Tag: The Wall Street Journal

How Imminent is the Next Market Crash?

image001This past week I received an article from a client regarding ideas about “wealth preservation” that made some good sense, and offered advice about calculating how much money you need for retirement. But while the premise was sound; that it makes sense to pursue investment strategies that protect your nest egg when your financial needs are already met, a one off comment about the future of the stock market caught my attention.

You can read the article HERE, but the issue I wanted to look at was the not so subtle implication that the US markets were now due for a correction. A serious one. Quoting the Wall Street Journal contributing writer William J. Berstein,

“In March, the current bull market will be six years old. It might run an additional six years—or end in April.”

This isn’t the first time I’ve heard this point before. It isn’t unique and sits on top of many other market predictioner’s tools, but its use of averages gives a veneer of knowledge the writer simply doesn’t possess.

Obviously we would all like to know when a market correction is due, and it would be great to know how to sidestep the kind of volatility that sets our retirement savings back. But despite mountains of data, some of the most sophisticated computers, university professors, mathematicians and portfolio managers have yet to crack any pattern or code that would reveal when a market correction or crash should be expected.

Which is why we still rely on rules of thumb like the one mentioned above. Is the age of a bull market a good indication of when we will have a correction? Probably not as good of one as the writer intends. Counting since 1871, the average duration of a bull market is around 4.5 years, making the current bull run old. But averages are misleading. For instance the bull markets that started in 1975, and 1988 (ending in 1987 and 2000 respectively) lasted for 153 months each, or just shy of 13 years. Those markets are outliers in the history of bull markets, but their inclusion in factoring the average duration of the bull markets extends the average by an additional year. Interestingly if you only count bull markets since the end of the second world war the average length is just over 8 years, but that would only matter if you think our modern economy has significant differences from an economy that relied on sailing vessels and horses.

table_us_bull_markets_since_1871

The fact is that the average age of bull markets is only that, an average. It has little bearing on WHY a bull market comes to an end. There was nothing about the age of the bull market in the 2000s, when people had become convinced of some shaky ideas about internet companies that make no money, that had any bearing on its end. The bull market that ended in 2008 had more to do with some weird ideas people had about lending money to people who couldn’t pay it back than it did with a built in expiration date. Even more importantly, the market correction of 1987 (Black Monday) was an interruption in what was an otherwise quarter century of solid market gains.

Taking stabs at when a market correction will occur by using averages like duration sounds like mathematical and scientific rigour, but actually reveals very little about what drives and stops markets. And a quick survey of the world tells us a great deal more about global financial health and where potential opportunities for investment are than how long we’ve been the beneficiaries of positive market gains.

by The Walker Report of Walker Wealth Management and Aligned Capital Partners Inc

Jack Sparrow and the Pirate Stock Exchange

In case you missed it 2013 seemed to mark the end of Somali piracy. If you can cast your mind back to 2011, piracy off the coast of Africa seemed to be the next big problem. In fact 2011 marked the peak of Somali piracy with 237 separate attacks. In contrast 2013 saw only 15 Somali pirate attacks, an incredible reduction. Piracy is still out there, around countries like Indonesia and off the coast of some West African nations, but the threat of Somali piracy has largely disappeared.

That’s good for those on the high seas, but it means that we miss an opportunity to see how natural and beneficial capital markets are in distributing wealth and helping economies. And yes you read that sentence right.

In this photo taken Sunday, Sept. 23, 2012, masked Somali pirate Hassan stands near a Taiwanese fishing vessel that washed up on shore after the pirates were paid a ransom and released the crew, in the once-bustling pirate den of Hobyo, Somalia. The empty whisky bottles and overturned, sand-filled skiffs that litter this shoreline are signs that the heyday of Somali piracy may be over - most of the prostitutes are gone, the luxury cars repossessed, and pirates talk more about catching lobsters than seizing cargo ships. (AP Photo/Farah Abdi Warsameh)
In this photo taken Sunday, Sept. 23, 2012, masked Somali pirate Hassan stands near a Taiwanese fishing vessel that washed up on shore after the pirates were paid a ransom and released the crew, in the once-bustling pirate den of Hobyo, Somalia. The empty whisky bottles and overturned, sand-filled skiffs that litter this shoreline are signs that the heyday of Somali piracy may be over – most of the prostitutes are gone, the luxury cars repossessed, and pirates talk more about catching lobsters than seizing cargo ships. (AP Photo/Farah Abdi Warsameh)

The core problem for Somalians is that amongst their many, many problems, there is not enough money in the country. This makes sense for a number of reasons. It is a dangerous place, and people who do have money and live there are unlikely to put money into local businesses or trust a bank. Corruption is rampant and the best way to describe Somalia currently is as a failed state. All this makes it very difficult for the citizens of Somalia to attract foreign investors. As an alternative to traditional business practices, many Somalians took up the cause of high seas piracy and ransomed boats and ships back to their host countries in exchange for money. Whether you realize it or not, in this way Somalia was actually improving their economy (albeit illegally) by providing fresh inflows of foreign capital. But how did the money find its way into the local economy? Through the pirate stock market of course!

That’s right, in 2009 a stock market was set up in the small fishing community of Harardheere with about 70 different…pirate entities(?) that locals could invest in. Giving money to one of these entities helped fund piracy on the high seas and successful raids would be paid out to the investors. There is more information about it in this 2011 article in the Wall Street Journal and I encourage you to have a read of this fascinating account of a naturally occurring stock market, but I think this quote from the article sums up the rather banal and natural benefits that markets provide to economies:

As local security officer Mohamed Adam put it to Reuters, “Piracy-related business has become the main profitable economic activity in our area and as locals we depend on their output.” Mr. Adam claims that the district government gets a cut of every dollar collected by pirates and uses it—naturally—for schools, hospitals and other public infrastructure.

jack-sparrow-running

Since then however the international response to Somalian piracy has been swift and decisive. And while the horn of Africa might be safer for international shipping the reasons behind Somalian piracy remain unresolved. But it is insightful to see that this brief chapter of piracy (outside of the Johnny Depp variety) was actually more nuanced and lends an odd credibility to the needs and benefits of markets for investors and companies, regardless of who they are or what business they are in.

by The Walker Report of Walker Wealth Management and Aligned Capital Partners Inc