Stock Markets in Bubble Economy

1. In financial terms, investors and advi-
sors have been told for decades, all this
isscientific:Post-Modern-Portfolio-The-
ory, Markowitz (Nobel prize), Black-Sholes
(Nobel prize), Monte-Carlo, the “blessings”
of diversification and passive investing,
then the recent flood of nice abbrevia-
tions like TARP, ZIRP, MiFID, ESM, EFSM
etc., or rather spots on the camouflage
of the century old Big Money lab trial
of monopolist Central Banking, the
biggest “fiat” money experiment the
world has seen ever. There’d been his-
torical warnings from the beginning,
of course, that something had been
wrong with the fundamentals like Wil-
son’s regret, the Great Depression, the
Executive orders 6102 and 11110, then
Fort Knox, De Gaulle’s claim for gold,
the petrol dollar created, LTCM and
the recent New Economy of QE! Let us
stop here for a minute. QE Economy?
A missing link to investments? Yes,
once risk (the probability of losses) becomes
relative to certain market players, and
access to easy money is not equal
across the markets, and intervention
(of governments and central banks) becomes the
rule not the exception, then all the nice
investment theories above, part of the
classic economy, do not help to shape
a reasonable portfolio. Just remem-
ber the discussions after the August
market drop: the focus hasn’t been on
what actually happened and especially
not why, but about September Fed rate
hike, QE4 (after 3 called Infinity…) and how
the Chinese government intervenes to
keep asset prices afloat (attempting to pre-
vent bubbles from popping). However, the real
discussion went on outside the main-
stream media: what Tobin’s Q-ratio says
about the current stock market levels,
how currency wars destabilize markets,
what’s the impact of the GREAT CREDIT
uNWINDING on the stock markets, the
outlook for the (euro)dollar, SDR and
__________________________________________
TRUSTING N°8 – July/December 2015 121
Practical Investing / INVESTING
Stock Market:
The Biggest Bang for your buck ever!
We live big times: Big money, Big debt, Big bubbles, Big govern-
ment, Big regulation.
You get all the stories ready: the world has to be saved, some (usu-
ally the banks) bailed out to prevent collapse at any price, others
to be punished at the same time, these are indebted governments
which actually means the sorvereign, so in the end ALL the bills go
to the taxpayer, i.e. the normal citizen.
This is the new Social Contract of modern times.
Dr. Zoltan
Luttenberger

2. the new BRICS financial system, and
(this is our main point) how to invest at the
top of such a bubble in stock markets
(aswell)? You can say of course, QE ”n+1”
can be launched any time, and the Chi-
nese (still) can lower interests and so on,
but money creation (“easing”) worked in
the end like drugs: the bigger dose, the
less impact!
The 3 common charts tell the story
about the Century of Big Paper Mon-
ey or, more precisely, Fiat Money. One
possible reading, that after the cred-
it expansion triggered bull market of
the 80s and 90s the dotcom bubble
launched a secondary bear market and
according to the charts we’ve seen a
deferred and leveraged recurrence of
the Great Depression, with a much big-
ger amplitude and probably also on a
longer timescale OR a radical reform of
the global financial system shall clear
the way for a next bull market soon?
This would explain the desperate ef-
forts of central bankers to generate
inflation by printing (issuing) more and
more money. However, even if that
worked, it just blows more and bigger
bubbles to burst later, and adds to the
pains of normalization, says the Austri-
an School (www.mises.org).
The key lesson for intermediaries is that
product sales and passive investing
does not really work in deflating-bub-
ble markets any more, as risk percep-
tion and measuring of real risk need
a fresh look, and suitability can be ad-
dressed only if there’s a common un-
derstanding with your clients about the
asset classes. No one fits-all approach
works: what’s a safe asset for the one,
is a don’t touch for the other. None of
them is wrong ex ante, and the advi-
sor’s real task is to evaluate the scenar-
ios and to feed relevant and unbiased
information clients need to make their
own judgment. So, while you’ve got
the “holy scientific” model of financial
markets ready as a mandatory part of
your college or certification curriculum,
from the broker-dealer or product ven-
dors you work with or even from new-
born robo-advisors, now you can’t es-
cape making your OWN ASSuMPTIONS
about asset classes and particular in-
vestments.
This is a clear shift in the investment
process that, unfortunately, asks for
much deeper knowledge than the aver-
age advisor ever had. It includes mas-
tering the contrarian view to “scientific
finance” as well. The once “product
seller” (whether in a bank or tied or independent)
distributing nice colored product bro-
chures has turned into a “model sell-
er” presenting an investment solution
made up of risk-profiling and other
suitability assumptions according to
the focus of recent regulatory whammy
worldwide.
Furthermore, the client gets another
piece of “scientific evidence”, the out-
come of the risk questionnaire and even
nicer color pies about the optimal port-
folio allocation created on the scientific
(again) base of Modern Portfolio Theory.
How nice!
But how did this happen? No one real-
ly knows… certainly neither the clients,
nor the advisor, since the solution came
from the Holy Corporate Black Box built
by “Best of breed” Experts, Softwares
and Scientific models under the hood
of Compliance Excellence, Quality As-
surance, Awards and Certifications.
Common sense? Not here please. Have
you ever seen this term in the regula-
tions? ...or the brochures? ...or in a cur-
riculum, or in an exam questionnaire?
Not me.
I remember that, when introducing a
multi-scenario asset class table and the
__________________________________________
TRUSTING N°8 – July/December 2015122
INVESTING / Practical Investing

3. corresponding model portfolio projec-
tions a couple of years ago to a HNWI
client, there is always a possibility of
different cases and outcomes or, from
the client’s point of view, that THERE IS
A CHOICE. It triggered an immediate
re-balancing action to optimize the ex-
pected long term outcome or, in finan-
cial slang, to immunize the portfolio
against the potential (negative) outcomes
of certain scenarios the client wasn’t
happy with. So, while banks struggle
to accomplish reasonable stress tests,
you should just show to the client that
there is a choice, which means several
hours and days of additional real work
- supposed that you’re able and willing
to support free choice!
Two more trends make the life of the
financial advisors hard. DIY (Do-it-Your-
self) clients represent a growing part of
investors in the Internet age, when ro-
bo-advisors have emerged as an alter-
native tool. Then, also thanks to easy
money, socialist governance became
common meaning that citizen’s wealth
isn’t safe from bail-in actions any more.
Here steps in CIFA’s Charter of Investors’
Rights to save legitimate wealth, the
base for a free market, from govern-
mental excesses.
So, you’ve been actually getting the
BIGGEST BANG for your buck in the
stock markets EVER! Good news isn’t
it? Whether it is a TOP or a POP, let us
wait for.
Zoltan Luttenberger
__________________________________________
TRUSTING N°8 – July/December 2015 123
Practical Investing / INVESTING
_________
Zoltan Luttenberger PhD has been
working in the FS industry since
1989 as (independent) financial plan-
ner, management and IT consultant.
www.linkedin.com/in/luttenberger
Zoltan Luttenberger PhD is a
Founding Partner of the “European
Transition Program in Financial
Advice™”
Zoltan Luttenberger PhD is Member
of the Board (in charge of Interna-
tional Relations) and the Founding
Chairman of the Hungarian Associa-
tion of Qualified Financial Planners.
www.HAQFP.org
He is also a member of the CIFA’s
Executive Committee.