Tuesday, June 22, 2010

Seasonally adjusted thinking

Farmers know how things work: they plant in spring and harvest in fall. Their business is in sync with nature’s cycles. If modern central bankers could do the same, we wouldn’t need to have G8 or G20 Economic Summits to save the world.

Modern economies work in cycles, just like nature’s seasons. There are times of expansion, when economies run smoothly; and there are times of economic contraction, when financial things get rough. Classic theory calls for governments to stimulate economies when things are rough in hopes of smoothing them out. And we all know that stimulating an economy costs money. Governments are supposed to recoup those costs in the good times. They are supposed to sow (stimulate the economy by lowering interest rates and increasing government spending) in weak economic times and harvest in the good times. (Harvest means increase taxes and pay off government debt.) And if they consistently did this, there would be no need for a massive meeting in Toronto this week.

Why can’t they get it right? Why were crazy European bankers and American mortgage companies allowed to blow up the world’s economies in 2007 and 2008? Why did the world’s taxpayers get bagged for billions of bail-out bucks in 2008-9? And why will this G8 – G20 meeting resolve to recoup those billions now, before the world’s economies move from the rough times to the smooth times? Why can’t they be like farmers and line up their G8 – G20 business with the natural cycles of the economy?

It’s because of the law of cause and effect.

In nature, the interaction between the earth and the sun causes the seasons. We human beings found nature’s cycle and lined up our agricultural activities with hers. Human beings have been doing this for millennia because we can objectively observe nature’s cycle.

The economic seasons are not as easy for us to objectively observe. That’s because we human beings are both the cause and the effect of economic cycles. It is our collective activity that makes up the economic cycle. When masses of people borrow money and buy things, that causes economic expansion. And when we all stop buying and pay off our loans, that causes a recession. We cause the cycles. What makes people borrow money and buy things? Desire for nice things the confidence that we can pay back the loans. And what makes us stop buying things and pay off our loans? Fear that we can’t pay off our debts and will lose what we have. Confidence and fear: desire to have things and fear of losing what we have. It’s difficult for most of us to be objective about our own desires and fears.

That’s what went wrong in the earlier part of this century: normal desire turned into greed. Bankers and mortgage lenders wanted bigger and bigger bonus’s. The sellers and manufacturers of things kept up the advertising pressure. Consumers became addicted to buying nice things. (Remember the slogan: shop ‘til you drop?) The western world went into a consumers’ feeding frenzy and the business world kept right on feeding it. Normal desire for a reasonable life became greed for more and more. Look in your basement and in your garage. Are they full of “stuff” you no longer use? Check your neighbour’s basement and garage. More stuff? That’s what went wrong. Collectively we bought too much stuff and borrowed too much money.

And this week the G8 – G20 Economic Summit will try to sort all that out. In order to create economic spring time, they’ll need to inspire confidence in ordinary working people. Can they persuade the public it’s safe to keep on buying and keep on borrowing, but within reason? Tough job.

What’s emerging from the series of G8 – G20 meetings since 2008 is this:
1. Blaming the banks. Increased regulation and taxes for the banks
2. Preserving the status quo: even though the big financial corporations have failed, we must preserve the system in its current form.
3. Bail outs are OK. Shifting of economic risk from the big institutions to the citizens/governments is OK.
4. Ordinary citizens can trust the G8 – G20 to do the right thing and it will all work out.

What should we expect form the June 2010 World Economic Summit?
1. Regulation and taxation of the banks.
2. Assurance that the current system still works.
3. Austerity measures to help governments recoup what they lost in the bail-outs and stimulus deficits.
4. Statements by our leaders that everything is fine and they’ve reached a satisfactory compromise.

Farming wisdom is not part of the G8 – G20 mentality. Their job is to take credit when things go well, and to take credit for fixing things when they go wrong. The closest they ever come to farming is closing the barn door after the horse has left.

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).

Contact Ken directly at ken@castlemoore.com.

Tuesday, June 15, 2010

Group Think and Disastrous Leaks

British Petroleum’s disastrous oil leak in the Gulf is giving us a sinister example of how futile American group-think can be. George Orwell coined the phrase ‘group think’ in his classic book 1984. It was his sarcastic word for those times when we all think the same way, and we all get it wrong.

This horrible oil-rig accident is very serious: it’s a huge eco-disaster and it’s running out of control. There is no controversy about that. There is unanimity about getting it under control and stopping further damage.

What’s interesting is the American people’s group-think reaction. Somehow the people’s focus is turning toward President Obama; somehow the people seem to blame him. His popularity is dropping on the opinion poles for his failure to act. Or is it his failure to react? Or is it his failure to . . . to . . . ― “Well, we’re not quite sure what he should do, but he sure isn’t doing a very good job!” Isn’t it interesting how they seem to be blaming Mr. Obama for the oil-rig disaster?

And isn’t it interesting how President Obama feels the pressure of public group-think and has engaged BP’s management publicly, demanding that they do what they are already trying to do: namely, stop the disaster. And now, before the disaster is even under control, they’re talking about BP’s liability for the clean-up.

I am fascinated by the American public’s focus on the politicians. Surely they don’t really believe the President or the Senators and Congressmen can help. Or maybe they do. When Mr. Obama took control of the White House, the world was in the middle of a banking crisis. And by simply following the advice of his experts, he participated in saving the world from a banking calamity. Then, in the role of White Knight, he went on to chastise those banking leaders who caused the problem. And then he took several deep bows for his cool thinking under fire. He was so popular he was given the Nobel Peace Prize before he actually did anything.

Now the Gulf eco-disaster has placed his White Knight image in jeopardy: the president who can fix anything can’t fix this one. Nobody can fix it. Just as he took the credit for fixing the banking crisis, he is taking the blame for not fixing the oil-leak crisis. Group-think, American style: the president gets the credit for everything that goes well and gets blamed for everything that goes wrong. What interesting people our American cousins are. They love their heroes. And they love to despise their heroes when they disappoint.

Perhaps we Canadians can learn a lesson from them. In my book on investing Beyond the Bull, I put forth the idea of learning from others. Can we become better investors by learning from Americans’ impatience with their former heroes?

Remember the hero of the investment world in the 1990s? (Warren Buffet was only the icon.) The hero was your personal financial planner who became a financial White Knight leading us all on a crusade for personal wealth. All we had to do was buy the mutual funds he championed and hold them steadfastly until the End of Time. In financial Camelot, we would all retire rich and live happily ever after. I’m sure several Certified Wizards of Retirement Planning (CWRP) felt they should be nominated for a Nobel Prize.

But now it’s our stock market mutual fund investments that have blown up and are leaking our retirement savings. Have you noticed how equity mutual funds no longer advertise their ten-year returns? The stock market has become a retirement disaster for yesterday’s steadfast financial planners. Yesterday’s investment heroes have disappointed.

But we Canadians are different from Americans. They get disillusioned fast! We are slow to blame. They expect problems to be solved now! We will wait patiently and hope for things to get better. Americans criticize their president or fire their financial planners. We politely look the other way.

But my analogy doesn’t really work, does it? That oil well really is spewing black gunk into the Gulf’s rich waters and no White Knight has yet stopped it. But to stop the financial leak in our retirement plans, all we have to do is sell our stock market investments. It’s so easy. But financial group-think is hard to shake off when you’re part of the group. Maybe that’s why we Canadians are so patient with our investment disasters: we have no one to blame but ourselves.

Our advice? Invest in stock market mutual funds when the stock market is moving up. And when it’s not moving up, invest in something that is.

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com
(Bullmanship code SS32)

Contact Ken directly at ken@castlemoore.com.

Wednesday, June 9, 2010

Invest like an Israeli

Looks like Iran will be getting nuclear weapons. Today’s UN resolution levies sanctions against Iran unless they stop their relentless drive to become a nuclear power. Experts tell us the sanctions will not stop them: it’s just a matter of time until Iran’s Islamic fundamentalist government gets the bomb.

The United States has been adamant that Iran should not become a nuclear nation. But it appears the United Nations was less adamant, and the recent watered down UN sanctions against Iran reflect that lack of conviction. Iran will soon be a nuclear power. The Ayatollah will have the bomb. The concept of the car bomb takes on a whole new meaning.

How would you feel if you were an Israeli?

Most of us have no power in world politics. We are pawns. Collectively, the United Nations has made her move. And we pawns will learn to live with it. But the Israelis have a real problem. They can’t afford to be pawns and live with the build up of nuclear arms in the Arab world. They have to have attitude or they won’t survive. And as we see from last week’s news of potential arms smugglers trying to run the Israeli naval blockade of Palestine, they do have attitude. Israel is aggressive in the defense of her territory.

What can we learn from the Israelis? - Attitude!

Let me explain how attitude affects our investing.

Most of us have no power in world economics. In a few days the G-8 and G-20 nations will meet and take some sort of joint economic action. And we pawns will learn to live with whatever they collectively decide. And what will we learn? Does it really matter what they decide? We will have to live with it, no matter what. You see, nuclear war has already broken out in the financial world. In 2008 it was the banks that blew up. In 2009 it was the US auto manufacturers. In 2010 it’s several of Europe’s sovereign nations. G-8 governmental financiers are trying to repair the monetary world after the economic nukes have done their destructive work. And most of us are content to sit and watch.

In my book, Beyond the Bull, I urge investors to adapt the attitude of the financial warrior and abandon the sugar and spice world of bullish optimism.
Let’s not be like the na├»ve 1930s British Prime Minister Neville Chamberlain who tried to negotiate “peace in our time” with Adolph Hitler. Or the modern day pundits who advise dealing with Iran after she gets the bomb. Or today’s die-hard investors who have bought their equity mutual funds and will hold them no matter what.

It’s about attitude. Do I fight my own battles or do I simply follow the views of some economic guru or financial planner? When there’s danger, act decisively. We are not pawns in our own financial affairs. We do have power in our own worlds. Our opinions and decisions do make a difference in our own RRSPs and our own investment accounts. That’s where we can benefit from a little of that Israeli attitude. How should we act when our personal financial world is threatened by economic instability? Like the Israelis, we need to be aggressive in the defence of our territory.

Our advice is simple: sell your riskier investments and replace them with safer investments. We live in dangerous times.

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).

Contact Ken directly at ken@castlemoore.com.

Tuesday, June 8, 2010

Safety First: The June Economic Conference

Protection
The media is full of interesting articles about Canada’s preparations for the big G-8 economic summit we will be hosting later this month. Their angle zero’s in on the physical protection of VIP participants from attack by protesters and terrorists. The focus has been on the amount of money and inconvenience that security problems are causing. Some Toronto residents are upset because they will have to show passes to get in or out of the secure area. Others are amazed at the high cost of security for the few days of this conference. The police and military will cost a lot of money and they will cause some inconvenience to those who live in the area. But they will protect the G-8 participants from external attack by protesters or terrorists. Security is expensive and it’s inconvenient: and unfortunately, we need it.

But importance of G-8 security runs much deeper than its price tag. The whole purpose of this conference is to deal with another kind of security: economic security. The real story of the G-8 summit is a world economic system that needs protection. It has been shelled by an economic turn down and a banking system melt down. G-8 VIPs are all acting as if those problems have passed – but ordinary people know better. General Motors has not been saved because a few thousand people borrowed money and bought a new Chevy. And the financial system has not been saved because the taxpayers of the world poured a few billion into banking’s black hole. The world’s economic whiz kids will be meeting in Toronto to concoct new rules that will prevent the bank’s big bonus boys from blasting another hole in your retirement plans. They are hoping to protect us from a recession/depression and more big 2008-style losses in the stock market.

“Two out of Three Ain’t Bad”
So far we’ve talked about two levels of security: second line security is the G-8 conference participants trying to protect us. Third line is the police and military trying to protect the G-8 conference participants. What’s missing? What is first line security?

First line security is us trying to protect ourselves. And this is where the financial security system breaks down.

How do ordinary citizens protect themselves from economic danger? We act conservatively. We save our money. We live will within our means. We don’t take investment risk. We pay off our debt. This is where the today’s economic safety system breaks down. If everyone becomes more economically responsible, who will borrow from the banks we just saved? If we make our old car last another year, who will buy that new Chevy and save GM from bankruptcy? If we pay off our mortgages, how will the Royal Bank set yet another new record in profitability? It’s dangerous for ordinary people to protect ourselves from economic danger. The system needs us to be the risk takers. Modern economic theory requires we consumers to keep on consuming – to keep on borrowing and keep on buying. And if we stop spending, the economic music will stop and everyone will have to rush to find a chair. First line security in the economic world is actually the opposite of security: when consumers stop consuming, they collectively pull the trigger that ends the whole game.

The Dilemma
First line financial security is us ordinary people NOT protecting ourselves economically – continuing to spend as if there were no danger. Second line security is the G-8 leaders giving us the confidence to keep right on spending. Third line security, the only real security, is offered by the police and military who are trying to protect G-8 participants from protesters and terrorists.

The music has already stopped. It stopped when America’s biggest blue chip financial companies and manufacturers needed to be bailed out. That sound you hear is not the music of a thriving economy: it’s politicians, bankers and economists whistling as they walk by the palliative care ward of America’s and Europe’s biggest baddest banks. It’s time for typical investors to find a chair.

What Should We Do?
In my book, Beyond the Bull, I encourage investors to act like financial warriors and leave behind the bullmanship of the economists’ and the politicians’ worlds. The June G-8 conference will feature the bull – optimistic talk and reassuring rhetoric. But in the background there will be hard working police and soldiers trying to protect people. Those are the real protectors: they have discipline and they do their work methodically. In the financial world, that’s how we all should act.

Protect yourself. Spend prudently. Save your money. Invest more conservatively than you ever have before. Pay off debt. Live well within your means.

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).

Contact Ken directly at ken@castlemoore.com.

Tuesday, June 1, 2010

Two Steps and a Stumble

Do American rules work in the Canadian Economy? 20th century market technician, Edson Gould, devised a rule about interest rate increases: they call it Two Steps and a Stumble. In Gould’s day, if the US Federal Reserve Board raised interest rates twice (two steps), the stock market would fall (“stumble”).

Today the Bank of Canada raised interest rates: that was step one. I wonder if Gould’s guideline applies to the Canadian Stock Market now. In my book, Beyond the Bull, I observe that the rules of the stock market seem to change over time. What worked in the 1990s might not work now. Gould was a market technician from the 1920s to the 1970s. This quotation will give readers some flavour for his era: “The Dow Jones Industrial Average came down from 120 in the summer of 1931 to 40 in the summer of 1932, doubled to 81 in September, kicked back to 50 in February, 1933 and doubled again to 110 by July, 1933.” - Edson Gould. What a time that must have been! Today’s stock market volatility seems tame compared to the 1930s.

Will the rules or guidelines of a bygone era help investors today? If the Bank of Canada (B of C) raises its rate again (step two) will it trigger a decline in the stock market?

The B of C raised interest rates to protect us from inflation. If house prices go up, that’s inflation. If food prices go up, that too is inflation. When energy prices, consumer prices, metals prices – when prices go up, that’s inflation. The Bank of Canada just raised interest rates to protect us from rising prices.

When the stock market goes up – is that inflation? If your RRSP is invested in stocks or equity mutual funds, and they go up in price, is that inflation? Maybe inflation is not all that bad.

If Gould was right, two increases in interest rates triggers a decline in the stock market. That means your stock market investments are at risk. Is it correct for the B of C to raise interest rates knowing that it puts RRSPs and pension plans at risk?

Running the Bank of Canada is a tough job. When you mess with interest rates, it helps here and hurts there. Damned if you do and damned if you don’t.

But most readers are not running the Bank of Canada. You’re running your own personal finances. What will you do?

Most readers will do nothing. Most did not learn from the 2008 – 9 stock market slam-dunk. Most Canadian investors would rather ponder the strategies of the Bank of Canada rather than ponder their own strategies. And if the stock market does stumble, most investors will suffer their losses and blame someone else for their demise. And most will say: “Don’t worry, it’ll come back some day.” To the “Don’t Worry Be Happy” crowd, we say: read the second paragraph above, the excerpt from Edson Gould’s article about the stock market in the early 1930s.

Our advice? Reduce risk. Own fewer equities than you normally own. These are dangerous times for stock market investors.