Quote"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 1"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 1"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 1"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 1"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 1"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 1"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 1"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 1"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 2"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 2"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 2"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 2"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 2"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 2"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 2"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 2"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 2"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 2"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 2"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 2"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 2"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 2"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 3"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 3"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 3"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 3"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 3"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 3"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 3"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 3"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 3"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 3"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 3"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 3"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 3"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 3"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 4"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 4"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 4"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 4"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 4"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 4"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 4"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 4"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 4"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 4"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 4"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 4"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 4"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 4"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 5"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 5"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 5"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 5"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 5"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 5"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 5"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 5"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 5"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 5"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 5"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 5"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 5"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 5"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 6"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 6"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 6"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 6"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 6"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 6"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 6"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 6"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 6"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 6"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 6"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 6"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 6"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 6"/>
<w:LsdException Locked="false" Priority="19" QFormat="true"
Name="Subtle Emphasis"/>
<w:LsdException Locked="false" Priority="21" QFormat="true"
Name="Intense Emphasis"/>
<w:LsdException Locked="false" Priority="31" QFormat="true"
Name="Subtle Reference"/>
<w:LsdException Locked="false" Priority="32" QFormat="true"
Name="Intense Reference"/>
<w:LsdException Locked="false" Priority="33" QFormat="true" Name="Book Title"/>
<w:LsdException Locked="false" Priority="37" SemiHidden="true"
UnhideWhenUsed="true" Name="Bibliography"/>
<w:LsdException Locked="false" Priority="39" SemiHidden="true"
UnhideWhenUsed="true" QFormat="true" Name="TOC Heading"/>
<w:LsdException Locked="false" Priority="41" Name="Plain Table 1"/>
<w:LsdException Locked="false" Priority="42" Name="Plain Table 2"/>
<w:LsdException Locked="false" Priority="43" Name="Plain Table 3"/>
<w:LsdException Locked="false" Priority="44" Name="Plain Table 4"/>
<w:LsdException Locked="false" Priority="45" Name="Plain Table 5"/>
<w:LsdException Locked="false" Priority="40" Name="Grid Table Light"/>
<w:LsdException Locked="false" Priority="46" Name="Grid Table 1 Light"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark"/>
<w:LsdException Locked="false" Priority="51" Name="Grid Table 6 Colorful"/>
<w:LsdException Locked="false" Priority="52" Name="Grid Table 7 Colorful"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 1"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 1"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 1"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 1"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 1"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 1"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 1"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 2"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 2"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 2"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 2"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 2"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 2"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 2"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 3"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 3"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 3"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 3"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 3"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 3"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 3"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 4"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 4"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 4"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 4"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 4"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 4"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 4"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 5"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 5"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 5"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 5"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 5"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 5"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 5"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 6"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 6"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 6"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 6"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 6"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 6"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 6"/>
<w:LsdException Locked="false" Priority="46" Name="List Table 1 Light"/>
<w:LsdException Locked="false" Priority="47" Name="List Table 2"/>
<w:LsdException Locked="false" Priority="48" Name="List Table 3"/>
<w:LsdException Locked="false" Priority="49" Name="List Table 4"/>
<w:LsdException Locked="false" Priority="50" Name="List Table 5 Dark"/>
<w:LsdException Locked="false" Priority="51" Name="List Table 6 Colorful"/>
<w:LsdException Locked="false" Priority="52" Name="List Table 7 Colorful"/>
<w:LsdException Locked="false" Priority="46"
Name="List Table 1 Light Accent 1"/>
<w:LsdException Locked="false" Priority="47" Name="List Table 2 Accent 1"/>
<w:LsdException Locked="false" Priority="48" Name="List Table 3 Accent 1"/>
<w:LsdException Locked="false" Priority="49" Name="List Table 4 Accent 1"/>
<w:LsdException Locked="false" Priority="50" Name="List Table 5 Dark Accent 1"/>
<w:LsdException Locked="false" Priority="51"
Name="List Table 6 Colorful Accent 1"/>
<w:LsdException Locked="false" Priority="52"
Name="List Table 7 Colorful Accent 1"/>
<w:LsdException Locked="false" Priority="46"
Name="List Table 1 Light Accent 2"/>
<w:LsdException Locked="false" Priority="47" Name="List Table 2 Accent 2"/>
<w:LsdException Locked="false" Priority="48" Name="List Table 3 Accent 2"/>
<w:LsdException Locked="false" Priority="49" Name="List Table 4 Accent 2"/>
<w:LsdException Locked="false" Priority="50" Name="List Table 5 Dark Accent 2"/>
<w:LsdException Locked="false" Priority="51"
Name="List Table 6 Colorful Accent 2"/>
<w:LsdException Locked="false" Priority="52"
Name="List Table 7 Colorful Accent 2"/>
<w:LsdException Locked="false" Priority="46"
Name="List Table 1 Light Accent 3"/>
<w:LsdException Locked="false" Priority="47" Name="List Table 2 Accent 3"/>
<w:LsdException Locked="false" Priority="48" Name="List Table 3 Accent 3"/>
<w:LsdException Locked="false" Priority="49" Name="List Table 4 Accent 3"/>
<w:LsdException Locked="false" Priority="50" Name="List Table 5 Dark Accent 3"/>
<w:LsdException Locked="false" Priority="51"
Name="List Table 6 Colorful Accent 3"/>
<w:LsdException Locked="false" Priority="52"
Name="List Table 7 Colorful Accent 3"/>
<w:LsdException Locked="false" Priority="46"
Name="List Table 1 Light Accent 4"/>
<w:LsdException Locked="false" Priority="47" Name="List Table 2 Accent 4"/>
<w:LsdException Locked="false" Priority="48" Name="List Table 3 Accent 4"/>
<w:LsdException Locked="false" Priority="49" Name="List Table 4 Accent 4"/>
<w:LsdException Locked="false" Priority="50" Name="List Table 5 Dark Accent 4"/>
<w:LsdException Locked="false" Priority="51"
Name="List Table 6 Colorful Accent 4"/>
<w:LsdException Locked="false" Priority="52"
Name="List Table 7 Colorful Accent 4"/>
<w:LsdException Locked="false" Priority="46"
Name="List Table 1 Light Accent 5"/>
<w:LsdException Locked="false" Priority="47" Name="List Table 2 Accent 5"/>
<w:LsdException Locked="false" Priority="48" Name="List Table 3 Accent 5"/>
<w:LsdException Locked="false" Priority="49" Name="List Table 4 Accent 5"/>
<w:LsdException Locked="false" Priority="50" Name="List Table 5 Dark Accent 5"/>
<w:LsdException Locked="false" Priority="51"
Name="List Table 6 Colorful Accent 5"/>
<w:LsdException Locked="false" Priority="52"
Name="List Table 7 Colorful Accent 5"/>
<w:LsdException Locked="false" Priority="46"
Name="List Table 1 Light Accent 6"/>
<w:LsdException Locked="false" Priority="47" Name="List Table 2 Accent 6"/>
<w:LsdException Locked="false" Priority="48" Name="List Table 3 Accent 6"/>
<w:LsdException Locked="false" Priority="49" Name="List Table 4 Accent 6"/>
<w:LsdException Locked="false" Priority="50" Name="List Table 5 Dark Accent 6"/>
<w:LsdException Locked="false" Priority="51"
Name="List Table 6 Colorful Accent 6"/>
<w:LsdException Locked="false" Priority="52"
Name="List Table 7 Colorful Accent 6"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Mention"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Smart Hyperlink"/>
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<b><i><span style="font-family: "times new roman" , serif; font-size: 14pt;">“Men, it has been well said, think in herds; it
will be seen that they go mad in herds, while they only recover their senses
slowly, one by one.”</span></i></b><span style="font-family: "times new roman" , serif; font-size: 12pt;"></span></div>
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<i><span style="font-family: "times new roman" , serif; font-size: 12pt;">Charles Mackay –“Extraordinary
Popular Delusions and the Madness of Crowds” (1841)</span></i><span style="font-family: "times new roman" , serif; font-size: 12pt;"></span>
<br />
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<span style="font-family: "times new roman" , serif; font-size: 12pt;">Ever
since the end of the “Great Financial Crisis” in June 2009, central bankers and
financial analysts have been sifting through each newly released economic
report, carefully searching for signs of a sustainable recovery so that they
can confidently declare “Happy Days Are Here Again” (a song ironically written
in 1929, just before the Great Depression). While Canadian and U.S. Gross
Domestic Product (or GDP, which measures the growth of an economy) have
certainly improved since the recession of 2009, neither economy has really
’bounced back’ with the same magnitude and strength of previous recoveries. In
fact, while the economic expansion in the United States is approaching a record
with regards to <b><i>duration</i></b>, the rates of <b><i>growth</i></b> have
been some of the weakest and most anemic on record. Unfortunately, persistently
weak economic data does not deter financial analysts (whose job it is to be
glowingly optimistic) from misrepresenting certain data points to support their
forecasts, calling for buoyant recovery brewing just beyond the horizon. </span></div>
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<span style="font-family: "times new roman" , serif; font-size: 12pt;">To quote
former British Prime Minister Benjamin Disraeli, </span></div>
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<b><span style="font-family: "times new roman" , serif; font-size: 14pt;">“<i>There are three kinds of lies: lies, damned
lies, and statistics.</i>”</span></b><span style="font-family: "times new roman" , serif; font-size: 12pt;"></span></div>
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<span style="font-family: "times new roman" , serif; font-size: 12pt;">As
someone who immerses himself in macroeconomic data seven days a week (an
embarrassing confession, I will admit), I get very frustrated when I read
economic forecasts that are obviously relying on cherry picked data to support
a blatantly biased bullish narrative (because quite honestly, being bullish is
great for business). From my perspective, an economic forecast should simply
reflect what “is” going on versus what we “wished” was happening. It’s even
more frustrating, however, when the stock and bond markets fall for a flimsily
supported bullish narrative without at least taking time to look under the hood
at exactly how the forecast was derived.</span></div>
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<b><i></i></b><br /></div>
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<b><i><span style="font-family: "times new roman" , serif; font-size: 14pt;"></span></i></b><br /></div>
<br />
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<span style="font-family: "times new roman" , serif; font-size: 12pt;"></span><br /></div>
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<span style="font-family: "times new roman" , serif; font-size: 12pt;">We’ve
seen the markets buy into a bullish recovery three separate times since 2012,
and it appears as though we are working on “false alarm number four” today. In
the three previous occurrences, an optimistic narrative (from a credible
source, the Federal Reserve) resulted in market expectations of a strong
increase in economic activity, which in turn led to the presumption of higher
wages, rising inflation and ultimately rising interest rates. In this
situation, bond and utility prices fall in <i>anticipation</i> of rising rates,
and subsequently, yields rise. Over time, however, the expected growth in these
three previous bullish cases was not forthcoming, and shortly thereafter bond
and utility prices not only recovered previous losses, but outperformed the
overall market quite handsomely. </span></div>
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<span style="font-family: "times new roman" , serif; font-size: 12pt;">The chart
below shows three separate occasions since late 2012 where the markets
responded to forecasts for a strong rally in U.S. economic growth as well as
the fourth case that is as of yet unresolved. In each of these three cases, you
can see interest rates increased sharply which in turn caused bond and utility
share prices (as measured by the TSE Utility Index) to decline. However, as
detailed above, the jump in economic activity proved not
forthcoming. Enthusiasm for the growth story eventually faded, and interest rates start falling once again. In all three cases bonds and utility stocks
enjoyed a very strong recovery. </span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEit-MWL4JfxmOfJf4zgEBxFQ6gOJDID96Imfry3v8R8M9q4_EfB7fep1YfFZLfN3sroTcnbsAyj2TW7GH1DaXwaE5WYpk52DwJnq2I2sCyMPfvwwg6LBJoDKcWELmxpYlcpPKJ69dSFVZA/s1600/chart+1+post.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1032" data-original-width="1422" height="290" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEit-MWL4JfxmOfJf4zgEBxFQ6gOJDID96Imfry3v8R8M9q4_EfB7fep1YfFZLfN3sroTcnbsAyj2TW7GH1DaXwaE5WYpk52DwJnq2I2sCyMPfvwwg6LBJoDKcWELmxpYlcpPKJ69dSFVZA/s400/chart+1+post.jpg" width="400" /></a></div>
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<span style="font-family: "times new roman" , serif; font-size: 12pt;"></span><br /></div>
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<span style="font-family: "times new roman" , serif; font-size: 12pt;">The next
question for us then becomes, “What do we do about the current
expectation for future growth?” For me, the answer here is the same as it was for
growth narratives one to three, do nothing.</span></div>
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<span style="font-family: "times new roman" , serif; font-size: 12pt;">I say “do
nothing” because I’ve taken the time to tear into how the current bullish
forecast has been derived. In doing so, I recognized quite early on that calls
for an economic growth spurt started to hit the headlines in late September
2017, immediately after Hurricanes Harvey and Irma made landfall and devastated
regions of the Southern U.S. and Puerto Rico. Hurricane Harvey was the first
major hurricane to make landfall in the U.S. since 2005, and inflicted
approximately $108 billion in damages, while Irma’s damage (which made landfall
two weeks later) was estimated to be $83 billion. Obviously, huge sums of money
were spent to rebuild portions of the Southern U.S. from these two devastating
disasters (approximately $200B). Spending $200 billion in an economy in such a
short amount of time would undoubtedly lead to a very measurable jump in
economic activity. However, unlike a sustainable recovery, these hurricane
related expenditures were one-offs, and would eventually die down after the
rebuilding was complete. Unfortunately, some economists and news outlets jumped
on this economic bump and started to extrapolate a story of economic recovery.
For example, look at the leading headline from a <a href="https://www.cnbc.com/2018/01/12/strongest-holiday-sales-since-great-recession-up-5-point-5-percent-topping-views.html" target="_blank"><span style="color: blue;">CNBC story</span></a> in January 2018
that declared, “Strongest holiday sales since Great Recession, up 5.5% topping
industry’s forecasts.” If you read the story further you will see the sector
that recorded the biggest jump in sales was building materials and supply
stores with 8.1% growth. Building materials and supply store sales are part of
Christmas sales? Ask yourself, when was the last time you got a cinder block or
a sheet of plywood for your significant other for Christmas? This is simply a
case of twisting statistics to report something that was wished true, rather
than what was actually true. </span></div>
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<span style="font-family: "times new roman" , serif; font-size: 12pt;">Another
key component of our current growth narrative is that wages are beginning to
show signs of improvement. A February 2018 <a href="http://money.cnn.com/2018/02/02/news/economy/january-jobs-report-2018/index.html" target="_blank"><span style="color: blue;">CNN Money article</span></a> boasted
“America gets a raise: Wage growth fastest since 2009.” The article goes on to
say “The unemployment rate stayed at 4.1%, the lowest since 2000, the Labor
Department said Friday. Wage growth has been the last major measure to make
meaningful progress since the end of the Great Recession.” And, finally, the
article states, “Economists say it’s time to take note of how strong, or tight,
the U.S. job market is.” </span></div>
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<span style="font-family: "times new roman" , serif; font-size: 12pt;">While it
is true that the current rate of unemployment in the United States is a very
low 4.1%, which (if accepted at face value) <i>should</i> suggest a very strong
job market, the reality is not quite as straightforward. To get a better understanding
of this we need to dig into how this statistic is derived. </span></div>
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<span style="font-family: "times new roman" , serif; font-size: 12pt;">The
unemployment rate measures “the current number of people who are unemployed”
against “the number of people who are in the labour force.” A more indicative figure
is the civilian employment population ratio. It is calculated by dividing the
number of people employed by the total number of people of working age. What is
interesting is that if you look at the relationship between the civilian
employment population ratio and the official unemployment rate you will see a
very large disconnect between the two that started at the bottom of the Great
Recession in 2009. </span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgMS4NIIOZLq_3Rb5m1gA-XssqPZVng96KpdcyZayPp-5dSjoos0E7XuMbPFCr7fYZ-tSiPVJUVVzh3xFtP3ek2KAzfLtNH19U-5vL8NqKMHAhzjgVzcCbSlduaaUJv5BwzuSVwv719tZY/s1600/chart+2+post.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1032" data-original-width="1421" height="290" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgMS4NIIOZLq_3Rb5m1gA-XssqPZVng96KpdcyZayPp-5dSjoos0E7XuMbPFCr7fYZ-tSiPVJUVVzh3xFtP3ek2KAzfLtNH19U-5vL8NqKMHAhzjgVzcCbSlduaaUJv5BwzuSVwv719tZY/s400/chart+2+post.jpg" width="400" /></a></div>
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<span style="font-family: "times new roman" , serif; font-size: 12pt;">We can
see this disconnect in another comparison, between the unemployment rate and
average hourly earnings. In the chart below, there appears to be a very close
historical correlation between average hourly earnings and the unemployment
rate in the United States that seemed to break just after the crisis ended in
2009. Once again, I would suggest "opportunistic economists" are using the
unemployment rate to make overly optimistic forecasts about future economic
growth. </span></div>
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<span style="font-family: "times new roman" , serif; font-size: 12pt;">The
charts above and below (coupled with about two dozen more that I maintain on a
regular basis) leave me with the opinion that the call for strong U.S. economic
growth and persistently rising interest rates is yet another false alarm. As
such, I’m not selling any of the bonds and utility companies that I hold, even though prices of both have fallen since September. Instead, I am
using this as a buying opportunity for these great investments as I believe
market participants will realize (slowly and one by one) that growth is once
again not forthcoming and instead, will realize that the market fell once more for another false
alarm, compliments of misrepresented facts through statistics. Benjamin
Disraeli would be impressed. </span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiLCj7ewehECg0-haybIeWTFkqBDlgIwlg7ts6-bwHH0mj2FxtO1zWkSwkgH1HigvIXmRy0dKdRGntjpRddGCNx13VmyxNcEGAiLwcdpltBslctG-edY-U1Apn8fv7kYHuXwJPXrdQKA7Y/s1600/chart+3+post.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1032" data-original-width="1421" height="290" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiLCj7ewehECg0-haybIeWTFkqBDlgIwlg7ts6-bwHH0mj2FxtO1zWkSwkgH1HigvIXmRy0dKdRGntjpRddGCNx13VmyxNcEGAiLwcdpltBslctG-edY-U1Apn8fv7kYHuXwJPXrdQKA7Y/s400/chart+3+post.jpg" width="400" /></a></div>
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<br />Gubbhttp://www.blogger.com/profile/00411147564595486174noreply@blogger.com3tag:blogger.com,1999:blog-1820525859739554784.post-27204108430912447422017-11-26T11:43:00.001-08:002017-11-26T11:43:17.391-08:00The Euphoric Rise and Inevitable Fall of Dr. Feelgood<div class="MsoNormal" style="margin-bottom: 10.0pt;">
<i>“I got me a man named Doctor Feelgood</i></div>
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<i>Yeah! Yeah!</i></div>
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<i>That man takes care of all of my pains and my ills”</i></div>
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<b><i>Aretha Franklin,”Dr. Feelgood” - 1967</i></b></div>
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Before
Aretha Franklin sang about “Dr. Feelgood” there was a German doctor
named Max Jacobson who ran a thriving medical practice in New York City.
Dr. Jacobson’s office catered specifically
to high profile celebrities such as Truman Capote, Eddie Fisher,
Thelonious Monk, Anthony Quinn and Judy Garland. He also served as the
physician of choice for U.S. President John F. Kennedy from 1960 to
1962. Jacobson’s patients nicknamed him “Dr. Feelgood”
in response to the feelings of euphoria and energy they experienced
after the doctor administered his ”specialized” vitamin injection
therapy.
</div>
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What most of the patients didn’t realize was that Jacobson’s magical cure actually contained between 30 and 50 milligrams of
<i>amphetamines</i>, a mood elevating neural energizer that goes by the
street name “speed.” The drugs were then combined with a jumble of other
ingredients including multivitamins, steroids, enzymes, hormones, bone
marrow, animal organ cells and solubilized
placenta. </div>
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Obviously,
given the true contents of the injections, the patient’s symptoms were
never really “cured” but rather masked by the powerful psychotropic
effects of the amphetamines. Thus, patient
relief was artificial in nature and short term in duration as once the
drugs wore off, the unaddressed ailments would inevitably return.
</div>
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As
one would expect, reality finally came crashing down on Max Jacobson and
his fake remedies. In December 1972, Jacobson’s practice was exposed in
a New York Times 1972 piece entitled “<i>Amphetamines
Used by a Physician to Lift Moods of Famous Patients.</i>” As a result,
Jacobson was charged with 48 counts of unprofessional conduct, and in
1975 the State Department of Education revoked his license to practice
medicine. Jacobson died a few years later in
1979.</div>
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During
his heyday, Jacobson bragged that his patients “went out the door
singing,” which may have been exactly what inspired Aretha Franklin to
sing about him in 1967.
</div>
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<b><u>Financial Parallels:
</u></b></div>
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Ever
since the start of the “Great Financial Crisis” in 2008, global central
banks, including the Federal Reserve, have aggressively resurrected the
role and unconventional remedies of “Dr.
Feelgood.” Using a dangerous mix of liquidity, monetary accommodation,
asset purchases and risk suppression, central banks have managed to
create a sense of confidence and euphoria within the stock market that
has served to mask the ongoing ailments within
the U.S. economy. Put plainly, the economic recovery we “feel” today
has been vastly overstated thanks to the regular financial amphetamine
injections that have taken place since 2009.
</div>
In my 2014 macroeconomic thesis, “<b><i>The View from 30,000 Feet, The US Economy Was Sick before the Crisis,</i></b>”
I showed how middle and lower income earners tend to hold fewer, if
any,
financial assets. As such, they have not been able to participate or
benefit from the rising stock market as much as the extremely wealthy.<br />
<br />
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The growing gap between the wealthy and lower income earners is called “<i>income inequality</i>” and it is just one example of the many negative side effects that inevitably arise when a stock
market is subjected to nine continuous years of aggressive drug therapy. </div>
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While
central banks believe wholeheartedly in their amphetamine therapies,
and regard the record level of the stock market as definitive proof that
their injections are working, a more granular
and thorough inspection of the global economy reveals continued
sickness. </div>
For
example, Gross Domestic Product (GDP) in the United States continues to
trend WELL below its’ historical norm. Absent central bank” injections,”
it would be highly unlikely that these anemic
levels of economic growth would result in the same kinds of stock
market gains we’ve enjoyed since 2009.<br />
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If
there were no dangerous side effects to using amphetamines over the
longer term, there would be no need for the government to strictly
regulate its use. Doctors would be free to use injections
regularly to suppress their patient’s underlying symptoms and all would
be well. Unfortunately, this is not the case. Instead, physicians must
focus on the health of the patient over the LONGER TERM, which suggests
these extreme forms of drug therapies must
be used sparingly, and over very short periods of time.</div>
<div class="MsoNormal" style="line-height: 115%; margin-bottom: 10.0pt;">
I
believe we will eventually realize the central bank’s heavy handed and
extended use of financial amphetamines did not result in a ”<i>miracle cure</i>”
for the global economy at all. It instead
created a false sense of wellness and euphoria within the stock markets
that served to mask and suppress the ongoing problems that continue to
exist within our economy.
</div>
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As a
portfolio manager, it is my job to obsess about stock market
fundamentals and capital preservation for my clients over the longer
term. The biggest concern I have today is that the vast
majority of the stock market’s rise since 2009 has been a direct result
of a drug induced state of euphoria that has been created and
maintained by central bank monetary policy. I believe that as central
banks begin to wean the stock market off their aggressive
nine year drug program, these feelings of euphoria will fade and once
again expose the true economic pain that’s been suppressed for all of
these years.
</div>
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It is
for these reasons that I continue to invest with a very conservative
and defensive bias. I am not allowing my strategies and investment
advice to be influenced by the central bank induced
hallucinations that I believe exist within the stock market and
underlying global economy.
</div>
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With the benefit of hindsight, the <a data-saferedirecturl="https://www.google.com/url?hl=en&q=http://dot.com&source=gmail&ust=1511810869327000&usg=AFQjCNHUWpDDZN-UjtDnTzrNS8Of_JUN-g" href="http://dot.com/" target="_blank">dot.com</a>
and sub-prime housing bubbles are now considered two periods where
underlying fundamentals were usurped by a similar sense of strong stock
market euphoria.
In both “bubbles,” euphoria ultimately gave way to reality and the
stock markets corrected sharply. When one looks at the stock market’s
relentless rise since 2009, it’s very hard not to wonder if we aren’t
perhaps falling for Dr. Feelgood’s short term ”cure”
once again. </div>
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Gubbhttp://www.blogger.com/profile/00411147564595486174noreply@blogger.com18tag:blogger.com,1999:blog-1820525859739554784.post-18988486242588175012017-04-07T10:09:00.000-07:002017-04-07T10:35:28.461-07:00The Federal Reserve's Recovery Playbook - a Theory <div class="separator" style="clear: both; text-align: center;">
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After spending more than 8 years arguing and providing data to back up my view that there has been no discernible economic recovery in the US (of the traditional "escape velocity" variety), I've decided to stop my focus on this subject and move on to other issues. Thankfully I'm no longer making these charges on my own. As such I'm going to let the far more eloquent and technical writers like <a href="http://www.alhambrapartners.com/author/jsnider/">Jeff Snider from Alhambra Partners</a> continue the fight to hammer that message home.<br />
Despite the clinging narrative, the "economic recovery" is not one of the main drivers behind the stock market's meteoric rise to record highs, although the 'green shoots' story did start the rally ball rolling in March 2009. <br />
Similarly, earnings, expansions in PE multiples, the recovery in housing, rising wages and the falling unemployment rates have also all been offered up as reasons to explain the stock market's rise at one time or another over the last few years. While all of these measures have seen increases or improvements, none have been consistently strong enough to be thought of as the main underlying support system in the market since the end of the Great Financial Crisis.<br />
One theory that I will expand upon in this post relates to my view that the Federal Reserve is actively using the US stock market as a policy tool to impact and influence consumer sentiment. By increasing consumer sentiment (through a rising stock market), the Fed believes there will be an increase in consumption expenditures that would be more significant than leaving sentiment to run on its own merits.<br />
First - we need to take a close look at the historical and recent correlations that exist between Consumer sentiment and the S&P 500. In this example I've used both the University of Michigan Consumer Survey as well as the Conference Board's Consumer Sentiment Index.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjZDuo0G2Jg-MK4WMvlJ1w1J8zGwtrZt_nYq9fBHkP0oAPv3AktBNYbAgy7nmk2lPYNVc55u-pZD1r1bQ7iUuYElDBH362Cb0OBMt1y_Jy5gs_r5poYjOUxjwdOZ4m7rer9zvG-VdMKyrM/s1600/aa.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="468" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjZDuo0G2Jg-MK4WMvlJ1w1J8zGwtrZt_nYq9fBHkP0oAPv3AktBNYbAgy7nmk2lPYNVc55u-pZD1r1bQ7iUuYElDBH362Cb0OBMt1y_Jy5gs_r5poYjOUxjwdOZ4m7rer9zvG-VdMKyrM/s640/aa.JPG" width="640" /></a></div>
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As you can see from the charts below, while there is a marginal correlation between consumer sentiment and the markets over the entire history of these measures, the correlation in BOTH surveys from March 2009 to today (2017) is almost perfect. <br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhMyo8Ns0PewuEe-ELKU-3B6vWtjTY85mgblKF7P31K3PPiyIUOiy6xpNUBJJS-FGYcP2-dvwN3GcxYmN04JqNxRTJ9Lep9Lgndsf8B_sUnsLOrVeOpDr9-8EFVwKDGYhoA6f07rcuqhHA/s1600/aa12.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="466" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhMyo8Ns0PewuEe-ELKU-3B6vWtjTY85mgblKF7P31K3PPiyIUOiy6xpNUBJJS-FGYcP2-dvwN3GcxYmN04JqNxRTJ9Lep9Lgndsf8B_sUnsLOrVeOpDr9-8EFVwKDGYhoA6f07rcuqhHA/s640/aa12.JPG" width="640" /></a></div>
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The Conference Board's Consumer index shows a similar pattern:<br />
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Given the work above - there should be absolutely no debate that from March 2009 to today, consumer sentiment is greatly influenced by the rises and falls of the S&P 500. <br />
Now that we've established that this close relationship exists, let's review research written by the Federal Reserve on the subject of consumer sentiment to gain insight into how they feel sentiment relates to future consumption:<br />
<strong><u>Research Review - </u></strong><br />
1993 - "<a href="https://www.google.ca/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0ahUKEwi2tJTKpY7TAhUG_mMKHT4VAbEQFgglMAA&url=https%3A%2F%2Fwww.bostonfed.org%2F-%2Fmedia%2FDocuments%2Fneer%2Fneer193b.pdf&usg=AFQjCNEqS5-Yo-8_XHTDWMF3tqmWNf4FpA&sig2=opbIBiOcK_2CzckNsF4HTw">What Role Does Consumer Sentiment Play in the U.S. Economy?"</a> <br />
By Federal Reserve Bank of Boston Economist Jeffrey C. Fuhrer <br />
<b><u><br /></u></b><br />
<b><u>Key quotes:</u></b><br />
<strong><u><br /></u></strong><br />
<br />
"The economy is mired in recession. Consumer spending is weak, investment in plant and equipment is lethargic, and firms are hesitant to hire unemployed workers, given bleak forecasts of demand for final products. Monetary policy has lowered short-term interest rates and long rates have followed suit, but consumers and businesses resist borrowing. The conditions seem ripe for a recovery, but still the economy has not taken off as expected. What is the missing ingredient? Consumer confidence. <br />
<br />
Once the mood of consumers shifts toward the optimistic, shoppers will buy, firms will hire and the engine of growth will rev up again".<br />
"In its most recent publication (1992), the Survey research Center (SRC) at the University of Michigan is careful to point out that the important of the Michigan Surveys derives from the <br />
<br />
"important influence of consumer spending and saving decisions in determining whether the national economy slips into recession or is propelled toward recovery and growth". They argue that consumer's optimism or pessimism primarily affects the timing of decisions to purchase homes, vehicles and other durables". <br />
<br />
<br />
June 1998<br />
"<a href="https://www.newyorkfed.org/research/epr/98v04n2/9806bram.html">Does Consumer Confidence Forecast Household Expenditure? A Sentiment Index Horse Race"</a> <br />
by Jason Bram & Sydney Ludvigson <br />
<u><b><br /></b></u><br />
<u><b>Key quotes:</b></u><br />
"Household sentiment has been cited as one of the leading causes of the 1990-91 recession"<br />
<br />
<br />
"In response to the widespread belief that consumer's opinions and expectations influence the direction of the economy, a growing number of studies have set out to analyze the relationship between consumer attitudes and economic variables"<br />
"Our empirical analysis suggests that consumer sentiment can help predict future movements in consumer spending"<br />
.."our results suggest that consumer confidence can help predict consumption, and that consumer attitudes may also act as a catalyst for economic fluctuations". <br />
<br />
<br />
September 2006<br />
"<a href="http://www.nber.org/papers/w10548">Stock Prices, News and Economic Fluctuations</a>" <br />
by Paul Beaudry and Franck Portier<br />
<u><b><br /></b></u><br />
<u><b>Key quotes:</b></u><br />
<br />
<br />
"There is huge literature suggesting that stock price movements reflect the market's expectation of future developments in the economy"<br />
<br />
"There is also a huge literature, and a long tradition in Macroeconomics (from Arthur C. Pigou, 1927, John Maynard Keynes, 1936, to the survey of Jess Benhabib and Roger E. A. Farmer, 1999) suggesting that changes in expectation may be an important element driving economic fluctuations."<br />
<br />
"In particular, our evidence suggests that business cycles may be driven to a large extent by TFP (total factor productivity) growth that is heavily anticipated by economic agents, thereby leading to what might be called expectation driven booms. <br />
<br />
May 2009<br />
"<a href="https://www.chicagofed.org/publications/chicago-fed-letter/2009/may-262">Trends in Consumer Sentiment and Spending</a>"<br />
by Maude Toussaint-Comeau and Daniel DiFranco<br />
<br />
<u><b><br /></b></u><br />
<u><b>Key quotes:</b></u><br />
<strong><u><br /></u></strong><br />
<br />
"Consumer sentiment is one of the many macroeconomic indicators tracked by policymakers. It is seen as an important barometer of economic activities - an indicator of the way people plan to spend their income."<br />
<br />
"Research has shown that consumer expectations align more closely with spending during periods of weakness in the economy, and the forecasting contributions (or predictive power) of consumer sentiment appear to be wrong when the economy is weaker. During times of greater economic uncertainty, as consumers perceive greater risk, they tend to accumulate precautionary savings to insure against a sudden loss in income. For example, even if a consumer's financial position remains unchanged, the precautionary motive for saving will affect his discretionary consumption, i.e. spending on nonessential goods and services, in the present."<br />
<br />
"We find that the condition of the macroeconomy has a strong influence on consumption spending. Consistent with the implications of precautionary motives, the impact of consumer sentiment on spending decisions is stronger among those with greater constraints in income and liquidity."<br />
<br />
"The stock market index may affect consumer confidence in two ways: An increase in stock market prices may increase wealth and directly boost confidence, or rising stock markets may act as an indicator of higher expect labor income, which would also increase confidence and hence consumption spending."<br />
<br />
November 2010<br />
"<a href="http://www.frbsf.org/economic-research/publications/economic-letter/2010/november/confidence-business-cycle/">Confidence and the Business Cycle</a>" <br />
by Sylvain Leduc<br />
<u><b><br /></b></u><br />
<u><b>Key Quotes:</b></u><br />
<strong><u><br /></u></strong><br />
<br />
"Indicators of consumer confidence have been at depressed levels in recent months. Business sentiment is also low, reflecting uncertainty about U.S. fiscal policy and the perception that economic weakness may be prolonged. This lack of confidence raises the risk that pessimism can become entrenched and self-reinforcing, further dampening the nascent recovery". <br />
<br />
"The boom-and-bust cycles in the United States and other parts of the world over the past two decades and the stock market collapses in 2000 and 2008 have prompted macroeconomists to take another look at the extent to which confidence, optimism, and changes in expectations may drive and amplify business cycle fluctuations. Recent empirical work indicates that these sentiments contribute significantly to economic ups and downs. Typically that means monetary policy remains accommodative when weakness in confidence becomes entrenched". <br />
<br />
<strong><u>Comments:</u></strong><br />
<br />
So, based on research produced by the Federal Reserve over the last 25 years, we know that consumer sentiment is thought to have a very large and measurable impact (positively and negatively) on the underlying economy. One report in particular attempts to calculate exactly how much consumer confidence can add or take away from economic activity. <br />
<br />
April 1995<br />
"<a href="http://www-bcf.usc.edu/~matsusak/Papers/Matsusaka_Sbordone_1995.pdf">Consumer Confidence and Economic Fluctuations</a>" <br />
by John G. Matsusaka & Argia M. Sbordone<br />
<br />
<b><u><br /></u></b><br />
<b><u>Key Quotes: </u></b><br />
<strong><u>"</u></strong>The pattern is striking; all recessions were preceded by a fall in confidence, and all major falls in consumer sentiment were followed by a recession (except in 1965 which, while not in recession, was the so-called "growth recession")."<br />
<br />
"In a multiple-equlibria model, output responds to fundamentals, but in addition there can be fluctuations as the economy shifts between equilibria. Perhaps the most intriguing feature of these models is that output can fluctuate simple because everyone expects it to. Put differently, expectations can be self-fulfilling in that if people expect bad times they get them."<br />
<br />
"... the evidence that movements in consumer confidence precede movements in output can be interpreted in two ways. Either consumer sentiment <i>causes</i> GNP or it simply <i>anticipates</i> GNP." [emphasis theirs] <br />
<br />
".. changes in consumer sentiment have a statistically significant effect on output fluctuations. In other words, we find evidence of Granger-causality running from consumer sentiment to GNP". <br />
<br />
[<b>Granger-Causality definition from Wikipedia</b>: The <b>Granger causality test</b> is a statistical hypothesis test for determining whether one time series is useful in forecasting another, first proposed in 1969.<sup class="reference" id="cite_ref-1"><a href="https://en.wikipedia.org/wiki/Granger_causality#cite_note-1">[1]</a></sup> Ordinarily, regressions reflect "mere" correlations, but <a href="https://en.wikipedia.org/wiki/Clive_Granger" title="Clive Granger">Clive Granger</a> argued that causality in economics could be tested for by measuring the ability to predict the future values of a time series using prior values of another time series. Since the question of "true causality" is deeply philosophical, and because of the post hoc ergo propter hoc fallacy of assuming that one thing preceding another can be used as a proof of causation, econometricians assert that the Granger test finds only "predictive causality".<sup class="reference" id="cite_ref-2"><a href="https://en.wikipedia.org/wiki/Granger_causality#cite_note-2">[2]</a>]</sup><br />
<br />
"Our second finding is that while sentiment is not the most important factor in GNP fluctuations, it plays a quantitatively significant role: between 13 percent and 26 percent of GNP innovation variance can be attributed to innovations in consumer sentiment."<br />
<br />
[referencing Oh and Waldman research (1990, 1993)] "Their key insight is that if there is an announcement that the economy is about to boom and everyone believes it then future output should be high, even if the announcement is based on false information".<br />
<br />
"This paper explores the possibility that the economy's total output occasionally varies not in response to a shift in fundamentals but in response to a shift in consumer sentiment. Specifically the paper asks whether and to what extent exogenous declines in consumer confidence cause recessions, and conversely whether and to what extent bullish consumers drive economic growth." <br />
<br />
"There are two inspirations for this research. The first is the fact that something called "consumer confidence" plays an important role in popular explanations of the business cycle and in the public statement of business and political leaders. The second purpose of the paper is to provide some evidence on the rich collection of macroeconomic models with strategic complementaries that have been developed in recent years. All these multiple-equilibria models have in common that expectations are self-fulfilling - because agents must expect to be in a particular equilibrium before the economy can move to it, either expectations in a sense cause the movement to the equilibrium.<br />
<br />
"An implication of these models, then, is that after controlling for movements in economic fundamentals, changes in consumer sentiment lead to changes in GNP".<br />
<br />
Based on the examples and statements above, it is clear that the Federal Reserve views consumer confidence as a very important and influential component that impacts the broader economy (either positively or negatively). Now to be thorough, let's look at two simple examples where consumer confidence has had a measurable impact on an economy. <br />
<br />
<b><u>Example one - </u></b><br />
<br />
The U.S. recession of 1990-91 - <br />
"<a href="http://www.nytimes.com/1991/04/03/business/better-economic-mood-many-say-gulf-crisis-shook-confidence-foresee-recovery-hope.html?pagewanted=all">A Better Economic Mood; Many Say the Gulf Crisis Shook Confidence and Foresee a Recovery as Hope Revives</a>" by Sylvia Nasar, The New York Times (April 3, 1991)<br />
<br />
<b><u><br /></u></b><br />
<b><u>Key Quotes:</u></b><br />
<strong><u><br /></u></strong><br />
"The current recession may be the first in memory that can be attributed to a case of nerves. And now that confidence has come roaring back, signs are that an economic recovery is not far behind."<br />
<br />
"Pinning hopes of an economic revival on the recovery of nerve makes sense for the great many who believe that when the economy stumbled, psychology was the main culprit".<br />
<br />
"<a href="http://www.nytimes.com/1992/03/21/business/confidence-indexes-show-brighter-consumer-outlook.html">Confidence Indexes Show Brighter Consumer Outlook</a>" by Sylvia Nasar, The New York Times (March 21st, 1992)<br />
<br />
<u><b><br /></b></u><br />
<u><b>Key Quotes:</b></u> <br />
"To economists, improvement in the confidence indexes is critical evidence that the recent jump in retail sales was not a fluke and that the economic recovery is not necessarily doomed to fizzle."<br />
<br />
"Economists had worried that consumer's pessimism could turn into a self-fulfilling prophecy. A DRI/McGraw Hill calculation showed that if consumers remained deeply worried, retail sales would be $20 billion lower, and 100,000 fewer cars and 40,000 fewer houses would be sold this year".<br />
<b><u><br /></u></b><br />
<b><u>Example two: </u></b><br />
<strong><u><br /></u></strong><br />
The economic impact of the D.C. Sniper attacks of 2002 <br />
<br />
"<a href="http://newspapers.bc.edu/cgi-bin/bostonsh?a=d&d=bcheights20021105.2.85">DC economy suffers in wake of Sniper attacks</a>" By Jeremy Raelin, The Heights, Volume LXXXIII, Number 25, 5 November 2002 <br />
<br />
<u><strong>Key quotes:</strong></u><br />
<br />
"While the sniper was at large, the Washington Post reported that retailers in Montgomery County MD, were suffering a 50 percent drop in sales. People were afraid to leave their homes, fearing assassination while doing even the most trivial tasks such as pumping gas, playing at recess and walking to a car". <br />
<br />
"Retailers have lost money in one of the biggest shopping months of the year. Anirban Basu, chief economist at Towson University's Regional Economic Studies Institute, which tracks the Washington area's economy, said in an interview with the Washington Post. "It's never a good time for a sniper, but this is really not a good time. If it persists, if people do not come out of their houses to shop, the effects are going to be more permanent".<br />
<br />
While there are many more examples where consumer confidence has impacted an economy, for the sake of keeping this post at a reasonable length, I will move on. <br />
<br />
<strong><u>Thus far we have established two incontrovertible facts: </u></strong><br />
<br />
1. After a tremendous amount of research, the Federal Reserve is convinced that high or rising consumer confidence will help boost & support the economy and keep it out of recession. <br />
2. The correlation between the S&P 500 and consumer confidence has increased substantially since the bottom of the Great Financial Crisis (March 2009).<br />
<br />
Correlations between the stock market and consumer sentiment are now running at 88% to 97% (depending on which survey is measured). Given the Federal Reserve has not admitted to explicitly supporting the stock market in an effort to help the economy recover, we must therefore use our research and the information available to draw inferences that suggest this is exactly their strategy.<br />
<br />
The first hint came during an unprecedented interview with then Fed chairman Ben Bernanke on 60 minutes on March 15th, 2009 - right at the bottom of the crisis.<br />
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The first few minutes of this interview have Ben Bernanke suggesting that the crisis will only stop when the financial system is stabilized. Then, at the 12:05 mark, Bernanke makes a pledge that the Fed will backstop ANY problems that arise in the banking system. <br />
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<strong><u>Scott Pelley:</u></strong> "Are you committing in this interview that you are not going to let any of these banks fail? That no matter what their balance sheets actually look like, they are not going to fail?"<br />
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<strong><u>Ben Bernanke</u></strong>: They are not going to fail. But, what we can do should it be necessary, is try to wind it down in a safe way".<br />
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Part Two also contains provides us with some excellent insight into Fed thinking:<br />
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9:50 in to the second half of the interview -</div>
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<strong><u>Scott Pelley:</u></strong> "There's an argument made today that that's not what the problem is. The problem isn't that there's too little money in the system, the problem is that there's too much fear in the system. That with these companies being propped up by the government, no one on Wall Street can tell who's solvent and who's not, and therefore business does not move."</div>
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<strong><u>Ben Bernanke:</u></strong> "Well I absolutely agree that confidence is key. People don't know what's happening and they're afraid and they're not sure whether or not the system is going to recover. Umm so how do you get confidence, that's the question. And I think the way that you get confidence is to show progress." </div>
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Bernanke then goes on to explain all of the various areas that he's seeing improvement - many of which are within the financial arena. As we know, the market started it's current rally a week prior (many, myself included think the bigger catalyst was the changing of FASB 157, but that is certainly open to debate). A few years later, Ben Bernanke made is first formal reference that associated the rise of the stock market to the US economy.</div>
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The date was January 13th, 2011 and Ben Bernanke was part of a panel hosted by the FDIC on the subject of "<a href="https://www.fdic.gov/news/conferences/sbtranscript.pdf">Overcoming Obstacles to Small Business Lending</a>", the event was moderated by CNBC's Steve Liesman. </div>
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During the event, the following discussion took place: </div>
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<strong><u>Mr. Liesman:</u></strong> Chairman Bernanke, I have to ask you this question. Since you guys have launched QE2, rates have gone up. The stock market's gone up too. We did a poll of CNBC market participants and they said that QE2's responsible for a higher stock market, but also higher commodity prices. That does not seem to be something that in general is helping small business".</div>
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<u><strong>Chairman Bernanke:</strong></u> Well, how much time have you got to answer this question? </div>
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<strong><u>Mr. Liesman:</u></strong> As much time as you have sir. </div>
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<strong><u>Chairman Bernanke:</u></strong> First of all I do think that our policies have contributed to a stronger stock market, just as they did in March of '09 when we did the last iteration of this. The S&P 500 is up about 20 percent plus. The Russell 2000 which is about small cap stocks is up 30 percent. I think a stronger economy actually helps small business more than it helps even larger businesses. Yes, it is contributing to the stock market. Interest rates are higher, but I think that's mostly because the news is better. It's responded to a strong economy and better expectations.</div>
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The most interesting commentary about the Fed's attempt to push the stock market higher came from former Fed member Richard Fisher who in March 2016 said, <br />
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<strong><em>"I like to say that we injected cocaine and heroin into the system and now we are maintaining it on Ritalin"</em></strong><br />
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So to summarize, given the volumes of research published by the Fed over the last 25 plus years, we can safely assume they were very concerned that, if left unchecked, consumer confidence could have become increasingly negative during the sub-prime crisis, making any form of future economic recovery impossible. To combat this potential danger, Fed Chair Ben Bernanke took the nprecedented step to address Americans directly via an interview with 60 minutes. In that interview he pledged that no other US bank would fail under his watch. He then suggested that the market would recover when progress was made and the financial system was stabilized. </div>
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A few years later, Bernanke cited the level of the S&P 500 and Russell 2000 as "proof" that the economy was positively responding to a stronger economy thanks to Fed policy. Further, whenever the US stock market experienced a significant correction (for example during the European debt crisis, the recession scare of 2011, the Brexit vote, etc), Fed members would make dovish statements suggesting that monetary policy would continue to be extremely accommodative (and therefore support stocks). These messages of assurance helped stocks rebound in kind, which in turn helped preserve positive consumer sentiment.</div>
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I personally do not think that the Fed is secretly "buying shares", although I am aware of theories to this effect. Instead I believe the Fed is simply sharing it's playbook with Wall Street and allowing them to act on this information.</div>
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Interestingly, it has come to light recently that in 2012 then Richmond Fed President Jeffrey Lacker leaked secret, market sensitive information to an analyst at Medley Global Advisors. But Lacker's leak is not the only example of a seemingly cozy relationship between Wall Street and policy markers. Some will recall then Treasury Secretary <a href="http://www.cbsnews.com/news/when-paulson-met-goldman-from-russia-with-love/">Hank Paulson setting up a meeting with some of Goldman Sachs' board members in Russia</a> just as the crisis was unfolding in 2008, or <a href="http://archives.cjr.org/the_audit/the_geithner_leak.php">Timothy Geithner's alleged leaking of policy to Ken Lewis</a>, then CEO of Bank of America. </div>
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So, by allowing Wall Street in on the strategy to boost the stock market, the Fed expects consumers to be relatively more optimistic than they would be on their own. As discussed in the research above, </div>
<br />
<i><b>"if there is an announcement that the economy is about to boom and
everyone believes it then future output should be high, even if the
announcement is based on false information".</b></i><br />
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We can see that some of the foremost thinkers in the economics field are starting to be aware of the Fed's reliance on confidence and 'narratives' to generate optimism. Below are two very recent examples from some of the US's most influential economists: Mohamed El-Erian and Robert Shiller.<br />
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<a href="https://www.project-syndicate.org/commentary/trump-market-optimism-economic-growth-by-mohamed-a--el-erian-2017-03">America's Confidence Economy</a> - by Mohamed El-Erian<br />
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<u><b><br /></b></u><br />
<u><b>Key quote:</b></u> <br />
<br />
"The surge in business
and consumer sentiment reflects an assumption that is deeply rooted in
the American psyche: that deregulation and tax cuts always unleash
transformative pro-growth entrepreneurship. (To some outside the US, it
is an assumption that sometimes looks a lot like blind faith.)<br />
<br />
Of course, sentiment
can go in both directions. Just as a “pro-business” stance like Trump’s
can boost <br />
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confidence, perhaps even excessively, the perception that a
leader is “anti-business” can cause confidence to fall. Because
sentiment can influence actual behavior, these shifts can have
far-reaching impacts." <br />
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"<a href="http://www.nber.org/papers/w23075">Narrative Economics</a>" - by Dr. Robert Shiller <br />
<u><b><br /></b></u></div>
<u><b>Key quotes:</b></u><br />
<br />
<br />
"This address considers the epidemiology of narratives relevant to economic fluctuations. the human brain has always been highly tuned towards narratives, whether factual or not, to justify ongoing actions, even such basic actions as spending and investing. Stories motivate and connect activities to deeply felt values and needs. Narratives 'go viral' and spread far, even worldwide, with economic impact. The 1920-21 depression, the Great Depression of the 1930's, the so called "Great Recession of 2007 and the contentious political-economic situation of today are considered as the results of popular narratives of their respective times".<br />
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"When in doubt as to how to behave in an ambiguous situation, people may think back to narratives and adopt a role as if acting in a play they've seen before. the narratives have the ability to produce social norms that partially govern out activities, including our economic actions.'<br />
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<strong><u>Comments: </u></strong><br />
<strong><u></u></strong><strong><u><br /></u></strong><br />
Considering all of the research and examples discussed above, it seems entirely reasonable to assume that a portion of the Federal Reserve's strategy to help stimulate the economy is to keep consumer confidence as high as possible. This would insure that pessimism would never have a chance to permeate the consumer's psyche, while also opening the door to a possible 13 to 26 percent bump in GNP than would not be forthcoming otherwise. <br />
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We can see these expectations for a jump in consumer expenditures by the Fed (given a rising stock market) contained in a few comments by Fed officials recently. First we have Janet Yellen responding to a question from Binyamin Appelbaum from the New York Times on the apparent lack of concern by the Fed to excessively elevated equity prices. <br />
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(apologies but C-SPAN doesn't allow me to embed into Blogspot - so the picture will take you to the clip) - here is the link just in case: <a href="https://www.c-span.org/video/?c4661620/fed-playbook">https://www.c-span.org/video/?c4661620/fed-playbook</a><br />
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<a href="https://www.c-span.org/video/?c4661620/fed-playbook"><img alt=" https://www.c-span.org/video/?c4661620/fed-playbook" border="0" height="180" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgiTV80BSmA_5gk-TY2xHEbZKzL2VIfWMIdsYsO8filWPPl8zhMiLEwAsL00je23RgxMuay6EE8p8XKADzp9fKxqQaNPvvUnPuSmBhlHnpalkMPzGutBV5EJiVxJVjA-yxlwZ6y6z78bdY/s320/aaa.JPG" width="320" /></a></div>
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<strong><u><br /></u></strong><br />
<strong><u>Key Quote:</u></strong><br />
<strong><u><br /></u></strong><br />
Chair Yellen: "the higher level of stock prices is one factor that looks like it’s likely to somewhat boost consumption spending"<br />
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Secondly we have this story in Bloomberg, <br />
"<a href="https://www.bloomberg.com/news/articles/2017-03-31/how-the-yellen-fed-got-religion-over-the-stock-market-and-policy">How the Yellen Fed Got Religion Over the Stock Market and Policy</a>" by Matthew Boesler<br />
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<u><b>Key quotes: </b></u><br />
<br />
" In February 1998, Dudley and his team at Goldman took a cue from then-Fed Chairman Alan Greenspan, who had just <a href="https://www.federalreserve.gov/boarddocs/hh/1998/february/testimony.htm" itemprop="StoryLink" itemscope="itemscope" rel="nofollow noopener" target="_blank" title="Greenspan congressional testimony">testified</a>
before Congress that although inflation-adjusted interest rates had
risen, “in virtually all other respects financial markets remained quite
accommodative and, indeed, judging by the rise in equity prices, were
providing additional impetus to domestic spending.” Two years later, the
dot.com technology bubble burst."<br />
<br />
"Ultimately, the Fed’s response to easier financial conditions should
hinge on whether or not that boost in business sentiment translates to
an actual acceleration in consumption, said Freedman.<br />
<br />
“Stock
markets go up. That in itself is not relevant,” he said. “What is
relevant is its effect on people’s willingness to spend.”<br />
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<u><b>Conclusions:</b></u><br />
<br />
If we consider all of the material covered above, and put two and two together, I think it is very easy to come to the conclusion that the Fed has been attempting to use the stock market as a policy tool to help the US economy recover. By informing Wall Street of its intentions and going out of their way to keep the market stable and elevated, consumer sentiment remains high, which in turn could add several valuable percentage points to economic growth. This potential 13 to 26 percent swing in GNP could, for example, have been the difference between the 'near miss' recession in 2011, and another full blown recession.<br />
<br />
While this is the <a href="http://blogs.wsj.com/economics/2017/03/01/this-is-now-the-third-longest-economic-expansion-in-u-s-history/">third longest expansion in U.S. history, </a>it is also the <a href="http://blogs.wsj.com/economics/2016/07/29/seven-years-later-recovery-remains-the-weakest-of-the-post-world-war-ii-era/">weakest</a> in the post world war II era. For reasons I've laid out in my larger macro thesis (<a href="http://gubbmintcheese.blogspot.ca/2014/05/revised-view-from-30000-feet-us-economy.html">The View from 30,000 feet: the US economy was sick before the Great Financial Crisis</a>), the consumer has been mortally wounded and as such should not be expected to bounce back in the same fashion that they have from previous recessions. It appears as though the Fed continues to be bewildered by the lack of increased consumer expenditures in the face of a rising stock market and high confidence. <br />
<br />
It is my sense that the Fed is now backing away from trying to push the market higher as they realize the gap between stocks and the underlying economy is at a very critical and dangerous level. By raising interest rates at this point, the Fed is attempting to slowly deflate the asset bubble they've created, while simultaneously trying to preserve consumer confidence and the forward progress they've made in the economy. Given the Fed's track record at deflating bubbles, I am not optimistic that they will be successful in their attempts. Time will tell.<br />
<br />Gubbhttp://www.blogger.com/profile/00411147564595486174noreply@blogger.com105tag:blogger.com,1999:blog-1820525859739554784.post-67968973401065324332017-02-16T16:18:00.000-08:002017-02-16T17:59:14.462-08:00The Fed's Playbook Uncovered: Gaslighting us to recovery<div class="separator" style="clear: both; text-align: center;">
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If I was given a dollar for every time I saw a
headline, looked at a chart or watched some market guru say something on
TV that made me think I had lost my mind over the last 8 years, I’m
sure I’d be a zillionaire by now. </div>
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Kyle Bass described
the growing gap between fundamentals and investment behavior in a 2011
newsletter entitled, “<a href="https://www.mauldineconomics.com/images/uploads/pdf/mwo030711.pdf"><i><b>The Cognitive Dissonance of It All</b></i></a>”. In 2014,
legendary hedge fund manager <a href="https://www.bloomberg.com/view/articles/2014-03-26/seth-klarman-says-markets-are-too-bubbly">Seth Klarman warned</a> “There is a growing gap
between the financial markets and the real economy..
and the overall picture is one of growing risk and inadequate potential
return almost everywhere one looks…. As every “Truman” under Bernanke’s
dome knows the environment is phony”.
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While we may indeed be living under a dome with a 'phony economic environment', it's clear that the market is more than happy to surge ahead - fundamentals be damned. The S&P 500 has jumped an additional
25% since Klarman’s warning, and a whopping 77% since Bass described the 'cognitive dissonance of it all'.
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So how does this happen? What happens to enable a stock market to disconnect so widely from its underlying fundamentals?</div>
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After more than a decade of diving deep into the macro, I've come to the conclusion that the disconnect between economic fundamentals and stock prices is
being perpetuated and nurtured by the Federal Reserve. To put it as bluntly as I can, I think the Fed is trying to "gaslight" us towards an economic recovery.
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<i>“Gaslighting is a form of manipulation that seeks
to sow seeds of doubt in a targeted individual or members of a group,
hoping to make targets question their own memory, perception and sanity” </i><br />
<br />
<i>Using persistent denial, misdirection, contradiction
and lying, it attempts to destabilize the target and delegitimize the
target’s belief”</i> – (link:
<a data-saferedirecturl="https://www.google.com/url?hl=en&q=https://en.wikipedia.org/wiki/Gaslighting&source=gmail&ust=1487363492600000&usg=AFQjCNE14WW8AyAQidLEVtE03kevhMwF0w" href="https://en.wikipedia.org/wiki/Gaslighting" target="_blank">https://en.wikipedia.org/wiki/<wbr></wbr>Gaslighting</a>)</div>
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Those of you who will stop reading this article because you think my ‘gaslighting by the Fed’ theory is nothing more than the pointless ramblings of a tin
foil hat conspiracy theorist actually help prove my point. (you've already been gaslighted). </div>
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There are a ton of examples of the Fed "talking up" the economy while simultaneously ignoring some pretty significant contradictions. First and foremost is there constant reference about the "<b>strongest jobs market in decades</b>" </div>
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consider: </div>
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<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEitXyjQ7bnVADVCYZz4qVIgeELuSH7tdkVuQdnuKQx5BL_tX1FeZXVsHXZtn0KA6JwsLHBqLMJoTeqZjIxuNvXwKc_HZo8C9g1ouE0mG_EuUfGcU6qiTWm_QPgfZaoq6-RiS2XrvK4rABM/s1600/jobs.JPG" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="145" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEitXyjQ7bnVADVCYZz4qVIgeELuSH7tdkVuQdnuKQx5BL_tX1FeZXVsHXZtn0KA6JwsLHBqLMJoTeqZjIxuNvXwKc_HZo8C9g1ouE0mG_EuUfGcU6qiTWm_QPgfZaoq6-RiS2XrvK4rABM/s400/jobs.JPG" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">link: https://www.bloomberg.com/news/videos/2016-12-19/yellen-u-s-jobs-market-strongest-in-nearly-a-decade</td><td class="tr-caption" style="text-align: center;"><br /></td><td class="tr-caption" style="text-align: center;"><br /></td></tr>
</tbody></table>
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and </div>
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<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhWlmfcUF8pD5591tDG81n1fzb2IrjMQLtFQTYcmYvGQjQfa3iVUVAIHkWim5M2aBv9EyAnXuuPBCAEU8DWklFv62DsDS1lG-cZHI5Fjdbat6LMsQsqajRSTK5hSg0BB4E_GTtR4S9ZdAc/s1600/jobs1.JPG" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="145" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhWlmfcUF8pD5591tDG81n1fzb2IrjMQLtFQTYcmYvGQjQfa3iVUVAIHkWim5M2aBv9EyAnXuuPBCAEU8DWklFv62DsDS1lG-cZHI5Fjdbat6LMsQsqajRSTK5hSg0BB4E_GTtR4S9ZdAc/s400/jobs1.JPG" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">link:https://www.wsj.com/articles/u-s-jobless-claims-fall-to-43-year-low-1461242009<br />
</td></tr>
</tbody></table>
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while it is true that the unemployment rate and jobless claims are indeed at record lows, is it accurate to suggest that it's the "strongest employment picture in decades" as the Fed has described? </div>
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Even a cursory review of the employment statistics by the simplest of macro tourists would raise a few questions. First and foremost would be the precipitous decline in the labor force participation rate:</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg5TkRCABhyH30sbV4VuMlhL9n0lKLbfgl2CF12BD-ioRuZ_oZ5Y1OY0v0ihueMdOC3TxUIFPip4TLhCffJ1xFVwh1Ms7zgoOChWfW3ja6giSg4_4ENQoKJoak1-DjRwLTygW6A6-PeaXk/s1600/lfpr1.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="160" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg5TkRCABhyH30sbV4VuMlhL9n0lKLbfgl2CF12BD-ioRuZ_oZ5Y1OY0v0ihueMdOC3TxUIFPip4TLhCffJ1xFVwh1Ms7zgoOChWfW3ja6giSg4_4ENQoKJoak1-DjRwLTygW6A6-PeaXk/s400/lfpr1.JPG" width="400" /></a></div>
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of course some (the Fed, market bulls and the Whitehouse) tried to explain away the issue by blaming demographics and suggested the decline was "expected".</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgYGu8R83Fa31L9uplVOTaKX3H77OrnDRh5pMvLZgIIaNr52grUQPUGoj2wUYXLRlhoYjgujz2MUfutCyEU_A4SpdsrtN9DI8jS0pfIHwNLgFw0Vk0nEb0jQ5HRji0HKc04azS62TX-10k/s1600/aa.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="64" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgYGu8R83Fa31L9uplVOTaKX3H77OrnDRh5pMvLZgIIaNr52grUQPUGoj2wUYXLRlhoYjgujz2MUfutCyEU_A4SpdsrtN9DI8jS0pfIHwNLgFw0Vk0nEb0jQ5HRji0HKc04azS62TX-10k/s320/aa.JPG" width="320" /></a></div>
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<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEix3ukOqPDQhyrb33ZuEgssX3b4k9fHfD1Os3sd9tCF-QZCAmxRPF8_IupL1Z-NtWEWfxmj8BNFzGFSaeZ61_zNur8Ir1SqADAyzHcY1bzUX30tYiBTEaMplMXy_wJu7PS-RGPmNeP27zc/s1600/aa1.JPG" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="72" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEix3ukOqPDQhyrb33ZuEgssX3b4k9fHfD1Os3sd9tCF-QZCAmxRPF8_IupL1Z-NtWEWfxmj8BNFzGFSaeZ61_zNur8Ir1SqADAyzHcY1bzUX30tYiBTEaMplMXy_wJu7PS-RGPmNeP27zc/s320/aa1.JPG" width="320" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">link: http://www.usnews.com/news/articles/2014/07/17/baby-boomers-are-a-big-part-of-labor-participation-rate-decline</td></tr>
</tbody></table>
This flimsy excuse served to placate most of the macro tourists, but the more hard nosed and thorough researcher easily discovered that this explanation falls short. All they needed to do was look a bit deeper into the LFPR -<br />
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for example - the labor force participation rate for prime aged workers (25-54) is falling -<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjAn3oDizg8b0tpxDHqyM3G255aJ9-8y8TdDe7cNiZs84HulZNH6a0mlgslPXNDEZFHlzBK3yQN0GECI6jfvD_qerlXKd9rNAJTRs50Ys2S_idggJUfbjixbZEWkyXRPGaHlwW7-0H8VrI/s1600/aa.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="161" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjAn3oDizg8b0tpxDHqyM3G255aJ9-8y8TdDe7cNiZs84HulZNH6a0mlgslPXNDEZFHlzBK3yQN0GECI6jfvD_qerlXKd9rNAJTRs50Ys2S_idggJUfbjixbZEWkyXRPGaHlwW7-0H8VrI/s400/aa.JPG" width="400" /> </a></div>
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while the LFPR for people 65 and older is<i><u> rising</u></i></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjB0sEQkzlz-sJpqXndofF82ZWrzOfAdGDL6X1jjHj5Te-JJ5MEYGNZEVlNyVm6ZE5VBG3zRVqXEEmpQ7G2qVvHFzzosaibV8gjTeoOMO-WmX8SMAoYJzHgIY31TVzGqEpGU0SmzTefK64/s1600/aa.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="160" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjB0sEQkzlz-sJpqXndofF82ZWrzOfAdGDL6X1jjHj5Te-JJ5MEYGNZEVlNyVm6ZE5VBG3zRVqXEEmpQ7G2qVvHFzzosaibV8gjTeoOMO-WmX8SMAoYJzHgIY31TVzGqEpGU0SmzTefK64/s400/aa.JPG" width="400" /> </a></div>
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So given the data available, a 'thorough & objective' review of the information above yields a starkly different perspective about "the best jobs market in decades". In fact, it would suggest that the more accurate unemployment rate in the US is actually closer to 7.00%.</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgZhbH7J0U6_xwAl93yzI_Pxo7AV_Oq7Vp743ZEZGRx_hySGkLq7NdF77BAuobupiU39niBDWtoR2JJL-nSFCxO-tlubctn7UuI95Fp-lvf1xMv6JGEAstq7PrHLAUWlHAXR70UCQGv1-k/s1600/24+to+55.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="291" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgZhbH7J0U6_xwAl93yzI_Pxo7AV_Oq7Vp743ZEZGRx_hySGkLq7NdF77BAuobupiU39niBDWtoR2JJL-nSFCxO-tlubctn7UuI95Fp-lvf1xMv6JGEAstq7PrHLAUWlHAXR70UCQGv1-k/s400/24+to+55.JPG" width="400" /></a></div>
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Interestingly the new Fed narrative on the decline in the LFPR emerged a few days ago when Fed member Pat Harker (during a Q&A session) suggested, "opiate abuse is part of the reason for the decline in male employment in the US, also there are people who are just disconnected from the workforce".<b> </b></div>
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<b>(</b>link:<b> </b>http://www.zerohedge.com/news/2017-02-15/feds-harker-blames-prime-aged-american-male-joblessness-drug-abuse)</div>
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Drug addiction is a big part of the 90m plus people who have left the labor pool? Seriously? </div>
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The next noteworthy contradiction is found in the growth in average hourly earnings. Again, a simple macro tourist would just look at the headline and proclaim "this is bullish, the economy is getting better".</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgJtcQvT5X4Peu6ZPMlykt1EJIYrfnvV3jydJcZdh6G6zgrAEcroofxRoKxKXnkG1xy8z5FUepFRHFP0zyPAVrDt_PlaAh86m7zg3G00GnO_c0CUvJD-EVffEiWC_aBmEaeHOWmuJEknU4/s1600/aa.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="95" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgJtcQvT5X4Peu6ZPMlykt1EJIYrfnvV3jydJcZdh6G6zgrAEcroofxRoKxKXnkG1xy8z5FUepFRHFP0zyPAVrDt_PlaAh86m7zg3G00GnO_c0CUvJD-EVffEiWC_aBmEaeHOWmuJEknU4/s320/aa.JPG" width="320" /></a></div>
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhJmruYdrpg6afHss2pqp3pT0ARvR6PmO6_OvNPB0SWtDMmZEjdKej_fwj5t-iyl-iNAFIV-m1Ehv1wHJlHoKEalI7tQssH7fBey652umyyhJPTKVwYvhCaQBsZfnOj9s0R-VQB9uAVOc4/s1600/aa.JPG" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="175" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhJmruYdrpg6afHss2pqp3pT0ARvR6PmO6_OvNPB0SWtDMmZEjdKej_fwj5t-iyl-iNAFIV-m1Ehv1wHJlHoKEalI7tQssH7fBey652umyyhJPTKVwYvhCaQBsZfnOj9s0R-VQB9uAVOc4/s320/aa.JPG" width="320" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">link: http://www.afr.com/news/economy/american-workers-average-hourly-earnings-rise-29pc-in-2016-20170106-gtnf8u</td><td class="tr-caption" style="text-align: center;"><br /></td></tr>
</tbody></table>
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But, what the simple headline readers fail to appreciate is that (as with the unemployment rate), 'average hourly earnings' is a <b>ratio</b>. So, when wages stay flat <b><i>and</i></b> the hours worked fall, you get a jump in "average hourly earnings" - </div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiCttiTh3Tl7-S3vqsOY2HuKFA55GRKahebLBLenR5YycItjb6fIlz5D5RRO92rjuuS2BcWCfk-topDrIuaBWwOA5kwdyYEGFjaOiAXNbpRqXCc6G8DR6JfGKT6Py-sdHmVXsAGblwBVKo/s1600/aa.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="161" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiCttiTh3Tl7-S3vqsOY2HuKFA55GRKahebLBLenR5YycItjb6fIlz5D5RRO92rjuuS2BcWCfk-topDrIuaBWwOA5kwdyYEGFjaOiAXNbpRqXCc6G8DR6JfGKT6Py-sdHmVXsAGblwBVKo/s400/aa.JPG" width="400" /> </a></div>
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knowing this fact explains why real disposable income isn't reflecting the bullish proclamations made by the Fed, Wall Street and the Whitehouse. </div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiJD15FWLlHE09IvmUPxuxG7ZnCsPMTLYFazKblCSkio41gVsIXATZ4VsijAduAJC8bvVz3Gd_RC0kdNlzkEJm6eLKQms6f1MQ4LlpfWlgRTRej-2Er7-aVNhD1CqBw0g02o50pYcqXdNE/s1600/aa.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="160" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiJD15FWLlHE09IvmUPxuxG7ZnCsPMTLYFazKblCSkio41gVsIXATZ4VsijAduAJC8bvVz3Gd_RC0kdNlzkEJm6eLKQms6f1MQ4LlpfWlgRTRej-2Er7-aVNhD1CqBw0g02o50pYcqXdNE/s400/aa.JPG" width="400" /></a></div>
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These are just a few examples of the stark contradictions that exist within the marketplace.<br />
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The purpose of this post isn't to highlight ALL of the contradictions at play, as that would require more writing than I am prepared to do at this time (plus I just want to post to my blog, I don't want to write a book). Instead, this post is intended to expand on a theory about what the Fed might be trying to accomplish by misrepresenting the economic facts as they are. </div>
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As I can best surmise, the Fed is trying to project confidence to Americans that the economy is getting better. But rather than have some anonymous macro-nerd, hunk of cheese turned blogger explain, why don't we get the information straight from the horse's mouth.<br />
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In November 2010, the Federal Reserve Bank of San Francisco published a paper entitled, "<a href="http://www.frbsf.org/economic-research/publications/economic-letter/2010/november/confidence-business-cycle/">Confidence and the Business Cycle</a>" </div>
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here were some of the more noteworthy observations:<br />
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"Indicators of consumer confidence have been at depressed levels in recent months. Business sentiment is also low, reflecting uncertainty about U.S. fiscal policy and the perception that economic weakness may be prolonged. This lack of confidence raises the risks that pessimism can become entrenched and self-reinforcing, further dampening the nascent recovery"<br />
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"These experiences suggest that optimism about the future helped fuel economic booms and that subsequent buildups of pessimism contributed to the busts."<br />
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"In macroeconomic models, this information changes people's expectations about the future and thus their <i>current</i> [emphasis theirs] economic decisions." <br />
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"Clearly, confidence reacts to a host of economic developments. Identifying a causal link between confidence and economic performance is therefore challenging. <b>Is confidence higher because the economy is booming or vice versa</b>?" [emphasis added]<br />
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So how would we check to see projecting confidence to consumers is indeed part of the Fed's post crisis playbook?<br />
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A recent post and chart by Tyler Durden on Zerohedge inspired this trip down the rabbit hole.<br />
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Here's the chart that attracted my attention: <br />
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<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiuwC9Vd4hwq3BUBpWbOtJFc2XTtQ8KOmtMXfjuxVkoicPluBM_mep1qcppacW04XoZ2NsMjg1TaE2WblRqPoQdn9PBRchZPCJqp6NdLrt40GHpv_iCZaa9wAoLtiRqf3WOj1meii7hlOA/s1600/aa.JPG" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="221" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiuwC9Vd4hwq3BUBpWbOtJFc2XTtQ8KOmtMXfjuxVkoicPluBM_mep1qcppacW04XoZ2NsMjg1TaE2WblRqPoQdn9PBRchZPCJqp6NdLrt40GHpv_iCZaa9wAoLtiRqf3WOj1meii7hlOA/s400/aa.JPG" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">link: http://www.zerohedge.com/news/2017-02-09/chart-larry-fink-thinks-horrifying</td><td class="tr-caption" style="text-align: center;"><br /></td></tr>
</tbody></table>
Curious, I decided to pull the University of Michigan's Consumer Sentiment data and pair it up with the performance of the S&P 500 to see if there were any noticeable correlations out past the chart timeline above.<br />
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Here is what I found:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgNTUVx06BRRDn42H7OFI3xnER2pZb-oUlBN3cVIOW6u445-t-xJ0TUrSvEOQ3RyCsI7ck_3j9WIYls70zrZIGwbQXjG6eVRjBml5BhDN0dQNJMenEniDgYu2rd8ib8JU0j7aAfYjPn_hI/s1600/aa.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="468" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgNTUVx06BRRDn42H7OFI3xnER2pZb-oUlBN3cVIOW6u445-t-xJ0TUrSvEOQ3RyCsI7ck_3j9WIYls70zrZIGwbQXjG6eVRjBml5BhDN0dQNJMenEniDgYu2rd8ib8JU0j7aAfYjPn_hI/s640/aa.JPG" width="640" /></a></div>
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Zeroing in on the 2009 to 2017 market/sentiment correlation shows there is definitely a relationship<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEitWiyrQXhIx20-BOE6CHUGN2AM9vXLakyZu9GjAMyaa7DVRJwlPzhhyphenhyphenVx3J3g-JJsJbsuODU8g6a8g7GHRzqwmOqJ70UpJlHNsCX9pwu_jS5_JVhZZ_3oh44Kx3AggqiLqjK0Obqm9tu0/s1600/aa.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="291" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEitWiyrQXhIx20-BOE6CHUGN2AM9vXLakyZu9GjAMyaa7DVRJwlPzhhyphenhyphenVx3J3g-JJsJbsuODU8g6a8g7GHRzqwmOqJ70UpJlHNsCX9pwu_jS5_JVhZZ_3oh44Kx3AggqiLqjK0Obqm9tu0/s400/aa.JPG" width="400" /> </a></div>
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this is a very big departure from the 1978 to 2007 correlation of 0.4985</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhpEQZG9zbFiSClTWJMBT3TCyZCi80znQ4f2vMSqdBLp0g3S9lL7r45hLGZAJyJoG1CFy6LT52eOYkxGhFIzcuO-yGv5md6Ty36eJkPhycZmszOdP_kqgQpyU9P7tXK0UGxmQfHN2A7hKk/s1600/aa.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="290" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhpEQZG9zbFiSClTWJMBT3TCyZCi80znQ4f2vMSqdBLp0g3S9lL7r45hLGZAJyJoG1CFy6LT52eOYkxGhFIzcuO-yGv5md6Ty36eJkPhycZmszOdP_kqgQpyU9P7tXK0UGxmQfHN2A7hKk/s400/aa.JPG" width="400" /></a></div>
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What does this all mean? Well it certainly helps me feel a bit better as I listen to Janet Yellen talk about a robust U.S. economy, or a strong jobs market, and watch as the Fed leaps to action anytime there is even the smallest correction in the US stock market.<br />
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On paper the strategy does make some sense, as confidence (or pessimism/fear) does indeed have a strong impact on the economy. Consider for example how the sniper killing spree impacted the local DC economy in 2002 -<br />
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<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhhoOBHo8BmwNg0gZOdy743M6MQoEBBYpzDVPyh4z4iDV5Gb13Q5PVh-EFydpXi_etensjv5jM0EE1E_D28iZb-fgvUuJ8fBJ8HdzuhjCp9KmC3H5fj554veAYB6lWyrt2v7i01EVIqzME/s1600/aa.JPG" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="273" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhhoOBHo8BmwNg0gZOdy743M6MQoEBBYpzDVPyh4z4iDV5Gb13Q5PVh-EFydpXi_etensjv5jM0EE1E_D28iZb-fgvUuJ8fBJ8HdzuhjCp9KmC3H5fj554veAYB6lWyrt2v7i01EVIqzME/s400/aa.JPG" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">link: http://newspapers.bc.edu/cgi-bin/bostonsh?a=d&d=bcheights20021105.2.85</td><td class="tr-caption" style="text-align: center;"><br /></td></tr>
</tbody></table>
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Unfortunately I think the Fed's strategy isn't working, as the consumer has been in serious financial trouble since <u><i>well before the crisis</i></u>, something I laid out in my larger macro thesis a few years ago:<br />
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http://gubbmintcheese.blogspot.ca/2014/05/revised-view-from-30000-feet-us-economy.html<br />
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While it might sound a bit arrogant to suggest that the Fed is 'wrong' given the brain power that works there, it's important to remember what they were saying just before the sub prime crisis in 2008. <br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhijub7NRMdMoPGvQ7A36JtyaWz7SXMvey4V8lP8tpjveTgapjJJhVSp0XFmZzQj0L3wzNERWOxBFxsu8q6ethWQyvlG4HN0LifBaTb5Wvls-YkZQsfLyp0QdLW-dgtM4lXC4W2OLZNd7Q/s1600/fed+speak.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="290" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhijub7NRMdMoPGvQ7A36JtyaWz7SXMvey4V8lP8tpjveTgapjJJhVSp0XFmZzQj0L3wzNERWOxBFxsu8q6ethWQyvlG4HN0LifBaTb5Wvls-YkZQsfLyp0QdLW-dgtM4lXC4W2OLZNd7Q/s400/fed+speak.jpg" width="400" /> </a></div>
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So they either didn't' see it coming, or they did and said nothing. Neither of these two options is particularly comforting to me as an investor. </div>
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Confidence is a great thing, unless of course it leads to wildly unrealistic expectations, which is what I tend to think is happening when you look at the gap between the stock market and the underlying economy. </div>
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Obviously based on the correlations I've covered above, it appears as though the Fed's post-crisis playbook is working hard to gaslight us towards a recovery. <br />
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So investors, don't trust your own experience and feelings about the economy. Instead trust Auntie Janet when she says, "don't worry - be happy".<br />
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<iframe allowfullscreen="" class="YOUTUBE-iframe-video" data-thumbnail-src="https://i.ytimg.com/vi/KZ1mA1NeUmU/0.jpg" frameborder="0" height="266" src="https://www.youtube.com/embed/KZ1mA1NeUmU?feature=player_embedded" width="320"></iframe></div>
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some other work on the 'recovery' by Gubb:<br />
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<a href="http://gubbmintcheese.blogspot.ca/2016/06/the-post-crisis-comb-over.html">The Post Crisis Combover</a><br />
<br />
<a href="http://gubbmintcheese.blogspot.ca/2015/10/the-fed-has-created-prisoners-dilemma_18.html">The Fed has Created a Prisoner's Dilemma</a><br />
<br />
<a href="http://gubbmintcheese.blogspot.ca/2015/03/paul-tudor-jones-ray-dalio-channel.html">Paul Tudor Jones and Ray Dalio Channel James Goldsmith</a><br />
<br />
<a href="http://gubbmintcheese.blogspot.ca/2015/03/symbiotic-parasitic-and-parasitoidal.html">Symbiotic, Parasitic and Parasitoidal Cycles of Finance</a><br />
<br />
<a href="http://gubbmintcheese.blogspot.ca/2014/09/excel-fun.html">Excel fun </a><br />
<br />
cheers!<br />
<br />
Gubb Gubbhttp://www.blogger.com/profile/00411147564595486174noreply@blogger.com15tag:blogger.com,1999:blog-1820525859739554784.post-39739541367934966012017-01-14T13:31:00.001-08:002017-01-14T13:31:27.336-08:00Gubb's observations and view on market<div class="MsoNormal">
<span style="font-size: 12.0pt;">Here’s a theoretical
question for you: If someone doesn’t realize they are standing on thin
ice, are they in a risky position if the ice doesn’t break? </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: 12.0pt;">This might sound like an odd, semi-obvious question, but when you apply the same basic concept to investing (<b><i>i.e. “Does the stock market need
to fall before there is any ‘risk’ in holding stocks?”</i></b>) you
might have a better understanding about some of the challenges we as
portfolio managers confront on a daily basis. Namely, what should I
advise my clients to do if I see dangerous levels of
"thin ice" building within the stock market? </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: 12.0pt;">I mention this theme
as a follow up to the note that I sent out at the beginning of 2016. In
that message, I took a bit of time to discuss the state
of the stock market (which was down a whopping 12% in the first 15 days
of 2016), and provided some observations about the health of the
economy, numerous interventions by the central banks and my concern
about the expanding gap that persists between underlying
fundamentals and share prices. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: 12.0pt;"> In my note sent January 15, 2016 I pointed out: </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal" style="margin-left: .5in;">
<span style="font-size: 12.0pt;"> “<i>…. Central bank bailouts (by the
Federal Reserve, Bank of England, European Central Bank, Bank of Japan
and the People’s Bank of China) were attempting to solve a complex
economic problem by simply burying it under a mountain
of money and a rising stock market.</i>”</span></div>
<div class="MsoNormal" style="margin-left: .5in;">
<br /></div>
<div class="MsoNormal">
<span style="font-size: 12.0pt;"> I followed that observation with: </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal" style="margin-left: .5in;">
<span style="font-size: 12.0pt;"> <i>“Investors took the central bank’s
pledge to “do whatever it takes” to heart, and share prices rose quickly
off their 2009 lows to all-time record levels a few years later. But,
as stocks raced to higher and higher levels,
a problem was building whereby either the economy would have to “catch
up” to the level of the stock market, or the stock market would have to
“catch down” to a more realistic measure of the underlying economy.”</i></span></div>
<div class="MsoNormal" style="margin-left: .5in;">
<br /></div>
<div class="MsoNormal">
<span style="font-size: 12.0pt;">As bleak as the
beginning of 2016 looked for investors, the year ended with a bang and
the S&P/TSX Composite Index, the S&P 500 Index and the Dow
Jones Industrial Average closed up at 17.5%, 9.5% and 13.4%
respectively. As with previous years (since 2009), the gains in the
stock market weren’t earned thanks to dramatically improving economic
growth or a strong rise in corporate earnings (earnings have
fallen by 18% since the start of 2015). Instead, the gains enjoyed in
the stock market were helped along by the promise of more central bank
support and intervention. Consider these comments from a news story (<i>U.S. Stocks Rally Along With Global Markets
as Brexit Worries Ease</i>, Wall Street Journal, June 29, 2016) that
discussed the sharp, three day 6.75% decline in the U.S. and Canadian
stock markets that immediately followed the shocking “Brexit” vote
results from June: </span></div>
<div class="MsoNormal" style="margin-left: .5in;">
<i><span style="font-size: 12.0pt;">“Many investors now expect major
central banks to act to counter a potential drag on the global economy
after the Brexit vote, with some predicting rate cuts from the Bank of
England and further stimulus from the European Central
Bank. Some also expect the Brexit vote to derail the U.S. Federal
Reserve’s plans to raise interest rates this year.”</span></i></div>
<div class="MsoNormal" style="margin-left: .5in;">
<i><span style="font-size: 12.0pt;"> </span></i><span style="font-size: 12.0pt;">
</span></div>
<span style="font-size: 12.0pt;">Perhaps I am guilty
of being too cautious and cynical with regards to my confidence that the
global central banks will be able to find a solution
to our ongoing macroeconomic problems, but I feel as though I come by
my distrust and skepticism honestly. Consider the comments made by the
Federal Reserve and U.S. Treasury Secretary a few months BEFORE the
sub-prime housing crisis started: </span><br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhvigoG8V5dDBNaFNcj0fzqUpeAL_obVDkoAwTCb9Nb8Q5Ux2fFpOqKYDi42gpMkuInJ-VhNLQYJ9HwxeRmde1c5qeUBHaVQ_yF7SPvk0uu2Ko3dvMCJLKkwbLdlDTngIvPmzbRzAj-s1w/s1600/unnamed.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="464" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhvigoG8V5dDBNaFNcj0fzqUpeAL_obVDkoAwTCb9Nb8Q5Ux2fFpOqKYDi42gpMkuInJ-VhNLQYJ9HwxeRmde1c5qeUBHaVQ_yF7SPvk0uu2Ko3dvMCJLKkwbLdlDTngIvPmzbRzAj-s1w/s640/unnamed.jpg" width="640" /></a></div>
<br />
<br />
<div class="MsoNormal">
<span style="font-size: 12.0pt;">As you can see in
the chart above, the Federal Reserve was on the record stating that
investor concerns about the housing and financial sectors (i.e.
thin ice) were greatly overblown mere MONTHS before the Great Financial
Crisis started in earnest. Any investor who relied on the promises of
the U.S. Central Bank and remained ‘fully invested’ saw the value of
their holdings fall dramatically over the coming
year. A recovery in the stock market was only made possible via an <i>unprecedented number</i>
of coordinated central bank interventions (QE1, QE2, QE3, and Operation
Twist, European Central Bank QE, Bank of Japan QE and a move to
negative interest rates,
just to name a few).</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: 12.0pt;">Successful investing
requires people to buy good companies at cheap prices and sell those
shares when prices are high, thus inspiring the popular
expression “<i>Buy low and sell high.</i>” Unfortunately, markets
saturated with seven plus years of central bank accommodation and
intervention have become so distorted that it’s virtually impossible to
invest in stocks based on traditional fundamentals.
Given the gap between stock prices and fundamentals, investors are now
hoping to “<i>Buy high and sell higher,</i>” a strategy that history has proven countless times to be highly ineffective.</span></div>
<div class="MsoNormal">
<br /></div>
<div align="center" class="MsoNormal" style="margin-left: .5in; text-align: center;">
<span style="font-size: 12.0pt;">“<i>I
don’t think a single trader can tell you what the appropriate price of
an asset he buys is, if you take out all this central bank intervention</i>.”</span></div>
<div align="center" class="MsoNormal" style="margin-left: .5in; text-align: center;">
<span style="font-size: 12.0pt;">-Alex Weber, former head of the Bundesbank (CNBC, October 10, 2016)</span></div>
<div align="center" class="MsoNormal" style="text-align: center;">
<br /></div>
<span style="font-size: 12.0pt;">How substantial is
the gap between current share prices and underlying fundamentals? That
is, how thin do I think the ice is in today’s stock market?
A comprehensive reply would require hundreds of pages of charts and
graphs drawn from some of the more than two dozen economic models that I
have built from scratch over the years and maintain on a regular basis.
Perhaps the most succinct & simple perspective
comes from a chart using Robert Shiller’s CAPE (Cyclically Adjusted
Price Earnings) data. The CAPE uses a 10-year moving average of S&P
500 earnings to try and smooth out business cycle volatility in an
effort to provide a clearer view of stock valuations.
As you can see from the chart below, current CAPE valuations suggest
that the S&P 500 is currently at the 3<sup>rd</sup> most expensive
level in history, trading almost two standard deviations above its
long-term (126 year) average. Only the periods just before
the crashes of 1929 and the <a data-saferedirecturl="https://www.google.com/url?hl=en&q=http://dot.com&source=gmail&ust=1484515421548000&usg=AFQjCNHlDzK_ruegq3NX7oVKryPTF2uqtw" href="http://dot.com/" target="_blank">dot.com</a> bubble were higher than valuation levels today. </span><br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEinkGgnb8c7mVWOwoLsycOjoghygSpSrzECceob-0YWBLV4WwBnsEfAmjFpEh5V4iME7HYoifWdSYTCEZLOTzO_9uk99MALkPNTFKDe0EpRj_wsOwX4_16ta0WmoGeQpDBjUhd5KzUMJso/s1600/unnamed2.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="464" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEinkGgnb8c7mVWOwoLsycOjoghygSpSrzECceob-0YWBLV4WwBnsEfAmjFpEh5V4iME7HYoifWdSYTCEZLOTzO_9uk99MALkPNTFKDe0EpRj_wsOwX4_16ta0WmoGeQpDBjUhd5KzUMJso/s640/unnamed2.jpg" width="640" /></a></div>
<br />
<br />
<div class="MsoNormal">
<span style="font-size: 12.0pt;">Some quick math puts the current market valuation in context:</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: 12.0pt;">For earnings to ‘<i>catch up’</i> to the stock market, and push CAPE valuations back down to their 16.72x average, we would need to see earnings rise
by 56.2% (from their current level of $87.26 USD to $136.30 USD).</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: 12.0pt;">Conversely, if the stock market had to ‘<i>catch down</i>’ to fundamentals, thereby re-converging at the long-term average of 16.72x, the S&P 500
would have to fall from today’s level of 2,280 to approximately 1,458, suggesting a possible decline of 36%
<i>just to get back to the long-term average</i>. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: 12.0pt;"><i><span style="color: red;"></span></i></span></div>
<div class="MsoNormal">
<span style="font-size: 12.0pt;">This is just some of
the ‘thin ice’ that has me concerned as a portfolio manager. While this
thin ice hasn’t broken (yet), it certainly doesn’t mean
that the risks I’ve discussed here aren’t present. Given my mandate is
to not only invest to generate suitable returns, but also to mitigate
undue risk, I feel as though a cautious, defensive stance continues to
be warranted at this time, even as the market
continues its rapid ascent to new record highs. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: 12.0pt;">I leave you with a wonderful quote from Seth Klarman (<a data-saferedirecturl="https://www.google.com/url?hl=en&q=http://zerohedge.com&source=gmail&ust=1484515421548000&usg=AFQjCNEsn3ygxt_7ab6tIndDLhytUlpA6Q" href="http://zerohedge.com/" target="_blank">zerohedge.com</a>, May 5, 2013), who is regarded as one of the best hedge fund (and risk) managers
in the world:</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal" style="background: white; line-height: 15.6pt; margin-left: .5in;">
<span style="font-size: 12.0pt;">“</span><i><span lang="EN" style="color: black; font-size: 12.0pt;">Only
a small number of investors maintain the fortitude and client
confidence to pursue long-term investment success even at the price of
short-term under performance.
Most investors feel the hefty weight of short-term performance
expectations, forcing them to take up marginal or highly speculative
investments that we shun. When markets are rising, such investments may
perform well, which means that our unwavering patience
and discipline sometimes impairs our results and makes us appear overly
cautious. The payoff from a risk-averse, long-term orientation is just
that - long term. It is measurable only over the span of many years,
over one or more market cycles.</span></i><span style="font-size: 12.0pt;"></span></div>
<div class="MsoNormal" style="background: white; line-height: 15.6pt; margin-left: .5in;">
<i><span lang="EN" style="color: black; font-size: 12.0pt;"> </span></i></div>
<div class="MsoNormal" style="background: white; line-height: 15.6pt; margin-left: .5in;">
<i><span lang="EN" style="color: black; font-size: 12.0pt;">Our willingness
to invest amidst failing markets is the best way we know to build
positions at great prices, but this strategy, too, can cause short-term
under performance. Buying as prices are falling
can look stupid until sellers are exhausted and buyers who held back
cannot effectively deploy capital except at much higher prices. Our
resolve in holding cash balances - sometimes very large ones - absent
compelling opportunity is another potential performance
drag. </span></i></div>
<div class="MsoNormal" style="background: white; line-height: 15.6pt; margin-left: .5in;">
<span style="font-size: 12.0pt;"> <wbr></wbr> <wbr></wbr> <wbr></wbr>
</span></div>
<div class="MsoNormal" style="background: white; line-height: 15.6pt; margin-left: .5in;">
<i><span lang="EN" style="color: black; font-size: 12.0pt;">But we know that
in a world in which being anti-fragile is good, what doesn't kill you
can make you stronger. Short-term under performance doesn't trouble us;
indeed, because it is the price that must
sometimes be paid for longer-term out performance, it doesn't even enter
into our list of concerns. Patience and discipline can make you look
foolishly out of touch until they make you look prudent and even
prescient. Holding significant, low or even zero-yielding
cash can seem ridiculous until you are one of the few with buying power
amidst a sudden downdraft. Avoiding leverage may seem overly
conservative until it becomes the only sane course. Concentrating your
portfolio in the most compelling opportunities and avoiding
over-diversification</span></i><i><span lang="EN" style="color: red; font-size: 12.0pt;">
</span></i><i><span lang="EN" style="color: black; font-size: 12.0pt;">for its own sake may sometimes lead to short-term under performance, but eventually it pays off in out performance.”</span></i></div>
<div class="m_-2974069885742949358MsoListParagraph" style="margin-left: 1.5in;">
<br /></div>
<span style="font-size: 12.0pt;"> </span>
<div class="MsoNormal">
<span style="font-size: 12.0pt;">I wish you all the very best in 2017!</span></div>
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<br /></div>
Gubbhttp://www.blogger.com/profile/00411147564595486174noreply@blogger.com0tag:blogger.com,1999:blog-1820525859739554784.post-76493867974446450502016-06-24T18:13:00.000-07:002016-06-24T18:13:47.474-07:00The Post Crisis Comb Over<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjTnItMeoW5x4lMxcvQGF8toVuDWfeBYYrpLK2E8IL1TsVlPtqmhehzaKsIMgq_rb4vXshh0DzvAKiryaM5AH2-JIaGPH_xGi_Zq5q-CMDHunPSTKp0g6Jaz8cW4FHuFhPgrkMQn65oKIw/s1600/combover.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjTnItMeoW5x4lMxcvQGF8toVuDWfeBYYrpLK2E8IL1TsVlPtqmhehzaKsIMgq_rb4vXshh0DzvAKiryaM5AH2-JIaGPH_xGi_Zq5q-CMDHunPSTKp0g6Jaz8cW4FHuFhPgrkMQn65oKIw/s320/combover.jpg" width="272" /></a></div>
<br />
<br />
From Wikipedia:<b> “<i>A comb over or combover is a hairstyle worn by bald or balding men</i></b><br />
<i><b>in which the hair is grown long and combed over the bald area to minimize the evidence of baldness.</b></i><i><b>Sometimes the part is lowered so that more hair can be used to cover the balding area."</b></i><br />
<br />
Bad comb overs. We’ve all seen them, and there is a very good chance that someone in your immediate family sported one of these unfortunate hairstyles at some point in their life (for me, it was my Grandpa). While some comb overs have enjoyed “reasonable” success in creating the desired effect of creating confusion about the actual existence of male pattern baldness (think Donald Trump), most attempts fail miserably.<br />
<br />
It would seem logical then that the relative success or failure of a bad comb over is therefore determined more by two main things: <br />
<br />
1. the proximity of a viewer to the comb over and<br />
2. the level of attention and interest paid to the person sporting the comb over<br />
<br />
Obviously, the closer the proximity to the disingenuous hair style (and the higher the level of interest) the more the illusion of hair gives way to the bald, sad truth. It’s probably at this very point in the discussion that you start to wonder, “What a very odd thing to talk about. Where exactly are you going with this?” Stay with me – it will make sense in a second!<br />
<br />
You see, it is my belief that the ‘recovery’ and the ‘fundamentals’ that have been driving the stock market higher since the end of the crisis in 2009 are in effect, very bad comb overs that can only be seen from a distance. As such, these comb overs are making it very difficult for regular people to see what’s really going on.<br />
<br />
To add to the confusion, Wall Street, Central Banks, Financial Reporters on TV and the paper, have all been very active in pushing a narrative that supports the view of a strong recovery and healthy market. It seems like every week someone ‘of influence’ is out there bragging about what a full head of beautiful hair the US economy and stock market. They assure you that given their exclusive access (which is much closer than you or I can get), they can confirm that all is well and growth is present.<br />
<br />
For years now, the Federal Reserve has referred to the decline in the unemployment rate as proof positive that the US economy is back on track after the crisis. In May of this year Janet Yellen was quoted as saying “we are close to an unemployment rate that most economists would associate with our full employment goal”. <br />
And if we look at the unemployment rate from across the room, it certainly does look impressive.<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjOre7ZvHJuw_P7OYghw2dFJq35yoIYY6lhhjVFQBpXV2eNq-H_nRUvdLXfs1WUoujspa0aOirCoTsedkYondeZlTsqIJIep8OEROU_3eOZfhOiKQfFmw-fOUcelwBWQOuV-ftdeVhGIAc/s1600/1.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="260" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjOre7ZvHJuw_P7OYghw2dFJq35yoIYY6lhhjVFQBpXV2eNq-H_nRUvdLXfs1WUoujspa0aOirCoTsedkYondeZlTsqIJIep8OEROU_3eOZfhOiKQfFmw-fOUcelwBWQOuV-ftdeVhGIAc/s640/1.png" width="640" /></a></div>
<br />
<br />
But here’s the problem: when you take time to learn HOW the unemployment rate is determined, you will recognize that it too is a ratio, one that measures the number of unemployed people divided by the Labor force. So – as we do a little investigating, and look closely at the labor force participation rate – we see something odd.<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj7YUGpixnAt2NgCwjGYiZSSPpZjU7FOGRc-0UrzVTLy0nul1lHrKKk3hV9BCffsiqrM2BCCcqAr5aVZ5LVNUgjS7OZFPkPHLVmF7gZFLmDiMsDStqjY7rSW9VbULn9XQPdVpcpetlmjpE/s1600/2.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="259" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj7YUGpixnAt2NgCwjGYiZSSPpZjU7FOGRc-0UrzVTLy0nul1lHrKKk3hV9BCffsiqrM2BCCcqAr5aVZ5LVNUgjS7OZFPkPHLVmF7gZFLmDiMsDStqjY7rSW9VbULn9XQPdVpcpetlmjpE/s640/2.png" width="640" /></a></div>
<br />
<br />
What would cause the labor force participation rate to decline to such low levels? To understand that, we need to look more into what this data point measures. As the name suggests, the labor force participation rate is yet ANOTHER ratio that measures the “number of people who are either employed or are actively looking for work” versus the number of total people in the labor pool. One important aspect to note about this rate is that “people who are no longer actively searching for work would not be included in the participation rate”. So, going back and reviewing the rate, we can see that much of the decline in the unemployment rate discussed above has been a function of an unusually large number of people who have left the workforce.<br />
<br />
Now when presented with this information some in the “comb over crowd” will suggest that the decline in the labor force participation rate is because of demographics, and therefore the drop is merely a function of baby boomers starting to retire.<br />
Here’s an example from Barrons (link: http://fortune.com/2015/07/02/us-labor-force-participation-drops/)<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjHvzOEXZDRipA24YzU5H4Fh14gHz28j-4hmPLqdQN5CPtfKC3Nyu1KGeFMAlyq5Spp0WkT2WmH51CzoGy5YCVL6SUNNSflobgWQJ4N2tERkYrtx3IoFNS3goLL4ZpAk3-srWsSHhouJZM/s1600/3.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="198" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjHvzOEXZDRipA24YzU5H4Fh14gHz28j-4hmPLqdQN5CPtfKC3Nyu1KGeFMAlyq5Spp0WkT2WmH51CzoGy5YCVL6SUNNSflobgWQJ4N2tERkYrtx3IoFNS3goLL4ZpAk3-srWsSHhouJZM/s400/3.png" width="400" /></a></div>
<br />
So, as someone who is motivated to get to the truth of the matter, we take a bit of time to investigate the validity of the story. To accomplish this we go to one of the best macroeconomic sites on the internet: The St. Louis Federal Reserve FRED<br />
<br />
When you go here and search the database for “labor force participation rate” – you will find that FRED has already done the hard work for you, and has divided the labor pool into various age categories: 25 to 54, 55 to 64, 16 to 19, etc. <br />
<br />
So let’s look at the labor force participation rate of the prime retirement age, 65:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEithG2UAhtFV8yyc-naRnK4YL_d9CtrId6go1qZAiDPkXWBpGc_nym889VBbnQxe5KMvp2y8QS1Icka51HB1Ee7ZNCREqHOeBCv6q0UYzYU1xkXEWp66jXr94Vt82zCcVgbl0XZB1KsTlc/s1600/4.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="252" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEithG2UAhtFV8yyc-naRnK4YL_d9CtrId6go1qZAiDPkXWBpGc_nym889VBbnQxe5KMvp2y8QS1Icka51HB1Ee7ZNCREqHOeBCv6q0UYzYU1xkXEWp66jXr94Vt82zCcVgbl0XZB1KsTlc/s640/4.png" width="640" /></a></div>
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That’s odd, the labor force participation rate for people 65 years and older is INCREASING. It probably explains why we are reading stories like this more often (link: http://www.sacbee.com/site-services/databases/article85405502.html)<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhfzY0KWdAauW21gE-HDJhX5BUoTQ_wLcLYh4scGVXd3f07mw_SPm7Wvic_K2HPkWXJ_j287x4gkI-fJdJa9rBJH0xr41XdTRcxCQyTu1d2xLsXcuOJQXadcZmVo4qUbf0gn0wZ215lPEc/s1600/5.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="67" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhfzY0KWdAauW21gE-HDJhX5BUoTQ_wLcLYh4scGVXd3f07mw_SPm7Wvic_K2HPkWXJ_j287x4gkI-fJdJa9rBJH0xr41XdTRcxCQyTu1d2xLsXcuOJQXadcZmVo4qUbf0gn0wZ215lPEc/s400/5.png" width="400" /></a></div>
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Okay, let’s put the 65 year old cohort aside for a moment. What about workers in the 55 and over category, maybe they are the ones leaving the labor pool.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiRFvGksqlI4BDF47MRRDpUTa8Zo80rkm_viD8sRw5Q3PC3sRApyYbAsrfNKOSCtP9P7z__B_qY3wKD9fmAwryNBITdfcqmHi_Dhpdxjjz9zJhv60ID9UQzRYNIowvPlUuE-eTa1QD1aiU/s1600/6.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="252" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiRFvGksqlI4BDF47MRRDpUTa8Zo80rkm_viD8sRw5Q3PC3sRApyYbAsrfNKOSCtP9P7z__B_qY3wKD9fmAwryNBITdfcqmHi_Dhpdxjjz9zJhv60ID9UQzRYNIowvPlUuE-eTa1QD1aiU/s640/6.png" width="640" /></a></div>
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Again, we see a huge increase. So if the overall labor force participation rate is declining, but it’s not coming down from the 55 to 65 age group (where one would expect it to decline given the “baby boomers are retiring” narrative), then where is the labor pool seeing leakage? Let’s take a look at the prime working age, which is the 25 to 55 category:<br />
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Hello! There is the source of your labor pool shrinkage and it certainly fits the stories we have been reading since the crisis started. As such, this would seem to confirm that the “strong job market” narrative spun by Janet Yellen and the rest of the members of the Federal Reserve is not exactly accurate.<br />
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What we’ve learned here is that when you read reports discussing the ‘strong jobs market’ where the unemployment rate is used as ‘proof’, you can be fairly certain that you are looking at a pretty bad economic comb over.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjUor-wpozgJdDba1XsSKYgqgjj821JTdCR5B1hbAmR73xPf-FQlsw1icj-AeDfE7mLumv4Gr1yx3A5ZeEx7kE1rAwQsA20Ehs-jRbUrmtNiASS0Hy4-0Vd0yxZoSQ83mNJw9Iykek7GAM/s1600/8.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="256" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjUor-wpozgJdDba1XsSKYgqgjj821JTdCR5B1hbAmR73xPf-FQlsw1icj-AeDfE7mLumv4Gr1yx3A5ZeEx7kE1rAwQsA20Ehs-jRbUrmtNiASS0Hy4-0Vd0yxZoSQ83mNJw9Iykek7GAM/s640/8.png" width="640" /></a></div>
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That was fun! Are there any other comb overs out there? Well if you’ve ever walked around the streets you know there is always more than one bad comb over out there. Let’s take a look at another possible comb over of the ‘economic recovery’ narrative: The US consumer.<br />
The US consumer has long been cited as a key component of economic growth.<br />
Consider these two recent stories -<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEikkk6ZrVb2NEDrEHHxgTn54Vqa4de4r-x6EJQ5V7Ws8NN69TfgZX7YMopDb2Bz1LfE_TJwl1cE3k_beS2rXm7kMNE03YdMRIvUTyjFlomXN7G75EZ_ixkoAfs6OeJAy3J1WyZ2W0OazTQ/s1600/31.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="48" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEikkk6ZrVb2NEDrEHHxgTn54Vqa4de4r-x6EJQ5V7Ws8NN69TfgZX7YMopDb2Bz1LfE_TJwl1cE3k_beS2rXm7kMNE03YdMRIvUTyjFlomXN7G75EZ_ixkoAfs6OeJAy3J1WyZ2W0OazTQ/s400/31.png" width="400" /></a></div>
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(link: http://www.bnn.ca/News/2016/5/31/US-consumer-spending-surges-on-strong-auto-sales-inflation-creeps-up.aspx)<br />
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And</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi3_9_Lc1IKgB-LEJqXA7f2d1sOcZDoIFCbIC87pXLX5OSyRkPwVisn0RkZ5vEkYQ2mbIj9JT67NMAfBPZIunYApZl60vujAxzZEoubi0XFqdeK3YbegD15fdpZpLcf-AvSn-i7ueZ-qsU/s1600/9.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="240" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi3_9_Lc1IKgB-LEJqXA7f2d1sOcZDoIFCbIC87pXLX5OSyRkPwVisn0RkZ5vEkYQ2mbIj9JT67NMAfBPZIunYApZl60vujAxzZEoubi0XFqdeK3YbegD15fdpZpLcf-AvSn-i7ueZ-qsU/s640/9.png" width="640" /></a></div>
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(Link: http://www.reuters.com/article/us-usa-economy-idUSKCN0YM1HC)<br />
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(PS: did you notice in the quote above they mention an already identified comb over in the labor market?? You will find that comb overs tend to serve as positive feedback loops to other comb overs)<br />
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So apparently the significant increase in auto sales we’ve seen since the crisis in 2009 suggests the consumer is back on track financially, and therefore we should expect the US economy to begin firing on all cylinders very soon.<br />
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Now, as you can see below, there is no denying that auto sales have been very robust (link: http://www.freep.com/story/money/cars/chrysler/2016/01/05/fca-sales-rose-13-2015-record-year-autos/78268882/)<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiS01kAsgd5ZaQdiHE7aVlcTl3ttXQvONBwHEql-p1QINQHZ9BEVArRwKuB6ou2-f3dCByfFJ2SbQYk-jtq1LLabD_Wg_rTRy7Px5ktUBhEI3OGifPbSl5ovKKIpxpWdOQKDWQn-IScOAs/s1600/10.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="300" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiS01kAsgd5ZaQdiHE7aVlcTl3ttXQvONBwHEql-p1QINQHZ9BEVArRwKuB6ou2-f3dCByfFJ2SbQYk-jtq1LLabD_Wg_rTRy7Px5ktUBhEI3OGifPbSl5ovKKIpxpWdOQKDWQn-IScOAs/s400/10.png" width="400" /></a></div>
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Not only are the car companies selling more, the transactions per vehicle are increasing significantly as well –<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjXyaUoenB9RfJf7-MxCQbg4kIN6s8JQxyu89vFk1_BjUEb8yR8Njt5g3ySpFbHP2hqMq0c2qiLb63QOufyVq4dhL6xhC92QcgGuCsXPFSxSwoA_owZtXlD0eK4rWieA6eKErFJvAkeoO8/s1600/11.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="83" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjXyaUoenB9RfJf7-MxCQbg4kIN6s8JQxyu89vFk1_BjUEb8yR8Njt5g3ySpFbHP2hqMq0c2qiLb63QOufyVq4dhL6xhC92QcgGuCsXPFSxSwoA_owZtXlD0eK4rWieA6eKErFJvAkeoO8/s400/11.png" width="400" /></a></div>
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So logically it should follow that the US consumer has indeed recovered from the crisis, and their financial health is back to pre-crisis levels. Maybe all of the bullish news is correct!<br />
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Then why do we keep reading stories like this?<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhivevO5QHR9FxkYB2xlBibKXQaLSh_3cHRIRssOIDGGUiL9G3G_ZdzgL2Lo1wKU5r20qedfs0SHwNwvAfl9FBNazQXXt_Kg7MvfWVYUb_mhxiVg9wBGCFAOvF81pno55RlCGar47ZpD78/s1600/12.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="145" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhivevO5QHR9FxkYB2xlBibKXQaLSh_3cHRIRssOIDGGUiL9G3G_ZdzgL2Lo1wKU5r20qedfs0SHwNwvAfl9FBNazQXXt_Kg7MvfWVYUb_mhxiVg9wBGCFAOvF81pno55RlCGar47ZpD78/s400/12.png" width="400" /></a></div>
(link: http://www.cnbc.com/2016/06/21/66-million-americans-have-no-emergency-savings.html)<br />
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Or this – taken from Federal Reserve’s “2014 Report on the Economic Well-Being of US Households” – link: https://www.federalreserve.gov/econresdata/2014-report-economic-well-being-us-households-201505.pdf<br />
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So 66% of Americans have “no savings” and 47% say they couldn’t cover an emergency bill of $400.00 without selling something or borrowing? What? How you can afford to buy a $33,000 vehicle but NOT have enough money to cover an unexpected $400 bill? This sounds very much like a comb over, so let’s investigate!<br />
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First – let’s look at how auto sales are happening. Given people have “no savings” and can’t cover an unexpected bill of $400, it makes sense that consumers are finding other ways to finance the purchasing of their vehicles.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgeLOWbiOGZBpMxTiGKyxoJHUGogpiymmatnXeH0cMRjDo7XB4RD2gZUgeqX-lnKvm8kQRw8-tnveuKuLxJCOPkamQmVNiXx9GUJxIxmh9XXjOY9dRqoL00w-verueY3lA4KiKCnKgO6B4/s1600/14.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="520" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgeLOWbiOGZBpMxTiGKyxoJHUGogpiymmatnXeH0cMRjDo7XB4RD2gZUgeqX-lnKvm8kQRw8-tnveuKuLxJCOPkamQmVNiXx9GUJxIxmh9XXjOY9dRqoL00w-verueY3lA4KiKCnKgO6B4/s640/14.png" width="640" /></a></div>
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(link: http://www.wsj.com/articles/after-speedy-recovery-will-fed-tap-the-brakes-on-u-s-auto-sales-1442314801)<br />
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Our instincts were correct: what's driving auto sales? A big jump in loans! And there is one loan in particular whose name you might remember from my letters from a few years ago -<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg-OjnNvkqNCLRXG8hP1zFCNVso8DhsaZjEdVednUUHMx5uJPBZCC-eUntWSUXRO6TTujjojzFqWvvsvBBBrk75oMnsAACFStZBJvrCTKdP2jUahP7DevvSQpqlOFkoEMAAFySY9olevB4/s1600/15.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="251" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg-OjnNvkqNCLRXG8hP1zFCNVso8DhsaZjEdVednUUHMx5uJPBZCC-eUntWSUXRO6TTujjojzFqWvvsvBBBrk75oMnsAACFStZBJvrCTKdP2jUahP7DevvSQpqlOFkoEMAAFySY9olevB4/s640/15.png" width="640" /></a></div>
Sub prime loans - remember them? Well they've made a comeback, only this time it’s in the auto market.<br />
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One thing I puzzled over for a while was how a consumer who has zero savings and can't absorb a $400 emergency bill is able to swing buying a $33,000 car. Surely the payment on such a vehicle via a typical 4 or 5 year car loan would be rather onerous would it not? A little digging finds the answer to my puzzle -<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjB5kMvEA93DOxLAGdnq-O17ennWF2Ib5OOunQRhgEhd69NbJ07aOhOCbYOXlTjrIne2SoFYrdSzAgTkwaArqxIkrA8npEGzaq0fULF02oamz5_JrkVG4k8DsfkZK_Aew020Vi-fsOwG0o/s1600/16.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="248" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjB5kMvEA93DOxLAGdnq-O17ennWF2Ib5OOunQRhgEhd69NbJ07aOhOCbYOXlTjrIne2SoFYrdSzAgTkwaArqxIkrA8npEGzaq0fULF02oamz5_JrkVG4k8DsfkZK_Aew020Vi-fsOwG0o/s640/16.png" width="640" /></a></div>
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96 months (that’s EIGHT years!!!) on a "gently used" car?<br />
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But yes (sadly) despite the warnings, this is indeed happening<br />
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apparently people want a new car more than they worry about their finances - so loans and terms are rising.<br />
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Ironically given the low interest rate environment, the securitization of sub prime auto loans has been a very hot commodity of late. Given the demand for these kinds of loans, there is a very similar kind of ‘frenzy’ going on, as loan demand is high, and puts pressure on finance companies to reduce lending standards to borrowers with lower and lower credit scores…. (stop me if you’ve heard this one before).<br />
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So, the big driver of auto loans is not the “health’ of the consumer per se, it is the accessibility of credit. But if the consumer is borrowing more, surely they must be MAKING more, right? A simple look at the FRED data on 'real median household income" confirms what we had already assumed: income is not growing, it’s still well below it’s pre-dot.com high. In reality the “strong consumer” is yet another example of a horrible economic comb over.<br />
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Okay we will play one more game of “spot the bad comb over” and then I will leave you alone to enjoy the sunshine! One of the most important components that investment managers use to determine the suitability of a particular stock, or a stock market is earnings. Obviously the more profitable a company, the more attractive the company would be to invest in. Conversely, most investors would not be as excited to invest in a company that was losing money year after year.<br />
Here is a fantastic graph of the earnings of the S&P 500 group of companies going back to 1981 (the black line) versus the performance of the S&P 500 (red line). It’s clear that there is a very close correlation between the two inputs: as earnings increase, the market increases – and as earnings decline, so too does the market.<br />
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Given the stock market was sitting yesterday at over 2,100 points, within 35 points of the highest level in recorded history, a look at the relationship above might lead a person to assume the EARNINGS on the S&P 500 are rising and approaching “all time record highs” as well. Hmm, could this be an economic comb over?<br />
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Let’s investigate! A look at the Factset data<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEizQKLolIDx9ktGZkhelfgmboC8CUvWpTFdR1lykMg5-_OBFmdUQ25kY-5YOGI0SlWeqeuvuP0RSMRAcd8_Q-KO9KBzDv4SS8BJvE5A1-NKc5VRTYhtBRKvYGPH7EtUo5oTnQJ1q0-gHTE/s1600/21.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="409" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEizQKLolIDx9ktGZkhelfgmboC8CUvWpTFdR1lykMg5-_OBFmdUQ25kY-5YOGI0SlWeqeuvuP0RSMRAcd8_Q-KO9KBzDv4SS8BJvE5A1-NKc5VRTYhtBRKvYGPH7EtUo5oTnQJ1q0-gHTE/s640/21.jpg" width="640" /></a></div>
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(link here: http://www.factset.com/websitefiles/PDFs/earningsinsight/earningsinsight_6.24.16)<br />
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shows that earnings fell from $1400 per share in June 2007 to a low of $875 by June 2009. They then bounced back significantly to approximately $1800 a share in late 2014.<br />
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But – one thing to note is that earning referenced here is “earnings PER share” – exciting, another ratio! So let’s dig into this a bit more.<br />
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One thing we've discussed before is how many companies are using their cash, or raising debt to buy back their shares. Factset has done an exceptional job of tracking this over the years - here is their latest chart to Q1 2016<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjGFEl517IRqGjfnpECRHz65cNX7F2fXGldOnp1sFOI7rrdJ8yietzXfKiC56Uv6Pgylvm5Jx9H3TzFNKhAUmc4ACQAEy_6iWiOkkgRSjYDMxX2HwZ3DI1TAUYwicP4EKh3-SHLYwAI5wI/s1600/22.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="377" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjGFEl517IRqGjfnpECRHz65cNX7F2fXGldOnp1sFOI7rrdJ8yietzXfKiC56Uv6Pgylvm5Jx9H3TzFNKhAUmc4ACQAEy_6iWiOkkgRSjYDMxX2HwZ3DI1TAUYwicP4EKh3-SHLYwAI5wI/s640/22.png" width="640" /></a></div>
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(link: http://www.factset.com/insight/2016/06/buybacks_06.23.16#.V22yP_krJD8)<br />
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as per the report - the magnitude of the buybacks of late are not insignificant levels -<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEilTd5bY4KTXH_EXR9ULByMnS4KOXoQIP2oXjN5cBDr-zbo2Or7JZ3pVZcbfHhCLUrbHMPzvXmVLaOH3EY7cKKlCCE1YtV8bRU2rnqsVSdwgYriPR3EtA9Z9eoqmIBZW7Jb_6t08oF3jTo/s1600/23.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="136" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEilTd5bY4KTXH_EXR9ULByMnS4KOXoQIP2oXjN5cBDr-zbo2Or7JZ3pVZcbfHhCLUrbHMPzvXmVLaOH3EY7cKKlCCE1YtV8bRU2rnqsVSdwgYriPR3EtA9Z9eoqmIBZW7Jb_6t08oF3jTo/s640/23.png" width="640" /></a></div>
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in fact many research reports suggest that the amount of corporate share buybacks could top a whopping $2 trillion dollars since 2009!<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj0PAdl5j2nFgIzA2kRdYAVaJI02ekf11hZEJAVj5OgmYlP3BKynhLWKAreZsOZ4JvpL2Oy7TFjGq7KCIs2eZf_eIN4lwybFLZsDFY0iIPTc-PMsvjk-YvNhMXAOAcSxJbVMm-tEu_5swg/s1600/24.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="148" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj0PAdl5j2nFgIzA2kRdYAVaJI02ekf11hZEJAVj5OgmYlP3BKynhLWKAreZsOZ4JvpL2Oy7TFjGq7KCIs2eZf_eIN4lwybFLZsDFY0iIPTc-PMsvjk-YvNhMXAOAcSxJbVMm-tEu_5swg/s640/24.png" width="640" /></a></div>
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(link: http://www.bloomberg.com/news/articles/2015-03-03/company-cash-bathes-stocks-as-monthly-buybacks-set-record)<br />
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and, knowing what we do about ratios, a company buying back shares in an aggressive fashion might be doing a bit of a 'comb over' when it comes to earnings per share growth.<br />
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Consider the share count on the S&P 500 <br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjAr-WpUg8pGT0NN4KRj1ZDorx1yDo9xxba3oU9Cq2bS6inbCbIlnFDTPEs7lHYU7GcBm2QpG9gd-jzlq_l9TDeBK0YNO8szefNfN-zVicVXGS_TWu2DRT0_mLBCAd1n6SBaU6wPu5t1Ec/s1600/25.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="353" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjAr-WpUg8pGT0NN4KRj1ZDorx1yDo9xxba3oU9Cq2bS6inbCbIlnFDTPEs7lHYU7GcBm2QpG9gd-jzlq_l9TDeBK0YNO8szefNfN-zVicVXGS_TWu2DRT0_mLBCAd1n6SBaU6wPu5t1Ec/s640/25.png" width="640" /></a></div>
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Now as with the question we asked above relating to the financing of auto sales, I think it would be helpful if we investigated how these companies are raising funds to buy back their stock. Is the cash coming from profits, it is excess cash? How have they raised almost $2 trillion? The clip above already states that companies were "on pace to spend 95% of their earnings on repurchases and dividends" - but another report tracks debt issuance -<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhsk6GuQ-7lJk79Uk0PnoJiNqToTkhL0AdL1L0iCeNRX-TQMhdP9lVeW4WSTgyIrdsgSvroeCNxwKjTCjpavTt8WfXD9FcCxYG1c7RuGgURUYfj7e6C6646yDKeZg3nDUx8AEy1eksMrkg/s1600/26.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="515" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhsk6GuQ-7lJk79Uk0PnoJiNqToTkhL0AdL1L0iCeNRX-TQMhdP9lVeW4WSTgyIrdsgSvroeCNxwKjTCjpavTt8WfXD9FcCxYG1c7RuGgURUYfj7e6C6646yDKeZg3nDUx8AEy1eksMrkg/s640/26.png" width="640" /></a></div>
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clearly this is beginning to resemble the Mother of all comb overs: Over $2 trillion dollars has been poured into the market by companies in an effort to improve the appearance of their "earnings per share", which in turn makes it 'appear' as though there is organic business growth when in fact there is none (which as we pointed out earlier is the exact definition of a comb over!). So here is what is troubling, over the last 5 or six quarters both revenues AND earnings have been declining.<br />
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As per factset:<br />
(link: http://www.factset.com/websitefiles/PDFs/earningsinsight/earningsinsight_6.24.16)<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg-iKL3EAyRUpBX-tkxlXGQEr8skHuJIW4OuUdNru8q3E7tStVKr3mvjmQBSlTjgDBNlOAnWwcZIWtRnYN-SHiMU7OsiNqusiubVLDr_wehoO75Czsafc18xNmhNDoBQpo43IE7AQWIwtE/s1600/27.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="115" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg-iKL3EAyRUpBX-tkxlXGQEr8skHuJIW4OuUdNru8q3E7tStVKr3mvjmQBSlTjgDBNlOAnWwcZIWtRnYN-SHiMU7OsiNqusiubVLDr_wehoO75Czsafc18xNmhNDoBQpo43IE7AQWIwtE/s640/27.png" width="640" /></a></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgxNR0P0GfrXBYyOax4ZmwWHHdbhoOd_lsSbVQT6ar2gcmK-COP7Q46dMrWxDDxsD9E_jEGp3udrRiIl0469F22uxfq00AsohrfwDv9RJwOD_DwF2MzeBoId56mn_hhUOERJu_5TKzwZhc/s1600/28.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="112" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgxNR0P0GfrXBYyOax4ZmwWHHdbhoOd_lsSbVQT6ar2gcmK-COP7Q46dMrWxDDxsD9E_jEGp3udrRiIl0469F22uxfq00AsohrfwDv9RJwOD_DwF2MzeBoId56mn_hhUOERJu_5TKzwZhc/s640/28.png" width="640" /></a></div>
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5 or 6 quarters of declining revenues and earnings is a big deal. You will recall the graph at the top of this section that showed the close correlation between GAAP earnings and the performance of the S&P 500? Well here is a closer look at what's been happening since late 2014 <br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgUYdUA03IqwWFWCEcafJD5jJL1gS2LkrzjZtVu8A3kkRW7fx5uGkArTOpHF0j-n9ITriP3nrGs04fcOduFgNpNeZJYT7MHzprBns6SFt5kuX4LE0jkFkJ2lrdnvpObMUjH0eTrKA1DALo/s1600/29.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="276" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgUYdUA03IqwWFWCEcafJD5jJL1gS2LkrzjZtVu8A3kkRW7fx5uGkArTOpHF0j-n9ITriP3nrGs04fcOduFgNpNeZJYT7MHzprBns6SFt5kuX4LE0jkFkJ2lrdnvpObMUjH0eTrKA1DALo/s640/29.png" width="640" /></a></div>
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Earnings declines of this nature are not typical, and should serve as a huge red flag to investors that there may be "danger ahead". Given the exercise we've just gone through in learning how to investigate and identify '<b><i>economic comb over</i>s</b>', the last thing we want to do is be caught by an unexpected gust of wind (you know, like an unexpected Brexit vote where the UK leaves the EU) that exposes the secret that the comb overs that the market is so desperately trying to conceal..<br />
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which of course is......<br />
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(there is NO GROWTH!) </div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiB7YV7tUKmAIjkml6xHhfooXeeNCV-wLKk69VBh3c8ol1rRiJYumhTV1gZG5QSNB4bTRoVuiOFtuZXaMqwBd6_0djIzcbPN56djXAxu-wtksQzNc66GxsIh6BACWRh_qw3eZ7UjtregGY/s1600/30.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="396" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiB7YV7tUKmAIjkml6xHhfooXeeNCV-wLKk69VBh3c8ol1rRiJYumhTV1gZG5QSNB4bTRoVuiOFtuZXaMqwBd6_0djIzcbPN56djXAxu-wtksQzNc66GxsIh6BACWRh_qw3eZ7UjtregGY/s400/30.png" width="400" /></a></div>
<br />Gubbhttp://www.blogger.com/profile/00411147564595486174noreply@blogger.com2tag:blogger.com,1999:blog-1820525859739554784.post-57522571594351395402016-06-02T19:51:00.003-07:002016-06-02T19:51:53.680-07:00Finding a solutionCaroline Baum tweeted a piece by Greg Ip in the Wall Street Journal today that caught my attention<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjoI-V1ahI5W7OLIxA5xisSQIxjyYpkLK0f5VqnjSkHWs_cOFBca54FWzgjCPRaPuoni1pZBk1qU_-PCtbhMYHjPQl_XJKTLT0a-EtEAHhm4DlVjrWXEisoD8QrMKTgHog0T5-qDA3QQ8w/s1600/caroline.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="232" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjoI-V1ahI5W7OLIxA5xisSQIxjyYpkLK0f5VqnjSkHWs_cOFBca54FWzgjCPRaPuoni1pZBk1qU_-PCtbhMYHjPQl_XJKTLT0a-EtEAHhm4DlVjrWXEisoD8QrMKTgHog0T5-qDA3QQ8w/s320/caroline.JPG" width="320" /></a></div>
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I replied with a link to my "<a href="http://gubbmintcheese.blogspot.ca/2014/05/revised-view-from-30000-feet-us-economy.html">View from 30,000 feet</a>" piece and a unduly cheeky little jab that in retrospect was crappy and just plain old rude. I had been attempting to have a bit of a discussion a bit earlier in the morning with someone who just rubbed me the wrong way and I unfortunately took out my frustration on Caroline - something I still feel really crappy about as I am better than that and always try to be respectful while talking to people.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEid6XmN17dk4i8ney_aRHIDCm5becHmsTFc35Wu5-Dmp6mifEe6J1z984Hn9-JiqgR5n3mYaqNJHc8UsyKsoa8j0aq5x1mPy1nZ3vFLvnNYH0e8vVUs5d7QKwI30T6HEmJRAMfLsFEMFvE/s1600/snark.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="52" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEid6XmN17dk4i8ney_aRHIDCm5becHmsTFc35Wu5-Dmp6mifEe6J1z984Hn9-JiqgR5n3mYaqNJHc8UsyKsoa8j0aq5x1mPy1nZ3vFLvnNYH0e8vVUs5d7QKwI30T6HEmJRAMfLsFEMFvE/s320/snark.JPG" width="320" /></a></div>
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Caroline rightly lit me up.. and I realized I came across as a bit of an ass, to which I apologized. </div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiznRV1TMAZ4eCHOMByrdU4IBke5Uf3FGNRQQAAMpsk8pTmAQi-WmrrETYH2RjHSgIFpXtRbJOAQVX8EYFa2KOnxNOSsiXaFr0BcV7S0Hh6chj2dhQK0-1_SQNS34KQHsiTsalXH_17goM/s1600/light+up.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="106" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiznRV1TMAZ4eCHOMByrdU4IBke5Uf3FGNRQQAAMpsk8pTmAQi-WmrrETYH2RjHSgIFpXtRbJOAQVX8EYFa2KOnxNOSsiXaFr0BcV7S0Hh6chj2dhQK0-1_SQNS34KQHsiTsalXH_17goM/s320/light+up.JPG" width="320" /></a></div>
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She then asked me a pretty damned good question - </div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhzgEjoQWyGwfcLZjoejsflZgfLhce1mTgvt3noQx43752yiA6KMN_v-zfSfHyeTsCiiDA8Xw-QCUOfpBH545aIEDl59rDhyphenhyphen0nhCTEsAiiHzFJ5sjuK6r5g4rmcMkLsQZnu7ZlRpSM8h68/s1600/solution.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="127" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhzgEjoQWyGwfcLZjoejsflZgfLhce1mTgvt3noQx43752yiA6KMN_v-zfSfHyeTsCiiDA8Xw-QCUOfpBH545aIEDl59rDhyphenhyphen0nhCTEsAiiHzFJ5sjuK6r5g4rmcMkLsQZnu7ZlRpSM8h68/s320/solution.JPG" width="320" /></a></div>
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I provided a bit of a response (you can see the whole conversation <a href="https://twitter.com/gubbmintcheese/status/738376153392545792">here</a>), but her question rolled around in my head all day. </div>
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So, given I have a little time and it was an exceptionally good question. I thought I'd take a bit of time to lay out SOME of the solutions I would suggest. </div>
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I think the obvious thing to say here is that the "very" best solution to this economic issue is to not allow yourself to get into this position in the first place. It's kind of like asking for a solution to the Titanic's problems <i><u><b>AFTER</b></u></i> it hit the iceberg. </div>
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The second key thing that I think is important to point out and remind people is that we are still asking for SOLUTIONS today. That means whatever the problem happens to be, it's still here, it's still a problem. In light of that, let's PLEASE dispose of the 'a recovery is just around the corner' stories that follow any and all remotely positive data points. It's been seven years of waiting for the recovery Godot - enough already. </div>
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All of those requests aside - there are a few things that I think could and would truly help get the economy back on track. </div>
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First and foremost, since the consumer makes up a huge part of the US economy, and for reasons I laid out in "<a href="http://gubbmintcheese.blogspot.ca/2014/05/revised-view-from-30000-feet-us-economy.html">The View from 30,000 Feet</a>" - I think the first place to start would be to help the consumer lower their debt loads. While I haven't seen 'official' data lately, I know credit card debt balances are still quite high. <a href="https://www.nerdwallet.com/blog/credit-card-data/average-credit-card-debt-household/">NerdWallet did a review for 2016</a> and here is what they found:</div>
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Average Credit Card Balance in USA - $15,762.00</div>
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Average Car loan Balance: $27,141.00</div>
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Now, some (but not all) of these cards still are able to charge some pretty mind boggling rates. It's even more amazing when you see where GIC/CD and Bond rates are. </div>
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<a href="http://www.creditcards.com/credit-card-news/interest-rate-report-060116-unchanged-2121.php"><br /></a></div>
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<a href="http://www.creditcards.com/credit-card-news/interest-rate-report-060116-unchanged-2121.php">Creditcards.com </a> tracks average rates on all credit cards in the US - and here's the number for June 1st..</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhKe-SRTgPXePJue1fMv3CwFAw0WrBdaIP2xm12MxNUwfFsc4_7ZNjD5B43MPX88ZH-IJCGUblV3SS2BRntyCRNl5MOKTep5liZ-HHse7e8BzGgJ6NiXgV-6sR0_VXVOcVD8efFOPj-9VA/s1600/rates.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="85" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhKe-SRTgPXePJue1fMv3CwFAw0WrBdaIP2xm12MxNUwfFsc4_7ZNjD5B43MPX88ZH-IJCGUblV3SS2BRntyCRNl5MOKTep5liZ-HHse7e8BzGgJ6NiXgV-6sR0_VXVOcVD8efFOPj-9VA/s400/rates.JPG" width="400" /></a></div>
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I don't need to tell you that a rate like that is ridiculous given we still basically exist in a ZIRP world. Yes Banks need to charge a certain level of interest to compensate for the risks and service.. but 15.19% AVERAGE?</div>
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I know here in town the rate on some department store credit cards is 28% !</div>
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So yes - one solution would be to mandate a cap on rates. TO be fair I'd suggest that the banks are only allowed to charge X% over a certain reference rate. </div>
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Secondly - I'd start up a Federal government loan repayment program whereby a consumer can transfer a certain amount (say $5,000 max) to an account that is held but charges NO interest. The consumer's credit limit is not increased, and they have to make minimum payments on this amount. The details are sketchy yes, but in essence you are enabling consumers to get a bit of shelter and responsibly pay down their debts (rather than just forgive them). Yes bank profits would be impacted - but I think they've done rather well over the years charging 19%.. no? </div>
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Once the $5k is paid off, the consumer can reload the account and do it all over again. The idea is as the consumer works down these debts - the amount of money NOT spoken for in interest payments increases.. which will help boost overall consumption and therefore GDP.</div>
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Another program that I will admit is NOT my idea but a dear friend of mine - allow people who can't afford to put money into their RSP accounts to SELL their unused RSP contribution room to someone who can afford to buy it. Some people have literally hundreds of thousands of dollars worth of UNUSED RSP contributions that they will NEVER be able to utilize. Enabling them to be able to sell it </div>
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a) allows them to use the proceeds to pay off debt (ideally)</div>
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b) spend it</div>
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it allows someone who is well off to expand their tax deferral more than they normally would - but it also suggests the Govt would be able to TAX more than they normally would once the funds are transferred into a RIF.</div>
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this would also create a bit of a new industry and trading market - this means jobs, revenue.. etc. </div>
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I see no real downside in this option and while some would say it helps the rich at the expense of the poor.. I'd suggest it's a far more balanced approach than simply ramping the stock market to create a 'wealth effect' - which ONLY helps the wealthy. </div>
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One final idea before I sign out would be to change executive stock compensation so that there is no incentive to focus on boosting stock prices over the short term at the expense of the longer term health of the company. As we all know, much of the 'share buybacks' and earnings shenanigans we are reading about now are being done to keep prices high so executives get fat bonuses. Let's work on figuring out a way to align the board with shareholders.. perhaps naive.. but let's at least give it a try.</div>
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Yes - infrastructure is a big one, and there are a million more ideas.. but here are a few for you..</div>
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From the consumer side - people just need to be better aware of their budgets - live within their means, and SAVE. The stock market is not going to answer your retirement prayers. Juicy returns in the stock market from 1980's to 2009 convinced people that they didn't need to save much in order to retire comfortably.. this is wrong. </div>
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You don't need to make $300k a year in order to be able to save up enough to retire comfortably.. you just need to live modestly, within your means.. and have a very strict saving discipline. Ask yourself "do I really need this right now, or do I just WANT it.."</div>
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that simple little process will make a huge difference over the years. </div>
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anyhow - there are a few ideas off the top of my head.</div>
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thanks for getting my brain working this morning Caroline.. and I'm sorry for being a jerk. : (</div>
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cheers!<br /></div>
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Gubb </div>
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<br />Gubbhttp://www.blogger.com/profile/00411147564595486174noreply@blogger.com1tag:blogger.com,1999:blog-1820525859739554784.post-1866580033101409102016-05-20T15:35:00.002-07:002016-05-20T15:39:45.608-07:00Being mindful of the bigger picture<br />
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Just look at those fat stacks, should I grab 'em????</div>
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As I have admitted before, I am hard wired to be cautious. While this has certainly kept me out of trouble (mostly..) it has also probably held me back from enjoying one or two big wins over the years as well. As I look back on my career to date, I can see that I tend to identify problems very early on, and my knee jerk reaction is to reduce my exposure to the issue immediately. That being said, what I have also learned over the years is that these problems, can (and do) persist for extended periods of time. </div>
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As J. M. Keynes once said, </div>
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<b> "Markets can remain irrational longer than you can remain solvent."</b></div>
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Now I've already gone on a bit of a rant (<a href="http://gubbmintcheese.blogspot.ca/2014/07/john-maynard-keynes-loves-lemmings.html">here</a>) on some of my pet peeves on Keynes' views related to career risk, and the idea above that you just need to always 'go with the flow'. Sure, it might work if I was trading for myself, or my investment mandate was different, but the reality is that I run "other people's money", so I feel it's my duty to be aware of where ANY risks may lie.</div>
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While I am certain my approach works best for me (and by extension to my clients), I am certainly not arrogant enough to think that it makes sense for everyone. Obviously different portfolio managers and different clients have unique views on how best to invest and that's great. </div>
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One thing that I have noticed over my career (and have spoken about a a fair bit on this blog) is how UNPOPULAR it is to take a bearish view on the market, even when history ultimately <i><u>proves</u></i> that it was the prudent and correct move to make. </div>
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I marvel at this phenomenon, although it has obviously been the source of much frustration over the last few years as well. Why? Well after correctly calling the crisis in 2007, I continued to promote caution after the rally started and the bailouts began. While the price action of the market has certainly made me look relatively foolish since March 2009, I felt (and continue to feel) that we haven't hit the absolute bottom yet. That being said, I've been reasonably pleased with my calls over the years. What I find amazing is that even as the risks increase and my views continue to be confirmed.. no one cares because of PRICE!</div>
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think about that - </div>
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After years of debating, we now accept that the 'recovery' has been anything but: US economic growth, while positive, is the weakest recovery in history, and we are still reliant on the Fed to come to the rescue at the first sign of trouble. So all of those optimistic narratives that we heard over the years relating to "green shoots", "housing recoveries being driven by first time home buyers" etc was wrong. </div>
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Interest rates have NOT increased - in fact bond yields are down. Save the crazy movements during the taper tantrum in 2013 (which proved to be a huge buying opportunity if you used <a href="http://gubbmintcheese.blogspot.ca/2014/12/mcculley-fed-rates-and-ism.html">McCulley's nominal ISM model</a> like I do..)</div>
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The rise of politicial discontent is also something I've discussed in great length - my focus started with the rise of the Golden Dawn party in Greece - but voter discontent certainly rings true given the rise in popularity of Donald Trump and Bernie Sanders as well. </div>
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I started talking about the rally in housing in 2012 and suggested it was NOT a signal for recovery driven by first time home buyers and a stronger economy, but rather a function of large institutional and private buyers..</div>
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I admitted that I was wrong on the recession call for 2012.. as the negative data got revised away. But was happy to have erred on the side of caution. as I said before - that's how I am wired.</div>
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Throughout the rally we weren't seeing anything other than Central Bank support of the stock market. There was no strong GDP growth and no quality increase in earnings. Given I'm a strict value guy who needs fundamentals, this was clearly NOT the market for me. </div>
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I was also early in pointing out the massive expansion in multiples..</div>
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and early in discussing the impact of share buybacks on making earnings per share metrics look better than they actually were (from an organic perspective).</div>
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I was also VERY early in talking about income inequality</div>
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I have been a big believer in lower rates for longer (and therefore a long bond buyer) this has been a very good move for my clients and I.. although 2013 & the taper tantrum was indeed my worst year EVER versus the market. </div>
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I was also very early to realize that Ben Bernanke's "Wealth effect" was a no go, and wouldn't help stimulate the economy..</div>
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But - I have certainly made some mistakes - most notably I was very early on gold.. </div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhH5m88DjkYhMsle7dtVsdl-rP9wU2BkaF55soHm3DLofyxGjJMswIZX_GSg_vXIOcM1RTo0lTIlqQ271xOYgaG_XjLtC3d4W79foUihsFYQsZAOeqPp0oMgEwP0MfFWSoTTg78ya7jMVk/s1600/homz.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="256" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhH5m88DjkYhMsle7dtVsdl-rP9wU2BkaF55soHm3DLofyxGjJMswIZX_GSg_vXIOcM1RTo0lTIlqQ271xOYgaG_XjLtC3d4W79foUihsFYQsZAOeqPp0oMgEwP0MfFWSoTTg78ya7jMVk/s320/homz.JPG" width="320" /></a></div>
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and I did not see this decline in oil coming as that was my hedge against my being wrong on the economic recovery. </div>
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I'm human.. and certainly not anything close to perfect. </div>
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I write this blog to vent, and to record my thoughts and views so that I can go back and see how I did where I was right, and where I was wrong. Obviously I am not the only one saying these things, and there have been many who have been earlier in their calls, and far more accurate than I have been. I am certainly not trying to suggest I am the only one who sees this. I am just laying out the risks as I have seen them in the past, and how I see them going forward, because I think that is an important aspect of what I do as a portfolio manager. </div>
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As for grabbing that "fat stack" of cash shown at the top of the post..</div>
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this is where having a strong idea of the bigger picture will help you decide if it's a good idea or not.</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiaqTHU8nEBoQcsqCfqfkutT-jeCf7uFpIgXsaH28uSwCy0jZlQMn3_EaJIsFO3ST9P_XBW5a9HLN-PGTJfYEq2OkYML9uxSHejPaqmBAw6N0Efx3SdUkWM4xFYSWC5ete-th5W5060THA/s1600/risk.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="425" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiaqTHU8nEBoQcsqCfqfkutT-jeCf7uFpIgXsaH28uSwCy0jZlQMn3_EaJIsFO3ST9P_XBW5a9HLN-PGTJfYEq2OkYML9uxSHejPaqmBAw6N0Efx3SdUkWM4xFYSWC5ete-th5W5060THA/s640/risk.jpg" width="640" /></a></div>
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cheers!</div>
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Gubb ; )</div>
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Gubbhttp://www.blogger.com/profile/00411147564595486174noreply@blogger.com1tag:blogger.com,1999:blog-1820525859739554784.post-55563374738991868162016-01-17T15:07:00.003-08:002016-01-17T15:07:35.954-08:00Looking at Shiller's CAPEMuch has been made about the usefulness of Robert Shiller's CAPE research in light of the rally we've seen in the stock market since March 2009. Some people even go out of their way to suggest the <a href="http://www.businessinsider.com/robert-shiller-pe-ratio-2011-4">Shiller Cape is a "useless" for investors</a> , forgetting perhaps that Shiller won the Nobel Prize in Economics in 2013 for his work on this subject. (*yes Blog Police, I am very aware that there is no official "Nobel Prize in Economics.. I was just too lazy to type out the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.. get a life!)<br />
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But I digress.<br />
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I think calling the Shiller CAPE "useless" is, in and of itself.. "useless". While I do agree that it should not be used as a model to TIME an investment in the stock market.. I do think the information provides a ton of useful and interesting information about the stock market.<br />
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I have spent many years looking at the data from a variety of different angles to see what sort of information and understanding I could glean from the good Doctor's research. The following post details one of the more interesting findings I've come across over the years - and while it might be 'irrelevant' to high frequency traders and algos whose investment time horizons are measures in "nanos" and "picos", it should be of interest to any retail portfolio manager or broker who runs money for individual clients to finance their retirements.<br />
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What did I do? I looked at the Shiller data (<a href="http://www.econ.yale.edu/~shiller/data/ie_data.xls">link here</a>: note, this will open an Excel Spreadsheet) and then calculated the 5, 10, 12, 1 and 20 (per) year returns based on a starting CAPE level. The returns that I found do NOT include reinvested dividends, but it at least gives you an idea of what sort of return one "should expect" for the next few years.<br />
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The results came in as one would expect - if you pay a higher CAPE for a stock.. your following year's returns are significantly lower than if you buy at a lower CAPE.<br />
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Here is a graph for the 12 year averages..<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjo4czwCBZrdnM9x4rxkQmKjrgHq3ssBAvTDIF4V4_59Qh1Wqlzfi9g2l9uBrhNvlhWAKgXmJVnX2zO0teCvBu-xWkjqQ6eBsTbipDWO6vVa2sCGgFC3xwKJ1cthcG73FmzGTWPjFlh7gk/s1600/12cagr.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="290" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjo4czwCBZrdnM9x4rxkQmKjrgHq3ssBAvTDIF4V4_59Qh1Wqlzfi9g2l9uBrhNvlhWAKgXmJVnX2zO0teCvBu-xWkjqQ6eBsTbipDWO6vVa2sCGgFC3xwKJ1cthcG73FmzGTWPjFlh7gk/s400/12cagr.JPG" width="400" /></a></div>
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So, if you buy the S&P 500 at a CAPE of 40.40x to 44.20x, you should expect to earn an average return of -0.41% a year for the next 12 years.. alternatively, if you buy with a CAPE between 4.87x and 12.96x, your average return per year jumps to a very healthy 7.81%.. Nice!<br />
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I won't bore you with all of the data (the entire 5-20 year spectrum) as that's not what I really want to discuss in this post.. but here is the 10 year just for laughs..<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiZU1WfGeCRiEONQpuopzYXiZHr7i7_2i5IyakMFmMjq2uGfqlzw8TZkxaAcfUgrXL15faNSs4jr0Lap4vLkEvVNJPuDLDS968slBmt_h7qPIgFaj9HchogOSEGl1XKFYGL0IshecZulFo/s1600/10cagr.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="290" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiZU1WfGeCRiEONQpuopzYXiZHr7i7_2i5IyakMFmMjq2uGfqlzw8TZkxaAcfUgrXL15faNSs4jr0Lap4vLkEvVNJPuDLDS968slBmt_h7qPIgFaj9HchogOSEGl1XKFYGL0IshecZulFo/s400/10cagr.JPG" width="400" /></a></div>
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This process is all well and good and provided a result that wasn't, nor shouldn't have been a shock. We as investment professionals spend our entire careers trying to identify "attractively priced' companies to buy on behalf of our clients. Indeed, if you are a regular reader of this blog (that's a joke - as no one reads this thing - but that's okay.. I write more for me.. not anyone else..) then you know equity valuation is a sort of a big thing in my book - and why my favorite quote about investing is:</div>
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<b><i>"Never overpay for a stock. More money is lost than in any other way by projecting above-average growth and paying an extra multiple for it."</i></b></div>
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Charles Neuhauser (Bear Stearns)</div>
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Yes - I've mentioned this quote a few times - <a href="http://gubbmintcheese.blogspot.ca/2014/06/charles-neuhauser-meets-asch-paradigm.html">here</a> and <a href="http://gubbmintcheese.blogspot.ca/2014/08/the-industry-is-getting-lazy.html">here</a> but the frequency of my mentioning it simply highlights the importance of Neuhauser's advice: Don't overpay.. ever!<br />
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Now.. here is where it gets super interesting....<br />
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Last week I finally got a chance to watch Jim Bruce's amazing documentary "<a href="http://www.moneyfornothingthemovie.com/">Money for Nothing - Inside The Federal Reserve</a>". (If you haven't seen this movie.. do yourself a favor and watch it.. I'd say it's a "MUST".)<br />
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One part that really stood out for me was the concrete view that the Fed seems to be fully engaged in blowing bubbles to recover from past bubbles. So, after I watched the movie.. I went back to my CAPE spreadsheets - and sure enough.. there it is. Evidence of another Fed induced bubble.<br />
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What am I talking about? Well - go back to that 12 year CAGR chart above.. this time I was looking at WHEN the upside bounces on those returns from starting CAPES of 44.20 down to 20x happened.. (circled here for you in angry blue....)<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEga9GkCMM_ChUJ3VYm4utwLK8vWz172pQhyN8iFe9dW3b8vXBjBARBr0NZ6v5WHwe_6vLrhFqMgjgnhEB28KIprlzh-ZKwJW3K-GrF3vL4FuHJKdsQqLxpAMWUQTOpysKsAD5YpCFxM_DM/s1600/12yre.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="231" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEga9GkCMM_ChUJ3VYm4utwLK8vWz172pQhyN8iFe9dW3b8vXBjBARBr0NZ6v5WHwe_6vLrhFqMgjgnhEB28KIprlzh-ZKwJW3K-GrF3vL4FuHJKdsQqLxpAMWUQTOpysKsAD5YpCFxM_DM/s320/12yre.JPG" width="320" /></a></div>
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Why angry blue? Well.. check out the dates that are associated with he highest rates of return earned over a 12 year period..</div>
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the top 68 HIGHEST 12 year rates of return have been earned at some point between 2001 and 2015..</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiJJvVetFGr0J4HduzymfuMsDPAWVBNrGnvTkxoitb4Q_Y5ytqLDXcF3p2YqlDhqI2tfKBhIu-KPv1NOv7GyWfYT9xKI3xb83woqTM0Fy583l4nA9YMoofbIg2t79xtyP_7CP3RTTydf0E/s1600/list1.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="400" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiJJvVetFGr0J4HduzymfuMsDPAWVBNrGnvTkxoitb4Q_Y5ytqLDXcF3p2YqlDhqI2tfKBhIu-KPv1NOv7GyWfYT9xKI3xb83woqTM0Fy583l4nA9YMoofbIg2t79xtyP_7CP3RTTydf0E/s400/list1.JPG" width="128" /></a></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEis_m-nmwVo40tl7kj2HF-jgFfqtYKVhTqA8JehgRCXpwVQ3KEjXvuf_dFvwuMrZRQ5aVxykfHOC8SWuBrQAUfuMuDVd-0UVExMckGiBUttDBnbzmww5J-azZG6IS89-ZhaCjpnpFUu4lI/s1600/list2.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="400" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEis_m-nmwVo40tl7kj2HF-jgFfqtYKVhTqA8JehgRCXpwVQ3KEjXvuf_dFvwuMrZRQ5aVxykfHOC8SWuBrQAUfuMuDVd-0UVExMckGiBUttDBnbzmww5J-azZG6IS89-ZhaCjpnpFUu4lI/s400/list2.JPG" width="166" /></a></div>
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It follows then that the Fed's blowing of a SECOND bubble after the dot com bust has greatly skewed the 12 year average rates of return - and that absent a Fed induced bubble (if things were allowed to sort themselves out naturally.. like they did from 1881-2000) the rates of return would have been substantially lower. </div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgSKIeURtQDYtsJDIZf0KhsbWCceVoFbav0rEIe2v5owbMqadTyxvz8J5cMVvEI1XiO8WRAHCde6fpP0LEuMT4AXlOKwUM93wki1dI05plI5vSuld6rPDo18TBwY9yXqd5eFKuYhASiwPg/s1600/shill.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="222" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgSKIeURtQDYtsJDIZf0KhsbWCceVoFbav0rEIe2v5owbMqadTyxvz8J5cMVvEI1XiO8WRAHCde6fpP0LEuMT4AXlOKwUM93wki1dI05plI5vSuld6rPDo18TBwY9yXqd5eFKuYhASiwPg/s320/shill.JPG" width="320" /></a></div>
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the other thing that I think contributed towards the jump in valuations was acceptance of "forward earnings". I seem to recall that when I first started in the business, research reports and commentary centered around "trailing" earnings.. that is, earnings that had already been reported. Gradually 1 year forward eps estimates crept into the finance vernacular. First, along side the trailing - so you'd see something like:</div>
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XYZ is trading at 10x trailing earnings, and only 6x next year's.</div>
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then the street went super cheeky and started talking about 2 year forward earnings..</div>
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So now you can imagine what good old Mr. Neuhauser would say if he saw that we were paying 18x <b><u>two year forward expected earnings</u></b> on a company whose growing at 4% a year..</div>
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he'd probably yell a lot and then get a nosebleed..</div>
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So yes, the CAPE isn't a useful tool for telling you when to get in or out of a stock.. but, I think it IS a valuable tool for giving you an idea of what sorts of returns one should expect given a certain starting level on the CAPE...</div>
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interesting stuff!</div>
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<br />Gubbhttp://www.blogger.com/profile/00411147564595486174noreply@blogger.com3tag:blogger.com,1999:blog-1820525859739554784.post-1020057111484783752015-10-18T13:08:00.002-07:002015-10-18T13:08:10.153-07:00The Fed has created a Prisoner's DilemmaGame theory is generally regarded as a science that seeks to understand how intelligent, rational humans cooperate and compete with each other during the decision making process. One of the more well known game theory models is called "<a href="https://en.wikipedia.org/wiki/Prisoners%27_Dilemma">The Prisoner's Dilemma</a>". What makes this particular game theory model noteworthy is that under the construct of the prisoner's dilemma, the rational actors are compelled to behave <i>irrationally</i> and therefore end up making decisions that are not in their own best interests. This odd outcome given the specific framework of the prisoner's dilemma results in the model being looked upon as a paradox.<br />
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I believe that the Great Financial Crisis created some very problematic situations that have forced the Federal Reserve (and all other Central Banks) to create their own version of a "Prisoner's Dilemma" within the stock market. One primary issue that I feel required the Fed to use this unorthodox approach (as it continues to hold back a full scale economic recovery) is that most of the developed world is mired in a "<a href="https://en.wikipedia.org/wiki/Balance_sheet_recession">Balance Sheet Recession</a>". While not a mainstream and widely accepted economic view, Nomura economist Richard Koo has been talking about this phenomenon for decades. Initially he used the term to describe the economic conditions in Japan starting in 1990, but expanded his view to include the United States in 2008.<br />
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Wikipedia describes a balance sheet recession this way,<br />
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<i>"A balance sheet recession is a particular type of recession driven by the high levels of private sector debt (i.e., the credit cycle) rather than fluctuations in the business cycle. It is characterized by a change in private sector behavior towards saving (i.e., paying down debt) rather than spending, which slows the economy through a reduction in consumption by households or investment by business. The term balance sheet derives from an accounting equation that holds that assets must always equal the sum of liabilities plus equity. If asset prices fall below the value of the debt incurred to purchase them, then the equity must be negative, meaning the consumer or business is insolvent. Until it regains solvency, the entity will focus on debt repayment".</i><br />
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Unfortunately many people (including most economists, analysts and Central Bankers) still do not appreciate that the United States (and indeed ALL of the advanced economies) are mired in a balance sheet recession.<br />
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One key difference between a balance sheet recession and a 'normal' recession is that when a central bank lowers interest rates in response to an economic slowdown, the increase in borrowing that normally occurs (in a regular recession) is not forthcoming. This is because as the definition above states, in a balance sheet recession the consumer is focused on deleveraging their balance sheet, not expanding their debt loads. .<br />
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It is this unique phenomenon that occurs only within the parameters of a balance sheet recession that I believe required the Federal Reserve to create their own "prisoner's dilemma" within the stock market. I believe they are attempting to fight one economic paradox (consumer deleveraging in the face of low interest rates) with a paradox of their own. In the Fed's prisoner's dilemma model, they are forcing rational, normally risk averse actors to behave "irrationally" and against their own best interests by forcing them to embrace higher and higher levels of risk. This decreases risk premiums which in turn raises equity prices (and high yield bonds as well).<br />
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I believe the Fed hopes that as asset prices increase, a significant wealth effect will be created that will work to counteract the economic contraction created via on going consumer deleveraging. <br />
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Unfortunately, I think the Federal Reserve has slowly realized that their grand experiment is rife with flaws and they now have no idea how to reverse the process without a) significantly damaging the stock market and b) throwing the economy into an even deeper and more painful recession than we saw in 2008.<br />
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I have attempted (as best as I can) to discuss a few of the larger and more glaring flaws that are holding back the recovery within the pages of this blog - specifically:<br />
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1. While Wall Street is acting in its own self interest (which should expected) it is achieving much of this success through increasingly abusive, predatory and illegal actions. Contrary to popular belief, Wall Street has not 'learned it's lesson' after the Great Financial Crisis, and the fines that were subsequently imposed have done nothing to resolve the problem. <a href="http://gubbmintcheese.blogspot.ca/2015/04/when-fiduciaries-go-bad.html">They will not stop because they can't help themselves</a>. As such, these abuses continue to come at a very large cost to the rest of the economy.<br />
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2. The wealth effect is a myth, which is why <a href="http://houseofdebt.org/2014/05/24/piketty-and-u-s-wealth-inequality.html">income inequality</a> gets worse even as the economy sputters.<br />
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3. Moral Hazard - Since the Great Financial Crisis "ended" in 2009, the Federal reserve and other Central banks have created an environment that has gradually become very complacent with regards to risk. In an economy (and market) where there is no real threat of downside risk, malinvestment persists - unfettered and unappreciated. It is only when risk is normalized and reintroduced back into the system will these issues begin to surface and be better understood.<br />
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4. The Great Financial Crisis of 2008-09 was a symptom of a bigger, more complicated problem - I laid out these bigger trends in my <a href="http://gubbmintcheese.blogspot.ca/2014/05/revised-view-from-30000-feet-us-economy.html">"The View from 30,000 feet" thesis</a>.<br />
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Obviously there are many more flaws that could be holding back the economy from a full recovery - but these are the ones I've chosen to write about over the years.<br />
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What concerns me the most is that by creating this kind of <i>extended</i> prisoner's dilemma, the Fed is creating a dangerous environment where distortions are slowly becoming embedded into the system. It is important to remember that in the original Prisoner's dilemma scenario, the rational actors were only put in a position where they had to made an irrational decision ONCE. Once the decision was made, the consequences were immediate. The Fed model has been running non-stop for 7 years (and counting), which means rational players in this environment have been compelled to make irrational decisions against their best interests every single day. It's hard to imagine how that environment will work out without any unintended consequences.<br />
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A good example of a dangerous semi-permanent distortion that the Central Banks created via their prisoner's dilemma model is the phenomenon of people paying huge premiums on homes purchased in Vancouver (I discussed the issue in a <a href="http://gubbmintcheese.blogspot.ca/2015/08/vancouver-real-estate-inconvenient.html">post here</a>). While paying a premium for a property may not be an unheard of event, it is slowly becoming the norm in the Vancouver area.<br />
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Unfortunately, since people are unaware that they are making decisions within a prisoner's dilemma it follows that they do not know many of the decisions they've made are "irrational" and not in their best interests. <br />
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What I find interesting is that when the Fed is tried to communicate their desire to normalize and END the prisoner's dilemma - the market responded quite negatively. It was as if people were starting to realize that irrational behavior was once again going to be subject to risk.<br />
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The market only started to improve when the economic data was so poor that it became glaringly obvious that the Fed would NOT be able to normalize rates and stop their prisoner's dilemma. This highlights yet another possible problem created via an excessive duration of a prisoner's dilemma within the financial markets: addiction.<br />
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<a href="https://www.discoveryplace.info/stages-addiction">There are four accepted states of addiction</a><br />
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1. Experimentation<br />
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2. Social use, regular use<br />
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3. Problem Use, Risky Use<br />
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4. Substance Abuse<br />
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If you look at where we are now, I think it's safe to say (after 7 years of on going Fed intervention into the markets via a prisoner's dilemma construct) that we are well on our way to stage 4 where we<br />
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<i>"use a psychoactive drug (or in our case financial intervention) to such an extent that its effects seriously interfere with health or occupational and social functioning"</i><br />
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I have no idea how we normalize from where we are now without having a negative impact on the market AND the economy, but think we need to make those moves now before the addiction to our irrational behavior gets even worse.<br />
<br />Gubbhttp://www.blogger.com/profile/00411147564595486174noreply@blogger.com1tag:blogger.com,1999:blog-1820525859739554784.post-85949350744737272022015-08-28T22:03:00.002-07:002015-08-28T22:03:16.376-07:00Yet another unexplained 2 day rally in the S&P 500Back in December of 2014 I took a bit of time to analyze the biggest 2 day rallies in the S&P 500 using daily prices from January 1940 to December 28th, 2014. I made a decision to ignore the 1929-1939 "Great Depression" period as the volatility experienced in the stock market at that time completely dominated the data set and I figured 75 years of daily prices was a sufficient sample size.<br />
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That blog post can be found here -<br />
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http://gubbmintcheese.blogspot.ca/2014/12/2-day-rallies-putting-dec-16-18th.html<br />
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After crunching through the data, I came up with the following summary:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjagnALFejfhztWmenyQ4VWW1LJSv40tB1An4NU1HXoUIDmP7z3kZvfsG56bbqW7BhewaSxcPYY6v_vkq4Krinl2CkBV1MFus68QPaHyY3zur_uR8rDx10JIhyctj5y5UWfwdufs3T9M-U/s1600/2+day+rallies.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="291" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjagnALFejfhztWmenyQ4VWW1LJSv40tB1An4NU1HXoUIDmP7z3kZvfsG56bbqW7BhewaSxcPYY6v_vkq4Krinl2CkBV1MFus68QPaHyY3zur_uR8rDx10JIhyctj5y5UWfwdufs3T9M-U/s400/2+day+rallies.JPG" width="400" /></a></div>
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As you can see, the majority of the larger 2 day rallies had some form of catalyst or cause - be it a declaration of war, a currency crisis or the volatility during the popping of a bubble. I admitted that the "unknown" category was more a function of my lack of access to news, and (ahem, laziness) than it was these 14 days not having an explanation (I do these posts on my 'free time'... which is scarce).</div>
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Given the massive rally we just witnessed over the last few days of August - I thought I'd go back and revisit this data set to see how the August 25th to 27th rally measured up. It was impressive - </div>
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it ranked 21st out of 19,021 two day rallies - about a 4.6 sigma event. Wow.</div>
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This rally is even more impressive when you consider the other characteristics of large 2 day rallies:</div>
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It happened absent a typical mitigating factor such as a currency crisis, a popping stock market bubble, a recession or the outbreak of a large scale war. At best you 'could' suggest that the initial 1089 point drop (or 6.6%) in the Dow on the morning of August 24th was a Crash - something similar to the Crash of 1987, but I would remind readers that the Dow managed to recover 501 of those points and only closed down 588, or 3.57%. Even at its' worst this 1089, 6.6% intraday low can not compare to decline of 22.61% in a single day - it can't even break into the top 20 list of single day declines in Dow history (going back to 1899).</div>
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I pulled off a revised "Top 30" two day rallies of all time (going back to January 1940) - and listed the catalyst for each one (Crisis, bubble volatility, war, etc). All of the largest two day rallies rallies seem to have an explanation except for one (in red) - which I find very interesting.</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjt4cky7r20pUIOVjc8dTSyS2SK28gfED3ZyJ9aV6PBHSZGZqAILeNEapBWQj-IZUNgKQh5xehGpC17quZUDwo6k9Nx_C3JYjQfczr6lqKw3eA5x762kXEqjHfpuj7sG5yYkzZRQIczdXA/s1600/weird.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="400" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjt4cky7r20pUIOVjc8dTSyS2SK28gfED3ZyJ9aV6PBHSZGZqAILeNEapBWQj-IZUNgKQh5xehGpC17quZUDwo6k9Nx_C3JYjQfczr6lqKw3eA5x762kXEqjHfpuj7sG5yYkzZRQIczdXA/s400/weird.JPG" width="331" /></a></div>
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So, the next time someone tells you that the rally from August 25th to 27th was a "no brainer" and should have been expected, mention that the rally was a 4.6 sigma event that ranked 21st out of a total of 19,021 two day rallies dating back to January 1940. It was also a rally environment completely void of any of your typical market chaos. In a nutshell it was hardly "business as usual".</div>
Gubbhttp://www.blogger.com/profile/00411147564595486174noreply@blogger.com0tag:blogger.com,1999:blog-1820525859739554784.post-65980934523086404922015-08-10T17:17:00.001-07:002015-08-10T17:17:18.679-07:00Vancouver Real Estate: The Inconvenient Truth about Data AvailabilityI have read so many stories about Vancouver homes selling above their listing price over the years that I find myself completely numb to the phenomenon now. Of course every once and a while I’ll read a story of some house selling at an astronomical price, and I’ll try to comprehend the logic and fundamentals behind these moves. But after so many years of seeing these stories, I find the shock and confusion fades quickly and I get back to my day as if everything was normal. But I think it doesn’t take a real estate specialist or an<a href="http://www.ctvnews.ca/business/canadian-housing-market-overheated-imf-warns-1.2272364"> international monetary watchdog</a> to see that things in the Vancouver real estate market are far from 'normal'.<br />
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<a href="http://www.cbc.ca/news/canada/british-columbia/vancouver-house-sells-for-567k-over-listed-price-1.3012604">Some news articles </a>have made an attempt to explain the drivers behind the market’s incredible jump. In this link, a real estate agent explains that the premium paid on the home he sold recently was simply the result of a very successful marketing strategy.<br />
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<b>"I would call it strategically listed to garner the interest level that we wanted to get [and] the result that we got."</b><br />
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So, if we are to believe this agent's explanation at face value, the action of listing the home at an lower than market price generated an above average response of prospective buyers which in turn led to excess demand to buy, which ultimately led to a sale price that was fully 35% above the actual asking price.<br />
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While some agents do indeed list homes to garner more attention from prospective buyers, expecting this strategy to net an offer that is 35% over your asking price (in an already red hot market) seems to be a bit of a stretch (to this blogger at least).<br />
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Is it really true that you can lower the asking price on a home and wait for crowds of people to come in and offer an above ask price? Or, is this less a case of 'brilliant marketing' and more a case of a euphoric bull market that exists within a specific area of Canada.<br />
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While there is no denying that Vancouver has been growing steadily for decades (it really took off after the <a href="https://en.wikipedia.org/wiki/Expo_86">Expo in 1986</a> put them on the map), the last few years have been well beyond explanation -<br />
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As discussed above, it’s to the point now where it is commonplace for homes in the Greater Vancouver area to be selling for huge premiums over asking prices.<br />
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Here are a few recent examples of stories -<br />
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<a href="http://www.theglobeandmail.com/report-on-business/economy/housing/the-real-estate-beat/developer-pays-big-premium-in-hunt-for-vancouver-land/article23604767/">Developer pays 32% premium in hunt for Vancouver land </a><br />
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<a href="http://www.canada.com/business/story.html?id=11198971">Shoppers willingness to pay premium for luxury homes</a><br />
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<a href="http://www.canadianrealestatemagazine.ca/market-update/vancouver-buyer-pays-1-million-over-asking-price-192205.aspx">Vancouver buyer pays $1 million over asking price</a><br />
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What confuses me is why is no one is interested in digging down into the details of these transactions to find out exactly what is driving Vancouver real estate? Most of the stories provide guesses, theories or thoughts on where the demand ise coming from, but as of yet there have been no definitive reports provided. Some pundits suggest Vancouver prices are simply catching up to other great cities, while others suggest an influx of Mainland Chinese funds are driving prices.<br />
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Personally I think the theory of Chinese money flooding into the Vancouver market has a lot of merit and is absolutely worth looking into in more detail. Unfortunately apart from ‘ancedotal evidence’, any further information on the influx of Chinese buying hits a major roadblock. For example, <a href="http://www.theglobeandmail.com/report-on-business/economy/housing/the-real-estate-beat/vancouver-housing-data-reveals-chinese-connection/article20164662/">MacDonald Realty recently suggested that over a third of all sales had mainland Chinese ties </a>, but further down in the same article we are told that the 'data is unavailable to confirm' the thesis. Specifically it said,<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiqOEjuiLumoc0diJkMI4eBYRRjSvxXIsCN5YMq9mSwpJRtXoWDbJQH54EcPNTgrl6ALznv3f7OKZE-q-gyPxDhQuVKH3GkuHXKcANHq-jlFbw8nTQ4RwH1tWh1aRCzpdpT9oL9XY6MpYI/s1600/handle.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="95" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiqOEjuiLumoc0diJkMI4eBYRRjSvxXIsCN5YMq9mSwpJRtXoWDbJQH54EcPNTgrl6ALznv3f7OKZE-q-gyPxDhQuVKH3GkuHXKcANHq-jlFbw8nTQ4RwH1tWh1aRCzpdpT9oL9XY6MpYI/s400/handle.JPG" width="400" /></a></div>
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Another story discusses <a href="http://business.financialpost.com/personal-finance/mortgages-real-estate/how-skyrocketing-vancouver-home-prices-are-fuelling-anger-towards-foreign-buyers">calls by local residents to track the origins of sales</a> to confirm (or deny) the Chinese buyers theory but once again mentions the same informational roadblock - "no data is kept on these transactions"<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEipIH4Cva3wk1BZ7GJh6t3XbN_kyHDmz5x4-U3-ovMvmfnvrlJpH_2PGTT62xsNWzOCpzZNYZdWsi_rj2Nba81KhUA2p7BI79pn3IyuXm7HfTGFiLaeN23cK3YAG2pkxlBl6478_IaCQR0/s1600/quote.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="42" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEipIH4Cva3wk1BZ7GJh6t3XbN_kyHDmz5x4-U3-ovMvmfnvrlJpH_2PGTT62xsNWzOCpzZNYZdWsi_rj2Nba81KhUA2p7BI79pn3IyuXm7HfTGFiLaeN23cK3YAG2pkxlBl6478_IaCQR0/s400/quote.JPG" width="400" /></a></div>
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The most interesting thing about this “lack of data” excuse is that it’s false.</div>
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But don't take my word for it - just go to the <a href="http://www.fintrac-canafe.gc.ca/intro-eng.asp"> Financial Transactions and Reports Analysis Centre of Canada website</a> - and then look at the section on <a href="http://www.fintrac-canafe.gc.ca/re-ed/real-eng.asp#s33">real estate</a>..<br />
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There you will find these informative tidbits on the Federal requirements for all Real Estate agents and brokers -<br />
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<a href="http://www.fintrac-canafe.gc.ca/publications/guide/guide6/6B-eng.asp">Guideline 6B: Record Keeping and Client Identification for Real Estate</a><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhN15wgy2NBDhNrmtZaXgBPLZ9yx_qirRdq4VIQFQVe2ZQ2WN6PnuRMOgqTkLz6MBvEeqgziBB6zS3mPOuU-6rmTaddxYfDbMVtJL_O4xDRstggUrHVzFKX2LnM26H7_DEu-K4Nxckylqw/s1600/records.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="120" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhN15wgy2NBDhNrmtZaXgBPLZ9yx_qirRdq4VIQFQVe2ZQ2WN6PnuRMOgqTkLz6MBvEeqgziBB6zS3mPOuU-6rmTaddxYfDbMVtJL_O4xDRstggUrHVzFKX2LnM26H7_DEu-K4Nxckylqw/s400/records.JPG" width="400" /></a></div>
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and client identities (including 3rd parties) -</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiwC5NFInlsz6rYS0a6qcoSlg5ChAmWhHzXck2Au9OSf5_P9Olt8-JnD8obkfHTKoaKh-s7pd8lnvt1kX3rQL_d_RwbmszxSu3tw5ttH1BDvTrozvWVQjyytdJsoJeujeOgIPy81Re7ess/s1600/identity.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="197" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiwC5NFInlsz6rYS0a6qcoSlg5ChAmWhHzXck2Au9OSf5_P9Olt8-JnD8obkfHTKoaKh-s7pd8lnvt1kX3rQL_d_RwbmszxSu3tw5ttH1BDvTrozvWVQjyytdJsoJeujeOgIPy81Re7ess/s400/identity.JPG" width="400" /></a></div>
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So, based on the information taken directly from the Canadian Government's FINRAC website, real estate agents and brokers are required to record the identity of their clients (including 3rd parties) and the origins and amounts of money used for "ANY TRANSACTION OVER $10,000".</div>
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This means that contrary to the narrative, the data on who is buying what in Vancouver IS available and therefore we could determine how much money is coming in from Mainland China absolute certainty. Unforunately for some reason, we choose not to.</div>
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I have no idea why interested parties (Municipal, Provincial and Federal Governments, corporations, Real Estate Boards and financial firms) don't see the value in having a better understanding of exactly who is dabbling in their real estate markets, but my gut tells me that all related industries have taken a "don't ask, don't tell" approach.</div>
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Put simply - They just don't want to know the answer. And more importantly, I think they don’t want us to know either.</div>
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As with anything in life, ignoring or suppressing issues in the hopes that any “inconvenient truths” go away or resolve themselves on their own hardly ever works.</div>
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In my mind, the most important lesson to take away from what’s going on in the Vancouver real estate market today is this: “As with trees, real estate prices don’t grow to the sky”.</div>
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There is no denying the fact that Vancouver is a beautiful city, and that many people want to live here. But the phenomenon of paying 35% over the asking price of a home is not a typical occurrence, and instead reflects an overly euphoric market. While we don’t know when a particular market might experience a correction, we can review the fundamentals, look at past bull markets, and demographics to determine with reasonable comfort where prices “should” be. Back in the old days, before Central Banks controlled all aspects of asset prices and rendered this kind of information irrelevant, this was called “fundamental analysis”.</div>
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Two things I’d suggest people consider when looking at Vancouver real estate:</div>
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1) The concept of <a href="https://www.gmo.com/docs/default-source/public-commentary/gmo-quarterly-letter.pdf?sfvrsn=14">price insensitive buyer and sellers that was recently discussed by Ben Inker at GMO</a> – In this piece Mr. Inker identifies a particular type of asset buyer where </div>
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“<b><i>the expected returns of the assets they buy are not a primary consideration in their purchase decision</i></b>”. </div>
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Inker goes further to state, “<b><i>it is worth recognizing that investors prepared to buy assets without regards to the price of those assets may also find themselves in a position to sell those assets without regard to price as well</i></b>”. </div>
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Inker’s views do a great job (I think) of foreshadowing future problems in the Vancouver market: “<i><b>in order to see massive changes in the price of a security, you don’t need the price insensitive buyers to become a seller. You merely need him to cease being the marginal buyer</b></i>”. </div>
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Students of history will recall Japan’s insatiable demand for exotic real estate in Hawaii during their economic boom of the early and mid 80s. At that time you had a country experiencing a massive economic boom that pushed domestic prices through the roof. In response many wealthy Japanese (like their Chinese counterparts today) started accumulating vast properties in a very small, concentrated area. In the case of Japan it was Hawaii, in the case of China, it is Vancouver. As such, it is worthwhile spending a bit of time finding out what happened when the Japanese economy slowed down in 1989. The Federal Reserve Bank of San Francisco wrote a paper on this issue entitled,<a href="http://www.frbsf.org/economic-research/publications/economic-letter/2011/december/hawaii-house-prices/">“Fluctuating Fortunes and Hawaiian House Prices”</a> that I would suggest is worth a review.</div>
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2) My second point would be to not allow yourself to become too complacent about the markets. Paying a 35% premium to the going market price is not a normal, sustainable phenomenon. Imagine all of your other major purchases following the same pattern. For example, you go to a coffee shop and order a Latte. The bill is $3.50, but you are told that if you really want your latte immediately, you will need to pay $4.73. You then go to the grocery store to get some food for dinner. When you get everything checked out, the bill comes to $85.75 – but again you are told “if you want it now” you will have to pay $115.76. You can see when the current real estate environment is removed from its’ market friendly narratives – that the process is a bit illogical. At the very least it should provide some caution towards our actions and attitudes – and the desire to get more information so we can better understand what’s driving this marketplace.</div>
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In the end, no one really knows if or when the Vancouver market will correct. “When the bubble pops in Vancouver” has been the subject of speculation for years. What I find interesting is that we do in fact have the data and ability to see exactly who and/or what has been driving the markets, but instead we choose to ignore this opportunity. Maybe it will be fine in Vancouver, or maybe decades from now we will read another research piece by the San Francisco Fed entitled, “<b><i><u>Fluctuating Fortunes and Vancouver House Prices</u></i></b>”.</div>
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<br />Gubbhttp://www.blogger.com/profile/00411147564595486174noreply@blogger.com15tag:blogger.com,1999:blog-1820525859739554784.post-78299166851117570782015-04-24T11:08:00.001-07:002015-04-24T11:08:29.088-07:00When Fiduciaries go bad<a href="http://en.wikipedia.org/wiki/Fiduciary">From Wikipedia:</a> "<i>A fiduciary is a person who holds a legal or ethical relationship of trust between himself or herself and one or more other parties (person or group of persons).</i><br />
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<i>Typically, a fiduciary prudently takes care of money for another person. One party, for example a corporate trust company or the trust department of a bank, acts in a fiduciary capacity to the other one, who for example has entrusted funds to the fiduciary for safekeeping or investment. Likewise, asset managers—including managers of pension plans, endowments and other tax-exempt assets—are considered fiduciaries under applicable statutes and laws. In a fiduciary relationship, one person, in a position of vulnerability, justifiably vests confidence, good faith, reliance, and trust in another whose aid, advice or protection is sought in some matter.<u> </u></i><br />
<i><u><b><br /></b></u></i>
<i><u><b>In such a relation good conscience requires the fiduciary to act at all times for the sole benefit and interest of the one who trusts</b></u></i><u><b>.</b></u>"<br />
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So the Coles notes version of this suggests that a person who is deemed to be 'vulnerable' vests trust and good faith in another person (the fiduciary) for professional advice, guidance or help. Further, upon acceptance of the responsibility, the fiduciary has a legal and ethical responsibility to exhibit a very high standard of behavior (higher than a simple "duty of care") to ensure the vulnerable party is protected from exploitation from that particular relationship.<br />
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Obviously a lot of very bad things can happen to a person who establishes a fiduciary relationship with someone who has questionable ethics and bad motives.<br />
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So who in the financial industry is a fiduciary and who isn't?<br />
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Well - investopedia has a nice description of the difference <a href="http://www.investopedia.com/articles/professionaleducation/11/suitability-fiduciary-standards.asp">between the two here: </a><br />
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here's an excerpt:<br />
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<i>"In the investment field, there are two primary parties who are able to offer investment advice to individuals, as well as institutional clients such as pension funds, non-profit organizations and corporations. These parties are investment advisors and investment brokers who work for brokers-dealers. Many clients may consider the investment advice they receive from each party as similar, but there is a key difference that may not be completely understood by the investing public. The difference pertains to two competing standards that advisors and brokers must adhere to, and the distinction has important implications for individuals who hire outside financial assistance. Below is an overview of both parties, the standards each must follow and how the standards that brokers follow can create conflicts between themselves and their underlying customer base. "</i><br />
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So investment advisors, who are regulated by the Securities & Exchange Commission are considered fiduciaries, and as such are bound by the <a href="http://en.wikipedia.org/wiki/Investment_Advisers_Act_of_1940">Investment Advisor's Act of 1940</a>. It means all advisors need to put their client's interests above that of their own and insure that all advice fits the client's needs, objectives and risk tolerances.<br />
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Broker-dealers on the other hand are regulated via the Financial Industry Regulatory Authority (FINRA) and therefore only need to fulfill a "suitability obligation". This obligation suggests that the broker-dealer makes recommendations and undertakes actions that are "consistent with" the best interests of the client.<br />
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I will leave readers to go through all of the details of who is, and isn't a fiduciary, and what the rules and differences are between suitability & fiduciary obligations for themselves. And start getting more to the point of this post...<br />
<br />
It is my humble view that ANYONE who provides investment/financial advice to a client of any nature should be considered a 'fiduciary' - and as such should be held to the accepted and much higher standards of a fiduciary.<br />
<br />
I believe Wall Street, or more accurately (since I live in Canada) the "financial industry", has done a masterful job of muddying the waters with regards to who should be held under the lens of the fiduciary standard for selfish, profit seeking reasons. I'm sure that's not a shocking statement given all of the amazing abuses we've seen over the last 8 years - but it needs saying (again and again and again...)<br />
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I am also of the believe that the financial industry has changed its approach over the last 2 or 3 decades, and has now taken on what I've described in previous posts as a parasitoidal sort of relationship with clients. You can read more about this in my blog post entitled, "<a href="http://gubbmintcheese.blogspot.ca/2015/03/symbiotic-parasitic-and-parasitoidal.html">Symbiotic, Parasitic and Parasitoidal Cycles of Finance</a>".<br />
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Former Goldman Sachs director Gus Levy was famous for suggesting that Goldman was "long term greedy". The insinuation here was that Goldman was pricing their services in a such a way that they were maximizing profits while still keeping clients happy and well represented. This model worked, and worked well. While you may assume that due to my bearish rants on the industry (via here, and twitter) that I'm very much 'anti-finance', but this is actually a model that I'd happily endorse because in the end - everyone wins - and the 'fees' can be negotiated and agreed upon ahead of time.<br />
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But, somewhere along the lines - somewhere in the mid 90s I'd argue, Wall Street's profit model changed. I'm not sure who started it, or how, but somewhere, somehow the tried and true, perfectly harmonious "long term greedy" model morphed into something I'd describe as "predatory finance".<br />
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Under this new model, it seemed that clients were no longer to be well represented, but instead exploited or sacrificed in the name of quarter over quarter profits or annual bonuses. Of course the biggest problem with this transition was that no one told the client. Meaning for the most part, clients were left believing that the financial industry was still working tirelessly with their best interests in mind.<br />
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Obviously there are a lot of fantastic advisors and firms out there who are 100% honest, and as such are busting their buns to do the right thing for their clients - but I think most of them would agree that they are not in the majority.<br />
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In fact, as Bill Black discusses (<a href="https://www.youtube.com/watch?v=j3iQHplnfT8">here</a> and <a href="https://www.youtube.com/watch?v=-JBYPcgtnGE">here</a>), thanks to a combination of "<a href="http://en.wikipedia.org/wiki/Control_fraud">Control Fraud</a>" and <a href="http://en.wikipedia.org/wiki/Gresham%27s_law">Gresham's Dynamic</a>, honest brokers are more than likely getting displaced by other, less ethical brokers who don't mind 'bending the rules' and working against their client's best interests to help increase corporate profitability.<br />
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Is that assertion a stretch?<br />
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Well look at the <a href="http://www.bloomberg.com/news/articles/2015-04-23/deutsche-bank-trader-bittar-s-libor-messages-revealed-by-u-s-">comments and career of Christian Bittar, who was allegedly "Trader Number 3" from the Deutsche Bank Libor Scandal</a> - <br />
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From the article:<br />
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<i>"he was Deutsche Bank’s most profitable derivatives trader, earning a bonus of almost 90 million pounds ($136 million) in 2008 alone"</i><br />
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<i>"Bittar, who joined Deutsche Bank in 2001, took billion-euro positions on the direction of short-term interest rates with the firm’s own money and reaped hundreds of millions of euros in profit for the bank."</i><br />
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<i>Bittar was named global head of money market derivatives trading, moving to Singapore, in the years that followed, according to the CFTC</i><br />
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and most importantly -<i> </i><br />
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<i>Bittar hasn’t been charged with any offense.</i><br />
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There are a million examples of pre-crisis abuses but the one that I always think of as the ultimate poster child of abuse pre-financial crisis is the <a href="https://www.sec.gov/news/press/2010/2010-59.htm">Goldman Sachs' "Abacus" deal with Paulson</a>.<br />
<br />
Or, if you don't like me picking on Goldman, how about that time Bear Stearns tried to play "hot potato" by bundling up all of their problems into one IPO called <a href="http://www.bloomberg.com/bw/stories/2007-05-11/bear-stearns-subprime-ipobusinessweek-business-news-stock-market-and-financial-advice">"Everquest"</a>? They pooled all of their most toxic assets and tried to pitch it out into the muppetsphere (<a href="http://www.investopedia.com/terms/m/muppet-bait.asp">the term Muppet</a> was coined by the industry and refers to naive investors who act as cannon fodder for crappy, problematic deals)<br />
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Of course the industry will try to <a href="http://www.bloomberg.com/news/articles/2012-07-13/dimon-saw-1-billion-potential-loss-when-he-made-teapot-remark">spin a PR friendly narrative</a> that "we had some bad actors", or that "there were holes in our compliance management" or that it's really "not that big a deal", but the "<a href="https://www.youtube.com/watch?v=CG6b_0tgKO8">gee whiz, we don't know what happened there</a>" excuses sort of fall short when you consider that as of December 2014, the largest US banks have paid out a collective $180 BILLLION in fines and settlements.<br />
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The problem is an epidemic, and the incentives to exploit fiduciary relationships are alive and well.<br />
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<a href="http://en.wikipedia.org/wiki/William_K._Black#Savings_and_loan_scandal">Bill Black</a>, who was in charge of investigating the Savings and Loans scandal in the 80s presented a very harsh assessment of the Great financial crisis -<br />
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<iframe width="320" height="266" class="YOUTUBE-iframe-video" data-thumbnail-src="https://i.ytimg.com/vi/J8CqaHTygSc/0.jpg" src="https://www.youtube.com/embed/J8CqaHTygSc?feature=player_embedded" frameborder="0" allowfullscreen></iframe></div>
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To me - the key statement in this video piece was when Black said this,<br /><br />
<b><i>"When people cheat, you can not as a regulator continue "business as usual". They go into a different category, and you must act completely differently as a regulator"</i></b><br />
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Let's do a quick acid test - are firms cheating? Answer: Yes<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhqvGIx-Iheq7gGsgRLGivPMF3QQKHK3n2A42UathNnQy-5n3qD4gii84-Hx21tIV_9-XNv1hC6WYZqwLsTI9xTwSnwEDSfxi6JBXC-oCLmvwmkCmw7HK3uU7CUJB_n36eYQOYsWghTh2o/s1600/dbadmit.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhqvGIx-Iheq7gGsgRLGivPMF3QQKHK3n2A42UathNnQy-5n3qD4gii84-Hx21tIV_9-XNv1hC6WYZqwLsTI9xTwSnwEDSfxi6JBXC-oCLmvwmkCmw7HK3uU7CUJB_n36eYQOYsWghTh2o/s1600/dbadmit.JPG" height="60" width="400" /></a></div>
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from: </div>
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<a href="http://www.justice.gov/opa/pr/deutsche-banks-london-subsidiary-agrees-plead-guilty-connection-long-running-manipulation">Deutsche Bank's London Subsidiary Agrees to Plead Guilty in Connection with Long-Running Manipulation of LIBOR</a></div>
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Second question - are regulators 'acting completely different' in the face of cheating?</div>
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Not so much - 'deferred prosecutions' and charging fines continue to be favored plays by the regulators, as we continue to wait for ONE arrest and conviction of an executive who is 'personally' responsible for abuse. </div>
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<a href="http://dealbook.nytimes.com/2014/10/29/prosecutors-wrestling-with-wall-streets-repeat-offenders/?_r=0">Prosecutors Suspect Repeat Offenses on Wall Street</a></div>
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and Wall Street knows it - </div>
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Elizabeth Warren to JP Morgan CEO (in 2013), "I think you guys are breaking the law...."</div>
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<a href="http://www.huffingtonpost.com/2015/03/31/elizabeth-warren-jamie-dimon_n_6972182.html">"Suddenly Dimon got quiet. He leaned back and slowly smiled. “So hit me with a fine. We can afford it.”</a></div>
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So what is the point of this post? </div>
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It's to point out that the financial industry is NOT your buddy. For the most part the incentives are out of whack and need to be corrected. Yes, there are still 'great people' working in the industry who are honest and who do a great job - but I think they would agree that they are being heavily out gunned by the predators and exploiters of the system who are busy making as much money for themselves at any cost. </div>
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Remember - the financial industry attracts a tremendously high number of sociopaths.. </div>
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and as I discussed in my post, "<a href="http://gubbmintcheese.blogspot.ca/2014/05/the-farmer-and-viper.html">The Farmer & The Viper</a>" - <a href="http://phys.org/news187775822.html">sociopaths are wired to pursue a reward "at any cost"</a></div>
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I'm happy to see more research is being done in this area (it's finally not just me going on and on about this stuff). </div>
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Consider this fantastic paper by Alain Cohn, Ernst Fehr1 & Michel Andre Mare entitled, </div>
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<a href="http://www.ttu.ee/public/m/mart-murdvee/EconPsy/6/Cohn_Fehr_Marechal_2014_Business_culture_and_dishonesty_in_the_banking_industry.pdf">"Business culture and dishonesty in the banking industry"</a></div>
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which was mentioned in another great article, by William D. Cohan -<br />
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"<a href="http://www.theatlantic.com/magazine/archive/2015/05/can-bankers-behave/389558/">Can Bankers Behave</a>"<br />
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(My answer would be for the most part: No, they can't.. unless things change dramatically)<br />
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So, when getting financial advice, use Ronald Reagan's advice: "trust but verify" -<br />
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Especially when you are being sold stocks are "cheap", or that we are at the start of a recovery, or that you should take out a 109 month car loan (<a href="http://www.cnbc.com/id/23483123">from 2008</a> & <a href="http://www.keystoneautoloans.com/articles/term-length/108-month-auto-loans/">today</a>), or are told to use the <a href="http://finance.yahoo.com/news/3-reasons-tap-home-equity-185226024.html">equity in your house to buy stocks</a> or use a <a href="http://www.zerohedge.com/news/2015-03-05/take-out-7-year-car-loan-buy-stocks-cnbc-experts-advise">7 year car loan to buy stocks</a> or (alledgedly) get talked into taking out a loan at a<a href="http://www.timescolonist.com/business/judge-turfs-unconscionable-loan-with-42-annual-interest-rate-1.1826019"> 42% annual interest rate</a>...<br />
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This behavior and abuse will continue to build until something blows up - which is a large part of the reason why I continue to be so defensive with regards to the market. It's NOT better, it's just that the people who blew it up the first (and second and third) time are TELLING you it's better. they are telling you that they've learned their lesson, that the risks are far lower than they were in 2007 and that there are backstops and protection measures now in place.<br />
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No.<br />
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We need a present day <a href="http://en.wikipedia.org/wiki/Pecora_Commission">Ferdinand Pecora</a> to get us back on track. We need to regain control of our financial industry, we need to demand change, and we need to make sure regulators and politicians start representing the best interests of the voters, and not simply that the of monied interests.<br />
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It sounds naive, but it's the truth.<br />
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We can change things now, or we can wait for another crisis.. it's entirely up to us.<br />
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caveat emptor..<br />
<br />Gubbhttp://www.blogger.com/profile/00411147564595486174noreply@blogger.com4tag:blogger.com,1999:blog-1820525859739554784.post-59753931908052048972015-03-21T11:56:00.002-07:002015-03-21T11:56:09.775-07:00Paul Tudor Jones & Ray Dalio channel James GoldsmithThis week both Paul Tudo Jones and Ray Dalio had comments that took the twittersphere by storm. Tudor Jones presented a thought about "<a href="http://blog.ted.com/justice-capitalism-and-progress-paul-tudor-jones-ii-at-ted2015/">Just Capital" at the Ted2015</a> talks while Dalio warned about the <a href="http://www.bloomberg.com/news/articles/2015-03-17/bridgewater-s-dalio-warns-of-1937-market-risk-with-rates">Fed raising rates too early and repeating a 1937 styled correction</a>. The latest 1937 warning from Dalio was interesting given his other rather dark worry relating to the possibility <a href="http://www.businessinsider.com/ray-dalio-on-the-rise-of-hitler-2012-9">of the rise of a 2nd Hitler</a>.<br />
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I know what you are saying, "Geez Gubb.. nice light topic for a Saturday afternoon" - but hear me out.<br />
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While I am certainly encouraged by these two recent gentlemen sounding these warnings, I will say I'm not the least bit shocked. This was something I called at the very beginning of the Great Financial Crisis when it became clear to me that the politicians weren't going to make any meaningful reforms to try and regain control of Wall Street.<br />
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To me it was clear: Wall Street was calling the shots.<br />
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Remember this from Brad Sherman?<br />
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Martial law if they didn't bailout Wall Street? Seriously?</div>
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Sherman made some excellent forecasts as to what would happen if the US carried out the bailout..<br />
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But, the person I credit the most with calling the financial crisis, the abuse by Wall Street and generation of Corporatism is Sir James Goldsmith - who laid all of this out in an interview he did with Charlie Rose back in 1994. </div>
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If you haven't taken the time to watch this interview in its entirety, you are doing yourself a great disservice. </div>
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<br /><iframe width="320" height="266" class="YOUTUBE-iframe-video" data-thumbnail-src="https://ytimg.googleusercontent.com/vi/4PQrz8F0dBI/0.jpg" src="http://www.youtube.com/embed/4PQrz8F0dBI?feature=player_embedded" frameborder="0" allowfullscreen></iframe></div>
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I'm not going to provide a link to all 6 sections of this interview as I figure if you find it interesting, you will seek the rest of it out on your own. </div>
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But - even in the first portion, what does Goldsmith say?</div>
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He calls global wage deflation, increasing profit margins, a hollowing out of the middle class, a "destruction of one's society" and the rise of corporatism.</div>
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All the same things that Dalio and Tudor Jones are warning about now, 21 years later. </div>
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It was this interview that really helped me gel all of the ideas I had buzzing around in my head and inspired me to write "<a href="http://gubbmintcheese.blogspot.ca/2014/05/revised-view-from-30000-feet-us-economy.html">The View from 30,000 feet</a>" </div>
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and now Tudor Jones and Dalio are warning about the growing risks of unrest and market corrections. </div>
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As you know, Ray Dalio produced a fantastic discussion on "How the Economic Machine Works"</div>
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and I agree with everything Dalio says - but have made the contention that at the 23:10 mark, Dalio's simplified machine video misses the mark.</div>
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In the video - Dalio talks about how a government increases taxes on the rich to promote a 'redistribution of wealth from the haves to the have nots" and if this doesn't happen we start to see tension rise between the wealthy and the poor. Dalio then introduces the Central Bank as the hero and suggests by printing money, it helps drive up asset prices which in turn allows more people to become credit worthy.</div>
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Unfortunately as <a href="http://houseofdebt.org/">Amir Sufi and Atif Mian</a> have already shown, asset price increases are NOT flowing to all components of the US economy. </div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhqrWYcYnnUJK5RGU3pq56sQ6IOPoohxZkgaYiqfId1deTyRUilrHfCVz3SPiP6vlMVpchLZzBS3jADavUWbEGhu3b6ZU7KamVP5HLcuEVPEgh21ZouFCM64dvZ60UxGJimrhwNvV9Y61s/s1600/sufi+assets.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhqrWYcYnnUJK5RGU3pq56sQ6IOPoohxZkgaYiqfId1deTyRUilrHfCVz3SPiP6vlMVpchLZzBS3jADavUWbEGhu3b6ZU7KamVP5HLcuEVPEgh21ZouFCM64dvZ60UxGJimrhwNvV9Y61s/s1600/sufi+assets.jpg" height="278" width="400" /></a></div>
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moreover, politicians and regulators seem to continuing their long standing tradition of siding with Wall street at the expense of main street. </div>
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So, when you consider Goldsmith's commentary about the unappreciated trends in the global economy, and add in Wall Street's incredible influence and on going self interests, along with the knowledge that not ALL people are benefiting from the increase in the stock market and the US's economic "recovery".. you will get a better understanding of why I've been voicing the same dark warnings as Tudor Jones and Dalio over the last 7 years. . </div>
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Very few people have put all of these things together - and while some (like Dalio and Tudor Jones) are doing so now, only a handful made this call back in 2008.</div>
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I am thankful for Jimmy Goldsmith's warnings - as they truly opened my eyes to the direction we were heading down. </div>
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It's also helped me formulate my views on the <a href="http://gubbmintcheese.blogspot.ca/2014/05/the-farmer-and-viper.html">sociopathology that exists on Wall street,</a> and t<a href="http://gubbmintcheese.blogspot.ca/2015/03/symbiotic-parasitic-and-parasitoidal.html">he various parasitic phases of Wall Street. </a></div>
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I really do hope that I am wrong on these calls - but they seem to be confirmed more and more with each passing week.. which as I'm sure you can imagine is not great.</div>
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It is my sincere hope that at some point we get a present day Ferdinand Pecora to come in, regain control and reform the system.. but it seems that we are still a long way away from this critical step.</div>
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Gubbhttp://www.blogger.com/profile/00411147564595486174noreply@blogger.com5tag:blogger.com,1999:blog-1820525859739554784.post-73754484790994494062015-03-12T16:52:00.003-07:002015-03-12T16:53:00.799-07:00Symbiotic, Parasitic and Parasitoidal Cycles of Finance<br />
Part of my big macro economic piece (<a href="http://gubbmintcheese.blogspot.ca/2014/05/revised-view-from-30000-feet-us-economy.html">posted here</a>) planted blame for the 2008 Financial crisis squarely at the feet of the financial industry. The is the very same industry that I've worked in every day since I graduated from University in 1993 with a degree in Economics (hey, don't laugh..). <br />
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I started working as an investment advisor at a bank owned brokerage firm, one of the big four, and as crazy and stressful as it was, I wouldn't change the experience for anything in the world as it really helped open my eyes to how the system worked and where the REAL incentives lay.<br />
<br />
From my perspective, seeing first hand how the bank culture took over the brokerage side was a fantastic experience and the lessons I learned there helped me refine my instincts and skills as a money manager.<br />
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Now - if you've been reading this blog at all you will know that I am absolutely NOT an economist nor an analyst. As such, most of the comments and observations I make here are usually rough, unscientific and lack the polish and eloquence provided by many of the other people who take time to share their thoughts on the markets and the economy. But I think what I lack in written eloquence, I make up for by having a keenly observant eye and an obsessive passion for figuring out what's going on.<br />
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So - with all of that stated, let me start my "point".<br />
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I have long used the analogy that the financial industry is much akin to a tape worm that is attached to the stomach of the global economy. As the economy grows, so does the tape worm and the tape worm's associated appetite. This mostly clumsy analogy suggests that there is a parasitic relationship shared between the financial industry and the global economy.<br />
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I would suggest that over history, finance and the global economy have experienced parasitic cycles that ebb and flow from one extreme to another. Those cycles could be broken down into three distinct classifications:<br />
<br />
i) symbiotic<br />
ii) classic parasitic<br />
iii) parasitoidal<br />
<br />
In a symbiotic relationship (which is not 'officially' parasitic, but bear with me) both the financial industry and the global economy benefit from the relationship. A simple but effective example from my own little retail investment world would be the creation and mass distribution (by the financial industry) of zero coupon, or "stripped" bonds. These things are fantastic for client accounts (RRSPs and RRIFs) as well as being a huge source of revenue for the financial industry.<br />
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In a classic parasitic relationship - only one party (the parasite) benefits, and at the expense of the "host". You can take your pick here from a multitude of brutal parasitic financial plays, but to keep things simple let's just refer to the <a href="http://www.reuters.com/article/2010/04/16/us-goldmansachs-abacus-factbox-idUSTRE63F5CZ20100416">Goldman/Paulson/Abacus deal</a> - Boo!<br />
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In this situation Goldman and Paulson did very well, while the buyers of Abacus (the hosts) got blasted.<br />
<br />
Finally in a parasitoidal relationship - the parasite draws so much in the form of resources that it ends up either sterilizing or ultimately KILLING the host. <br />
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Again - take your pick, but for me the biggest (but as of yet 'unproven') example would be the plethora of debt instruments that have been made available to consumers. Each of these debt instruments draws a charge in the form of interest - that depletes the financial health of the host. <br />
<br />
Sub prime mortgages, credit cards, lines of credit, 9 year car loans, car equity loans, Home equity loans, etc etc etc.. <br />
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Again - if you read my larger macro piece, you know that I believe we hit 'peak debt' in 2007 and are now mired in a balance sheet recession of biblical proportions. <br />
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But, what I think the financial industry hasn't figured out is that all of these debts, all of the resources that they've drawn from their host (the consumer) has ended up KILLING them, or pushed them past the point of no return as we were motivated by profits and bonuses rather than fulfilling our fiduciary duties to provide SUITABLE financial advice to our clients. <br />
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This is why economists are always so flummoxed why the economy isn't bouncing back after 6 years of zero rates and unprecedented intervention and stimulus. <br />
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At best the host is now on life support in the ICU and is in a coma, and that's hardly a good thing.<br />
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<br />
Unfortunately for us, the financial parasite will never learn their lesson as they have sociopathic tendencies (as discussed here: <a href="http://www.gubbmintcheese.blogspot.ca/2014/05/the-farmer-and-viper.html">http://www.gubbmintcheese.blogspot.ca/2014/05/the-farmer-and-viper.html</a>) and as such will never change or ease off in their thirst for more resources. <br />
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NB: Another great discussion of the status-quo parasitic/parasitoidal relationship between finance and the rest of the world can be found in Jesse Eisinger's outstanding piece here: <a href="http://mobile.nytimes.com/2015/03/05/business/dealbook/despite-changes-an-overhaul-of-wall-street-falls-short.html?referrer&_r=0">http://mobile.nytimes.com/2015/03/05/business/dealbook/despite-changes-an-overhaul-of-wall-street-falls-short.html?referrer&_r=0</a><br />
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THIS is why I think the economy continues to struggle.<br />
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Now I know these points may sound a bit far off given my rambling, choppy writing style - but please, don't kill the messenger. For those who prefer glossy, professional, researched views look at what the BIS just wrote:<br />
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<a href="http://www.bis.org/publ/work490.pdf">"Why does Financial Sector Growth Crowd Out Real Economic Growth?"</a></div>
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Call me crazy but I think this just confirmed by parasitic tie in.. (See what I mean? I can see it and write about it, but will leave it to other people to do a more thorough and eloquent job or researching and writing about it. )<br />
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So what to make of all this information? <br />
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Well first and foremost, I would take EVERYTHING that Wall Street says with a large grain of salt. Don't get me wrong, there are some very honest and amazing people who work in this industry.. not everyone is a bad guy or girl. <br />
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Unfortunately though, the incentives are hugely misaligned.. which means the little people who still believe in the fiduciary relationship with their investment people, are probably getting taken advantage of. <br />
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As Stephen King said, <strong><u><em>"Trust of the innocent is the Liar's most useful tool".</em></u></strong><br />
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Keep that in mind when you are told that 'stocks are cheap' by people on the Street - even as the <a href="http://www.multpl.com/shiller-pe/">Shiller CAPE</a> sits just below 28, a level only surpassed in 1929 and 2000...<br />
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Plainly put - we desperately need another <a href="http://en.wikipedia.org/wiki/Ferdinand_Pecora">Ferdinand Pecora</a>, and we need him asap.<br />
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Great read here: <a href="http://en.wikipedia.org/wiki/Pecora_Commission">http://en.wikipedia.org/wiki/Pecora_Commission</a><br />
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Unfortunately it appears as though government and regulators are still far too cozy with the financial industry to make any changes - which suggest we are (as of now) simply doomed to repeat yet another crisis.<br />
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I hope we can get this sorted out before another break comes, but it's certainly not looking great at this point.<br />
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Maybe tomorrow.<br />
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Cheers all.<br />
<br />
Gubb<br />
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<br />Gubbhttp://www.blogger.com/profile/00411147564595486174noreply@blogger.com3tag:blogger.com,1999:blog-1820525859739554784.post-31704328186557002192015-03-11T19:05:00.003-07:002015-03-11T19:05:20.810-07:00An observation from the front lines - commentary from a real estate agent in VancouverAs I discussed on twitter - I received this email response from a client of mine after sending him a <a href="http://www.scmp.com/comment/blogs/article/1735460/vocal-academic-isnt-just-observer-vancouvers-real-estate-industry-hes">story about the Vancouver market</a>. This was his reply.<br />
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(names removed for obvious reasons)<br />
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Hi Gubb,<br />
<br />
Good article, I see it up close and personal every day.. I've been struggling to get a hold of business and it's becoming more difficult every month. The overall influence of the Asian buyer has become overwhelming. Home sellers almost universally believe it's necessary to hire an Asian realtor to get top dollar selling a home. Buyers are constantly having to go into multiple offer situations and are being out bid by Asian buyers willng to pay well over asking and assessed value. I've written offers on 4 properties in the last month - ALL were outbid, <b><u>some by as much as 30% over asking </u></b><br />
<b><u><br /></u></b>
70% of the for sale signs hopping up are with Asian realtors. The older, more well established realtors who dominated this market a few years ago are now fighting for listings and the back stabbing has begun. Up the street from my office the new home British Pacific Properties are selling new MODEST homes that start between $4m and $5m, and ALL of the buyers so far are from Mainland China who expect to come here once a year for a couple of weeks of holiday.<br />
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People are starting to speak out but no one is doing anything. In Australia they have the same problem but their government's foreign investment review board has implemented new rules to stem the surge in home sales to foreigners. We need to do the same.<br />
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<b><u>GUBB Comments below: </u></b><br />
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My client then provided an example of a big recent home sale for $51,800,000<br />
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http://www.vancouversun.com/business/Priciest+Metro+Vancouver+homes+draw+buyers+from+China+with+video/10875651/story.html<br />
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Pretty amazing stuff. I do honestly think that the percentage of Vancouver sales with Mainland Chinese ties is FAR higher than 30%.. I'd be willing to suggest it's closer to 60%.. but of course no one really cares... yet.<br />
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Cheers!<br />
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GubbGubbhttp://www.blogger.com/profile/00411147564595486174noreply@blogger.com0tag:blogger.com,1999:blog-1820525859739554784.post-76909692221048802862014-12-29T10:51:00.002-08:002014-12-29T10:51:26.949-08:002 day rallies - putting the Dec 16-18th return into context<table cellpadding="0" cellspacing="0" class="tr-caption-container" style="float: left; margin-right: 1em; text-align: left;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEilFh3hDnMQHZHcM_BVIpvoerO0oSiw3pefEP5EfoVJRlqjig2R28W9GUp8MefCRRmCE1vAlSO6z01wr7g-Tx-YuPimnzxYbS7SIcY9hMWkRnpIEsN6mAkNi4gTB9o1VpatQckkaJrW6Lo/s1600/2+day+ramp.jpg" imageanchor="1" style="clear: left; margin-bottom: 1em; margin-left: auto; margin-right: auto;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEilFh3hDnMQHZHcM_BVIpvoerO0oSiw3pefEP5EfoVJRlqjig2R28W9GUp8MefCRRmCE1vAlSO6z01wr7g-Tx-YuPimnzxYbS7SIcY9hMWkRnpIEsN6mAkNi4gTB9o1VpatQckkaJrW6Lo/s1600/2+day+ramp.jpg" height="167" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">How does this 2 day rally compare to the historical average?</td></tr>
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The 2 day rally that started December 16th of this year seemed unusually robust and euphoric - rocketing from a low (close) of 1972.74 to a whopping 2061.23 by the 18th - that's 4.49%.<br />
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I had already been running a bit of numbers in response to the "Bullard rally" in October, so I tweaked things a bit to see if I could see the context of the Dec 16-18 move relative to other big rallies in the S&P 500 throughout history.<br />
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Now, a huge warning about this post and its findings - I do NOT have a Bloomberg terminal, so all of the data crunching I've done here has been by hand. Exporting the daily pricing data into an excel spreadsheet, calculating the 2 day returns, ranking them - etc. It's been fun, but there may be bone headed errors, even though I've tried my best to be as accurate as possible. <br />
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After ranking all of the 2 day rallies going back as far as I could (1928) - I found the Great Depression was providing way too much noise. So I thought I'd look at the data from January 2nd, 1940 to December 2014.<br />
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When I did that, some interesting things happened.<br />
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A - I found that the 4.49% rally we saw from December 16th to 18th was indeed noteworthy as it ranked as the 89th largest rally out of 18,853 2 day rallies in the data set. Not bad given a three sigma move is 5.05%.<br />
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B - I also noticed a tremendous cluster of similar dates on the other top rallies - 2008, 2000, 1998, 1973, 1982, etc<br />
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So, after ranking the top 100 2 day rallies back to 1940, I was able to categorize them into the following 12 events -<br />
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1. The 1987 Crash (Oct 19th, 1987)<br />
2. The Sub-Prime Crisis<br />
3. The Dot.com bubble<br />
4. The 1973 - 1975 Recession<br />
5. The 1981-82 Recession<br />
6. The European Crisis of 2011<br />
7. The 1990-91 Recession<br />
8. The 1969-70 Recession<br />
9. The Asian Flu<br />
10. The LTCM Crisis<br />
11. Various dates associated with war outbreaks<br />
12. an "Unknown" classification - requires more research on the significance of each day<br />
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The date ranges I used for each particular crisis or event was the relative high as the start date, and the low as the end date. I did strip out the high market value reached before the Great Depression because the 31.86 high reached in 1929 wasn't recovered until 1954.<br />
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Doing this resulted in the following breakdown -<br />
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So, apart from the 14 days listed in the "unknown" category (which is more a function of me needing to do a bit more research than anything else) and the Dec 16-18th rally, 85% of the 2 day rallies between January 1940 and December 2014 occurred during a time of financial crisis, bubble chaos, recession or time of war. I found that very striking given the December 16-18th rally happened absent any of those markers. </div>
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The other question I had about the history or tendencies of huge 2 day rallies related to how they compared to the previous high. My guess was that many (or most) of these unusually large 2 day rallies would occur after a significant correction or pullback from a previous high. SO once again I did a bit of digging through the data.</div>
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I found the larger (ie top 100 2 day rallies) occurred only after the markets had corrected on average by 30%. The smallest correction (3.59%) and outlier 2 day rally of 5.46% occurred in November 1982, during the 1980-81 recession. But, it took 705 days to surge past the previous market high. The December 16-18 4.49% rally occurred after a 4.95% correction but only took 7 days to surpass the previous record high. This is unusual given the average number of days to surpass the previous record high is 1637 days. </div>
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While this breakdown doesn't provide any information that will help you with a trade, it does put the December 16-18 2 day rally of 4.49% into context. Given the rally occurred absent a recession, crisis, bubble or time of war - the magnitude of the rise is VERY unusual and should not be treated as 'normal' or "not noteworthy" - </div>
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A breakdown of the top 100 2 day rallies is snapped below for your interest - again, given this was all done by hand, there may indeed be some errors.. but I've tried to be as thorough as possible. If you notice an error please let me know and I will update my spreadsheet. Or, if you are able to track down any of the "unknown" events let me know.. </div>
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<a href="https://drive.google.com/file/d/0B-J8lDlgeRm6dmZBUWI2d09IRXc/view?usp=sharing">copy of my spreadsheet is here</a></div>
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If you find this information useful GREAT!! If you reproduce it, post it, etc.. please do me a favor and provide attribution. I don't post much but it would be nice to get some credit if you find the material interesting.</div>
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Thx</div>
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<br />Gubbhttp://www.blogger.com/profile/00411147564595486174noreply@blogger.com0tag:blogger.com,1999:blog-1820525859739554784.post-57820895276188530572014-12-08T14:49:00.002-08:002014-12-08T14:49:53.481-08:00McCulley, the Fed, rates and the ISMI am a big fan of Paul McCulley and was a keen reader of his thoughts during his time at PIMCO (the first time around).<br />
<br />
One of the best pieces I ever came across was entitled,<br />
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<a href="https://drive.google.com/file/d/0B-J8lDlgeRm6MVlja3BQTC1iMklJYkR3blRrQ09TTDZ3cEJ3/view?usp=sharing">"Keeping the Rabbit at home and the Dog at the Office"</a></div>
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As you know I do a fair bit of bonds for my retail clients, so this piece was very interesting to me.. so - I set about to recreate Paul's work..</div>
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First, to make sure I had the right idea - I recreated Paul's graph from 1983 to 2005, just to make sure it looked similar. </div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhk4_8rcAZaEB8NhxoF0srHdkkkCS-yq3ZmE7jGSepiZxXDHpGU26hLXGmcG1BntDONU9-Tzi_NUXqpfnGTmw7Toip8FE93RoLbARDExjhcS4daYWrHGb2H1nv5GELgaIWpVj5-TlyMuaw/s1600/first.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhk4_8rcAZaEB8NhxoF0srHdkkkCS-yq3ZmE7jGSepiZxXDHpGU26hLXGmcG1BntDONU9-Tzi_NUXqpfnGTmw7Toip8FE93RoLbARDExjhcS4daYWrHGb2H1nv5GELgaIWpVj5-TlyMuaw/s1600/first.JPG" height="233" width="320" /></a></div>
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not bad.. </div>
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and then, I went off and applied the same set of rules to today's market. I've done this a few times (after the taper tantrum for example.. to check and see what I was missing) - </div>
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here's where we are today - </div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjuxEuta_QIE0V7yZ8_8aVEC24ytk0HYPswInbyxm7vMiMujDPUwqyJXmhBaP_niEhkIi3nXE1kjHEOCt8wXZuVeOmET0iMjvAvfAgliJTjgZBejmuA4Kh07Ef91nYnAu8zTUoU2oetqYA/s1600/conundrum+buster.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjuxEuta_QIE0V7yZ8_8aVEC24ytk0HYPswInbyxm7vMiMujDPUwqyJXmhBaP_niEhkIi3nXE1kjHEOCt8wXZuVeOmET0iMjvAvfAgliJTjgZBejmuA4Kh07Ef91nYnAu8zTUoU2oetqYA/s1600/conundrum+buster.JPG" height="228" width="320" /></a></div>
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so to me, this continues to flash the "all clear" on rates. As such I don't think you will see rates rise because of fundamentals. We could however see a rate bump as per Gundlach's suggestions - but I doubt it would be much, or meaningful.. as the data just doesn't support a move higher at this point. </div>
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Interesting stuff - </div>
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Gubbhttp://www.blogger.com/profile/00411147564595486174noreply@blogger.com0tag:blogger.com,1999:blog-1820525859739554784.post-8772436990106221882014-09-13T14:40:00.002-07:002014-09-13T14:40:27.103-07:00Excel Fun - I'll say it until I am blue in the face.. I am NOT smart. I was never a kid who got A's in school, no matter how hard I tried or studied. I think one of my best qualities as a person who works in the financial industry is that I am very curious. I want to understand how things work to the best of my ability. While some are happy to just bob along like a cork in the big market, taking the returns that are given to them - that isn't okay with me. I want to UNDERSTAND the machine so that I have a very good idea of where these returns come from.<br />
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If you've been reading me here, or via my twitter account you know I have some major concerns about the market. To save time I won't rehash all of that here, but suffice it to say I don't think all is well out there.<br />
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Anyhow - John Hussman recently posted a fantastic chart that I think really put things into perspective - it was in his <a href="http://www.hussmanfunds.com/wmc/wmc140908.htm">Weekly commentary from September 8th</a><br />
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here's the chart -<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgsLLtWReHkU67RpMRt1WUjQxNLc8UpdL328YzsIX3n9nXJln0780nJDlI53_emyRfucA2A34bUBtnEut-RKurDE23LwrvwQwsbKlLMSX2qaAB-B6pXKd4vgeKY0pa0J99Athr2hChsAmg/s1600/hussman+2.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgsLLtWReHkU67RpMRt1WUjQxNLc8UpdL328YzsIX3n9nXJln0780nJDlI53_emyRfucA2A34bUBtnEut-RKurDE23LwrvwQwsbKlLMSX2qaAB-B6pXKd4vgeKY0pa0J99Athr2hChsAmg/s1600/hussman+2.JPG" height="325" width="400" /></a></div>
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I've seen a lot of charts over the years, but nothing screams "umm.. what?" more than this one. But given my natural inquisitive nature.. I wanted to take a deeper look at this chart to see if there was anything noteworthy under the surface. I mean the run on the S&P 500 from 2009 to today 'could be' justified if earnings, incomes, jobs and GDP growth was running at all time highs. </div>
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So I went to the best website on the planet for anything related to US macroeconomics <a href="http://research.stlouisfed.org/fred2/">FRED</a> and pulled off the quarterly stats for GDP, Personal Consumption Expenditures and Corporate profits. I then hit <a href="http://www.econ.yale.edu/~shiller/data.htm">Professor Shiller's website</a> to snag the S&P 500 data along with the CAPE info.</div>
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Once it was all put into excel - I just created a base index using the respective starts of the bull markets to the nearest quarter (January 1995 to April 2000, January 2003 to October 2007 and April 2009 to present)</div>
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and came up with this (1995 bull for example).</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhTYa8KAqbUPWt5u1vsa0Y1zvlpJngGG3SzWXz0S8GXPrlL9aBxK5Xqfii77ws72SBWPMQtCQVcKYnV2QpF1emd5rarhb4VMenxkHyrJ5p546wzTZm1sZoBhFzXvwZYlksK_vBcbeTLGTQ/s1600/1995.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhTYa8KAqbUPWt5u1vsa0Y1zvlpJngGG3SzWXz0S8GXPrlL9aBxK5Xqfii77ws72SBWPMQtCQVcKYnV2QpF1emd5rarhb4VMenxkHyrJ5p546wzTZm1sZoBhFzXvwZYlksK_vBcbeTLGTQ/s1600/1995.JPG" height="146" width="400" /></a></div>
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I guess some will argue I should use different numbers, or a different base - or that GDP, PCE, EPS and CAPE figures don't matter.. and maybe that's true. It seems that economic fundamentals mean nothing these days.. but I have a very hard time thinking that they don't matter "anymore".</div>
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here's 2003-2007</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhugYQp44Cc5GFNjtn-BPB4m9a5P0M8Xg97RD00nr6BMxBMBleUUcITRTGGnbjmvzrk3bM1eDbvgiq7tomxix0zbKLeXmlIcwAZOtO50aUZqVTSAZR65S8EGmkB-jwTjAoMLZ92_3nRsxY/s1600/2003.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhugYQp44Cc5GFNjtn-BPB4m9a5P0M8Xg97RD00nr6BMxBMBleUUcITRTGGnbjmvzrk3bM1eDbvgiq7tomxix0zbKLeXmlIcwAZOtO50aUZqVTSAZR65S8EGmkB-jwTjAoMLZ92_3nRsxY/s1600/2003.JPG" height="117" width="400" /></a></div>
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and 2009 to 2014</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhr-NHbnqRz7ek-6mrEluK104YoXc1Yxyda0DgwXhMIdE0LAwSR6BzZ5YW5kbb6XqXYJQtCzRDOLeRHx2PvzMH0nOTvk1f0F_TfHQ4qJhD5rX4dGbxRGFTwwYiqt7Y-qSEw3_Lk42BDQlQ/s1600/2009.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhr-NHbnqRz7ek-6mrEluK104YoXc1Yxyda0DgwXhMIdE0LAwSR6BzZ5YW5kbb6XqXYJQtCzRDOLeRHx2PvzMH0nOTvk1f0F_TfHQ4qJhD5rX4dGbxRGFTwwYiqt7Y-qSEw3_Lk42BDQlQ/s1600/2009.JPG" height="125" width="400" /></a></div>
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Nothing screamingly obvious here.. but interesting to me none the less.</div>
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Here was the summary of each bull market's growth in the various components</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiWGfOasEZLFxQ4CDOgyQyvz3izoydhIZCXCOJHnpHeVbEOSNFnQj0pM9APfIv2jQFsaMsns4j_USK8xU_gWmBx3YCZlclcHXecSgs1FkdRxDVGfBGh4CHicXMlnsBs4PwZZtfvXERKNGw/s1600/1995a.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiWGfOasEZLFxQ4CDOgyQyvz3izoydhIZCXCOJHnpHeVbEOSNFnQj0pM9APfIv2jQFsaMsns4j_USK8xU_gWmBx3YCZlclcHXecSgs1FkdRxDVGfBGh4CHicXMlnsBs4PwZZtfvXERKNGw/s1600/1995a.JPG" height="288" width="400" /></a></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEidfQZ8vIZzjcCqUfEQDdBzdeiL8ql5_b-Pqy9tj8btf96tExPI3Tc36-nAKoeBVQsGaZgiKdREVzueFdMsXv-SsRD8gW0GjP-ULIGt2X-EFtTTpT1L4wgiXmOYWmG0q-DW269NdLVTxRo/s1600/2003a.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEidfQZ8vIZzjcCqUfEQDdBzdeiL8ql5_b-Pqy9tj8btf96tExPI3Tc36-nAKoeBVQsGaZgiKdREVzueFdMsXv-SsRD8gW0GjP-ULIGt2X-EFtTTpT1L4wgiXmOYWmG0q-DW269NdLVTxRo/s1600/2003a.JPG" height="291" width="400" /></a></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgKsVX0aYOHQbv_4s7oohZXntMUCqddd-801VC8ai3uv-OJx4LgwRx2wADieJ0SKqqqrPkoLBZI5YM5AJlLS6fIQFI0JEMZSgSLG545B3zYiemIzQcd8rfVuN2TV8YAWVx88RKgjkvYy34/s1600/2009a.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgKsVX0aYOHQbv_4s7oohZXntMUCqddd-801VC8ai3uv-OJx4LgwRx2wADieJ0SKqqqrPkoLBZI5YM5AJlLS6fIQFI0JEMZSgSLG545B3zYiemIzQcd8rfVuN2TV8YAWVx88RKgjkvYy34/s1600/2009a.JPG" height="291" width="400" /></a></div>
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and then I added it to Hussman's original chart..</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiD1a-gO1SQRNVcwEFVMB5cUnBAkRG96cq0eXyCK42h5UojCNlneZGKOFdj3x5hCgdv2sWZLLh-sXZQhnz_xNlMt-_A_I47cz7qH3rHdJm1ATntwi8VxzYfxCe_h7vvTsJWXO10yy0sR1g/s1600/Hussman+Chart+and+Base+Numbers.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiD1a-gO1SQRNVcwEFVMB5cUnBAkRG96cq0eXyCK42h5UojCNlneZGKOFdj3x5hCgdv2sWZLLh-sXZQhnz_xNlMt-_A_I47cz7qH3rHdJm1ATntwi8VxzYfxCe_h7vvTsJWXO10yy0sR1g/s1600/Hussman+Chart+and+Base+Numbers.JPG" height="291" width="400" /></a></div>
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It would be interesting to tear into the EPS data a bit more given the massive increase in share buybacks, and I'm sure there are all sorts of other data points that we could look at in addition to the ones I've picked here. I didn't try to cherry pick anything - instead just wanted to see if there was any major 'thing' that stood out. It does look like GDP and PCE are quite a bit lower than previous bull runs - but who knows.</div>
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Anyhow informative or not.. it was fun to play around here. I hope it inspires someone else to dig into this stuff in a bit more detail. Of course you know I tend to be leaning pretty significantly towards this market being a rather large bubble.. but obviously have no idea if or when it will pop. </div>
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I guess time will tell. </div>
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<br />Gubbhttp://www.blogger.com/profile/00411147564595486174noreply@blogger.com2tag:blogger.com,1999:blog-1820525859739554784.post-10683351546520494002014-08-18T20:30:00.001-07:002014-08-18T20:30:06.213-07:00The Stockdale Paradox*<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhaIn7jmQSlLzVZ24tbWJJy82C6bVysGdQUWhiglXimpEGrHHfN0MGVh13w8sZ-ZKI1VLm7bI1OAcxBjSnOuOj00Wy0vTfAQMdZpaYgdSA-XR7PYgE8YFq2_po93FeuNrbnnbCHI7qjSvY/s1600/James_Stockdale_Formal_Portrait.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhaIn7jmQSlLzVZ24tbWJJy82C6bVysGdQUWhiglXimpEGrHHfN0MGVh13w8sZ-ZKI1VLm7bI1OAcxBjSnOuOj00Wy0vTfAQMdZpaYgdSA-XR7PYgE8YFq2_po93FeuNrbnnbCHI7qjSvY/s1600/James_Stockdale_Formal_Portrait.jpg" height="320" width="224" /></a></div>
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The Stockdale Paradox is named after Admiral James B. Stockdale, who was the highest ranking US Military officer imprisoned in Vietnam during the war. Stockdale was shot down while flying a mission over North Vietnam on September 9th, 1965 and taken immediately to the infamous Hoa Lo prison, also known as "The Hanoi Hilton". Stockdale was a "prisoner of war" and 'lived' there for the next seven and a half years.<br />
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In the summer of 1969, he was locked in leg irons in a bath stall and routinely tortured and beaten. When told by his captors that he was to be paraded in public, Stockdale slit his scalp with a razor to purposely disfigure himself so that his captors could not use him as propaganda. When they covered his head with a hat, he beat himself with a stool until his face was swollen beyond recognition. When Stockdale was discovered with information that could implicate his friends' "black activities", he slit his wrists so they could not torture him into confession. Stockdale was released as a prisoner of war on February 12, 1973<br />
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Year later, author James C. Collins was interviewing Stockdale about his time at the Hanoi Hilton for a book called "Good to Great" - during the interview, Stockdale explained how he managed to survive all those years as a POW. He said,<br />
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<i>"I never lost faith in the end of the story, I never doubted not only that I would get out, but also that I would prevail in the end and turn the experience into the defining event of my life, which, in retrospect, I would not trade</i>."<br />
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Collins followed up by asking Stockdale who didn't make it out of Vietnam alive. Stockdale replied,<br />
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"<i>Oh, that's easy, the optimists. Oh, they were the ones who said, 'We're going to be out by Christmas.' And Christmas would come, and Christmas would go. Then they'd say, 'We're going to be out by Easter.' And Easter would come, and Easter would go. And then Thanksgiving, and then it would be Christmas again. And they died of a broken heart.</i>"<br />
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Stockdale then added, "<i>This is a very important lesson. You must never confuse faith that you will prevail in the end—which you can never afford to lose—with the discipline to confront the most brutal facts of your current reality, whatever they might be.</i>"<br />
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It was this philosophy of duality, that inspired Collins to describe it as the Stockdale Paradox.<br />
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Why am I writing about this rather dark and depressing paradox this month?<br />
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Well as I am sure you have figured out by now, I think it does a wonderful job of explaining how I am wired as a Portfolio Manager. While my letters over the years may sound dire and dark, the truth of the matter is that I have great hope and excitement about our future. I have faith that we will see through these difficult times, and get back to less chaotic days. But, as with Stockdale, I also possess the discipline to confront the most brutal facts of our current reality.<br />
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It was this discipline that enabled me (as you know) to completely avoid the dot.com bust in 2000, as well as the Great Financial Crisis of 2008/09, even as many in the industry ere busy assuring investors that "all was well" - .<br />
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(for example)<br />
<a href="http://online.wsj.com/news/articles/SB121068163716188223?mod=djemTAR&mg=reno64-wsj&url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB121068163716188223.html%3Fmod%3DdjemTAR">2008 recession? Not so fast: </a><br />
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<a href="https://draft.blogger.com/-%20http://www.washingtonpost.com/wp-dyn/content/article/2005/10/26/AR2005102602255.html">Ben Bernanke: No Housing Bubble in US</a> -<br />
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Of course we know both of the statements above turned out to be spectacularly incorrect, and led to massive losses by investors.<br />
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Now, in 2014 the stock market has hit all time record highs as expectations that the US economy is approaching "escape velocity" - but, my discipline and macroeconomic research believes this is yet another naively optimistic narrative.<br />
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To borrow the paradox above, the US stock market has been saying they will see escape velocity by Thanksgiving, then Christmas, then New Years, then Easter.. Those of us who have been keeping track know that they've been saying this for the last 5 years.<br />
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Confronting the brutal facts about our current economic situation tells us that while things are certainly better than they were in January or February 2009, they are a very long ways away from anything that could be construed as "Escape velocity". As such, the longer true "escape velocity" eludes the US economy, the stock market as with those unfortunate souls who did not make it out of the Hanoi Hilton, run a massive risk of dying from a broken heart.<br />
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Just something to consider.<br />
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* a h/t to Zerohedge. While I was very familiar with the story of James Stockdale's torture, I had forgotten about the paradox - something they mentioned in two fantastic posts<a href="http://www.zerohedge.com/news/2014-08-11/confronting-brutal-facts-us-market-fly-search-windscreen"> here</a> and<a href="http://www.zerohedge.com/contributed/inspiration-admiral-stockdale"> her</a>e. I wrote something similar not to try and pretend this was my original idea, but to record these thoughts on my own blog for future reference.<br />
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cheers<br />
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<br />Gubbhttp://www.blogger.com/profile/00411147564595486174noreply@blogger.com1tag:blogger.com,1999:blog-1820525859739554784.post-54123335223487853172014-08-01T12:50:00.002-07:002014-08-01T12:50:46.833-07:00The industry is getting lazy...I should preface this - and all of my posts for that matter - by saying that my scope and experience is purely on the retail advisory side. I've never worked in straight banking, nor on the institutional side and I don't have a CFA and am certainly NOT an equity analyst. I started straight out of University in 1993 and everything I know today I've picked up along the way.<br />
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I run individual investment portfolios - I manage the investments of your Mom or Dad, your Grandparents, or your Aunts and Uncles. I don't do futures or currencies and stick to running mostly vanilla stocks and bonds.<br />
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The more I read about how some people trade via twitter, the more I realize that my specific portion of the investment world is basically the phytoplankton of finance. We are small and individually insignificant but do play a big part in supporting the bigger financial ecosystem. Bigger players have other terms for us, "muppets" comes to mind.. which is fair enough, so call me Gonzo.<br />
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I will concede that perhaps the observations I make, as a small phyto-financial plankton don't mean a hill of beans to the bigger ecosystem. But if I do say so myself I think I have developed a bit of a knack for identifying problem areas before they occur.<br />
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Yes I admit it freely - I'm wired to worry.<br />
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I am more often than not inclined to take the safer road and the cautious approach than to seek out risk. Personally think you kind of need this mindset if you want to work in retail and manage "Other People's Money".<br />
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I mentioned the problem that I have with analysts getting "lazy" with their target prices and advice on stocks in "<a href="http://gubbmintcheese.blogspot.ca/2014/06/charles-neuhauser-meets-asch-paradigm.html">Charles Neuhauser meets the Asch Paradigm</a>" - in today's market I am seeing a TON of target prices getting bumped up even as earnings estimates fall. Paying 24x next year's estimated earnings on a stock whose longer term eps growth rate averages 4 or 5% is just asking for trouble.. but, many ignore the rules.<br />
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AH well.<br />
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I'm seeing so many target prices being bumped up a few dollars via an expanded multiple assumption rather than any higher assumed earnings - just so analysts don't have to answer the question of why the stock isn't a sell.<br />
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It's that Keynesian career risk thing - you don't want to put a sell recommendation on a stock only to have it keep rolling higher on you.. client's don't dig that.<br />
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But you know what? An expensive stock is an expensive stock.. and call me naive but if you are simply slapping an additional 1.5x multiple on an ALREADY LOFTY forward PE.. just because the momentum of the stock continues to be higher.. what sort of value are you adding to the portfolio?<br />
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Also - given earnings growth and fundamentals are clearly NOT driving the share price.. how on earth are you going to know when to get the hell out of the way?<br />
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I find too many just accept the upside without paying too much attention to the fine print (or lack thereof).<br />
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Stock is moving through your target price? Well then take a look at your model and see if you are missing anything that could explain the action.. more growth coming from somewhere you didn't anticipate? Are your earnings expectations too conservative? But for god's sake don't just look at the street consensus and slap another 1.5x on so you can increase your target price by $5.00..<br />
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Clients pay us a lot of money to work diligently on their behalf.. if a stock is expensive.. it's expensive.. if it has a target price of $50.00 and it's trading at $56.00 with no new catalysts to push your earnings estimates higher.. you need to at LEAST do the math to see if you should ease the size of the position down.<br />
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If I'm running my own funds then it doesn't matter - but the last thing in the world you want to do is be overly optimistic on a stock or market with client money..<br />
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Most in retail tend to be fairly heavy in equity anyhow (some I know are basically 100% in stock.. holy crap..) - so if they are WRONG on the recovery and the bull market.. they don't get hurt.. but man, do the clients get smoked.<br />
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Just a small rant.. I saw about four 'increased target prices' using the same cheeky pe expansion (even as estimated earnings were REDUCED!!!)<br />
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Somewhere, Charles Neuhauser is shaking his head and waiting to say<br />
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"I told you so..."<br />
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be safe out there people.. :)<br />
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Gubb<br />
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<br />Gubbhttp://www.blogger.com/profile/00411147564595486174noreply@blogger.com0tag:blogger.com,1999:blog-1820525859739554784.post-37734609751541790812014-07-12T14:31:00.001-07:002014-07-12T14:32:26.920-07:00John Maynard Keynes Loves Lemmings<h1 class="quoteText" style="background-color: white; color: #181818; font-family: georgia, serif; font-size: 14px; line-height: 18px; margin: 0px 0px 15px; padding: 0px; text-align: center;">
<i style="background-color: transparent; font-family: Georgia, 'Times New Roman', serif;">"Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally"</i></h1>
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<span style="font-family: Georgia, 'Times New Roman', serif;">John Maynard Keynes - "The General Theory of Employment, Interest and Money"</span></div>
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As a retail portfolio manager who runs individual investment accounts, words can't describe how much I dislike the quote above. To me it's a cop out - it's lazy, ill advised and ultimately ends up hurting clients. </div>
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Is it really better for one's career to be wrong along with the majority than it is to stick to a well thought out long term strategy that may be 'out of favor' or unappreciated at the moment? </div>
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To me, Keynes seems to be endorsing a kind of "Blind Lemming" approach to investing. The sweet irony here is that the whole <a href="http://en.wikipedia.org/wiki/Lemming#Misconceptions">lemming "mass suicide" thing is a myth</a> that has been perpetuated by humans for eons. Of course reality follows logic: No, lemmings aren't dumb enough to blindly follow the masses off a cliff "just because everyone else is doing it". Unfortunately, many in the financial industry didn't get the "lemming myth" memo and instead have invested (their client's money) heavily in the myth. </div>
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Sure, career risk is very real and something that all of us have to be aware of - but does that mean we need to blindly follow or invest in something that we don't believe or understand, just so we can conform with the majority? </div>
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<i>"The opposite for courage is not cowardice, it is conformity. Even a dead fish can go with the flow"</i></div>
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Jim Hightower</div>
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said another way</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEifwqsQ3aFvZxnwd_t4gUF_1QHG1KZIfbbWg_47R6KHJxnVVbBbMvOxFQME1qfWIqi673Dd6cbPvBbH3KYwV1LRlgDGCqJxO57GlIDfVJK0JE3__x6KceAd23cXIcDZgqUVECv4FgrZbI4/s1600/lemmings.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEifwqsQ3aFvZxnwd_t4gUF_1QHG1KZIfbbWg_47R6KHJxnVVbBbMvOxFQME1qfWIqi673Dd6cbPvBbH3KYwV1LRlgDGCqJxO57GlIDfVJK0JE3__x6KceAd23cXIcDZgqUVECv4FgrZbI4/s1600/lemmings.JPG" height="121" width="320" /></a></div>
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The Keynesian lemming model can be found everywhere in the financial industry. Sure, it's not CALLED the Lemming model - because that would raise red flags. Instead the Lemming model for finance has been subtly hidden in pithy, bold, and well-known investment mantras such as: </div>
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"Don't fight the Fed" </div>
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and </div>
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"The Trend is your Friend".</div>
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"Don't fight the Fed" is considered good investment advice? Really?</div>
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Are we talking about the same Fed that had a hand in creating the dot.com bubble, the housing bubble, and the financial crisis of 2007/09 (to name a few)?</div>
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If it is - then why in the hell would you ever want to hook your wagon to their track record? </div>
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Forget the Fed for a moment. Instead assume there was a pilot who had a history of acting irresponsibly. Over the last 15 years, this pilot's irresponsible actions led to him to crash his plane <i><b>twice, </b></i>causing untold damage, death and pain. If we follow the same "Don't fight the Fed" logic, I should be seeking out said pilot when I choose to travel, and be happy and excited about flying with him. Does that make sense? </div>
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Assuming the irresponsible pilot doesn't recognize that he has a problem, and therefore doesn't change his ways - what is the likelihood of us being involved in another crash? </div>
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Following the same thought process then - if the Fed doesn't recognize that it has a problem, and therefore doesn't change it's approach - what is the likelihood of another Fed induced crisis/crash?</div>
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Sure, maybe it's a few years down the road.. but my point here is don't mindlessly "go with the flow" simply because everyone else is doing it.</div>
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If you are going to invest - have a model, have a method, have a discipline. </div>
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The best, NON-Lemming quote I've seen in a while is this: </div>
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<i><b>"I would rather lose half of our clients, than half our client's money"</b></i></div>
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Jean Marie Eveillard</div>
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Perhaps this issue doesn't apply with the institutional side, or for people who simply trade their own capital - but for running other people's money - it's absolutely KEY. </div>
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The last thing in the world anyone on the retail side wants to do (assuming they care about their client's well being, <a href="http://gubbmintcheese.blogspot.ca/2014/05/the-farmer-and-viper.html">and aren't a sociopath</a>) is blow up a client's financial future simply because they were "following the masses" in an effort to not look stupid. To me there is nothing more intellectually dishonest than sending out a "<i>There was no way to have seen this coming</i>" letter to try and explain what went wrong AFTER blowing up a client's account on a correction that they should have seen coming. The DOT.COM and 2007/09 corrections are PERFECT examples of situations where a broker 'should' have seen it coming - I mean really.. it wasn't rocket science. </div>
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Unfortunately today, I am seeing a LOT of complacency on the retail side of the business. Too many brokers walking around thinking the returns they are earning is because of their own brand of genius rather than the plethora of financial morphine sloshing around in the system. I've overheard "It's almost too easy" and "it's like shooting fish in a barrel" far too many times for my liking - just as I did in '98, '00 and '07.</div>
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While many may assume I am a 'perma-bear' I can tell you I am not - I am a realist. If and when the investment environment changes, my views will change. Unfortunately from where I sit, nothing has really changed. The problems, flaws and abuses continue to exist and there seems to be no desire to change the approach or come up with a workable solution. This is something I've been saying since 2009, although I have noticed more and more people are starting to suggest the same thing - (<a href="http://www.bloomberg.com/news/2014-07-10/portugal-smolders-as-allianz-says-debt-crisis-isn-t-over.html">Maximillian Zimmerer, CIO of Allianz SE recently said "The fundamental problems are not solved and everyone knows it"</a>)</div>
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So what to do? </div>
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All I suggest is that investors be keenly aware that many of those bold and courageous quips we keep hearing from CNBC and the TV gurus aren't calls to be wise. Instead they are fluffy, ill thought out calls to conform to the Lemming Mentality. It's a call not to think - but to just mindlessly go with the flow. </div>
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So, when someone gives you a little investment advice such as: </div>
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<i><b>"The Trend is your friend"</b></i><br />
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<i><b>"Stocks always outperform over the long term"</b></i><br />
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<i><b>"Stocks are the only game in town"</b></i></div>
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<i><b>"The market can stay irrational longer than you can stay solvent"</b></i></div>
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<i><b>"Don't fight the Fed"</b></i></div>
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<i><b>"The economy isn't the stock market"</b></i></div>
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<i><b>"The consumer doesn't matter"</b></i></div>
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<i><b>"Earnings/Sales/GDP/Wages doesn't matter"</b></i></div>
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<i><b>"It's a whole new paradigm"</b></i><br />
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<i><b>"The cleanest dirty shirt.."</b></i></div>
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and </div>
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<b>"This time it's different"</b></div>
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know what they are really suggesting is this - </div>
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Yes - Maybe it will take a while for reality to hit, for the mean to revert or for fundamentals to matter again.. but at some point they will - because they always do. All I'm suggesting is that if you run money on behalf of someone else, that you be keenly aware of Keynes' endorsement of the lemming myth. </div>
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Just a thought. </div>
<span style="background-color: whitesmoke; font-family: georgia, serif; font-size: 12px; line-height: 18px;"></span>Gubbhttp://www.blogger.com/profile/00411147564595486174noreply@blogger.com1tag:blogger.com,1999:blog-1820525859739554784.post-3717169188131820072014-06-01T12:09:00.003-07:002014-06-01T12:09:44.046-07:00Charles Neuhauser meets the Asch Paradigm"Never overpay for stock. More money is lost than in any other way by projecting above-average growth and paying an extra multiple for it"<br />
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Charles Neuhauser, Bear Stearns</div>
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This has always been one of my favorite quotes, and I think it's one of the most relevant thoughts I've ever come across. Of course these days, valuation and fundamentals have been thrown into the back seat as other factors are currently influencing the market's direction. But, valuation - what you pay for the companies you buy - is always important. No matter what is going on in the short to medium term. </div>
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With that in mind, I wanted to give an example of what I'm struggling with regarding current stock valuations, and then tie that into Asch's paradigm in an effort to show how the financial industry gets itself into trouble from time to time. </div>
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So I thought I'd pick a company whose business I like, but am wary of the valuation. A name that everyone knows, and that has a great global brand: Proctor & Gamble (NYSE: PG). I like the company because of it's incredible stability. It's paid a dividend every year since 1890, and has raised its dividend for 58 years in a row. The company boasts an incredible brand - selling products under the names Tide, Gillette, Pampers and Crest. </div>
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At the time of writing this post, PG shares were sitting at $80.79 - (<a href="https://www.google.com/finance?q=NYSE%3APG&ei=wFiKU8jfAoatiALUn4CgDg">link for current quote here</a>)</div>
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So a quick look at Valueline shows 2014 actual earnings were $4.05 - which suggests PG trades at 19.94x 'trailing earnings' -</div>
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Sidenote: See, way way back when I started in the business (1993) all PE ratios were based on trailing earnings, as those were the earnings actually earned and recorded into the books. The 'forward earnings' references started a few years after I started. Initially research pieces quoted forward earnings only going out a year into the future, but as the practice took root, it's now not unusual to see estimates going out three years. We will get back to this on the second part of the discussion. </div>
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If the earnings for PG in 2014 are expected to come in at $4.30, and 2015 at $4.60, then PG is said to be trading at 18.79x 2014e EPS and 17.56x 2015e EPS. See? Doesn't the idea of paying 17.56x to buy PG sound so much better and more reasonable than buying it at 19.94x?</div>
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Now, here is where Neuhauser's comments come into play.</div>
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An increase in earnings from $4.05 to $4.30 is 6.17%, and an increase from $4.30 to $4.60 is 6.97%. In its most simple form, value investing is when you are buying a company at a cheap price relative to its earnings growth rate. Using a PEG ratio measure (a ratio of PE ratio divided by a company's earnings growth rate) the goal is to buy a company under 1.00 - that is, you are buying a company whose PE ratio is less than the earnings growth rate of the underlying company you are buying. </div>
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Unfortunately in the case of PG at its current price - we are no where close to that kind of valuation.</div>
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PG's PEG ratio is sitting at 3.04x for 2014 (18.79 divided by 6.17) and 2.52x for 2015 (17.56 divided by 6.97)</div>
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Not cheap. </div>
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Now - there are a MILLION different ways to evaluate a company's worth that are more sophisticated that have merit and are worthy of your consideration - but I am using the PEG to show you what Neuhauser was talking about. </div>
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Remember what Neuhauser said.. "Never overpay for a stock. More money is lost than in any other way by projecting above-average growth and paying an extra multiple for it"</div>
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What does he mean by that? </div>
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Well in the case of our current example with PG, if we look at the company's compound growth rate (CAGR) in earnings from 1998 to 2015 (using current estimates) we find that PG has grown earnings at a rate of 7.82% per year - Pretty outstanding for a firm this mature. </div>
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But, if we buy the stock today at 19.94x trailing or 18.79x 2014's expected earnings, we are also breaking Neuhauser's timeless rule. This is where the financial industry can get itself into trouble. </div>
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Let me give an extreme example - if the PEG ratio on PG was 1.00 and reflected the company's average annual compound earnings growth rate from 1998-2015, the stock would be trading at $33.63, down over 58% from its current level. </div>
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recall: PEG ratio = PE ratio divided by Earnings growth rate. </div>
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SO to a 'strict Neuhasian valuation' would suggest a PE ratio of 7.82x on 2014e EPS of $4.30 - so 7.82 x 4.30 = $33.63 </div>
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Even a less extreme compression in multiples suggests a big decline in the price of the stock. Assume for example that PG's current trailing PE ratio only fell from 19.94x to 18x. In that case, the stock would move from $80.79 to $72.92.</div>
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I would suggest that investors also be very mindful when they see a stocks target price increase solely on the back of an increase in the assumed multiple.<br />
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An example of what I mean:<br />
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Assume XYZ Brokerage Firm initiated coverage on the company in October of 2013 at $76.00 with an $80.00 target price. As the price rises closer to the target price and the overall market environment is still bullish, it is not uncommon for a target price to get bumped up. But, there are times when instead of earnings assumptions increasing - from say $4.30 to $4.45 for 2014 - the analyst just tweaks the assumed multiple. In this case they'd say something like:<br />
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We are increasing our 12 month target price on PG from $80.00 to $88.58. We continue to think PG will earn $4.30 in 2014, but think a more appropriate multiple is 20.6x earnings and not 18.6x.<br />
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So, even though the earnings estimates haven't increased, the firm has managed to bump up the target price by over 10%.. ta da!<br />
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I for one am very wary of multiple expansion assumptions on stocks (to increase a target price) as there is no way to verify what 'exact' multiple is appropriate.<br />
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And this brings me to the second part of my post.. the Asch Paradigm.<br />
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I always found this experiment kind of interesting -<br />
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<a href="http://en.wikipedia.org/wiki/Asch_conformity_experiments">"The Asch Conformity Experiment"</a></div>
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from wiki:</div>
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<i>Male college students participated in a simple "perceptual" task. In reality, all but one of the participants were "confederates" (i.e., actors), and the true focus of the study was about how the remaining student (i.e., the real participant) would react to the confederates' behavior.</i><br />
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<i>Each participant was placed in a room with seven "confederates". Confederates knew the true aim of the experiment, but were introduced as participants to the "real" participant. Participants were shown a card with a line on it, followed by a card with three lines on it (lines labeled A, B, and C, respectively). Participants were then asked to say aloud which line (i.e., A, B, or C) matched the line on the first card in length. Each line question was called a "trial". Prior to the experiment, all confederates were given specific instructions on how they should respond to each trial. Specifically, they were told to unanimously give the correct response or unanimously give the incorrect response. The group sat in a manner so that the real participant was always the last to respond (i.e., the real participant sat towards the end of a table). For the first two trials, the participant would feel at ease in the experiment, as he and the confederates gave the obvious, correct answer. On the third trial, the confederates would all give the same wrong answer, placing the participant in a dilemma. There were 18 trials in total and the confederates answered incorrectly for 12 of them. These 12 were known as the "critical trials". The aim was to see whether the real participant would change his answer and respond in the same way as the confederates, despite it being the wrong answer. Once the experiment was completed, the "real" participant was individually interviewed; towards the end of the interview, the participant was debriefed about the true purpose of the study. Participants' responses to interview questions were a valuable component of Asch's study because it gave him a glimpse of the psychological aspects of the experimental situation. It also provided Asch with information about individual differences among participants.</i><br />
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the results? </div>
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Overall, in the experimental group, 75% of the participants gave an incorrect answer to at least one question.<br />
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worth watching the video here -<br />
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<iframe allowfullscreen='allowfullscreen' webkitallowfullscreen='webkitallowfullscreen' mozallowfullscreen='mozallowfullscreen' width='320' height='266' src='https://www.youtube.com/embed/sno1TpCLj6A?feature=player_embedded' frameborder='0'></iframe></div>
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Those work work in the business may never have heard of the "Asch Paradigm" before, but they are very familiar with its influence in the investment world. <br />
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Investment guru Jeremy Grantham summed up Aschian influences very effectively in his recent quarterly note entitled, "<a href="http://www.scribd.com/doc/92773801/GMO-Quarterly-Letter-My-Sister-s-Pension-Assets-0412-GMO-Grantham">My Sister's Pension Assets and Agency Problems</a>"<br />
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he said,<br />
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<i>"The central truth of the investment business is that investment behavior is driven by career risk. In the professional investment business we are all agents, managing other peoples’ money. The prime directive, as Keynes knew so well, is first and last to keep your job. To do this, he explained that you must never, ever be wrong on your own. To prevent this calamity, professional investors pay ruthless attention to what other investors in general are doing. The great majority “go with the flow,” either completely or partially. This creates herding, or momentum, which drives prices far above or far below fair price. There are many other inefficiencies in market pricing, but this is by far the largest."</i><br />
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and slightly shorter but very commonly used Aschian mantra in the investment world is<br />
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"Don't fight the Fed"</div>
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Peter Tchir of Brean Capital posted a wonderful article on Zerohedge this morning called,<br />
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<a href="http://www.zerohedge.com/news/2014-05-31/linoleum-economy">"The Linoleum Economy" </a></div>
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that hints at the same Aschian phenomenon of conformity going on with the Fed's GDP forecasts. Peter's article is a 'must read' as he rightly questions how the Fed can justify its' call for strong future growth given the volatility we've seen in other economic data points to date.<br />
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So what to make of this post?<br />
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Well the market is continuing it's run higher, of that there is no debate. But, as Charles Neuhauser warned, more and more people are assuming an above average growth rate and then tacking on a few extra points to the multiple when they buy. The narrative of the day is that growth is getting better, and that escape velocity is 'right around the corner', but this narrative has been running in a similar fashion for the last five years. Maybe, just maybe we are seeing yet another example of what Asch discovered in his experiment and Jeremy Grantham mentioned in his letter.<br />
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Just ask yourself what happens to share prices if stock multiples start to reverse course and compress? What happens if PG's PE ratio falls from almost 20x to 12x (which as we know is still above it's longer term CAGR)? What happens if you find out the conformist's narrative was wrong?<br />
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Sure there are lots of different ways to value a stock and account for the rise we are seeing (PEG is obviously a very simple valuation method) - but that's entirely my point: When it comes to investing, you need to think for yourself and don't never fall victim to a conformity trap.<br />
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Just something to consider -<br />
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cheers!</div>
Gubbhttp://www.blogger.com/profile/00411147564595486174noreply@blogger.com2tag:blogger.com,1999:blog-1820525859739554784.post-92141711974884705652014-05-24T14:16:00.002-07:002014-05-24T14:16:23.174-07:00The Farmer and the Viper<div class="separator" style="clear: both; text-align: left;">
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The story of the Farmer and the Viper is one of Aesop's fables and goes something like this,<br />
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A farmer finds a viper freezing in the snow. Taking pity on the snake, the farmer picks it up and places it inside his coat. The farmer's body heat revives the viper who then immediately bites its would be rescuer.<br />
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While there are various endings (and therefore morals) to the story, the one I thought I'd focus on for this post comes from <a href="http://en.wikipedia.org/wiki/Odo_of_Cheriton">Odo of Cheriton</a>. In this version the dying farmer asks for a simple explanation why the snake would deliver a mortal bite given the farmer's compassion. The snake answers,<br />
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"<i>Did you not know there is enmity and natural antipathy between your kind and mine? Did you not know that a serpent in the bosom, a mouse in a bag and a fire in a barn give their hosts an ill reward?</i>"<br />
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As you probably noted in my previous post about the <a href="http://gubbmintcheese.blogspot.ca/2014/05/revised-view-from-30000-feet-us-economy.html">US economy</a>, I have some pretty cynical and sharp views about the financial industry. Ironic I know as I've worked in the industry for over 20 years. To my defense, I wasn't always this skeptical. I started in the business with the same wonderment and awe as every other rookie who was hired on to work at a brokerage firm. No, my cynicism was accumulated over the years, as the shiny veneer peeled away and I got a better understanding of the darker workings industry. Now, let me stop right there and say there are obviously a TON of amazingly brilliant, honest and wonderful people who work in this business. But, there are also a lot of vipers as well and they are threatening our economy (again).<br />
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<b style="text-align: center;">Why?</b><br />
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Dr. Robert Hare from the University of British Columbia wrote a book with industrial psychologist Paul Babiak called "<a href="http://www.amazon.ca/Snakes-In-Suits-When-Psychopaths/dp/0061147893">Snakes in Suits: When Psychopaths go to Work</a>". The book discusses how psychopaths work (and excel) in the corporate world. <a href="http://money.msn.com/retirement-plan/your-adviser-could-be-a-psychopath">An article on MSN</a> referenced Hare and Babiak's work and highlighted that in a very small study of 203 corporate executives, 4% met the criteria to be deemed a 'psychopath' - an interesting number given the average for the general population is about 1%. Moreover, Hare made a very interesting comment in the article specifically about the financial industry -<br />
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"it may even be higher than 10%, on the assumption that psychopathic entrepreneurs and risk-takers tend to gravitate toward financial watering-holes, particularly those that are enormously lucrative and poorly regulated".<br />
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<b>Ding Ding Ding.</b></div>
Okay, not convinced yet? <br />
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How about this story from 2011 - <a href="http://www.spiegel.de/international/zeitgeist/going-rogue-share-traders-more-reckless-than-psychopaths-study-shows-a-788462.html">"Going Rogue"</a> - that discussed the case against UBS trader Kweku Adoboli who made unauthorized trades that led to losses of about $2.3 billion?<br />
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this was the part of the article that stood out to me: <br />
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<i>"According to a new study at the University of St. Gallen seen by SPIEGEL, one contributing factor may be that the stockbrokers' behavior is more reckless and manipulative than that of psychopaths. Researchers at the Swiss reseearch University measured the readiness to cooperate and the egotism of 28 professional traders who took part in computer simulations and intelligence tests. The results, compared with the behavior of psychopaths, exceeded the expectations of the study's co-authors, forensive expert Pascal Sherrer, and Thomas Noll, a lead administrator at the Poschwies prison north of Zurich. "Naturally one can't characterize the traders as deranged," Noll told SPIEGEL, "But for example, they behaved more egotistically and were more willing to take risks than a group of psychopaths who took the same test".Particularly shocking for Noll was the fact that the bankers weren't aiming for higher winnings than their comparison group. Instead they were more interested in achieving a competitive advantage."</i><br />
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This makes a lot of sense when you consider that a <a href="http://phys.org/news187775822.html">psychopath's brain is wired to seek reward at any cost</a><br />
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But are guys like Kweku Adoboli, Jerome Kerviel, Yasuo Hamanaka and Nick Leeson just a few bad apples? Is there really only one or two cockroaches here?<br />
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Well maybe, but it could be that they were hired exactly because they <u>were</u> psychopaths. Consider this:<br />
<a href="http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a.eCGz4Nscks&refer=uk"><br /></a>
<a href="http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a.eCGz4Nscks&refer=uk">"Functional psychopaths make the best investors"</a><br />
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From the article:<br />
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"<i>Functional psychopaths make the best investment decisions because they can't experience emotions such as fear, a study by researchers at Standford Graduate School of Business showed. Fear stops people from taking even logical risks, meaning those who have suffered damage to areas of the brain affecting emotions, and can supress feeling, make better decisions, the report showed. The ability to control emotion helps performance in business and financial markets, the researchers found".</i><br />
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So what am I trying to say here? What is the point of this particular blog entry?<br />
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Well, let me lay out my thesis.<br />
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1. The financial industry attracts a higher proportion of psychopaths than would be found in the general population.<br />
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2. Psychopaths display characteristics that allow them to excel in the industry but they are also tend to pursue reward at any cost, or risk.<br />
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3. Given these competitive advantages and successes (see #2) - we can assume that psychopaths would tend to climb the corporate ladder faster than others, and therefore would tend to cluster at the top of an organization.<br />
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4. Given the clustering of like minded individuals with common goals (ie pursuing rewards at any cost) the psychopathology would lead to less ethical behavior and heightened risk taking for that company or industry. <a href="http://en.wikipedia.org/wiki/William_K._Black">William Black</a> describes this as "<a href="http://en.wikipedia.org/wiki/Control_fraud">Control Fraud</a>"<br />
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5. A <a href="http://en.wikipedia.org/wiki/Gresham's_law">Gresham's dynamic</a> compels other competitors to adopt similar tactics until the entire industry is affected.<br />
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This I believe played a large part in the lead up to (and fall out of) the Great Financial Crisis of 2008.<br />
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But here's the problem. Who did we turn to to help get us OUT of the Financial Crisis?<br />
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Wall Street.<br />
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Wall Street convinced everyone (just ask <a href="http://www.amazon.com/Stress-Test-Reflections-Financial-Crises/dp/0804121184">Tim Geithner</a>) that it was critical to save them. So we did.<br />
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But therein lies the problem - and why I referenced the Farmer and the Viper story above.<br />
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Yes - we saved Wall Street, but failed to clear out or even control the activities of the 'psychopaths'. So, it is absolutely naive and unreasonable for us to assume that today they have "seen the light" and are going to change their behavior going forward.<br />
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How many times have we, the Farmers - saved Wall Street only to be lethally bitten once they recovered from the cold?<br />
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In the last 40 years we've had a <a href="http://en.wikipedia.org/wiki/Latin_American_debt_crisis">Latin American Debt Crisis</a> in the early 80s, an economic collapse from a credit bubble in <a href="http://en.wikipedia.org/wiki/Japanese_asset_price_bubble">Japan</a> in the late 80s, then we had the <a href="http://en.wikipedia.org/wiki/Savings_and_loan_crisis">Savings and Loans</a> situation in the US, <a href="http://en.wikipedia.org/wiki/Long_term_capital_management#1998_bailout">LTCM</a>, in 1998 and of course the <a href="http://en.wikipedia.org/wiki/Dot.com_bubble">dot.com bubble</a> and <a href="http://en.wikipedia.org/wiki/Great_Financial_Crisis">2008/09 global crisis</a>.<br />
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Again, I am not saying that 'everyone' in the industry is bad - clearly they aren't. But I can't help but notice some of the excesses of old are starting to creep back into the marketplace..<br />
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<a href="http://www.reuters.com/article/2014/02/14/us-banks-subprime-insight-idUSBREA1D07820140214">sub prime is making a comeback</a><br />
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<a href="http://online.wsj.com/news/articles/SB10001424052702303672404579147843301078988">as are PIK-Toggles.. </a><br />
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I am also seeing a lot of commentary lately given the fine imposed on Credit Suisse - and how it will not end up being a deterrent for future abuses. <a href="http://www.newyorker.com/online/blogs/johncassidy/2014/05/credit-suisse-got-off-lightly.html">Credit Suisse got off lightly</a><br />
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It's happening again - and I will say I am worried.<br />
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Change will only come when we, the people, demand it. It is our duty to facilitate sweeping changes in the financial industry to once again realign our objectives with our clients.<br />
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And we need to do this soon, lest we find ourselves mortally bitten once again and asking "why".Gubbhttp://www.blogger.com/profile/00411147564595486174noreply@blogger.com1