(B)(N) Extreme Economics – Breaking Bad (Really Bad)

Figure 1: Breaking Bad (Really Bad)

Drama. Two of the portfolios in our World Trade Class are “breaking bad” today; one of them consists of all of the twenty-three companies of the more than  1600 companies in our World Trade Class that have each lost more than 60% of their market value since December, and we could call that “breaking bad” or “breaking bad (really bad)” without too much argument.

The other portfolio consists of all of the sixty-five companies that have each gained more than 60% in their market value since December but we have to call them “breaking bad” too because we don’t know when or if we should or can take profits, and if we do, how will we take them and what will we do with all of our money?

Figure 2: Breaking Bad (Really Bad) +800% To The Good

The other thing that’s really confusing is that we have made vastly more money in the “breaking bad (really bad)” portfolio in the last five years (including this year) than in our “breaking bad (really good)” portfolio and we can say that “breaking bad (really bad)” is now an “inflationary economy” at low prices whereas “breaking bad (really good)” is in a depression at high prices.

In other words, we have the really awkward situation that prices down is up (signalling an inflationary economy) and that prices up is down (signalling a depression); please see the summary in Figure 2 on the right and below for more details because the answer to this riddle is a compelling one and you probably have remnants of both of these portfolios in your retirement or 401(k) plan right now.

But the answer to this riddle is not in December or the last six months, but long before that in 2012 and since then, and that’s our problem for today – what are we going to do with all of that money that you don’t have anymore.

The other thing that is disturbing to Wall Street is that “volatility is not an investment risk” (John von Neumann 1946) and (guess what) we’re not buying it anymore because there’s a new wave in town.

Breaking Bad – Extreme Economics

The “price of risk” exists and it is a calculation and has a meaning that is guaranteed by the Theory of the Firm (Goetze 2006) but there isn’t much that guarantees investor behavior outside of the “fear of loss” which could be due to the fear of loss or prudent “risk aversion” but it could also be due to greed or, to put it another way, “risk seeking” behavior that has come undone.

The “price of risk” (or the risk price) is most colorfully described as “the least stock price at which a company is likable” and that price is not zero as long as there is a market for the stock; the risk price also resolves a Nash Equilibrium between “risk averse” and “risk seeking” investors that we can reliably infer from their past behavior in what they have bought, held, or sold, and at which prices.

However, that’s only the “rational component” of investor behavior and it’s obvious that there are many other factors in investor behavior that are not “rational” although “willfully losing our money” isn’t one of them.

Maybe tell that to your “investment adviser” but there is one thing that we can prove scientifically because the “risk price” is the clearing price in a rational market and, therefore, we know that fear and greed will always trump “rational” and only convicts and poor people or bad investors are prisoners of their “convictions”.

For example, the combined portfolios in Breaking Bad are worth only about $270 billion at the current market prices, but less than a year ago, they were “worth” over $400 billion which is still not a lot of money in the $40 trillion US market, but a “hedge fund” would tend to be long on the “inflationary economy” (like an “emerging market”) now trading at low prices (the “really bad” portfolio) and short on the “depression” (largely in “commodities”) now trading at high prices (the “really good” portfolio, we guess).

That makes sense and the outcome is not hard to figure; we just don’t know when or how that will happen, if it will happen at all, because that strategy in December would have wiped-out the entire capital – 100% of the capital gone in six months – if that plan had been executed in December because the “long (deemed good) portfolio” has lost more than 50% of its value and the “short (deemed bad) portfolio” has gained more than 50% since December and the “facts” of these companies have hardly changed at all since 2012.

Nor have the investors and the “smart money” on Wall Street is doing exactly that with your retirement savings today.

By Wall Street standards both of these portfolios are amazing; please see Figure 2 above for 63% per year for five years and below for more details on both the “good” (only 33% per year) and the “bad” (63% per year (sic)) portfolios.

But there are significant differences between these portfolios – staggering differences – so much so that we have to wonder if Wall Street knows anything about “investing” that is not about fear and greed.

For example, you have probably noticed that Wall Street will never promise any return on your capital nor even promise the return of your capital, all of which is OK because they told you that you’re not paying them to make money for you – it’s in the Prospectus.

However, we can do what they won’t do and invest our capital safely  – 100% capital safety guaranteed – in either or both of these portfolios in exactly the same way yesterday, today, and tomorrow as a (B)-class portfolio in perpetuity even though these “economies” are antipodal and have nothing in common but the commonality and indiscretion of your money spread evenly over both of them.

Please see the Exhibits below for more details (and click on them and again to make them larger as required).

Breaking Bad (Really Bad) – An Inflationary Economy

Exhibit 1.1: (B)(N) Breaking Bad (Really Bad) – An Inflationary Economy

Breaking Bad (Really Good) – A Depression

Exhibit 1.2: (B)(N) Breaking Bad (Really Good) – A Depression

Exhibit 1.3: (B)(N) Breaking Bad – Cash Flow Summary

For more examples of the (B)-class portfolio in difficult markets, please see our recent Posts on”The “W” Syndrome“, Steel,  Green Energy and The Coal War; 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.

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.

Postscript

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

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Disclaimer

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*.