Recessions & Crashes: Memories & Lessons

[winston]

What Exactly Is a Black Swan, Anyway?

By Charles Sizemore

There is near universal agreement that the Brexit – and the walloping it gave the market – was a black swan event. But actually defining what a black swan is can be a challenge.

I thought to mention this today because everyone and their dog has been throwing the term around like candy lately, and they seem to have the wrong idea of what it actually is. So let’s clear this up right now…

A black swan event is NOT a market crash… or something else generally bad. This seems to be the general consensus. Instead, a black swan is simply an event that no one saw coming… that also has a large, outsized impact.

Yet most investors equate a black swan with a market crash. But that’s putting the cart before the horse. The market crash is what happens because of a black swan.

A meteor falling out of the sky and hitting your house would be a black swan event. But so would an inheritance check for a million dollars from an aunt you never knew you had. Both would be completely unexpected… and both would have major impacts on your life.

Trader, Professor and financial writer Nassim Nicholas Taleb made “black swan” a household word (at least in households that regularly debate financial topics… like mine) and gave it its current meaning. But the expression has been around a lot longer…

The first recorded use of black swan as this kind of metaphor dates to the Roman Empire, and it was a common expression in 1500's London.

Until 1636 – when European exploration of Australia was underway – all swans were presumed to be white. No one had ever seen a black swan, so it was presumed that none existed.

The black swan is an example of the problem of induction, or trying to draw general conclusions from specific observations. In plain English, seeing a thousand white swans and not a single black swan doesn’t “prove” that no black swans exist. And just because something has never happened before doesn’t mean it can never happen.

Up until March of 2000, it was popularly believed to be impossible for a tornado to hit a major, urban area. The thinking was that the skyscrapers affected the wind patterns in such a way as to make a tornado touchdown impossible.

Well, on March 28, 2000, an F3 tornado touched down on downtown Fort Worth’s Main Street and proceeded to obliterate one of the largest skyscrapers in the city. (I was living in Fort Worth at the time, and distinctly remember cowering in the basement of the building I was in…)

Just because it’s never happened, doesn’t mean it can’t…

In black swans of the financial variety, Taleb says you need to have three conditions in place:
1. The event must be a surprise, or a “statistical outlier” in finance-speak.
2. It must have an extreme impact.
3. And despite it being unpredictable, once it’s happened we spin a story that makes it seem completely predictable in hindsight.

No country has ever left the European Union… and no opinion poll or betting market suggested it was possible. So the financial markets assumed a UK vote to leave to be impossible.

Only, it turned out to be entirely possible and the impact was definitely outsized. No one knew at the time – or knows now – what the full impact of Brexit will be once all is said and done. And as for the narrative, after the fact it became “obvious” that Brexit would happen because of the dissatisfaction of older, blue-collar British voters, the rise of Donald Trump in America or any number of other reasons.

So, Brexit does indeed make the cut as a black swan… just not for the reasons many media pundits have been touting!

All of this is fine and good, but if black swans are always unpredictable and obvious only after the fact… what’s the point of even talking about them?

The thing is, even if you can’t anticipate individual black swans, you can definitely take a few simple steps to “black swan proof” your portfolio… or at least come close.

First, don’t make the assumption that something can’t happen simply because it hasn’t happened yet. Don’t be overconfident based on your limited observations.

Second, always have a little portfolio insurance. That can mean different things to different investors, but as a general rule it means you should have a few assets in your portfolio that zig when the market zags. Taleb himself made enough money in a single day to walk away from Wall Street forever. He was “long volatility” on the day of the 1987 stock market crash, and scooped up millions when the market cratered.

Finally, beware of debt. Excessive debt has been the death of many a good trader. The people who ran Long-Term Capital Management were geniuses. They were quite literally the men who wrote the books on quantitative finance, a who’s who list of brilliant academics.

And in 1998, their hedge fund blew up in spectacular fashion when a black swan hit. Russia defaulted on its debts, which was something no one expected. It caused investors to dump everything related to emerging markets and run for the hills.


Source: Boom & Bust

[winston]

Lessons from the worst banking crisis in history

By Tim Price

It’s ironic that some of the most honest words to come out of a politician’s mouth were, “When it becomes serious you have to lie.”

That was a quote from Jean-Claude Juncker, former Prime Minister of Luxembourg and President of the European Commission (the EU’s executive branch) in 2011 when asked about Greece’s financial crisis.

This raises a very reliable rule of thumb to keep in mind during (and before) a banking crisis: don’t trust anyone in the establishment, especially a politician.

“In the summer of 1982, large American banks lost close to all their past earnings (cumulatively), about everything they ever made in the history of American banking – everything.”

“What we at the New York Fed had to do was arrange for all the foreign banks to keep credit lines open to the American banks, knowing fully well that all these American banks were actually bankrupt.

“And we also could not tell the outside world about the situation because if you go out and say ‘American banks are bankrupt’ – the next day they will be bankrupt.

“And so we had to come up with these stories that ‘well, there are some Latin American problems, but they’re all good debt, not bad debt’. . .

“So by keeping this myth going, that everything is fine.. we had to do that for a very long time..”

Source: Sovereign Man

http://www.thetradingreport.com/2016/07 ... n-history/

[winston]

One Thing to Never Do When the Stock Market Goes Down

By Shoshanna Delventhal

Source: Investopedia

http://www.investopedia.com/articles/in ... z4EvktvXEy

[winston]

The Other Side of the Big Short

Munger is essentially saying that yes, you can make a lot of money shorting the market but in the end, it is the hardworking American taxpayers money that you take and that’s not the best way of making money.

“if you had made a lot of money through shorting the market using CDS, you will probably keep looking for the next big short opportunity.”

John Paulson (Trades, Portfolio), who was relatively unknown prior to the financial crisis and managed a small hedge fund, became famous after he made billions of dollars shorting the housing market.

But after 2008, Paulson’s performance has been very poor.

Human nature is such that you seek patterns that confirm to the prior successful experiences, especially the ones that have rewarded you handsomely.

You could be lucky and you could be right “once and for all.” I think this is especially true investing in previous metal, energy, commodity, retail, technology, casino and industrial stocks.

Munger’s lessons are clear and deep:
1. There are many ways to make money and you want to make yours in honorable ways.
2. Stay alert of unjustified pattern seeking behaviors.

Source: Guru Focus

http://www.thetradingreport.com/2016/07 ... big-short/

[winston]

The Secret to the Secret (of Big Profits)

by Keith Fitz-Gerald

History Shows the Biggest and Most Expensive Risk Is Sitting Out

What does happen, though, is that growth continues.

It may slow but it will never stop, which means that the only way you’ll capture that is…

By investing.

Get “in” to win.

Source: Total Wealth Research

http://totalwealthresearch.com/2016/08/ ... /#deeplink

[winston]

What You Should Know About The Last Three Bear Markets

Investors need to answer these 2 key questions to understand the markets

By Gary Gordon

Earnings per share (EPS) for the S&P 500 for Q2 came in at $87 over share. Those results are no better than the EPS data from four years earlier. Worse yet, the $87 GAAP-based earnings are 18% lower than the $106 reached in Q3 of 2014.

Now look at the price-to-earnings (P/E) ratio chart below.

For the better part of three years (circa 2013 -2016), the traditional metric held relatively stable between 18x-21x previous 12 months earnings. Since the start of 2015 roughly 20 months ago, however, P/Es have literally catapulted up to 25.2.

As far as putting the much-maligned valuation tool into perspective, a TTM P/E of 25.2 is higher than approximately 90% of previous bull market tops.

Many optimists have tried (in vein) to push the notion that there are other measures that indicate a fairly valued equity environment. A dividend yield that is higher than the 10-year treasury, for example.

The dividend yield from corporations was higher than the 10-year treasury for the bulk of the low rate environment after the Great Depression (1936-1955). That alone did little to arrest four harsh bears from occurring in 1937-1938 (-49.1%), 1938-1939 (-23.3%), 1939-1942 (-40.4%), and 1946-1947 (-23.2%).

The real questions are:
(1) How long will corporate stock buybacks support equity prices and
(2) How long will central bank manipulation support asset prices.

Gross buybacks by S&P 500 corporations declined 15% in Q2. Even more troubling perhaps? The 3rd quarter (July-September) appears to worse off than Q2 or Q1 or the prior 3rd quarter.

The Fed lowered its overnight lending rate 500 basis points (five percentage points) from 8% to 3% to stimulate economic activity in the 1990s. It did not prevent a recession; it did not prevent the 21% price depreciation in equities.

The Fed dropped overnight lending rate 500 basis points (five percentage points) from approximately 6% to 1% to stimulate economic activity in the early 2000s. It did not head off the economic contraction or the dot-com collapse or the 80% price evisceration on the NASDAQ. It did not keep the S&P 500 from losing 50% over an agonizing two-year, nine month period either. (N

The Federal Reserve next lowered its Fed Funds rate 500 basis points (five percentage points) from the 5% level to 0% at an attempt to escape the Great Recession in 2008-09.

It was not enough.

Source: Pacific Park Financial

http://investorplace.com/2016/09/here-i ... 8tpnph96M8

[winston]

The Bubble Burst You Didn’t See Coming

By Harry S. Dent Jr.

I keep saying that in the next great crash, everything will get swept up in the onslaught – with virtually no exceptions.

And that goes too for what we eat!

The 30-Year Commodity Cycle peaked in mid-2008 and has been the first major bubble to crash and burn.

The CRB (Commodity) Index has been down as low as 67%, with the potential for 74% or lower in the next few years.

Among individual commodities, oil has been down as much as 82% in early 2016. It looks set to revisit its late 2011 low – $18, or down 88%. And meanwhile, iron ore and steel have been down 76% with a potential for 88%.

That all goes without saying. When my Commodity Cycle turns down, these are all likely to follow. And the commodity bubble proves that when bubbles burst, they don’t just correct in a gentlemanly manner – they crash and burn so that the downside is more like 80%, not 50% as in more normal, long-term corrections.

That said… I would have thought the last thing people would do in tough times is eat less!

The biggest surprise in the commodity crash to me has been that even agricultural commodities like corn have crashed. It’s down 62% with a potential for 70%-plus.

Look at the chart on corn:

It’s dropped from a high of $832 in late 2012 to $318 recently!

Corn is literally everywhere. It goes in animal feed. It’s in our processed food. Cornstarch, corn syrup, ethanol… it’s everywhere. And it’s down across the board. Wheat has also fallen 61% and soybeans are down 52%.

But here’s the kicker…

You’d think with all these grains down so badly that the land they’re made on would be down as well.

But the thing is, they’re not…

Yet.

Farmland is still near its highs in many areas. In states like Indiana, Illinois and Ohio, farmland prices are still strong due to the upward pressure of suburban sprawl.

But the one state that has little suburban sprawl is Iowa, and corn is its biggest crop by far. I would know – I’ve been there several times. It seems to have more corn than people and produces more of it than most countries!

For that reason, it’s the purest state to get a feel for the farmland bubble. And the forecast isn’t pretty:

See larger image

Farmland there has only fallen about 12% so far. It peaked shortly after corn in early 2013 at $8,716 per acre.

But before all’s said and done, I could see Iowa farmland crashing 63% when it bottoms out around early 2023. In general, real estate tends to fall back 85% towards its Bubble Origin as opposed to 100% in stocks and commodities.

And believe me – farmland will catch up to corn and continually lower agriculture prices in general. Whereas stocks typically crash in half the time it took for the bubble to build, commodities and real estate tend to take just as long to crash as they do to build. But the coming second and broader real estate crash will likely be what drives it over the ledge.

It’s what I’ve been saying for years: given enough time, bubbles always burst. Still, when I warn that major bubbles will crash some 63% – or more like 80% in most cases – people act like it just isn’t possible.

It’s simply because most people don’t understand bubbles! And that’s why I’ve written a new book on them.

This new book – The Sale of a Lifetime – is dedicated to documenting and explaining bubbles so there’s no excuse for being blindsided by them when they burst.

And bubbles. Always. Burst.

In the case of farmland, the chart above shows that there was indeed a bubble that took 10 years to build from early 2013. It wasn’t as steep as most residential bubbles around the world and only had a bubble intensity of 0.38 – more average for a real estate bubble.

But still high enough to trigger a 63% crash.

Again, this particular bubble peaked in early 2013. Since it took 10 years to build, it’ll take another 10 or so to burst – meaning we’ve still got about six or seven years to go with this one!

And you heard it here first!

The whole point of my new book is that bubbles are not black swan events. They are, in fact, highly predictable. Farmland may hold up a bit better than commercial and residential real estate, but it’s going down with everything else.

Once it does, farmers and investors should look for “the sale of a lifetime” in farmland around early 2023, and possibly earlier.

Source: Economy and Markets

[winston]

How Many Times Do I Have to Say It…
Bubbles Don’t Correct, They Burst!

By Harry S. Dent Jr.

I keep going on the media and saying that we’re going to see the greatest bubble burst in modern history, after the greatest bubbles in history have clearly formed…

But everyone says this is not a bubble…

Because the central banks will keep supporting the economy and markets with more free money…

Because real estate is in tight supply and can only go up…

Because there is nowhere else to go but high-dividend stocks…

And because sovereign bond yields are going to negative, not just zero.

This is absolute BS!

Nothing lasts forever. You don’t get something for nothing, and that’s exactly what the central banks have created since late 2008 with their endless money printing and zero interest rate policies (which are now pushing desperately into negative territory) – neither of which has ever happened in history.

Doesn’t such desperation in policies make you wonder how weak the actual economy would be without such massive and never-ending stimulus?

The markets are so blind with free money and highly leveraged carry trades into bonds and stocks that they just don’t care about fundamentals anymore!

Earnings have been declining since late 2014, according to real GAAP or accounting standards. They have been declining for over three quarters even on the “funny money” standards… the ones that don’t count one-time losses, even though they keep occurring!

Productivity has been declining for years and is near zero. GDP has declined to just under 1% adjusted for inflation over the last three quarters… if it’s not actually lower.And the average wage has been declining since early 2000 and is close to what it was back in the early 1970s. No wonder the middle and lower-middle classes are pissed and supporting Trump and Sanders.

We’re already heading into a recession, if we’re not already in one. But the stock market is ignoring this because there’s simply nowhere else to go, as programmed by the Fed and central banks…

Just think – last Friday the Dow was off by nearly 400 points because one Fed governor said they might raise rates by a quarter frickin’ point in the coming months?

This is ridiculous!

It’s lemmings hurtling right over a cliff.

Do you want to be a sheep and follow the rest of these morons? Or do you want to preserve your wealth and have the unprecedented opportunity to cash in on The Sale of a Lifetime?

And if you don’t think bubbles can burst 80% or more in a matter of years, look at the commodity bubble that we predicted would burst many years back. Everything from oil to iron ore to corn to the general CRB Index is down 70% to 80%, with a bit more to come.

See larger image

The commodity bubble proves that bubbles burst and don’t just correct.

And as it was the first to fall over the cliff… it may also be the first opportunity to reinvest in the years ahead…

Again, the sale of a lifetime is ahead if you preserve your wealth… and even grow it with our investment systems that have proven track records in both boom and bust periods.

After commodities, stocks will once again become a buy… and so will real estate.

But “buy and hold” has been dead since late 2007. It won’t be a safe bet until at least early 2020, and likely late 2022 in the next global boom – but that will be concentrated more in emerging countries like India and Southeast Asia, while the U.S. will still tend to be the “best house in a bad neighborhood” of slowing demographics and debt deleveraging.

Don’t listen to the never-ending army of pundits that are defending this bubble. It is the greatest, most pervasive, and most perverse in modern history, and it will destroy your wealth faster than you can imagine when it finally bursts – especially into late 2019/early 2020 when all four of my longer-term cycles bottom together.

Source: Economy & Markets

[winston]

A Powerful Crash & Recession Indicator Says: “Extreme Danger” from 2017 into 2019

By Harry S. Dent Jr.

When it comes to spotting danger periods for recessions, and especially major crashes, the Boom/Bust Cycle lets us see when stock crashes and recessions are most likely to occur.

As my fourth key macroeconomic cycle, this makes it the most important one I have innovated since the Generational Spending Wave in 1988.

It explains why Ned Davis’ Decennial Cycle failed in 2010-2012, and why his cycle is more variable than clock-like. And right now it’s flashing a warning sign of extreme danger into 2019!

What gives this cycle an edge is that it’s based on sunspot activity, and scientists have measured this accurately since the mid-1700s. As such, they can now project it fairly accurately, as you can see for yourself in this first chart…

See larger image

Dave Okenquist, my research analyst, found data on recessions back to 1850 and added the grey shadings to indicate these on the chart. That shows us that 88% of such recessions occurred in the downward leg of this Boom/Bust Sunspot Cycle.

That’s an astounding and irrefutable correlation!

Anyone who thinks this is too weird to pay attention to does so at their own expense.

In the last Boom/Bust Sunspot Cycle, we experienced the tech crash from right at the top in March 2000 into October 2002, exactly within the first three years of the downward trend – as Ned Davis’ cycle would have predicted.

Then we had the 2008/09 crash and great recession right into the cycle’s bottom in August of 2009. That’s not something Davis’ cycle would have predicted.

How’s that for a forecasting tool?

The most recent cycle was the most extreme in hundreds of years. It stretched out to 13.9 years instead of the average 10! It only peaked and began to turn down in February 2014, not the more typical early decade setback we’ve seen in the past since the 1960s.

Now, look at this table. It lists the major financial crashes, crises and depressions as they correlate with downturns in sunspot cycles all the way back to the early 1800s.

See larger image

That’s 11 out of 11 major financial crises right over two decades – a 100% batting average!

So what does the current cycle say?

It tells us that the greatest danger zone is right ahead, from 2017 into early 2020!

Andy Pancholi of markettimingreport.com will be speaking at our IES conference on October 20-22. In addition to his near-term turning point models, he saw major connections with longer-term crashes, like the one we saw in 2008. He sees this happening again in 2017 and 2019. This adds weight to the warning that the worst is just ahead.

Central banks are fighting this tooth and nail and they may just succeed in delaying a crash a bit longer. But despite such extreme efforts, the markets have gone nowhere since late 2014, shortly after this Sunspot Cycle turned down. Passive investors would be silly to risk staying in this market.

The best scientists are my secret weapon here and they project that this Sunspot Cycle bottoms around late 2019/early 2020 (investors who still follow Ned Davis’ Decennial Cycle will likely continue to be way off track on this).

In short: all four of my powerful macroeconomic cycles point down together into early 2020.

The most critical demographic cycle doesn’t turn back up until late 2022 forward. But the Geopolitical Cycle and Boom/Bust Sunspot Cycle both turn up around early 2020. Each one represents the most comprehensive, but still simple, view of the dimensions that shape our economy over time, giving you a window into future years.

And what they’re all saying is that we’ll soon see the sale of a lifetime, when stocks, real estate, businesses, and even gold will be going for pennies on the dollar… and where those who understand what and why it’s happening can take advantage!

Source: Economy & Markets

[winston]

Black Monday Revisited: Lessons From 29 Years of Market History

Here are some key lessons from this history:

1. It is incredibly important to focus on secular trends and potentially detrimental to trade on short-term price action, even more so at important turning points in financial markets.

2. Using bonds to protect against equity market losses is neither a new fad nor a result of quantitative easing policies, which were not implemented in the aftermath of Black Monday. (However, there may well come a time when the negative correlation between stocks and bonds becomes less stable, and even flirts with positive territory – e.g., when deflation fighting turns into inflation fighting. That’s one of several reasons for actively managing portfolios across asset classes.)

3. It is instructive that faced with a momentous event like the 1987 stock market crash, the Federal Reserve eased policy by only around 100 bps. It left the heavy lifting to the bond market, which rallied 200 bps, and the foreign exchange market, which pushed the dollar down by about 10%.

Contrast that with today’s policy and market environment where most of the work seems to be done directly or indirectly by the central banks.

Source: PIMCO

http://blog.pimco.com/2016/10/26/black- ... t-history/