Appendix G - For Concise Edition
This section contains good articles
from the full version that I believe you may be interested although some have
nothing to do with investing.
My definitions
A secular stock market is a
prolonged period (about 12 to 22 years) that the market is heading in one
particular direction. There have been secular bear markets and secular bull
markets depending on the direction of the stock market.
Market cycles exist within a
secular market. Market cycles last for about 5 years. The market cycle of
2000-2007 lasts for about 7 years and the current one from 2007-to now for
about 7 years so far.
Within a year there are usually
two mini market cycles (I call them 5% corrections or dips/surges). The surges
provide the best time to sell stocks and the dips provide the best time to buy
stocks.
The secular market cycle, market
cycle and yearly corrections (also known as mini market cycles) are not
scientific concepts. Hence, their average durations are very rough estimates. I
use 20 years for secular market cycle for the ease to memorize while 15 could
be a better average.
Market Cycle vs. Economic Cycle
Understanding the Market Cycle is
important to investors and the Economic Cycle (also known as the Business
Cycle) is important to economists and businessmen. Do not be confused with the
two. The secular economy cycle usually follows the secular market cycle as
indicated in the last 60 years. The economy cycle usually (but not the current
one) lags the market cycle by an average of 6 months.
My prediction: The secular bull will start in 2017
Whenever a famous person predicts
with any certainty that the end of the world is coming or the Dow will double
next year, it is loudly broadcasted over the news. I predict that the next
secular bull market will start as early as in 2017. Who would take me, a
nobody, and his prediction seriously?
Note: After Obama’s election win,
I changed it from 2015 to 2017. It could be postponed further due to the
unending wars.
If this really happens, remember
you heard it (with legitimate reasons for this) from me first! If it does not
happen, check out which ones of my many arguments are wrong and/or any
unpredictable event or events have happened.
This is a bold prediction! There
are reasons why it might happen and also reasons why it might not happen. I
could write a book on this topic but I will spare you the
details. However, let us carefully scrutinize the coming events to better
clarify my prediction. Act on the prediction otherwise all will be lost! I am
not responsible if it does not happen.
Timing is everything even though
there is nothing truly considered as perfect timing. But be aware that reacting
too early to a secular bull secular market can cost you money, and reacting too
late to a secular bull market can miss the profit opportunity. Vice versa for a
secular bear market.
Past secular markets
If the market is good, the
economy would be good and every person would have a job in theory. Even the
poor would benefit from the more generous government benefits and the increased
individual generosity. Today, global corporations can hire any worker in any
place in the world at the least cost to change the US employment picture.
I have identified the last three
secular bull and bear markets (again they are rough estimates):
Secular bear
market: 1960-1980
Secular bull market:
1980-2000
Secular bear market: 2000-now
I did not include secular markets before 1960 as those times do not resemble
today’s market conditions.
In a secular bull market, every
investor is a genius. Most of our stocks rise with the tide in a bull market.
With the profits from the market, we spend more on disposable consumer
products.
During wars, most sectors fall
except those making bombs, jets and tanks.
The cause of secular
markets: War or lack of war
What causes the secular markets that usually last for about 20 years? My
contribution to this theory is that war is the major common denominator to the
secular bear markets. Though I have not read any article that distinguishes it
out, I am sure the concept is so obvious that someone would have reached the
same conclusion.
In the 1960s, it was the Vietnam
War and the effects after this war. Today it is the two wars in the Middle
East. Wars cost us a lot of resources. When these resources are devoted to
the economy after the wars, the economy would grow.
After each major war, our leaders do not forget the harmful effects at least
for a while. They cannot get re-elected with a new war, so there will be no major
war for a long while. That’s my explanation of the secular bull market from
1980-2000. After the year 2000, our leaders forgot the harmful effects of wars
and history repeated itself.
Wars are the primary cause of a secular bear market and bubbles are the
triggers to market plunges. Usually recessions follow market plunges. In 2000,
we had the internet bubble and in 2007 we had the housing bubble. With minor
exceptions, all bubbles are caused by excessive valuation and they will come
back to the average value eventually.
In 2000, many internet companies
had no profits or their P/Es were very high (some over 40) from the average P/E
of about 15. In 2007, the market housing value was too high due to the
availability of easy credit. The only exception of the bubbles is the recent
price of gold which does not really appreciate that much but the dollar
depreciates. The two wars contribute to its appreciation.
If the government concentrates its efforts on the economy rather than wars, it
could detect the bubble earlier before its burst and at least the economy would
have had a soft landing rather than the hard landing in 2008. Remind the politicians to avoid any future
war and use your voting power to enforce it.
We should have learned from the
French before we participated in Vietnam War or the Russians before we did the
same in Afghan. We have been dragged many times by Israel to the Middle East
wars that we have no business there.
We cannot afford to be the global
policeman. Our youths should enjoy their best time of their lives in colleges
or new jobs instead of being sent to the front line. The national guards should
guard in case of emergency and natural disasters, not to be sent to the front
line.
I expect we’ll have a prolonged bull market as early as in 2017 after ending
the two wars completely. By 2015 and hopefully earlier, the housing problem
should be solved by absorbing the inventory and the Euro crisis should also be
resolved. The politicians will not forget the harmful effects from the wars,
the secular bull market will hopefully continue for the next 15 to 20 years.
War and lack of war determines
the secular market. However, there are many other factors playing an important
role. In 1974, the oil crisis made the secular bear market even worse.
Secular bull market
could be postponed to 2020
The following events may prevent a secular bull market starting in 2017 and
postpone it to 2020 and hopefully earlier:
1. A
possible war with China due to protecting Taiwan from invasion.
When the Chinese government cannot suppress the
internal unrest and to detract attention of its own inability, it would force
itself to invade Taiwan. More likely, a trade blockage would be more effective
with the tight economic ties with each other.
2. Another
probable cause for a war is the U.S. military backing of Japan and other Asian
countries on the disputes of the islands near Japan or the Philippines.
It is illogical
to borrow more money from China to contain China.
3. World
climate change adversely affects the food supply. If the technology that has
improved the production of food in last 50 years did not continue, there would
be a famine in poor countries today.
Global warming leads to many problems such as the shortage
of drinking water. India would suffer most when China, the owner of the water
source in Tibet, would re-direct the water flow for its own citizens.
4. Natural
disasters such as earthquakes and hurricanes. California is long over-due for a
big one. Japan suffered its worst Tsunami in recent history.
5. Huge
budget deficit.
If the government continues to spend unfunded, the
prolonged unbalanced budget could never get us out of the recession. In
addition, the government’s excessive obligations on generous welfare, social
security, Medicare and other entitlement budgetary obligations are growing too
quickly and lead to imminent bankruptcy.
The Fiscal Cliff has not really been fixed and we are
still too deep into debts. We cannot pass our debt obligations to the next generation
forever.
6. The
trapped gas and oil could provide us with enough energy for the next 50 years.
The successful extraction could accelerate the start of the secular bull market
back to 2015.
Conclusion
Be realistic: Re-access these developments and
adjust such predictions accordingly. An accurate prediction based on current
events would better assess the risk of the market.
I do not suggest staying away from the market
until 2017. As before, there will be market cycles within a secular market and
yearly corrections. When we are in a
secular bull market, we can be more aggressive, and vice versa in a secular
bear market.
Statistically, there are three recessions in a
secular bear market. Is it coincident? As of January of 2014, there were two so
far.
Afterthoughts
·
Signs of an economy recovery:
1. Increase
corporate profits.
2. Increase
employment.
3. Increase
housing starts.
4. Decrease
Federal deficit.
5. Increase
the growth of GDP.
6. Rising
values on some sectors such as consumers, high tech., housing, etc.
As of 1/2014, #2
and #3 seem to be improving. #1 is OK. However #4 is not.
When you borrow
money (#4) and use them productively, you can improve #1 to #3. I have strong
doubts about this economy recovery.
We’re having a
non-correlation in the Economy and the market.
The following information is
supplied by my friend Norman.
·
Traditional theory would say 20 years secular
cycle with 10 years between major pullbacks.
The first major pullback was called Capital Crisis (1997-2003). The second major pullback was called Real
Estate Crisis (2007-2009). According to
this theory, the next major pullback will be 2017 (Capital Crisis).
·
In between major crisis are business cycle
pullbacks (Kitchen Cycle) approximately 5 years each. These are also called inventory cycles.
It
should be noted that these have always existed, even before Capitalism in
1720. During the secular bull market, they
are muted by the positive market trend.
However, they still exist.
·
Norman believes we have started the secular bull
market in Jan. 1, 2013. The secular 20 year cycle is based on the generations. The X generation has just moved into old age and the millennials are becoming mid-life consumers--This is a huge generation, similar to the Baby Boomers and demand for everything is going up.
·
Nikolai Kondratiev
would say the generational economic cycle has 4 seasons.
He said it lasted 50-60 years.
Coconut Theory
In a tropical island, every one
sleeps under a coconut tree assigned to him. He wakes up only when a coconut
falls on his head once in a while; he does not have to think when he just wakes
up and eats. He eats the coconut and goes back to sleep. He is lazy due to the
nice weather (no need to find shelter) and the nice resource (the coconut
tree). He is happy and rich by his own standard. However, he is lazy, fat, and
stupid due to the lack of any need to work, exercise, and think out of his
‘perfect’ environment.
The worst that happens to the
natives is borrowing coconuts from other natives with the coconut tree as
collateral or cut down the coconut tree to make a canoe without plans on how to
replenish coconuts in the future.
This is a simple theory. It can be
used to explain how and why many countries are rich, poor, and continue to be
so. Let’s check how this theory stacks up with countries.
U.S.A.
The U.S. is the richest country due to its developed
and highly educated citizens, hard-working immigrants and the huge natural
resources per capita (i.e. having a lot of coconuts in my theory). The U.S. is declining as we spend more time enjoying our wealth
(borrowing coconuts so he can eat more; on credit – living beyond our means!)
rather than creating more wealth (i.e. eating up most of the coconuts and not
planting new coconut trees in my theory).
The wealth is
equivalent to the bountiful of coconut trees that were available originally and
the many that were planted by our ancestors. There were fewer natives to
consume the total number of coconuts, so there was a surplus of coconuts grown,
eventually to be given away (as welfare and entitlements). Are you incentive to
plant more coconut trees (work) when you have unlimited coconuts (generous
welfare)?
Because of
WW2, most coconut trees in the world were destroyed while ours were fine. We
were rich to ship our better coconuts to the rest of the world.
God gave us
plenty of natural resources, good soil and climatic wealth (coconuts hidden
under the land) and hopefully we continue to be wealthy. Unfortunately, we’re
now consumers (of coconuts) instead of producers (planting new coconut trees).
Norway
Norway is the
richest to its population group (3 millions) while Brunei is richest in its own
category. Norway has more money than God because of its long coastal line and its
intelligently governed oil wealth, so everything works better there. I hate to
compare any country to Norway as most likely we are comparing Apples to Melons.
From its long
coast line Norway has rich off-shore oil fields and abundant fish exports which
is second in the world-- only 6% of its export, after China but far, far #1 per
capita wise. Because of the world's oil addition and food dependence secures
its income flow.
Peru has a long coast line, but it is not wealthy. My
theory does not apply fully here, as there are always exceptions. It could be
Norway’s educated citizens, close location to its trade partners and buying
assets around the world (planting more coconut trees). The dividend payments
allow Norway to prosper for decades. They have about 600 billion sovereign fund
to be shared by 3 million citizens. Simple math!
Iceland
Some smart guys suggested cutting down all the coconut
trees to make canoes so they can earn a rich life by fishing. The world loans
them with coconuts. When the fishing fails, their land is lost with no coconuts
and no coconut trees left. Do not bet all the coconuts in one venture.
Singapore and SE Asia
Singapore is rich due to its important location for the sea
route for trade and commerce, as well as being the cultural intersection
between the east and the west and its industrious citizens (most are Chinese).
When the hard-working folks land on a land of coconuts (i.e. resources), they
naturally become rich.
Mekong River
is a good resource providing fishing, irrigation, transportation, and fertile
land in the delta for SE Asia. Hence, SE Asia should be rich, and at the same
time attracts hard-working immigrants from India and China to enhance their
wealth.
Japan
Japan has few
natural resources. Its only resource is the educated and hard-working citizens.
With a decreasing population and the policy not welcoming immigrants, Japan
will face problems.
Haiti
Haiti used to
have enough coconuts for its small population. French imported African slaves
to the sugar cane plantation and changed the allocation of natural resources
per capita. Coupled with frequent natural disasters and bad governance, Haiti
becomes the poorest country in the world. Corruption in poor countries is
natural.
UAE
When the west
helped UAE to explore its oil resources (the hidden coconuts under the sand)
about 50 years ago, UAE becomes the richest country on earth. She expands in
different areas and it could be over-expanded. When the oil dries up in 100 or
so years and/or the shale energy competes better, they could be in big trouble.
Russia
Russia is a
country full of resources (coconuts). Its citizens become lazy having a good
time under the ‘coconut’ tree. Chinese are just the opposite. That’s why the
Russians hire the hard-working Chinese to tender farm in the border while they
enjoy life with plenty of Vodka J.
The primary
reason why USSR fell was the temporary low prices of their resources oil and
timber (coconuts). Trying to be #1 was another reason.
China
China has
roughly 20% of the world population, but it has far less than 20% of the world
resources (coconuts). For example, it has only 6% of the world land area. The
situation was worsened in the last 250 years during the Opium Wars, and then
semi colonization by the eight countries (helping the opium pushers). It
bankrupted China by their colonial masters. It caused massive migration to
escape from the land without coconuts. It was followed by WW2, war lord era and
then the bad governance. Their bitter lessons ensure this generation and the
next generation to work hard and be smart. When they do not have ‘coconut
trees’ (the colonial masters cut most of them down), you have to work hard or
die.
China ranks
#2 in the economy. It is only important to its trading partners. Its own
citizens care about their living standard which is about the middle in the rank
of all countries.
Ancient
civilizations too
Greece, Iran,
India, China and Italy are among the oldest civilizations. Most do not do well
in today’s economy and many of their citizens have immigrated to other
countries. My theory suggests that they have exhausted their coconuts (farm
land and metals) throughout the long history. Hence, they have to migrate to
lands with more coconuts.
To
illustrate, there is a huge discrepancy in natural resources (oil, metal and
farm land) between China and the U.S., which has a relatively short history.
Corporations
too
Microsoft was
a tougher company with more innovations fifteen years ago than today. However,
they are enjoying easy profitability of upgrades of Windows and Office
(coconuts planted by their ancestors). For a long time, she only has one
successful new product, the Xbox. Her managers are counting their bonuses instead
of taking risk. The Coconut Theory works again.
Rich families too
It is very
rare to have rich families that last over three generations. The first
generation grows the wealth (planting coconuts), the second generation enjoys
the wealth, and the third or fourth generation usually becomes poor due to the
easy life.
Conclusion
So far, no
one tells me that this theory has been ‘discovered’ by others. Shamelessly I
claim it is mine. To me, it is just common sense.
Afterthoughts
·
I did not have a
coconut tree (i.e. financial aid or money from my dad), and that is why I
worked two jobs in my first summer while attending college here. The first one
was a bus boy job from 5 pm to 10 pm. The other one was cleaning slot machines
from 4 am to noon for 5 and most likely 7 days a week. Lack of coconut makes
you desire to work hard or you die. With an average IQ, I can make it by
working hard in a land of coconuts.
My children have too many coconuts
and they live in a more lavish life style than the old man. They ask me why I
work that hard during my retirement or why I still go to Burger King with a
coupon even they do not treat me like a king.
According to Norman, the problem with a
small place filled with coconuts is someone would likely to colonize you and steal
your coconuts as happened to Norway during WWII. Similar to China about 250
years ago. Once a while, need to cut down one among many coconut trees to make
spears to protect the rest of the coconuts.
A good economy has to be
supported by an educated workforce. We still have the best higher education
system in both quantity and quality. Our
pre-college
education is failing with a high percent of dropouts.
When you find out your store under
charged you by $1, do you go back to pay them back?
I do not go back all the way to give it back for two
reasons:
1.
The store has cheated
me before intentionally or unintentionally, so it breaks even.
2.
We also need to teach our children to conserve energy. J
Despite the above reasons, I’ll go back to set up an
example for my children. The primary problem with our education system is
education should start at home. No matter how much money you throw into the
system, it will not work if the students do not want to learn. With so many
single-parent and teenage-mother families, I do not see a bright future.
It happens all the time that you have a convict and a
doctor in the same class as indicated by this video.
It proves my point again that education should start at home.
Some of our discrimination and biases are passed to our
children unknowingly. That will hurt them eventually. Be careful what we talk /
act in front of children.
Education by example is the most powerful and most effective,
but unfortunately it is the most neglected. It is about time for the
politicians resolve our root problems NOT by throwing our money (not their
money) recklessly at the problem. Everyone with a first grade education can
write a check.
We need to limit the generous welfare
for teenage mothers and preach family value to stop the vicious cycle.
Afterthoughts
This short article attracted a
lot of feedbacks including myself.
·
My elementary class in Hong Kong of 45 students
produced one world-known chef, one movie director, one MIT Ph.D., one
pharmacist, one doctor… I am the under achiever. Our teachers were not from
Hong Kong University (the best there). The incentive to learn is simple: If you
do not study hard, you will be a nobody. No one will bail you out. Our average
class size is 45, so do not use class size as another excuse.
·
We need to select college trainings in the
fields that the society or the corporations need. It is a luxury to take a
major you’re interested in but is not demanded by the society. I did not have
that luxury. However, even though I could not speak English well, I managed to
start a professional job as a programmer while some college graduates with
perfect English Xeroxed manuals for me.
·
The problem of many high school students is the
loss of respect for their teachers. You cannot learn from someone you do not
respect. I feel bad for the teachers in many urban cities as your lives could
be at risk every day and many lose their initial enthusiasm to teach after they
face their cruel reality.
Norman added:
My wife taught reform school in Richmond and was
threatened several times. Once the girls
in her food service class grabbed her and held a pair of scissors to her throat.
·
The U.S. college
education is a big export. It does not seem to be counted in our GDP and it
should be. In addition to the highly–qualified professors, we have the best
research (both on equipment, procedures and systems).
The landscape has been changed.
Though most professors are still born here for more than one generation, a lot
of students are foreigners and the children of the first generation of
immigrants. Our high school systems are not graduating qualified students in
the same scale as the last generation and foreign countries especially Asians
are catching up and some are even passing us.
·
Some Chinese students here
are tutored by their parents on science and mathematics every night and a lot
of students in China go to tutor schools after regular school. If you do not
have the dedication of the parents (vs. single parents in many families in the
U.S.), you cannot catch up with them. We cannot let your children play video
games or watch TV all day long.
·
'Leave no one
behind', 'Race to the top', 'No homework '... are just ideals and bear no fruits
in the real world except for the big-mouth politicians.
After our best effort to educate
the problem kids, should we still leave them to disturb the rest of the class?
·
There is no
controversy that Chinese and Indian students are passing the U.S. counterpart
in education.
The controversy is: China’s
one-child policy gives rise to better education of the next generation. The
child is raised by two parents and four grandparents. It is all good as long
the child is not spoiled. In addition, the female has a better chance to find a
richer, better educated husband due to the gender imbalance. The richer family
enables the child to receive better education from the mother and the better
school. My theory.
·
One guy who was among
the top in the unified examination for high schools in Hong Kong drove a bus to
make a statement. We need these geniuses to create more jobs such as
discovering a new drug to save many lives, not driving a bus.
·
Why Mass. is rich? It
is due to the large number of high tech companies including those involved in
bio tech formed by former researchers of higher-learning institutions such as
MIT and Harvard. It proves the point that we need about .5% of geniuses to
provide jobs for the mass.
·
Robots will be
harmful to the employment of the unskilled workers. In next five years, we can
see the more replacement by the robots.
Five years ago, robots could not
do much. Now, they can do something useful from vacuum cleaners to bionic
limbs. In ten years, they can do almost everything like a human being except
one task (i.e. reproduce but they can assemble robots).
Robots are still expensive for many
jobs today. To illustrate, Apple can assemble thousands of workers to assemble
a new product in China. They cannot have that large number of robots and
program them in a short time.
·
Non-correlation of
education and the economy.
Brazil’s booming economy (due to high natural resources including
oil) can benefit more with better education and harder working citizens. The
education is lacking in Brazil. It gives rise to corruption and widens the
wealth gap.
Brazil is one of the major countries participating in today’s
globalization. When China slows down, Brazil will feel the pain too.
Philippines has the opposite problem. It has a lot of college
graduates working at factories. The economy does not support enough
professionals. The poor economy is due to lack of natural resources (or
resources to be extracted), long-term corruption, poor governance, etc.
Hong Kongers hire nurses and teachers from Philippines to be
their household servants. It appears to be inequality, but actually it reduces
inequality.
My Coconut Theory explains partly why it happens.
Links
·
Stuffs
that college do not teach.
·
Click
here
for more Afterthoughts.
### Tips
###
·
You need to know both
value investing and the basic technical analysis to be successful in today’s
market.
·
Buy in fears and sell
in greed instead of the other way round.
·
An inflated sector
will return to the average value.
·
Be conservative and
diversified. The turtles are always the winners in the long run.
