A major conflict is now underway on the U.S. Supreme Court between Justices Elena Kagan and Neil Gorsuch over the issue of judicial deference to the administrative state.
Their division centers in part on whether or not a contentious Supreme Court precedent, Auer v. Robbins(1997), should be kept in place by the justices or struck down in its entirety. In Auer, the Court held that when an “ambiguous” regulation promulgated by a federal agency is challenged in court, the judge or judges hearing the case should respect the expertise of the agency and its staff and therefore defer to the agency’s interpretation of its own regulation. An agency’s interpretation, the Court held in Auer, is “controlling unless plainly erroneous or inconsistent with the regulations being interpreted.”
Last month, the Supreme Court decided a case that asked the justices to overrule Auer once and for all. Writing for a narrow majority in Kisor v. Wilkie, Justice Elena Kagan managed to save Auer from total destruction. “Auer deference retains an important role in construing agency regulations,” Kagan wrote. “When it applies, Auer deference gives an agency significant leeway to say what its own rules mean. In so doing, the doctrine enables the agency to fill out the regulatory scheme Congress has placed under its supervision.”
Critics of Auer deference argue that the doctrine is tantamount to judicial abdication, that it tells judges to stop doing their judicial duty. Kagan acknowledged those critics, but insisted that the doctrine, while deferential, though still have some teeth. “First and foremost, a court should not afford Auer deference unless the regulation is genuinely ambiguous. If uncertainty does not exist, there is no plausible reason for deference.” According to Kagan, Auer “is a deference doctrine not quite so tame as some might hope, but not nearly so menacing as they might fear.”
Justice Neil Gorsuch was not persuaded by Kagan’s positive view. “It should have been easy for the Court to say goodbye to Auer,” Gorsuch wrote. Not only does Auer require judges “to accept an executive agency’s interpretation of its own regulations even when that interpretation doesn’t represent the best and fairest reading,” but the precedent also “creates a ‘systematic judicial bias in favor of the federal government, the most powerful of parties, and against everyone else.'”
Gorsuch also challenged Kagan’s claim that the Auer doctrine has some judicial teeth. On a daily basis, Gorsuch wrote, federal judges “reach conclusions about the meaning of statutes, rules of procedure, contracts, and the Constitution. Yet when it comes to interpreting federal regulations,” he continued, “Auer displaces this process and requires judges instead to treat the agency’s interpretation as controlling even when it is ‘not…the best one.'”
It is no surprise that Kagan and Gorsuch are now squaring off over this particular issue. In their respective pre-SCOTUS careers, the two figures basically stood on opposite sides of the same general debate.
For example, in a 2001 article for the Harvard Law Review, Kagan, who was then a Harvard law professor, made the case for broad judicial deference not only to federal agencies, but also to those presidents who seek to wield extensive influence over federal regulators. As an example of this phenomenon in action, she pointed to President Bill Clinton:
Faced for most of his time in office with a hostile Congress but eager to show progress on domestic issues, Clinton and his White House staff turned to the bureaucracy to achieve, to the extent it could, the full panoply of his domestic policy goals. Whether the subject was health care, welfare reform, tobacco, or guns, a self-conscious and central object of the White House was to devise, direct, and/or finally announce administrative actions—regulations, guidance, enforcement strategies, and reports—to showcase and advance presidential policies. In executing this strategy, the White House in large measure set the administrative agenda for key agencies, heavily influencing what they would (or would not) spend time on and what they would (or would not) generate as regulatory product.
Under Kagan’s view, the courts should generally extend to same deference to such presidential behavior as the courts already extend to the regulatory agencies.
Gorsuch, by contrast, established himself as a critic of judicial deference to the administrative state while serving as a judge on the U.S. Court of Appeals for the 10th Circuit. In his 2016 concurrence in Gutierrez-Brizuela v. Lynch, for example, Gorsuch challenged the notion that judges should defer to an agency’s interpretation of an “ambiguous” federal statute. “Under any conception of our separation of powers,” Gorsuch wrote, “I would have thought powerful and centralized authorities like today’s administrative agencies would have warranted less deference from other branches, not more.”
In sum, when the next big case testing the bounds of judicial deference to the administrative state reaches the Supreme Court, it will be Kagan and Gorsuch drawing the battle lines.
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A major conflict is now underway on the U.S. Supreme Court between Justices Elena Kagan and Neil Gorsuch over the issue of judicial deference to the administrative state.
Their division centers in part on whether or not a contentious Supreme Court precedent, Auer v. Robbins(1997), should be kept in place by the justices or struck down in its entirety. In Auer, the Court held that when an “ambiguous” regulation promulgated by a federal agency is challenged in court, the judge or judges hearing the case should respect the expertise of the agency and its staff and therefore defer to the agency’s interpretation of its own regulation. An agency’s interpretation, the Court held in Auer, is “controlling unless plainly erroneous or inconsistent with the regulations being interpreted.”
Last month, the Supreme Court decided a case that asked the justices to overrule Auer once and for all. Writing for a narrow majority in Kisor v. Wilkie, Justice Elena Kagan managed to save Auer from total destruction. “Auer deference retains an important role in construing agency regulations,” Kagan wrote. “When it applies, Auer deference gives an agency significant leeway to say what its own rules mean. In so doing, the doctrine enables the agency to fill out the regulatory scheme Congress has placed under its supervision.”
Critics of Auer deference argue that the doctrine is tantamount to judicial abdication, that it tells judges to stop doing their judicial duty. Kagan acknowledged those critics, but insisted that the doctrine, while deferential, though still have some teeth. “First and foremost, a court should not afford Auer deference unless the regulation is genuinely ambiguous. If uncertainty does not exist, there is no plausible reason for deference.” According to Kagan, Auer “is a deference doctrine not quite so tame as some might hope, but not nearly so menacing as they might fear.”
Justice Neil Gorsuch was not persuaded by Kagan’s positive view. “It should have been easy for the Court to say goodbye to Auer,” Gorsuch wrote. Not only does Auer require judges “to accept an executive agency’s interpretation of its own regulations even when that interpretation doesn’t represent the best and fairest reading,” but the precedent also “creates a ‘systematic judicial bias in favor of the federal government, the most powerful of parties, and against everyone else.'”
Gorsuch also challenged Kagan’s claim that the Auer doctrine has some judicial teeth. On a daily basis, Gorsuch wrote, federal judges “reach conclusions about the meaning of statutes, rules of procedure, contracts, and the Constitution. Yet when it comes to interpreting federal regulations,” he continued, “Auer displaces this process and requires judges instead to treat the agency’s interpretation as controlling even when it is ‘not…the best one.'”
It is no surprise that Kagan and Gorsuch are now squaring off over this particular issue. In their respective pre-SCOTUS careers, the two figures basically stood on opposite sides of the same general debate.
For example, in a 2001 article for the Harvard Law Review, Kagan, who was then a Harvard law professor, made the case for broad judicial deference not only to federal agencies, but also to those presidents who seek to wield extensive influence over federal regulators. As an example of this phenomenon in action, she pointed to President Bill Clinton:
Faced for most of his time in office with a hostile Congress but eager to show progress on domestic issues, Clinton and his White House staff turned to the bureaucracy to achieve, to the extent it could, the full panoply of his domestic policy goals. Whether the subject was health care, welfare reform, tobacco, or guns, a self-conscious and central object of the White House was to devise, direct, and/or finally announce administrative actions—regulations, guidance, enforcement strategies, and reports—to showcase and advance presidential policies. In executing this strategy, the White House in large measure set the administrative agenda for key agencies, heavily influencing what they would (or would not) spend time on and what they would (or would not) generate as regulatory product.
Under Kagan’s view, the courts should generally extend to same deference to such presidential behavior as the courts already extend to the regulatory agencies.
Gorsuch, by contrast, established himself as a critic of judicial deference to the administrative state while serving as a judge on the U.S. Court of Appeals for the 10th Circuit. In his 2016 concurrence in Gutierrez-Brizuela v. Lynch, for example, Gorsuch challenged the notion that judges should defer to an agency’s interpretation of an “ambiguous” federal statute. “Under any conception of our separation of powers,” Gorsuch wrote, “I would have thought powerful and centralized authorities like today’s administrative agencies would have warranted less deference from other branches, not more.”
In sum, when the next big case testing the bounds of judicial deference to the administrative state reaches the Supreme Court, it will be Kagan and Gorsuch drawing the battle lines.
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Last month President Trump briefly described what in his vision war with Iran would look like if launched: it “wouldn’t last very long” and “we’re not talking boots on the ground,” he said in an interview. “I hope we don’t but we’re in a very strong position if something should happen,” he added as cited in Reuters. As we previously suggested, if things escalate to direct US military assault on Iran, it would likely (at least initially) take place in the manner of a “one and done” major fireworks display — the idea being to hit hard, then declare a hasty “victory” and get out fast… at least in Trump’s ideal version of how things would play out, similar to the prior two strikes on Syria.
* * *
“…it could go either way, and I’m OK either way it goes.”Image source: EPA-EFE
While President Trump’s position on Iran tends to change with little notice, he backed away from his insistence that he doesn’t want war with Iran on Monday, saying now of the war “it could go either way, and I’m OK either way it goes.”
Trump added that it’s “getting harder for me to want to make a deal with Iran” in the first place, because he views them as “behaving very badly,” and are “the number one state of terror in the world.”
Trump followed this up by announcing new sanctions against China, saying they were intended to punish them for “accepting crude oil.” This is likely to be a bigger problem for US-China ties than Iran, as Iran is already heavily sanctioned.
If Trump’s new bellicose stance sticks, this could be a major shift in US hostility toward Iran. President Trump has been one of the few top officials insisting he didn’t want a war as administration hawks continued to talk of a conflict as all but inevitable. If Trump is indeed “OK either way” on the war, it’s not going to be any secret that his top aides will be pushing him to choose war over peace.
via ZeroHedge News https://ift.tt/2SwrWfU Tyler Durden
Another ex-Tesla employee has surfaced at Apple: this time, according to Bloomberg, it’s former VP of Interior and Exterior Engineering Steve MacManus. He marks the third former Tesla employee that has drifted over to Apple over the course of the last year.
He left Tesla near the beginning of the month and has joined Apple as a Senior Director, according to his LinkedIn profile. He worked at Tesla since 2015, after working at Jaguar Land Rover, Bentley Motors and Aston Martin.
It’s not certain whether or not Apple is seeking his design skills beyond automotive purposes. Apple’s Lead Designer, Jony Ive, announced weeks ago that he was planning on leaving the company.
Apple also hired former Tesla drive systems vice president Michael Schwekutsch in March and former chief vehicle engineer Doug Field in August.
The two companies have been poaching each others’ engineers for years. In 2015, Tesla CEO Elon Musk called Apple a “Tesla graveyard”. There has long been speculation of a partnership between the two companies, but nothing has ever materialized.
We noted that MacManus had left Tesla in an article early in July.
via ZeroHedge News https://ift.tt/2Y62yDT Tyler Durden
Ever-ready to ignite some momentum, headline-reading algos panic-bid stocks on headlines that US trade negotiators are to head to China for face-to-face talks.
But the machines don’t care…
Pushing the S&P 500 back above 3,000…
Offshore Yuan spiked…
Bloomberg reports that the US team will be in Shanghai through Wednesday, according to people familiar – which is odd because it’s already Wednesday there.
via ZeroHedge News https://ift.tt/2Zi69Le Tyler Durden
In 1993, William Kurt Hauser, a San Francisco investment analyst, presented his results from an incredibly interesting study.
Hauser had analyzed tax revenues in the United States over time and came to the conclusion that tax revenue as a percentage of GDP had remained around a narrow band of 19% since 1946.
That was astonishing. After all, over that same period, tax rates had been all over the place.
The top marginal tax rate was as low as 28% in the 1980s and as high as 94% right at the end of WWII.
But despite those extreme variations, overall tax revenue had barely changed.
To better understand why, try and imagine the economy as a giant pie. Hauser’s data shows that the government’s slice of the pie is always around 19%– no matter how big the pie (or how high or low taxes are).
That means that the obvious solution to increasing tax revenue is to grow the pie itself.
While a few places in the world (like Singapore) have figured this out, this productive mindset completely escapes nearly every major western government.
And in the Land of the Free, the cries for higher taxes are getting louder and louder.
In the US, almost every candidate supports a government-run healthcare and university system, and claims it should all be “free”.
Their solution to everything is more government, more regulation, and of course higher taxes– all things that shrink the pie instead of increasing it.
Some of the presidential candidates now support income tax rates of 70-90%.
Elizabeth Warren wants to go as far as taxing not just income, but also wealth (a policy that’s been dropped by virtually every “socialist” country in the world, by the way).
Some want higher estate taxes and some want an investment sur-tax… But they ALL want higher taxes.
The Bolsheviks simply don’t understand that their higher tax rates won’t actually increase tax revenue.
Again, the numbers undeniably show that the size of the government’s piece of the economic pie always remains 19% of GDP– no matter how high the tax rates are.
But that’s a concept they will never bother to consider.
Instead, they’ll just keep riding their Bolshevik high horses.
Of course, they tell you not to worry because their higher taxes will only hit rich people who earn over $400,000– you know, those greedy dentists and small business owners.
But taxing just the top 1% will barely make a dent in the budget required to fund all of these socialist programs.
So then they’ll start talking about taxing the top 5%. Then the top 10%. And soon these higher taxes will end up slamming right into the middle class.
The much-despised “Alternative Minimum Tax” is a great example; it was originally passed back in the 1960s specifically to tax the very wealthy. But today millions of people are ensnared by the AMT.
Even the US federal income tax itself is a great example.
When it was originally passed in 1913, federal income tax targeted wealthy people, and was only paid by the top 3% of income earners. 97% of Americans paid no federal income tax.
Today tens of millions of people in the middle class pay income tax.
Fortunately, there are simple steps you can take to dramatically reduce your tax obligation.
This is something that makes sense no matter what happens next.
Think about it like this… if you can eliminate capital gains tax, you’ve essentially earned a RISK-FREE return of 23.8%.
Reducing your taxes is the easiest and SAFEST way to generate a significant return on investment.
And there are MANY legal strategies to do just that.
If you are a business owner or a self-employed professional, such as a consultant or dentist, then you know the pain of crippling taxes and regulations all too well.
Fortunately you also have access to some of the greatest opportunities to drastically slash your taxes (potentially to nearly ZERO).
These legal tax-reduction strategies used to be available only to giant mega-corporations with armies of lawyers at their call, but globalization has changed the game.
Now, even small business owners can take advantage of them– if they have the right knowledge and tools.
Even regular employees can still take advantage of a little-known opportunity to slash your taxes and boost your retirement savings at the same time.
Here’s a small selection of strategies to legally pay minimal taxes…
Anyone can stash away up to $56,000 in 2019, TAX-FREE, for their retirement through a solo 401(k) with a small side hustle (such as driving Uber or renting out a room on Airbnb)
Business owners and self-employed professionals can slash their business’ corporate tax to just 4% (and pay NO tax on dividends) by moving to Puerto Rico…
…or they can earn up to $2 MILLION per year and legally not pay corporate tax by using a captive insurance company (without moving their business)
Investors and day traders can legally cut their capital gains tax to 0% by moving to Puerto Rico
Location-independent individuals can earn upwards of $150,000+ per year, nearly TAX-FREE by taking advantage of the Foreign Earned Income Exclusion
Investor’s who are sitting on capital gains can take advantage of Opportunity Zones, an overlooked tax incentive, that could save them $279,996 (or more) over the next ten years
And much, much more…
And all of these strategies are completely legal.
For example, captive insurance is in section 831(b)(2), the Foreign Earned Income Exclusion is in section 911, Puerto Rico’s incentives are in section 933(1) and Opportunity Zones can be found in section 1400Z-2.
These aren’t hidden loopholes. They’re right there in the tax code.
I encourage you to learn more about them because reducing your taxes is the easiest and SAFEST way to generate a significant return on investment.
That sentence has been uttered in Washington DC exactly one time ever, by a Senator announcing that the US government was officially debt free.
That was on January 8, 1835 when the debt that the United States government had accrued since it’s birth was finally paid off.
Never again would the United States be debt free.
It took 174 years for the debt to rack up to a mind boggling $11 TRILLION in 2009.
And then it took only ten years to balloon ANOTHER $11 trillion.
Today the national debt is larger than the entire economy of the USA, $22 trillion.
It took 147 years to get a trillion dollars into debt. The USA now routinely adds at least $1 trillion in debt every 365 days.
And why exactly are we adding all this debt? These are the good times!
The economy has been growing for a decade. The stock market is pumping up to all time highs. Almost every asset class is practically bursting with wealth. We’ve even seen record tax revenues.
And still, routine spending is a trillion dollars more than the government collects.
Any semblance of financial restraint is not even an afterthought on politicians’, or their constituents’, mind.
This is really insane.
Back in 2009, people were actually talking about how troubling the debt was… when it was half of what it is now.
A 2009 Forbes article is almost adorable as it predicts the US debt will be $14 trillion by 2019. Only about 50% off… and still, the author was extremely concerned. As he should have been.
As we all should be, even more so now.
Back then, 7.7% of the revenue the federal government collected went towards servicing the debt, about $162 billion.
This year about 15.4% of the $3.4 trillion tax revenue was spent entirely on interest payments for America’s massive debts. That’s $523 billion of productivity taxed away, because the politicians don’t care to balance the budget and pay down the debt.
That is just the interest. It’s like if you or I paid just the minimum balance on our credit card every month, while spending 33% more than we earn each year.
Eventually, your card would be declined.
But the US government has the power to raise the limit on it’s own credit card, the debt ceiling, which it routinely does.
They may be able to ignore economic realities for much longer than we can. But rest assured, the same principles apply.
Remember, these are the good times, interest rates are low, and everyone still considers the US government good for their debts.
But suppose a recession take a chunk out of tax revenue. Or suppose the US gets embroiled in even more, larger, costlier wars– far fetched, right?
There’s no telling what kind of turmoil this unsustainable debt could cause, even without a major event. From Rome to the Weimar Republic, massive debts have wreaked havoc on the value of money, and society in general.
That’s not to say that the same would necessarily happen in the USA. But what is certain is that countries with healthy finances fare better.
It is the Universal Law of Prosperity: take in more money than you spend. And when that hasn’t even been an afterthought for politicians in decades, it is time to prepare for the havoc that could wreak on society.
Rational people don’t ignore these things.
There are so many steps that you can take to insulate yourself from the consequences of this runaway debt.
One is to move some of your savings into precious metals like gold and silver. Chances are that what’s been true for the last few thousand years will continue to be true: they hold their value.
It also makes sense to spread some of your risk outside the USA.
That could mean getting a second passport, so that one country doesn’t get to dictate where you can live, work, and travel.
Foreign property gives you somewhere to go in the worst case scenario. Foreign bank accounts mean you have some money outside the reach of certain governments, and American lawyers.
And the best thing about taking all these steps to survive and thrive through the likely turmoil the debt will cause, is that you aren’t any worse off, even if nothing happens.
There is absolutely no downside to protecting yourself and your family with these, and many other “Plan B” strategies.
via ZeroHedge News https://ift.tt/2Y99cEb Tyler Durden
After six consecutive auctions without a tail, moments ago the US Treasury finally was met with subpar demand for its just auctioned off $40 billion in 2Y notes, which priced at a high yield of 1.825%, a 0.2bps tail to the 1.823% When Issued, and the first tail since December 2018 (which for some may come as a surprise considering that for virtually all of 2019 the Fed had made clear its intentions to soon start cutting rates).
The internals were similarly disappointing, with the Bid to Cover dipping from 2.576 in June to 2.500, below the 6 month average of 2.58. Foreign demand slumped, with Indirects taking down jkust 43.5%, the lowest since February and well below the 48.46% recent average. And with Directs taking down 24.9%, it left Dealers holding 31.6% of the auction, the highest since April, and below the 34.5% average.
Overall, a subpar auction in every aspect, which however is surprising considering that it is certainly the market’s consensus that a recession will take place some time in 2020, and as such the yield on 2Y paper will only continue to slide.
via ZeroHedge News https://ift.tt/2OctgpH Tyler Durden
Sen. Cory Booker (D-NJ) can get in line behind Joe Biden as the second 2020 presidential candidate who wants to assault President Trump.
In a Monday night appearance on “Late Night with Seth Meyers,” booker relayed a story from an Iowa campaign event where dozens of people showed up – one of whom told him to “punch Donald Trump in the face.”
“Dude, that’s a felony man,” Booker replied, before launching into his deep seated desire to assault the president.
“Donald Trump is a guy who you understand- he hurts you and my testosterone sometimes makes me want to feel like punching him, which would be bad for this elderly, out-of-shape man that he is if I did that,” said Booker,” calling Trump a “physically weak specimen.”
And after Booker calls Trump an “elderly, out-of-shape man,” he adds that Trump is “the body shamer.”
“That’s his tactics and you don’t beat a bully like him, fighting him on his tactics, on his terms, using his turf. He’s the body shamer,he’s the guy that tries to drag people in the gutter.”
Did Booker’s testosterone make him similarly feel like sexually assaulting a girl in high school when he “slowly reached for her breast,” only for her to push his hand away once he reached his “mark?”
Was Booker’s out-of-control testosterone responsible for a credibleallegation (his phrase) that he sexually assaulted a man in a public restroom?
And did Booker fail to constrain his toxic masculinity when he browbeat former DHS Secretary Kristjen Nielsen last January over President Trump’s comment that Haiti and parts of Africa are ‘shithole countries.’
Cory Booker: “We have a history that is beautiful and grand and also ugly. From this nation to others, we know what happens when people are bystanders and say nothing.” (via CBS) pic.twitter.com/I43rklf1JB
Over the last couple of weeks, I have laid out the bull and bear case for the S&P 500 rising to 3300, and the case for the Fed to cut rates. In summary, the basic driver of the “bull market thesis” has essentially come down to Central Bank policy.
This reliance on the Fed has led to a marked rise in “complacency” by investors in recent weeks despite a burgeoning list of issues. As shown in the chart below, the ratio of the “volatility index” as compared to the S&P 500 index is near it’s lowest level on record going back to 1995.
Combine that with investors now completely back in the market, and you have the ingredients for a decent short-term correction in the weeks ahead.
In other words, investors are “all in” based on hopes the Fed will cut rates. However, rate cuts are unlikely to reverse the macro pressures facing the markets currently. Such as:
The global economy IS slowing.
Interest rates have turned lower with nearly 1/3 of Sovereign bonds now sporting negative yields.
China, representing 30% of global GDP growth, has slowed markedly.
Domestic GDP is expected to rise by only 1.50% in the second quarter, which is a sharp reversal from last year.
The trade war with China, and to a lesser degree Europe, has not been resolved and could accelerate on a Tweet.
Not surprisingly, ten years into an expansion, markets at record highs, unemployment near 50-year lows, and inflation is near the Fed’s target. Yet, the Fed is talking about cutting rates at the end of the month. What does the Fed know that we do not?
The potential for a hard Brexit is still prevalent.
Earnings expectations have fallen markedly along with actual earnings and revenues.
There is much more, but you get the idea.
Investors are currently betting very heavily on a “weak” hand as they ignore the “risk.”
What Is Risk?
The word “RISK” is not normally associated with positive outcomes. For example:
Yes, professionals do these things and survive. But for the average person, it could mean serious injury or even death.
The same idea of “risk” applies to investing.
Many individuals convince themselves that in order to make more money, they need to take on more “risk.” The correlation, over the short-term, may indeed seem positive when markets are trending higher.
However, the reality is quite different. “Risk” in a portfolio can be directly correlated to the amount of loss (destruction of capital) which occurs when something inevitably goes wrong.
The Poker Analogy
Last week, I was visiting with a new client who had just transferred over from one of the “big box” financial firms. Of course, as usual, she began to regurgitate the media-driven myths of how she was a “long term”investor, how she was diversified, and since she was an “aggressive” investor with a “high risk tolerance,”she was willing to ride out the “wiggles” in the market.
It only takes a couple of questions to derail these myths.
What did you do in 2001-2002 and/or 2008?
How did you feel?
Are you willing to do that again?
Since the “dot.com” bust, when I began asking those questions, I have NEVER had anyone tell me:
I sold near the top and bought near the bottom. (Sell High/Buy Low)
It was a truly terrific experience watching half of my money disappear.
Absolutely, just tell me when so I can get some popcorn.
In this particular case, she happened to be an avid “poker player” and enjoyed going to Las Vegas for a “few hands” at the tables. Poker is a straightforward comparison to investing as the general rules of risk management apply to both. The conversation was quick.
“Do you go ‘all in’ on every hand you are dealt?”
“Of course, not” she responded.
“Why not?”
“Because I will lose all my money,” she said.
“You say that with certainty. Why?”
“Well, I am not going to win every hand, so if I bet everything, I will certainly lose everything” she stated.
“Correct. So why do you invest that way?”
“………….Silence………………….”
The issue of “risk,” as stated above, whether it is in the financial markets or a hand of poker, is the same. It is simply how much money you lose when the “bet” you made goes wrong.
In poker, most individuals can not calculate the odds of drawing a winning hand. However, while they may not know the odds of drawing a “full house” in a 7-card poker hand is just 2.6%, they do know the odds of “winning” with such a hand are fairly high. Therefore, they are comfortable betting heavier on that particular hand.
When it comes to investing, they are comfortable betting their retirement savings on a market which, at current valuation levels, has a long history of delivering less than optimal results. I have shown you the following chart before, and statistically speaking, the odds aren’t in your favor.
Despite this simple reality, investors continue to chase stocks as if future returns over the next 10-years will be as profitable as the last 10-years. This most likely will not be the case.
To make this clearer, let’s equate market fundamentals to poker hands.
If individuals were presented with the following “hand,” rather than media rhetoric, do you think they would quickly put all their retirement savings in the markets.?
Sure, one could absolutely win with a “high card hand” assuming everyone else at the table is in exactly the same position without an “Ace.” But what are the “odds” of that being the case?
However, this is the market as it exists today and the media is telling you to “be all in” as it is a “no lose”proposition.
Are you all in?
I’ll bet you are and your reasoning is completely logical – “The market is going up.”
What if you were dealt the following hand?
Are you “all-in” now?
You should be, but you won’t be.
Why? Because this is what markets look like following major, mean reverting events. It is at this point individuals have learned the lesson of “risk,” and want nothing to do with the “financial markets ever again.”
If you were around in 2009, you remember.
The issue of understanding risk/reward is the single most valuable aspect of managing a portfolio. Chasing performance in the short-term can seem to be a profitable venture, just as if hitting a “hot streak” playing poker can seem to be a “no lose” proposition.
But in the end, the “house always wins” unless you play by the rules.
8-Rules Of Poker:
1) You need an edge
As Peter Lynch once stated:
“Investing without research is like playing stud poker and never looking at the cards.”
There is a clear parallel between how successful poker players operate and those who are generally less sober, more emotional, and less expert. The financial markets are nothing more than a very large poker table where your job is to take advantage of those who allow emotions to drive their decisions and those who “bet recklessly” based on “hope” and “intuition.”
2) Develop an expertise in more than one area
The difference between winning occasionally, and winning consistently, in the financial markets is to be able to adapt to the changing market environments. There is no one investment style that is in favor every single year – which is why those that chase last year’s “hot hands” are generally the least successful investors over a 10- and 20-year period.
As the great Wayne Gretzky once said:
“I skate where the puck is going to be, not where it has been.”
3) Figure out why people are betting against you.
“We know nothing for certain.” Managing a portfolio for “what we don’t know” is the hardest part of investing. With stocks, we must always remember that there is always someone on the other side of the trade. Every time some fund manager on television encourages you to “buy,” someone else has to be willing to sell those shares to you. Why are they selling? What do they know that you don’t?
3) Don’t assume you are the smartest person at the table.
When an investment meets your objectives, be willing to take some profits. When it begins to break down, hedge the risk. When your reasons for buying have changed, be willing to “call it a day and walk away from the table.”
4) It often pays to pass, and 5) Know when to quit and cash in your chips
Kenny Rogers summed this up best:
“You’ve got to know when to hold ’em. Know when to fold ’em. Know when to walk away. Know when to run.”
All great investors develop a risk management philosophy (a sell discipline) and combining that with a set of tools to implement that strategy. This increases the odds of success by removing the emotional biases that interfere with investment decisions. Just as a professional poker player is disciplined with his craft, a disciplined strategy allows for the successful navigation of a fluid investment landscape. A disciplined strategy no only tells you when you to “make a bet,” but also when to “walk away.”
6) Know your strengths AND your weaknesses & 7) When you can’t focus 100% on the task at hand – take a break.
Two-time World Series of Poker winner Doyle Brunson joked a bit about his book with which he had thrown around two alternative ideas for titles before going with “Super/System.” The first was “How I made over $1,000,000 Playing Poker,” and the second equally accurate idea was, ‘How I lost over $1,000,000 playing Golf.”
The larger point here is that invariably there will be things in life that you are good at, and there are things you are much better off paying someone else to do.
8) Be patient
Patience is hard. Most investors want immediate gratification when they make an investment. However, real investments can take years to produce their real results, sometimes, even decades. More importantly, as with playing poker, you are not going to win every hand and there are going to be times that nothing seems to be “going your way”. But that is the nature of investing; no investment discipline works ALL of the time. However, it is sticking with your discipline and remaining patient, provided it is a sound discipline to start with, that will ultimately lead to long-term success.
Those are the rules. Play by them and you have a better chance of winning. Don’t, and you will likely lose more than you can currently imagine. As the old saying goes:
“If you look around the poker table and can’t spot the pigeon, it’s probably you.”
via ZeroHedge News https://ift.tt/2Y1juuS Tyler Durden
