The Writing On The Wall

Be completely honest with yourself. If you heard the sentences below on the news or read them the newspaper, would you have any idea how the information contained in the sentences affected your life?

Traders saw the bid, recognized that the government was intervening to support the market, and the bid was front-run with the hedge fund algorithms automatically picking up the action.” Or, “The futures purchases prevented margin calls and stop/loss orders in a heavily leveraged equity market that would have collapsed the market.” (These are typical quotes from a typical on-line financial news and opinion site.)

If you have an IRA or 401(K) or a company pension (remember those?), you do have money in the stock market – in equities and possibly debt instruments as well. If you’re wealthy, you may have professional money management. (If you’re a do-it-yourselfer and you don’t have training in finance and economics, good luck and may the force be with you.) If you have a broker or money manager, can you trust him or her to do what’s best for you, and not what’s best for the brokerage? Those goals are supposed to coincide, but the truth is, often times they do not. How can you know if your broker is doing right by you if you don’t occasionally check up on his actions—compare what he does with what you would do, given the same information.

In America today there are no free financial markets. The markets are rigged by the Federal Reserve’s Quantitative Easing, by gold price manipulation, by the Treasury’s Plunge Protection Team and Exchange Stabilization Fund, and by the big private banks.” (

Can you trust a system that is rigged for the benefit of the super-rich, managed with a vocabulary that requires at least a bachelor’s degree in finance to understand?

The markets have plunged nearly 8% over just a single week. And the losses are across the board. Nearly every asset class from stocks to bonds to commodities to real estate are participating in the pain. Market displays are a sea of red.

Many contrarian analysts have recently written of the dangerous level of over-valuation in asset (stock) prices. The reason for this, according to people I pay attention to, is years of central bank (Federal Reserve in the U.S.) intervention. This intervention will not cease and will continue to grow until it causes a collapse of the economy. Due to the ability of the Fed to finance government debt spending, the U.S. debt now stands at over twenty trillion dollars. That’s a whopping 104% of Gross Domestic Product, which is, by any rational standard, socially unacceptable, financially unhealthy, and portends nothing but bad news for the future, especially given the trajectory shown in the graph below.

Another chart demands our attention. This shows how dangerously over-valued the markets have become. This 20-year chart of the S&P 500 indicates its pattern of trade vs its 50-month moving average (the thin green line). More importantly, the chart shows the Bollinger bands for the moving average. The red line (upper) and purple line (lower) indicates measurements of volatility. (For more information on Bollinger Bands search the internet. There’s so much information out there I hesitate to recommend one link.) The information in the graph is how high or low the market price is compared to its trading history. When the S&P 500 trades near the upper band it indicates the market is over-priced compared with its historic trading pattern. As this chart shows, the market is not only over-priced, but it is more over-priced than it has been in the 20 years represented. In fact, note that the market, within the last 20 years, has never traded above the upper band until the last seven months, and last week’s drop only brought it back down to the upper band.

PhD financial analysts will spend untold hours on CNN and MSNBC explaining why none of this matters and the economy is doing well. Really! It really is! That’s exactly what they were saying just a day before the crash of 2008.

What’s the lesson here? If you’re counting on your IRA, 401(K), pension, or (heaven forbid!) Social Security to provide for your retirement, think again.

Diversify your income. Create more than one cash flow that will not end when you celebrate your 65th birthday. There are so many opportunities to create diversified income streams that no one has an excuse for sitting in a rocking chair in retirement watching the government and its corporate friends chip away at your life savings until there’s virtually nothing left.

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