Tuesday, December 27, 2011

Weapons of Mass destruction: Real ones this time!

Our American neighbours have suddenly become quite respectful. When North Korean dictator Kim Jong II died a few days ago, they approached the Chinese government and held a meeting about the possible risks associated with the transfer of power to the Korean heir to the throne. Both nations are concerned that there could be political unrest in North Korea. And North Korea has nuclear weapons.
Those of us who grew up in the cold war know that these risks are real. In the 1960’s they built fall-out shelters and the Distant Early Warning Line. Remember the Diefen-bunker? It was a radiation-proof fortress built in a desert near Brandon Manitoba to house government officials in event of a nuclear attack. Remember “the hole?” It is a mile-deep tunnel drilled into the Canadian Shield near North Bay Ontario. It was built to house the NORAD command centre: they said it could withstand a direct nuclear hit. In the 1960s, Canadians were ready for trouble and made an effort to defend themselves.
Am I ready? Are you ready? Of course we’re not ready! The previous generation was ready because they survived the depression and the war. We survived rock and roll and the “dot.com” bust. For us, nuclear weapons and political unrest are part of information overload. We’ll just keep on dancin’ and see what happens.
In my investment book, Beyond the Bull, I discuss how information overload destroys your long term rate of return. The key to improving your long term return is to be constantly looking for specific economic information that is relevant to your specific investment techniques. Anything that is not what you are looking for is irrelevant overload. But if you have no pre-planned investment techniques, all economic information becomes equal in value. None of it has value because it’s not tied to your action plan.
Americans have military techniques: when they, or their allies, feel threatened, American aircraft carriers move into the region near the threat. In this case, they’d like to move those carriers into the Yellow Sea. The Yellow Sea borders both Korea and China: hence, they are being very respectful to China. Perhaps those carriers that have just been freed up from supporting U.S. operations in Iraq will find their way to this new theatre.
Similarly, Canadian pension plan managers have investment techniques: when one area of the investment world is underperforming, they like to redeploy their investments to more lucrative assets. For example, their stock market assets have produced a low rate of return since 2000, bonds have produced a good solid rate of return, and gold has been stellar. They would like to move assets from the stock market to bonds and gold. But it takes even longer to move a giant pension fund out of the stock market than it takes to move a fleet of aircraft carriers. The pension funds are so big that their selling can drive the stock market down. They have to make their moves stealthily, under cover of bullish rhetoric and strong earnings.
Investors with less than $50 or $100 million don’t have to pussy-foot around like that. We can switch from stocks to bonds to gold and back easily. What most of us are missing is neither intelligence nor liquidity. Most of us need investment techniques that will help us separate valuable information from noise. Most of us need to be like the American military or the Canadian pensions: we need to know what kind of information we are looking for and how to act when we find it.

Monday, December 12, 2011

Greco-Roman Economics: Tragedy or Comedy?

Greece and Rome, once cultural centres of the western world, have become modern day theatres in the drama of world economics. The tragedy is the outrageous debt levels Italy and Greece chalked up and the naiveté of those who kept on lending them the money. The comedy is the performances of politicians and labour leaders scrambling to centre stage to present their lines on how to solve the problems.
“To be or not to be…” That is the question the European unity is asking itself. Whether ‘tis nobler in the mind to suffer the slings and arrows of outrageous debt levels and, by opposing them, give rise to a sea of troubles… The economic scene has dramatically shifted since last summer’s performance by Americans when they faced their country’s debt downgrade. One after another, self-righteous Senators and Congressmen marched into the spotlight and delivered their scathing political lines. I am told that, in international investment circles, Americans are considered to be narcissists: they focus too much on themselves and have surprisingly little interest or expertise in non-American economics. It must be difficult for them to see their stocks and bond markets rocking and rolling to the beat of a European concert. They are not used to having Greek and Italian politicians move their markets.
American politicians, like Canadian investors, are not in charge of this drama. We are part of a supportive audience, applauding on cue, anxiously waiting for the next act.
I wonder what’s going on back stage. I’m wondering if, while all eyes are focused on the obvious, if there’s not something subtle going on behind the scenes.
Subtlety #1. Consider, for a moment, the basic plot of both 2011 Econo-plays: Down Grade America, and The Wheels Fell Off the Euro Van. In both cases, governments spend far more that they earn. In both cases, they have to spend less – and (horror of horrors) they may have to raise taxes to earn more. Both these economic actions (austerity and increased taxation) tend to cool off an economy.
Subtlety #2. Pension fund managers, the ones who control many hundreds of billions of dollars in investments, like to have lots of money invested in the best performing financial assets, and much smaller amounts in the weaker performing assets. Since the year 2000, gold has been the best performer, bonds have been great supporting actors and the stock market has been the worst. Pension plans would dearly love the stock market to go up. But, when economies cool off, stock markets usually cool off too.
Subtlety #3. The Stock markets have been particularly volatile since this year. January 2011 saw the S&P500 at 1260 and it’s around 1260 now. (For you historians, it was 1260 in January 1999 too.) There have been wild up moves and wild down moves this year, but no real progress in either direction.
I am wondering if our friends, the pension fund managers, are taking advantage of the wild ups and downs of this year’s stock market drama, to quietly achieve their goal of reducing their stock market holdings. Pension funds like to move stealthily. Because they are so big, they need time to accumulate and distribute their gargantuan positions. And the Greco Roman drama being played out now, along with all its volatility and emotion, is giving them what they need: the opportunity to sell without being noticed.
Individual investors or small institutions like CastleMoore don’t need time. We can sell out or buy in quickly, whenever we observe danger or opportunity.
In my investment book, Beyond the Bull, I wrote about developing investment techniques: pre-planned procedures that you will follow so you can buy when opportunity presents itself or sell when markets become dangerous. Our techniques will be different from the techniques of the mega investors because we have liquidity and they don’t. But 2011’s wild gyrations and Greco-Roman Euro-drama have given them just what they need: an emotional distraction that allows them to quietly distribute billions of dollars of stocks. Readers who have access to your pension plan’s investments, check to see if they have reduced their exposure to the stock market in 2011. It’s what their prudent management plan should call for. The process of institutional selling in sideways markets is called “distribution.” It is always followed by a bear market. 2012 could prove to be a dramatic year too.

Wednesday, November 30, 2011

Singin’ The Blues Again.

In August we observed that the Mediterranean region had become a hot-spot of human activity. On the north shore we had the debt burdened nations of Greece, Italy, Portugal and Spain rocking the European banking system. On the south shore we had the nations of Egypt, Libya and Tunisia violently turfing out the military dictatorships that had dominated them for so long. Crisis sometimes brings out the worse in people. When we observe the hot-heads on the north shore or the civil warriors on the south shore, we know we are not observing harmony, cooperation and understanding.
As a financial philosopher, I am concerned about two things: will the bad energy that surrounds the Mediterranean spread? – And what should we do to protect ourselves?
My first concern seems easy to answer, doesn’t it? It’s already spreading. From a sociological point of view, the “Occupy” movements seem an extension of Mediterranean unrest. In the USA, the emergence of The Tea Party, a protest movement of the right, seems like a reaction to corruption and incompetence in the status quo. In Canadian politics, the demise of the Liberal Party and the Parti Quebecois in this year’s federal election could be interpreted as discontent with the establishment. A good observer can make the case that the hot-headed rebel spirit that has affected the Mediterranean region is spreading.
In a September article I commented on the late Col. Muammar Gaddafi, wondering if he had a good “plan B.” Now that he’s been hunted down and executed, we see his plan B wasn’t effective. Now I wonder about Bashar al-Assad of Syria. He’s in a deep hole right now: even his plan A seems unbelievably bad. Former Egyptian dictator, Hosni Mubarak is also in serious trouble. On trial for crimes relating to the deaths of the protestor/revolutionaries, his fate seems unavoidable.
Contrast the Plan B’s of these dictators with the plan B of arch-villain, Adolph Hitler. When Hitler’s reign ended, he disappeared. Some say he was killed, others say he escaped. But we don’t really know. Whatever Hitler’s Plan B might have been, it seems a lot more effective than Gaddafi, Assad, or Mubarak’s plan B.
My concern is your plan B. As the bad energy of the Mediterranean continues to spread through our complex world of international finance, how will you escape the ravages? The answer, of course, is quite simple: a good financial plan B involves selling your down trending investments and buying securities in up trends. In the August 2011 stock market selloff, we were told that gold and bonds were safe. But the truth is gold and bonds were going up as the stock market came down. The level of risk or safety in a given investment is a matter of judgment. The price trend is a matter of mathematics. But, whether you are making a judgment or following a mathematical model, in times of danger, your plan B must include a plan to sell. Whether you judge a given investment to be too risky or whether you see it’s in a down trend, you’ll sell it. So, in reality, there is no need for me to be concerned about your plan B – it’s easy for ordinary investors to sell.
The problem lies with those who cannot sell: the big pension funds and the big mutual funds. Because of their sheer size, their selling drives the market down. If they are too aggressive in their selling, they can cause the markets to go lower. Their plan B’s are different from ours: they try to ride out the storm. That’s why they use economic forecasts. That’s why they diversify. That’s why institutional money managers are so expert at understanding the underlying value of the investments they own. The tools of illiquid investors are diversification, financial analysis and economic know-how. They don’t need to develop skills on when to sell out because they never sell out.
Expertise on knowing when to sell is left to smaller investors and smaller investment managers. It’s our advantage in down trending markets.

Monday, October 24, 2011

Blue suit protesters

Have you ever meet one of those old fashioned 1960s left wing “save the world” radicals who seem to get off on protesting? They love to raise their voices in righteous outrage at the latest atrocity. They love the lime light – they love the sound of their own voices blended with a thousand other voices, all yelling in unison over some noble cause. The 1960s protest movement was associated with being young and hip and anti-war. But that’s all changed: the new generation of protesters is all about fiscal fairness and economic conservatism. And their leaders inhabit high places. Last weekend’s G-20 meeting illustrates the new era of protesting. This time it’s the blue suit boys protesting against the left-wing radicals. Canadian conservative finance minister Jim Flaherty protested the precarious predicament in Europe brought about by left wing Greeks building their economy on a mountain of debt. And that Olympian mountain of debt is threatening the world’s banking system. Greece’s problems are our problems.
What’s their problem? It’s simple. The Greek people collectively owe so much money the only way they can make their interest payments is by borrowing even more! It’s like kiting, on a grand scale. Kiting is a pre-bankruptcy phenomenon where an individual is so far in debt that he borrows on one credit card to make a payment on the other one. He keeps going back and forth between the credit cards alternatively borrowing from one in to make a payment on the other, until he max’s them all out and can no longer make any payments. There are only two things the kiter can do: dramatically decrease his spending and make payments from his earned income – or go broke. That’s the situation Greece is in right now. And, it appears that the old fashioned left wing style of protest is still alive and well in Greece. Unions are out if full force, shouting angrily that they don’t want to dramatically decrease Greece’s spending. Their problem is they don’t want to take the decrease in standard of living that is required to keep their economy going. And our problem is, when the Greeks default on their debt payments, the world’s banking system takes the hit.
That’s why Jim Flaherty and the G-20 blue suits are protesting. We are in trouble because of Greek monetary mis-management. But it’s not just the Greek borrowers who caused this problem. Who loaned them the money? What lender would advance money to someone they knew couldn’t pay it back? What kind of banker lends money without doing a credit check on the borrower? From one angle, the European bankers did it to themselves! If they had been more prudent in their lending practice, they wouldn’t be in the jam they’re in. Perhaps borrowing from the Greeks would have earned the banks an extra ¼ of 1% interest. That might have seemed like easy money for the Euro-banks if they didn’t check out the credit risk. Jim Flaherty and the blue suit protesters were waving their placards at loose lending as well as blatant over borrowing. The whole thing stinks.
And the stench seems to have crossed the Atlantic. A good old fashioned anti-establishment “Occupy” protest is spreading all over North America: the Occupy Wall Street movement. Young activists are raising their voices in unison, calling for an end to corporate greed. They could easily add sovereign debt greed to their list if indignities. But, it all makes sense, doesn’t it? Irresponsible mortgage lending almost broke the banks back in 2008 and 2009. Those same banks that had loaned American homeowners more money than they could afford to repay, were the ones that almost went under in the American sub prime mortgage fiasco. And now, in late 2011, the Euro-banks are threatened by irresponsible sovereign debt lending. And the Occupy protesters seem to have picked up on that vibe. Somehow, they seem to have recognized that same thing that Jim Flaherty and the blue suit boys have recognized. The big banks went way too far.
Now what are we supposed to do? It’s clear that the banking binge of the early years of the twenty first century has led to the current monetary morning after. It’s equally clear that there’s not a thing an ordinary person can do about it. We can’t save the world. But we can save ourselves.
In my investing book, Beyond the Bull, I outline a five step program for investment survival. Step 2 is having a plan and step 3 is acting on that plan. Protesters all over the world are warning us that there is danger blowing in the financial winds. And so far, the blue suit boys have muddled through it all and kept the boat floating. Each of us has to do the same thing in our personal financial world. This is the time to adjust your investments – the time to take less risk than you have ever taken. Once your financial house is in order, once you save your own world, you can pick up your placard and joint the blue suit protests.

Wednesday, October 12, 2011

Apple - Rim

What marvelous creatures we investors are: so different and yet so much the same. Consider the pickle barrel that Steve Jobs and Jim Balsillie were in before Jobs’ untimely death: Jobs was the Chairman of Apple Inc. (AAPL), Balsillie of Research in Motion (RIMM). Both are/were billionaires because of their ownership of industry leading high tech firms. Since mid-2008, Jobs had seen his AAPL stock rise from under $165 per share to over $400 per share. Balsillie saw his RIMM drop from almost $150 to under $22 in August -2011. (These prices are all in US dollars) Jobs got way richer at the same time Balsillie got way less rich. Yet both are way richer than most of the readers of this article.
Big institutional investors like pension plans and mutual funds might own shares of both AAPL and RIM – and their holdings have been affected by the rise and fall of these two high tech giants. Although the professional decision makers for these mega investors may not personally own the shares, they participated in the rise and fall of these two high tech stocks. And their decisions to buy or sell their clients’ shares affect the rise and fall of AAPL and RIMM share prices – and they also affect the rise and fall of the financial net worth of Jobs and Balsillie.
Then there are the ordinary investors who may own shares of AAPL or RIMM. Most of us can buy or sell our whole position without affecting Jobs’ or Balsillie’s net worth at all.
Isn’t it fascinating how different we all are with respect to AAPL’s rise and RIMM’s fall? Different, yet, somehow, the same. Jobs and Balsillie were both Chairman of the Board and significant shareholders of their respective companies. One is a hero; the other – somewhat less than a hero. One became a lot richer than he was – one, somewhat less rich.
The mega-money portfolio managers are in the most interesting predicament. Imagine sitting at their computer screens, managing multi billions. Imagine you managed a huge portfolio of high tech stocks in June 2008, and your clients had approximately equal portions of RIMM and AAPL. Now, because of the rise and fall of these two giants, they have 20 times as much AAPL as RIMM. As the manager of these mega-funds, what should you do? One possibility is to readjust your holdings so you have equal amounts again. In this case you would sell a few gigs of AAPL and use the proceeds to buy RIMM. They call this “rebalancing:” it’s the kind of thing value investors do when one stock runs way too high and the other way too low. The mega-money managers realize that years from now AAPL might not stay the hot-stock darling it is today, and RIMM might not remain the ugly sister. Because their positions are so big, the mega-bucks managers can’t really sell out of the market all together. So they adjust the percentages of their holdings, maintaining a diversified portfolio at all times. It’s the prudent thing to do.
And what about you? What should you do? Most professional advisors encourage small investors to behave like large investors. Ordinary investors are encouraged to own large diverse portfolios and let the professional mega managers run them. That’s what the mutual funds business is all about. Small investors trying to behave like big investors.
But that is a serious error.
In my investing book, Beyond the Bull, I encourage readers to develop their own way of investing and to take advantage of their edge. Small investors have one huge advantage over mega-money. Liquidity. We can buy or sell RIMM or AAPL without affecting the price at all. So, why would we have owned a single share of RIMM since June 2008? Why not just sell out and be done with it? Why not just own AAPL, and nothing else, and get richer like Steve Jobs did? In fact, why would we ever own any investment that is not in an up trend? Why should we behave like mega-money at all?
We are all the same, yet so different. If we are high tech genius’, we should start a high tech company and get rich like Jobs and Balsillie. If we love the markets, we should get a high-priced job with a mega-money pension fund manager and prudently rebalance our way to the top of the heap. And if we are an ordinary investor, we should figure out how to tell an up trend from a down trend. Whatever of these three we pick, we can be successful in the world of money.

Gaddafi’s Plan B

The hunt is on. No one feels sorry for deposed military dictator Muamar Gaddafi. Somehow it appears to us that justice is being done. Earlier this month we heard that his interior minister had escaped to Egypt with his family. Has Col. Gaddafi done the same thing? The western press had always presented him as a mad man. But our own rational minds told us he couldn’t have been completely crazy because he held power all those years. We know there was some modicum of ruthless ration in that cloudy mind. Near the end of his regime, he was still shouting victory and defiance from wherever he was hiding. Did he really believe his own bull? Surely he saw the signs. Tunisia fell. Egypt fell. NATO forces had destroyed his military installations. Surely he saw. Was he, in his most desperate hour, able to muster up enough IQ to create and execute a Plan B? Or is he hiding in some hole like Sadam, when Iraq fell?
In my investment book, Beyond the Bull, I wrote about the concept of being objective. Holding our minds in an objective state helps us stay rational in an irrational world. I recognize the possibility that Col. Gaddafi’s world was irrational most of the time; but his predicament at this very moment is the result of a rational sequence of events. And his survival now depends of the viability of his Plan B. Beyond his world of power and wealth, beyond the illusion, was a rational sequence of events involving rebels, Tunisia, Egypt and NATO. Now that the man hunt is on, we all see how important it is to objectively see through the illusion of power and wealth and to objectively formulate a realistic Plan B for our survival.
In 1969, when Gaddafi took power, the Dow Jones Industrial Average closed the year at 800.40. When power was taken from him last week, the DJIA was 11,500. Col. Gaddafi got rich AND America got rich. How have you made out since 1969? Gaddafi’s time of prosperity and power has ended. Some say America’s time of prosperity and economic dominance is ending. (based on the failure of her biggest bluest chip companies in 2008-9 and the long term decline of the US dollar) But let’s stop pretending to be objective – there’s nothing we can do about Libya or America. What counts is us. Will our period of prosperity end? What are the signs we should look for? Do we have a Plan B?
Colonel Muamar Gaddafi is teaching us all we should do.
Lesson One: live in your world. Know your world. Know your strength and your weakness. Know yourself.
Lesson Two: objectively observe the world around you. How does it affect your world? What are the signs that your world is in danger?
Lesson Three: when you see these signs, what will you do? What is your Plan B.
In my book, Beyond the Bull, I write about Five Keys to economic success. The three lessons Col. Gaddafi is teaching us all right now are the first two keys. Now that he is a fugitive, he is involved in the third key: execute your plan.
Our sheltered world, our world of western wealth and peace, is quite different from Col. Gaddafi’s desperate world. Gaddafi’s Plan A kept him in power since 1969. Our Plan A gave us our life style since 1969 too. What we have in common with this hunted man is our need for an effective Plan B. Like him, we hope we’ll never need our Plan B. But when we see the signs, we’ll know it’s time.

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).

This article and others by Ken are available at http://kennorquay.blogspot.com.

Contact Ken directly at ken@castlemoore.com.


Elvis sang it in 1962: “Suspicion! Torments my heart. Suspicion… keeps us apart.” His peaceful relationship was being torn apart by his suspicion that his woman was not, in fact, what she appeared to be. The investment world is a little like Elvis’ love life… things may not always be what they appear to be. In the investment world it pays (literally) to be suspicious.
Case in point: on September 1, 2011, the US dollar made an important show of strength. Market technicians would say the US dollar broke above a down trend line. On the same day, the Euro broke below an up trend line. Those were important events. I know that we are supposed to believe that western currencies trade in a free market, but I am suspicious that there is something hidden. Things may not be what they appear to be. I suspect there is another bank crisis looming – a crisis like the 2008/9 sub prime mortgage bank crisis. Only this time the culprits are the European nations of Portugal, Italy, Ireland, Greece and Spain. These so-called PIIGS of Europe are having difficulty paying their debts and are facing the usual consequences: bail outs, higher interest rates and credit downgrades. All this is old news. But September 1, 2011 marked a suspicious event in the currency world. It triggered a short term rise in the US dollar and a short term fall in the Euro. Something’s not right here.
In my investment book Beyond the Bull, I explain that in the financial world, everything is connected to everything else. This is how foreign exchange is connected to the European banking system:
European banks are highly leveraged. For every Euro of capital a bank has, it can create over 25 Euros of debt. By way of comparison, conservative Canadian banks can create less than 20 CDN dollars of debt for every CDN dollar of capital. The strange part is that the European banks hold most of their capital in US dollar denominated investments, even though the majority of their loans are in Euros. You can see how troublesome it is for them when the US dollar is weak and the Euro is strong. It really puts the squeeze on the European banking system. Their capital base drops in value because it is mostly US dollars. When the US dollar is weak, the European banks could have to start calling in their loans… for every one Euro their capital shrinks, theoretically, they’ll have to call 25 Euros of loans. That’s what went wrong in 2008/9. And one of the ways that crisis was handled was by strengthening the US dollar. In the three months from August to November 2008, the US dollar rose 20%. That means the European banks’ reserves would have risen by almost 20%. This currency driven increase in European bank reserves contributed to the saving of the banking system. My suspicion is that the September 2011 up surge of the US dollar and down surge of the Euro was a deliberate manipulation of the currencies. The G-8 nations have started to move the US dollar up and the Euro down because there is another bank crisis brewing.
Let us not be like Elvis; his suspicion was a curse that was ruining his love life. Let our suspicion be a blessing that will enhance our financial lives. Like Elvis, we don’t know what’s going on behind the scenes. But, unlike The King of Rock and Roll, we can use our suspicion in a constructive way.
In 2008, many of us were caught off guard – we were not suspicious enough. But not this time. Let the September 2011 up surge of the US dollar and the down surge of the Euro be a warning for us. Let us mentally prepare for a possible down-jolt in the stock market. Let us review our plan “B.”
In my investment book, Beyond the Bull, I encourage people to develop their own investment techniques. At my investment firm, CastleMoore Inc, we have preplanned investment techniques. We are ready for a crisis. Here are the essential ingredients for a good plan B: (1) observe the financial world, looking for something specific, (2) when you objectively observe that “something specific,” act in a pre-planned way. In this case, we see the sudden rise of the US dollar and simultaneous decline of the Euro. By the process of logic combined with suspicion, we recognize the increased risk in the stock market and the possibility of a 2008/9 style decline. In fact, the stock market sell-off of August of 2011 might have been the beginning of such a decline. What specific financial event can we look for that will be our signal to sell? And what will we do when we see it? What’s our plan B?
The world of finance is so much simpler than Elvis’ world of love and relationships. A financial plan B is just a matter of good business practice. What would Elvis have done if he found his woman with another man? For Elvis, plan B involved mending a broken heart. For us, a financial plan B means avoiding a broken heart.

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).

This article and others by Ken are available at http://kennorquay.blogspot.com.

Contact Ken directly at ken@castlemoore.com.

China – Shmina! It’s all bull!

We have been told for decades China is the waking dragon whose economic emergence will somehow fuel the world’s economy into prosperity. But, not according to Jim Chanos’ article in the September 26 edition of Bloomberg Bussinessweek. He points out that local governments in China have racked up $1.6 trillion in debts they can never pay back. Makes the Greek Euro-crisis look like a flea on a tiger’s back. He also points out how Chinese accounting is different from Western accounting. “The further down you drill on China, the more bearish you get…” His article concludes that American investors should sell short certain Chinese stocks and Chinese currency. Selling short is a technique where you make a profit when the stock goes down. Those Canadians who owned shares of Canadian/Chinese company, Sino-Forest know just what Chanos means. Sino-Forest stock dropped from $19.40 to $1.29 in June 2011 as certain accounting problems came to light.
In my investing book, Beyond the Bull, I point out how important it is to know about the concept of deceit in the investment world. Deceit is part of our modern commercial world. In the old days smoking cigarettes was OK. In late 2007 the world’s bankers were told that US mortgage-backed paper was a sound investment. In May 2008, just before the crash, we were told that we should buy resource stocks so that we would own “assets in the ground” to protect our portfolios against possible problems in the banking system. In a world dominated by politicians and financial salesmen, we know that economic reality is never as rosy as they say.
How can we survive in such a world? How can we thrive?
They key is in our focus. If we focus on the words of the politicians and financial salesmen, we know what to expect: more deceit. The key is to focus on our own personal financial world. What’s in our own portfolio? Is it going up? If it’s not going up, why are we invested in it? Our focus should be the price of our investments over time. If those investments are going up, we are succeeding. And, when the price trend of our investments turns down, we simply sell them. It’s a very simple plan, but it works.
A case in point would be the Canadian stock market. At the very top in the year 2000, the TSX composite hit 11,423. On October 4, 2011, it traded at 11,250. Holding a portfolio of Canadian stocks for the long term has not been a profitable way to invest. Gold, on the other hand, traded at $294 in the year 2000. Today it’s $1650. Gold is in a long term up trend, stocks are not. Financial planners will tell you that gold in speculative and stock mutual funds are not. That’s the deceit. Reality is gold has been going up for 11 years and stocks have been going up AND down. That’s reality.
A similar case can be made for the bond market: in early 2000, long term Canada bonds yielded 6.25%. Now the yield is under 3.25%. In the bond market, bond prices rise when interest rates fall. Those who bought long term bonds in 2000 and are still holding them have received 6.25% interest each year and racked up a sizeable capital gain. Financial planners told us that the stock market has outperformed the bond market over long periods of time: but that has not been true for the past 11 years.
Financial planners are usually mutual funds salesmen trying to persuade us to buy their product. It’s the “persuasive” element of this situation that gives rise to the deceit. The truth lies in the mathematics of your portfolio. Your investments are either in up trends or they’re not.
The key is our focus: if investors and financial planners had focused more on bonds and gold – and less on the stock market, they would have been much more successful during these past 11 years.
Beyond the Bull Accounting. Check in on your portfolio: is its focus correct? Does it contain only investments that are in up trends? At what price did you buy? What is the price now? Is your portfolio like a Chinese stock? – the story sounds good, but it doesn’t add up. The remedy? Sell your losers.

Thursday, August 18, 2011


Dr. Renee Heffron of the University of Washington discovered that women who use hormone-based birth control pills or injections are more likely to spread AIDS to their non-infected husbands than women who do not receive the injections or take the pill. The study was done in seven African countries. Western charities have been trying to help Africans deal with a very large AIDS problem and a rapidly expanding population. But it looks like this one backfired. Providing women with hormone based birth control methods may solve one problem, but it causes another.
What complex beings we humans are. This tragic African problem illustrates how difficult it is to fix things that break. It’s better to prevent it from breaking in the first place. Too late for that; Africa is broken; how can we fix it? Add poverty and racial tension to the mix, and we see an even greater tragedy. How can anyone fix that?
African problems make our economic problems seem small. But the same Mr. Fix-it situation applies. In my investment book, Beyond the Bull, I point out how everything is connected to everything else. Our attempts to fix one economic thing affect the rest of the economy. For example, in 2008 and 2009 the western nations instituted a coordinated package of economic stimulus in an attempt to save a collapsing banking system and revive weak economies. And they actually did save the banking system. But the economic growth they had hoped for never materialized. Instead they got inflation. Metals, food and energy prices all went up. And now, Europeans and Americans are instituting austerity programs, cutting government spending in the hopes of balancing their budgets. Even the City of Toronto is cutting spending. Austerity is the economic fix-of-the-day now, just as stimulus was the fix- of- the- day in 2008 and 2009. We can only hope it doesn’t backfire like the African birth control fix.
What’s your personal economic fix-of-the-day? During the “Roaring ‘90s” (1991 to 2000) the Buy-and-Hold investment concept became more and more popular. By late 2008 – early 2009, people realized it no longer worked. Their ten-year stock market returns were abysmal. Some gave up and put their money in the bank. But, much to their dismay, the world banking system became quite shaky. Others gave up and put their money into treasury bills. Much to their dismay, they achieve almost no return. How can we get a reasonable return on our money without risking serious loss? What should investors do to fix their problem?
Maybe we can learn from our African neighbours. If we lived in Africa, our problem would be to not get AIDS. Seems pretty straightforward, doesn’t it? Everyone reading this article can easily figure out a plan to not get AIDS. Hint: It’s something to do with your sex life. Easy fix. We all realize it’s not 100% guaranteed, but any African can take measures to avoid AIDS and dramatically reduce their risk.
Is there some obvious way we can live our lives as investors without exposing ourselves to serious risk of loss? Yes, there is. We can own investments that are in up trends and not own investments in down trends. For example, during the dramatic August 2011 decline in the stock market, gold went up and bonds went up. Because everything in the economic world is connected to everything else, there are times when a decline in one area of finance actually causes a rise in another area. There is no need to sit idle and watch your losses mount up. You protect yourself by selling. We have to be vigilant and active, not passive. By becoming an active investor who protects against loss, we can thrive in times when others don’t.
Sex in an African country is a lot like investing in a western country: it is our responsibility to protect ourselves. In the arenas of health and wealth, we can’t save the population from its fate. But we can protect ourselves.
Ken Norquay, CMT
CastleMoore Inc,
“Buy, Hold and Know When to Sell.”

Monday, August 8, 2011

Precious Metals August 2011 Top

Friday August 5, 2011. Thursday’s price action in the price of gold and silver was a short term top. Investors who are planning to buy gold should postpone their purchases for a few months. Speculators should sell now and realize their gains. More aggressive speculators can bet on the decline.
Technicians refer to yesterday’s chart pattern as a Key Reversal Day or an outside reversal day. The price went up in the morning to a new high, then reversed and closed below the low of the previous day. And all this was done on a day of huge volume of trading. Check the charts of the ETFs for Gold and Silver. (Symbols GLD and SLV) See what a Key Reversal Day looks like. It was Thursday August 4, 2011.
This particular reversal was underlined by another statistic: the percentage of investors who are bullish on gold. This is a contrary indicator. When investors are excessively bullish, it’s time to sell. When they are excessively bearish, we should buy. The US financial research firm, Ned Davies, reports that recently there were more gold bulls than any time in the previous five years. Excessive optimism accompanied yesterday’s Key Reversal Day. Rarely is a sell signal so clear to a technical trader.
In my investment book, Beyond the Bull, I suggest that individual investors should improve their own investment techniques by studying the techniques of others. The opening dialogue to this article about trading gold based on Thursday’s price action is a good example. Many investors dismiss technical trading. They try to use economic data and financial events as a way to help them make investment decisions. If they feel, as now, that the US economy might be weak for a while, they may decrease their holdings of stocks and increase their holdings of bonds. For these investors the idea of selling because of price action seems crazy: we should sell because of economic action. And, human nature being what it is, they will often argue why their approach is good and someone else’s approach is not. Instead of pondering the performance of their portfolio and searching for investment techniques that improve performance, they use their intellects to defend their ego: my way is better than your way.”-Buying and holding for the long term is better that trading.” “-A diversified portfolio is better than a focused portfolio.” “-It’s always better to have all your cash working for you.” These statements all come from one’s ego, not from one’s desire to make money in the investment world. Rather than thinking from an ego position, I recommend using scientific methodology to develop your investment judgement. Scientists ponder a theory, and then test it by conducting experiments and making observations. In the investment world, we could ponder the theory that “Key Reversal Days” herald declines. Then we would take note of last Thursday’s action; then sit back and observe what happens over the next few months. We would test the idea.
If we were more ambitious, we could examine many stock charts, looking for Key Reversal Days in the past, and see if, in fact, the price did go down after such an event. We would look for proof in the real world, rather than defending our own theory.
One of the reasons why most investors resort to ego gratification rather than scientific observation is because of the competitive nature of the investment world. In a competitive world, we compare ourselves to everyone else. This is especially true for investment professionals. They all want you to believe their truth, not the truth of the other professional who is competing for your business. They are proud of their reputations. They enjoy being right. So intense is this competition that it draws ego driven clients to the investment world. When I attended Merrill Lynch’s training program in 1976, they talked openly about the kind of personalities that made the best stock brokers; competitive, intelligent, aggressive, ego driven personalities. The investment world is a world of big egos.
In order to add other investors ideas to your own repertoire of investment techniques, you have to be open, objective and respectful – the exact opposite of egotistical. One of the most successful investors of the modern era was Sir John Templeton. His book was entitled: The Humble Approach. If you have occasion to see videos of today’s investment icon, Warren Buffet, you will see a portrait of a humble man. Re-read the first three paragraphs of this article: they seem to have been written from an ego position, don’t they? Cocky, confident, full of advice. Don’t be seduced by that egotistical manner. Observe the author’s theory objectively and humbly. Make a few notes and observe the price of gold, silver and precious metals mining companies over the next few weeks and months. See if the notion of a “sell signal” can be useful in your investment world.
Monday August 8, 2011. Gold opened at a new all time high price, negating Thursday’s egotistical sell signal that was “so clear.” Gold went higher in the short term, not lower. The sell signal didn’t work. Will the technical trader who gave his advice in such a cocky confident manner become more humble? More importantly, will you become more humble? My book, Beyond The Bull, challenges investors to learn from other investors’ victories and defeats. What can we learn about using sell signals in our own investing? The arrogant and the cocky like to show you those times when their signals worked in order to persuade you to do business with them. What can you learn from a person who shows you the time the technique didn’t work in order to persuade you to do business with him?

Thursday, August 4, 2011

It’s a Dog Fight: a comment on recent volatility

I am an officer at the investment firm CastleMoore Inc. My partner and I wrote the following report to our clients: CastleMoore Special Midsummer Report
"Commentators sometimes refer to “the dog days of summer,” because the hot weather makes market participants behave like dogs in a heat wave: they just want to go and lie down in the shade. Not this summer. Financial commentators agree – there are no lazy slow moving dogs in the investment world.
European governments have been fighting with their citizens to implement constraint and reduce deficits. American Republicans have been fighting the same fight with the Democrats. And all this is set against a
backdrop of faltering economic news: western economies are not as strong as expected. Bond markets have been sharply higher and stock markets sharply lower. The price of gold went straight up, but oil went down. And the financial media loves to fan the flames of the financial fires.
Rather than participate in the excitement, let’s sit back and observe the action from an intellectual distance. Let’s be objective.
Three things are happening this summer: investment volatility, weakening economies and a continuation of debt/banking instability. The volatility is new, but the other two problems have been around for a long time. How are your investments positioned for the new part: the resumption of financial volatility?
CastleMoore accounts currently hold a large percentage of assets (40-70%) in the bond markets. This past two weeks, when volatility heated up, both the Canadian and the US bond markets surged up. Our preplanned strategy worked.
CastleMoore accounts currently hold gold (8-14%). This past week, gold also went up sharply. Again, we were well positioned.
But the stock market dropped like a stone. How were we positioned for that? We had been shifting out of resource stocks into health care, consumer and utility stocks. Of the nine stocks or equity ETFs held in our Focus (Tandem Active) or Class accounts, five were the same or higher during the steep decline of this past week. During that week, the S&P 500 Index dropped approximately 450 points. Only four of our nine picks declined with the market.
In addition to picking the right stocks, we had been cautious about increasing our exposure to equities,using a “go slow” strategy to increase our holdings of stocks while also maintaining cash reserves (5 – 23.5%).
Our message to our clients has been one of over caution for quite some time. Now it’s starting to pay off."

Wednesday, July 20, 2011

Murdock Schmurdock!

The News of the World scandal is not about billionaire Rupert Murdock. It’s about ordinary people like you and me. We have yet another excuse to sit in judgement, brazenly criticising everyone associated with this British illegal cell phone ease dropping affair. We condemn the gossip mongers who read that filthy newspaper, we condemn the regulators for not catching the offence sooner, and we condemn the newspaper’s management for allowing (encouraging?) cell phone wireless-tapping. We human beings, it seems, have a strange attraction to the seedy side of life.
In my investing book, Beyond the Bull, I maintain that if we want to become better investors, we have to change the way we think. The News of the World scandal clearly illustrates a faulty way of thinking. This negative thought pattern is known as the V-A-R Triangle. The thinking pattern involves people who are cast in the role of Victims, Abusers and Rescuers. In this scandal, the Victims are all those people who were spied on illegally: this includes everyone from the Royal Family, and a series of celebrities, to victims of kidnapping. The Abuser role is being filled by the reporters of The News of the World. The Rescuer role is being assumed by British politicians. There’s even a US Senator who wants to be the Rescuer of those who perished in the World Trade Centre tragedy (the would-be Victims) from having beenspied on by these over-zealous English reporters (the would-be Abusers).
The V-A-R Triangle is a thought pattern. Whenever we consider a situation from the point of view of either Victim, Abuser or Rescuer, we are in this unhealthy pattern. This pattern of thought is particularly harmful when we consider ourselves to be a Victim, Abuser or Rescuer. For example, the US Senator who is calling for an investigation into wireless tapping around the 9/11 incident is putting himself in the role of Rescuer. Once we start to think in this pattern, our objectivity goes out the window. We lose contact with reality. The results can be disastrous.
Here are a few historical examples where this V-A-R thought pattern has led to disaster:
Nazi Germany: Hitler portrayed the German people as Victims of a conspiracy of Jewish bankers, whom he presented as the Abusers. He and his Nazi Party were to be the Rescuers. This thought pattern turned the ordinary German into the greatest abusers of the twentieth century. The massacre that followed was the result of V-A-R thinking.
Canadian Court Rooms: in the late 1900s there were many court cases where “the accused” was put in the role of Abuser, an innocent child was placed in the Victim role and the police, assisted by a certain child pathologist named Dr. Charles Smith, cast themselves in the role of Rescuers. Many people were falsely sent to jail because of Dr. Smith’s testimony. It turned out that Dr. Smith was a fraud – and his testimony was false. Many cases where Dr. Smith had been the expert witness were re-tried and many of those sentenced to long jail terms were released. The Abusers had become Victims: the Rescuers had become Abusers.
These examples show how harmful a thought pattern can be. This particular one, the V-A-R pattern, is the most harmful and the most wide spread destructive thought pattern I know. As The News of the World scandal heats up, notice how damaging it becomes. Notice how it draws you in: the V-A-R thought pattern invites every one of us to join the rescuers.
How does it work in the investment world? How does this pattern destroy your ability to earn a respectable rate of return on your money? It happens when the market goes down and we lose money. Our loss causes us to cast ourselves in the role of Victim. Our Abuser can sometimes be our financial advisor; sometimes it’s some politician. And our rescuer? That’s who we look for.
Consider the 2008-9 stock market crash. The Canadian stock market dropped almost in half in eight months. Investors felt victimised. The abusers most commonly blamed for that fiasco were George Bush, the big-bonus deal makers at the big brokerage houses, the greedy banks, and former FED chairman Allan Greenspan. The Rescuer? What White Knight would restore our RRSPs to their former levels? Some selected a new financial advisor; some voted for a Democratic president; some hoped “the market” would recover as their financial planner predicted: the market itself would rescue us.
But if we want to become better investors, we have to get out of this thought pattern all together. Finding another rescuer is not the answer. We need a new thought pattern.
This is what the V-A-R teaching recommends. If you find yourself in the role of Victim, ask yourself the question: “What did I learn from this negative experience?” If you find yourself cast as the Abuser, ask yourself: “How can I challenge this person’s (the Victim’s) beliefs? If you fancy yourself as the Rescuer, ask yourself: “How can I help this person help themselves?” Once your thought pattern shifts in this way, you will find yourself taking responsibility for your own actions.
Instead of a victim of a market crash, you will become a defensive investor who won’t be caught in a market down draft again. Instead of blaming someone else for your loss, you will accept responsibility and learn a new way of investing based on not losing money in a crash. Instead of a high powered securities salesman offering to rescue innocent investors from a corrupt system, you will become an educator, teaching people what to look for in the investment jungle. Instead of pretending you have the Holy Grail of Investing and having all your clients investments exposed to the ups and downs of the market, you will use compassion as you advise your clients about being cautious in their portfolios.
And what about Mr. Murdock and this nasty little thorn in his side? What can we learn from him? Try this: put yourself in his shoes. He thinks he’s the Victim. His over-aggressive reporters are the Abusers. And now, the press and the public are also his abusers... and members of the British Parliament. Let’s step into Mr. Murdock’s shoes and ask ourselves: “what did I learn from this experience?” The answer might be a variation of, “When you live by the sword, you die by the sword.” For Mr. Murdock in particular, “When I live in a world of sensationalism, gossip, accusations, muck-raking and meddling in other people’s business, I could die in that world.”

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.

Thursday, July 14, 2011

Tradesman Saves World Economy

My father tried in vain to save the global economy. It didn’t bother him when he failed – but the possibility of failure didn’t prevent him from trying.
How could a tradesman who worked in a steel mill in Hamilton save the global economy? In his view, it was relatively simple. Just keep doing what he had always done. The economic activity that created the modern global economy is the same activity that will save it. It’s ordinary working people who will correct the economic errors made by the MBAs who have leveraged the world beyond its limit. This is his reasoning:
In 1952 my father and his young wife bought a house in the east end of Hamilton: 10% down, 90% financing. He had a steady job and paid off their mortgage in 20 years. I remember their mortgage-burning ceremony. It was an important day in their lives: the day they became debt free. In the 1950s it took only one income to buy a house. He went to work and my mother stayed home with the kids. That was the formula. Those Canadians who grew up in the Great Depression of the 1930s and fought in the Great War of the 1940s formed the basis of the economic world that is falling apart today. The “family formation formula” worked in the 1950s and 1960s. Now it’s almost impossible for a young tradesman to buy a house with 90% mortgaging and support a stay-at-home-mom. The numbers just don’t add up. That’s why it’s coming undone.
My father didn’t realize that his solution to today’s global financial riddle is a variation of Austrian Economics. The founders of Austrian Economics believed that the economy is self-correcting. When things go wrong, there is no need for a big government bail-out: just let things take their natural course and eventually everything will work out. For example, the MBAs who masterminded the sub prime mortgage fiasco in the early part of this century eventually blew up the US real estate market. My father’s view was: who cares? His mortgage was paid off in 1972. If some appraiser told him his home was worth $200,000 in 2006 and $150,000 in 2011, he didn’t care. He bought it for $7,000 in 1952. Those real estate speculators and their bankers who bought and financed some house they thought was worth $200,000 – they’re the ones with the problem. Was it his responsibility to bail them out?
In my father’s view, the collapse of US house prices is a good thing. If prices fall enough, young tradesmen will eventually be able to buy a house with 10% down – and their wives will have the option of staying at home with the kids. And if this causes the mortgage bankers and realtors to miss a few payments on their Mercedes, that’s their problem too.
Today’s European PIIGS sovereign debt default problems and American debt-ceiling default problems can be handled in the same way. Let the ones who got into debt in the first place solve the problem. And let the ones who loaned them the money solve the problem. And, of course, that’s exactly what’s going on in the world today. The wisdom in my father’s neo-Austrian approach is the same wisdom that’s found in the Alcoholic’s Serenity Prayer. “God, grant me the serenity to accept the things I cannot change, the courage to change the things I can, and wisdom to know the difference.” In the world of finance, this translates into serenely and objectively observing the economic world and courageously reacting to it by getting our own economic house in order.
With this principle in mind, let’s make some serene observations about the Canadian economy now and the Canada of my father’s era, the 1950s and 1960s.
Observation #1: in the 1950s, municipal governments started adding fluoride to city drinking water. Yes, it was an additional expense for the city, but it was good for dental health. Today, the city of Toronto is considering stopping this program because it costs too much and the city is spending way more than it earns. The city of Calgary recently stopped their fluoridation program for the same reason. It’s up to individuals to buy fluoridated tooth paste if they want stronger teeth.
Observation #2: the city of Toronto is currently releasing a long list of ways to decrease spending. They are seriously over spending and are desperately trying to reduce expenses. In the mid to late 1990s, the government of Canada found itself in a similar situation. Finance Minister Paul Martin stick-handled the federal government through an austerity program in those days. The European PIIGS countries are involved in the same ‘austerity or else’ process. Our American neighbours are currently negotiating a spending reduction program. It seems there are many governments today who are in the same predicament as Canada in 1993.
Observation #3: have you noticed that municipal and provincial governments no longer cut the grass along Canada’s highways? In my father’s day, they created summer jobs for university students by cutting that grass. They believed that putting money in the hands of university students would stimulate the economy because (a) the students would spend the money, and (b) educating Canadians was good for Canada in the long run. Now it is more common for university students of get student loans and to emerge into the work force carrying a huge debt load. Governments owe less, individuals owe more.
My father’s primary approach was to live within his means and pay off his debts. And that’s what a whole series of governments seem to be trying to do today. So, it appears that the world’s big debt problem is being solved. But the second part of his approach seems much less popular: keeping his own economic house in order. Today’s investors seem reluctant to take responsibility for their own financial fate. They keep hoping the stock market will bail them out like the governments bailed out General Motors and the banks. They keep hoping they will get back the money they lost on their mutual funds. They keep hoping...
In my investment book, Beyond the Bull, I encourage people to be active investors, not passive. This is the wrong time in the cycle to buy and hold for the long term. The long term is over. It has been replaced by a series of short term ups and downs... like when my father was growing up. It’s time to replace your passive invest plan with a conservative responsible active plan – a plan that involves serenely observing the economic world and reacting to it in a pre-planned way.

Sunday, July 10, 2011

Greco-American Debt

My friend Richard, the engineer, sometimes likes to play dumb and ask me questions about the economy when he already knows the answer. It’s his way of keeping me sharp. This week he asked me: “Why is the Greek debt crisis so important to Europe.” With a population of only 6 million people, Greece represents a very small fraction of the European community. Why not let the Greeks default on their sovereign debt and let them live with the consequences? Why should the rest of Europe bail them out by lending them even more money?
To add further to this irony, he pointed out that the Americans are having a debt crisis now too. Unless they legislate an increase in their own debt ceiling, they too will default. Everyone knows neither the Greeks nor the Americans have the cash to pay off maturing debt. Both nations have to borrow more. But everyone believes the American crisis is not a real crisis: it’s just political bull. Republicans are trying to embarrass a Democratic president, and at the last minute, they will pass the required legislation. But the sorry truth is that neither nation can pay its current debts unless they borrow more.
Richard baited me further by making up a story of two neighbours: an American and a Greek. They each borrowed half a million dollars and opened a restaurant. One served hot dogs, hamburgers and steaks; the other offered souvlaki, mousaka and tzatziki. Both of them were unable to make it work, and both defaulted on their bank loans. Richard challenged me: “Why is this any different from a country defaulting on its loans? We don’t expect the bank to loan them even more money! And don’t tell me it’s because they are so big! On the grand scale of world economics, Greece is simply not that big! There are many cities bigger than the nation of Greece – no-one would bail out New York City, London or Tokyo.”
I reminded him about the 2008, 2009 banking crisis. I reminded him that most European and American banks were over leveraged, just like Greece and the USA. Except in the world of banking, it means the banks loaned too much money to borrowers who couldn’t make the payments. Let’s say that a certain European bank had a loan portfolio that was 22X its capital. And let’s say that part of that capital was invested in Greek Short term notes. And Greek Short term notes were downgraded from A to D. And because of that, the Short term notes dropped in value from 500 million Euros to 400 million Euros. In other words, our bank just lost 100 million Euros. Now it is forced to call in 100 million X 22 Euros in loans, to get back on side. That’s the real problem. That’s what happened in 2008 when the US sub prime mortgage backed paper was downgraded. Once bankers realized they couldn’t find buyers for those US dollar junk mortgages, their value dropped and the crisis unfolded. French banks own a lot of Greek paper. German banks own a lot.
The immediate problem is not with the ones who borrowed the money and can’t pay it back. The problem is with the bankers who loaned them the money. In 2008 their toes were trampled by American investment dealers, and now they are dancing with Zorba the Greek.
Then it was my turn to challenge Richard.
If the situation in Greece (or Italy, Spain, Portugal or Ireland) is really this dangerous, what have you done to protect your investments? In 2008, 2009 the stock market dropped in half. Individual investors need a plan to protect themselves against another banking crisis. What’s your plan? I turned the tables on him: “Why is the Greek debt crisis so important to you?”

Tuesday, June 21, 2011

The Golden Fleece of Europe

In my May 31 article, Mediterranean Blues, I suggested that one possible reason why the P.I.I.G.S. of Europe (Portugal, Ireland, Italy, Greece, Spain) might be in financial and political turmoil is because of political corruption and over-borrowing. Over borrowing had been used to create artificial prosperity in the PIIGS’ economies for political gain – in a democracy, prosperity leads to re-election. Political corruption was doing to Europe what mortgage lending corruption had done to the USA: endangering the banking system and ruining the economies. Under my scenario, the nations of southern Europe were taking advantage of the good credit of the nations of the north. But there is another, more sinister possibility.

Perhaps the nations of northern Europe have intentionally victimised the nations of the south.

Costas Los, President and Chairman of the marine insurance company The Strike Club, offered a “more European” way of looking at the over-leveraging of the Mediterranean nations. He reminded me of a by-gone era in Europe: the era of European empire building; the days when Europeans colonized the world. He suggested that the same gene that inspired the Spanish Conquistadores, the British Empire on which the sun never set, France’s Napoleonic era and the German Third Reich; this same gene might be responsible for today’s European debt crisis.

Here’s what he inferred: the imperialist nations of northern Europe recognized that the southern European have-not southern European nations were asset rich and cash poor. With this in mind, the northern nations loaned the Mediterranean nations money they knew would never be repaid. Their goal was the confiscation of assets. Inevitably the Greeks and Italians would be unable to pay and their assets would come under the control of the lenders, the northern nations. Instead of Napoleonic or Nazi armies, this invasion would be done by an army of blue suited bankers. But the result would be the same: the Mediterranean nations’ assets would come under the control of the North Sea nations. Bankers’ imperialism.

Thank you, Costas, for this enlightening point of view. As North Americans, we often see the world from our own narrow prospective.

Ironically enough, that’s precisely what I encourage investors to do in my book, Beyond the Bull. I suggest that objective investors make more money than subjective investors. Objectivity allows us to make changes when we need to change. Who is responsible for Europe’s debt problems; the people of the north or the people of the south? If we think it is important for us to know, we should objectively examine both sides of the question. But one thing remains clear: who is responsible for our own personal finances. We are. And if the problems of Europe upset the financial system as the problems of the United States did in 2008/9, it is our responsibility to take action. We can’t afford to ride out yet another severe decline in the stock market. We need to take action.

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).

This article and others by Ken are available at http://kennorquay.blogspot.com.

Contact Ken directly at ken@castlemoore.com.

Wednesday, June 1, 2011

Mediterranean Blues

On the south we have Libya, Tunisia, Egypt and the sequential overthrow of long standing Islamic dictatorships. On the north we have four of the five the PIIGS of Europe, those countries whose governments borrowed too much from the future so they could live high off the hog today: Portugal, Italy, Greece, Spain.

The Mediterranean region contains the roots of western civilization. The Egyptian, Greek and Roman Empires dominated our early history. Similarly, the noble Persian Empire was once the jewel of middle eastern culture. What happened? Today, in 2011, there is chaos where there once was culture.

How could this have happened? What lessons we can learn from the observation that the Mediterranean region is in chaos.

As a financial philosopher I have no trouble understanding the PIIGS of Europe: they pushed their luck too far. The five PIIGS nations borrowed too much money on behalf of the people. (The fifth PIG is Ireland – not a Mediterranean country.) They ran up huge debts and were unable to pay when the time came to pay. As members of the European Common Market, these have-not countries found a way to have. The Mediterranean PIGS’ governments spent way more than they took in and ran up huge debts. Their governments had borrowed their way to prosperity. And, in a democracy, prosperity leads to re-election. The governments of the European Mediterranean countries sunk their countries over their heads in debt so they could win votes and keep power. When those governments couldn’t make their monthly payments, governments had to cut back on spending and refinance. And the people rioted! Easy enough for a financial guy to understand. And easy enough for a political guy to understand too.

But why are the people of Mediterranean south suddenly rioting? Did their governments push their luck too far too? Some blame rising food prices for the north Africans’ uprisings. They argue that the dictatorial governments of these countries were benefiting from rising oil prices and the people were suffering from a punishing rise in food prices. Those dictatorships could have avoided the riots by subsidising food prices using the proceeds of excess oil profits. But the dictators had run up serious deficits and accumulated serious debt. They couldn’t help the people with food subsidies. And the people rioted! This explanation is not so easy for a financial guy to understand because we have no access to the dictators’ national bank books. We can’t verify that they pushed their luck too far. But it does seem possible that over-borrowing may be contributing to the overthrow of the North African dictatorships. We suspect the North African dictatorships borrowed excessively to keep power in their way: by maintaining a huge army and police force.

The Mediterranean theme seems to be corrupt governments borrowing excessively to stay in power. Dictatorship or democracy, the pattern is the same.

What about the people of the USA? Has the American government, in their heroic effort to kick-start house prices and create more jobs, borrowed too much money, just like the Mediterranean nations? We know that the American housing market is in shambles because big mortgage companies loaned billions to new home buyers who could not afford their mortgages. The whole sub prime mortgage financial fiasco came undone in 2008/9, and it’s still unravelling. Has the American government now fallen into the same trap as the yesterday’s over-leveraged home buyers and the Mediterranean nations: borrowing too much?

I have accused the Mediterranean governments of abusing their borrowing power in order to hold onto power. And now it’s payback time. And now it’s coming undone. But we would never accuse the American government of corrupt practices because, to us, they don’t seem corrupt. Canadians support the USA’s noble efforts to re-kindle their failing economy: it seems the right thing to do. But, right or wrong, the results will be the same in America as it is in the Mediterranean: political and economic chaos.

It’s tempting to pontificate about the rise and fall of the world’s economic and political tides. But let’s be practical. There’s nothing an individual Canadian investor can do to stop these tides. Fate will unfold according to its own agenda. We are merely observers.

Our impact will be felt only to the extent that we manage our own financial affairs in the midst of these economic storms. If the world’s economy comes undone again, as it did in 2008/9, we can’t stop it. But we can react to it.

Imagine if you had reacted to the bank crisis of 2008. If you had sold your stock portfolio any time in the last quarter of 2007 or the first half of 2008 and bought it back a year later, your RRSP would be significantly ahead of where it is now. But most investors would rather ponder the economic fate of the world and not react to it.

By now, “buy-and-hold” investors have made back most of what they lost in 2008/9. If the stock markets can rise by another 15%, they’ll break even. But if the market drops in half again, like it did in 2001/2 and 2008/9, they will be behind the 8-ball again.
In my investment book, Beyond the Bull, I wrote about having investment technique. An investment technique has two parts: (i) objectively observe the financial world, and (ii) react to it in a pre-planned way. We have observed that American consumers borrowed too much mortgage money – and this led to a 50% drop in the stock market. We now observe that over-borrowing in certain Mediterranean countries has put those economies at risk. If this Mediterranean Blues phenomenon spreads, there is a risk that the stock market could drop again.

Our advice? Don’t let the Mediterranean Blues catch you off guard. If this economic phenomenon triggers another decline in the stock market, act. In a bear market, whoever sells first wins.

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, May 17, 2011

Count Down to the G20

World Economic Review
Devil: world banks hold most of their reserves in US$-based investments. A lower dollar hurts these banks and puts the world’s shaky banking system at risk again.

Deep Blue Sea: the US economy is the engine that powers the world’s economy. It’s sputtering and coughing right now because of the collapse of the American real estate market. A lower US$ would help the American economy recover because it makes US exports more competitive in other countries.

The May 26 G20 meeting will face this devil-deep dilemma. Let’s see what we can glean from the trend of the US dollar vs. the basket of international currencies. In late April and early May it looked like the banking system was going to be sacrificed to help the US economy because the US dollar kept going down. It was sinking toward the ultra low level it hit when the banking collapse was in full bloom in 2008. Then, seemingly out of no-where, on May 5, 2011, the US dollar rose dramatically and began a zigzagged up trend. Are the economic powers that be trying to control the word’s currencies as May 26 draws near? Will they try to hold the US dollar where it is for the next few weeks?

Let’s review this devil-deep scenario from the Canadian perspective. Canada gets economic enjoyment when America has a modest amount of inflation. Our resource based economy thrives on other nations’ inflation. The 17% decline of the US dollar in the past 50 weeks has been accompanied by a rise in commodities such as grain prices, fuel prices and metals prices. This has been good for Canada. But, some analysts look at the recent collapse of gold and silver prices as a sign that this game is over. And they suggest that the current blow off in gasoline prices will be the final blow-off in the current inflation game. If the commodities inflation game really is over, that would not be a favourable development for Canada. Toronto stock market investors would want to sell their natural resource investments and stock up on health care or consumer staples investments. Yesterday’s leaders, the Canadian resource stocks, would become tomorrow’s trailers, if the US dollar starts to rise and American inflation cools off.

And it’s your portfolio of investments that hangs in the balance. That part of your RRSP or pension fund that is invested in the Canadian stock market depends on the price of the US dollar. In my investment book, Beyond the Bull, I explain the importance of getting experience in the investment world. Getting experience means taking action based on your knowledge of changes in the world’s economic situation. The devil-deep scenario outlined above has been with us for quite a few years now, following the 6-year devaluation of the US dollar from 2002 to 2008. And it’s still with us. But it seems easier to express an opinion about the market than to take action. It’s easy to think about economic things; it’s not so easy to do something in reaction to economic things.

When the financial press starts to report the important news that will flow from the G20 meeting a few weeks, remember how important it is for them to find balance among the various currencies. And remember how important it is for you to take action to protect your own investments in response to G20 currency policy.

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.

Monday, May 2, 2011

The DARK ART of Election Forecasting

A week before the election, I made the following wild and crazy forecast:
1. The Liberals will get trounced.
2. The NDP will make huge gains.
3. The Conservatives will get their majority.
4. The PQ will shrink.
5. Mr. Ignatieff will resign as Liberal leader; the Liberals will elect Bob Rae as their new leader.
6. Mr. Rae will negotiate a merger of the NDP and Liberals – let’s call the new party the Liberal Democrats.
7. The Liberal Democrats will be the opposition, when the recession/depression sets in, in 2012. The PCs will be blamed for the nation’s economic problems and when the next election comes in 2016, the New Liberal Democrats will form the government with the biggest lop-sided victory since Chrétien smoked Kim Campbell.
8. Scenario B is where the PCs get a minority again – under this scenario, the Liberal Democrats, along with the remains of the PQ, will defeat the
government and form the dreaded coalition. The coalition will form the government and lead Canada into the 2012 recession/depression. When the coalition breaks up and the election comes, Mr. Harper will win the most lop sided election since John Diefenbaker’s 1960s victory.

As you can see, in my view it is irrelevant who wins this election: a recession or depression is coming. Canadian politics can’t trump world economics.

And, as you can see, my naivety in politics has lead me to predict the formation of a new left-leaning party in the same way that a new right-leaning party was formed in the 1990s. Liberal and NDP supporters may urge me to stick to what I know best: the investment world. And keep my crazy political views to myself. And I would do that, were it not for one important concept: bullmanship.

In my investment book, Beyond the Bull, I talk about the different kind of lies found in the investment industry. My venture into political commentary sets me up for the creation of “the advertising lie.” In the investment world, we all present ourselves as qualified to help people make investment decisions – and we advertise that premise. Having made a starry eyed prediction about a Canadian political mega-merger, I can now wait… if my long-shot prediction does not come true, I will simply never mention it again. But if it does come true, I can quote myself time and time again as a political visionary who saw into the future. I will set myself up as a wise and insightful commentator who can truly see what lies ahead in Canadian politics. But I’m really a long-shot observer with a big imagination.

This is how the stock market’s advertising lie works.

Here’s what I mean. In Atlanta, USA, there are many people who have inherited shares of Coca Cola from the original inventor of Coke. Or from those local investors who bought into Coke 100 years ago and are still holding today. And today they are millionaires today because of their forefathers’ original wisdom in buying Coke shares when it was a small time local enterprise. This story is used time and time again by the investment industry to illustrate the wisdom of buying great companies and holding them for the long term.

It’s a true story: why am I referring to is as a lie? Easy: because the securities salesmen could have told the same story about General Motors a few years ago. Those who owned GM when it first became a company would also be millionaires today, except for one tiny detail: GM went bankrupt in 2010 and all the shareholders wound up with nothing. The reason the stock brokers tell the bullish Coke story is to persuade you to buy what they are selling. And the GM story does not support that goal. If you were a real estate agent trying to persuade an investor to sell his stocks and buy a commercial property, you might tell the GM story – or the Nortel story – or any other “they went broke” story. The stories are all bullmanship, designed to persuade you to buy whatever they are selling.

Now that I have boldly predicted the merger of the Liberals and the NDP under Bob Rae’s leadership, I just have to wait. If it does not come true, I will simple never talk about it again. If a merger does materialize, I will quote myself extensively and sell my services as a political visionary. I can’t lose.

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.

Sunday, May 1, 2011

Royal Numbers

The royal wedding is over and the royal honey moon has begun. CBC carried a story that Great Britain lost 5 billion pounds because of the wedding. Who could know how much theoretical revenue the British people lost because they stayed home to watch the wedding on the telly. They also reported that security cost the British people 20 million pounds: that’s $31.6 million Canadian. That’s interesting for Canadians: in June 2010, we spent $1,000 million (that’s $1 billion) on security for the G20 conference. Who would possibly believe that the Canadian government spent over 30 times the money on security for a one-week conference than the British paid for a one day event?

Who comes up with these crazy numbers? And who believes them?

In my investment book, Beyond the Bull, I warn about believing financial data. If a writer is trying to persuade his audience, the data he uses is suspect. If that British reporter was one who believes the British monarchy should be abolished, he might exaggerate the wedding’s expense as a way to support his anti-monarchist views. He might be inclined to inflate the expense of the royal wedding and understate the increased revenue it generated. His personal bias about royalty would be expressed in his economic estimate.

Financial estimates most often reflect the personal bias of the estimator, not economic reality.

The same can be said for official government statements: their economic “data” might be skewed to make a situation look and feel better than it really is. This is the irony of a free economy. The health of an economy depends on the spending habits of the people. When the down part of the cycle arrives, official government spokesmen act like some British newspaper reporters: they report in terms of official government bias. They try to make the economic situation look safer than it is so people will spend freely. And if their deception succeeds, the economy actually could recover. But if their bias and exaggeration is not believed, the people might curb their spending and make the economy worse! It’s one of those rare occasions when lies, biased reporting and intentional exaggeration is good.

How does this affect your investing?

Whenever you hear financial data, be suspicious. If that data comes from a salesman who is trying to persuade you to buy his product, it is suspect. In my chapter on the different types of lies that permeate the world of the stock market, I recommend that you don’t believe any of the data. Certainly some of the data might be accurate and certainly some is just persuasive bull. But the average investor is not in a position to sort the true information from the persuasive bull. My advice? It’s all suspect because it’s all persuasive. Once a novice investor accepts this premise, he enters a more realistic world: he learns do be an effective investor in the world of the unknown. His suspicion makes him cautious. Cautious investors do better than faithful unsuspecting investors.

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, April 20, 2011

Redefining 'Blue Chip'

The sales slogan most widely used by the financial planning industry in the 1990s was simple. We could all become wealthy if we simply bought a portfolio of blue chip stocks and held them indefinitely. And, in the period from 1991 to 2000, it worked. But it hasn’t been working lately, has it? Why not? What has gone wrong? Blue chip used to mean “big.” Somehow the safety of owning a big widely recognized company seemed a reasonable thing to do. “Small” was held out as risky or speculative, not so reasonable. Big was good in the old days.

But the twenty first century has seen that idea deteriorate badly. The biggest manufacturing company in the world went bankrupt in 2010. The biggest bank, brokerage firm, insurance company and mortgage company all needed bail outs in 2008/09. Between 2001 and 2008, the currency of the biggest country in the world dropped over 40% against the basket of smaller world currencies. We can no longer consider General Motors, Citibank, Merrill Lynch, AIG, Federal National Mortgage Assn, and the US dollar to be blue chip investments.

And now the credit rating company, Standard and Poor, has issued a warning that it could consider downgrading its AAA credit rating for the biggest and bluest of all: the sovereign debt of the USA herself! In the 1960s, folk singer Bob Dylan crooned: “You mothers and fathers throughout the whole land, don’t criticise what you can’t understand… The times, they are a-changin’”

My mother and father were teenagers in the 1930s. Imagine what they thought about the stock market and the economy. When the times changed in the 1950s, they were reluctant to participate in the investment world at all. For them, the stock market was speculating. It was more important to have a good job, spend only what you earn, and salt away your savings for a rainy day. They knew all about rainy days.

Those who were teenagers in the 1990s learned a whole different set of values. Buying and holding blue chip investments was one of their truest lessons.

I wonder what the teenagers of 2000 to 2010 learned about the stock market. They saw the market drop in half twice – the 2001/02 bear market and the 2008/09 decline.

I hope they learned that Bob Dylan was right. And when the times change, we had better change with them.

Now we see that the concept of “blue chip” has changed. Bigger no longer means better. How should the typical investor change in reaction to this new fact?

Big blue chip Microsoft stock is approximately the same price it was 10 years ago. The smaller Apple has gone up by 30X! Yes, there’s money to be made in the stock market. But blue chip is not the ticket.

In my investing book, Beyond the Bull, I suggest investors take stock of themselves. Know yourself. What was the stock market doing when you learned about it? Did you learn in the roaring 1990s bull? Or the swing-up-swing-down market of the 2000s? How was the market’s performance when you first began your investment adventure. If your first investments were made in the 1990’s you might believe in buying blue chip stocks and holding them for the long term: that’s what was working in the 1990s. If you learned to invest in the 2000s, you learned that buying low and selling high was a proper way to invest.

I learned to invest in the 1970s. It was one of those buy low, sell high eras. But, I worked for Merrill Lynch: their main focus was on blue chip American stocks. So, that’s what I learned. But, because I have had to earn a living in the financial markets these past 36 years, I have had to change my style as the times changed. Bob Dylan was right.

My advice? Leave yesterday’s blue chip dinosaurs to their financial fate. Stay light on your investment feet: we are in a buy-low-sell-high market.

Sometimes the hardest thing to change is your mind.

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, April 5, 2011

Voting Chevy

With a federal election campaign in full swing, we keep hearing that the electorate have short memories. Let’s test those memories.

Remember the General Motors bail out of 2009? Most of us recall the irony of the super-supportive NDP, with six sitting Members of Parliament elected by the people of Oshawa, Windsor and Hamilton backing the Conservative government’s multi-billion dollar tax-payer loans to GM in order to preserve manufacturing and steel making jobs in those three cities.

But do you know the hidden story?

My father tried to bail out GM single-handedly: at the age of 85 he bought a brand new Chevy. He believed in the North American auto industry: those cars were made of Canadian steel and he had worked as a machinist for the Steel Company of Canada for 30 years. In my father’s day, GM was the pride of American manufacturing and Stelco was the pride of Hamilton. For him, buying a Chevy was an act of patriotism. His purchase was helping his neighbours keep their jobs. But, in spite of his heroic octogenarian effort, both GM and Stelco declared bankruptcy. His sincere effort had been wasted.

Just before GM declared bankruptcy, the governments of Canada, Ontario and the USA had promised them bail-out loans totaling thirty-three billion dollars. Buying a Chevy had not been enough. Now my father, along with all the rest of us tax-payers, had loaned GM a very large sum. We all hoped the Conservative government, with the support of the NDP, working on behalf of my father, would somehow spin this straw into gold.

But even the big bail out loan didn’t prevent the inevitable. On June 1, 2009 General Motors declared bankruptcy. The common stock went to zero and was de-listed. I wonder how many pension plans owned GM stock. It seems logical that the pension plan of a company who sells steel would own shares of its biggest customer. If it did, then GM had declared yet another “gotcha!” on my father by stinging his pension plan.

The following year, the new streamlined stripped down General Motors issued new stock: over $20 billion in new stock! The various governments had recouped part of their loans!

Why is it important for readers to remember this ironic corporate fiasco? In my investment book, Beyond the Bull, I encourage investors to be objective: try to see economic situations for what they really are. Try to learn from the way other people behave in the economic world. That’s how you can become a better investor. But it’s not easy.

Now that Canadians are in an election campaign, political parties are aggressively trying to persuade us to see the situation the way they see it – and to vote for them. The Beatles once sang: “Try to see it my way…” There’s no objective thinking in an election campaign!

And what about my father? He passed away last summer, leaving me to drive his new Chevy. With gasoline prices flying through the roof, I’ll probably trade it for a small car with better fuel efficiency.

And what about you? Are you objective in your economic thinking? When your RRSP dropped 30% in the 2008/9 stock market crash, were you able to stay objective? Are you able to objectively look at the various candidates in this election? Or is it easier to slip back into your old familiar patterns of seeing the world the way you’ve always seen it?

Most investors are like my father, still thinking in the old ways. Most investors think that big blue chip companies are safe investments. But GM was once the biggest. Stelco was once the biggest. Buying and holding big blue chip companies no longer works. It’s time to be objective; it’s time to re-think the old ways.

The first step in becoming objective is to remember. Remember what happened in the past and learn from your mistakes.

Can we be objective about this election? When all the votes are tallied, will the NDP be re-elected to those six union-town seats in the House of Commons?

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).

This article and others by Ken are available at http://kennorquay.blogspot.com.

Contact Ken directly at ken@castlemoore.com.

Thursday, March 3, 2011

Revenge of the Sub Prime Mortgage Nerds.

My apologies go to Twentieth Century Fox for my paraphrasing their 1984 movie, Revenge of the Nerds. The story line featured nerdy good guys outfoxing their tormentors, the jocks and socialites; the movie ended happily with the nerds getting the girls. Classic 1980s Hollywood comedy.

A rather comedic development occurred in the USA’s real estate collapse and world banking neo-failure: it looks like the nerdy homeowners are getting revenge on the big banks. It seems there are a significant number of foreclosures where the mortgage documentation wasn’t quite right. A computer signed the mortgage document instead of a human being. And the computer notarized the fake signature: they call it robo-signing. Judges have been throwing them out of court. Assembly line mortgage documentation didn’t hold up in court. One American mortgage officer was able to crank out 5000 mortgages per day using robotic mortgage underwriting. And now the banks are having trouble enforcing their foreclosures.

What a miracle is the human mind. In my investment book, Beyond the Bull, I postulate that there is no mind more crafty, more imaginative, more persuasive than that of a good stock broker. But maybe I was wrong. A good mortgage lender who is out on a limb is pretty good too. Let me ask you this: if you were stupid enough to hold a portfolio of mortgages with faulty supporting documentation and if your foreclosure actions were regularly being thrown out of court, what would you do? Here’s what they did: they pretended to be noble. In a gesture of humanitarian kindness, they offered to let the defaulting homeowners pay a reduced affordable monthly payment and allowed them to stay in their houses. Ah, the milk of human kindness! This, they rationalized, would keep millions of houses from being sold on the open market at fire-sale prices, and would actually help both the banks AND the home-owning public. All those forced sales were depressing the housing market, and if we just keep those houses occupied, well maintained and off the market, eventually, we will all muddle through this crisis.

This illusion, as all other illusions, has its flaws. What’s a $300,000 mortgage on a $250,000 house really worth? And if the monthly payments are so low that the $300,000 loan actually increases over the years, what’s it really worth? And if the banks reported the true value of that loan (and the millions of others just like it), what would the banks be worth? That’s the beauty of being noble. Everyone else tries to be noble too. The bank regulators don’t want another crisis; they don’t want to force the banks to be more accurate in reporting the value of their mortgage portfolios because, after all, the banks are being so kind to those poor folks who are unable to pay. Maybe this is the way banking will be conducted in the future – instead of having faith that people will pay their debts, maybe we can all have faith that it doesn’t really matter if people pay or not. Banking in the Age of Aquarius.

In early 2009 when American tax-payers bailed out their biggest banks, homeowners complained that it wasn’t fair. It was banker’s greed that pushed the mortgage business to ridiculous extremes, endangering the banking system, pushing the economy into recession and forcing millions of homeowners into foreclosure. President Obama’s bank bail out scheme was making those tax payer/homeowners responsible for the banks self-inflicted problems! It didn’t seem fair. But so extreme was the banks’ greed that they even screwed themselves! The homeowners who could least afford their mortgages are now getting their revenge. They are getting to stay in their homes at much reduced monthly payments. Sweet!

So, when all’s said and done, who really got screwed? People who moved into houses they couldn’t afford seem to be emerging from their debacle in reasonable shape. The banks and mortgage companies whose greed squeezed the system so hard, got bailed out. So, who got screwed?

It’s the responsible Americans who still need justice. They bought houses they could afford and dutifully made their mortgage payments. But their houses have dropped 30% on average anyway. There’s no revenge for them.

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, February 22, 2011

Why are Africans rebelling? The Simple and Elegant Answer.

My long time friend Hank, smiled at my complex argument: African dictatorships are all coming unglued because of The Muslim Brotherhood and the Islamic Revolution. He smiled even more when we discussed the western press’s view about the north African people’s desire for Western style freedom of expression and self government. He actually started to chuckle as he explained his simple and elegant version of the real problem.

“Ken, you’re a chartist: get a chart of the price of grain for the last six months. Then you’ll see what the problem is.” So, I looked up the price of sorghum, an important cereal crop in Africa: it had risen 86% in the past 6 months! The price of wheat has gone up 67% in the same time! Hank pointed out that these people do not enjoy the same high income levels as we westerners. Food takes up a far larger percentage of their take-home pay. As long as they could get by in their modest lifestyles, they lived in peace. But now that the price of food has blown through the roof, they are hopping mad!

He chuckled even more as he pondered what he would do if he were an advisor to the north African dictators. He pointed out that all these countries are oil producing nations and that the price of oil has also risen in the past six month, though not as much as the price of grain. The dictators should simply use the excess profit on their oil exports to subsidize the price of food imports. Simple and elegant.

Neither of us did the math: how much grain is consumed vs. how much oil is produced. Does it add up? In these dictatorships, who controls the oil revenue and who buys the grain? I’m sure that implementing Hank’s simple and elegant solution might not be that simple. But his analysis is compelling, isn’t it?

In my investment book, Beyond the Bull, I encourage readers to try to see investing through the eyes of other participants in the investment process. That principle would also serve us well in the political arena. If we could walk in the same sandals as our north African friends, what would we learn?

Diverting state income from oil revenue to feed the people seems like good politics and good business to guys like Hank. But maybe it’s not that simple or that elegant. Maybe that oil revenue is used to pay the army and the police. Maybe oil revenue is used to prop up the bureaucracy of friends and supporters that a dictator needs to manage the various branches of government. Maybe these nations have borrowed against future oil revenue… maybe they’re seriously in debt like some European nations and need every penny of oil revenue just to repay their loans prop up the regime. Maybe this – maybe that: but who really knows?

Question: In a world that’s coming undone at the seams, what can we really do?

Answer: we can be a little more like my friend Hank: smile, live a simple and elegant life and keep your own house in order.

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.