Saturday, January 26, 2019

Deadly 'Freedom 55'

These days it is difficult to know what to do as an investor. Nominally many U.S. stock markets are near their peaks but in terms of P/E the pricing is very moderate. Sentiment is mixed to negative; that is often not the sign of a bull market peak.  Here in Canada the stock markets have lagged now for years.  

Figure 1 shows how the Dow Jones rose between 2007 and today

Figure 2 shows how Canadian markets have barely performed since the peak of 2007. Commodities peaked in 2011 and other industries have not performed either.

There are plenty of other markets that over the last year or so have done a lot worse than the U.S. and even worse than Canada. Many thought just a year ago that the world was in a synchronized recovery. That concept has disappeared like snow in the sun.
Add to this confusion political grand standing, bullying and plain weak leadership and no wonder many Canadians feel so depressed. Oh, and then we have a declining housing market in Toronto and Vancouver. And in the U.S. as well. To make matters worse, the commodity space is at desperation levels with several oil and gas producers trading at prices equal to their annual cash flow. I don’t know who calls these markets expensive but yes, if one just looks at nominal prices in figure 1, such a person may say that we are at the peak of a massive bull market. I beg to differ, the prerogative of any self-respecting contrarian.
In the meantime, most Canadian stock market investors, unless diversified into the U.S. have barely made any money over the last decade or so. Blame Stephen Harper?  Blame Justin Trudeau or Rachel Notley? If you look at Canada’s chart from March 2009 until the end of Mr. Harper's term you would say that the performance was not that bad at all. But since then… But there are other theories that state the Canadian markets performs well when the U.S. is not and vise versa (for example check Herman van Genderen's book: "Stocks for fun and profits"), while politicians are barely affecting market performance.
If I must judge or better guestimate, I would say that bad politics reinforce underperformance and flattish performance. Good politics enable but are not the cause of good stock market performance. Overall it is the market and the economy that set prices. A lot of 'near-term' pricing is more based on sentiment: a general feeling that we approach ‘the end of the world’, or euphoria and a ‘new economy’. The media loves all that emotionalism but ultimately it is the market that does what it does.
When resources are cheap, industrial markets tend to do best and the latter make up the U.S. market for a large proportion. When industrial markets fall back, due to say high energy prices or other high commodity prices then the resource markets do good; i.e. Canada outperforms. This is further reinforced by trends in foreign exchange such as a rising Canadian dollar while resources are expensive. When oversupply kicks in, commodity prices drop, and the U.S. dollar increases in value. Do you notice how eastern and western Canada seem always to be out-of-sync?  Same idea!
If you combine Canada, Mexico and the U.S. you are looking at nearly 30% of the world economy. Is that diversified enough?  If you add the EU which is an economy even larger than that of the U.S., then we are talking about over 50% of this planet’s economy!  Most countries governed democratically go through similar trends such as budget deficits, rising illegal immigration, high government debt and now even populism and political correctness.
Yes, less developed markets grow faster, but just like the West several of these countries have demographics against them. Look at the greying population of Japan?  And China has an old population with incredible pension problems (a lot worse than us) and just like Russia they have less and less young men to put in their armies. Yet, when you listen to the ever-whining media, you’d think that in spite of their dictatorial regimes, the increasing greyness of their populations plus a very poor social security net that it is the West that is about to collapse and that we should let ourselves being bullied by those ‘loud mouth’ nations. 
In the early 1900s we had the League of Nations and the promise of no-more war. Then came the great depression and the age of populists which devolved into the First and Second World Wars. The notorious upstarts: two ex-socialists Stalin and Hitler along with some stooges.
Today we come out of the age of ‘globalism and no more war’.  Next, we got several populists Trump (not a socialist but neither a dictator) fighting with China’s Xi Jinping and Russia’s Vladimir Putin. Instead of concentration camps in Russia and Germany, we now have China’s re-education camps for Muslims and Russia is not far behind. These are frightening parallels. But it also shows that China or Russia or Saudi Arabia are not necessarily the heavy weights of tomorrow.  I would dare say: to the contrary but we, the West, are in many ways so ‘wimpy’ and hide behind each other’s skirts while China, Russia and even little Saudi are showing off their illusionary muscles.
Now that the West is becoming increasingly vigilant of protecting its intellectual property, China will soon weaken and its dreams of becoming a high-tech giant are likely to fade because they don’t encourage free and creative thinking. It really is that simple. The West is far without problems, but I take our problems any day over those of these three nations that seem to think they can force us by just shouting!
Thus, fellow investors, let’s not be intimidated by all this ‘noise’, and let’s not be scared into anything by media and politicians who just want more readership and more citizens to manipulate. What are we really trying to do?  Right, we want our money – our resources – used to make more money. There is nothing wrong with that contrary to the ‘noise’ of perpetual jalousie by those who never try to save and who live from paycheque to paycheque.
You must realize that your financial resources, cash, assets and other stores of wealth, can be used in many different ways. The bankers want you to invest your money in companies they control or in funds that gives them the power to use your money to their advantage. The stock market is nothing but a money raising machine, not that much different than investing in debt. The latter ‘rents’ your money and the first sells you part of the profits that are controlled by others.  Yes, these are classes of investment but not the only ones. When you hear the financial types talking about stocks and bonds, basically they want your money in the ventures they control!  These financial TV channels continuously promote to hand over your hard-earned money to the financial types. The o-so smart money managers ‘working’ for outrageous fees and the power to control the economy at your expense! 
Yes, in that way the market is rigged.  These paper securities are not the only assets you can invest in. You can take control! You can invest many other ways, like in your own business or that of a friend or in real estate. Managing your own rental real estate is also like owning and running your own business. There is gold that can be owned in many different forms; there is art or race horses you can own. You can own recreational vehicles to be rented out. There is so much more than just stocks and bonds and … those assets not only make you money; you can hold them physically or you can enjoy using them while making money. Ask yourself, how much are you really manipulated in handing off your assets by politicians, money managers, or bank employees or loans officer?   You undergo a nearly continuous barrage to hand over your money because you are too dumb to do so yourself - they say. Most of this stuff is a lot simpler than you are led to believe – you really don’t have to do deals everyday.
They make you feel like you are dependant on the other guy whether it is a smooth-talking banker or an installer of windows. Do you realize how simple it is to soak a cup of peas and make it into pea-soup that tastes a lot better than that sh.t you buy in a can or bottle? I bet that the home-made pea soup is also a lot cheaper and not laced with ‘chemicals’.
This society makes you believe that you go to ECS, then school, and then you work on a job that you likely hate and then ‘Ode to Joy’ there is blissful retirement.  And… you need a lot of money to retire and to do nothing while leaving the management of your hard-earned money to a ‘knowledgeably professional’ for… of course a big fee.  This is the illusion of ‘Freedom 55’! No, dear reader, your goal in life is not to live with an atrophied brain in a chair watching all day soap operas until your date of expiration. 
Your life is about learning, creating and overcoming challenges so that you become an ever-better person. It is about leading a full life where you have achieved many things and tasks that you loved to do. It is about realizing your potential and loving doing so. It is about creating a life that you grow never tired off and… if you do, you find new more pleasant things to do and learn even more! Sitting in your chair losing contact with friends or colleagues after age 65 is not much different than a socially sanctioned way of committing suicide and … your financial planner helps you to achieve that… for a price. Life doesn’t stop at a magical age boundary!  
Being financially successful is building up the assets you need to do what you want to do in life and once achieved you look for new things to do. Things or causes that you think are worth doing, while expanding the assets that enable you to do so! Those assets are not only pension plans, stocks and bonds they are anything that helps you make more money and accumulate even more assets enabling you to do more and more. People are talking about building a legacy; well what is your legacy?  Getting a world record in watching soap operas without going completely nuts?  I doubt that. 
Yes, you should help the people around you achieve what they want but… you are Number One! Nobody else really looks out for you other than perhaps your partner-in-life or some of your children.  And do you think those children will still take care of you when you are 250 years old?  Not likely!  Learn to think different now that your life expectancy is getting longer and longer. If you have several generations of grand children or grand-grand-grand-grand children do you really expect to remember all their names and who they are?  Are they really important to your happiness? No, you need a completely new perspective!
When you vote for a politician do you really think that person cares about you? Or does he, or she, care only about becoming prime-minister? The political noise is often meaningless. Investing in stocks and bonds is just one way to use your assets, but really it is an abdication from life! You could use those financial assets in so many other ways to lead a great life rather than farming them out to a bunch of treacherous sycophants only caring about their own interests!
Learn to think entirely different about your finances – learn to see it as the means to fulfill your goals and dreams in life. Yes, you may invest in stocks and bonds but maybe only until you figure out what better things you may do with it. There is nothing wrong with letting others use your money to achieve their dreams in life… but these are not your dreams and you are Number One!  Helping those around you to achieve their dreams with your assets may be a great legacy.  Often though, your moral support is much more valuable than the financial means you provide to accelerate achievement of their dreams. 
So, don’t let stock market noise or political grandstanding, or others who ‘manage’ your money distract you from your real goals in life. Your assets and your own skills will throw off a much greater reward than what you will gain from storing your money in the stock market. There is a place for everything, but I hope to have convinced you that you need a whole lot broader vision than that deadly dream of ‘Freedom55’. Empower yourself first! Or as James Altucher says: Choose Yourself!

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