Stock Market Crash, Economic Collapse, Rigged Markets? How to invest rationally!

Good day fellow investors,

Last week I made the news on the topic how one should focus on the businesses he invests in and not so much on the macroeconomics.

I’ve got this interesting email discussing how I am missing many points:

Underlying factors that affect the metrics you used in your article:

  1. The role of the ESF in market ‘rigging’. – U.S. Treasury’s Exchange Stabilization Fund
  2. Stock buybacks from the new tax code (fudging the numbers you are working with).
  3. The key role the central banks are playing by keeping interest rates artificially depressed, thus not exposing the true cost of debt servicing.
  4. The sheer number of Zombie companies and historic high levels of BBB bonds.

Plus, how I should contact Peter Schiff, Gregory Mannerino and I would get quickly to 100k subscribers!

All the above is all correct, if I make a business analysis, I get 2k views, if I put stock market crash in the title, I get 4 times more views.

1 views

And in this article, I really want to put the topics of market rigging, buybacks, low interest rates, zombie companies into an investing perspective because I think there is a big difference between investing and protecting yourself from something that might happen but doesn’t have to happen.

2 keynes

When it comes to investing, the key is to achieve the best risk reward return and always remain solvent, no matter how irrational the market might seem.

Contents

Stock Market Fear and Irrationality

THE MAIN QUESTION IS HOW TO INVEST?

Market rigging!

Stock buybacks from the new tax code (fudging the numbers you are working with)

Artificially depressed interest rates

Corporate credit, zombie companies, government debt

How to invest keeping the risks in mind

THE MAIN QUESTION IS HOW TO INVEST?

One should think about HOW TO GET BOTH; good returns from businesses and protection from what might happen while taking advantage of possible market rigging. That is what I focus on and the message of this article is to try to give more balance to the possibly predominant message on YouTube regarding Stock market Crashes and Economic collapses etc.

We as investors have to focus on how to get the best risk reward return to reach our financial goals. Let’s say that gold explodes in 2034, I bet you that 98% of all those invested in gold at the moment, would not have the patience to wait till then to realize profits. That is one, plus, by 2034, if you have $1k now and you get a 15% return because you understand the market;

You know it is rigged,

You know buybacks are strong,

You know interest rates will remain low, or inflationary due to the huge debt,

You stay away from zombie companies, buy those that will do even better when the competition dissolves!

Your 1k become 8k thanks to the power of compounding, earnings and dividends that you don’t get if you buy insurance. Actually, insurance is a cost.

Let me put the things into perspective!

Market rigging!

The market has been rigged since ever – it is in the interest of most politicians, policy makers and people that stocks go up, pensions go up, everybody has more money, more confidence, spends more and even wages go up a bit – so it is in the interest of the current economies that markets go up, collaterals go down, and everybody is pushing for it to go up.

Take advantage of it.

On silver markets, gold markets, there are many speculators that make it look crazy and rigged because there is no rationality there. You can’t eat gold; no dividend and it doesn’t grow. In the 1980-s the Hunt brothers tried to rig the silver market. They owned 30% of global silver but regulations broke them.

Silver price:

silver price

Stock buybacks from the new tax code (fudging the numbers you are working with)

4 smart

Source: Reuters

$940 billion of buybacks expected in 2019, that is 3% of the market.

There will be ups and downs, but some buybacks are smart if made below book value, or replacement value or intrinsic value, and those values are in the eye of the beholder.

5 bubyacks

Source: Yardeni

Try to find buybacks that increase your value, your ownership and avoid those that destroy shareholder value. Compare many stocks and you will find the difference.

Artificially depressed interest rates

As long as it works, it does good in the short term while it is uncertain for the long term – again, as an investor you have to understand the game and play it wisely. The tide could change with a big inflation, but that is why I invest in businesses that would do well if there is inflation but that also do well in this environment. I get dividends, I get growth, expansion etc.

6 rate

Source: FRED

Corporate credit, zombie companies, government debt

Governments and corporations have increased their leverage as low interest rates allowed for lower borrowing costs. US government debt quadrupled in the last 20 years.

government debt

Source: FRED

However, this situation can be solved with inflation for the government and with bailouts for corporations. Plus, when zombie corporations finally fail, the environment will be healhier for good businesses. I’ll talk more about that in the next article discussing Archer Daniel Midlands (NYSE: ADM) where the CEO actually hopes for higher rates to limit the competition.

How to invest keeping the risks in mind

Now, what I just said, doesn’t mean I completely disregard it, I’m not stupid, I am not invested in companies that would go bankrupt in case interest rates go up, I am looking for both, both good businesses, that offer business returns and protection in case of any kind of crisis.

You have three options to invest your money!

The first option is to focus on protection: gold, put options, Treasuries (if you can call them protection). The second option is to focus on businesses, growth, business returns and investments.

Your $1k becomes $8k in 15 years with a 15% yearly return. If you own gold, and the dollar loses 50% of its value, you are at $2k, no dividends, no business, a lot of stress because you depend on what others are willing to pay, not on actual value.

I must say I did a lot of research on macro, especially when I was writing articles on a daily basis three years ago as that was my job, but my conclusion is, that one should be smart and take advantage of what is going on and not bet on something happening because it is logical to happen.

The situation was crazy in 2009, and many sold what they had fearing the macro voices, I was buying businesses in 2009, nice 5 baggers for me.

2 gdx

I took a loan 4 years ago, bought a house, and it was probably the best risk reward investment in my life. Fearing a crash would have me being without huge gains over the last 10 years.

The third investing option is to have it both. For example, a company I was heavily invested in 2018 was Nevsun Resources, a copper miner with a promising project in Serbia. However, what the market disregarded was that 30% of revenue from the project were from gold, not just copper. So, you can buy investments that give you a business return but also protection just in case some of the above mentioned risks materialize. I am now exposed to silver with my portfolio, but if you would take a look at my portfolio, you would never imagine it has a silver call option in it. That is because I like it both; give me business growth and give me the insurance part for free.

Think about it, although so rational, I reiterate my question, is it and will it actually be profitable to be scared or you should simply see how to get the best out of it all?

To put things into perspective, don’t focus on what should rationally happen due to text books or chicken littles, but put probabilities onto every conclusion. What will happen in the future is probably something unknown, be ready for it by investing in both.

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7 Things To Watch Before Investing In Gold Miners

 

  • Investing is about risk and reward. I feel many miss the risk part when it comes to investing, especially in the mining environment.
  • I discuss 7 risk factors that will help you avoid investing in the wrong miners.
  • ETFs, with their mindless investing strategy, are increasing the danger of investing in the mining environment.

Miners, especially gold miners (GDX) (GDXJ), don’t have a great reputation in the investing world. Unfortunately for them, that is rightfully so. It is often the case that the management is more focused on the stock market, than on business performance. A quote from the 19th century explains it very well!

Gold mining stocksIn such an environment, one must be very careful. The key is to understand the risk and not do stupid things like investing on hope or going after a good story.

An investment in a miner has to be founded on a real business analysis of its fundamentals and a careful assessment of the risks and rewards. On top of that, one should know the miner’s sensitivity to the respective metal’s cycle.

Investing while excluding the above, cannot even be called speculation, it is pure betting and you know what are the odds when it comes to betting.

In this video I share 7 things to analyze when investing in miners, or at least to take into consideration when analyzing the risk and reward of a specific investment. The things to watch are the following:

(0:39) – ETF ownership and business value

(1:47) – A general valuation of miners

(3:40) – Book values are often misleading

(6:05) – Advertising your own stock with Google ads

(7:09) – Example of operational risks in the mining industry

(7:53) – Dividends and cash flows

(9:00) – The value within junior miners and the Van Eck Junior miners ETF

Enjoy the video.

Berkshire stock is better than the S&P 500 – check your portfolio holdings!

BERKSHIRE’s INVESTING MINDSET

Towards the end of Benjamin Graham’s book, The Intelligent Investor, we can find the following advice (Chapter 20 – Margin of Safety):

Investment is most intelligent, when it is most businesslike.

Therefore, to find good investments one must use a businesslike perspective. Only such a perspective will lead to satisfying long term returns.

I compare Berkshire Hathaway (BRK.A) (BRK.B) and the S&P 500 index (SPY) applying a common sense, businesslike perspective. Over the long term, investing based on sound business principles should lead to healthy long term returns. Those principles include:

  • Seeking a high return on invested capital.
  • Buying when there is blood on the streets.
  • Careful risk assessment.
  • Accepting that markets and sectors are cyclical.
  • Being greedy when others are fearful and fearful when others are greedy.

The above, leads me to believe, BRK will outperform the S&P 500 and passive investors should invest more in BRK, than in index funds. In the video I give 5 strong arguments that back my case.

The video summary:

(1:03) Comparison of past performance
(3:44) First argument – S&P 500 and BRK’s investing strategies
(5:32) Index funds can’t copy Buffett’s special deals
(6:27) Second argument – market timing, discipline and cash
(7:31) Return on invested capital
(8:07) Third argument – S&P 500 top 10 holdings in 2018, 2013, 2008 and 1999
(9:26) Fourth argument – Investing in startups, buying high or low
(10:41) Fundamentals – PE, PB, PS
(12:04) Fifth argument – S&P 500 and BRK’s book value growth since 2008
(13:07) Deployment of excess cash
(14:07) Diversification
(14:27) Discussing long term returns

Enjoy the video.

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ARE THE STOCK MARKET AND ECONOMY IN A BUBBLE? 7 FACTOR EXPLANATION

I recently summarized Dalio’s last book, Big DEBT CRISES and there he shares his questions, check list, to see whether the stock market or economy is in a bubble or not. In today’s article, in light of the FED’s tightening, we are going to go through his questions, to see whether we are in a bubble or not.

1 bubble questions

Source: Big Debt Crises

Good day fellow investors,

my name is Sven Carlin and I am an independent investor, independent thinker who doesn’t really like to follow the crowd, that has served me well in my life and, I have the feeling it will serve me well in the future too. Let’s go through Dalio’s questions one by one and then conclude with what to do, where Dalio’s option is to have an all-weather portfolio.

We are going to look at whether the US economy and stock market are in a bubble. As for Europe, I’ll make a special article about it due to the many economies.

  1. PRICES ARE HIGH RELATIVE TO TRADITIONAL MEASURES

The US stock market is expensive and prices are much higher than traditional measures.

2 stock market price

Source: Multpl

A look at the cyclically adjusted price to earnings ratio for the S&P 500 that takes into account 10 years of earnings, shows how stock prices were higher only during the dot-com bubble. But, let’s not focus only on stocks, let’s look at housing.

3 house price to income ratio

Source: Longtermtrends

The home price to income ratio is not higher than it was in 2007 but is getting close to it and it is much higher than it was in the past 50 years. Incomes were low in the 1950s so that isn’t really comparable.

To answer question one: yes, prices are high relative to historical measures.

2. PRICES ARE DISCOUNTING FUTURE RAPID PRICE APPRECIATION FROM THESE HIGH LEVELS

If we take a look at the S&P 500 and at S&P 500 forward expected earnings, all we can see is fast growth.

4 price and earnings

Source: FACTSET

So, huge growth is expected, S&P 500 actual earnings are at 116 points while the market expects them to be at 175 points in the next 12 months.

5 s&p 500 actual earnings

Source: Multpl

As for home prices, the huge run up in prices up to 2018 showed bubble characteristics but it has been cooling of as interest rates go up.

6 new home prices in the us

Source: FRED

So, perhaps what we have seen up to December of 2017 will again be called a bubble as higher interest rates inevitably put pressure on asset prices. Not yet on stocks as the sentiment is still strong but you can’t escape when it comes to housing.

ANSWER: YES, prices are discounting fast future price appreciation, certainly in stocks, whereas it might be over for housing.

3. THERE IS BROAD BULLISH SENTIMENT

Let’s see, Kudlow states the US economy is crushing it.

7 kudlow

Source: CNBC

While consumer confidence is close to record highs.

8 consumer confidence

Source: FRED

Answer: YES, sentiment is bullish! Even with stocks, the sentiment has been extremely greedy in 2018.

9 greed

Source: CNN

4. PURCHASES ARE BEING FINANCED BY HIGH LEVERAGE

This is not in a bubble, consumer credit is just 50% higher than where it was in 2008 and is just 10 times higher than where it was in 1980. (allow for some irony here)

10 consumer credit

Source: FRED

As for the stock market, margin debt is at historical highs. Just to mention as a comparative note, margin debt was $263 billion in February of 2010 and $314 billion in July of 2008.

11 margin debt

Source: FINRA

Answer: YES, purchases are increasingly being financed by debt.

5. BUYERS HAVE MADE EXTENDED FORWARD PURCHASES

If we look at the level of business inventories, those are 33% higher than in 2008 and I don’t think the economy grew 33% since 2008.

12 inventories

Source: FRED

Answer: a mild yes in this case.

6. NEW BUYERS HAVE ENTERED THE MARKET

Now, the percentage of Americans owning stocks didn’t really go up that much lately as millennials don’t invest that much in stocks.

13 people invested

Source: Gallup

The middle class left after 2008, typical behaviour, buying high and selling low. If we see another bump like in 2007 where the participation jumped from 61% to 65%, we will know it’s a bubble. Those aged 35 and above are investing a bit but not yet like it had been the case.

14 americans invested

Source: Gallup

However, not investing in stocks but definitely saving for a house. New buyers are rushing into the home market.

15 new mortgages

Source: Bloomberg

Answer: with stocks it is a no but with houses it is a yes. Also, it is important to note the widening wealth gap where those that have invest more and push stocks higher while those that don’t have, simply don’t have to invest.

7. STIMULATIVE MONETARY POLICY THREATENS TO INFLATE THE BUBBLE EVEN MORE (and tight policy to cause its popping)

Interest rates have been already tightening and we can expect more in December.

16 interest rate

Source: FRED

However, just take a look at historical interest rates.

17 historical interest rates

Source: FRED

On top of monetary stimulus, there is huge fiscal stimulus.

18 budged deficit

Source: FRED

On top of the already huge deficit, the deficit is expected to breach $1 trillion in 2019.

So, to summarize on the questions:

19 summary

WHAT TO DO:

Now, that depends on where you are in your life, about to retire or just starting, but in any case, an all-weather portfolio is the key as we are in the late part of the cycle.

debt dalio

Source: Big Debt Crises

We are at bubble top – so a lot of opportunities to diversify by selling what is in a bubble and buying what is in depression. In a global world you can do that today.

If you wish to check how am I building my portfolio as I cashed out of most my long investments during 2015-to 2018, the last being Nevsun – you might want to check my Stock market research platform where I am slowly building my model portfolio that should do very well in this environment.

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5 Problems With Index Funds – Take Responsibility For Your Financial Life

If you want to be average – don’t read this post or watch the video (article below)!

It is time to really stand up against the crazy index investing mania where people hand over the responsibility for their financial life to someone else – in this case the market. A few decades ago, we used to call such behavior communist. The 5 dangers:

  • Not thinking is not good because you fail to learn and grow. Therefore, you miss on so many other opportunities!
  • By not taking responsibility for your own financial wellbeing, you’ll get the average!
  • Financial atrophy!
  • What has worked in the past 3 decades doesn’t have to work in the next 3!
  • It is possible to beat the market – especially this market – and it is even easier to reach amazing investing returns overall in a life!

Mindless behavior

A big chunk of the money going into investment funds and stocks today is directly invested into passive investment vehicles. Why? Because that has been working well over the past 35 years, requires no effort and is heavily promoted.

However, when something in finance is taken as granted, it usually becomes dangerous. Let me show you something else. Since 1985 the S&P 500 price to earnings ratio – the factor that actually determines your long-term investment return – went from 7 in 1982 to the current 24.

Figure 1 S&P 500 price to earnings ratiosandp 500 pe ratio

Source: Multpl

If I would put a PE ratio of 7 to the current S&P 500 earnings, the S&P 500 level would be at 857.87, which implies a 69% decline. Sounds impossible? Well, stocks would just be back to where those were in 2009, 2002 and 1997.

Figure 2 S&P 500 in the last 20 yearssandp 500 20 year chart

Source: Yahoo

So, we have past examples of how bad it can get and as communism didn’t end well, I believe this also won’t end well. Even if it ends well, you can do much, much better.

Be better than the average – especially as the average is not thinking

Investing in index funds will give you the average return – but since when is the average ok?

If you have kids, do you want them to be average? Why do you want them to go to the best schools, why do you work hard to give them the best opportunities and teach them to be the best they can be?

The same is with finances, it is easy to just accept the main herd mentality and transfer the responsibility to someone else. But, why not work to make your investment returns the best they can be for you?

Financial atrophy

Here we come to the most important thing of all – laziness and atrophy!

If you do not seek better investment returns for lower risk – your investment brain goes into cerebral atrophy, which means it won’t be able to recognize an opportunity when it comes to you, wherever it might come from – stocks, real estate or business!

I am amazed by people buying real estate – which is usually the biggest purchase of their live – and looking at only two properties. They will spend 20 years working to pay for something they bought in one day. Similarly, people save at 1% or invest in index funds while having a double digit interest rate on their credit card debt.

Index investing is just another fad

Vanguard was founded in 1976 and got traction after 1982. That year is not random, it is the year when interest rates started declining and debt burdens increasing.

Figure 3 Effective federal funds rateeffective federal funds rate

Source: FRED

Asset prices are correlated to interest rates. If you can get a yield of 15% from the Government, you will expect a 20% yield form stocks which translates into a PE ratio of 5. There has been a strong rising tide for the past 35 years in the investing environment that propelled index funds and all asset prices. As interest rates increase, thinking will become more and more valuable because there is a big difference among real asset values.

Yes! You can beat the market and do even better

Now, people say it is impossible to beat the market – well, I strongly disagree – I have been beating the market for the past 16 years now as my average investment returns have been around 18%, not counting the money made in real estate and businesses, because I simply look for opportunities.

Let me share with you what Buffett has to say about this:

The question is whether you want to be the average or you want to be the 1% or 2%. I know for myself that I have been the 1% in the past and I want to continue being!

Put in the effort

So, please, put in the effort – it will change your life in so many ways that you will not believe what has happened, not only on the financial side. This world would be such a better place if we would just renounce being average! Let’s all be the best we can be – and tomorrow the world will be much better.

Take responsibility for your financial life and just please look at what you are investing your money it!!!!!!! And, if you still like index funds, ok! Keep going, but please take a look!

I’ll do my best to help those who want to be better than the average to reach that. Somebody has to be better than the average so better be us, as 99% of people invest like the average it is not even a tough choice.

Two roads diverged in a wood, and I—

I took the one less traveled by,

And that has made all the difference.

Robert Frost – source: Poetry Foundation