written by reader James Dale Davidson “The Age of Deception”

By xiexgp@gmail.com, August 27, 2015

It seems Mr. Davidson is predicting a Black Swan event soon with the stock market wipeout of 50% or more due to fewer people trading, margin debt, that is, borrowing to invest; stock buy backs that obviously drive stock prices higher for the short term and our overall debt situation. Any thoughts on his predictions and potential opportunities (Other than buying another book and newsletter) since he was correct in almost all the other financial events that have impacted our financial and investing lives.

This is a discussion topic or guest posting submitted by a Stock Gumshoe reader. The content has not been edited or reviewed by Stock Gumshoe, and any opinions expressed are those of the author alone.



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Tom L
Tom L
May 29, 2016 3:20 am

Confidence is the name of the game, all right. We can all see that this house-of-cards, like an avalanche, is poised for a tumble. Too many of Davidson’s charts are aligned in an undeniable path of severe downward motion. Collapse, correction, adjustment, negative growth (my favorite) or any of a dozen other terms all apply. The problem is that we are turning blue holding our collective breath anticipating the answer to the big question of “when?”
Just like the analogy of a “Big Avalanche”, the smallest flake could trigger the collapse of any of the key indicators on those scary charts noted above. The deafening rumble, financial fallout and societal destruction will be greater than we could emagine, because of the combined effect, one Avalanche triggering yet another collapse.
To make this “potential” Avalanche disaster even more real, imagine the powers that be wanting to initiate an economic crisis just in advance of the Presidential election? This could be to effect the ballot outcome or further burden the next administration. It wouldn’t take much of a “push” in any of a number of areas, to effect the markets.
If we can keep a lid on it till next year, Trump’s team can start backing us away from the fiscal cliff(s) that threaten the very future of our nation for generations to come.
Or maybe it will all blow over and self-compensate back to safer and stable economy and marketplace. I doubt it. Pretty sure it will take a lot of work to turn this ship around and get us back headed in the right direction.

June 5, 2016 1:37 pm

Here we are 10 months after the thread started on James Dale Davidson, and while the Black Swan has not appeared it seems to me that the instability and uncertainty has intensified. Some may feel justified in saying Davidson is wrong about his outlook; I do not feel this way, I rather feel we have been fortunate that an unspecified Black Swan calamity or secular financial meltdown has not yet occurred.

There is a world of difference in seeing the macro picture accurately, and being able to translate that into specific investments that are timely and that will profit. And unfortunately, putting aside any specific investment recommendations, I find it increasingly difficult to disagree with JDD’s macro outlook. He cites these issues, which are there for everyone to see:

1, The stock market is due for a fall…narrow breadth, high margin debt, declining participation, high PEs. Engineered by low Fed rates.
2. Real estate will tumble when rates go up. Another asset bubble, thanks to low rates.
3. The Baby Boomer generation is retiring and does not need to consume anything.
Good for them, bad for the economy.
4. The economy has been based on debt rather than productivity. We are past the point of no return in being able to pay off national, state, and individual indebtedness.
To say nothing of unfunded future obligations.
5. The politicians will not and cannot do anything about the situation. It is too far gone and there is no political will anyway. The path of least resistance is the printing press/computer entry and we are just getting started.
6. The velocity of money is at all-time lows. Another reason the “stimulus” policies are failing.
7. Despite what the Government says, unemployment is closer to 20% than 5%. Is an economy in good shape when over 40 million people are getting food stamps ?
8. Another nail in the coffin…student loan indebtedness. More large numbers.
Most of the trends cited above have the common effect of reducing government revenue. The government deficits are unsustainable and getting worse.

Are any of these observations inaccurate ?

The Establishment ought to support Trump, then they could let the $&*&$@ hit the fan and have him to blame for it ! As though whomever is in office is responsible for this mess !

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d allen
June 8, 2016 6:32 pm

Just another cycle in the American economy.
No debt or very little gets you thru almost anything.

Serge d'Adesky
June 16, 2016 8:15 pm

Hi, I’m a financial advisor, who struggles with these issues on behalf of my clients and my own portfolio every single day. Generally speaking, I agree with the premise that we are on the cusp of a significant market correction, something on the order of 35-60%. And yes, many of the reasons that Mr Davidson states are accurate causes. Missing from his picture is another source of global malaise: namely the rapid pace of change in technology which is displacing workers in all fields at a faster rate than people can learn new skills and pursue new careers. But I digress…

My first point is that a big market correction need not mean the collapse of the economic system. We’ve had many such events over the last 200 years, and we’ve come out the other end whole. Unfortunately, many such events lead us to war, as brute force is sometimes the only way that global debt resets get settled. Nazi Germany’s bellicose ambitions can in large part be ascribed to their perceived need to find a way out of crushing wartime debts resulting from their loss in WWI. But even in that war, the economy did not collapse, people found jobs (often working in munitions factories) , and life went on.

Of course, that’s if you lived in the US and were not called into the draft. For those living on the losing side it was not so pleasant. Just look at the situation from the perspective of the average German or Japanese citizen in WWII. I wonder what good it did many Germans in Hamburg or Japanese in Nagasaki to have hoarded gold in the walls of their homes when the Allied forces razed those cities in bombing campaigns? And what of those prudent Germans from small towns in the Alps or the Black Forest who decided cash was better than gold and put it all in the safety of Reichsmarks? Those Reichsmarks were worthless at war’s end.

My point is : there’s just only so much you can do to protect yourself economically in the worst case of a global cataclysm, short of selling all your worldly goods and moving to a remote island with good land and water and reenacting Robinson Crusoe. Hoard cash or gold in your home? Be at the mercy of home invaders. Hoard it in banks? Hope the banks don’t collapse or deny you access to your safety deposit boxes AS HAS ALREADY HAPPENED IN LESS CRISES.

So my strategy is to prepare for lesser crises, not global Armageddon. I proceed on the assumption that the US government has not disappeared, that the banking system is still functional, and that the major stock exchanges still exist.

In such a scenario, here are my suggestions for different economic strata:

1) Struggling lower class with no savings and high debt: Don’t invest in the market, in vest in your own education and skills. Learn to live frugally and reduce debts. Consider skills in technology and healthcare, that will be in great demand in the next 2 decades.

2) Average middle class American with small but probably insufficient retirement savings : Don’t believe those who say social security payments will not be honored. They will, problem is, they’ll buy fewer and fewer goods an services. The upside? You can live longer, and healthier if your take proactive steps. This will allow you to produce income for a much longer time. So cancel those plans of early retirement. For your investments, keep it diversified, be nimble, be opportunistic. See specifics below.

3) Upper middle class with adequate savings (rumor has it there are still a few of these about):
Split your investments between some productive farmland, small amount of gold (10 percent max), large concentrations of foreign and domestic bonds of short duration (proportion varies by anticipated retirement day) and strategically invested equity positions (see equity strategy below), and at least 10 percent cash.

4) Wealthy individuals desiring asset preservation and tax minimization:
Consider annuities and insurance products for tax benefits, but only with the strongest insurance providers. If you haven’t already done so, talk to a trust attorney. Avoid the money traps of most muni-bonds. Returns are too poor versus admittedly low inflation to justify investing in safe creditors, and the higher returns often involve opaque financials very difficult to analyse. Exceptions exist, but they are not the norm.

Strategic hedged strategies:
1 ) I have not seen the specific recommendations of the Davidson approach, but the basic approach is sound. One can make great money with options, and an option strategy need not involved undue risk. What concerns me is their claim of 1000% returns. NO COMPANY IN THE HISTORY OF INVESTING HAS EVEN ACHIEVED SUCH RETURNS. About the best track record that I know of is a hedge fund called Renaissance Technologies, (qualified investors with $5 million plus, check them out) which has averaged something around 18% annually over a 30 year period. So no, I would not pony up the $1495 for their annual subscription.

Have you ever wondered why somebody who seriously believes they can average 1000 percent returns would even bother publishing a newsletter. Let’s see , mortgage my house (or hit up my mother-in-law) for $100k or so, invest for 5 years and presto, I’m a billionnaire! Must be their desire to “share the wealth”, or maybe I’m just too cynical.

2) Keep your “bets” short term, where you have visibility, and hedge them. For example, try to find bonds trading at a strong discount and yielding 8%-12%, but only if you can hedge out the risk of bankruptcy. I recently did this with CHK bonds that were coming due in a matter of weeks and trading in the high 80’s. I was able to sell further dated calls to pay for puts and offer a 110% payment in the event of an expected bankruptcy. To my great surprise, the bond did not default, I collected my principal at par value and was able to close out my options hedge at a minor loss. Return: 9 percent in 6 weeks.

3) Buy CD’s of distressed currencies where you can hedge out the considerable foreign exchange risk. For example, my wife ( a Colombian national) has her money in Bankcolombia (Colombia’s strongest bank – about a BB- rating here) earning 8 percent a year, which I hedge with rolling futures on the Colombian peso at the cost of about 2-3% a year. Net safe return: 5 percent. Unfortunately, the US FATCA regulations now make it more and more difficult for US nationals to find banks willing to open accounts for them, so this strategy can be difficult to implement.

3) Create income by selling far out of the money options straddles around earnings reports, but make sure you have enough margin to buy or sell shares to cover the unexpectedly large swings that inevitably will occur that otherwise will wipe out all earnings.

4) Find a good options advisor, or learn about options yourself (and don’t invest a penny until you’ve simulated trades for at least a year) to construct complicated strategies that reflect your expectations. For example, I believe the stock market is more likely to drop than rise, I do not think it will rise by 15% this year, and do not think it will drop by more than 40% within the year. So I’ve concocted a play that makes 9% minimum and 62% maximum as long as the market remains within that range. Beyond those levels, to the downside though, the losses rise rapidly and would warrant defensive measures.

4) Look into structured CD’s. These are FDIC-guaranteed equity investments of the banks linked to stock bet returns, similiar to some annuities but without the high insurance fees. Your gains are generally capped in the 10% range, but no losses of principal are incurred if held to maturity (3-7 years). Careful, these products are complex and if the banks can outwit you they will.

5) Think we may be headed for 20 plus years of low inflation,low yield returns? Consider a steepener structured CD. Pays you 4 to 7 times the difference between 20 year treasuries and 2 year treasuries. Various products have varying gotcha’s, but some offer a likely average return of 7-8 percent return with guarantee of principal. Biggest risk: future raging inflation and rising interest rates, because the duration on these bonds is very long. If inflation and interest go higher than 10 percent, you’ll be stuck earnings 7-10 percent, unable to sell your bonds at par and stuck earning below inflation rates.

6) Are you a conviction-based, patient value investor? Consider the rich premiums in some put options. At times you can be paid up to 10% a year to be willing to buy a company you believe in at a discount of 30% to 50%. For example, right now you can be paid 6.5% to be willing to buy AAPL stock at 39% discount. If it never drops that low you get to keep the premium.

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