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By EconMatters

In 2015 it was always beneficial to buy silver when it was below $14 an ounce in the futures market. Are things going to be any different in the Silver Market for 2016? Do we get a breakout in either direction this year, or does it remain largely a dead market for long term price trends.

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Submitted by Chris via Capitalist Exploits blog,

Last week I discussed how humans are wired to pay attention to scary things. In financial speak: risk. Darwinism has chastised those who ignore risk by rewarding them with an early grave, and by process of elimination rewarded those who stay out of the cross hairs.

Thing is, we no longer live in a world where saber-toothed tigers threaten our existence. In today’s world far greater risk lies in the truly enormous and disproportionate emotional attitude to (and assessment of) risk.

This has nothing to do with Darwin but rather more to do with an educational system designed and built for the industrial age. Education today is an advertising agency which leads us to believe we need the society on which it relies upon for its existence.

Beginning with the schooling system and followed by “higher education”, the middle and upper middle class in developed societies are by and large serfs. And they’re serfs because they don’t understand risk.

The overwhelming majority look at risk incorrectly. They look at it two dimensionally: “The more risk I take the more ‘volatility’ I have.” The fact is, risk is actually subjective to your own personal situation. Mismanaging your own personal situation increases risk disproportionately.

Let me give you an example of how easily an otherwise intelligent person gets royally screwed by the system by routinely miscalculating risk.

Let’s take Harry, a fictional guy from a middle class family who’s just left high school. Harry really wants to get ahead and has set himself a goal of becoming a millionaire by the time he’s 25. He figures that by 35 he’ll be worth north of $10 million.

Truthfully these figures don’t mean much to him but he’s had a small taste of the life and he knows it costs. There was that time he was trying to impress a brunette, and they dined at one of David Chang’s NY restaurants and he still remembers the almost palpable smell of money in the air as diners around him flashed Hublots, diamond necklaces and sophistication.

He remembers how the waiter unscrewed the cap of the water as though defusing a nuclear bomb. And although the beef he ordered was so thin that he had to lick it off the plate because it kept falling off the fork, his friends were really impressed and the girl so floored that she showed her appreciation by keeping him up all night.

The first thing poor Harry is told is to get an education. And so he does just that. Years of schooling have failed to developed in him critical thought. And so, though he has access to almost every resource one can think of, and at a cost approaching zero, he automatically associates education with a four-walled institution where people who like books theorize on how the real world operates, most never having experienced it first hand.

Here he spends 3 years getting into girls’ pants, drinking too much and associating with the same type of people as himself, which does little to develop his critical thought processes. Harry is rewarded with two pieces of paper. One represents his qualification and the other represents the six figure debt he now owes. Remember that the knowledge acquired between the drinking and sex is already free.

This is Harry’s first critical step in miscalculating risk. He exits university with a piece of paper and the world skills and street-smarts of a juvenile because his free time has been spent drinking and test driving anything in a skirt. Most importantly his future income is already tied up in debt repayments.

Fresh out of university Harry now has two doors ahead of him…

The Red Door

Choosing the red door takes Harry into a job. This promises a monthly revenue stream which appears to offer security and consistency. The lure is strong. After all the need to pay off his student debt lurks high on Harry’s list. He’s excited to put himself to test in the “real world” and believes that he can really target becoming wealthy once he’s got his student debt paid off and a few years under his belt.

The Green Door

Here Harry must take his skills learned and rapidly obtain an education. A real education. He will need to do this by becoming an entrepreneur and building his own outcome. This option offers no monthly revenue stream and no security or consistency. It also offers unlimited upside and a real, not imagined, shot at becoming wealthy.

Unfortunately, Harry has a distorted view of risk for two reasons:

1. He has debt and must make debt payments. This distorts his view of real risk.
2. He doesn’t have an education which shows him the real cost of risk.

The red door option appears far less risky than the green door option. After all, none of  Harry’s friends are doing this and when he brought up the topic with his parents they nearly blew a gasket. “Don’t give up your future so early on,” they pleaded.  Once again, poor Harry’s lack of critical thought gets the better of him and he takes the red door believing it to be less risky.

Fast forward a few years into cubicle hell and Harry is now earning $60,000 a year. His student debts are easily manageable and in an attempt to get ahead, Harry buys a house, reasoning that he needs somewhere to live and this is the first step towards fulfilling his goal of becoming wealthy.

He reasons that buying the house is a step in the right direction, but he hates his job more every day and it’s now dawned on him that it’s a long hard slog up the corporate ladder in order to earn the sort of money that can make him wealthy.

Once again, he’s faced with a dilemma. Does Harry risk kicking in the job and starting a business of his own, doing something that he really loves, or does he stay put?

And This Is How Harry Analyses The Risk

Scratching at his now receding hairline he thinks to himself, “I can’t take the risk of starting my own business because it may fail.”

The downside now is losing not only the $60,000 salary but defaulting on the payments now tied to this revenue stream. The risk is no longer $60,000. The risk now is in losing the ability to keep up student debt payments as well as mortgage payments.

Pretty soon he’ll fill that house he bought with “stuff” which will either come on hire purchase or simply be added to his mortgage. He lies to himself saying, “Hey, at least I’ve got the income, which I wouldn’t have had without the college education. And at least I’m on my way up because I now own an asset.”

Wrong! On So Many Levels…

Here is how Harry should analyse risk for something as simple as deciding whether to quit a $60,000 a year job or not in favour of having a crack at becoming wealthy.

Let’s look at the downside: if Harry has a job paying $60,000, chances are he’ll be able to pick up another paying $60,000.

Let’s say that those chances are 60%. So he has a 60% chance of getting back to where he is now if he screws up.

Let’s further say that there is a 20% chance he can only get another job paying $50,000, and another 20% chance he will only manage to get a position paying $40,000.

The worst case scenario is therefore a 20% chance of a $20,000 loss. This is his real risk. What then is the upside?

The upside is unlimited. Literally!

Even if Harry completely screws things up, a year running his own business will provide him with 10 years worth of “higher education” leaving him far more qualified than he’ll ever be if he stays in his job.

Why wouldn’t Harry risk a 20% chance of losing $20,000 for a potentially unlimited upside?

The reason Harry doesn’t make the trade is because he’s already tied his $60,000 revenue stream to a host of liabilities. Now I hear some of you saying, “Oh no, but he owns a house and that’s an asset”. No, it’s not!

Assets make you wealthy. They provide you with more, not less freedom. Is Harry’s house doing any of those things?

Harry has already fallen into a trap where he is no longer free to make rational choices. Freedom is wealth.

The financial infrastructure surrounding Harry and the education he’s received is DESIGNED to ensure that debt is never repaid, but only serviced.

If you, dear reader, and I can create a loan for a $1 million and collect an interest payment on it for eternity, all the while getting the poor sucker who’s taken the loan to sign up for even more loans on more liabilities, then that, my friend, is an awesome deal for us. This is what banks, insurance companies and credit agencies make a living out of.

80% of people routinely make the same decisions Harry does and then continue to do so throughout their life. Is it any wonder why despite having cars, boats, a house and all the trappings of the enslaved, they reach middle age, exhausted, unfulfilled, and forever trapped in these damn payments, with some far off absurd goal to pay off the loans upon retirement?

This brings me to that Italian mathematician I mentioned last week.

The Law Of The Vital Few

Vilfredo Pareto first observed the phenomenon that 80% of the land in Italy was owned by 20% of the people. Since then this phenomenon has been mathematically proved across literally every spectrum of society and business.

The principle states that, for many phenomena, 20% of invested input is responsible for 80% of the results obtained. Put another way, 80% of consequences stem from 20% of the causes.

What I discussed last week was how we’re hard wired to take notice of pain. This neurological fact is played upon by many industries where we are led to believe things which just ain’t so. We can see the results in wealth distribution, just as Vilfredo observed in the early 20th century.

Take early stage venture capital for example. If I had a brick for every person who’s told me that I’m taking massive risk by investing in early stage private companies, I’d have enough to rebuild the Berlin Wall.

Risk is not one dimensional. It’s a known fact that well over 50% of early stage deals go belly up. Risky? Sure, it is if viewed in isolation.

What is also a fact is that the mean return of early stage VC investments is north of 50% per annum. This is the mean and like anything else with a little bit (OK, a lot) of work, outperforming the average in anything is entirely achievable if you put effort into it.

Use proven laws to tilt the balance of probability massively in your favour. Turn off the TV. Travel. Educate yourself.

Unless you want to be part of Pareto’s 80%, then don’t invest in what 80% of the market are invested in. Look for asymmetry. Look for what lies in the 20%.

“The plain fact is that education is itself a form of propaganda – a deliberate scheme to outfit the pupil, not with the capacity to weigh ideas, but with a simple appetite for gulping ideas ready-made. The aim is to make ‘good’ citizens, which is to say, docile and uninquisitive citizens.” – H.L. Mencken

via Zero Hedge http://ift.tt/1WV8Zi7 Tyler Durden

Now that Japan has let the negative rates genie out of the bottle, or as DB put it, ‘opened the Pandora’s Box‘ and in the process unleashed the latest global “silent bank run” and capital flight, prepare to hear a whole lot more about NIRP in the coming weeks because as Citi’s Steven Englander put it, “Why are Negative Rates like Potato Chips? No one can have just one.”

This is what else Englander said:

You can admire the policy boldness of the BoJ move into negative rates, and recognise its powerful asset market effects – positive for equities and negative for JPY. Experience in other countries that have entered into this territory should sober you up on the likely economic and inflation impact. No country that has gone into negative rates has experienced major shifts in its growth and inflation profile – minor, yes; major, no. As a consequence every dip into negative rates has been followed by additional moves.

 

Negative rates are a powerful inducement for cash to leave the banking system, but there is little evidence that investors take the cash and build steel plants with it. They buy foreign and financial assets, which is probably more than enough for the BoJ.

Some further thoughts from Citi’s FX desk, and why the BOJ ultimately shot itself, and other central banks, in the foot:

As the dust settles on the BoJ reaction, USDJPY is somewhat higher and risk currencies have begun to rebound following an initial dip. However, the price action has not been one-sided. Partly this seems to reflect the tendency of many investors to dismiss the rate move as diluted given its tiered implementation. Of the investors I have spoken to since the decision, a significant majority were inclined to poke holes in the decision. The response also carries some echoes of the response to the Fed, where dovishness did little to support investor sentiment and markets sold off. If anything, the pattern seems to be that bad news is bad news, good news is bad news and no news is good news. To me, this latter concern presents a more sustained threat to risk sentiment and it has been harder to dismiss the deeper vein of market concern on underlying slowing, policy effectiveness and the ability of policymakers to respond to future shocks.

Finally, who could have possibly foreseen the entire world collapsing into NIRP singularity? Well, this blog for one (more on that later). Others included Albert Edwards and Bob Janjuah who sat down in September  and predicted that sooner or later the Fed itself would cut rates to -5%. Some laughed at the duo 4 months ago; hardly as much laughter this time around.

For those who missed it the first time, here it is again:

When Two Uber-Bears Sit Down: Albert Edwards And Bob Janjuah Expect The Fed To Cut To -5%

via Zero Hedge http://ift.tt/1SRSlRj Tyler Durden

As Donald Trump surges ahead in Iowa, taking the bellicose billionaire even closer to winning the Republican nomination, President Obama is busy trying to counter the GOP frontrunner’s message about “radical Islamic extremism.”

Trump has capitalized on events like the Paris attacks and the San Bernardino massacre. Those tragedies underscored the need to remain vigilant when it comes to immigration, a topic Trump has some rather strong opinions on. In a polarizing move, Trump officially called for a Muslim ban last month. No Muslims should be allowed to enter the country Trump said, until we can “figure out what’s going on.”

Needless to say, that message is starkly at odds with the President’s views, but as extreme as Trump’s position most certainly is, it’s resonated with large swaths of the American electorate.

In a bid to counter the growing backlash against the Muslim world, Obama will make his first visit to a mosque on Wednesday when the President will stop by the Islamic Society of Baltimore, described as “a sprawling community center in the city’s western suburbs that serves thousands of people with a place of worship, a housing complex and schools.” Here’s a fun image from the center where you can, should you choose to do so, jump rope:

The visit is an effort “to celebrate the contributions Muslim Americans make to our nation and reaffirm the importance of religious freedom to our way of life,” The White House said, in a statement.

“For years, Muslim Americans have lobbied him to visit a mosque, citing Islamophobia,” The Washington Post writes, adding that “the possibility of a mosque visit came up again a month ago, when several prominent Muslim Americans met with senior White House officials to discuss concerns about rising hostility toward people of their faith.”

Trump also wants to have close ties to mosques – by putting them under surveillance. 

You can be sure that Obama’s visit will end up in a GOP soundbite in the days and weeks ahead. Republicans have repeatedly criticized Obama for being shy about equating Islam with terror. To be sure, not every Muslim is a terrorist and indeed many of the mass shootings perpetrated on American soil have had no ties to Islam whatsoever. Still, it’s certainly difficult to overlook the fact that people are killing each other by the thousands every day in the name of Islam and for many Americans, the nuances don’t matter. They just want to feel safe. 

As WaPo goes on to note, the trip is also likely to reinforce the notion – still held by nearly a third of the population – that Obama is a “secret Muslim.” 

“A segment of Obama’s critics have said since he took office that he is a Muslim pretending to be Christian, and that he plays down the religious aspect of Muslim extremism,” WaPo says. “Recent polls show that 29 percent of Americans and nearly 45 percent of Republicans think he is a Muslim.” 

Of course America’s “Muslim” President probably isn’t too concerned about the optics around the visit. He’s now a lame duck. The question, however, is whether the GOP – and especially Donald Trump – will be able to point to the trip as evidence that America’s leaders are more concerned with political correctness and religious tolerance than they are with securing the homeland. 

via Zero Hedge http://ift.tt/1WV3e3T Tyler Durden

Submitted by Bill Bonner of Bonner & Partners (annotated by Acting-Man.com's Pater Tenebrarum),

No Shame in Cash

After a year of wandering the globe, we are back in the homeland… and ready to turn in our passport. Travel can be fun. It can also be “broadening.” But the most interesting thing about it is not so much what you find out about other places. It’s what you discover about your home.

You return to the land you once knew, as T.S. Eliot put it, and know it for the first time. So, we are ready to rediscover Baltimore – a place where children refer to handguns as “school supplies.”

 

The new school year begins in Baltimore…

 

But, let’s move on. First, we return to questions put to us in Mumbai two days ago.

“What should an investor do?” asked an old man in a Nehru jacket.

“Should I stay in the stock market? After all, staying in the stock market always seems to pay off over the long term. Or should I move to gold and cash?”

We have been telling people there is “no shame in staying in cash” until the market finds a bottom. If we’re wrong and prices shoot upward, we will miss the upside. But the risk of missing substantial gains seems slight. Earnings are going down. Almost all the signals from industry and commerce seem to be pointing down, too.

Meanwhile, U.S. stocks are still expensive. The CAPE ratio looks at the inflation-adjusted average of the previous 10 years of earnings relative to stock prices. On that basis, the S&P 500 has been a worse deal only three times in the last 100 years. Those were just before the 1929 Crash… the dot-com bust in 2000… and right before the 2008 meltdown – hardly auspicious precedents.

 

Where we are: the current PE/10 is in the 92^nd percentile of market valuations since 1871 – exceeded only by 1919, 2007 and 2000.

 

Not only that, but also global debt levels are higher today than ever in history. Wouldn’t it make sense to stay in cash… on the sidelines… until prices go down and debt issues are resolved?

 

March to Hell

Not according to the newsletter writers at The Motley Fool. The Fool’s Matthew Frankel gives us “three reasons you shouldn’t worry about the stock market in 2016.”

“Don’t panic,” he goes on. The late Richard Russell, of Dow Theory Letters, taught us there are short cycles and long cycles. The long cycles are the ones that count. You can miss a rally now and then; it won’t make much difference. But miss a major, long-term bull market, and you have missed an opportunity of a lifetime.

On the other hand, riding through a major bear market can seem like a march to Hell. The worst thing that can happen, Russell used to say, is that you take a “ruinous loss” – one you can never recover from.

Major market swings take time. The Dow reached a peak in 1929. It didn’t regain that peak again until the late 1950s. Since then, we’ve cycled through booms and busts, reaching the latest top in 2015, when the Dow rose over 18,000.

 

The DJIA from 1920 to 1956 – in nominal terms, the average only regained its 1929 peak level in 1954. Apart from a short time in the 1950s-1960s, it only got back to its 1929 valuation in real terms in the mid 1990s. The vast bulk of the stock market’s nominal gains are simply a reflection of monetary inflation – click to enlarge.

 

The questions to ask yourself: Where are we now? Have we passed the top? Are we in a long decline? Then there are the personal questions: How long will you live? When will you need the money? How much volatility can you withstand?

Although top to top is a long time, it can also take a long time just to break even. The 1929 high was not reached again until 1956 – 27 years later. In Japan, they’re still waiting to recover half the losses from the crash of 1989 – 26 years on. How would you feel about waiting until 2042 before we return to last year’s high?

 

Whenever someone tells you that “stocks always go to new highs in the long run”, be sure to ask for a precise definition of “long run”, because it can sometimes be a lot longer than you’d expect – click to enlarge.

 

No Mountain Left to Climb

The other thing to realize is that the long-term performance of the stock market is mostly a myth. Yes, you could have made about 10% a year if you’d gotten in 100 years ago and stayed in. But that figure is subject to some important qualifications.

First, you don’t really make a steady 10% a year. That’s just what you get when you go back and average out your annual gains over a century. It looks as though you have steadily marched up the mountain and now sit high and dry. But when you’re at the top, the only way to go is down! Do the math again when you get to the bottom. You will find your average rate of return looks awful.

Second, who lives long enough to make it work? Compounding is great in theory. But it only works its magic at the end. Compound a penny at a 100% a year – from one to two… two to four… four to eight, etc. – and at the end of 10 years, you have just $10.24.

Compound $1,000 at 10% a year, and after 10 years, you have $2,593. Not bad. But hardly the sort of stuff dreams are made of. And that assumes that you get 10% a year. At today’s prices, stocks are already so high, there’s not much mountain left to climb.

Nobel Prize-winning economist Robert Shiller estimates the average annual return on U.S. stocks the next 10 years at only 3%. Vanguard Group founder Jack Bogle puts it at a little more than 1%. And Rob Arnott at Research Affiliates looks for a return of less than 1%. At those levels, you can forget about the magic of compounding.

 

Dr. Hussman’s market cap/GVA valuation parameter with actual subsequent S&P returns overlaid predicts a 12-year nominal S&P 500 return of 2.5% following the recent market losses. As you can see, this is abjectly low from a long term historical perspective – even the 2007 projection looked better.

 

Whacked by the Big Bear

Then, you have to worry about those drawdowns – the peak-to-trough losses you experience in your portfolio. If you compound at a rate of 10% a year but have a 40% drawdown in year three, you have to go for another three years just to get back where you started.

Worse, your lifetime of savings and investing gets whacked by a big bear market. You take the “ruinous loss” Russell warned about, with no time to recover. Most investors don’t have enough time to make compounding work as advertised. Most are already over 50 when they begin investing. They don’t have 100 years. They’re lucky if they have 15 or 20.

Over that kind of time frame, if there are any substantial setbacks, they’re finished. That’s why it’s so important to get in when the market is low. Then double-digit gains, compounded over many years, can at least be a theoretical possibility.

But if we’re right about where the economy is… how expensive the stock market is… and how difficult it will be to sustain further gains, then this is probably not the best time to begin a program of retirement financing via stocks.

On our scales, the balance between risk and reward in U.S. stocks falls heavily toward the risk. We see a reasonable likelihood of a ruinous loss against a remote possibility of a big gain.

So go ahead and panic. You may be glad you did.

 

The big bad bear – there’s no point in sticking around when he makes his entrance.

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