Red Screen At Morning, Investor Take Warning

News & Current Events Public News & Current Events
21

I am I the only one who’s noticed we haven’t had a “terrorist attack” lately? Months ago they were coming at us almost weekly. Either the “terrorists” had a change in heart and gave up attacking us en masse, or our masters are busy with other things for the moment and have put the “terrorist” program on hold. It is 2018, after all; the year we are supposed to get a one-world currency. It must be true. It was on the Cover of the Economist. Here is my take:*
I think they see that we are near the bottom of the treasure chest of gold and / or silver. They know the end is nigh so we are seeing the final stages of the soap opera narrative they are playing. They only hit us with one thing at a time. Before it was terrorist attacks, but now they want us to be scared of market crashes instead, for a while. We have been fully primed to fear and blame terrorists now so they are focussing on other things: blow the stock bubble up high, then remove support so it crashes. Reap profits from the blood on the streets. Instill fear in all market participants; destroy the confident euphoria everyone had.
They might break the markets down some more but I think they will send them back up and the “green shoots” narrative will be used again. Everyone will breathe a hesitant sigh of relief as we get back on to Taking Care of Business and rebuilding the markets after this recent unfortunate correction.
Then the terrorists will make their return… but this time they will be back in combination with more market crashes!!! Nooooo!!! The terrorists will have moved beyond Russian meddling in the election, and have figured out how to hack the financial system!!! This terrorist attack will be so large it will take down the markets even further than we are currently witnessing. So far, in fact, that the fallout will destroy the delicate global financial system and the dollar. We will need a new currency!!! And, thankfully, they will just happen to have one on hand, ready to go!
Whether China and Russia are on board with that, I don’t know. The friction with those countries seems to be more than just a soap opera. I am guessing that our wannabe masters’ plans back in the 90’s for this one-world currency have hit problems and they aren’t going to get the whole world on board in 2018. It will instead be a western world-currency, with no gold to back it. It will be backed with debt-slave labour. The East will be doing its own thing with gold.
Timeline: before the end of 2018.

  • I reserve the right to be completely wrong.
22

OMG Adam, you crack me up. You are presently advising everyone here what to do with their cash when the crash happens and yet insincerely you fail to tell everyone they missed out of a 666 bottom and a still at a S&P 2300, plus that you already missed a great opportunity in the last crash. You’re arrogant. I went back in at 1217 and never looked back and got out last Wednesday and not because I thought we would crash, that was just lucky but because oil was hitting maintenance season. My point is this is all wash, rinse and repeat business here at PP. Chris is the only value this site has because he is able to at least construct what is happening in the market so reading it is easier. Everyone knows this is a short lived paper loss because the FED will get this under control too. It’s a volatility issue and not Financial, they have tremendous experience now and will have us all looking in our rv mirrors as this all passes us by. I’m planning purchases today myself to some really great deals in oil. CLR has me interested at these prices for instance. Anyways Adam, for me, you have yet to have risen to the level of Chris and to some of us old timers you haven’t even grasped the tenor of the stock market. Seldom for me are you a read that I finish. You are so easily duped by everything and please, do not talk when Chris is standing next to you. You are that embarrassing. Charles is a great teacher so why haven’t you gotten this stuff together yet? Incidentally, you do know that Charles and Chris come at this from a different angle, so, how do you and Chris get along with each others anyways? BOB

23

So, I found myself getting so swamped with people asking about last week, I decided to email out to my whole school some basic explanations of what the heck is going on. I’m shocked by how little anyone knows anything around here about basic investing…and all these people are college educated and have 401ks they don’t even remotely understand.

Greetings Fellow Faculty!

I’ve had a few people stop and ask me about the recent stock market craziness, and since I just taught about investing in my Economics class, I figured I’d put together an email that helps explain things…hopefully in plain and digestible form.

The Crib-Note Version: Stocks are going crazy because, in priority order:

  1. Bond yields- Interest rates on bonds have been going up, making them a more attractive investment option again. Investors often sell stocks to free up money to buy bonds (or visa versa).

  2. Profit-taking- Stocks were widely considered to be at their highest values ever. Since no one makes money on a stock until they sell it, at some point when prices get high, investors “take profits” by selling stocks.

  3. Psychology- as stock prices begin to dip, more investors begin to believe it is a good time to sell, which drives prices further down. At some point, panic may set in as too many sellers try to exit the market at the same time. To use a metaphor, the auditorium is big and packed, but the doors are not; in a rush, not everyone gets out in time.

The extended cut:

While there are a few reasons why the stock markets have been so volatile lately, one fundamental reason comes down to these two illustrations of what I just finished teaching my Econ students today.

<img alt="" src="https://peakprosperity.com/files/users/u_64818/principles_of_investing1.gif" style="width:504px;height:378px;" width="504" height="378" />

See, one makes money from investments in two basic ways:

First, you make a capital gain by selling an asset (real estate, stocks, bonds, your car, Bitcoin, etc) at a higher price than what you bought it for. The bigger the differential between the two, the more money you can make. However, as the risk-return pyramid shows, the higher the possible rate of return on your investment, the higher a risk it is. This is always true, and anyone telling you otherwise is either ignorant, deluded by promises of easy wealth, or selling you something. The problem here is that its REALLY, REALLY hard to time the market perfectly and sell at the “top,” because few of us have such a good handle on the future as to know where things are headed at any given time. The girls learned that the hard way during our simulation, as a few sold stocks at what they thought was an excellent high price, only to have the price go up even more the next turn. The howls were loud and clear…

Second, you can make money on the dividends/yields/interest generated by any assets you hold. Assets with higher yields/dividends/interest generally are riskier as well, but that depends on the reasons why dividends are or are not given, so the risk vs return law only applies to a certain degree here. Generally, though, if a bond or stock is giving you a stellar return, it means that they are either a risky business (a junk bond) or they never reinvest profits back into the business, which makes that a stock less likely to experience massive capital growth since the business isn’t expanding; this means you are less likely to make money according to #1 above.

It’s more complicated, of course, but I find these are good general concepts around which to form one’s macro investment strategies.

One big CAVEAT is that the rate of return you are getting in #2 must be higher than the current rate of inflation (which is a measure of how much value your money is losing each year). If your Savings Bond from the US government is generating 1% interest, but inflation is 2%, you are not making money; you are losing it.

So, for the last ten or so years, because of a concerted policy by various central banks around the developed world, interest rates have been so low that NOTHING below the “stocks” line in the risk-return pyramid has been generating a rate of return (interest rate) above the average rate of inflation. So Big Investors, hedge fund managers, and pension fund managers have been funneling money into stocks, commodities, and real estate because there’s nowhere else to PUT money that can make any kind of decent money back.

However, as interest rates begin to creep back up - and especially if the interest rates were to actually go back above the inflation rate (which they haven’t), things like bonds become more attractive again. This causes moves OUT of stocks and IN to bonds so that investors can “re-diversify” and balance their portfolios with some less-riskier-assets again. That leads to drops in the stock market.

This is a really long way of saying if you want to see whether it's going to be a bad day in the markets, keep an eye on the bond yields, inflation rate, and overall interest rates.
24

Thanks for the discussion.
S: Since no one makes money on a stock until they sell it
This depends on the stock. Over the years some stocks have paid double-digit dividend yields, plus had enough book value to cover any potential liquidation, so one holds their worth without selling and keeps some of the dividends (the part that exceeded inflation).
There are is also private equity out there as well. For example, I once pooled some cash for shares to build a house kit for $50M US and built it for $10M. It’s now worth over $200M…& rent value is equal to $10M profit annually. So this equity paid for itself in less than a decade and it’s book value has always been only 4X. So I made money on this “stock” even from year 1.
But for a Dow stock, MCD has fit this pattern over the last decade. The dividend yield has been obscene if you bought 15 yo. It’s all about the entry price, plus the divided yeld plus, the book value. Even a crash wouldn’t stop the profits from being realized. I do agree there are very few stocks left in the market that haven’t gone nuts.

25
Quote:
Bond yields- Interest rates on bonds have been going up, making them a more attractive investment option again. Investors often sell stocks to free up money to buy bonds (or visa versa) ...... However, as the risk-return pyramid shows, the higher the possible rate of return on your investment, the higher a risk it is. This is always true, and anyone telling you otherwise is either ignorant, deluded by promises of easy wealth, or selling you something.
re: bond yields, aren't they supposed to go down as investors pile into them from stocks? (price going up). I think I recall reading somewhere why they went up when they should have been going down but doesn't it just boil down to central bank meddling? re: risk-return pyramid, I was just hearing that Greek debt and junk bonds are trading below Treasury yield which makes no sense. Again, the result of central bank meddling? Dave Kranzler and PCR had a piece out explaining that the Fed and PPT buy stocks to send the market back up, which puts a floor under their price. Entirely stands to reason that they were behind the latest crash (the Fed, not Dave Kranzler and PCR...) http://investmentresearchdynamics.com/do-bona-fide-financial-markets-still-exist/
26
Mark_BC wrote:
re: bond yields, aren't they supposed to go down as investors pile into them from stocks? (price going up). I think I recall reading somewhere why they went up when they should have been going down but doesn't it just boil down to central bank meddling? re: risk-return pyramid, I was just hearing that Greek debt and junk bonds are trading below Treasury yield which makes no sense. Again, the result of central bank meddling? Dave Kranzler and PCR had a piece out explaining that the Fed and PPT buy stocks to send the market back up, which puts a floor under their price. Entirely stands to reason that they were behind the latest crash (the Fed, not Dave Kranzler and PCR...) http://investmentresearchdynamics.com/do-bona-fide-financial-markets-still-exist/

Mark,
I’m not an expert at the technical level, but in theory yes the yields go down as investors pile into bonds. The question is how many investors are piling in, and how much are they bringing to the table? If large players like China are backing out of buying Treasurys at the same time we’re issuing more to cover our debts, the end result will be rising rates overall.

As for Greek bonds/junk bonds, the fact that those rates are so low is the perfect evidence for just how broken the markets are. The risk-reward pyramid is how economics should work, not how it is currently working. I think one of Chris’s (Axel, Charles, et al) points is that reversion back to the kind of normalcy represented by that pyramid is where the pain and blood will happen, because the further from reality the markets are now, the harder the return to real markets and economic fundamentals will be. Yet we can’t stay here forever, because central bank shenanigans have blown away pensions, destroyed savings, created massive debt loads, and caused massive social inequality. You know, small stuff.

As always, I might be wrong. =)

-S

27

I was happily surprised to see that Greg Hunter’s (USAWatchdog’s) early Sunday podcast is with Charles Hugh Smith, “Financial Markets Definitely Destabilizing”

"Financial writer and book author Charles Hugh Smith has been watching the extreme movements in financial markets closely. Is he nervous? Smith says, “Oh yeah, it’s definitely destabilizing. In other words, it’s becoming not just more volatile, the whole underlying structure of our economy is destabilizing. What I mean by that is it’s becoming more brittle or fragile. That is fundamentally why we are seeing these wild swings. People are swinging between . . . keeping the money machine like it is for another nine years, and the other side of the coin says wait a minute, we have already had a weak expansion for nine years. It’s almost the longest expansion in U.S. history. A normal business cycle doesn’t run in one direction forever. . . .If you don’t allow your economy to have a business cycle recession, then you are simply making it more fragile by encouraging really marginal and risky investments, and that’s where we are now.”"