Click on images to enlarge. Interest rates from the Federal Reserve website (1)
One of the best examples of this strategy’s failure is the Japanese government’s creation of a low interest rate tactic beginning in early 1990s. The chart below shows that the Japanese yen interest rates have been almost at zero for 15 years.
Japanese yen interest rates at www.tradingeconomics.com (2)
Is this a great example to follow? The Japanese Stock Market chart below shows that Japanese shares have not recovered much in the decade and a half of low yen interest.
Nikkei 225 chart at www.finance.yahoo.com (3)
Europe has also joined in on the game. Some European countries have issued bonds with negative interest!
Who benefits most from low and zero interest rates?
Governments and big business gain because the cost of their debt drops and stays low. Big borrowers tend to borrow more. (Why not when it costs nothing?) The middle class man in the street and small business finds it harder to get loans.
Owners of big business also gain because low interest rates force savers to become equity investors. This drives up the price of shares and makes the big shareholders incredibly rich. Higher share prices inflate balance sheets, allows them to borrow even more and provides liquidity to unload overpriced shares!
The financial industry also gains because low interest rates drive small investors into overpriced mutual funds like a flock of sheep… where the wolves are waiting.
Who are the wolves?
A New York Times article “Americans Aren’t Saving Enough for Retirement, but One Change Could Help” by Eduardo Porter shows how the investment industry is ripping off small investors. The article states that more than half of all American households will not have enough retirement income to maintain the living standards they were accustomed to before retirement.
The article says: On average, a typical working family in the anteroom of retirement — headed by somebody 55 to 64 years old — has only about $104,000 in retirement savings, according to the Federal Reserve’s Survey of Consumer Finances.
Then the article gets to the real problem when it says (bolds are mine): The standard prescription is that Americans should put more money aside in investments. The recommendation, however, glosses over a critical driver of unpreparedness: Wall Street is bleeding savers dry.
Here is an excerpt: “Everybody’s big focus is that we have to save more,” said John C. Bogle, founder and former chief executive of Vanguard, the investment management colossus. “A greater part of the problem is the failure of investors to earn their fair share of market returns.” A research paper by Mr. Bogle published in Financial Analysts Journal makes the case. Actively managed mutual funds, in which many workers invest their retirement savings, are enormously costly.
The article explains that low cost index funds offer greater potential for profit than managed funds. then it says: “Wall Street makes no money on low-cost index funds,” said David F. Swensen, who runs the investment portfolio for Yale. “That is the problem.” Sendhil Mullainathan of Harvard and colleagues from M.I.T. and the University of Hamburg sent “mystery shoppers” to visit financial advisers. They found that advisers mostly recommended investment strategies that fit their own financial interests. They reinforced their clients’ misguided biases, encouraging them to chase returns and advising against low-cost options like low-fee index funds. “It is superslimy,” noted Kent Smetters, an expert on finance at the University of Pennsylvania’s Wharton School.
How can we avoid getting ripped off?
Step one is understanding how Wall Street is ripping us off. We began looking at this problem at the beginning of this year and recommended reading two books, “Dark Pools” and “Flash Boys”.
The book “Dark Pools” By Scott Patterson shows why the big financial institutions are stealing. Patterson is author of the New York Times best-selling book, “The Quants”. and a staff reporter for The Wall Street Journal, where he writes about the government’s regulation of the financial industry.
“Dark Pools” explains a problem created by high-speed traders, called high-frequency traders that has been spreading across Wall Street. These traders jump in and out of stocks in microseconds (millionths of a second). These and dark pools which are sub-markets that mask buy and sell orders from public view, allow insiders to skim spreads off each stock order.
The second book on the same subject is, “Flash Boys – A Wall Street Revolt”. The book looks at the huge problem of how most of the big banks and Wall Street brokers systematically rip off their customers again and again. The book shows the advice that many financial advisers and institutions give is designed to make them, not you or me, financially secure.
Next look for contrasts and trends that create value.
Third, create a strategy that expects 7% to 10% annual return in the stock market as a function of global nominal GDP growth and long term earnings growth plus risk premium. We must either increase risk or trust luck to attain higher growth. Risk is our partner…for better or for worse.
The strategy should have the following qualities:
* Does not care too much about day to day volatility. The short term process of buying and selling takes too much time and leaves too little time to analyze and forecast.
* Invests in inexpensive equities that are paying a reasonable return.
* Has a higher priority on numbers rather than good stories.
* Does not count on extraordinary returns. Be realistic.
* Is repeatable. Good shares can be found again and again.
Once the strategy is set:
* Turn on the auto pilot and normally add to our position. Most of us do this best with dollar cost averaging.
* Do not let our feelings created by short term volatility influence us too much.
* Do not panic during short term change.
* Do not underexpose ourselves for the long term.
* Know that a period of high returns will be followed by a period of low returns and vice versa.
* Do not fall in love with a stock…the feeling is never mutual.
* Sell our losers and let our winners run.
* Always evaluate shares we hold with the same critical eye as if we do not hold them. Ask, “Would we have acquired it today?”
Finally, accept the fact that we know less than we think we do…and that’s OK. Risk is your friend or alibi for expecting higher returns. We learn as we go and can keep evolving our strategy. We add restructuring stories to our portfolio by listening to those who disagree with us. This expands our horizons.
However we need to use our logic to filter the advice. The consensus may be wrong…truth is not created through repletion of an error.
Low interest rates are a huge problem for many but problems create opportunity. History suggests that stock markets are the best way to increase wealth and protect the purchasing power of our savings. The stampede into US shares creates good value in Europe and emerging markets so those who have value strategies can increase profits now.
If I Live Long Enough“If I Live Long Enough, I’ll really cash in next time”. I made this promise to myself in the 1980s. A remarkable set of economic circumstances helped anyone who spotted them become remarkably rich. Some of my readers made enough to retire. Others picked up 50% currency gains. I didn’t do much to invest then, but I did what I could as the profits rolled in for about 17 years.
Then the cycle ended. Warren Buffet explained the importance of this ending in a 1999 Fortune magazine interview. He said: Let me summarize what I’ve been saying about the stock market: I think it’s very hard to come up with a persuasive case that equities will over the next 17 years perform anything like—anything like—they’ve performed in the past 17!
Now I see those circumstances headed our way again.
The Dow Jones Industrial recently soared past 18,000 and reached an all time high. So why aren’t average investors all rich? There are several answers. First, even though the Dow has peaked, for the last 17 years the US stock market has been in a bear trend. You’ll see why in a moment. Another reason why the investors have not done so well is because of currency loss.
One final reason why profits have not been so good. Someone, probably someone you trust, has been stealing from you.
One of the biggest obstacles in profiting from the upcoming circumstances has been and remains the financial system. The reality is that banks and brokers have been structuring investments that are sure to lose. They sell you on these investments and then another division of the very same bank (or broker) that recommended the investment, bets against you. The bank knows that the investment is toxic. To add insult to injury, many of these same institutions cheat you on the way in and the way out (when you buy and sell a share) of the bad investment. Most brokers and bankerds are interested in your money making them rich, not in helping increase your wealth.
Three Patterns Create 50% profits.
Despite the predators on Wall Street who are waiting to take big gouges out of your savings and wealth, equities are still the best place to invest for the long term. This chart from the 24 page Keppler Asset Management 2014 Asset Allocation Review shows that over the past 80+ years equities have dramatically outperformed other types of investments.
Because of the predators on Wall Street (and every stock market in the world) the search for good investments requires a relentless search for value. Your investments have to be good enough to reap an outstanding profit even after the parasites siphon off part of the profit.
To take advantage of the once every 17 year circumstances, I chose to track Keppler Asset Management who continually researches developed and emerging markets globally. Keppler is one of the best market statisticians in the world and numerous very large fund managers use his analysis to manage funds such as State Street Global Advisors. Keppler compares the value of each share in each market based on current book to price, cash flow to price, earnings to price, average dividend yield, return on equity and cash flow return. From this study of monumental amounts of data Keppler develops a Good Value Stock Market Strategies. The analysis is based on long term, rational, mathematical facts and does not worry about short term ups and downs.
From Keppler I learned that market timing is not the way to get these high profits. Another graphic from the 2014 Keppler Asset Allocation Review explains why.
Click on image to enlarge.
A dollar invested 88 years ago in Treasury bills rose to $20.58. The same dollar invested in U.S. stocks over the 88 years grew to be was worth $4,677, UNLESS you missed the best 43 months. Literally all of the the Dow’s growth in 1,056 months came in 43 of those months. Your odds have been one in 24, better than roulette perhaps, but not good enough. Plus even after these odds, the predators are going to take their cut. You have to ask, “Am I that good at timing?”
The better alternative to timing is investing long term indexing based on value. Long term strategic investing in market indices reduces the amount of trading. Low trading activity is important because trades are where you are most vulnerable to predatory tactics.
A part of the long term strategic trading is to invest in low fee diversified Index ETFs. This simplifies your search for value because it focuses your research into lumps.
A comparison of US versus German stock market indexes gives an example of lump research and you can create good value, low cost, diversified portfolios that offer maximum potential for profit as they reduce risk.
Keppler’s research shows that Germany’s stock market is a good value market. Keppler lumps all the shares (or at least 85% of the shares) into the calculations. There is no attempt to select any one specific share. Keppler’s research shows that the US stock market index (a lump of about 85% of all the US shares) is now a bad value.
Germany has the world’s fourth largest economy. The country is the third largest exporter in the world and in 2013 recorded the highest trade surplus in the world making it the biggest capital exporter globally. Yet German shares have been overlooked. German share prices are cheap.
The German Stock Market as of January 2015 in terms of US dollars has a relative price to book value ratio of .78, a relative price earnings ratio of 0.87 and a relative dividend yield of 1.12. The US Stock Market has a much higher relative price to book value ratio of 1.29, a relative price earnings ratio of 1.07 and a relative dividend yield of 0.81. German shares cost much less, compared to the values and earnings, than US shares. German shares pay much higher dividends as well.
Keppler predicts that the US Stock Market (which is ranked as a sell market by Keppler) will have an annual index gain for the next five years of 3.1% and a total return (with dividends) or a total five year return of 21.7%. The same calculations for the German Market predicts an average annual index gain over the next five years of 7.5% and a total return (with dividends) or a total five year return of 47.3%.
Which would you rather buy, a 47.3% return sold for 78 cents on the dollar or a 21.7% return sold for $1.29 on the dollar?
You can forget about any specific share in the US or Germany and invest into an index (in this case the Morgan Stanley Capital Index) which represents about 85% of all the shares traded on the exchange.
You can invest in ETFs that passively invest in all the shares of the index in stock markets that offer good value. iShares investment company for example has an ETF that invests in 85% of the shares traded on Wall Street.
This ETF icalled the iShares USA (symbol EUSA) has risen from 22.91 to 43.40 or 89% in the past five years.
iShares also offers an ETF that invests in about 85% of the stocks listed on the German Stock Exchange (Symbol EWG). EWG has risen from 19.70 to 28.13 or 42% in the past five years.
Keppler’s lump reseach shows that Germany is a good value market. One simple (even very small) investment in iShares Germany MSCI Index ETF gives you a portfolio of almost all the shares traded on Germany’s largest stock exchange in Frankfurt. This ETF is a share traded on the New York Stock Exchange. The ETF invests in 85% of the shares in Germany. This ETF is a passive fund that does not try to outperform the growth of the German Stock Market. The managers simply track the investment results of the MSCI Germany Index. The MSCI Germany Index is designed to measure the performance of the large and mid cap segments of the German Index which is composed of the stocks of 54 different German companies and covers about 85% of all the German equities. Germany’s ten largest companies compose about 60% of the index. These ten companies are: BAYER (Health Care) composes 9.91% of the index – SIEMENS (Industrials) 7.89% – DAIMLER (Consumer Discretionary) 7.04% – BASF (Materials) 6.81% – ALLIANZ (Financials) 6.65% – SAP STAMM (Info Tech) 5.69% – DEUTSCHE TELEKOM (Telecom Srvcs) 4.46% – DEUTSCHE BANK NAMEN (Financials) 3.66% – VOLKSWAGEN VORZUG (Consumer Discretionary) 3.18% – BMW STAM (Consumer Discretionary) 3.15%.
You lump your research. You lump your investment. This makes it easy to capture the powerful economic circumstances that are unfolding now.
Just investing in Germany is not enough. There are currently ten good value developed markets, Australia, Austria, France, Germany, Hong Kong, Italy, Japan, Norway, Singapore and the United Kingdom. Plus there are 12 good value emerging markets. You can easily create a diversified portfolio in each or all of these countries with Country Index ETFs.
Investing in many stock markets through ETFs gives you opportunity in the second pattern of the falling US dollar. Preserving the purchasing power of your earnings, savings and wealth requires currency diversification.
The strength of the US dollar over the past five years is a second remarkable similarity to 30 years ago. In 1980, the dollar rose along with Wall Street. Profits came quickly over three years. Then the dollar dropped like a stone, by 51% in just two years. A repeat of this pattern is growing and could create up to 50% extra profit if you start using strong dollars to accumulate good value stock market ETFs in other currencies.
For example because of fears about the euro, EWG, the German ETF is down 9 percent over the last 12 months and down 8 percent over the last six months. These declines are created by currency concerns. When the euro regains strength, the shares have the potential to appreciate even more.
This is the most exciting opportunity I have seen since we started sending our reports on international investing ideas more than three decades ago. There is so much more to write and the trends are so clear that I have created a short, but powerful report “Three Currency Patterns For 50% Profits or More.” This report shows how to earn an extra 50% from currency shifts with even small investments. I kept the report short and simple, but included links to 153 pages of Keppler Asset Stock Market and Asset Allocation Analysis so you can keep this as simple or as complex as you desire.
The report shows 22 good value investments and a really powerful tactic to use that allows you to accumulate these bargains now even in very small amounts (even $5,000). There is extra profit potential of at least 50% so the report is worth a lot.
Research shows that most people worry about having enough money if they live long enough. I never thought of that. I just wanted to live long enough to see the remarkable economic opportunity that started in 1980 start again and those that continue to offer opportunity. This powerful profit wave has begun. I made it and am glad you did too. Even more I look forward to the next 17 years and sharing how to have more than enough money for the rest of your life.