The relevance of fatal flaws and finding opportunities.
In my last article, I discussed the need to embrace a new way of thinking — a way to achieve the results we are looking for in the troubled days ahead and a way to deprogram ourselves from the “buy and hold mindset”. At the very core of these strategies, is a philosophy which involves establishing a definition of — what strategy is fatally flawed? Once established, we can, in a sense, turn that strategy upside down to reveal its central flaws. In my last post, I discussed the basic problem with the research originating from the large financial institutions and how that research has destroyed the financial lives of many trusting investors. I see countless examples of the spokespersons for these financial institutions disbursing information which, at its core, is just designed to perpetuate the fuel to run these very institutions. That fuel is convincing you to “buy and hold”. In fact, if you study the structure of these financial institutions, you will find that their very existence is dependent on your willingness to “buy and hold”. They want you to hold whatever they sell you forever — even if they decide to sell their shares without your being aware. It is impossible to simply ignore these institutions, as they have a tremendous influence on the market. However, it is important to understand the basic flaw of who they are and what they stand for in order to make sound investment decisions. A perfect example of this is when you hear an analyst discussing the strategy of “buy and hold” as it refers to “valuations” — and most of all how “valuations are historically the most attractive” in x number of years. Anytime I hear this argument, I am infuriated because historical valuations are meaningless in a recession. To use any measure to determine how cheap stocks are is just a ploy to get you to “buy or hold stocks”. Valuations are only relevant perhaps in the “sell” decision and are never a justification to “hold”. I would equate this “flawed strategy” to going to the grocery store to find that all of the milk is on sale, only to learn it is on sale because it is past its expiration date. The lesson of this flawed strategy is —there is a time to own stocks when economic conditions support owning stocks and there is a time to reduce or eliminate stock positions at a time when economic conditions do not support owning them — like now.
The flawed “buy and hold” strategy has been defined and we have effectively dismantled the “valuation” myth, so now we can look at the market in “reverse”. This means we look for market flaws and define those that are fatal. Those fatal flaws are crucial in our decision making. If the markets are rallying on the “valuation” myth with no supportive economic improvement, I would use an inverse Exchange Traded Fund to capitalize on the inevitable decline of that index or sector as well as using an Inverse Exchange Traded Fund to hedge any position I am being forced to hold. I would also use an Inverse Exchange Traded Fund if the market is rallying on flimsy economic data or the “maybe someday” rational, that the economy will improve because one economic report improved a fraction of a percent while several others didn’t. The sooner we realize that the economy is either improving or not improving, we see that the “maybe someday” theory doesn’t work because someday could be a long way away.
Another fatal flaw to be recognized is the myth that more failed government policy will reverse a market or economic downturn. In the case of the recent market advance this Friday, investors decided to buy stocks because Ben Bernanke said the Central Bank will do “all it can” to sustain an expansion. That expansion is still restrained by weaker –than-expected consumer spending and poor job growth. First of all, the fatal flaw in this proclamation is that we have heard this before when we were first introduced to the stimulus bill and thus far we have seen virtually no improvement in the economy — especially in the employment situation. Apparently, Mr. Bernanke is saying — you know those things we have been doing to get the economy going that aren’t working? Well, we are going to do more of them. Second, the fatal flaw in Bernanke’s statement that the government would continue to “buy debt” to keep interest rates low is, that this “quantitative easing” or what I like to refer to as “quantitative dis-easing”, is creating artificially low interest rates and high bond prices which could potentially result in an inevitable bond bubble. The opportunity here — allocate money in anything which counts on interest rates going up and use Inverse ETFs which short the U.S. treasury to hedge existing positions. The strategy of using interest rates and Central Bank activity as the barometer for inflation is, at its core, fatally flawed since the Central Bank is keeping interest rates artificially low through “quantitative dis-easing” and “Fed Policy”. The real inflation will be seen in rising commodity prices as it is beginning to show in China. The opportunity — buy commodities and precious metals because they will be the only true gauge of inflation prior to the “bond bubble” bursting. The economic consequences of the “bond bubble” bursting will be catastrophic to the overall economy and to consider bonds a panacea against the volatility of the stock market is a fatally flawed way to think. This fatally flawed strategy of viewing bond yields, economic reports and interest rates as the true gauge of inflation will ultimately result in investors being annihilated in a bond based long strategy when inflation takes hold. The opportunity — recognize that once the fed discontinues artificially low interest rates, inflation will result. Commodity prices will be a much more accurate economic indicator so the opportunity is — invest in commodities and precious metals in advance of the Central Bank backing off their failing strategy. We will never see the Central Bank buying commodities to artificially keep commodity prices low, therefore they are a much better gauge of reality.
If we embrace this type of reverse thinking we will begin to see the market and the economy as it really is and not as we want it to be. If we continue to think through the fatal flaws of the market and find the opportunities which lie in them, we will realize ultimately the best characteristic of this economy and market is not that “it always goes up”, but rather that that it always provides opportunities to those who eagerly seek them out. We will make our greatest fortunes when our discipline allows us to think in a way that may defy the logic of those around us. Every market, every economy and for that matter, every person is flawed in some way. It is this recognition that no flaw, whether in our portfolios, in our economy, in our markets or in ourselves need be fatal if we acknowledge its existence. It is only in denying its existence that it becomes a destructive force in our portfolios, our economy and most importantly in our lives.
Thank You,
Jeffrey C. Sica
PresidentSICA Wealth Management, LLC
In my last article, I discussed the need to embrace a new way of thinking — a way to achieve the results we are looking for in the troubled days ahead and a way to deprogram ourselves from the “buy and hold mindset”. At the very core of these strategies, is a philosophy which involves establishing a definition of — what strategy is fatally flawed? Once established, we can, in a sense, turn that strategy upside down to reveal its central flaws. In my last post, I discussed the basic problem with the research originating from the large financial institutions and how that research has destroyed the financial lives of many trusting investors. I see countless examples of the spokespersons for these financial institutions disbursing information which, at its core, is just designed to perpetuate the fuel to run these very institutions. That fuel is convincing you to “buy and hold”. In fact, if you study the structure of these financial institutions, you will find that their very existence is dependent on your willingness to “buy and hold”. They want you to hold whatever they sell you forever — even if they decide to sell their shares without your being aware. It is impossible to simply ignore these institutions, as they have a tremendous influence on the market. However, it is important to understand the basic flaw of who they are and what they stand for in order to make sound investment decisions. A perfect example of this is when you hear an analyst discussing the strategy of “buy and hold” as it refers to “valuations” — and most of all how “valuations are historically the most attractive” in x number of years. Anytime I hear this argument, I am infuriated because historical valuations are meaningless in a recession. To use any measure to determine how cheap stocks are is just a ploy to get you to “buy or hold stocks”. Valuations are only relevant perhaps in the “sell” decision and are never a justification to “hold”. I would equate this “flawed strategy” to going to the grocery store to find that all of the milk is on sale, only to learn it is on sale because it is past its expiration date. The lesson of this flawed strategy is —there is a time to own stocks when economic conditions support owning stocks and there is a time to reduce or eliminate stock positions at a time when economic conditions do not support owning them — like now.
The flawed “buy and hold” strategy has been defined and we have effectively dismantled the “valuation” myth, so now we can look at the market in “reverse”. This means we look for market flaws and define those that are fatal. Those fatal flaws are crucial in our decision making. If the markets are rallying on the “valuation” myth with no supportive economic improvement, I would use an inverse Exchange Traded Fund to capitalize on the inevitable decline of that index or sector as well as using an Inverse Exchange Traded Fund to hedge any position I am being forced to hold. I would also use an Inverse Exchange Traded Fund if the market is rallying on flimsy economic data or the “maybe someday” rational, that the economy will improve because one economic report improved a fraction of a percent while several others didn’t. The sooner we realize that the economy is either improving or not improving, we see that the “maybe someday” theory doesn’t work because someday could be a long way away.
Another fatal flaw to be recognized is the myth that more failed government policy will reverse a market or economic downturn. In the case of the recent market advance this Friday, investors decided to buy stocks because Ben Bernanke said the Central Bank will do “all it can” to sustain an expansion. That expansion is still restrained by weaker –than-expected consumer spending and poor job growth. First of all, the fatal flaw in this proclamation is that we have heard this before when we were first introduced to the stimulus bill and thus far we have seen virtually no improvement in the economy — especially in the employment situation. Apparently, Mr. Bernanke is saying — you know those things we have been doing to get the economy going that aren’t working? Well, we are going to do more of them. Second, the fatal flaw in Bernanke’s statement that the government would continue to “buy debt” to keep interest rates low is, that this “quantitative easing” or what I like to refer to as “quantitative dis-easing”, is creating artificially low interest rates and high bond prices which could potentially result in an inevitable bond bubble. The opportunity here — allocate money in anything which counts on interest rates going up and use Inverse ETFs which short the U.S. treasury to hedge existing positions. The strategy of using interest rates and Central Bank activity as the barometer for inflation is, at its core, fatally flawed since the Central Bank is keeping interest rates artificially low through “quantitative dis-easing” and “Fed Policy”. The real inflation will be seen in rising commodity prices as it is beginning to show in China. The opportunity — buy commodities and precious metals because they will be the only true gauge of inflation prior to the “bond bubble” bursting. The economic consequences of the “bond bubble” bursting will be catastrophic to the overall economy and to consider bonds a panacea against the volatility of the stock market is a fatally flawed way to think. This fatally flawed strategy of viewing bond yields, economic reports and interest rates as the true gauge of inflation will ultimately result in investors being annihilated in a bond based long strategy when inflation takes hold. The opportunity — recognize that once the fed discontinues artificially low interest rates, inflation will result. Commodity prices will be a much more accurate economic indicator so the opportunity is — invest in commodities and precious metals in advance of the Central Bank backing off their failing strategy. We will never see the Central Bank buying commodities to artificially keep commodity prices low, therefore they are a much better gauge of reality.
If we embrace this type of reverse thinking we will begin to see the market and the economy as it really is and not as we want it to be. If we continue to think through the fatal flaws of the market and find the opportunities which lie in them, we will realize ultimately the best characteristic of this economy and market is not that “it always goes up”, but rather that that it always provides opportunities to those who eagerly seek them out. We will make our greatest fortunes when our discipline allows us to think in a way that may defy the logic of those around us. Every market, every economy and for that matter, every person is flawed in some way. It is this recognition that no flaw, whether in our portfolios, in our economy, in our markets or in ourselves need be fatal if we acknowledge its existence. It is only in denying its existence that it becomes a destructive force in our portfolios, our economy and most importantly in our lives.
Thank You,
Jeffrey C. Sica
PresidentSICA Wealth Management, LLC
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