Why Artificial Intelligence Will Never Beat the Stock Market

Over the past decade, the belief that artificial intelligence could solve the complexities of the stock market has spread like a wildfire. The notion that humans lack the capacity and capability compared to machines, who will, without fail, consistently beat the market over time. By simply programming a machine, it will produce the ultimate formula making you filthy rich in the process. A radical change in society where anyone can make money, but not just a stable income: a modest fortune.

Unfortunately, though, this is a mere fantasy.

There’s a major flaw in algorithms built solely to predict future market moves: they don’t. They only respect the technical aspects of an asset by taking into account past price movements, avoiding any consideration for future fundamentals. Any veteran trader will tell you the market isn’t there to give away free money. Instead, it’s a competitive environment punishing anyone — or anything — who tries to make a quick buck by trading on reactionary information already priced in.

Technical analysis alone will not make you money. In fact, the myth that it does has fueled an entire industry which preys on the vulnerable: As the homepage of many online brokerage websites illustrates, up to 96% of foreign exchange traders have fallen for the trickery. The truth about the brokerage industry is it makes money when its clients lose. So when your broker offers you a plethora of trading algorithms to choose from, the alarm bells should be ringing.

Still, you may fall for the con, because the trickery itself is seductive: Let the algorithms do everything for you, sit back and relax until you can retire. All the algorithm has to do is choose the right direction: either buy or sell, right?

Wrong.

In reality, feeding an algorithm with data based purely on technicals is the equivalent to putting on a blindfold and aiming at a dartboard. You hit the board 1 out of 10 times, but the rest hit the wall.

The buy or sell illusion is an anchoring effect: a cognitive bias discovered by the renowned psychologists Daniel Kahneman and Amos Tversky where your mind tricks you into believing your chances of winning are much higher than they actually are, due to being presented with a binary choice.

The stock market is one of the most complex systems we’ve created as a species and it cannot be beaten all the time. It’s the collective decision making of not just humans, but also machines, algorithms, and algorithms predicting what other algorithms are going to do next — an infinite loop of complexity. And when you multiply the probability of all these inputs together, the chance of succeeding is miniscule. Realistically, your odds are way less than 50%, and, in some cases, even less than 1%.

It’s clear by now that the complexities of the market can overwhelm a human, but they can also overwhelm machines as they have yet to counter massive market fluctuations. When they do occur, operators are forced to switch off the algorithms and allow human traders to take over. The modern market environment has become so dynamic, machines have failed to protect against huge standard deviation moves associated with black swan events.

For example, in 2015, the foreign exchange markets were a non-volatile asset class. All the major G10 currency pairs were rangebound, moving a few hundred pips here and there. For the EUR/CHF currency pair it was a quiet start to the year until January 5th when the Swiss National Bank (SNB) unexpectedly abandoned its cap of €1.20, causing a colossal intra-hour move of 20%. In a matter of minutes, hedge funds blew up, and retail traders lost a fortune, but the machines did too.

Not only are machines incapable of predicting a black swan event, but, in reality, they are more likely to cause one, as traders found out the hard way during the 2010 flash crash when an algorithmic computer malfunction caused a temporary market meltdown.

Ultimately, A.I is doomed to fail at stock market prediction. Beating the stock market over time, however, is possible. The solution lies with us because we humans have an edge. We have the ability to make informed decisions by analyzing future catalysts of an asset, and the reasons why they will move the price up or down — a strategy artificial intelligence has yet to beat us at.

Success in trading, like in any other discipline, requires hard work and extensive research, but this only results in having a slightly better chance of succeeding. With the best traders only getting up to half their trades right, this shows that if we humans have failed to decipher our own collective minds, then A.I doesn’t have a chance.

The 2020 Stock Market Dilemma


If there’s one thing that shows the massive disconnect between stock market performance and economic activity, it’s a chart of the Institute of Supply Management’s Report on Business: one of the world’s most popular economic sentiment indicators and the S&P500 index.

The disconnect is a result of several interventionist policies from major financial institutions and the White House: the multi-billion dollar liquidity injectionsthe buy-side algorithmsthe ability for companies to buy back their own shares, and the slashing of interest rates on a downward path to zero. As a result, stock markets are climbing in a bizarre, linear fashion reminiscent of the time before the early 2018 correction.

S&P500 Index vs. ISM

Because of interventionism within the financial system and how it shaped the market environment over the last decade, it’s rational to think that stocks will continue to rise. But for anyone who makes their investment decisions based on fundamentals, they now have to overcome a tricky dilemma: how do you commit to investing in the stock market when you know, for a fact, that economic fundamentals are failing to portray a similar narrative?

The struggle to decide whether to invest doesn’t stop there, though, as resisting the urge to take part creates the fear of missing out — or FOMO for short. If the market mania and hysteria persist for a long period of time while fundamentals continue to deteriorate, you’ll have to be comfortable knowing you’re missing out on future gains before an inevitable stock market correction.

On the other hand, deciding to participate means dealing with yet another obstacle. As the fun began in September 2019 when the Fed launched its silent quantitative easing program, it’s been a solid five months of parabolic stock market action. So what if we’re already late to the party?

Credit: CNN Fear & Greed Index

One way to find out is by following investor sentiment indicators which give us a good idea of whether we are throwing our money away and paying a cheque to the market. Right now, sentiment shows we’re doing just that: CNN’s Fear & Greed Index — a combination of seven popular indicators: stock price momentum, stock price strength, junk bond demand, put and call options ratios, safe-haven demand, and market volatility — has risen to the highest level since Winter 2017.

The current market sentiment reflects one of Warren Buffet’s famous quotes: “Be fearful when others are greedy,” illustrating how extreme greed is a reliable indicator of an overconfident market — a logical time to trade out of winners whose stock prices have risen dramatically despite weakening earnings growth and other major fundamental drivers.

Another indicator that sides with Buffett’s theory is the VIX (CBOE Volatility Index), also known as the Fear Index, which measures daily market volatility.

VIX Index (2010–2020)

Presently, the VIX is on a path towards the notorious “Volpocalypse” level of February 5th, 2018 when the index exploded 200% higher and the market sold off at least 10% from its high. When the indicator reaches such a low level it indicates extreme optimism: the belief that nothing will stop markets from climbing higher which, in reality, is never the case — there’s always a correction.

For the many investors who’ve woken up to this mind-boggling disparity, the abundance of uncertainty it creates means 2020 will be a year of wait and see; a year of sitting on the sidelines anticipating what happens next in the strangest market environment of our time.

On the flip side, for anyone who’s brave enough to participate in the current market mania, the days of valuing stocks based on company fundamentals are over. Instead, in 2020, your new role as a trader, investor or speculator is assessing the reliability of the market’s plumbing, and predicting how long before a blockage in the financial system causes a volatility explosion once again — an almost impossible task to achieve.

Why Global Stock Markets Rise Despite an Economic Collapse

We all know or have a feeling that our economy is no longer an economy, but more of a balloon that inflates and deflates depending on how much air the Federal Reserve decides to pump in.

Right now, the most powerful central bank needs a sizeable cannister as economic indicators continue to show poor readings: The world’s most influential PMI, the Institute for Supply Management’s Report on Business (ISM), points to contraction at 47.2, freight volumes are down, year on year, every month for the past two years, and even the most lagging of economic indicators like jobless claims are in a bearish trend moving into the new decade.

As the U.S economy continues to falter, a decline in global economic activity continues to emerge: Germany has narrowly avoided recession after posting -0.2% and 0.1% GDP growth in respective quarters. The Chinese economy is experiencing hiccups as financial institutions continue to be bailed out and taken over by authorities, and the U.K narrowly avoided recession despite delaying a “no-deal” Brexit.

But if leading indicators are pointing to a global economic contraction, why are stock markets — the most reactionary markets in the world — still climbing to all-time highs? Quite simply, they are no longer a barometer for economic fundamentals.

This is evident by reviewing any popular metric used to value — or predict the future value of — a stock. Take earnings growth, for example. This once-reliable metric used by many in finance has become inconsequential: According to a recent FactSet report, the EPS growth of S&P500 companies in 2020 is set to decline by 1.4%. The biggest weighting of the index, Apple, is the poster child achieving no increase in earnings growth for over a year. But despite that, the tech giant’s stock price continues to climb higher. Price-earnings (PE) ratios also tell a similar story. The mind-boggling valuations of companies like Square and AMD that sport PE ratios of at least 200 times, remain in high demand and the market still deems them to be cheap.

So if fundamentals are out of fashion, what’s the new trend driving stock markets higher? The truth is the stock market is no longer a barometer for the value of companies, instead, its a barometer for liquidity within the financial system, and, right now, there’s an excess supply.

To counter the poor global economic data, Federal Reserve Chair, Jerome Powell, announced recently that the Fed will continue to prop up markets in 2020 by injecting billions of dollars, daily, into the financial system. And although he insists it’s not QE (quantitative easing), in reality, it’s a repeat of the same process: the rapid re-expansion of the Federal Reserve’s balance sheet. Admitting that “Not QE” is, in fact, QE, may panic investors triggering a bit of Déjà vu reminding them of the Fed’s response to the threat of a global collapse during the Great Recession. For now, though, the Fed has successfully duped the market into believing it’s a way to help out in the short term, but without long term assistance, the inputs holding the market together will not function.

The liquidity “Not QE” provides, enables public companies to inflate their earnings, therefore, inflating their stock price. By buying their own stock in the open market — commonly known as share buybacks — this once illegal practice has contributed to some of the biggest stock market bubbles in recent history. It allows any company on the verge of negative earnings to borrow money and buy a part of their company, masking the damage of any short term economic downturn.

That’s not all, though, as buybacks have a partner in crime when it comes to stock manipulation: Algorithms designed for the sole purpose of trading stocks on news headlines, analyze press releases of “trade deal optimism”. Whether the initial story was real or fake, trades executed by computer algorithms can add several hundred points to the Dow Jones in a matter of seconds. What’s more remarkable, though, is the correlation between news around “trade deal optimism” and short term rallies.

Politics is always at the center of most stock market bubbles which are more likely to form when a President has an attraction to ultra-low interest rates such as Trump — it’s a real estate tycoon’s dream. Every time the stock market falls to an unsatisfactory level, the President protests, and the Federal Reserve lowers rates. The consistent decline in interest rates creates an increasingly cheaper financial environment, enabling almost anyone to take out cheap loans and buy stocks they can’t afford outright, increasing the size of the bubble further.

While this is happening, Trump insists we have the greatest economy ever, but this is, in fact, a euphemism for the highest stock market ever. Though, a booming stock market does not equal a booming economy. You have to ask the obvious question: Why would you have to lower rates when everything is good? How can it be the greatest economy ever when the Fed is providing daily support and announcing rate cuts at all their recent meetings except one? When you remove all the non-fundamental inputs: the liquidity, the algos, the money printing, the cheap credit, the politics, who’s left to support the stock market? The answer is the people, but we’ve already hit peak optimism. Who’s next in line to buy?

This is our situation: an economy based on maintaining liquidity to prop up asset prices instead of trying to create real, organic growth. It’s been the status quo for so long that, ultimately, we have embraced it as a collective. We are entering a yoyo situation: an up and down economy where we create temporary growth and face the consequences of our actions in the future. As long as irrationality in the form of overvalued stocks, bonds, and real estate, continues to be a moneymaker, we’ll stand by this system through endless booms and busts despite the end result always being the same: another financial crisis. The bankruptcies, the delinquencies, the disparities, the misallocation of resources, the inequalities, and the ever-increasing size of the wealth gap are ignored in favor of unrealized profits.

What’s scarier, though, is the people in power are unwilling to accept that economies fix their imbalances at some point in time. They will never drop the strong economy narrative even when economic data shows otherwise, because, simply, its political suicide. If our leaders truly believe we have the best economy ever while, in reality, we’re on the brink of collapse, a weak economy is something sinister; a situation we all want to avoid, but we all know is coming.

How to Trade Out of Losing Investments

Knowing how irrational markets are can get you out of tough situations

Photo by Austin Distel

We’ve all done it: becoming way too attached to an investment or trade that just isn’t working. No matter what we do, we can’t bring ourselves to press sell in our brokerage accounts.

Instead, we average down until finally realizing we were wrong, but by then, it’s too late. The stock’s down 40% since last fall, and the company’s outlook doesn’t seem as bright as the analysts on television predicted.

But this behavior is quite normal. We are human. And the reason why we allow losses to run is our emotions. Whether it’s because we’ve done hours of research, can’t bear to lose money or just like gambling, humans are programmed to take small profits and heavy losses.

Though your mind is telling you a lot will go right, it blinds you from the harsh truth about markets: a lot can, and will, go wrong.

The late polymath and mathematician Benoit Mandelbrot exposed this in his book, The Misbehavior of Markets, highlighting the challenge you face when trying to make a profit in financial markets: “In theory, people have the same investment goals and the same time-horizon, so given the same information, they would make the same decisions.” He adds, “but patently people are not alike — even if differences in wealth are disregarded.”

In reality, the market and its participants are incredibly diverse in almost every regard. Some investors are compassionate while others are competitive, and some are complacent while others have strong convictions.

“Some investors buy and hold stocks for twenty years for a pension fund; others flip stocks daily speculating on the Internet. Some are “value” investors who look for stocks in good companies temporarily out of fashion and others are “growth” investors who try to catch a ride on rising rockets.”

— Benoit Mandlebrot

Knowing this, being able to ditch bad investments requires you to acknowledge two popular, false assumptions: people are rational, and they think and want the same thing as you.

If you add the sheer complexity of human psychology to the number of participants trading an asset, it’s clear that being right, even 50% of the time, is a tall order. For example, the most traded stock on the Nasdaq Exchange is Advanced Micro Devices, ticker $AMD, with an average daily share volume of 57.95 million. That’s 57.95 million potential reasons why you may end up losing money.

If that doesn’t convince you that things can go wrong more than right, it helps to think about the unsuccessful investments you’ve made over your lifetime.

Here are some common cases:

  • Research leads you to believe Microsoft’s stock will gain 25% or higher over the summer, but at the same time, the rest of the market decides — for any reason — to sell and the stock falls 25% over the same period.
  • You might have day traded the S&P500 to profit from a positive Trump trade tweet, but then he backtracks and decides to increase tariffs on China.
  • You were bullish on the stock market going into 2008. That’s a 60 percent drawdown in six months!

Clearly, these ideas didn’t go to plan. It happens to everyone, we can’t get all our trades right. It’s never been done before, and it never will. Yet admitting you were incorrect and limiting losses is a difficult skill to master.

Within the retail trading industry, statistics show non-institutional investors are way more likely to lose than make money in the current economic climate. In Brazil, for example, it was reported that 97% of day traders lost money. And if you visit any popular brokerage platform, you’ll see a regulatory message appear in the top banner: “70–90% of our customers lose money.”

Never think you’re alone in your failures. Looking back at the history of my own investing career, although remaining profitable, I’ve got about 45% of my investments right over time. When I’m wrong, I accept it and trade out before getting carried away.

Taking everything into account, succeeding in investing looks somewhat of a challenge, to say the least. But now if an investment or trade starts to go against you, you’ll be able to say, “maybe I got it wrong this time,” and cut your losses with conviction knowing there are a million or more reasons why.

The Smart Way To Use a Credit Card

In the digital age where methods of transacting become easier every year, there’s no obvious catalyst preventing us from becoming a full-blown, cashless society. Consequently, the temptation to increase spending habits has never been greater. By using your phone, tablet, or credit card, you can instantly pay for a spice pumpkin latté at your local coffee shop, followed by your favorite magazine, and that’s even before reaching the office.

While the average American is $8,000 in debt, consumer spending continues to rise, ballooning to record levels in 2019. However, this isn’t going to change any time soon as new research indicates we’re not only spending money on “stuff” but experiences too. A recent study by Harris Poll showed that more than 8 in 10 millennials (82%) participated in a variety of live experiences in the past year. But this doesn’t mean we are going to abandon materialism in the near future. Instead, it creates an illusion of choice: Not spending isn’t an option anymore. Consumers will prioritize one of the two: experiencesorstuff.

It’s no surprise, then, that credit card companies — the biggest financiers of consumer spending — are reporting record profits this year. They are enabling a dark premise to spread throughout society: the belief that you can avoid hard work and borrow money to achieve happiness.

But financing pleasure through debt only leads to a temporary high and the comedown is having to deal with the mental stress of what you owe. In the U.K, studies show that 50% of adults who are struggling with debt, also have a mental health issue. It’s becoming clear to most that taking on liabilities to fund lifestyle habits increases the likelihood that you’ll experience setbacks later in life. Spiraling into indebtedness starts with credit cards. Then you go down a rabbit hole. Feeling dejected, you accumulate more and more liabilities, funding experiences and luxury items in an attempt to feel better. Until you realize you have to pay off the previous fix— it’s a vicious cycle.

So if loading up on debt via credit cards isn’t going to improve your life in the long run, how could you possibly benefit by using one?

Money-savvy individuals have discovered a niche in credit card companies’ business models: ironically, they reward customers who embrace the principle of sound money. It’s not a loophole or an elaborate hack. It’s simple: they only use a credit card when it’s possible to pay the debt off upfront.

The smart way to use a credit card is to use it like a debit card — with no overdraft.

If you’re able to pay off the balance in full every month, there’s no reason to transact using your current account. Instead, credit card companies allow you to set up a monthly direct debit and by directly transferring the amount of money spent, you don’t owe a single penny of interest. Except by doing this, you reap several rewards in the process.

Irresponsible lending habits allow consumers who are sensible with their spending to benefit from card companies’ reward schemes. Most companies offer a concierge, luxury consumer goods, and holidays for zero cost. Over your lifetime, while living within your means, your reward points could earn things like flatscreen TVs, first-class lounge access, first-class flights, and holidays — all free of charge. But it’s only free if you aren’t spending more than you own.

On top of that, by financing your purchases with credit, you maintain free cash flow: a fancy way of saying, “I have the cash to buy things right now but I want to maintain liquidity for, say, an emergency.”

If you have $3,000 available in your current account and you want to buy a MacBook Pro for $2,500. You have two options: buy the laptop outright or on finance for 0% interest over 12 months. Although technically the latter option means you are taking on debt, subjectively, your liability becomes an asset. Instead of instantly removing $2,500 of your liquidity, you’re only giving up $125 each month. Rather than the original $500 left over after a full purchase, you now have $2,875, then $2,750 the next month, and so on.

But because you have the money upfront it’s an asset and not a liability knowing you can pay it off, in full, any time you want. The extra cash flow you’ve gained could mean a lot when things go wrong elsewhere in life.

A few months after taking advantage of credit card companies you start to get the impression they don’t like you — for obvious reasons. The minority of people who ignore temptation definitely aren’t the card companies’ favorite customers.

But they wouldn’t just kick you off their platform straight away. Instead, they try to tempt customers who are living within their means to make extravagant purchases by increasing the amount of credit available to borrow. “We’ve increased your line of credit” is code for “If we can’t turn you into a slave on a $50,000 credit limit, we’ll try a $250,000 limit.” That’s how they work. The conflict of interest is clear.

Knowing all this, should you feel remorse about receiving a free lunch from a company exploiting those who are vulnerable? Not at all. They think you’re irresponsible and they rely on that to make money. They know it’s happening, and will keep happening until the credit system is replaced by something monetarily sound.

As a debt-free human, you’ll start to appreciate life a lot more. Becoming and staying financially free requires sacrifice; more for some than others. If you are deep in debt, don’t make it worse. Be prepared to downgrade and drop everything and anything; your status, fancy apartment, but most of all your pride. Life is a lot easier and fulfilling when you’re living it debt-free. You are able to focus on the important things without the burden of liabilities hanging over your shoulders.

If you’re constantly tempted to live beyond your means, there’s a simple solution: Remember this quote from the People’s President, Andrew Jackson: “When you get in debt you become a slave.” And that’s exactly what happens. It’s an endless conveyor belt of payments to a subservient.

Would you rather become a slave to the debt industry or exploit their exploitative capitalism? Now that’s an easy decision to make.

How to Invest For an Apocalypse

Credit: Comfreak

How to Invest For an Apocalypse

An introduction to armageddon-style investing

Since 2011, Alex Mason has been planning for an apocalypse. By joining the “Doomsday Prepper” craze the 17-year-old has mastered the art of survival, teaching himself how to fish, hunt with a crossbow, and stockpile resources. Despite the obvious backlash from his friends and family he continues to prepare for a doomsday scenario.

Meanwhile, the ultra-wealthy are also taking precautions but without all the hassle. Instead of confronting the harsh reality of a post-apocalypse world they are eager to obtain one of 573 billionaire bunkers: luxury underground accommodation designed to shield against anything Mother Nature throws at you.

But for those of us who don’t have time to learn survival skills — or can’t afford a luxury bunker — how do we prepare for what author Richard Goswiller describes in his book, Revelation, as “an unveiling or unfolding of things not previously known?” Whether the next apocalypse is a depression, a rapture, or a nuclear war, there are a few ways to prepare ourselves for the day of reckoning while also benefiting our normal day to day lives.


During the Q&A of an investment conference I attended last year, speakers were asked the following question: “If you were given $1,000, what would you invest in?”

While most recommended particular stocks, bonds, and real estate, one man gave an answer nobody was expecting: tinned food. At first, the audience chuckled under their breath, but their amusement turned into astonishment when they heard his rationale: “It’s currently the most undervalued asset in human history.”

With a quick Google search showing tinned food selling at a rate of roughly $150 per 60,000 calories, right now, it’s a bargain to invest in your survival. This makes sense when everyone is expecting a brighterfuture, so it’s cheap to protect yourself against certain risks, no matter how absurd or unlikely, turning the famous “buy when there’s blood in the streets” quote by Baron Rothschild on its head.

But in preparation for an apocalypse, we don’t want to stock up solely due to the cost or durability. Having a food reserve is the ultimate protection against hyperinflation: a long and accelerating period of rising consumer prices. Most people in the western world have yet to experience such an event, though it happens more often than you think.

Venezuela is at the mercy of hyperinflation, where the price of coffee rose 285,614% in a year costing consumers over a whopping one million bolivares per cup. While convenience stores remain almost empty, there are even reports of citizens eating rodents to survive.

But developed economies are no stranger to disaster either with the textbook example being the Weimar Republic. In 1923, to pay off their debts during the First World War, the German government suspended the exchange of the Papiermark into gold. In the coming months, the German central bank, Reichsbank, inflated the money supply tenfold to try and pay off the ever-increasing debt. But this caused a steep devaluation causing the currency to lose almost all its value. Just before the introduction of the succeeding German currency, the Reichsmark, you could exchange 4,200,000,000,000 Papiermarks for 1 U.S dollar — what a bargain.

Now imagine hyperinflation spreads to your economy. While everybody else is busy spending millions — if not billions — on food with worthless paper currency, your once-crazy tinned food purchase turns out to be the best investment you’ve ever made. In an economy in freefall, a bunker full of the stuff becomes a goldmine. You’ll either consume it to stay alive when times are tough or sell it for a tidy profit — providing there’s anyone to sell too.

Though if you hate the taste of Spam and favor fresh food, acquiring an allotment is a better approach to counteract a monumental surge in prices. You’ll have the freedom to grow fruit, vegetables, and other plants without having to fret about Walmart hiking food prices 10,000% overnight in response to a hyperinflation disaster. But when chaos arrives, remember to harvest your crop before someone else does it for you.

Preserving your capital during an apocalypse presents many challenges if you aren’t holding the right assets. Though you don’t need to worry about financial crises because, first, an apocalypse would spell the end of the modern monetary system, and second, it’s underway already. The U.S Dollar is the preferred global medium of exchange due to its reserve currency status but as is starts to lose dominance and value, the Greenback is heading in the same direction as every other fiat currency in history. Since 1913, it has lost over 97.5% of its value due to inflation, and with prominent world powers like the Chinese and the Russians making a consolidated effort to decouple from its hegemony, the U.S dollar is a ticking time bomb.

It’s scary but useful to know that throughout history all fiat currencies collapse, so there’s no harm in protecting yourself against an inevitable devaluation. Instead, we want a reliable store of value for our hard-earned capital, and if there’s one asset class that’s stood the test of time, it’s precious metals: gold, silver, platinum, and palladium — to name a few.

Over the past century, as we’ve moved into an era of debt and confidence-backed currencies, precious metals continue to flourish in an environment of loose monetary policy. Demand has skyrocketed, forcing the financial industry into action. As a result, there are many ways to buy, sell, and transact precious metals: metal-backed Exchange Traded Funds (ETFs), metal-backed bank accounts, and metal-backed cryptocurrencies. When the apocalypse hits, the problem is they only mirror the price of metals. Their digital infrastructure will be wiped out and you’ll have no liquidity; nothing physical to trade in your possession. There will be no market, bank, or exchange.

Without a currency and digital means of transacting, bartering will become the norm as the only way to buy and sell anything will be through physical means. That’s why physical assets, with real, intrinsic value are the only means of exchange during tough times.

But to keep those assets safe, you’ll need more security than the storm cellar Dorothy uses in the opening scene of The Wicked Wizard of Oz. Instead, it’s time to build a personal Fort Knox: a place to store prized possessions, capital, and reserves.

If you’re lucky enough to join the billionaires club in a luxury underground bunker then go for it. Still, for the average citizen, the smallest size bomb shelter will set you back $37,000 — and that’s without ongoing costs. Of course, the cheaper alternative is to board up your windows and doors, pray, and hope for the best. But if Hollywood’s apocalyptic genre of movies is anything to go by, for you, this doesn’t bode well. It’s clear that despite preserving food and capital being somewhat affordable, finding a place to preserve those assets is the real expense when preparing for an apocalypse.

As everybody on your street starts to notice the silo in your front yard and the food reserves in your garage, prepare to face your critics. Exposing yourself as an ultra-contrarian means you’re perceived as a crazy person similar to the characters you see in the movies, the Charlie Frosts, the Russell CassesBut never mind what your critics say. You’ve got the supplies, capital, and shelter you need to have a better chance of surviving the next apocalypse.


Now all you have to do is play a waiting game, yet it isn’t a waiting game: it’s a game of hope. Though the subject I’m writing about is naturally pessimistic, I am optimistic about the future. I hope we survive the next apocalypse whether it’s a nuclear war, a financial meltdown, or an asteroid collision — like the Chicxulub. But, ultimately, we also rebuild and learn from our previous mistakes.

Being preemptive by avoiding reactionary thought helps us prosper because risk happens slowly then all at once. So to have any chance of surviving for an apocalypse — and what’s to come after — we need to study our history. It prepares us for events that happen over and over again, but that nobody else sees coming. As the famous philosopher, Edmund Burke, once said, “Those who don’t know history are doomed to repeat it.”

By now it’s evident that apocalyptic investing isn’t investing: it’s more of an insurance policy protecting you from events most people don’t believe will happen. If an apocalypse does occur you’ll hit the jackpot, but you won’t be driving a flash car or sailing a luxury yacht. Sadly, there are no modern luxuries in a post-apocalyptic world.

Why the Entire World Is Heading For Negative Interest Rates

The threat of Japanification spreads across the globe

Credit: Jase Bloor

In January 2016, the Central Bank of Japan made a remarkable decision: for the first time, the Japanese economy would feel the effects of a negative interest rate. After decades of low productivity and commerce, the central bank had no other option after running out of ideas on how to create economic growth.

Ever since the 1980s, Japan’s economy remains in limbo due to an aging population. As the ratio of workers to retirees keeps decreasing, Japan has hit a breaking point and continues to experience stagflation with little to no improvement in GDP growth. A Goldilocks state: not too hot and not too cold.

Originating from The Lost Decade: a prolonged period of slow economic growth in the Japanese economy, “Japanification” is the latest phrase to describe the ongoing problem of stagnation we see across the world. As economies globally experience little to no prosperity under the current fiat monetary system, many are starting to undergo the process themselves.

Following Japan’s population peak in 2008, there are clear signs of Japanification in other parts of the world. Countries with low birth rates such as Sweden, Denmark, and Switzerland, are already following in the footsteps of Japan having introduced negative deposit rates in their interbank markets— the overnight lending market between banks.

If the global trend of Japanification continues, the next economy to experience its full effect is China with its population set to peak in 2029 — mainly due to the one-child policy launched by the Chinese government in the 1970s. And while the European Central Bank (ECB) is predicting Europe’s population will peak in 2044, the biggest economy in the world, the U.S, has the slowest rate of population growth since 1937 during the midst of the Great Depression — now that’s food for thought.

Recent political and monetary concerns around the world have exposed the fragility of economies with slowing population growth: Trade war tariffs, a crisis in money markets, and Brexit uncertainty caused the majority of central banks to stop raising interest rates and reverse the process trying to counteract any damage done.

As the most influential financial institution, The Federal Reserve, cuts rates from 2.5% to 1.75%, along with other major central banks like the Reserve Bank of Australia, clearly there’s something very wrong with the global financial system as it fails to stabilize in an environment of rising borrowing costs. Monetary stimulus is the screw missing from the global economic engine and without it, consumers — who have little to no savings — can’t borrow money on the cheap, causing the system to fall apart.

Therefore, central banks will do, in the words of Mario Draghi, “whatever it takes,” to maintain stability within the financial system even if that’s by introducing negative rates. Many central bankers around the globe are open to the idea with former Federal Reserve chair, Janet Yellenconsidering them in 2016, and recently the new head of the ECB, Christine Lagarde, saying, “in the absence of the unconventional monetary policy adopted by the ECB — including the introduction of negative interest rates — euro area citizens would be, overall, worse off.”

But while central bankers are hinting at the possibility of going or staying below zero, the consensus within the finance community is it’s unlikely to become part of central bank policy in major economies like the U.S, United Kingdom, and Australia. Jim Cramer, the Mad Money host, says, “It’s a sign of weakness,” and Wall Street veteran, Milton Ezrati, remarks, “Not any time soon,” showing distinct signs of a confidence bubble in central banks being able to save economies in the developed world without implementing negative rates.

But here’s the status quo: every major economy is echoing Japan’s issues: the declining demographics, the central bank stimulus, and the excessive printing of money — problems that aren’t going away any time soon.

As the entire world follows the same economic model and design, it’s almost a certainty that we’ll voluntarily or involuntarily embark on one of the riskiest monetary experiments of our time: a globally synchronized world of negative interest rates.

Adam Neumann: The First Billion Dollar Redundancy

How WeWork’s founder walked away with a fortune

Credit: Eloise Ambursley

Love him or hate him, Adam Neumann, the founder of WeWork, has walked away with a whopping 1.7 billion dollar severance package, smashing the previous record of $417 million held by Jack Welch — the former CEO of General Electric.

As for WeWork, the company’s valuation continues to decline losing 80 percent over the last few months, causing the most important shareholder, Softbank, to enter full cost-cutting mode: the New York Times reported the company plans to lay off 30% to 50% of WeWork’s workforce —up to 6,000 employees — by the end of 2019.

WeWork’s valuation got ahead of itself because we’ve entered the euphoric stage of the business cycle, which creates an abundance of cheap money, and where there’s cheap money, you’ll find malinvestments.

The market is starting to expose crazy valuations and companies that only have the aim of “going public.” A phenomenon where you no longer need to build a successful, profitable business but instead create enough hype for investors to keep buying into your idea. To get rich quick in a market based on loose monetary policy, all you have to do is IPO your company, offload your stock when the lockup period expires, and run for the nearest exit — dealing with any backlash later.

At a glance, it may be confusing as to why any business, let alone WeWork, would pay out such an enormous amount of money to an ejected CEO, and especially to one who tried and failed to go public. Your initial judgments are probably along the lines of fairness, equality, and ethics: why are they handing out huge sums to ex-employees over current employees? But as outsiders in this scenario, it’s easy for us to rush to the conclusion that they are rewarding poor management instead of rewarding faithful employees.

In reality, severance packages are anything but a bonus or a way of saying thanks for all the hard work. They are, in fact, a damage control tool: a bribe to brush over the range of complex issues created by firing a high ranking employee.

With a public company like Softbank facing so much scrutiny, $1.7 billion will be a small price to pay to protect the company’s reputation and image as opposed to what would happen if Neumann remained as CEO. Despite the rapid devaluation of WeWork, it remains a solid part of Softbank’s Vision Fund portfolio, and if a CEO is costing the company millions — or in WeWork’s case billions — then paying them a small fortune for a quick dismissal is a sound business strategy.

Severance packages offered by companies in crisis create a bizarre dynamic: the more damage a CEO does, the more they get paid.

If there’s one thing Hollywood gets right, it’s severance negotiation in the boardroom. When a corporation is in full damage control and an employee has access to potentially damming inside information, such as dodgy filings or financial accounts, the company can literally offer hush money in exchange for a nondisclosure. So when you compile the speculation from journalists and insiders about WeWork’s questionable figures, it makes sense why many believe Neumann has signed nondisclosures that would contribute to the size of his severance package.

Employment law is another major threat to a company: If a CEO feels at all hard done by then there’s a chance of an impending lawsuit, and it could take weeks, maybe months, to resolve with the CEO still in their position. This could cost a company millions not just because of litigation costs but generally what the CEO is doing to make a company unprofitable. Whether that’s due to a failing business strategy or a loss of confidence from shareholders, a potential lawsuit is a nightmare scenario for any board, especially for companies like WeWork, creating a big incentive to offer a significant payout.

In the end, it’s not about equality, fairness, and ethics: it’s all about damage limitation at whatever the moral cost. When the health of a company like WeWork is under stress the board is only thinking about one thing: the financial ramifications of keeping the CEO in their position. Neumann’s gigantic payout shows just how crazy the world of venture capital is right now as severance packages offered by companies in crisis create a bizarre dynamic: the more damage a CEO does to a company, the more that CEO gets paid.

How to Survive a Black Swan Event

Credit: Negative Space

Market risk happens slowly then all at once

19th October 1987, also known as Black Monday, was the day investors never thought possible: a 22.2% fall in the U.S stock market. It was perhaps the most mysterious black swan event in history as nobody knew for sure why it was happening.

It was a day that most investors want to forget as they witnessed the full force of a global stock market selloff, and how fear sparked more fear creating a self-fulfilling loop of panic selling. Markets reacted instantly and there was no way to get out, unless, of course, you were willing to accept a heavily discounted price for your holdings.

Yet it was just another day at the office for a few smart investors who knew to protect themselves in advance. Like everyone else, they already had a fancy broker and a diverse portfolio of stocks, foreign currencies, bonds, and commodities. But what gave them an edge was their ability to withstand the most contagious psychological force in finance that many investors succumbed to leading up to the events on that fateful day: extreme greed.

When times are good, extreme greed forces even the most rational of thinkers to avoid paying for protection: the failure to sacrifice a few gains to secure profits. Greed turns us into irrational beings so we think we can predict the unpredictable and assume the unassumable, but, in reality, anything can happen at any time, at any pace.

Surviving a black swan compels us to overcome this greed, shielding our investments from any event of any magnitude, whether that’s the U.S subprime market collapsing, a European sovereign debt crisis, or an event that’s yet to occur. But you don’t need to be an expert in math, science or psychology. Protecting your investments doesn’t require complex arithmetic or the latest computer algorithms from Wall Street’s Intelligencia. Instead, it comes down to two approaches: the passive approach and the active approach.

The Passive Approach

The passive approach is for passive investors. For people who live busy lives managing their jobs, side hustles, and kids. Whether you have a pension, a brokerage account, or even a Vanguard fund, all these financial products have exposure to the stock market, and if the stock market falls dramatically — say 22.2% or more — it’s going to impact your investments.

With events like Black Monday occurring every so often, we need to be preemptive so we can sleep well at night knowing we are protected. The passive approach is to utilize long term Options which provide a simple, passive shield against black swan events.

As options are maximum risk instruments, the price you pay for the option is the most you can lose meaning you don’t have to worry about your insurance blowing up as well. For example, let’s say you start with a hypothetical $100,000 portfolio of stocks and the market is up 30% over a year and a half. Now you are looking to preserve your $130,000 for the latter half of year two so you decide to use around 5% ($6,500) of the portfolio as insurance against a market you believe to be overvalued. You obtain $SPY put options that expire in six months, which — at current prices — are a bit over budget at $7,050.

A few days later, and it’s Monday morning. You wake up and turn on the T.V, but unfortunately, another Black Monday is wreaking havoc in the stock market which falls 22.2% over the trading session. This is what happens to your portfolio, with and without protective puts:

Black Monday Without Options Protection

Portfolio Value Before Market Open: $130,000*
Portfolio Value After Market Close: $101,400

Black Monday With Options Protection

Portfolio Value Before Market Open: $130,000*
Portfolio Value After Market Close: $127,727

* Not $122,950 because the option has yet to lose any value.

When the market drops 22.2% your $130,000 becomes $101,400 without protection. But if you bought a put option it’s now worth $27,485 saving you over $21,550 ($130,000-$101,400-$7,050) worth of losses from the crash.

But remember this is just Black Monday. We have yet to see a 50% down day or more in U.S stock markets and that’s when having protection really pays off. This scenario happens more often than you think: recently Argentina’s stock market halved overnight due to the surprise election victory of Alberto Fernandez.

If, however, the world is in a better place six months from now then you’ve sacrificed $7,050, but now you know it’s a sacrifice worth making.

The Active Approach

The active approach, also known as the long-short approach, is the defacto strategy that professionals use to manage risk at financial institutions such as hedge funds and investment banks.

There are only two types of real-world portfolios: long-only and long-short. While with a long-only portfolio you buy and hold stocks, with long-short portfolios you buy, hold and short-sell them. The typical long-short portfolio of a professional money manager consists of around 20 stocks: 10 stocks long: betting that a stock will go up, and 10 stocks sold short: betting that a stock will go down.

Now let’s compare the two styles and see how they fare in a Black Monday scenario. We have a long-only portfolio consisting of 5 stocks, and a 10 stock long-short portfolio consisting of five longs and five shorts. Both portfolios total $100,000 in value.

As you can imagine, each portfolio performed slightly differently on Black Monday. In the examples below, note that we adjust stock moves by their volatility using Beta: a measure of how stocks move relative to the market as a whole. For instance, if a stock moves 20% more than the market on an average day then the stock has a beta value of 1.2. So when the market drops 20% we adjust the value of the stock which, in this example, will lose an additional $640 on top of the market loss of $2,000. Therefore, our $10,000 worth of stock becomes $7,360 instead of $8,000.

A Long-Only Portfolio Example on Black Monday

Ford: ($20,000-(($20,000 * 1.2) * 0.22) = $14,720
Caterpillar: ($20,000-(($20,000 * 1.4) * 0.22) = $13,840
Wingstop: ($20,000-(($20,000 * 1.1) * 0.22) = $15,160
Amazon: ($20,000-(($20,000 * 1.2) * 0.22) = $14,720
Facebook: ($20,000-(($20,000 * 1.1) * 0.22) = $15,160
Total Before Market Open: $100,000 
Total After Market Close: $73,150

A Long-Short Portfolio Example on Black Monday

Longs
Ford: ($10,000-((10000 * 1.2) * 0.22) = $7,360
Caterpillar: ($10,000-(($10,000 * 1.4) * 0.22) = $6,920
Wingstop: ($10,000-(($10,000 * 1.1) * 0.22) = $7,580
Amazon: ($10,000-(($10,000 * 1.2) * 0.22) = $7,360
Facebook: ($10,000-(($10,000 * 1.1) * 0.22) = $7,360
Shorts
Macy’s: ($10,000+((10000 * 1.2) * 0.22) = $12,640
Netflix: ($10,000+((10000 * 1.3) * 0.22) = $12,860
Gap: ($10,000+((10000 * 1.0) * 0.22) = $12,200
Shakeshack: ($10,000+((10000 * 1.2) * 0.22) = $12,640
Walmart: ($10,000+((10000 * 0.8) * 0.22) = $11,760
Total Before Market Open: $100,000
Total After Market Close: $98,680

As you can see, a long-short portfolio is the best antidote to a black swan event like Black Monday with only a small drawdown compared to a five-figure loss by being long-only.

But, of course, having the time to learn how to trade profitably using the strategy is an art that only a small percentage of professional investors get to master — and a bigger drawdown is the price the rest of us have to pay.

The Takeaway

Implementing just one of these two strategies will help you sleep at night knowing that whatever the market does, you’ll be able to survive the next black swan event. No matter how big or how small and whatever it may look like, both passive and active approaches provide certainty and stability even against a zero situation.

But before we get to implement them, a major hurdle we face is identifying and overcoming extreme greed which, in other words, is the bizarre fear of not wanting to protect ourselves from a financial disaster — the reason why most investors fail to meet their investment goals over a long period of time.

If we can’t eliminate this habit then we can’t implement protective measures that help us manage risk in markets; a risk that could increase at any time in the morning, afternoon, or at night. The period before Black Monday is a testament to this: a nonvolatile, quintessential calm before the storm.

A Storm Is Brewing In Technology Stocks

Photo by Usukhbayar Gankhuyag on Unsplash

US/China Multifaceted Wars

If you thought the tariff war between China & US would cause some meltdown in tech stocks you would be correct but only in the eastern hemisphere. China has resorted to sacrificing it’s stock market for as long as possible by deleveraging debt and devaluating it’s currency as an offset to Trump’s tariffs. All the Chinese have to do is devalue the yuan to the percentage that offsets the latest round of tariffs imposed by President Trump therefore having no effect on the cost of exporting goods to the US.

The current mood towards the stock market in China is completely indifferent to that of the US. China will happily tank their stock market if required to maintain their political status quo. Under a communist rule by the Communist Party of China social mobility and cohesion ranks higher than profits and gains driven in the Shanghai Composite.

As investors start to see that China is on the brink of stock market meltdown and the EM debt crisis causing flatlining stock prices, the US tech sector has gained an artificial safe haven status alongside defensive sectors and the US dollar. Investors are flocking into the dollar as a safe haven trade and US equities have outperformed other world stock markets in 2018 dramatically.

Tech Earnings Growth Has Peaked Dramatically

What the EPS estimates show is something to behold. Analysts are currently estimating that stocks such as NVDA and INTC have negative next year EPS YoY growth estimates of around 80%~ compared to the previous year yet stocks have continued to rise even after Q2 earnings releases. The hilarity ensues as analysts are still maintaining strong buys on the stock even though the growth potential for next year’s earnings has dwindled to single digit figures. Current earnings estimates tend to only matter until the second quarter earnings releases and after that next year’s earnings start to matter a lot more on Wall Street.

80%~ Drop Year on Year EPS Growth In Major Tech Stocks (Source: Zacks Investment Research)

We have seen this kind of false optimism occur many times before. Every analyst had a Buy or Strong Buy rating on Apple stock in 2011 however 12 months later it was trading at a 50% discount to the sector and retail investors who had made money on the way up in the previous year ended up breaking even. This shows that tech stocks are in classic bubble territory where investors are loaded up on fake optimism and no one is really looking at the actual numbers.

FIRRMA Effects Are Being Underestimated

If you think the US tech sector has weathered the perfect storm you would be mistaken, this is just the beginning of the multifaceted war between China and the US. President Trump has another powerful weapon up his sleeve to create even more market uncertainty in the future; introducing The Foreign Investment Risk Review Modernization Act (FIRRMA).

“A close-up of the dome of Capitol Hill in Washington D.C.” by Jomar on Unsplash

The act is part of reform enacted by the The Committee on Foreign Investment in the United States and was signed into law recently on August 13th, 2018. The bill essentially grants Trump greater powers over Chinese business influence in the US such as prohibiting company takeovers and the transfer of new technologies. As China continues to steal technology from US through various channels Trump has a new trick in his playbook and can cause a cataclysmic effect on tech stocks by limiting Chinese investment not just in the technology sector but also in telecommunications and defensives.

“Shutting off the second biggest market in the world (China) to technology related investments will cause a major correction and revaluation of technology stocks in the US market.”

Once Trump starts to use this weapon it is likely to cause severe pain for the tech sector as a whole but the most pain will be seen in extremely high beta stocks such as chip makers and testers that operate research and development facilities in both the US and Asia regions.

A Missile Pointed At Chip Stocks

FIRRMA has the potential to kill the rapid growth in any company who sells or licenses technology developed in America to non-U.S. customers. For AMD this is particularly worrying since they carry out research in facilities located in both the US and China.

We see the same risk factors in every chip stocks’ annual report:

Uncertain global economic conditions have in the past and may in the future adversely impact AMD’s business, including, without limitation, a slowdown in the Chinese economy, one of the largest global markets for desktop and notebook PCs.

We conduct product and system research and development activities for our products in the United States with additional design and development engineering teams located in Australia, China, Canada, India, Singapore and Taiwan.

AMD Annual Report 2017

So what happens when AMD’s Chinese facilities make a breakthrough? The Chinese can easily issue countermeasures to seize technological advances before it ever reaches the US mainland. Chip companies rely on providing technological breakthroughs hence it allows them to beat their competitors in gaining contracts with important clients further up the value chain. This could have disastrous effects on the bottom line of chip making companies like AMD as governments seize their means of production.

China’s Likely Response: Technological War

China retaliates in a copycat fashion and expect nothing but the same from The Communist Party. Anything the US has done to hurt China, China has replicated. So imagine how the market will react when both sides start to engage in technological armageddon. The result inevitably is a major correction in the tech sector which has the potential to push major US indexes down sharply due to the highly cyclical nature of tech stocks.

ISM Report on Business Is Flatlining

The main indicator for economic health indicator the ISM Report on Business has rebounded from it’s yearly lows in February 2018 where world markets plunged 10% the month earlier however its beginning to look like a downtrend in growth is occurring. What we could be seeing is the topping out in the US which would only add to the decline in stock markets worldwide. So what does this mean for tech stocks?

The Warning Signs Are There

Taxes kill growth and the victims are the technology, telecommunications and defence companies. An exit strategy to get out of tech stocks at the right time is hard but looking at the headwinds in the future and understanding what the effects of FIRRMA could be on the global tech industry is a no brainer. Reducing tech allocations in stock portfolios will likely to be a big theme in the near future as the reality strikes home.

What matters is how the media reacts to FIRRMA in the coming months and Trump’s weaponisation of the new legislation in order to give the US a temporary edge in the multifaceted war which in turn will have the Chinese respond with similar countermeasures. I will be keeping an eye out on the ISM reading for August if it continues trending downwards we could be seeing a massive downward move in technology stocks that is long overdue.

The trick is to get out before it’s too late.