My Wednesday message showed the close correlation between weak emerging market currencies and emerging market stocks. It showed the WisdomTree Emerging Currency Fund (CEW) threatening to break an important support line. The green line in Chart 1 shows that happening. After falling sharply on Thursday and Friday, the CEW closed just below its 2012/2013 lows. While all emerging currencies tumbled, the most notable collapses took place in Turkey and South America. Argentina and Venezuela were hit especially hard, with the latter suffering a de facto currency devaluation. Why that poses a problem is because a close linkage exists between emerging market stocks and currencies (as well as bonds). Chart 1 shows that Emerging Market iShares (red line) track very close with emerging currencies. The 6-month Correlation Coefficient (below chart) has a positive correlation of .79. Emerging market bonds denominated in local currencies also fell sharply. The subsequent plunge in emerging market assets caused a high-volume selloff in developed stock markets all over the world and a flight to quality into American, German, and Japanese government bonds. Gold prices also jumped. Although the U.S. dollar bounced on Friday, most currency money went into Europe and Japan. A jump in the Japanese yen pushed Japanese stocks sharply lower.

DROP IN CHINESE STOCKS DIDN’T HELP … My Wednesday message suggested that emerging markets needed a stronger Chinese stock market to recover from their current slump. Unfortunately, they didn’t get that help. Chart 2 shows China iShares (FXI) plunging nearly 5% on the week. In so doing, the FXI tumbled to a five-month low and ended below its 200-day moving average. News that China’s manufacturing sector had slipped into a contraction mode had an especially negative effect on emerging markets that export to China (mainly in Asia and Latin America). China is the world’s biggest emerging market and the world’s second largest economy. What happens to that economy and stock market has a big effect on markets everywhere else.

Recent StockCharts Articles You Might Have Missed

• Market Message – PLUNGE IN EMERGING MARKETS CAUSES GLOBAL DOWNTURN IN STOCKS — CHINESE STOCKS TUMBLE ON WEAK ECONOMIC NEWS January 25, 2014
• Don’t Ignore This Chart! – $NIKK Looks Wobbly Here January 24, 2014
• The Canadian Technician – Gold Miners Outperform Gold January 24, 2014
• The Traders Journal – The Teacher Becomes The Student January 24, 2014
• MailBag – How Can I plot Dividend Adjusted Data and Unadjusted Data? (video) January 24, 2014
• Art’s Charts – Pockets of Weakness Emerge, but Bulk of Evidence Still Bullish January 24, 2014
• Scanning Technically – What’s Wrong with this Scan ?? Bearish MACD Crossover January 23, 2014

On the colored charts below… Its a lot of red and green but these are the most understood colors for knowing what ranges means (bullish or bearish).  CANT SEE THE CHARTS? View Online: 

This was a very emotional week for traders. The strong selling Thursday and Friday has traders and investors running for the door and panicking out of positions. While I did close out our long SP500 swing trading on Thursday to lock in a profitable trade, I do feel as though we can re-enter next week a better price.

The only ones feeling pain today are those who do not have enough self-discipline to create rules and trade by them. Again this is talked about in GREAT DETAIL in my new book. If this is you, I recommend buying my book and reading it this weekend as it’s a quick and simple read. There is a paperback version or instant PDF download available: Get Book.

Without self-discipline no amount of courses are trading services will make you a successful trader.

Let’s get technical and jump into the charts…

Momentum Index – The Intraday Extreme Overbought/sold indicator

This is an indicator I follow daily to understand how strong the selling is. If it is broad based or sector related. The last two sessions clearly shows is broad based and that the market has moved to quickly in one direction and is primed for a knee jerk reaction bounce.

Swing Trading Cycles : 3-8 Weekly Overbought/Sold Market Cycles

This is a fantastic tool for timing key pivot lows and highs in the broad market. We are nearing another key pivot low but there is still room for more selling next week.

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Options Traders Are Fearful of Continued Selling

If you don’t know what the put/call ratio is, in simple terms it tells us when the majority of traders are buying put options (expecting stocks to fall, ratio of 1.0+), and when they are overly bullish (expecting stocks to rise, ratio below 0.60).

The chart below shows everyone is leaning towards more selling in the stock market. I use this as a contrarian indicator.

The Fear Trade – Shorting Fear with an Instrument that Naturally Loses Value: VXX

There is a lot of interesting way to trade the stock market and once way it through shorting the VXX ETF during bull markets. Instead of buying a long position in stocks, you could simply short the VXX fund. This thing loses value over time because of the way it’s managed/constructed. So logic says, shorting it on bounces can be very rewarding during times when fear is high.

Keep in mind this fund and its underlying index moves FAST with 20-30% percent swings… Trade small position sizes if you ever touch this thing…

Weekly Technical Trading Report Conclusion:

In short, (pardon the pun) I feel the stock market is setting up for another big bounce. The technicals and longer term trend remains bullish. I trade with the trend until proven wrong. Only then will I change the direction and trade with the new trend.

Get These Reports Free Each Week: www.GoldAndOilGuy.com

Chris Vermeulen

What distinguishes “new money” from “old money”? 

I’m often asked this question because I recently set up something called a “family office.” The aim of a family office is to perform this feat of alchemy. It must take money that’s earned today… and make sure it’s around for the next generation. 

Most people think preserving money is all about what stocks you pick and which money managers you employ. Not at all. 

What matters most is the right family culture. Families with old money all have their own norms, values and no-nos. These largely determine their success or failure over time. 

What follows is a list of eight taboos for families who want to create “old money.” You will have your own list. What’s important is that you spend time instilling the values on your list in your kids and grandkids. Your family’s success rests on their shoulders. 

1. Consuming, not Producing 

Give $1 million to an average person, and he immediately thinks of what it will buy. But give a million to an old-money family, and it goes into a business… an investment… or a new entrepreneurial venture. 

What matters for old money is producing, not consuming. We don’t want to consume goods and services. We don’t want to consume information and ideas. We don’t want to consume Wall Street’s fee-stuffed products for high-net-worth individuals, either. 

Let others drive their fancy cars, carry their expensive handbags and have their addresses in the chic zip codes. Old money doesn’t show off by buying things. It prefers to keep a low profile… and a low cost of living. 

Old money knows that investment costs have to be kept down, too. The best way to do that is to avoid hedge funds and structured products. Stick with simple, low-cost, long-term investments. 

2. Spending the Family Fortune 

“Never touch the capital” is a hallowed tradition among old-money families. You may spend the interest on the family fortune – even the capital gains it produces. But woe to the heir who draws down the principal. 

The principal must be kept intact. Any distributions should be of interest, after taxes and inflation adjustments. At today’s low interest rates, it is hard to earn much income – safely – from your investments. 

Families are tempted to “dip into capital” to make ends meet. There’s a taboo against it for good reason. Once you begin living on a previous generation’s savings, you will find it hard to stop… until the family fortune is all gone. 

“Eat only what you kill” – as our family governance strategic partner, Joseph McLiney, put it at our recent Family Wealth Forum in Nicaragua – it is a better way of expressing the taboo against spending family wealth. 

It allows you to spend only what you make yourself. The earnings from capital go back into the family fortune, replacing losses from inflation and taxes. 

3. Doing What Others Do 

Most people want to fit in. They seek social approval by doing what other people do. But if you do what other people do, you will get the results that they get. You will become average… just like they are. 

Having wealth is rare. Having it for more than one generation is rarer still. You don’t do that by doing what other people do. You have to think more clearly… and avoid many of the ideas, values and habits that most people have. 

You must be willing to be different. Sorry. But that’s the price of having old money. 

4. Making a Public Spectacle of Yourself 

Paris Hilton may have enjoyed getting her face in People magazine. But the Hilton family didn’t like it at all. Old money likes to keep things private. It favors private businesses, private information, private investments and private lives. 

Private businesses are more profitable to their owners than publicly quoted stocks. They pay fewer legal and accounting fees and spend much less money trying to please investors and the media. 

Today, publicly traded businesses in the U.S. distribute a measly 2%-3% of their profits to shareholders. A privately owned and controlled business, on the other hand, may return significantly more of its earnings to shareholders. 

It may give the owners corner offices, too. In a public company, much of the earnings go to pay CEOs and corporate managers. In a privately controlled corporation, the owners decide who gets the money. 

Old-money families also learn to discount public information – the stuff you get from newspapers and TV. They put a premium on their private information sources. They trust their own eyes and ears… and their personal contacts. 

This attitude informs old-money families’ investments. Rather than invest on the basis of what everybody knows, they try to pin their investments on what they know that other people don’t. Deep knowledge of particular industries is developed. Special “family secrets” are encouraged. 

Jobs, financing, insurance and a helping hand are available when needed. Old money looks to private sources – primary among them the family – for what it needs. 

5. Too Busy to Make Money 

It’s capital that counts, not income. Most people – even high earners – are on a treadmill. They earn. They consume. There isn’t much left. Since their consumption depends on their income, they are eager to increase their income at every opportunity. 

Not so with old money. It knows that in the long run, income barely matters. It knows, too, that expenses normally rise with income, but not with real capital gains. 

In other words, when you earn more money, your taxes rise… and you tend to spend the extra money on lifestyle enhancements. But if the value of the family farm goes up, the extra wealth tends to stay put. (See No. 7 below.) 

Old-money families don’t care as much about income as they do about capital. Often, they live in houses that were bought many years ago (no mortgages)… they drive cars that were fully depreciated during the Clinton administration (no car payments; no loss in value)… and they eschew costly fads and fashions of all sorts. 

The typical young person is encouraged to go out and get the best-paying job he can find. Then he enters the labor force and spends the rest of his life trying to stay ahead of his expenses. He becomes a living example of the old expression, “Too busy to make money.” 

I tell my children: “Don’t worry about how much you make. Worry about what you learn… and what you end up with. Tell your employer you’d rather have equity than a salary increase.” 

This is true in your careers. And it is true in your investments. If you worry too much about the current yield, you are likely to miss the real payoff later. 

Trading out of winning stock positions, for example, can trigger taxes and incurs trading costs. In your work, as in your investments, you are better off ignoring income and short-term gains in favor of long-term capital growth. 

6. Trying to Beat the Market 

We all have seen the study results. Most of your investment profits come from being in the right market at the right time (beta), not from picking individual stocks (alpha). 

Trying to beat the market is a losers’ game. You can count on two hands the number of professional money managers that do it with any consistency. Most individual investors end up having the market beat them. 

If you stick to the romantic notion of beating the market, sometimes you will get it right. Other times you won’t. Over the long run, you will make too many mistakes and probably end up poorer than when you started. 

It is better to find a decent market – a beta position – and sit tight. Trading in and out of it… or moving from one market to another… is usually disastrous. The results over the last 30 years, for example, show that an investor in oil, gold, stocks or bonds – had he simply just sat on his positions the whole time – would have had an average annual gain three or four times as high as the average investor during that period. 

Why? 

Because the average investor couldn’t sit still. 

I use the term “beta” in a broader sense, too: It is important that you and your family are in the right place at the right time. 

One hundred years ago, for example, Russia had one of the fastest-growing economies in the world. But it didn’t matter how good an investor you were. If you had stayed in Russia at the turn of the last century, you would have lost all your money. Stocks, bonds, real estate – all were confiscated by the Bolsheviks. And your family would have waited two full generations before it could begin rebuilding its wealth. 

That’s why we spend so much time trying to understand what is going on in the world. Beta matters. 

And we’re not alone. A report in a recent Financial Times tells us that most rich people “make the same investment mistakes as the rest.” In short, they go with investment fashions – notably hot hedge funds – rather than sticking to a sensible long-term discipline. 

But “the richest of the rich… are different,” the report concludes. They “started liquidating their portfolios and slugging money into cash as early as the summer of 2007. [T]he suspicion has to remain that the very wealthiest escaped into cash because they, almost uniquely, understood the gravity of the situation.” 

Why? Because the richest were focused on beta. And they weren’t distracted by alpha. 

7. Selling the Family Farm 

Ordinary people need liquidity. Banks need liquidity. The whole financial system needs liquidity. But it’s illiquidity that works for old money. 

Families fare best when they have old assets that are hard to buy, hard to run and hard to sell. A family farm, for example. 

It’s not easy to sell a family farm. Family members develop a sentimental attachment to it. It’s hard to get all the family to agree on a sale. And you usually can’t sell it in pieces. You can’t fritter it away. It’s all or nothing – a big decision that takes time and reflection. 

Families tend to hold onto their illiquid assets… and they grow. 

8. “Na… Na… Na Live for Today” 

Old-money families know they have to give up something today to have more tomorrow – accepting a short-term disadvantage for a long-term strategic advantage. 

Great businesses, great families and great fortunes take time. You have to be willing to invest time and effort… and wait for the payoff sometime in the future. Old money knows how to delay gratification, in other words. 

As Albert Einstein noted, compound interest is the ninth wonder of the world. But it only becomes a miracle at the end, not the beginning. That’s when you get the huge increases that create real family fortunes. 

These are 8 lessons I’ve learned from old money families about how to preserve wealth for generations. If you want details about how to put these ideas into practice and create a legacy of wealth for your family, then I hope you’ll fill out the Declaration of Interest formto find out more about my project, Bonner & Partners Family Office. 

This is the last email you will receive from me in this series. So, if you’re interested in what I’ve shared with you about building a family legacy, I do hope you’ll take the time to sign up and learn more about what I’m doing with my own money and Bonner & Partner Family Office. 

Sincerely, 

Bill Bonner
Editor, Diary of a Rogue Economist

P.S. Membership is currently closed at Bonner & Partners Family Office. The next intake – our only one of the year – is in February 2014. If you’d like to receive an invitation to join at that time, simply fill out this brief declaration of interest form.

Thanks to Hugh Pavletich and Wendell Cox co-authors of the Demographia International Housing Affordability Survey. This table shows that Vancouver BC continues to rank as the least affordable city out of the 35 largest Canadian cities with a multiple of 10.3 times median household income required to buy a median priced house. As of Q3 2013 the 6 cities ranked from least to more affordable are: Vancouver 10.3, Toronto 6.2, Montreal 4.7, Calgary 4.3, Edmonton 3.9 and Ottawa 3.8 

All 35 Demographia ranked cities in Canada are tabled on the chart below. You can access the same chart and all of the commentary relating to this affordability study by clicking on the chart below or HERE 

What separates the rich from the rest of us? 

“They have more money,” said Hemingway. 

But how did they get it? How do they hold onto it? 

That’s a bit more complicated. 

I recently drove through a working class neighborhood in Baltimore called Dundalk. It is an area of simple one- and two-story wooden houses on small lots.

Fifty years ago, it was where Baltimore’s industrial labor force lived. They worked in industry – for Bethlehem Steel, General Motors, The B&O Railroad and in the busy harbor. 

Today, those high-wage industries are mostly silent and rusting. Some sites along the water have been converted to loft apartments for Baltimore’s young professionals. And some of the children and grandchildren have moved away – to the suburbs or to other cities. 

But most of them are still there. Their parents and grandparents earned a good living. But few got rich. And now, few of their descendants are rich either. 

Across town in the rich “old” northern suburbs of Roland Park and Ruxton the people are different. 

The rich left the city many years ago. But in these green suburbs they remain. Some richer. Some poorer. But, by and large, the same people whose parents were there 50 years ago. 

What accounts for it? 

How come some families stay rich generation after generation, while others never have a nickel? 

“Culture,” you will say. 

“Education,” perhaps. 

You won’t be wrong. But what, specifically, about culture and education is it that makes such a big difference in outcomes? 

Simply put, you might say the secret is that these “Old Money” families take the long view. 

But there is something deeper and more important. These families know how to turn time into an ally instead of an enemy.   

They have worked out very specific strategies that use time to boost investment returns (much higher rates of return… with lower risk). 

And they have worked out ways to use time to prepare the family to not only protect money… but to make it grow. 

This is why they invest in education and training. And why they make sure family members add to their collective wealth, rather than subtracting from it. 

It is why they try to guide their children to suitable spouses. They know that a rotten apple will spoil the barrel. 

It is why they spend time and money on lawyers and accountants, too – making sure that the structures are in place to pass along wealth and protect it. 

It is why they prefer deep value assets over momentum investing. Over time, value rises to the top. Momentum slows. 

It is why they will wait a long time – many, many years – for the right investment at the right price. 

It is why they like investments with long-term payoffs – such as timber, mining and infrastructure. And it’s how they are able to benefit from compound growth – letting relatively modest gains grow over several generations. 

It is why they are almost fanatical about eliminating costs – taxes, investment charges and unrewarding living expenses. They know that wear and tear, over time, will wreck their family fortunes. 

It is why they develop long-lasting partnerships with the professionals they need to make sure their interests are protected and their plans are carried out. 

Let me ask you something. If you thought you’d live forever, would you do anything different? 

Wouldn’t your attitude to your money change a little? Wouldn’t you slow down, realizing that you’re not in such a hurry to make money? 

And wouldn’t you reduce your spending too – knowing that your money would have to last you a long, long time? 

The truly wealthy are careful to spend their money on things that hold their value over time. 

It is why they do not trade in and out of investments. Instead, they find a few positions and stick with them – for decades. 

It is also why they prepare their families, over the course of many, many years, so that they will be prepared for the challenge of managing and enlarging the family wealth. 

This is what separates the serious money from the here-today-gone-tomorrow crowd. The serious money knows there’s a lot more to successful wealth building… especially over the long run… than just stock picking. 

Instead of trying to control the uncontrollable – the returns you get from stocks – they are focused on what they can control. 

Of course, most really wealthy families have a family office somewhere in the background making sure these things are on track. 

And without someone dedicating time to making these things happen, they often don’t. Most generational wealth transfers fail. Money that was hard earned is lost through poor investment decisions and lack of planning. 

When it comes down to it, you might say that successful families do all the things unsuccessful families don’t want to do. 

These things take work. But if you’re determined to keep wealth in the family, the sooner you start on them, the better. 

Sincerely,

Bill Bonner
Editor, Diary of a Rogue Economist

P.S. Membership is currently closed at Bonner & Partners Family Office. The next intake – our only one of the year – is in February 2014. If you’d like to receive an invitation to join at that time, simply fill out this brief declaration of interest form.