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 Chr├ętien 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.