QUESTION: What do you think of value investing?

Bob

ANSWER: As with everything, a cycle that you have to understand will unfold. Everything will move to extremes on both sides and you must understand the driving forces. Look at the PE Ratio. People write in and say I am wrong and the market must crash because of the PE Ratio. Everybody is wrong at some point in life. That is how we learn from our mistakes, which we call “experience.” If you assume such stagnant relationships are always fixed, well, you have a lot to learn.

Value investing works for the majority of the trend in general. However, that view typically looks just at earnings. As illustrated at the top, I used these charts during the 1980s and was blamed for creating the takeover boom. Why? Forget earnings. The book value of assets were ignored after the Great Depression so the low in the Dow Jones Industrial shares was 1977. You could buy a company, sell its assets, and triple your money. So looking just at earnings did not identify the takeover boom when the Dow rose from 1,000 to 6,000.

Consolidation was the name of the game in the morning session for Japan, which dealers were happy to see especially after yesterdays prestigious run. Hang Seng had a rather subdued day with very little change for them today. In Shanghai, once the market saw the unchanged CPI and the better than expected PPI, bulls were in the driving seat and we closed +0.7% better on the day.

Europe had a good day across the board. The DAX closed up 2.5% with a general performance from Munich Re, Lufthansa and Infineon Technologies all around 4%+. The CAC and IBEX were both around 1% each again on a good array of cross-sector performances. The UK FTSE did see a +0.6% rally but coupled with a decline of 0.3% in the GBP it is not so impressive if you are an overseas investor. One of the BOE board members (McCafferty) says to expect more QE if the economy sees decline from here – certainly unsettled sterling but also business sentiment.

The US market really was happy to play around unchanged for most of the day especially after the Productivity release (+0.4% expected but actual was -0.5%). More consolidation around record levels with both the S+P and NASDAQ recording yet more intraday highs. Many are still reflecting on last Fridays jobs numbers and the recent revival of the DXY. Having bounced from the end of April lows many believe the recent revival has only just started. Retail Sales on Friday with expectations of 0.4% against previous 0.6%.

Having seen the big sell-off on Friday on the back of the NFP number, Treasuries are undecided whether they should follow domestic economic sentiment or track European paper as they continue to edge lower! Today we saw a return to the curve flattening theme with 10’s dropping 4bp (to 1.55%) whilst 2’s recouped just 2bp closing the 2/10 curve at +84bp (2bp flatter than yesterday close). 10yr German Bund closed -0.08% (-1bp) which puts the US/Germany spread around +163bp. Italy 10yr closed unchanged at 1.12%, Greece 8.11% (-3bp), Turkey 9.38% (-12bp), Portugal 2.77% (-2bp) and UK Gilt closed 0.58% (-3bp).

COMMENT: Mr. Armstrong; I attended the Berlin Conference. I have to say that you have done an excellent job of laying everything out from the rally in the euro back to 116 to the rally in gold and its failure to get past 1362 not to mention Brexit and the breakout in the Dow. You alone called for Brexit and that from there Europe would begin to unravel. Today, it was reported that the rest of Europe is ganging up on Germany over austerity. I sold the pound, bought the Dow and sold gold watching 1362 as you have explained how to trade. For an idiot like me to beat everyone I knew was really spectacular. You will have three more people joining your WEC.

KD

London

REPLY: If you just step back and go with the major trend instead of trying to catch every wiggle, sometimes you just outperform the crowd. Yes, they are starting to ban together against Germany and that includes France. Deflation is raising the real value of loans and makes debtors unable to repay. That was the very essence of the Great Depression. Germany is just focusing on the last event of hyperinflation. As they say, we tend to always fight the last war.

QUESTION: Mr. Armstrong, it appears to me that we are moving to the extreme in political correctness to the point it is creating children who can no longer rep the very benefits of civilization. Have you seen this latest insanity in Australia where children cannot even clap their hands?

PD

ANSWER: Yes, I agree. Placing a ban on clapping and cheering is just nonsense. Some people are afraid to fly. Should we ban airplanes? There will always be someone offended by something. Either they realize they must bend to society or they cannot function. You cannot demand that society outlaws everything that people find offensive, for there will be no limit whatsoever.

You can get to the point of such political correctness that civilization ceases to exist. Fly into Miami. You will see so many people who speak Spanish but cannot speak English. They are defeating themselves. The very thing that made America great was that we discriminated “fairly” insofar as the last one off the boat could not get a job unless they spoke English. After the first generation, their children spoke English. If you ask an American what they are, they will typically respond something like half-Irish and half-Italian for example. You will rarely see such a combination in Europe. The failure of the EU is their misunderstanding of America. It was not the single currency that made the economy, it was the single language. This puts meat on the bones of the old story of the Tower of Babel.

COMMENT: Dear Martin, you always claim that the costs for social security will become unpayable from 2017 onwards. In Germany we have health care system organized by the federal government / the federal state. The government now created a “turbo” to bankrupt this system: The government passed a law that allows them to take 1.5 billion euros from the liquidity reserve of the public health care fund (10 billion euros in total, paid by all members and additionally by the taxpayer) and to give that money to refugees / asylum seekers. What would you call this? Insane?

Thank you for all you do!

Kind regards,

Michael

ANSWER: You are correct. The refugee crisis is rippling through every aspect of the economy. Germany is seeking to pay for the crisis the government created and will not reverse their policy.

The Asian cash markets just could not wait to open this morning after the huge Payrolls number on Friday. Admittedly, it took a little time and a better than expected Trade Surplus number (52.31 v’s and estimated 47.6) for the Shanghai market to join the excitement, but they eventually did to close +0.9% firmer. The Nikkei and the Hang Seng however, were euphoric from the start and with JGB’s trading lower (less yield from -0.1% to -0.05%) this also encouraged a weaker Yen. Nikkei closed +2.4% and the HSI +1.5% Asian futures have maintained their gains in late US trading.

Cash markets in Europe hit their days highs in the morning session and spent the rest of the day trying to hold those gains. FTSE closed above the 6800 level but then that should be no surprise given the continued weakness in sterling. Better than expected Sentiment data (4.2 against an expected 3 in August where previous was 1.7 for Sentix Investor Confidence) helped the market but was in thin summer trading. Markets are looking for the excuse to do nothing and the chances are they will get that this week with little data expected other than some Bond auctions.
Talk late in the day is that Italy are planning on holding their own referendum to overhaul the current political system. More uncertainty is certainly not what markets are looking for and so this will have yet another negative impact on BTP’s but also the Euro.

Having seen the rally on Friday following the jobs data, today was time for the markets to reflect on their recent performance and evaluate the price action. Many expected consolidation to be key today and that is what we saw. Even with the gains seen for oil today there was no commitment from core indices to act upon it, so summer trading is certainly confirmed and we could expect a quiet week. We will probably have to wait until Friday (Retail Sales) before the market attempts its next move.

As the US Treasury market watched the DOW play around unchanged, so we saw bonds recoup some of Fridays losses. Yields did bounce a small amount but it really was a tight trading range after Fridays steep decline. 2/10’s closed +86bp with 10’s closing at 1.59%. In Europe it was not until late in the day that the peripheral market started to play and even then it was a little late. German 10yr Bund closed -0.07% closing the spread at +166bp. Italy closed 1.12% (but may move tomorrow given the political uncertainty. Greece 10’s closed 8.14% (+2bp), Turkey 9.50% (-16bp), Portugal 2.8% (-4bp) and UK Gilt 10yr closed -6bp at 0.61%. The fall in Gilt prices is a knock-on effect from the TFS (Term Funding Scheme) that the BOE will provide funding for banks at interest rates close to the BOE main rate.

QUESTION: Dear Marty, I understand your general message and totally agree with it. I now see the big picture in a systematic trend and everything moving in the direction Socrates has forecast. I do have a few questions though. Can we call the trend: the public sectors trend to swallow the private sector? In other words, governments desire to “assimilate” the individual? And by trying to do so burn everything including itself to ashes from which hopefully a phoenix (new better system) will rise?

ANSWER: Unfortunately, yes. This is really how empires, nations, and city-states collapse. Government will hunt every dime to try to survive. The unfunded liabilities will drive them toward dark authoritarian forms of government. This is the crash and burn mode. All we can do is try to educate the people who are the real culprit here. They will claim it’s the rich to justify confiscating assets. We already have 65 million people in the USA who have been charged with something. They then can eliminate your right to even vote by simply charging you with something. They then make it a crime for anyone charged with a crime to have a gun, even if the crime is tax evasion.

The American Revolution took place because the king had decreed 240 felonies. If you were charged with a felony, the penalty was death. This benefited the king because he was able to confiscate all your property, and your wife and kids would be thrown out on the street.

Here is a note where the law was written that anyone in POSSESSION of a forged banknote was a felon and subject to death. This protest imitation shows people hanging. They were not the forgers. They merely accepted such a note and tried to spend it. This was highly profitable for the king who was desperate for money to fight wars.

Unfortunately, we do not have a government of the people, by the people, for the people. The people are the victims as they always become under any Republican form of government historically.

History repeats because human nature never changes.

QUESTION: Mr. Armstrong; I recently read a book which claims that the disparity of wealth among nations is something recently unfolding post-Columbus. The thesis claims that before 1500, the income differences between nations were small. It proposes that only since the discovery of America, the interplay between geography, globalization, technological change, and economic policy has determined the wealth and poverty of nations. It claims that the West pioneered new technologies that have made them richer whereas prior to the Industrial Revolution, most of the world’s manufacturing was conducted in Asia. It attributes the Industrial Revolution to the economic reduction of Asia transforming then into underdeveloped countries based on agriculture. The thesis is that a few countries – Japan, Soviet Russia, South Korea, Taiwan, and perhaps China  are catching up with the West through creative responses to the technological challenges. Would you agree with this thesis?

LHG

Hong Kong

ANSWER: No. This is a review of only the post-Dark Age period, which is akin to saying the stock market rises after only reviewing the history back to 1948. Yes, the Industrial Revolution and the creation of the steam engine advanced the West greatly. However, what made Lydia great were roads, but Cyrus the Great of Persia used those roads to conquer Lydia. Athens rose as a power for banking and insurance. As insurance was invented, shipping expanded and transformed it into the next financial capital of the world. Philip of Macedonia conquered Greece and his son Alexander the Great took on the world. He tried to conquer India but was driven back. Rome then conquered the West and it was a single language, along with Roman roads, that made it the financial capital of the world; peaking in 180 AD about the same time China peaked under than Han Dynasty.

The fall of Rome sent the title of financial capital of the world to Constantinople. When that fell, it moved to India. China then took the title from India and then Britain took the title from the Spanish. World War I sent the title to the United States. Each of these empires saw the same trend moving away from agriculture. Aristotle in “Politics” wrote about the new market-economy that was emerging. He saw the traders, who were men, making money from money. This actually influenced Karl Marx.

Aristotle did not understand the economic evolution process dynamically, which has taken place in ALL societies throughout recorded history. What Aristotle saw was the abandonment of what I have dubbed the Villa Economy of self-sufficiency and the gravitation of both people and capital toward commerce. This part of the economic cycle usually involves people becoming attracted to the big city and abandoning the farm life. Every society sees this oscillation both in the concentration of capital as well as people.

Aristotle clearly lamented over the loss of the Villa Economy. The old rural ways were giving way to capitalism. Even at the start of the United States, we will see that Thomas Jefferson and John Adams both shared the view that true wealth was created by the rural farm life. Yet, Aristotle’s imperfect understanding of the dynamics at work contributes to centuries of debate and influence. Nonetheless, Aristotle tried to draw a line between capitalism that would assist economic growth and that which would fuel these booms and busts driven by speculation in his mind’s eye.

“Now money-making, as we say, being twofold, it may be applied to two purposes, the service of the house or retail trade; of which the first is necessary and commendable, the other justly censurable; for it has not its origin in [1258b] nature, but by it men gain from each other; for usury is most reasonably detested, as it is increasing our fortune by money itself, and not employing it for the purpose it was originally intended, namely exchange.”

(Politics, Chapter X §1258b-1259b translation by William Ellis 1912)

What Aristotle did not comprehend was the concentration of capital. There is no difference between a landowner who leases his land to a farmer to grow crops and someone who has excess cash to lease out for a fee known as “interest.” Aristotle thus focused in on this concept of making money from money. He did not quite understand that when a city or a nation becomes the center of the global economy, capital concentrates, and the natural evolution process begins.

So the thesis of which you ask is not well established for it merely propagated a theory from the post-Dark Age. They were the same economic processes that predated our modern era.

QUESTION: Have you ever been wrong?

HS

ANSWER: Since I am human, the obvious answer must be YES! I have stood up and explained at conferences how I made a bunch of money when I was 13 in the metals/coin market. My father thought I was too much of a speculator and told me I should be more conservative and invest in mutual funds. I listened to my father, bought Fidelity Trend at just about the top in 1966, and watched it crash. I turned to my father and asked, “Is this the way conservative people make their money?”

Being WRONG inspired me to figure out what I did wrong. That is what interested me, for there were several crash events in short order: 1966, 1970, 1973, and then 1980. Much of what I write about comes from the experience of being wrong. If we do not learn from our mistakes, we are foolish.

The purpose of developing the computer to do this is a recognition that NOBODY can trade based upon their “interpretation” of anything for they will interpret what they want to see. That is just the way it is. Socrates is in test mode. We are not finished porting everything over. It tends to catch the major trends because everything is functioning in a coordinated manner. When there is noise that something will rally, it fakes out some traders. That is what the markets do. If you get caught up in such swings, you are trading on an emotional basis and that should be a warning.

This is why portfolio management is better than short-term. The more you trade, typically, the lower the profit. That is akin to someone who tries to prevent a loss and in the process creates losses because they do not trade in the proper size to cope with the risk.

There are a lot of tricks to the trade. All come only from experience. Fund management is the classic trap. Someone can make, say 20% with $1 million and lose with $10 million. Why? The more money the harder it is to get in and out. Look at the big hedge funds. The bigger they are, the lower the return in recent years.

A Wayne Gretzky rookie card sold for a record $465,000. He is known as the “Great One” and retired as an NHL player in 1999. This shows that the collector’s market seems to be doing well.

Bill Gross, who now co-manages the Janus Global Unconstrained Bond Fund, sold a portion of his stamp collection for $4.5 million. Gross is estimated to have spent more than $100 million on his stamp collection. A stamp gallery is named for him in the Smithsonian National Postal Museum in Washington, DC. Gross sold a block of six of the rare Double Geneva stamps. The so-called Double Geneva (Scott 2L1) of 1843 was a two-part stamp: each half was worth 5 centimes for in-town delivery, while the whole 10c stamp paid for delivery throughout the canton. The small group of Swiss stamps was purchased at a private treaty for $4.5 million by Robert A. Siegel Auction Galleries. Bob was actually an old friend of mine who died back in 1993.