Personal Finance

Slowly At First, Then All At Once


Bull markets always seem to end the same – slowly at first, then all at once.

My recent discussion on why March 2020 was a “correction” and not a “bear market” sparked much debate over the somewhat arbitrary 20% rule.

“Price is nothing more than a reflection of the ‘psychology’ of market participants. A potential mistake in evaluating ‘bull’ or ‘bear’ markets is using a ‘20% advance or decline’ to distinguish between them.”

Wall Street loves to label stuff.  When markets are rising, it’s a “bull market.” Conversely, falling prices are a “bear market.” 

Interestingly, while there are some “rules of thumb”for falling prices such as:

  • A “correction” gets defined as a decline of more than 10% in the market.
  • A “bear market” is a decline of more than 20%.

There are no such definitions for rising prices. Instead, rising prices are always “bullish.”

It’s all a bit arbitrary and rather pointless.

The Reason We Invest

It is essential to understand what a “bull” or “bear” market is as investors.

  • “bull market” is when prices are generally rising over an extended period.
  • “bear market” is when prices are generally falling over an extended period.

Here is another significant definition for you.

Investing is the process of placing “savings” at “risk” with the expectation of a future return greater than the rate of inflation over a given time frame.

Read that again.

Investing is NOT about beating some random benchmark index that requires taking on an excessive amount of capital risk to achieve. Instead, our goal should be to grow our hard-earned savings at a rate sufficient to protect the purchasing power of those savings in the future as “safely” as possible.

As pension funds have found out, counting on 7% annualized returns to make up for a shortfall in savings leaves individuals in a vastly underfunded retirement situation. Moreover, making up lost savings is not the same as increasing savings towards a future required goal.

Nonetheless, when it comes to investing, Bob Farrell’s Rule #10 is the most relevant:

“Bull markets are more fun than bear markets.” 

Of this, there is no argument.

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The Consumer Price Index jumped 0.6% in May, after having jumped 0.8% in April, and 0.6% in March – all three the steepest month-to-month jumps since 2009, according to the Bureau of Labor Statistics today. For the three months combined, CPI has jumped by 2.0%, or by an “annualized” pace of 8.1%. This current three-month pace of inflation as measured by CPI has nothing to do with the now infamous “Base Effect,” which I discussed in early April in preparation for these crazy times; the Base Effect applies only to year-over-year comparisons.

On a year-over-year basis, including the Base Effect, but also including the low readings last fall which reduce the 12-month rate, CPI rose 5.0%, the largest year-over year increase since 2008.

In terms of the politically incorrect way of calling consumer price inflation: The purchasing power of the consumer dollar – everything denominated in dollars for consumers, including their labor – has dropped by 0.8% in May, according to the BLS, and by 2.4% over the past three months, the biggest three-month plunge in purchasing power since 1982:

On an annualized basis, the three-month drop in purchasing power amounted to a drop of 9.5%, and this eliminates the Base Effect which only applies to year-over-year comparisons.

That plunge in purchasing power is “permanent” not “temporary.”

Yup, the current plunge in purchasing power is permanent. And the plunge in purchasing power in the future is also permanent.

The only thing that might make a small portion of it “temporary” is if there is a period of consumer price deflation, which has happened for only a few quarters in my entire life, for example in the last few months of 2008, which is indicated in the chart above. So I’m not getting my hopes up.

The rest of the time, we’ve had lots of decline in purchasing power. And that has proven to be rock-solid “permanent,” and we never got that lost purchasing power back.

Durable Goods inflation exploded by 10.3% from a year ago.

And it jumped by 3.0% in May from April, the biggest month-to-month jump since 1980. The problem is across the board, but the biggest biggie is used vehicles.

Used Vehicle CPI exploded by nearly 30% year-over-year, and by 7.3% just in May. I have long been fuming about and dissecting the reasons behind this price surge, based on data from the auto industry. And it is now seriously showing up in used-vehicle CPI.

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Warning Signs A Correction Is Ahead


After a decent rally from the recent lows, there are multiple warning signs a correction approaches.

Over the last few weeks, we discussed the rising risk of a correction between 5-10%, most likely this summer. Such drawdowns are historically very common within any given year of an ongoing bull market. As Sentiment Trader recently noted, we are now in one of the more extended periods without such an occurrence.

Of course, as is always the case, amid a bullish advance, it is easy to become complacent as prices rise.

Before we go any further, it is essential to clarify we are discussing only the potential for a short-term correction. As is often the case, some tend to extrapolate such to mean I am saying a “crash” is coming, and you should be all in cash. Such an extreme move is ill-advised without a significant weight of evidence.

However, there is reason to be cautious in the near term.

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What comes next as the US argues about how many Angels are needed to plug a dam?


This morning: Nothing to worry about… except Pandemic, Bonds, Inflation or Deflation, Record Container Prices and Geopolitics? Is there any chance of compromise and a deal on the US infrastructure package everyone agrees is necessary – or will it sink into the partisan swamp? And Cathie Wood talks up her investment strategies – but what’s the substance behind the leading Zeitgeist Investor?

Apologies for the lack of porridge Thursday, but it was a busy morning trying to raise a lot of money before the puppy took me to owner training…

It’s been a “digestive” kind of week in market… Among other things figuring out the how, if and when of possible new coronavirus threats, and if mutations and panics could trigger new lockdowns. As we watched the sun go down from the yacht club veranda while yesterday’s glorious summer came to its end, we were calculating the odds of whether the lad’s ski-trip in Feb 2022 will actually happen!  Hope so.

But there is plenty else to ponder.

The fact container prices from Asia to Europe topped $10k for the first time ever – is that a sign of resurgent, sustained long-term demand, or is the repressed post-pandemic spending going to prove temporary?

There are an increasing number of analysts bought into the theory the current inflationary blip will be temporary as repressed spending is balanced by stretched savings, unsustainable leverage, and job fears as the real scale of the pandemic damage to SME balance sheets becomes apparent. Despite the loans, furloughs, and bailouts – many companies are struggling. The apparent rosy spending orgy may not last long.

We are still balanced betwixt Inflation and Deflation..

And then there is the bond market. If we are headed for inflation and a taper then just how much pain will a screaming bond market (screaming in agony as rates crush prices), inflict on other financial asset market? Clue: lots. Lots! And if bond markets collapse – then you can bet the right-wing monetarists hidden among us will be heaping the blame on the god-damn communists in Washington, Downing Street and Frankfurt for debasing currencies through reckless fiscal carpet bombing.

Or how about widening geopolitical fault-lines. Earlier this week I was pondering on whether the rumoured accidental release of Covid from a Wuhan lab might trigger China push-back. Biden has now instructed the CIA to report on the matter. The Chinese are screaming its already a “dodgy-dossier” – if you don’t know the reference, it’s the reason you should count your fingers afterwards if you ever meet Tony Blair. Meanwhile, Beijing has solved problematic Hong Kong elections by declaring the winners ahead of any vote.

The other side of the China vs US face-off is the realisation both are essentially market driven economies… they just do it differently. I suspect many smart fund heads are wondering how to play it neutral, hedging downside risks in one bloc against the upside of the other, all without offending the plethora of ESG, CSR, Sustainability and Social Justice mandates that now dominate investment decisions in the West….

Meanwhile… back on the Range..

Is the US crawling towards a possible-partisan agreement on infrastructure spending? If it is, then the prospects for the US dramatically improve – with knock on effects around the global economy. The Republicans have countered Biden’s $1.7 bln plans with a $982 bln counter-package. To say there remain “vast differences between the White House and Republicans” would be an understatement – but anything that looks less polarized is positive.

Over the past couple of days I’ve been having a fascinating email debate with a great mate of mine. He’s a very successful alternative asset manager.  He’s also a Republican – which doesn’t necessarily make him a bad person. Although Trump dominates the party, not every Republican is a Trump aficionado – they just can’t say it.

At least they are having the debate on just how much to spend on recovery, and the fiscal consequences that may emerge. Its not a debate being heard in Europe or the UK to any real extent. (Ok, the Germans are getting a tad concerned about German tax-payers funding Italian pensions and creating massive inflation in Draghi’s spending plan’s wake – but, fear-not! Germans are good Europeans.. for now..)

Broadly the US argument revolves around the number of US firms abandoning Democrat states like California in favour of low tax states like Texas that remain corporate friendly. It’s a fact Democrat run states tend to have higher unemployment and higher taxes. According to my mate that’s prima facie evidence the Democrats can’t be trusted to run the US economy, and are proven incompetents. That’s pretty mild polarisation compared to what passes for political debate in the US these days.

Many states are struggling to balances taxes, spending and growth. Central government vs regional spending is a fault line in most modern economies. When it comes to the US, it’s a factor driven by the evolution of US economy – the big cities evolving from manufacturing into services, and more recent factors driving greater inequality and raising the need for more expensive social services.

For instance, I reckon the social problems in San Francisco have been accelerated by the costs of housing being driven up by the tech industry. Distorted ultra-low interest rates have fuelled tech valuations, allowing over-valued start-ups to pay massive salaries, driving up the cost of SF accommodation to insane levels, pushing out the bulk of service workers in low paid service sectors. Just saying – monetary distortions have consequences… not just on markets.

Balance these states against the “frontier capitalism” of Texas et al. They compete for jobs on the basis of low taxes and business friendly corporate laws. It clearly works for them. Entrepreneurs can put their businesses up for a bid to see which states are prepared to host them for the least. Everyone from Tesla, Apple, HP and Planatir has moved business units on to the Texican scrub. It sort of makes sense – a firm that makes a $1000 distributal profit will end paying nearly $700 in Federal and State corporate, dividend and capital gains taxes in California. (Most of it is Federal.)

Most Europeans scratch their heads understanding why US states compete against each other like that. Surely the country would be stronger if they worked together? Don’t even go there… competition and states rights.. etc..

I hazarded the view that’s it’s the success of the US that’s the reason for the increasing negative social issues in America’s large cities. I am not advocating communism – just that the USA solves the issues created by success. Spread the love. Inequality and lack of opportunity ultimately sucks for everyone.

And…. Step up to the block; Cathie Wood

Even as Central Bankers around the globe put the boot into Crypto we’ve got Cathie Wood of ARKK on the wires reassuring investors Bitcoin is here to stay. She still reckons Bitcoin is good for the environment because it will focus miners to get their power from green sources. I must be missing something there, because if miners use the green energy everyone else wants, that will push up its price meaning more green energy will be produced – perhaps, but until it is, let’s just burn another mountain of extra coal?

This morning on Bloomberg Businessweek there is a must-read piece on Cathie: Cathie Wood’s Bad Spring is Only a Blip When the Future is So Magnificent.

It’s a great read – and you know what. I agree with her. The world is changing. New Tech is going to make it much, much, much better. I buy into 3D, Space, Gene therapy, and the rest, just not digital currencies.

The thing is. They are going to happen. But not at the pace or in the fashion Wood expects. The history of business is constant evolution driven by the forces of the market and money. Everyone loves innovation, but the firms that have great ideas don’t necessarily succeed. Ford was not a first mover, but found how to make profits and sell more cars. The Wright Brothers were first movers, but became a minor engine maker. The Brits pioneered the Jet Airliner and never made a cent from it. The trick is not just finding innovators, but finding the winning innovator! That is really hard work.

What Wood has successfully done is become the figure head of the Age of Zeitgeist Investment – making lots of money the easy way. Her crew (described in the article) and herself see the future as disruptive and innovative and it’s all terribly exciting.

The reality is very different. Understanding ultimate winners and losers is hard. It’s not about getting excited. Growth and neat solutions to as yet undiscovered or comparatively minor problems are just part of the equation alongside money and profits. The Tech industry is no different from anything else – trends matter, but it’s about what companies are going to succeed and pay decent returns….

That’s not what Cathie Wood’s multi-billion dollar ETF’s do – she sells a dream of tech riches, not the hard work in making them…

Here endeth today’s rant.


We live in a time of radical monetary policy and dramatic technological change. Cheap money finances innovation, and innovation helps hide the full effects of cheap money. In the process, everything we know about work, investment, and consumption is being redefined.

To understand what this means in practice, let’s start with a familiar example.

Taken for a Ride

Uber has more than 100 million customers and is synonymous with “getting from A to B.” But this does not mean it has a good business. On average, every time someone takes an Uber, the company loses money. Over the past decade, investors kept Uber from going bankrupt by pouring more money into the company. In essence, these investors are subsidizing Uber’s customers.

Uber and its investors are part of a bigger trend which Derek Thompson first described in 2019. Companies such as Casper, Peloton, Uber, WeWork, DoorDash, Lyft, and Postmates lowered their prices to a loss-leading level in order to maximize their growth. They got more customers but lost money on every sale. By doing so, these companies and their investors helped fund the lifestyle of their customers — mostly young people living in cities. Thompson calls this the “Millennial Lifestyle Sponsorship.”

This strategy offers important hints about the future of other businesses and professions. But before we get to these, we need to understand how technology and monetary policy enable the Millennial Lifestyle Sponsorship and why this strategy is more reasonable than it sounds.

Losing Interest

“Money never sleeps,” Gordon Gecko explains to a young banker in the original Wall Street movie. Gecko is referring to the fact that markets are always open somewhere. But his deeper message is that money cannot rest: it needs to generate more money. Sleeping means missing out on investment opportunities and losing value to inflation.

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Number of 401(k) and IRA millionaires hits record one year after Covid

  • Thanks to the market’s recent run-up and increased savings, retirement account balances have now surpassed pre-Covid highs.
  • The number of 401(k) and IRA millionaires also hit an all-time record in the first quarter of 2021, according to Fidelity.

Although thepandemic isn’t over, many retirement savings accounts are back to pre-Covid highs.

Retirement account balances, which took a sharp nosedive almost exactly one year ago when the coronavirus outbreak caused economic shock waves, have now bounced back entirely, according to the latest data from Fidelity Investments, the nation’s largest provider of 401(k) savings plans.

And despite three recent days of losses, the market’s run-up has been a boon for savers.

From January 2020 to the beginning of this month, the S&P 500 has had an annual return of more than 20%, according to Morningstar Direct.

That has helped propel average retirement account balances to record levels, surpassing even the previous highs reached right before the pandemic.

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