Review - Theory of Financial Relativity by Daniel R Moore

I discovered the observations of Daniel R. Moore when I stumbled across his blog while I was researching royalty trusts.  His website had the most cogent analysis of royalty trust valuation I could find anywhere, so I added his page to my RSS feed.

Daniel is who I like to call The Most Interesting Man in the Financial World.  Not because he earned his MBA from from Duke’s Fuqua School of Business, but because of his experience.
You see, Daniel has had ringside seats for the biggest financial freakshows of the past 3 decades:

During the 1980’s – Daniel worked for North Carolina National Bank, which would become Nations Bank, which would become Bank of America. His employer was on an acquisition run to make the biggest bank in the States, with unmatched economies of scale.  Daniel did not know it at the time, but this desire for bank size and scale led to a bank (Bank of America) that would become ‘too big to fail’.

During the 1990’s – Daniel went to work for telecom carrier Northern Telecom (which would be come household name NORTEL Networks).  He saw the wave of change from analog to digital control of the telecom industry switching equipment.   Unfortunately, a government ruling (Telecom Act of 1996) made Nortel’s business model unsustainable- eventually leading to Nortel’s bankruptcy.

During the 1990’s to early 2000’s – Daniel had a front row seat for the Silicon Valley feeding frenzy that fueled the internet bubble.  Simply put, there was too much cash chasing too few companies that had too few earnings.  By 2004 Daniel had seen enough- He cashed in his California house 2 years prior to the housing peak, but he had held his house long enough to watch it double in value in 5 years.

This life experience led to Daniel’s financial opus – The Theory of Financial Relativity.  Loosely paraphrasing, the Theory is:

1 – Nominal GDP is the nucleus in the United States financial market
The Stock Market follows GDP over time – almost 1 to 1 over time comparing Dow to Nominal GDP.

2- Interest rates are the yardstick by which Financial Relativity is measured
See #1.  GDP tracks the Dow index more loosely when interest rates are extremely high- or extremely low- by historical standards.
3- High Debt-to-GDP depresses real GDP and inflation
When Uncle Sam runs up his credit card debt, it hurts his purchasing power.


4- Inflation and asset bubbles are always linked to government fiscal policy excess

Daniel quotes Milton Friedman, “Inflation is always and everywhere a monetary phenomenon”.  The corollary to this is that  Asset bubbles are always and everywhere  a monetary phenomenon.
5- The Fed is the regulator of Financial Relativity- With the power to create and extinguish market imbalances
Ben Bernanke (and soon Janet Yellen) has three levers to pull as Fed Chairman- Print Money, Buy Government Bonds, and Adjust Interest rates.  Any of these moves can be used to tip the scales in favor of one asset class or nation.

 

6- Oil spikes are ‘shockingly’ correlated with stock market corrections
An oil price ‘shock’ is a 75-150% hike in oil prices in a 12 month period, usually above and beyond a previous all time high.  OPEC nations get ants in their robes whenever it takes more than 13 barrels of oil to purchase an ounce of gold.  In fact, oil-exporting nations will halt production or get in to geopolitical conflicts (spoken: wars) with one another to restore oil prices to their historical gold-equivalent price.

 

7- Gold in dollars is an absolute reflection of the magnitude of market forces between the U.S. and export trading partners
See #6.  Gold is a proxy for the GDP of countries that export raw materials (like oil).   Gold and Oil are HIGHLY correlated- From 1974  – 2004, the “R-value” of gold to oil is .91.

 

8- Major stock market corrections are  triggered by Fed tightening mp to fix an inflation or asset bubble imbalance and resort global market relative balance and order
Watch the Yield Curve between the 10-Year Treasury (usually higher) versus the 2-Year Treasury.  If these are backwards (an ‘inverted Yield Curve’), trouble is brewing.

Daniel has some more highly useful market observations, like defining the ‘Dow Signal’- Which almost always foretells when a market correction is imminent and when the recovery is imminent.  However, unlike most prognosticators of Market Timing Methods, Daniel is wise enough to state that his Theory of Financial Relativity is solid, but not iron-clad.  He recommends use his Theory rules to re-balance or overweight stocks, but not to time absolute entry and exit points from the stock market.

Overall, The Theory of Financial Relativity gets a bit technical in some spots, but it is still an interesting and insightful read. I highly recommend you grab or borrow a copy on Amazon today!

Subscribe to GubMints:

via RSS: via Email:
Subscribe to GubMints via RSS Subscribe to GubMints via Email

 


Leave a reply

<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong> 

required