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(B)(N) The Canada Bank Act

September 25, 2017
Banking Map

The Price of Money

Drama. Wall Street is saying that the Canadian banks are so well-managed that they’re not even an investment – they just have too much growth and too much net interest margin and too much return on the shareholders equity – so where’s the risk? And how can they make money in the stock market without the risk? (Bloomberg, September 13, 2017, Canada Has Best `Boring’ Banks in the World).

But they’re trading them like New York banks anyway because they don’t know what else to do but try to invoke the “risk/reward equation” and the “Hammer Principle” in their favor.

And as a consequence, they’ve been giving us 15% a year on no risk investments for the last five years and 15% a year must be the actual price of money (please see below or just consider the rate on your credit card or a revolving line of credit) which is growing older and bolder faster than it gets used to produce something useful like more GDP and a better trade balance.

And it also explains why people who already have a lot of money that they don’t need (the 1%’s) just keep getting more of it but it has less and less value to them, and it also explains why governments are so deeply in debt and print just enough new money to look prudent at election time and stay solvent between times.

The Canada Bank Act

Our paradigm in economics (the Theory of the Firm) informs us that companies which are trading at stock prices above their price of risk are “undervalued” because their price (as opposed to their worth) is more likely to increase for a time than it is to decrease – which is all to the good if we already own the stock – until “The Hammer” sets in to kill their feeling of vertigo on “good value” or worth for their money in stocks and not cash or government bonds.

A Free Market Yield

Figure 1: The Free Market Yield

The reason is that such an economy – which in this simple case consists only of the company (or companies), their investors and how much money they have to spend on stocks and for how long they can afford to spend it on stocks before needing their cash instead of stocks to pay their bills (liquidity) – is properly described as “deflationary” (not inflationary despite the rising prices) and possibly tipping towards a recession and even a depression if the companies fail to deliver on the earnings and dividends expected of them.

Or, concomitantly and in the alternative such as for pharmaceutical companies or the FANG stocks, the market can no longer attract the new money that is needed to fuel this economy with its scant supply of stocks towards higher prices for the earnings which, hopefully, have not turned negative or are likely to or are likely to decline and, so, at these “high prices” the price of an income is also high; please see Figure 1 on the right for more details (and click on it and again to make it larger as required).

And what we have said about companies in the stock market is just as true about countries and their GDP and GDP growth and their currency, and their proclivity to print new money that doesn’t respect its foundations of worth to those who would hold it.

No doubt this sounds to be quite strange if you’re only a Harvard or Wharton graduate, but look at it this way: it is usually better for you to trade A for B by exchange than to pay A+D < B+E where D and E are the money profits for the sellers on both sides of this equation, on the left for those who own A and want B, and on the right for those who own B but prefer A (which might be cash to pay their bills), and they both get what they want by trading A for B, but they’ve cut out the middleman, your neighborhood money printer (as above).

The problem with Wall Street is that they tend to believe that they have the magic that makes A+D > B+E most of the time for them.

Alas, only we have that equation for us with no risk investments and a studiously enforced arbitrage in everything that we buy at or above the price of risk, and even the Canada Banks which don’t have any risk, they say; please see Figure 2 below for how that works in practice.

Figure 2 Canadian Banks - Risk Price Chart

Figure 2: The Price of Risk

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 actionLa 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 AmericaBig OilShopping 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

The Perpetual Bond
Alpha-smart with 100% Capital Safety and 100% Liquidity
Guaranteed
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.

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*.

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