Drama. Iconic investors are saying that the price of an income is too high and that they’re spending too much of our money chasing too little income and that we (not them) are to blame for having too much money and too little sense to spend it wisely on good investments at lower prices (Bloomberg, April 20, 2017, Paul Tudor Jones Says U.S. Stocks Should ‘Terrify’ Janet Yellen).
However, the trigger for a market blow-out that would cause the price of an income to decline to lower stock prices and higher dividend yields is merely the anticipation (and neither we nor even the fact) that the interest rates on government debt will increase because even a small increase in the rate on government debt favors the really wealthy and some institutional investors such as the insurance companies who will be better able to cover their daily expenses even with a little inflation and reduce their market risk for liquidity and that has already happened twice since 2014 (please see below).
But there is no reason that we who pay the taxes and the interest on government debt should favor the really wealthy with that equation even though they might be effective in advocating for it in their own self-interest and damn the rest of us.
And it’s a simple fact that the price of an income is always high in a depression, recession, or a deflationary economy and pillaging us for a few dollars more in bad times is not going to change that equation.
Our solution, of course, is the (B)-class portfolio which thrives on market risk and if they want to kill the market, we say bring it on because all in all, gentlemen, it’s a tawdry game that you’re playing and we’ve got your number.
The Two Economies
We expect that the blow-out will come and that they will create it if they have to in order to capitalize (harvest) the market float and buy the stocks back at lower prices and pocket the difference.
This renovation of the market is the 20th century equivalent of the 18th century “Clearances” in which millions of families were forced out of their homes and homesteads for generations – sometimes prehistoric – to make way for the sheep and their wool to feed the factories in Birmingham and Manchester and most of our pension plans and savings have that same exposure to underperforming assets because they bought the risk and there’s nothing that they can do but ride it out or buy the bonds.
As a result, there are two economies at work in the World.
The one economy is the investor economy which is inflationary and growing at the rate of about 10% per year (please see below) by the work of investors who are trading stocks and bonds among themselves and inviting others (new money) to do the same.
The other economy is the companies which they trade as commodities in stocks and bonds and to some extent, which they create, but which are not growing at the same generous rate of return but only at about 50 basis points (0.5%) a year (the Free Market Yield) which is a long way from even the GDP growth rate which is (generously) about 3% per year globally.
In this World of the two economies, we operate the World Trade (B)-Class Portfolio (the Perpetual Bond) which we illustrate below and it currently has over 900 companies in it with a current value of at least USD$8 billion (pending the aforesaid presumptive blow-out) from a dozen World markets and that portfolio has returned an average of 18% per year for the last five years and more than doubled our money and the return increases to 22% per year if we’re running both the long and the short portfolio pro forma in the face of the presumptive risk (as above) with no capital risk at all.
Moreover, but for our budget, we own (as investors in the first economy) 700 of these companies now and we can reasonably expect a return of 17% this year which is the current dividend yield (2.36%) plus twice the normalized annual volatility (twice 7.5%) no matter what the market does in the next twelve months and we can benchmark that every month as the year unfolds unlike the other investors who have no idea whether they’ll make any money at all or when.
And anecdotally because there are some significant liquidity issues if we’re buying the whole market, there’s enough idle cash in the cash and brokerage accounts of the World Trade Perpetual Bond (please see below) which we got from the investors to pay down the US National Debt ($20 trillion or so) should anyone want to do that and we’d still be holding $30 trillion in stocks (about 80% of the market) at the current stop/loss prices and we can’t do any worse than that (although we’ve scaled the actual bond to only 1/10th of 1% of the market or 1% and a few hundred billion if that’s all you need).
For more examples of the (B)-class portfolio in difficult markets, please see our recent Posts on”The “W” Syndrome“, Steel, Green Energy, UFOs and the High Flying Techs, and The Coal War which is heating-up again now; and the Canadian Mines have also taken-off – please see our recent Post “(B)(N) Extreme Economics – The (New) Canadian Mines” for a heads-up on that as well as The Great Rotation & Twenty Hot Canadians 2017.
And for more information and examples of the Free Market Yield and the terms that we have used above, please see our Posts “(P&I) The Dismal Equation (Ecclesiastes 9:1)” and “(B)(N) S&P 100 Volatility Risk and The Full Moon” and “(B)(N) NASDAQ 100 Volatility and The Stone Bunnies“ and for an introduction to The Barometer “(B)(N) What’s A Girl To Do” or “(P&I) The Swiss Franc Debacle“.
And for more information on real “risk management” in modern times and additional references to the theory and how to read the charts and tables, please see our Post, The RiskWerk Company Glossary and “(P&I) Dividend Risk and Dividend Yield“, and our recent Posts “(P&I) The Profit Box” and “(P&I) The Process – In The Beginning“; and we’ve also profiled hundreds of companies in these Posts and the Search Box (upper right) might help you to find what you’re looking for, such as “(B)(N) TLM Talisman Energy Incorporated” or “(B)(N) ATHN AthenaHealth Incorporated” or “(B)(N) PETM PetSmart Incorporated“, to name just a few.
And for more applications of these concepts please see our Posts which rely on the Theory of the Firm developed by the author (Goetze 2006) which calibrates The Process to the units of the balance sheet and demonstrates the price of risk as the solution to a Nash Equilibrium between “risk-seeking” and “risk-averse” investors within the demonstrated societal norms of risk aversion and bargaining practice. And for more on The Process, please see our Posts The Food Chain and The Process End-Of-Process.
And for more on what risk averse investing has done for us this year, please see our recent Posts on “(P&I) The Easy (EC) Theory of the Capital Markets” or “(B)(N) The Easy (EC) Theory of the S&P 500“, and the past, The S&P TSX “Hangdog” Market or The Wall Street Put or specialty markets such as The Dow Transports & Utilities or (B)(N) The Woods Are Burning, or for the real class action, La Dolce Vita – Let’s Do Prada! and It’s For You, Dear on the smartphone business.
And for more stocks at high prices, The World’s Most Talked About Stocks or Earnings Don’t Matter – NASDAQ 100. And for more on what’s Working in America, Big Oil, Shopping in America or Banking in America, to name just a few.
We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product
The Perpetual Bond™
Alpha-smart with 100% Capital Safety and 100% Liquidity
With No Fees and No Loads on Capital
For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.
Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”). The Canada Pension Bond®™, The Medina Bond®™, The Barometer®™, the Free Market Yield®™ and Extreme Economics®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.