German Property Market – A Real Estate Bubble?


Asking €747,000

QUESTION: Possible Correlation with ECM-peak in Nov. 2017? Mr. Armstrong, just today I became aware of your story and your life’s work. Your theory is captivating, especially in the light of a series of unsettling changes in my work environment. All of this near Nov. 24-25, a predicted turning point within your ECM forecast. I am a self-employed agent, working mainly on behalf of a … German finance [company] which specializes in selling mortgages for public housing projects ….

Since it´s foundation … [we] operated with a strict lending limit of 80%. Upon so-called “customer-demand”, those limits have now been raised to enable 100% lending at almost the same interest rates (Nov. 9. 2017) while additionally allowing fixed interest rates for 25 years and amortization terms up to ca. 40 years. I have seen even more outrageous offers from competitors. These factors, combined with the unnaturally low-interest rates caused by the ECB, enable almost every household to acquire a house of one’s own.

However, these amortization terms fail to include future investments and a possible future increase in interest rates. In my opinion, households with an average income have a high risk of debt overload or at least a risk of constantly living in debt. It seems to me as if the public model of never repaying one’s debt is slowly being transferred to the private sector.

My observation might just be a small part of the picture, probably a peak in one minor cycle you observe. Yet it does make me feel uneasy, for this peak correlates with your next predicted ECM turning point. Although the public opinion states the opposite, I fear a massive housing bubble on the German market. Even minor changes in interest rates or household income could cause substantial problems for the average homeowner.

I would very much like to hear your thoughts on this subject. Please excuse my rusty English, I did not have practice for a very long time. Thank you in advance for your response. Also, I want you to know that I have the highest respect for your resolve in those times of imprisonment.

From Germany, FW

ANSWER: Unfortunately, Germany has allowed its own housing bubble not much different from the USA that burst in 2007. Normally, like fashion, things tend to start in Europe and then migrate to the USA. In the case of real estate, the value of property in areas such as Bavaria was very cheap compared to international levels. The market has been rising since 1996. Even back in 2015, Sparda Bank (http://www.sparda-bw.de) was offering just over 1% fixed rate mortgages for 10 years.

Our timing models do suggest that there is a pause in the trend due here in November (4th quarter). There should be a decline of softening in the market going into the first quarter of 2018. Thereafter, the trend will shift and the next big turning point will be the 4th quarter 2018.

The risk of fixed rates even out now for 25 years will not be on the back of the home-buyer. That risk will belong to the lenders. Yes, the ECB with its negative rates has caused tremendous distortions in the debt markets. They were unsuccessful in creating inflation or expanding the economy. What they have created is asset inflation, which does not show up in the economic statistics as they are focused upon by the media.

The central banks are focused on DEMAND inflation. That has been defeated by any expansion in the money supply is sterilized by a net rise in taxation. Consequently, the consumer is buying assets and hoarding cash. They are not spending it frivolously in dinner, wine, cloths, and song.

The risk to the borrower will be the rise in taxation that then eats into their disposable income. Lending 100%+ to buy houses is insane. Those who have no equity are highly prone to default. As this group defaults, they increase the supply of property coming to the market and thus all prices are suppressed. This is the process that creates the major high in REAL TERMS.

The homeowner who has equity will lose short-term. However, the euro will crack and in this regard, a low FIXED rate mortgage that they can maintain will be a HEDGE against the currency. The market will shift from asset inflation and cross-over to currency inflation.

Nonetheless, in terms of INTERNATIONAL VALUE, the market is peaking now in November. Housing prices have risen to world standards so the foreign capital will back off and not see this as cheap anymore. As the euro declines, then the property in real value terms globally will also decline.

Are We Losing the Training Ground for Trading?


 

COMMENT: Dear Mr. Armstrong,

Really glad that you again warn us of impending famine moving into 2020 – 2030 and give us ample time to prepare though many still do not believe in your forecast. Your blog have done a great service to humankind.

Also pertaining to your recent article pertaining to skills needed to be a successful traders or fund managers. I tend to agree that going against majority view at important turning points require nerve of steel to pull the trigger. Not many can do it as emotions can overwhelm our decisions. Being a fund manager myself, I find that how we perform and react during bear markets, crisis and panic moments will distinguish me from others (my peers). During rising tide, our performance mask our real ability to handle crisis.

As you say, life is a journey of learning. Socrates provides a valuable tool for my investing journey while your blog helps in allowing me to view the world in different dimensions. I do make mistakes along the way but thank God I become a better investor as day goes by.

Regards,

SS
Malaysia

REPLY: Yes. Funds that are just a buy and hold are not traders. The regulation also creates much of the problem. Because we have the CFTC and the SEC, these two agencies do FAR MORE HARM than good. They each have their own lobbyists to retain and expand their power. I was once offered a fund to manage in the USA with $50 billion+. The problem that confronted me was the blunt fact it was a buy and hold affair. Because it was equity, it would come under the SEC. I would not be allowed to hedge using futures greater than 15% at the time or else I would then violate the CFTC rules and cross into a futures fund. This was all because of a turf war between the two agencies. In other words, if I saw an imminent crash, I could not protect my clients by hedging more than 15%. You had to sell outright everything, which would then also raise red flags. I turned down the offer for I felt my reputation would be destroyed because I would have to suffer a serious loss and could not prevent it. That was while hedge funds were created offshore because you could not trade everything do to regulation to create government jobs rather than provide the best management service for investors.

Because of the regulation, the field is dominated by buy-and-hold managers who have no real trading skill because they were never allowed to trade. Then you have exchanges closing the floor pits and going all electronic. It was the floor trading that forged the souls of traders. You could smell the blood from the screams on the floor. Today, that is reduced to just flashes of light. Actually trading with other people is who you learned to trade. Dealing Rooms were set up with everybody on one floor – not in cubicles. You heard the phones ringing on every desk when the markets were hot. It was that interaction that made great traders. Eliminating that human interaction makes me wonder if we are not losing the core of understanding markets.

NAFTA Round #5 Reaches Impasse on Critical Auto Sector – Canada/Mexico Balk At Rules of Origin…


$64 billion of the current annual trade deficit with Mexico stems from the auto sector alone.

For over a decade auto manufacturers have moved to Mexico in order to import parts from Asia, assemble and install them, and then ship the completed cars into the U.S. through NAFTA without duties (tariffs).

The U.S. auto ancillary business groups (parts suppliers) have been pushed out of competition in the auto sector by this corporate profit strategy.  Thousands of U.S. jobs have been lost in both the plant assembly and the ‘auto-parts’ manufacturing sector.

CTH has called attention to this bastardized supply chain for years.  Foreign auto-parts, made by foreign workers, assembled into U.S. owned manufacturing, and sold as U.S. automobiles. The weird supply chain and assembly process is essentially a multinational corporate scheme (in the auto sector) which exploits one of the loopholes in the 25-year-old NAFTA agreement.

If the assembly plant was on U.S. soil the foreign (mostly Asian) parts would be taxed as imported parts.  However, so long as the assembly is in Mexico (or Canada), the origin of the parts is currently irrelevant, and the finished automobile crosses the border into the U.S. avoiding the taxes using NAFTA.

Keep in mind, the auto manufacturing sector, not just U.S. assembly plants but also European auto-makers, have made capital investments into Mexico, based on this NAFTA loophole as part of their business model. They don’t want this cost/profit plan disrupted.

Along comes U.S. Trade Rep. Robert Lighthizer and U.S. Commerce Secretary Wilbur Ross and say: NO MORE.

If you are going to consider it a North American Free Trade Agreement vehicle,  then an established percentage of that vehicle should actually have to come from North America; just as importantly, that percentage should be high.

That’s the basic argument behind the “rules of origin” part of NAFTA. If you are going to call it a “North American vehicle”, then the parts should come from North America.  Makes rational sense, no?

The U.S.A. position is that half of content for ‘American-built’ autos should be produced in the United States; and the regional (NAFTA) vehicle part content requirement should be increased to 85 percent from the current 62.5 percent.

Mexico and Canada do not want rules of origin because they want to use their workers to assemble vehicle parts from other nations and sell into the U.S. as “American Autos”.  They correctly fear that if American cars must actually contain American content, and be assembled by actual Americans, then the American Auto-Manufacturers will move their auto plants to America.

The auto-industry, who have invested tens-of-millions in the current scheme, wants to keep the entire source of origination a hidden secret from the public.  They are not too keen on American consumers finding out that Japanese, Chinese, Indonesian, Korean and Vietnamese parts are actually behind the American badges.

Additionally, the European Auto-Manufacturers who are also building in Mexico and Canada don’t want to lose the NAFTA loophole that lets them assemble outside the U.S. and get their vehicles into the American market.

The current system employs lots of Mexican and Canadian workers who assemble foreign parts into American vehicles that are then sold into the U.S. as “American Cars”.

If “rules of origin” are forced upon them, there’s no incentive -beyond labor- for the U.S. auto corporations to continue making cars in Mexico and/or Canada.  Simultaneously, the vast majority of the assembly is now automated (with human assistance), so the labor costs are currently smaller as a percentage of the overall cost of manufacturing.

Automation and modern efficiencies in human assisted robotics mean the labor cost incentive is not as valuable as it once was for manufacturing.  In the modern auto-era it’s the quest for cheaper parts that is now driving the business model; hence, the “rules of origin” exploitation.

MEXICO CITY (Reuters) – Canada and Mexico will rebuff the United States over its demand for tougher NAFTA automotive content rules, top officials said on Monday as negotiations to renew the treaty bogged down with only a few months to go.

[…]  Canadian and Mexican negotiators will address the U.S. auto demands on Tuesday, the final day of the fifth round of talks to update the North American Free Trade Agreement, chief Mexican negotiator Ken Smith told reporters.

Although the talks are due to wrap up in March 2018 after a seventh and final round, they are deadlocked over a series of hard-line proposals the United States unveiled at the fourth round last month.

“It’s definitely slowed down from the previous round,” said a Canadian source with direct knowledge of the talks. “There has been no progress in the contentious chapters.”

Canadian and Mexican officials have complained repeatedly about what they see as U.S. inflexibility. A spokeswoman for the U.S. Trade Representative declined to comment.

Mexico and Canada fear Trump will follow through on a promise to pull out of NAFTA, causing disruption and economic damage. The Canadian dollar edged lower against its U.S. counterpart on Monday, in part because of concerns about the negotiations. (read more)

This is where we must fight the lobbyists.

You must remain engaged and understanding of the issues within these and other trade disputes.  President Trump is wearing the bullet-proof vest, but you must engage your congressman to let him/her know you support the administration and their objectives in these Trade deals.

Your congressional representative is being lured with millions of millions of dollars from lobbyists who work for the multinational corporations.  They will try to retain their financial position.  YOU must educate yourself and your family on these issues.

Together we must engage and fight.  This is the president we have been waiting for.  Don’t expect he can do this on his own.  Make your voice heard.

Will Spain be the First to Default on Pensions?


The Pension Crisis is brewing rapidly and we will begin to see this make headlines much more so around the world. There is hardly a country not in trouble (Norway the exception), where pensions are underfunded as governments have relied upon tax revenue. As the crisis in Spain brews, it will be the pension crisis there which blows the lid off of the entire problem. The Spanish pension system is moving rapidly toward a major crisis threatening its collapse. The Madrid government needs to issue debt to close the huge gaps as, without new debt, the pension crisis would have a meltdown this year. The question becomes when will buyers of debt realize that it is not even backed by economic growth.  This is similar to a person without a job borrowing from the bank just to pay the rent. What governments have done in the management of pensions is criminal for anyone in the private sector.

Spain faces a major social crisis as we cross the threshold of 2018. The situation keeps getting worse by the day. For years, the Spanish government, like so many others, has been using funds from its pension reserves to finance expenses elsewhere in the budget ever since 2012. Billions have been used to offset the widening deficits in the welfare system. Consequently, the pension fund has collapsed from 66 billion euros in 2011 to only about 15 Billion euros in 2016. At this rate, Spain goes into default in 2018. The crisis materializes when those who buy debt suddenly see there is no possible way to repay the debt from future revenues. A default becomes possible when there is NO BID for new debt.

This is how it will begin. The peripheral economies will go bust and then a contagion begins as traders look around and say –OMG! They are all the same!

The Majority will Come Around When they are Compelled to See Gov’t in a New Light


COMMENT: Thank you for all or your recent posts in this regard. You have often said that we will be going through times that will try a man’s soul, and yes the Socrates platform will allow us to see it in motion, those of us who are prepared will stand a chance to survive and break even. The very sad part is that when you try to explain to people to educate themselves you are quickly dismissed, I nearly lost my sister over this discussion as she cant comprehend something like this happening and chooses to stick her head in the sand. I think and hope that my family will survive but it is really eating away at me at just how many family and friends will endure hardships that may be too great for them, there are children and elderly involved, no different from any bodies else’s situation I guess. I will be turning 60 soon and am afraid that I will be seeing the worst of everything to come, passing away just as we come out the turn in 32 give or take. The big question is when, you have often stated that major events occur when the pi cycle is due, wouldn’t surprise me if that is when something of this magnitude occurs. Everyone in Canada seems to think that our banks are the soundest in the world and cant comprehend the contagion when it occurs yet we have had Greece and Cyprus occur in recent memory. Guessing that people here think that life is still too good for any problems to occur. You have provided myself along with just a few others that I know a very great public service, so sad that more people are so closed minded. Take care and keep up the excellent work, perhaps when the dust hits the fan for real people will wake up and realize that the tree has truly been cut and choose the right path when the cycle shifts to a public one.

IF
REPLY: The majority MUST be wrong. That is actually the fuel that drives political change. Don’t beat your head against a brick wall. As the Public Confidence starts to erode next year, more and more people will come over. In the end, somewhere between 32% and 72% of the people will switch their view. That is just how it works. So be patient. Everything will begin to come into focus. Even during the American Revolution, the majority were against the revolution. It was not until January 9th, 1776 when Tomas Paine issued his Common Sense that the tide began to turn. In his introduction Paine begins:
Perhaps the sentiments contained in the following pages, are not yet sufficiently fashionable to procure them general favor; a long habit of not thinking a thing wrong, gives it a superficial appearance of being right, and raises at first a formidable outcry in defense of custom. But the tumult soon subsides. Time makes more converts than reason.
It was Thomas Paine who turned the tide. His opening paragraph swayed the doubters converting them into the believers.

Some writers have so confounded society with government, as to leave little or no distinction between them; whereas they are not only different, but have different origins. Society is produced by our wants, and government by our wickedness; the former promotes our happiness positively by uniting our affections, the latter negatively by restraining our vices. The one encourages intercourse, the other creates distinctions. The first a patron, the last a punisher.

Society in every state is a blessing, but government even in its best state is but a necessary evil; in its worst state an intolerable one; for when we suffer, or are exposed to the same miseries by a government, which we might expect in a country without government, our calamity is heightened by reflecting that we furnish the means by which we suffer. Government, like dress, is the badge of lost innocence; the palaces of kings are built on the ruins of the bowers of paradise. For were the impulses of conscience clear, uniform, and irresistibly obeyed, man would need no other lawgiver; but that not being the case, he finds it necessary to surrender up a part of his property to furnish means for the protection of the rest; and this he is induced to do by the same prudence which in every other case advises him out of two evils to choose the least. Wherefore, security being the true design and end of government, it unanswerably follows that whatever form thereof appears most likely to ensure it to us, with the least expence and greatest benefit, is preferable to all others.

Paine’s Common Sense had turned the tide in just three months. So do not worry. They too will come around in their own time. Perhaps a Christmas gift of Common Sense if they will read it.

Banking Insurance & The Complete Undermining of the Entire Financial System


COMMENT: Just quizzed the Canadian Bank insurance CDIC. It is obvious they do not have a specific time period in which to pay claims. Kept dancing around the specific question but they said they pay cash accounts ASAP so people can pay bills. Bottom line, contagion will destroy all financial obligations and transactions.

REPLY: No government that I am aware of has ANY plan for a contagion such as LTCM, S&L etc…. You must understand that the people who even dream up legislation have ZERO experience in markets. Absolutely everything is based upon a single failure of any institution. When the LTCM crisis hit, bids withdraw and institutions are unsure who to even trade with. This creates the NO BID crisis and volatility rises dramatically. The panic unfolds because of price moves without volume. When large gaps appear WITHOUT supporting news, even professionals sell because they cannot make a decision in a vacuum.

I have been in many meetings. There is just no comprehension of how markets or the economy even function at the highest levels. It is assumed that contagions are just flukes so there are absolutely NO contingency plans whatsoever. I have tended to get called in more as a crisis manager AFTER the fact – never before. When it all comes unglued, they seem to just need someone to talk to.

The underlying structure has been completely undermined. I have warned from INSIDE sources that these big fines paid by the banks are really to-line the pockets of government. That has created the false image of Too Big to Fail. The government is NOT interested in prosecuting bankers personally. There are no big bucks in that. They want the billion-dollar fines. More and more banks are leaving the marketplace because it is too expensive.

By extorting banks with huge fines, they have caused many banks to get out of proprietary trading. This has been shrinking liquidity laying the seed for the next crisis to be far worse than 2007-2009. Particularly European banks have been downsizing trading dramatically. It is being called the “juniorization” of the financial industry. The phrase means the banks have been engaging in the practice of firing senior traders and salespeople and replacing them with younger talent. This has been prevalent over the past few years as banks have sought to cut costs. What this is leading to is those with experience are retiring, which is increasing the risk that there will be nobody who knows even what to do in a crisis. It will be their first time up to bat. We have less experience unfolding in the industry combined with the number of participants declining, and regulators more interested in lining their pockets with extorting fines than protecting the financial system.

People who pretend to be analysts who have NO experience behind the curtain have no idea what has happened to the financial infrastructure. This is far more serious than the quantity theory of money or central bank balance sheets. They are not even close to the real dangers we face as government bureaucrats try to regulate something they are completely ignorant of in reality.

We have major institutions lining up for our computer services. They know there are risks nobody is talking about in the press. They are looking for objective forecasting that is not some OPINION or trading that is dependent upon DISCRETION. They know our models are geared to forecasting the contagion events that can easily be seen on the Global Market Watch.

Banking Insurance – The Real Risk Behind the Curtain


 

COMMENT: I’m sure you are aware but just highlighting that the ‘Assumption’ goes deeper than personal bank accounts, as this is ALSO the assumption taken by the clearers too! They assume that if one CCP fails then the others just pick it up. Obviously, given that then the stress tests are taken just for one bank failure they do not price-in the fact that there will be no bid for anything! As you say, this is obviously why the ECB is so vulnerable… Everything is fine until it is not…

 

REPLY: You are absolutely correct. People do not understand that the “ASSUMPTION” for everything is a single failure and not a contagion as was the case in the S&L Crisis or the Long-Term Capital Management Crisis. For those who do not know what we call a “CCP” it is a central counterparty clearing house. Those who lack the experience of actually being behind the curtain in the financial industry are clueless as to what is really going on. We are extremely vulnerable far beyond what most people dare to consider. A banking crisis can take down a CCP in a contagion. That was why the Fed had to step in during the Long-Term Capital Management collapse. The markets will freeze when nobody knows who is acceptable counter-party risk.

That was the entire reason elastic money was invented long before the Federal Reserve. The Clearing Houses issued their own money to enable trades to be settled. As the panic subsided, then the newly created money was redeemed and expired. Contagions froze the economy and liquidity vanished.

This is why we are introducing a RISK TABLE into our professional reports. Our greatest risk is a serious CONTAGION with the first crack exposed.

This is why I urge people to have cash outside the system enough for 30 days living expenses.

Bank Insurance Clarification – A contagion eliminates all Rules!


The entire banking insurance schemes created during the aftermath of the Great Depression, are predicated upon an ASSUMPTION that a bank failure is a single isolated event. The contingency plan for a wide-scale banking collapse will default to a “per person” basis despite what anyone else says. I have been in meetings and that is the stated fallback position. The closest example was the S&L Crisis of the late 1980s caused by Congress raising taxes changing the tax credits for real estate which led to a sell-only market.

The S&L institutions were insured by the Federal Savings and Loan Insurance Corporation (FSLIC) which was established to provide insurance for individuals depositing funds into S&Ls. When S&L banks failed, the FSLIC was left holding a $20 billion check. They inevitably left the FSLIC corporation bankrupt. The Federal Deposit Insurance Corporation (FDIC) that oversees and ensures banking deposits today is what also comes into play. During the S&L crisis, the deposits of some 500 banks and financial institutions were backed by state-run funds. The collapse of these banks cost at least $185 million and destroyed the concept of state-run bank insurance funds since they could not cover the losses.

If we look at the fine print of the FDIC, the limit isn’t “per person, per bank,” as is sometimes stated. It’s “per depositor, per insured depository institution for each account ownership category.” So what does that actually mean? This turns on account ownership category and therefore checking, savings, and money market accounts all fall into this category. Therefore, the insurance depends upon the title of the account. Dodd-Frank raised the limit on FDIC from $100K to $250K. Therefore, the same individual can have $250,000 in each of these three types of accounts but that is considered all the same category so the individual accounts all contribute toward the same limit. The exception to this “category” would be an IRA account. There we have the risk of states trying to lobby to take those accounts to manage in order to bail out state pension funds. Therefore, you can exceed the $250,000 limit by placing a part in a spouse’s name or children’s names. Of course, that introduces other risks with divorce being as high as it is. You can create an irrevocable trust, but keep in mind that as governments become desperate for revenue, they can always change the trust laws as well. Splitting funds also into corporate accounts changes the legal status of a “depositor” to increase the limit.

However, the assumption that you are insured and will receive your money in a timely manner is dead wrong. There are countless lawsuits during the S&L Crisis by people trying to get paid. There is the Supreme Court decision of Coit Indep. Jt. Venture v. FSLIC, 489 U.S. 561 (1989) even stating that there should be some reasonable time limit that was absent in the legislation.

What government states on their websites is really immaterial. He who controls the pen controls reality. The government can change the law at any time whenever it goes against them. They can revert to the definition of income taxes which is applied to “household” income. Look at Obamacare. The IRS website clearly states that everyone in the household is responsible for everyone else. “The individual shared responsibility provision of the Affordable Care Act requires you and each member of your family to have qualifying health care coverage (called minimum essential coverage), qualify for a coverage exemption, or make an individual shared responsibility payment when you file your federal income tax return.”

Then there is the kiddie tax, which the Democrats introduced to get at the rich. On May 17, 2006, the kiddie tax was altered by the Tax Increase Prevention and Reconciliation Act designed to keep the parents’ tax rates in effect until the child turns 18. That was still not punishment enough, so they revised it again with the Small Business and Work Opportunity Tax Act of 2007. They extended the kiddie tax age limit to 19 and then made it even worse. After the child turns 19, the kiddie tax still applies to his or her investments if he or she is between ages 19 and 23 and a full-time student.

Keep in mind, under the tax code, the government does not look kindly upon trying to avoid taxes by giving assets to family members. Years ago, when I bought a house in New Jersey in 1991, I simply added my children’s names to the deed. There was no issue. When I purchased my place in Florida last year, I could not do so for they would have to pay tax on the value I was giving them. So many governments are targeting children and family members (see Canada). Australia is stalking children on their way to school to collect taxes.

When it comes to actually collecting on insurance from the FDIC, (1) you may starve to death before you get the first dime, (2) they can simply revert to the tax code and accuse you of trying to get more insurance than you are entitled to by dividing it among family members, and (3) they will no question limit it to “per depositor” which does not expressly guarantee per bank or institution. When push comes to shove, they hold all the cards, guns, and tanks as well as the courts. On a single bank failure, there is no real problem. A contagion eliminates all rules!

ECB & the Coming Banking Crisis


 

QUESTION: Mr. Armstrong; Your post of November 16th where you state that the ECB is looking to freeze accounts in a banking crisis, does that mean they will no longer honour the claimed insurance of €100,000 per account?

PH

ANSWER: No. They will not pretend to eliminate that insurance, they just will “suspend” it as a bank holiday. But you gloss over another problem. The insurance of  €100,000 is NOT per account, but PER PERSON. So taking €1 million euro and spreading among 10 banks does not thereby provide insurance for the whole lot. The same is true in the USA. The ECB is proposing supplementing it with discretionary powers to suspend bank withdrawals. To say that the entire program will be terminated is an exaggeration. Nevertheless, it reflects the realization that the European banking system is in serious trouble. I recommend that Europeans should have a stash of cash, and if you have a lot of cash in your account, put some into dollars in the States before it is too late.

Warning About People Soliciting Money for Trading


It has come to our attention that there are individuals soliciting clients for money to trade on their behalf claiming they have mastered our system and will use it. These people have NEVER managed money and handing them money is no different than asking a cab driver to conduct surgery on you because he sounds like he knows something about medicine. Managing money is a difficult task, to say the least. It takes nerves of steel and every study has shown that someone who trades a small amount of money even successfully, loses money when they try to trade size. In fact, 66% of large-cap active managers failed to top the S&P 500 in 2016. Some 58% of hedge fund managers reported a decline in assets under management in 2016 and 63% of funds-of-fund firms also reported a decline in assets under management.

Handing money to anyone without a LIVE TRADING background is suicidal!!!!! Emotion will ALWAYS overrule their decisions when it counts most! This is why I have NOT endorsed anyone. I am at that stage in life that money does not impress me. I am interested in demonstrating that there is a better way to manage our economy and our future. This service is about trying help clients stay on the RIGHT side of the market. I need not push any philosophy religious or otherwise.

Life is a journey of learning. We have all made mistakes in life. If you learn from your mistakes, that is the path to wisdom. If you fail to learn, that is the path to ruin. Most losses take place in trading because people try to find a trade or they are listening to the TV. There is far more at stake here than personal OPINION. A trader who follows his opinion and tries to claim he is better than someone else is a total fool. Success requires always assuming you are wrong and that demands you constant recheck what you are doing. NEVER marry a trade or form an inflexible opinion.

 

Historically, my best trades in life were usually the hardest to do. You have to fight your inner gut to stay calm and do what has to be done in the middle of everyone in a state of panic and chaos. If you have never been there, you will not know how to survive. Emotions will get the better of you every time.

When I shorted the markets for the Russian collapse that manifested into the Long-Term Capital Management Crisis, that was easy to initiate. The hard part came when to take profits and reverse. I sold $1 billion against the Yearly Bullish Reversal in the yen at 147 and had to cope with a contagion that hit every market contrary to all fundamentals. It was a liquidity crisis so everything was sold without logic.

The Japanese yen fell to 103. I covered all my shorts in everything, flipped, and then left the office. It was a gut-wrench trade for I was truly alone. I put in my stops and it would work or not. Very black and white. This was a discipline that I knew I had to walk away and not second guess myself, which would be a disaster. The market would decide. The New Yorker Magazine reported:

“The hedge-fund manager who used to work for Armstrong remembers him coming out of his office in September, 1998, two months after he’d got short in front of the ruble crisis. Monica Lewinsky was on TV. “My oscillators just turned,” Armstrong announced. He booked his profits, pulled out of the market, and went to his beach house, on the Jersey Shore.”

I traded through many crashes. It was that EXPERIENCE that I drew on. Sometimes you just have to fight your emotions to go against the majority. They will all think you are insane. But the majority will also be wrong. This is not an easy thing to do when you are managing other people’s money. What is critical to trading is to see HOW someone acted in the middle of a panic. Were they calm? Did they join the majority or comprehend what was really at stake?

 

DeutscheBank-1

 

My drawdowns were less than 2%, which is unheard-of. Many people dubbed me the “legend” I supposed for trading. The best way to make money is to REDUCE your trading activity.  All the analysis starting funds found that 22% of emerging manager funds made a loss in their first year of trading. They are also more volatile and represent the risk of significant losses to investors. It takes a seasoned trader with a global perspective to survive. Someone who keeps their head in the middle of a panic. At the same time, a fund that grows in size too large, cannot trade like a small fund. Returns tend to decline with size, not expand.

 

Investors are regularly reminded that past performance is NO guarantee of future results, but track records continue to play an important role in manager selection. One reason for this is the
evidence of their decision making and survival. Here is an audit from Republic National Bank showing again the drawdown max for 1997 was $2.7 million compared to $38.1 million gain and I used only 4% of the cash for margin. You cannot guarantee the return made one year will be repeated the next for the basic reason that volatility rises and declines from one year to the next. Even the indexes do not perform the same from one year to the next.

However, a track record reveals something much more important. How did someone respond to abrupt market movements? Did they get out in advance? Did they just panic and follow the crowd? How quickly did the abandon a losing trade? This is where the seasoned trader comes in.

Many people dream of being a hedge fund manager and yearn to cut their teeth on other people’s money. If he puts forth trades that are hypothetical, does he have the courage of his convictions to trade in a flexible manner or refuse to admit when he is wrong? There is so much more to selecting a fund manager than meets the eye. The best hypothetical track record means nothing. Do they have the courage to actually trade?

We will be setting up a forum for our clients who are subscribers to Socrates run by people who have used the models for more than 20 years. You will be able to ask questions there that will be answered without soliciting you for money. We have a couple of major banks with EXPERIENCE in trading who we are looking at allowing our models to be used formally to prevent others from trying to solicit people using our track record pretending it is theirs.

I have stated I am not interested in returning to funds management. That is a job which is 7 days a week and you have to be on call 24 hrs a day. I still have a hard time sleeping more than 3 hours straight. I greatly appreciate all the offers and understand that the track record of the fund I managed for Deutsche Bank remains probably the best ever.  Nonetheless, we all have our shelf-expiration dates and I just have no interest in going back to that lifestyle – been there done that!

I will make an effort to find the right firm who I believe is seasoned to survive the chaos ahead because what lies ahead will be far greater than most are even capable to trading. We are entering a period of extreme volatility on just about every front. This will indeed try the character and soul of the best funds manager. So please do not listen to anyone who claims to have mastered our model. Emotions will override any model if they are not a truly seasoned trader. A lot of people think they can become rich as a hedge fund manager. It takes a hell of a lot more than simply a few good trades.