Thursday, October 15, 2015

Our Non-Linear World Has Fooled The Best And The Brightest........DO NOT MISS THIS!

Our Non-Linear World Has Fooled The Best And The Brightest

More likely they have given in to their greed.

A few short weeks ago, Canada's self-proclaimed biggest and best bank told clients: "much of the negative news from Europe is firmly rooted in the past" and that there is "more potential for upside for markets."

Result: European Stocks subsequently declined -13.5%

America's biggest and best bank bragged: "global developed market equities should remain attractive".

Result: Global Stocks subsequently declined -11.3%

Britain's biggest and best bank was optimistic on markets, proclaiming: "Economic growth is gaining momentum" and "overall, we continue to prefer risk assets such as equities, high yield credit and EM debt."

Result: Global stocks subsequently declined -11.3%, High Yield Bonds subsequently declined -4.7%, and Emerging Market Debt subsequently declined -3.2%

By now, most people are once again painfully aware that stocks, high yield bonds and emerging market bonds can actually go down as well as up. For stock investors, it has been a brutal 5 weeks.

As a reminder, a -10% decline needs a +11.1% rebound to get back to where you started. Or from a more serious perspective, a -50% decline needs a +100% rebound to get back to where you started.

These very simple and obvious mathematical facts is due to the following intelligent investment insight: avoiding and limiting downside losses is a crucial aspect of investment management.

Yet, as you can see from the market wisdom from the biggest Canadian, American and British banks – they completely ignore this very simple rule of investing.

Instead, millions of investors are constantly bombarded with the seemingly innocuous market wisdoms:

Buy the dip
Invest for the long term
Know your time horizon
Invest regularly

This is a real shame – a very, real shame. There certainly are times when these are words of wisdom. But, there are also times when they are not.

Global financial markets, the global economy and government fiscal balances are all converging to make everyone's investment experience very different than that painted by the very big banks and investment managers.

Yet, the big banks continue to shamefully respond as if all is well. Considering the fact that central banks have kept interest rates at 0% for 7 years and the global economy continues to decline is the clearest of clear messages that the financial World isn't quite right.

And now many countries have begun to implement NEGATIVE interest rates to help stimulate their economies.

Yet, we rarely read or hear any of these facts from the big banks. 

This of course can mean several things – none of which are complimentary:

1 – the big banks feel the average investor isn't intelligent enough to understand what is happening

2 – the big banks cannot honestly 
articulate the true state of the money World to their millions of clients

3 – the big banks truly believe all is well, and that the World will always see a few bumps every now and then.

As we all know, investment managers will ALWAYS make a few wrong decisions – it's inevitable.

Investment professionals around the World are following the age-old adage of buy and hold, buy the dip, stocks always outperform bonds, and never invest in currencies.

Just steer the course and you'll be fine, just fine.

Unless of course, the ship you are in doesn't have a rudder, a mast, a jib, a boom, a tiller or a keel. In truth, these folks are not really investment managers at all, instead they are asset gatherers.

The difference being is that real investment managers are very focused on making investment decisions to preserve your capital during volatile times, while growing your capital during the good times.

Asset gatherers on the other hand, are very focused on winning new clients and receiving new money to manage – after all, investment management IS a business.

At these firms, the focus is on marketing and sales. They razzle and dazzle you with very nice commercials, brochures and presentations, as well as a splendid array of investment options.

Yet, if you open your eyes and ears just enough, you'll notice the difference and it mainly starts with investing for the long-term, buy and hold, and invest regularly – sadly, it ends the same way as well.

In other words – investors hear the same old story, time and time again. This would be perfectly acceptable IF we lived in a linear World. The problem of course is that we DO NOT live in a linear World.

While it is human nature to think and expect along linear lines, our World just doesn't work that way. Instead, everything moves in cycles, some short and shallow, while other cycles are long and deep.

What we are experiencing today is the likely turning point in a very long cycle of borrowing, borrowing and then borrowing some more.

The capacity to borrow has reached the limit, yet our governments and central banks are desperate to keep the party going.

The real difference between the investment managers and asset gatherers is in their ability to truly understand market conditions, identify the key driving points, reposition your strategies and then to easily communicate the entire process.

Let's be honest here – the calm sailing and the good times ended in March 2000. That was the end of the most beautiful simultaneous bull market in both stocks and bonds ever known to mankind.

For 18 stunning years prior to March 2000, financial markets everywhere, charmed everyone into believing that life as an investment manager was as difficult as a sail into a gentle, onshore breeze.

And considering markets produced an average annual return of +15%, how could anyone not be happy?

This was the way life should be.

However, since March 2000, stocks plummeted -50%, then soared +100%, then crashed -56%, only to zoom +215%.

So since March 2000, 16 years of buying the dip, investing for the long-term, knowing your time horizon, diversifying your portfolio, and investing regularly netted you a handsome annual return of +2%.

So which is it? Do you expect stocks to always perform like they did from 1982 to 2000? Or, do you expect stocks to perform like they did from 2000 to 2015?

Judging by their investment commentary, the big banks obviously believe in the 80-90s era. In reality however, the big banks believe in gathering your assets, and investing for the long-term, buying the dip...

Have no doubt about it – our economy and our debt loads have created a very uncomfortable environment for those in governments and central banks.

Today, we have 3 enormously important market drivers steam rolling towards each other and when they collide, the distortions will be leave everyone dazed, confused, asking questions – and demanding answers.

Sadly, the answers will be completely unsatisfying entirely due to an industry focused on linear thinking and obsessed with gathering assets. 

Fortunately, the key to understanding why the World has reached a precarious point in time is actually quite easy to achieve – just shed your mind of your tunnel visions and linear thinking, and open it to a World that is crystal clear.

For starters, knowing and accepting that every market, every economy, and every society is interconnected will allow you to understand the events that are unfolding around us.

Next, ignore the drivel from the talking heads and asset gathering machines. 

Then, know that every single time our World has experienced an economic bump, our governments and centrals always responded by:

1) Borrowing more money to spend on special projects

2) Cutting interest rates to make it cheaper for individuals and companies to borrow

The result of 1) and 2) should be more money pumped into our economies, but that is not what is happening now.

Over 60 years of excessive borrowing and 35 years of cutting interest rates has left us with the mess we have today:

1) Excessive debt loads for practically EVERY country

2) ZERO and NEGATIVE interest rates

Mathematics always trumps optimism and pessimism too for that matter. Unfortunately, today's market cycle - has the World sliding downwards and not upwards.


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