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Hi Patrick and the rest of the forum,

How are you all these days? Life as a homesteader in Hogsback has been bliss, but one does need to travel to the big cities every now and again to keep up with clients etc.

With the poor performance of the stock market in 2022 has your view on investing changed at all? Do you think the stock market will always go up regardless? I personally feel that we're in much trickier waters these days and that stock market returns are going to be down to around 5-8% pa for a while still. Inflation is here to stay, especially when basic income grants really start kicking in. The socialists would love for inflation to kill the wealth of the 1%.

Hope that all is well your side, wherever you folks may be hiding out these days.

Hi Patrick,

I'd like to get your opinion on this.... Martin Luther King once said that, "Communism forgets that life is individual. Capitalism forgets that life is social, and the kingdom of brotherhood is found... in a higher synthesis that combines the truths of both."

Unbridled capitalism has enabled market returns on average over the last several decades of around 10-15%. However, the world is realising that this is not only inequitable but also unsustainable. We are seeing the emergence of active investors and ESG and impact investors who are advocating for a fairer world, perhaps leading towards the synthesis mentioned in the quote above. Investors now realise that correcting wage and social inequality, helping protect the environment etc. all involve higher costs that were never previously considered by the rampant, greed driven capitalism.

The world is also struggling with the limits to growth, with negative rates abounding, even as central banks try to stimulate inflation and growth by conjuring up new cash. The problem is that there is not enough real-world growth to "absorb" this new cash and it has found its way into markets, dangerously overheating them, at least from a value-investors perspective.

Thus, I believe that low stock market returns are here to stay for the foreseeable future, of around 3-7% per year if we're lucky. There is also the ever-present risk of a serious market correction if prices trend too high above value. ESG and impact investors seem happy with this sort of return, as the world starts to consider measuring returns in more than just monetary terms.

The question is, what does this type of return do to the FIRE movement? What is the minimum annual return required to keep withdrawing (4%) of your capital and not run out of money?

In a way this whole trend change is making intuitive sense to me.... It's only possible to be a passive investor, adding no productive value to the world (e.g. indulging in travel), when we do not properly value the real factors (i.e. the workers and environment) that help that investment to make outsized returns. The days of rocking up with capital, facilitating an investment in a factory, paying slave wages, not accounting for environmental resources properly (cost of water or cleaning up pollution), and then taking the bulk of profits out, are nearing an end....

I watched The Big Short on Netflix yesterday and enjoyed it immensely. Apart from some minor technicalities, I reckon they did a pretty good job of capturing the 2007/2008 mania and ensuing trades etc. Technicalities like if you have a short swap (ISDA) position with Bear Stearns, and then close out your exposure with UBS because you think Bear is going bankrupt, you've actually doubled your risk i.e. Bear won't pay you if they go bust whilst UBS will still expect payment.

Anyway, in the final credits it mentions Dr. Burry now only invests in one commodity... water. Having been in contact with him he explained his strategy some more to me. He's actually buying up water-rich farmland and planting water-intensive crops such as almonds etc. Reason being that water is rapidly disappearing across the globe, thanks to climate change, and these crops are going to be very rare in future. Many farmers I've spoken with are now saying that the past year has been the worst in terms of our drought. Yes, we've had rain, but thanks to the general temperature increases, the soil is too hot and baked to germinate crops. Plus, any rain just runs off the hard land now, and evaporates too quickly as well. Climate change is real folks and we're on the cusp of the hockey stick. Agriculture is going to get hit hard and I reckon we will soon stop exporting our water in the form of fruits and other crops pretty soon. This will affect everything and the taps will run dry in the next few years if something isn't done soon. Israel is far ahead in this game - they price water accurately, they recycle 90% of their black water for agriculture, they desalinate and they don't waste a single drop in the form of leaks. Plus most homes also all recycle their grey water for domestic, washing use, or for home-grown crops.

With that in mind, other than water-rich land, what investments do you see as being vital in the water sector?

Edit: Water is not actually disappearing. It can't be destroyed. Like energy, it simply transfers form on its ultimate journey from cloud, to river, to sea and back again. But it is being distributed in different ways now. Climatologists refer to this as 'drought and deluge'.

With markets in sell-off mode, you can expect a slew of news articles coming out about how one should always buy and hold in stock markets long-term. Well, that may have been true for the past 50 years but we are facing a very different future now.

The baby-boomer generation (born after WW2) threw away the austerity of their parents and were responsible for fuelling the mass consumerism we have today. The money men of Wall Street convinced them not to save for retirement but rather to give their money to the bankers and brokers and they would grow it in the markets. Of course this worked quite well while the baby boomers and their children have all been earning salaries. The massive bull run in stock markets we've seen since 1950, apart from a few minor corrections along the way, has been fuelled by boomers and everyone else seeking ever higher risk returns. The music has hardly stopped playing, until now....

Because those baby boomers are now all retiring en-masse. They are not earning like they used to and they are not buying the dips like they used to. Their children and grandchildren are mostly mortgaged and indebted (house, student loans etc.) up to their eyeballs with expensive property and toys. With markets in sell-off mode, we can expect greater and greater runs to the safety of cash and boring instruments such as government bonds. We should not expect markets to recover quickly again as there simply isn't the volume of readily investable cash lying around any more. The retirees need it now.

The 2008 GFC saw a massive deleveraging of wealth from consumers to businesses and HNW's who were able to turn the easy money into easy profits, in housing and stocks. This has created an even greater wealth disparity and inequality across the world. The average man in the street in New York, London, Sydney and Maputo feels poorer than ever before, and that's without hardly any inflation at all.

Pension and tracker funds have propped up markets for the longest time now. Of course we can expect these to continue but in an uncertain world with rising interest rates and inflation, and with low growth (even in the US) the best we can expect is stagflation. I've said this before here but Japan was once the world's no. 2 economy before stagflation hit them in the 90's. They're only kinda recovering now.

Yes, of course markets will recover. But I suspect we're in the early stages of a slow grind downwards. As I said here before, this feels like October 2007 again, where there was a slow but steady decline, before the final crash came in 2008. Depending on how macro events play out here, I expect a similar situation this time, only at twice the speed now. So we should know if we're into proper crash mode by Christmas / early Jan, or if this is just a prelude.

Either way, I reckon the fundamentals of the stock market are changing for good now. Too many people chasing returns. The mathematics of Capitalism doesn't work like that i.e. it asymmetrically rewards the top 20% with great wealth, whilst the bottom 80% must get less than average returns.

I'm only trading ZAR and crypto in the Investor Challenge. I came in a little late which was probably a good thing but let's see how things go... I figure I could either end up winning with massive returns, or completely blowing out at -50% or something similar.

I would be interested in people's comments on crypto in the meantime. We have some crypto millionaires in Hogsback who don't have to ever work or save for the rest of their lives. They are in the late 20's - it's sickening!    Do you think that BTC or other cryptos have a future, either as a store of value or as a currency? Personally I'm interested in a seed-backed crypto and would welcome any thoughts on this i.e. where farmers become the miners and earn crypto in exchange for their crop, paid in advance. In many places around the world this is being termed Community Supported Agriculture, and is helping break down massive centralised farms, logistics chains and major retailers selling chemically-preserved and outdated crap in plastic containers.

BTC is only now making a 50% correction and could possibly be building a support base here. Insto's are coming up with new financial instruments to support their HNW clientele, as they structure long/short plays in this new asset class. Could we be seeing some legitimacy entering this space? I don't believe that any of the major cryptos at the moment will emerge as a great store of value, or transactional tool in the next 5-10 years. However, there probably will emerge a killer app that will leverage the blockchain and provide some utilitarian value. Any ideas as to what that could be? I'm all ears....

Last year December I told colleagues that commodity prices were going to rally in 2016. This was when everyone was still really, really bearish. Around March / April people started believing it and mining stocks have a really great run. I'm astounded by the price gains in iron ore however, because that is a dead commodity if ever there were one. Coal prices have also surprised me. With every man and his dog loathing coal, and renewables making great inroads into power generation, one would have thought Ol King Coal was finally dead. And yet China and India are buying the stuff like there's no tomorrow. This last week has seen coal prices move from the mid-60's to around the mid-90's i.e. USD/ton. You will probably see the stock market wake up to this fact in the next day or so. Expect counters such as Glencore and South32 to do quite well in this regard.

But, being the contrarian I am, I am now quite worried. The coal market is easy to squeeze and manipulate. Certain Swiss based trading companies spring to mind. With Hillary most likely to be stepping into the power seat, I can't imagine that US coal demand is going to go back up. That really leaves Europe, India and China as the major buyers, with China the big swing factor. Next year China gets their High Voltage power network properly up and running. This means that their Hydro Power (of which they have loads) can now easily be transported to the big demand centres on the coast and the SE, where the coal plants are. So, with oil prices remaining rational at around $50 and gas and LNG prices also still quite bearish, I can't see coal being supported at these insane prices for too much longer. Having watched this market for over 18 years now, I think this is the final "Hurrah" for the coal industry. In 5 years time it may only be Eskom buying coal from the Guptas. Enjoy the price rally while it lasts....

If this chart doesn't scare the living crap out of you then.... ok, keep calm and put your money into the market as normal.   

The reason is that momentum trend is negative (red line on bottom graph is in negative territory) whilst short term momentum (blue line) is above red line (which means it must turn down again). When this happens it will be in line with momentum trend and we will see the big concurrent moves. At the moment, momentum trend is negative and short term momentum is positive i.e. crosscurrent. This is why we're seeing choppy market conditions, like the chop on the water when the wind blows the opposite direction to the swell. It just so happens that this imminent concurrent move will co-incide with the Fed's decision to raise / not raise interest rates next week. The market is so confused right now that it doesn't know what to do i.e. it goes sideways in a choppy way. So what happens when fear and confusion reign in the market...? People sell to preserve cash. And that creates more negative sentiment which feeds on itself in a vicious downwards spiral, especially when the algo traders and bots get involved.

Expect the market to sell off big time into next week's Fed announcement in a classic "sell the rumour, buy the fact" trade. Markets will recover after the Fed announcement no matter what the result but how much will have been lost before then? Going to be a very interesting week.... Of course I could be completely wrong about all this...   

Looks like EUR:USD forming a bottom and potential upside breakout of this medium term strong Dollar. US stocks should start recovering as USD weakens and ZAR should also strengthen a little from here. However, gold likely to fall or at best stay flat, unless news out about rate increases.

I'm calling around 11.10 for next week USD:ZAR (currently 11.22) and both US and SA equities to consolidate and bounce around sideways here for a bit. Following that, if equities go south from there we can all pack up shop because that could be a nightmare ride into the end of the year. I think the Dow should find a floor at 16650 (currently around 16770).