FLIP THAT HOUSE

4 comments

Posted on 7th May 2013 by Administrator in Economy |Politics |Social Issues

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The Wall Street generated housing “shortage” has driven prices up 10% nationwide. In the formerly bubbly markets of Phoenix, Vegas and California, prices have jumped 20% or more. Record low mortgage rates, an influx of Wall Street hot money, a purposeful restriction of foreclosure supply, NAR hype, short memories, and a math challenged populace are a recipe for another disaster. Farrell is right. The same idiots that were flipping houses from 2004 through 2008 are back doing it again. Some will make a killing. Most will get killed. They don’t know when it will end in tears. They are gamblers, not investors. They depend on the greater fool theory. There are a lot of fools, so booms can last longer than you would think. But the bust always comes. There are two things that could change the dynamic. The Wall Street hedge funds that have piled into the foreclosure for rent trade all use the same models. The higher prices they have created make the rent equation increasingly weak. Their models will tell them to all sell at the same time. If mortgage rates were to even rise by 1%, the housing market would come to an abrupt halt. In the meantime, if you’re feeling lucky, roll the dice and flip that house. Maybe you’ll get a TV show on TLC. 

Flip houses to get rich, retire before next crash

Commentary: There’s a window of opportunity if you act now

By Paul B. Farrell, MarketWatch

SAN LUIS OBISPO, Calif. (MarketWatch) — Yes, flipping houses, your big new window of opportunity. Flipping commercials increasing on drive-time radio.

The Wall Street Journal reports “housing market accelerates … prices jump 9.3% in quickest rise since 2006, gains seen across country.” Over on 24/7WallSt.com you can see its coast-to-coast “10 Best Cities to Flip a House:” The New York/New Jersey/North East sector had average $118,376 profits on holdings of 118 days. On the West Coast, California’s metro San Jose saw profits averaging $61,758 on 105 days holding.

Yes, there’s a window of opportunity for house flipping. But ask yourself: When will the window slam shut? Timing, that’s the trick. You get it? Could be just a few months, like the fall 2008 crash? Or a few years, like the bull of 2004-2007.

Not sure? Timing crucial tracking cycles, picking tops, bottoms and turning points is less of a science than gambler’s coin toss. Over the years we reported on a couple dozen warnings of a bubble blowing before the 2008 crash. And yet, four months before the fall 2008 that tanked global markets and economies, we hesitated. The Lehman bankruptcy was the turning point.

Yes, flipping window will close … in 3 months or in 3 years?

One thing is certain, you will never hear the next crash coming. Wall Street will drown out the warnings with relentless happy talk. But bull or bear, bubble or bust, recovery or recession, every cycle has a natural pattern that ebbs and flows at its own pace.


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Investors Business Daily’s Bill O’Neill says market cycles average 3.75 years up, nine months down. But “averages” are old data, not future facts. Happy talk won’t restart a bull. And more warnings won’t puncture an old bubble. Cycles have lives of their own, move up and down when they darn well feel like it. That’s nature.

Still, today’s warning signs like flipping commercials point to housing and mortgage problems. But investors must decide what fits their risk profile, knowing that timing’s the key. Will the flipping market collapse in a few months? Or a few years? And most of all, do you have the stomach of a flipper?

History is the best teacher of all. Take a moment here and review some of the early warnings Americans heard and ignored about a coming market collapse and recession, beginning back in 2000 until the fateful 2008 Wall Street credit meltdown:

2000 to 2005, early prediction of ‘biggest bubble in history’

Fed governor Ed Gramlich was warning Fed chairman Alan Greenspan as early as 2000 about subprime problems. Later he wrote the book, “Subprime Mortgages: America’s Latest Boom & Bust.”

Coming out of the recession in 2004 money manager Robert Rodriguez of First Pacific Advisors told the world a meltdown was coming in the red-hot mortgage market. He began moving money out of equities, into cash.

Economist Nouriel Roubini warned that housing had become a “speculative sport,” would trigger recession. Soros and others started shorting the market, made billions when it collapsed.

In mid-2005, three years before Wall Street’s meltdown, the Economist magazine ran a major cover story with this message: “The worldwide rise in house prices is the biggest bubble in history. … Rising property prices helped to prop up the world economy after the stock market bubble burst in 2000.” Values increased 75% worldwide in five short years, from $30 trillion to $70 trillion. “Never before have real house prices risen so fast, for so long, in so many countries … This is the biggest bubble in history.”

In 2006, new predictions of housing collapse, ‘full-scale rout’

Former Goldman Sachs investment banker John Talbott’s book: “Sell Now! The End of the Housing Bubble.” His statistics covered America’s top 130 metropolitan areas. The top 40 were facing an average 47.2% decline.

Economist Gary Shilling wrote: “The current housing weakness will develop into a full-scale rout … It’s clearly a bubble and is nationwide … The house price collapse will induce a painful recession that will send U.S. stocks into a tailspin … weakness in the U.S. and China will spread worldwide.”

“Correction Time is Here!” was economist Marc Faber’s newsletter headline: “If we combine the overbought condition of the stock market, investors’ sentiment high optimism, equity mutual funds’ low cash positions, and also heavy foreign buying, we have all the ingredients for a stock market correction in the U.S. getting underway very shortly.”

Two years before the 2008 meltdown a Fortune headline: “Can the Economy Survive the Housing Bust?” The NAHB confidence index had “plummeted 54%.”

Harper’s magazine published Michael Hudson’s fascinating “Guide to the Coming Real Estate Collapse.” Hudson analyzed 20 trends: The crash “will further shrink the ‘real’ economy, drive down those already declining real wages, and push our debt-ridden economy into Japan-style stagflation or worse.”

Even Countrywide’s notorious CEO Angelo Mozilo was warning Journal readers: “I’ve never seen a ‘soft-landing’ in 53 years … I have to prepare the company for the worst that can happen.” But he did little.

Neither did the new Treasury Secretary Hank Paulson … Bloomberg Markets later reported that right after becoming secretary in 2006 he told the White House staff: “Over-the-counter derivatives are an example of financial innovation that could, under certain circumstances, blow up in Wall Street’s face and affect the whole economy.” But he never warned the investing public.

By 2007, warnings that a global crash will ‘rival anything in history’

Jeremy Grantham wrote in his GMO quarterly newsletter: “The First Truly Global Bubble: From Indian antiquities to modern Chinese art; from land in Panama to Mayfair; from forestry, infrastructure, and the junkiest bonds to mundane blue chips; it’s bubble time. … Everyone, everywhere is reinforcing one another. … The bursting of the bubble will be across all countries and all assets … no similar global event has occurred before.”

In a mid-2007 Wall Street Journal op-ed piece, former SEC Chairman Arthur Levitt wrote: “In terms of market meltdowns and the degree of pain inflicted on the financial system, the subprime mortgage crisis has the potential to rival just about anything in recent financial history, from the savings and loan crisis of the late 1980s to the post-Enron turndown in the beginning of this decade.”

Forbes columnist Gary Shilling also warned that “just as the U.S. housing bubble is bursting, speculation elsewhere will come to a violent end if history is any guide. … Richard Bookstaber, who designed various derivative-laden strategies over the years, now fears that financial derivatives and hedge funds, focal points of today’s huge leverage, will trigger a financial meltdown.”

Contagion spreading, but government leaders kept misleading

Our leaders failed us: A year before the banks crashed Treasury Secretary Paulson, a former Goldman Sachs CEO, tells Fortune “this is far and away the strongest global economy I’ve seen in my business lifetime.” Earlier, he and Fed Chairman Ben Bernanke said the subprime crisis was “contained.” A clueless Bernanke assembled hedge fund managers, asking them to explain the global derivatives market.

And while Paulson and Bernanke were telling us the subprime crisis was “contained,” the chief architect of the subprime-housing meltdown, Alan Greenspan, was on tour making millions hustling his new book, “The Age of Turbulence.” On tour, on “60 Minutes” and then before the U.S. Congress, Greenspan admitted he “really didn’t get it until very late.” Our long-time monetary leader “didn’t get it?” Yet, he still maintains a blind faith in the “free market” mythology, denying any responsibility for the crash.

Still want to be a house flipper in 2013? Can you trust our leaders?

The drama flipped in early 2008 when Bear Stearns was sold to J.P. Morgan Chase for just $2 a share, after trading at $172 a year earlier. Then in September, Lehman filed for bankruptcy and Paulson was begging House leaders for hundreds of billions to bail out the banks on favorable terms, especially protecting his old firm, Goldman Sachs.

But after a couple decades of Greenspan, Paulson and Bernanke misleading America, can you ever trust anything American political leaders say again? Certainly not about the housing market.

Still, you must decide. So begin with the fact that across America’s flipping markets, holding periods are three to four months, after you buy the property. That’s a long time in a volatile market. Yes, listen to all the happy talk and warnings, but in the end, trust your guts, your risk profile, your tolerance for uncertainty. Then scan all the information though your B.S. detector and decide what works for you. Only you can know.

Never, never, never trust what you hear from Wall Street or Washington.

9 DARK OMENS

4 comments

Posted on 15th April 2013 by Administrator in Economy |Politics |Social Issues

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No one has been more accurate than Gary Shilling over the last 10 years. I can’t disagree with any of his 9 points. The future is not bright. You won’t need shades, but you might need a gun. What Gary doesn’t anticipate is those in power doing something so stupid that it results in a hyperinflationary collapse and world war. That’s my #10 for his list.

9 dark omens show U.S. growth will fall near zero

Commentary: Economist Gary Shilling warns of recession, austerity

By Paul B. Farrell, MarketWatch

SAN LUIS OBISPO, Calif. (MarketWatch) — Bulls love bull markets. History’s most famous bull, Yale economist Irving Fisher, loved the Roaring Twenties of the Great Gatsby.

Remember, weeks before the Crash of 1929 this brilliant Yale professor told investors: “Stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon, if ever, a 50 or 60 point break from present levels, such as bears have predicted. I expect to see the stock market a good deal higher within a few months.”

Yes, bulls are perennial optimists. It’s in their nature, born in their DNA, a gyroscope guiding their brains. Their mantra: Napoleon Hill’s “Success Through a Positive Mental Attitude.” Their theme song, Monty Python’s “Always Look at the Bright Side of Life.”

They have an innocence, as if a sacred Invisible Hand gave them permission to set aside contrary evidence, dismiss facts and reality, rewrite history, challenge another “wall of worry,” and ignore market cycles, like the fact that 2013 is the fifth year of aging bull market, all mere dust to sweep under their bright-side-of-life rug.

Historical facts: Aging bulls in denial, roaring gets hoarse, bearish

Still, pause for a moment: Remember Bill O’Neil, Investors Business Daily’s publisher, a realist, part bull, part bear, who wrote in his classic, “How to Make Money in Stocks”: “During the last 50 years, we have had 12 bull markets and 11 bear markets … the typical bull market lasted 3.75 years and the classic bear market lingered only nine months.”

Well, investors, today’s bull is over four years old. Yes, an aging bull around hungry bears coming out of hibernation. Still, today’s bulls only sing the bright side, love roaring, and love taking risks against the odds.

They already lost roughly $10 trillion twice this century. They’re addicted to roaring, luring investors like a Pied Piper, making their money gambling with your money, even in losing markets.

Historical facts: Economic growth slowing to near zero

Jeremy Grantham, strategist for $100 billion GMO money managers, surveyed America’s economy for several generations, from the late 1900s: “The trend for U.S. GDP growth up until about 1980 was remarkable: 3.4% a year for a full hundred years. But after 1980 the trend began to slip.” And it’s “not going back to the glory days of the U.S. GDP growth.”

Get it? America’s growth rate is on a long slippery slope.

After a century of high-growth prosperity, GDP dropped “by over 1.5% from its peak in the 1960s and nearly 1% from the average of the last 30 years.” Worse, “going forward, GDP growth (conventionally measured) for the U.S. is likely to be about only 1.4% a year.”

And even worse, warns Grantham, through the next generation to 2050, America’s adjusted growth will average “about 0.9%.” Near zero, no growth, a killer for the stock markets through 2050.

Historical facts: Grand Disconnect, dramatic shocker by late 2013

Economist Gary Shilling, author of “The Age of Deleveraging” and long-time Forbes columnist, also confirms the long trend, warning of a “dramatic shock,” a wake-up call, a new black swan hitting the markets in 2013. Shilling is a realist among bulls: “Investors are paying little attention to weak and declining economies around the world, and concentrating on the flood of money being created by central banks.”

Gary Shilling

Shilling warns that this Grand Disconnect is driving “stocks around the world while the zeal for yield, amidst low interest rates, benefited junk bonds and other low-quality debt. The recent rush into equities by individual investors, after consistently liquidating them since 2008, suggests an expanding bubble.”

Yes folks, Wall Street bulls are blowing a new bigger, nastier bubble, repeating the roaring run-up to the 2008 meltdown, the 2000 dot-com crash, the 1929 Crash.

Remember, bulls are blind, they harmonize on the “Bright Side,” like Don Quixote, they believe in the promised land, a “permanently high plateau,” that they have finally discovered a cure to the 800-year old “this time is never different” malady. They dismiss Shilling’s warning that a Grand Shocker could shake up the financial markets before year-end.

Historical facts: 9 macrotrends slowing global economic growth

Gary Shilling just released his new Insight newsletter noting that “most of our economic forecasts have proved correct.” The most telling: “our projection of 2.0% annual real GDP growth was dead on.” Dead on, and he sees “another eight years of slow growth of about 2% in real GDP per year.”

That’s far less than the 3.4% long-term average from recent history and in line with the projected decline to near-zero growth in the next generation. Shilling sees a “forecast of continuing deleveraging” with “Nine Causes of Slow Global Growth in Future Years,” fairly rapidly through the next generation to 2050. The nine megatrends he predicts are putting the brakes on growth worldwide and across America are:

  • New consumer-savings era: “U.S. consumers are shifting from a 25-year borrowing-and-spending binge to a saving spree. This is spreading abroad as American consumers curtail the imports of the goods and services many foreign nations depend on for economic growth.” We went from 12% savings in the 1980s to 1% in the last decade.
  • Financial deleveraging: America’s financial leveraging binge began accelerating in the 1970s, with “debt-to-equity ratios of Wall Street firms jumping to 20-to-30 or more before Bear Stearns and Lehman Brothers.” Today financial deleveraging is reversing “the trend that financed much global growth in recent years.”
  • New government regulations: In “The Age of Deleveraging” Shilling warns: “increased government regulation and involvement in major economies will stifle innovation and reduce efficiency, slowing growth.”
  • Low commodity prices: “Earlier high prices spurred overinvestment and overcapacity, as usual, is coming on stream just in time for the recent drop in demand.” Going forward, “lower commodity prices will limit spending by commodity-producing lands” inhibiting future global growth: “The likelihood of continuing sluggish growth in coming years is a distinct depressing effect.”
  • More fiscal restraint: “Developed countries are moving toward fiscal restraint.” And while such policies may not be “needed now they have resulted from the ongoing political gridlock between the Democrats and Republicans” that is definitely slowing economic growth.
  • New global protectionism: “Rising protectionism will slow, even eliminate, global growth. Recessions spawn economic nationalism and protectionism, and the deeper the slump, the stronger are those tendencies.” It’s easier “to blame foreigners for domestic woes and take actions to protect the home turf.”
  • Domestic housing slowdown: In the future “the U.S. housing market will be restrained by excess inventories and loss of homeowner investment appeal.”
  • Consumer-spending cutbacks: As deflation continues, buyers will “curtail spending” anticipating lower prices as sellers get more competitive.
  • State/local governments cuts: States and municipalities “will continue to contract” meaning less to spend, lower revenues, fewer services, less money from the federal government and more costs shifted to the people.

Yes, Shilling sees things getting worse, with real GDP growth at 2.0% annually for at least for the rest of this decade. Then as Grantham and many others warn we’re on the “Road to Zero Growth,” America’s GDP growth collapsing under 1% by 2050.

Of course, none of these facts will stop a bull from being a perpetual optimist with a positive mental attitude. Indeed, it’s a motivation to stick to your convictions. Why? It’s in their nature, in their DNA, with an Invisible Hand gyroscope pointing their minds at the “Bright Side of Life.”

No matter that America’s bulls have already lost roughly $10 trillion twice this decade — after the 2000 dot-com crash and the 2008 bank meltdown — they still believe “this time will be different,” in spite of 800 years evidence to the contrary. And you can’t just turn off an optimistic bull’s brain. Never can.

So secretly you must admire their innocent faith. Yes, eventually these nine economic macrotrends will wake all of America up to reality. But until then, enjoy Robert Mankoff’s brilliant New Yorker cartoon: “While the end-of-the-world scenario will be rife with unimaginable horrors,” predicts the CEO of a leading Wall Street bank, “we believe that the pre-end period will be filled with unprecedented opportunities for profit.”

 

GET YOUR CALCULATORS OUT

9 comments

Posted on 27th March 2013 by Administrator in Economy |Politics |Social Issues

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I wonder if Paul heads off to the beach after writing these Armageddon articles a couple times per week. If I lived in San Luis Obisbo, I think I would be in a pretty good mood most of the time. Of course, his article is absolutely correct. How would a 50% stock market crash impact your life today? It’s already happened twice in the last 12 years. The third time will be a charm.

The Handy-Dandy Investors Crash Loss Calculator

Commentary: How much will you lose in next Wall Street bear?

By Paul B. Farrell, MarketWatch

SAN LUIS OBISPO, Calif. (MarketWatch) — How much will you lose this time around? Four years ago, on March 30, 2009, our column headline announced: “6 reasons I’m calling a bottom and a new bull.”

The Dow fell from 14,164. Hit bottom at 6,547. And Wall Street lost over $10 trillion of America’s retirement market cap. You lost lots. But it’s back up more than 100% since. We forget.

Time for another crash? Oh yes. Remember: Investors Business Daily’s publisher, Bill O’Neil, wrote in his classic, “How to Make Money in Stocks”: “During the last 50 years, we have had 12 bull markets and 11 bear markets … The bull markets averaged going up about 100% and the bear markets, on the average, declined 25% to 30%.” And “the typical bull market lasted 3.75 years and the classic bear market lingered only nine months.”

Today’s bull is over four years old, in dangerous territory.

Yes, you are facing an aging bull. Ready for pasture. But Wall Street’s still gambling with your money. Remember, Wall Street casinos have already lost roughly $10 trillion twice this century. Twice. And soon Wall Street will do it again.

But exactly when? Here’s how to figure “exactly” when. In his classic, “Stocks for the Long Run,” economist Jeremy Siegel studied all the “big market moves” between 1801 and 2001. Two centuries of data. Conclusion: 75% of the time there’s no rational explanation for “big moves” in stock, not up, not down.

So stop asking, maybe some technician, quant or high-frequency trader can predict short-term swings. But the “big market moves?” Never.

So “exactly” when? America’s top experts are warning us — it’ll happen before year-end. That’s “exactly” when. Why? It’s obvious. By year-end 2013 our aging bull will be 4 ½ years old, well past Bill O’Neil’s “average” 3.75 years for a bear drop putting a bull out to pasture.

So any rational investor would have to conclude that Mr. Market — as Warren Buffett’s mentor Benjamin Graham called the stock market in his classic “The Intelligent Investor” — would know that a bear drop, a crash, meltdown, or something very painful is coming very soon. Indeed, could happen anytime, maybe even tomorrow, because this bull is old-old by Bill O’Neil’s basic calculations.

Mr. Market will soon lose $10 trillion of your money, repeating 2008 and 2000

So the real question is not when, nor if, but how much will you personally lose in this third crash of the 21st century? Ask yourself: How would a rational investor estimate losses? Simple: a rational investor would logically estimate that Mr. Market could easily drop around 50%, again.

Another way of saying it is that Mr. Market’s latest roller-coaster ride will cost today’s Main Street American investors a new loss of another $10 trillion in market cap. Why? Because the Dow will loses half its value, crashing from today’s roughly 14,400 to 7,200.

That’s a reasonable conclusion by a rational investor, using the Graham-Buffett calculator logic on today’s Mr. Market. Remember: the Dow went all the way down to 7,286 in 2002 after the dot-com crash. Then crashed even deeper to 6,547 in 2009 after the Wall Street credit meltdown.

Handy-Dandy Investors Crash Loss Calculator: 25 portfolio killers

Here’s our little behavioral-economics calculator to help you figure out whether you’ll lose 50% when Mr. Market comes crashing again.

Quickly scan through the following list of common investor biases and bad habits. Don’t stop to think rationally about any one. Just keep tabs on roughly how many of the 25 fit some investment decisions you made during the dot-com era and in the years leading up to the recent bank credit meltdown.

And do it very fast. Maybe five seconds or so each. When you finish your scanning and have your number (even if it’s just a rough estimate like 12 of the 25) then we’ll go to the last step in our Handy-Dandy Investors Loss Calculator:

Overconfidence bias: You love trading and gambling. You pay little attention to the fees, commissions and taxes, because your know you’ll score big.

Blinders: Investors often stereotype certain companies, stocks and funds as “winners” or “losers” (Dell? Apple?), often missing turning points signaling a change in company fortunes, opportunities and reversals.

Heroics: Irrational investors tend to overestimate their stock-picking abilities, underestimate Mr. Market. Then later exaggerate their successes, talk about the one that got away.

Denial: Once locked in, irrational investors hate admitting they’ve made a bad decision. It’s an ego thing. So they hang on to losers, even refuse to sell losers. It’s un-American. Or means you’re not as manly or as smart as you thought.

Attachment bias : You fall in love with “special” stocks. You exaggerate virtues, downplay problems and then hold on too long.

Extremism bias: Irrational investors have trouble assessing risk, often bet big, and lose big. Probable events become certain. Unlikely events become impossible. So you’re likely to miscalculate your risks.

Anchors: In your mind you tend lock in price targets, like a hundred-buck stock or Dow 15,000, then minimize any data that suggests you’re wrong.

Ownership bias: Once purchased, you value what’s yours even higher, like overvaluing your home. That blinds you to the real value, adds to your losses.

Herd mentality: For all the talk about macho individuality, the truth is, most investors don’t think for themselves and tend to follow the crowd, or blindly track some trend.

Getting-even bias: You lose, then you try to break even taking extra risk, doubling-down. You get overanxious, overreact, and you lose more.

Small-numbers bias: Making decisions on limited data that’s incomplete and likely exaggerated.

Loss aversion: Many cautious people tend to avoid losses more than seek gains. That fear keeps investors out of the market too long, and in “safe” money markets.

Pride: You hate selling losers, hate admitting error. You have a no-talk rule.

Risk averse: You take too little risk after a big loss or a losing streak, get too conservative, don’t trust yourself, and miss opportunities for higher returns.

Myopic bias: You think recent data’s more important than older information. So you may pull back after a losing streak, or ride a winning streak till you lose it.

Cognitive dissonance: You filter out bad news and tend to ignore and discard new information that conflicts with your biases, preconceptions and belief system.

Bandwagon: You disregard fundamentals. You think you understand “momentum.” You conclude that “so many” followers can’t possibly be wrong.

Confirmation: You’re not only critical of any news that contradicts your beliefs, you blindly accept any data that confirms beliefs.

Rationalization: You are superlogical and can marshal lots of evidence to back up whatever you first decide to buy, even if it’s based on limited logic and data.

Anchoring bias: You rely too much on readily available data, just because it’s available, even when you know it could be faulty.

House money: You treat winnings as if they belong to the house or casino. Then you take bigger risks, giving it all back, and then some.

Disposition effect: You tend to lock in gains and hang onto losses, selling shares in an up market, hanging onto losers too long, similar to loss aversion.

Outcome bias: You judge your decisions on results rather than the context when the decision was made. That’ll result in misleading you the next time.

Sunk costs bias: You treat money already invested in a stock as more valuable than future opportunities, so you often hang on rather than sell and reinvest.

Perfect behavioral storm: Separately, each bias is bad enough. Combined, they become bubbles, set you and wipe you out. Either way, quants and behaviorists can easily manipulate you into what they want, blowing bubbles and popping them without you ever knowing what’s happening … manipulating you like a mindless puppet.

OK, you probably have a rough count, and likely not that exact. No problem. Let’s say, for example, you estimate that out of this list of 25 known investors biases, you’ve made investment decisions that were irrationally based on 10 of these bad habits and biases.

So here’s how you can use the Handy-Dandy Investors Crash Loss Calculator to figure your losses in the next crash. Very simple to estimate: If you estimate you exhibited 10 of the 25 bad habits and biases in the past, that suggests a portfolio drop of 40%. And if Mr. Market only goes down 50%, like it did in the 2000 crash and again in the 2008 meltdown, your losses would be between 20% and 40% of your portfolio’s total value.

Of course the real value of this exercise is not the numbers game. Besides, if you’re gaming the system, it may be impossible to stop. But if you’re ready, then this exercise makes you aware of the fact that Mr. Market really is overdue a crash.

And more importantly, if you lose money again, it’s your fault. Yes, the problem is yours, it’s all in your head, your own behavioral biases, quirks, blind spots and bad habits, and not Mr. Market’s problem. He’s just doing what Ben Graham and Warren Buffett tell us he always does.

So, get your behavioral act together and prepare for the crash that’s dead ahead, with no biases or bad habits.

 

DENIAL IS NOT A RIVER

8 comments

Posted on 25th March 2013 by Administrator in Economy |Politics |Social Issues

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Don’t worry. Cyrpus has been “resolved”. All is well. Resume buying stocks. Bennie will print $2.75 billion today and hand it to the Wall Street banks. What could possibly go wrong?

New Critical Warning as 2013 shocker looms

Commentary: We are at a market top and an economic turning point

By Paul B. Farrell, MarketWatch

SAN LUIS OBISPO, Calif. (MarketWatch) — Yes, another dark “shocker” before the end of the year, an unexpected “black swan.” And sadly for Fed Chairman Ben Bernanke — who hopes his “I saved America from economic collapse” illusion stays intact till he leaves office — he’s not going to get a dream ending to his Fed career.

Why? The shocker will happen before his scheduled exit in January, damaging Bernanke’s egocentric “hero’s legacy.”

The big shocker that economist Gary Shilling sees coming will hit before year-end. And it’s what we see as “Critical Warning No. 12” for 2013.

So let’s put all this in context, a quick survey going back four years when Bernanke was reappointed and he began his grand ego trip as the Great Savior of the American Economy, believing he was destined to do the job our dysfunctional politicians were incapable of doing.

True, Wall Street banks love Bernanke’s non-stop cheap-and-easy-money printing presses, even if bad for the rest of America. We called him the “Most Dangerous Man on Earth,” and “Black Swan’s” Nassim Nicholas Taleb was so shocked by the reappointment of Bernanke — certain to become Obama’s “greatest domestic blunder” — that Taleb went into isolation.

Now, four years later, Bernanke is even more rigid and dogmatic, hanging onto former Fed Chairman Alan Greenspan’s failed ideology pumping out bank QE stimulus while creating the illusion that he’s saving America from a dysfunctional gridlocked Washington that does nothing.

History will prove he’s made the economy worse, delaying the inevitable, blowing a new bubble, making the next crash ever bigger.

Benanke is Greenspan’s clone, repeating the same ideological mistakes

Why is Bernenke so uncompromising? It’s wired in the brain and DNA. The position as Fed chairman turns men into demigods who believe their own press, believe they alone have the answers. This happened to Greenspan who finally had to admit to Congress after 18 years he “found a flaw” in the “free market ideology” that he relied on in guiding America’s monetary policy for his tenure as Fed chairman.


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Federal Reserve Board Chairman Ben Bernanke.

This same psychological phenomenon has turned the thoughtful scholarly Prof. Bernanke into Bernanke the Savior, Hero and Leader of the Free World Monetary System. It’s a syndrome seen so often by psychologists, behavioral economists and neuroscientists. As a behavioral economist and U.S. Marine veteran I imagine Jack Nicholson as Col. Jessup on the stand in “A few Good Men,” barking “you can’t handle the truth” at Bernanke.

Few investors wanted to hear the warnings for years before the 2000 crash. Nor the warning before the 2008 crash.

Back then, so-called gurus on Wall Street, Main Street’s 95 million naive investors and our clueless politicians in Washington were lost in denial. Humans too often prefer delusions and wishful thinking to the truth. That was Greenspan’s downfall.

And that’s also Bernanke’s sad mental pattern, what Taleb, a behavioral -finance expert, meant when he said about Bernanke, “he doesn’t even know that he doesn’t understand how things work,” that he can’t handle the truth if it doesn’t fit into the ideology he and Greenspan before him have imposed on the American economy for 26 years.

When he returns to civilian life, like Greenspan, Bernanke wants a $10 million book deal, huge lecture fees and a high-paying cushy consultancy with Wall Street. A big price that will be paid many times over by Main Street Americans.

Six new ‘critical warnings’ confirm 2013 is topping, at turning point

In the years leading up to the 2008 meltdown we reported on a couple dozen major warnings. Turns out that most leaders “can’t handle the truth.” Paulson, Bush, Greenspan, Bernanke were all in denial: “Best economy in my professional life,” said Paulson.

Today we see how Bernanke does the same, just keeps on ignoring new warnings, stuck in his rigid ideology. He seems to have reverted to the professor doing research, pulling together eight years of data, as if working on a book about his grand legacy. Greenspan did it. Unfortunately that will end the same, as Icarus’s flight to the Sun.

So it’s time to add the new shocker, a black swan of global macroeconomic events, to our list of critical warnings. Here are 2013’s prior warnings:

  • Begin with January’s “Critical Warning No. 7: Banks Crush Economy Again” on how Wall Street banks’ relentless war against all reforms has blown a new bubble, setting up a huge meltdown to rival 2008. Since most American investors and leaders are in denial, since Congress won’t bailout the banks again, the next one will be a long, rough one.
  • Then in February came what we’d now label Critical Warning No. 8: Bill Gross’s “Global ‘Credit Supernova’ Turns 2013 Bull into Bear” exposing more about the Fed’s nonstop cheap-money schemes digging the taxpayers deeper into debt. Gross’s Pimco manages $2 trillion, has so much in the game and can be trusted.
  • Later in February came what was in effect, our Critical Warning No. 9, a lead-in to economist Nouriel Robini’s loud alarm siren to America: “Prepare for the Perfect Storm,” a powerful echo of Robert Prechter’ earlier 100-year bear market warnings. Yes, Dr. Doom said that a “Perfect Storm” was coming.
  • In March Critical Warning No. 10 took shape as “Your Sequestered Brain Can’t See The Next Crash Coming,” where we focused on the brain biases and flaws that make it impossible for investors, gurus and politicians to either see or stop a crash, again proving the wisdom of Profs. Carmen Reinhart and Kenneth Rogoff’s brilliant “This Time Is Different: Eight Centuries of Financial Folly,” called the “best empirical investigation of financial crises ever published” by Harvard financial historian Niall Ferguson. Get it? In 800 years humans have been unable to stop themselves from repeating the same bull/bear cycles and crashes, and losing tons of money.
  • This sequence of critical warnings evolved unplanned. We realized it earlier this week with what’s now our Critical Warning No. 11: In our column “Bond Crash Dead Ahead: Tick, Tick … Boom!” we covered a dark warning from InvestmentNews, perhaps the most trusted news source for America’s 90,000 professional financial advisors. INews predicts a bond crash coming that will rip though the stock market, Fed rates and the American economy. As one expert put it, “investors have no idea what’s about to happen.” Besides, they can’t handle the truth.

Now we have arrived at Critical Warning No. 12: The “dramatic shock,” a black swan expected later in 2013.

In his recent Insight newsletters Gary Shilling, contrarian economist, long-time Forbes columnist and author of the “Age of Deleveraging,” made fascinating observations about investor denial: “investors are paying little attention to weak and declining economies around the world, and concentrating on the flood of money being created by central banks.”

That’s Shilling “The Grand Disconnect” driving “stocks around the world while the zeal for yield, amidst low interest rates, benefited junk bonds and other low-quality debt. The recent rush into equities by individual investors, after consistently liquidating them since 2008, suggests an expanding bubble.”

Get it? Wall Street is now blowing a bigger, nastier new bubble, repeating the mindless run-up to the 2008 crash. And Shilling sees the shift, a black swan, a grand shocker coming before year-end 2013, not after Bernanke retires.

And after the shocker Shilling warns of 11 sectors to avoid: commodities, developed-country stocks. home builders, your own home, big-ticket consumer-discretionary equities, consumer lender stocks, selected bank stocks, junk securities, developing-country bonds, developing-country stocks and old-tech capital-equipment producers.

One final word: Timing is critical at a turning point. We warned of the coming crash well in advance in 2008. We picked the bottom in March 2009. We are in the fifth year of an aging bull.

These six Critical Warnings tell of a hard turning point dead ahead. Wake up. It takes time to restructure a portfolio. If you think you can do nothing and just wait for another year, you are like most investors: You just “can’t handle the truth.” Or you “have no idea what’s about to happen.” Or you believe “this time really is different.”

 

COMPLACENCY BUBBLE

6 comments

Posted on 20th March 2013 by Administrator in Economy |Politics |Social Issues

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This is an interesting and crucial question. Usually, when the stock market drops significantly, the bond market benefits as people pile into Treasury bonds for safety. Some smart people think there is going to be a bond market crash. Will these people pile into stocks?

The problem is that Ben Bernanke and his band of merry money printers have bastardized our free market capitalist system with their manipulation of interest rates to enrich their benefactor banker class. By artificially driving down interest rates to below the rate of inflation they have created a bond bubble. By confiscating the wealth of savers through these negative real interest rates and providing free money to the Wall Street shyster class, they are also creating a stock market bubble. They are also trying to reinflate a housing bubble through foreclosure manipulation and Wall Street investor money forcing prices higher by creating an artificial lack of supply.

I agree with David Rosenberg. The bond bubble and the growing stock bubble are tied together and will likely implode simultaneously when Bernanke successfully ignites his desired inflation or his efforts fail and we fall into a deeper recession. Federal Express reported absolutely horrific results this morning, with their profits plunging by 31%. Do the earnings of the biggest freight carrier in the world plunge when the economy is growing?

We are clearly in a worldwide recession, despite the propaganda being spewed by the MSM. The bankers are coming for your cash. Bernanke is already absconding with 3% of it per year through his Fed created inflation. Stocks and bonds are priced for negative real returns over the next ten years. Cash under your matress or converted into gold and silver or guns and bullets is the best investment at this time.          

Bond crash dead ahead: tick, tick … boom!

Commentary: ‘Investors have no idea what’s about to happen’

By Paul B. Farrell, MarketWatch

SAN LUIS OBISPO, Calif. (MarketWatch) – InvestmentNews latest cover is so powerful you can actually hear sirens atop a flashing neon billboard, megawarning in huge bold type: “Tick, Tick … Boom!”

A warning: InvestmentNews wants to make damn sure its readers, the 90,000 professional financial advisers who rely on timeliness and accuracy of every INews forecast: “What will your clients’ portfolios look like when the bond bomb goes off?” Get it? Not if but when it happens.

Yes, they do expect the bond bomb to explode and are publishing “a special report on the impending crisis in the bond market.”

Yes, you heard them. “Tick, Tick … Boom!” Wake up, it’s an “impending crisis,” dead ahead. And to punctuate their message, InvestmentNews added an alarming photo of an alarm clock with huge bells, wired to rolled up bonds looking like a stack of dynamite sticks. “Tick, Tick … Boom!”

InvestmentNews is not staffed by a bunch of not alarmists, quite the opposite — conservative, trustworthy and methodical. They know the 90,000 registered investment advisers that rely on them are in turn responsible for advising millions of Americans and managing trillions of retirement assets. Yes, their audience demands reliable forecasts.

So listen closely, we’ll summarize Andrew Osterland’s lead article “Fear Rising With Rates,” along with an interview with Bond King Bill Gross. And INews editorials on “repositioning client money” with “strategies for rising rates.” And a couple of opposing portfolio suggestions: “The case for, and against, stocks.”

The Bull says we’re on “the verge of an even bigger run-up. The bear warns, if you “goal is to avoid losses, stay out of equities altogether.”

Either way, the INews report reads like a Stephen King horror story, and in the background, you hear the ticking … ticking … louder … louder … Boom!”

Bond bubble, dangerous, big, doubled last four years

Since the crash four years ago investors have been wary of stocks and have been putting their money in bond mutual funds. INew’s interview with Gross noted that “assets in bond mutual funds have more than doubled to over $2 trillion.”

Gross reiterated Pimco’s “New Normal” warning: “The future for bonds is a lower-return future than investors have come to assume. Bond investors should be expecting 2% to 3% returns over the future years … bond returns will be lower than expected, but … still better than cash and will provide positive returns.”

Interesting that Gross also warned while interest rates will go up 10-15 basis points annually, “a big spike in interest rates is certainly a worry for bonds, but it wouldn’t be friendly for stocks, either.”

Latest stock bubble even more deceptive, more deadly

Over at Bloomberg BusinessWeek, Peter Coy also picked up on the “imbalance between the Dow and the economy … Bond yields are so low that savers who used to keep their money in, say, Treasurys are being driven into the stock market in search of positive returns. They have no choice.”

Then he borrows economist Roger Farmer’s metaphor of “two staggering drunks connected by a long rope. Sometimes the stock market and the economy go in the same direction, sometimes not. But … it won’t go on forever.” The party will soon be over.

Why? Coy highlights the no-win scenarios of economist David Rosenberg: “If the economy slips into recession, even the Fed won’t be able to keep the market aloft. On the other hand, if the economy finally catches fire, investors will conclude that the Fed’s extreme unction will eventually be withdrawn. They’ll sell bonds in anticipation, driving up interest rates and possibly pushing down stocks.”

It gets worse. Rosenberg doesn’t like what’s dead ahead: “His worry is simply that no one else is particularly worried — that the stock market’s rise has been so steady, calm, and untroubled” and nobody seems concerned.

Which reminds him that “stock market volatility is back to the lows of 2006 and 2007 (right before, ahem, the biggest crisis since the Depression). Says Rosenberg: “If there’s a bubble right now, it’s in complacency.” Investors are in for a rude awakening.

Warning: ‘Investors have no idea about what’s about to happen’

Why are investors complacent? Why? Because “the public thinks bonds are safe, but they’re not … Bonds are a big problem, and most people don’t understand that yet,” said Harry Clark, chief executive of Clark Capital Management.” Deep inside, the public has a vivid memory of the $10 trillion market cap lost on Wall Street in the 2008 collapse. But after four years of being lulled into feeling safe in bonds, “they have no idea what’s about to happen to them.”

Listen to the warnings. Start planning now. You have no excuse. Something big is “about to happen” and you are not going to like it.

Fortunately for investors, InvestmentNews’ Osterland also couldn’t be more blunt: “Fear among financial advisers of a bond-market crash that could devastate the portfolios of millions of investors is growing amid improving economic news and rising U.S. bond yields,” as he also sees the “imbalance between the Dow and the economy” that BusinessWeek warns “won’t go on forever.”

But what’s really scary is not just rates going up, or bonds down, or stocks hitting a bear patch, or the economy stalling. No, what’s really scary is that investors are complacent, clueless, just don’t get it. As a result, when the ticking time bombs go off (not just the bond bomb and the rate bomb, but the stock bomb and the economy bomb) the volatility will go into a wild ride like a roller coaster that will trigger panic selling, even a full-blown crash, repeating the 2008 disaster.

“Buyer beware. There’s a big yellow sign saying, ‘Caution ahead.’ It’s not going to be pleasant when rates go up,” said David Sherman, president of Cohanzick Management.” In fact, downright insane, if you remember the last crash.

Market’s already turned … even brokers see worst-case scenario

InvestmentNews even added a warning from FINRA, the chief regulator of the brokerage industry: “Last month, the Financial Industry Regulatory Authority Inc. took the unusual step of issuing an investor alert about the vulnerability of bonds and bond funds.”

Many economists believe that interest rates are not likely to get much lower and will eventually rise. If that is true, then outstanding bonds, particularly those with a low interest rate and high duration, may experience significant price drops as interest rates rise along the way.”

Get it? “Significant” interest rate increases … bond price crashing … rippling through the stock market, and the global economy. Investors have been lulled into complacency by Ben Bernanke’s long cheap money policy.

Warning, wake up plan ahead … your complacency, everyone’s complacency will soon end with a shock when rates jump … but by then it may be too late to plan ahead, because it will right here, right now.

Do the ticking math … tick … tick … tick … boom!

Osterland relies on some solid numbers to make his point that the market’s turning has already begun and will spiral down and out of control: “The yield on the 10-year Treasury bond, just under 2%, is up more than 35% from the record low in July. Investors are almost certainly going to see negative real returns on their Treasury portfolios in the first quarter, a rare event that many feel has the potential to trigger a wider selloff in the market.”

And adding to the selloff risk, we’re coming into federal tax season and a couple more debt ceiling cliffs: “With the Federal Reserve keeping short-term rates near zero and long-term rates near historic lows with its bond-buying program, there’s little room for further price appreciation. That means … interest rates have nowhere to go but up.”

And unfortunately, he warns that “a rapid rise in interest rates would bludgeon many existing bond portfolios. Simple bond math holds that a 1-percentage-point rise in interest rates would result in a roughly 1% decline in prices for every year of a bond’s duration.” Yes, “bludgeon” your portfolio once rates start ratcheting up.

InvestmentNews takes its responsibility to America’s 90,000 professional financial advisers seriously and in this “Special Report: Tick, Tick … Boom!” it’s painfully clear it sees enormous danger ahead for a millions of complacent investors who “have no idea what’s about to happen to them. … Tick … Tick … Boom!”

 
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