BalanceZone Investing
Timeless Investment Strategy and Software
Subscribe
the BalanceZone Blog
Duck--Rabbit Economics
What do you see? Duck or rabbit? Most people see the duck first, and then the rabbit. The point we want to make is that it is both.
Same can be said for statistics about our economy.
We point this out because of the all time high in conflicting economic data.
Perspective.
This drawing reminds us of one of our favorite quotes, "The car goes where the eyes look".
Duck or rabbit, good news or bad news, focus on what makes you happy.
Same can be said for statistics about our economy.
We point this out because of the all time high in conflicting economic data.
Perspective.
This drawing reminds us of one of our favorite quotes, "The car goes where the eyes look".
Duck or rabbit, good news or bad news, focus on what makes you happy.
Investing With Credit Cards--
The way our government is spending money is analogous to an individual borrowing on their credit cards to invest in the stock market.
Nothing good can come from this.
Nothing good can come from this.
Currency Wars Or One Currency For All?
Look at this international airline boarding pass. Notice what is underlined in red.
Notice they did not say, "Dollars, Euro's, Peso's etc...
If the IMF has their way, the SDR's will be hear before you know it.
Deflation In Things I Own, Inflation In Things I Need.
Deflation in the things I own, and inflation in the things that I need.
Crap.
Sadly, the Elephant in the room that Mr. Bernanke keeps talking about has a first name: Deflation, last name Inflation.
This makes for a strange looking elephant.
Crap.
Sadly, the Elephant in the room that Mr. Bernanke keeps talking about has a first name: Deflation, last name Inflation.
This makes for a strange looking elephant.
Debt Vomit--
There is a scene in the Monty Python movie, (The Meaning of Life) in which a hugely fat, grotesque man eats an enormous amount of food. He repeatedly vomits, and then explodes after he eats one last tiny dinner mint. It seems as though the economic dinner mint is just around the corner. We are not sure what this little triggering event will be, but Lord knows we have a plethora of dinner mint situations that could cause a massive financial avalanche of debt vomit.
The entire financial system has gorged itself in, "Debt vomit" for the last 40 years. (Getting off the gold standard, abusing the Black Scholes Option Pricing model, excessive dependency on spreadsheets, and becoming enamored with really powerful computers has created a series of predictable accidents that got us into this horrific economic mess.)
To put this in perspective, there is 715 trillion dollars of notational derivatives and debt sitting on top of our planet that is only worth 60 trillion.
We have 10 times more notational risk and debt than we do wealth for the entire planet.
This is like making $10,000 a year and trying to support $100,000 of credit card debt.
We have a problem. We simply cannot pay the interest on the debt.
No economy can grow with all of this debt hanging over it.
The only viable options is: Debt forgiveness on a governmental, corporate, and personal basis.
Failure has to be allowed to rip through the system.
Bankruptcy is not an evil word.
Look at it this way:
In order to have Christianity you must have a hell, and in order to have capitalism you must have failure.
Incentives, and punishment need to get back to equilibrium.
Once we get the incentives and punishments back to equilibrium we'll be fine.
People will begin to realize that they aren't really mad at other wealthy people. Hell, in America we love winners. We love wealth. What we can't stand is CHEATING. We hate cheaters.
A lot of very wealthy people and entities will have to lose an enormous amount of money.
This ends badly for those who are not prepared.
But, this is not the end of the world.
The U.S. will be OK.
We survived the civil war did we not?
After the failure is allowed to rip through the system, our bet is that a reboot will come faster than you could ever imagine.
Right now, everyone is sitting on pins and needles.
The mirrors have been pulled out by the Tea Party and Occupy Wall Street. And no one likes what they see.
The people are finally beginning to wake up to this atrocity.
Grotesque!
We will not perish.
But, we really do need to get on a diet.
No more debt vomit.
Debt forgiveness is our only corner of freedom.
Earthquakes--
Earthquakes are interesting.They show up with no warning.
With all of the knowledge and data that we have about our beloved earth, we have no idea how to predict when an earthquake will hit.
At best we can only know the reasons why they occur.
The same is true for financial earthquakes.
We have a Godzilla amount of data about our financial markets.
We know that they sometimes crash.
We have no way to predict when, where, or why.
We only know that they happen.
The 5.6 magnitude earthquake that rocked Oklahoma last night is a good reminder to everyone.
Average markets, average weather conditions, and average earth movements don't cause ruin.
It is the statistically improbable event that creates ruin for people.
We live in interesting times.
Blankets For The Indians & 401k's For The Retail Investor
Blankets For The Indians & 401k's For The Retail Investors.
Both are silent killers.
These days, the white man is paying for his sins.
Casino on every corner.
But we've been wondering when is the 401k/mutual fund industry going to pay for their sins.
When is the average retail investor going to get his/her payback for the failed experiment called:
401k.
Let's face it. The average retail investor has paid the average 401k plan 1.5 or 2% for the last 5, 10, 15, and in some cases 20 years for the luxury of earning 0% (basically nothing).
Sure, there are a few funds with 5 starts that, "Outperformed".
Go Morningstar!
But how can performance this bad get paid so well for so long?
Sadly, the fees really aren't the real problem.
The real problem is how 401k's are designed.
There is no exit strategy.
None.
You will never hear your 401k vendor say: Get out.
Even worse, the mutual funds that sit inside of your 401k are all based on some type of MVO (Mean Variance Optimization) algorithm. Everything is based on the Bell Curve.
Consequently, all 401k's are based on, "Average Design, for Average Acting Markets".
The problem is that markets aren't average anymore.
The combination of Wall Street's high frequency algorithmic trading super computers and extreme leverage techniques have made 4, 5 and 6 standard deviation movements the norm.
And if not the actual norm, these movements are starting to show up more frequently than ever before.
Average markets do not cause financial ruin. It is the statistically improbable event that causes financial ruin. Yes, eventually markets do revert back to the mean. However, it is the freakish event that kills 401k investors.
These MVO algorithms (and the people who pay homage to them) treat these freakish events as if they were financial fairies.
When you need these models to protect you the most, they fail.
When markets heat up and get crazy, everything correlates to 1. Everything moves in the same direction simultaneously.
The God's of the 401k universe will sheepishly acknowledge this, but then do nothing about it. They point out that their strategy works most of the time. And to be fair, this is a true statement.
So let's be honest:
401k's are expensive, have no exit strategy and are poorly designed.
401k investors have been given financial blankets dipped in financial MVO bell curve disease.
As always, we remain optimistically paranoid, with a twist of, "Really pissed off".
In conclusion, we see it like this: If the auto industry can survive from the Pinto, Gremlin and Pacer debacle, then surely our government and our beloved financial services industry can come up with a better way to save for retirement.
Both are silent killers.
These days, the white man is paying for his sins.
Casino on every corner.
But we've been wondering when is the 401k/mutual fund industry going to pay for their sins.
When is the average retail investor going to get his/her payback for the failed experiment called:
401k.
Let's face it. The average retail investor has paid the average 401k plan 1.5 or 2% for the last 5, 10, 15, and in some cases 20 years for the luxury of earning 0% (basically nothing).
Sure, there are a few funds with 5 starts that, "Outperformed".
Go Morningstar!
But how can performance this bad get paid so well for so long?
Sadly, the fees really aren't the real problem.
The real problem is how 401k's are designed.
There is no exit strategy.
None.
You will never hear your 401k vendor say: Get out.
Even worse, the mutual funds that sit inside of your 401k are all based on some type of MVO (Mean Variance Optimization) algorithm. Everything is based on the Bell Curve.
Consequently, all 401k's are based on, "Average Design, for Average Acting Markets".
The problem is that markets aren't average anymore.
The combination of Wall Street's high frequency algorithmic trading super computers and extreme leverage techniques have made 4, 5 and 6 standard deviation movements the norm.
And if not the actual norm, these movements are starting to show up more frequently than ever before.
Average markets do not cause financial ruin. It is the statistically improbable event that causes financial ruin. Yes, eventually markets do revert back to the mean. However, it is the freakish event that kills 401k investors.
These MVO algorithms (and the people who pay homage to them) treat these freakish events as if they were financial fairies.
When you need these models to protect you the most, they fail.
When markets heat up and get crazy, everything correlates to 1. Everything moves in the same direction simultaneously.
The God's of the 401k universe will sheepishly acknowledge this, but then do nothing about it. They point out that their strategy works most of the time. And to be fair, this is a true statement.
So let's be honest:
401k's are expensive, have no exit strategy and are poorly designed.
401k investors have been given financial blankets dipped in financial MVO bell curve disease.
As always, we remain optimistically paranoid, with a twist of, "Really pissed off".
In conclusion, we see it like this: If the auto industry can survive from the Pinto, Gremlin and Pacer debacle, then surely our government and our beloved financial services industry can come up with a better way to save for retirement.
Why Occupy Wall Street Is Really Mad--
We know what Occupy Wall Street is really mad about.
Cheating.
We know what the Tea Party is really mad about.
Cheating.
Neither group is really mad about a few people winning (getting rich).
They are mad about cheating.
Wall Street cheated and got away with it.
It's similar to the Lance Armstrong story.
There is no legal proof that Lance Armstrong ever took performance enhancing drugs.
There are however, several eye witnesses who will tell you that they saw him take dope.
For the average European cycling fan, this is why they hate Lance Armstrong.
From their perspective, Lance won because Lance cheated.
The Wall Street Bankers were ingenious in how they got around the system.
When a Wall Street banker or bond trader made a bad bet, they didn't get foreclosed on like the home owner who took out a loan that he/she could never repay.
There was no punishment for the banker. Actually, the bankers got the exact opposite of a punishment: Rewards!
The banker got free money from the tax payer to take care of his stupid bets.
There was a punishment for the home owner: FORECLOSURE.
There was an incentive given to the banker. He/she could be wrong, and cheat and they would get a governmental bailout.
It's not fair!
They cheated. They got away with it. They keep getting away with it. And when they get caught cheating, our rule makers do nothing about it.
OWS, and the Tea Party are mad for the same reason. They just haven't figured this out yet.
OWS is more focused on the banks.
The Tea Party is more focused on the politicians.
In the not too distant future, we think that the these two seemingly different groups will merge into one group that is committed to one thing:
Stop the cheating.
Cheating.
We know what the Tea Party is really mad about.
Cheating.
Neither group is really mad about a few people winning (getting rich).
They are mad about cheating.
Wall Street cheated and got away with it.
It's similar to the Lance Armstrong story.
There is no legal proof that Lance Armstrong ever took performance enhancing drugs.
There are however, several eye witnesses who will tell you that they saw him take dope.
For the average European cycling fan, this is why they hate Lance Armstrong.
From their perspective, Lance won because Lance cheated.
The Wall Street Bankers were ingenious in how they got around the system.
When a Wall Street banker or bond trader made a bad bet, they didn't get foreclosed on like the home owner who took out a loan that he/she could never repay.
There was no punishment for the banker. Actually, the bankers got the exact opposite of a punishment: Rewards!
The banker got free money from the tax payer to take care of his stupid bets.
There was a punishment for the home owner: FORECLOSURE.
There was an incentive given to the banker. He/she could be wrong, and cheat and they would get a governmental bailout.
It's not fair!
They cheated. They got away with it. They keep getting away with it. And when they get caught cheating, our rule makers do nothing about it.
OWS, and the Tea Party are mad for the same reason. They just haven't figured this out yet.
OWS is more focused on the banks.
The Tea Party is more focused on the politicians.
In the not too distant future, we think that the these two seemingly different groups will merge into one group that is committed to one thing:
Stop the cheating.
53 To 1--
Did you hear about the bank that is leveraged 53 to 1?
The U.S. Federal Reserve.
Yep! 52 billion in capital controlling 2.8 trillion in assets.
Now that's some leverage.
Now depending on who you want to listen to, our current TBTF banks mixed in with our regular sized U.S. banks have about 13 to 1 leverage.
This means: A 8% drop or greater would annihilate ALL equity.
Hop the pond, and we see that our European friends are kicking a 26 to 1 leverage ratio for their banks. And, if we apply simple math...
This means: A 4% drop or greater would annihilate ALL equity.
(FYI... Lehman was just 1 bank leveraged at 30 to 1)
Perspective?
Specifically, Japan’s banks are leveraged at 23 to 1. France’s are 26 to 1. Germany is 32 to 1
So, you kind of get the idea? Ya?
Ironic. The drunkest on debt of all banks, is the one entity that is suppose to bailout all the other drunk on debt banks.
Yes, stocks are rallying now based on the belief that QE III is coming.
The probability of a financial avalanche is high.
When?
We don't know.
Even at 53 to 1, the FED, and the other money printing central banks can keep on printing more money for a very long time.
Interesting.
As a side note, stock markets of countries that are on the verge of blowing up their respective currencies typically have incredible rates of return leading right up to the collapse of their money.
Click here for our old post about the mother of all currency killers, "Zimbabwe".
Sadly, stocks always get it last.
It's Bad...
It's bad.Our financial markets are broken.
According to the Bank of International Settlements, there is over 600 trillion dollars (notational value) of derivative securities floating around our planet.
Global GDP is approximately 60 trillion.
10 to 1.
That's a lot of leverage.
Greece, and Italy have huge debts coming due beginning in March of 2012.
Here in the U.S., trillions of 5 year adjustable loans and bonds are coming up for resets in March 2012.
The perfect financial storm is brewing.
The ingredients are in the stew.
It's bad.
It's not financial Armageddon.
It is what has to happen.
Failure.
Failure has to be allowed to clean the financial markets.
A lot of very rich people, and entities will have to lose a lot of money.
The good news is that up until March 2012, we see U.S. stocks moving much higher.
Strangely, our normal economy is fine. This earnings season should bring lots of pleasant surprises. Balance sheets are clean, Income statements are healthy, debts are being paid down, and companies have lots of cash to work with.
If we look at traditional economic indicators, we can make a case for the DOW Jones Industrial to go to 18,000, and even higher in the next few years.
However, when you look at the 10-1 debt to value ratio that is sitting on top of our planet like a black cloud, (if we can't pay the interest on this debt) we see the Dow Jones Industrial at 2000.
Now that's a GAP!
We feel that the Federal Reserve implemented, "Operation Twist" so that the U.S. Government, and corporations could get one last shot of really cheap long-term financing.
But that's it.
Once everyone refinances their 5 year arms for 30 year loans at 2 and 3%, the central banks of the world will only have one option.
Print more money.
This will cause huge global inflation.
As evidence from the, "Occupy Wall Street Movement" normal people are upset.
They don't want any more money printing.
They are upset about, "Global Banking Occupation".
This group of angry citizens hasn't figured out this one point yet. (This goes of the Tea party too).
Once they do, and they get focused on one single message, watch out.
We see our domestic problems with all of the 5 year ARM resets colliding with the European debt crisis. Once the fighting across the ocean begins, all financial markets will simultaneously experience extreme volatility and extreme devaluation.
Correlations will all go to: 1.
It's Bad.
But, it doesn't mean that you cannot make money.
Have a strategy in place.
Start selling your risk-based investments. You should have from now until early next year to get some decent prices.
In early 2012, look for opportunities to buy PUTS.
You don't want to be buying puts when there's blood on the streets. You want to be buying them when the sky is calm and blue.
Buy some physical Gold and Silver. Not ETF's.
When the volatility comes, be ready to buy companies with simple business models that trade at 10 times or less price to free cash flow.
It's bad.
However, on a closing note, we have one kind-of positive thing to point out.
While we might not have the AAA rated bonds any more, our BOMBS are still AAA.
We have the world's greatest military.
In the final analysis, our BOMBS are our currency.
If there is any glimmer of hope, we would urge you to look at New Orleans and how it has come back since Katrina.
To see New Orleans before, Katrina, then right after Katrina, and now, today, well, it's pretty darn amazing.
New Orleans is back. They survived.
There is still a lot of work to do. Sure.
But they came back.
Our financial system will come back to.
We will re-establish the, "Glass-Steagall Act".
We will design a new rules based currency and banking system.
We will keep commercial banks and investment banks separate.
There will probably be two tiers of stock markets. One for individuals, pension funds, 401k's and small business. There will be another tier that will allow for financial engineering to keep on.
Expect tough.
Expect rough.
Respond with ability.
You cannot control the markets. You can control how you respond.
This will be your corner of freedom.
It's bad.
