Posts Tagged ‘Economics’

Why Invest in Gold?

02/25/2010

By Levik Dubov

Simple Answer:

The reason why investors own precious metals, is to insure themselves from a debasement of currency at a greater rate than available market returns. Few people actually own precious metals physically, and those who do often do for the wrong reasons.

Gold is not a reliable vehicle for appreciation, yet it is an outstanding store of value. The sensible capitalist does not “invest” in gold. He merely safeguards his wealth in the form of non-financed physical-assets in times when currency competency comes into question, and waits until either the inflation subsides or an opportunity of adequate returns to be restored.

As one hedge fund manager recently put it: “All investments have their day, and right now gold is having its day”.

In-Depth Analysis:

For all those who aren’t familiar with Talmudic-style dissection, Get ready!

Some people are natural cynics and approach everything with a good dose of skepticism. (These people often spend years owning nothing but AAA-bonds and Market Funds). Others are opportunists and approach everything with a gullible zeal. (These people are often looking for the next Microsoft). We see ourselves as mere realists, in an attempt to approach everything with a logical and objective frame of mind.

To understand results we must first find reason…

Questions Scott Adams poses:

I am referring to a recent article by famed Dilbert cartoonist, Scott Adams. I enjoy his posts very much and I hope this article will clarify his perplexities regarding precious metals investment.

1. “People aren’t good at predicting the future, no matter how obvious the future path seems”.

It is for precisely this reason, that when things do change, (such as the turn of the English Empire), so few expect it and are prepared. Ask people interested in precious metals, exactly how many ounces of physical metal they own. You’ll notice how few people truly stand behind the words they’ve spoken. As a matter of fact, just glancing through the comments on Adams’ blog, it seems that most of the forum comes across as hypothetical folks who either own too little of a position, or are influenced by invalid reasoning.

2. “Warren Buffett isn’t putting all of his money in gold”.

I will get to the reason behind this in a moment, but it must be understood that Mr. Buffett is a “Common Stock Man”. That’s what fascinates him, that’s what engages him, that’s what he does best. So why should he invest in gold when he has found far greater returns in an under-valued marketplace?

3. “My failure to imagine how the debt can be contained might be just that: a failure of my imagination”.

When it comes to debt there is far too many variables to consider (i.e. Chinese Bond-ownership, Dollar Replacement, Federal Bankruptcy, Currency Revaluation, The Gold Standard). In other words, the ownership of gold stands not as an investment with the intention of appreciation, but as an clever insurance policy against a catastrophic hyper-inflation or currency debasement.

Explanation:

In “The Intelligent Investor” written by Benjamin Graham (Buffett’s famed mentor), which was revised as of 1971, Graham says in Chapter 2, “The Investor and Inflation”, in the article “Alternatives to Common Stock as Inflation Hedges”:

“The standard policy of people all over the world who mistrust their currency is to buy and hold gold… the holder of gold has received no income return on his capital”.

He adds in summation:

“There is no certainty that a stock component will insure adequately against such inflation” [emphasis ours].

A few points need to be highlighted:

1) Graham informs us that the hoarding of gold was an age old practice. This made total sense as in fore-times bank panics, currency debasement and depressions occurred just about once a decade.

2) He cites the years between 1935-71 as “proof” that gold has been a lousy and inadequate investment class. However, between the years of 1969 and 1981, gold appreciated phenomenally, outperforming each and every other asset class by a wide margin. Had Graham witnessed this spectacle there is strong reason to believe that he would have reconsidered his position, and may have made room for precious metals in a conservative portfolio.

3) In that paragraph he also frowns upon investing in real estate claiming that it is subject to “wide fluctuations” and “serious errors”. His only advice to such business is:

“Be sure it’s yours before you go into it”.

What Graham is telling us here, is that any asset is a bad investment if done for speculative reason, or with improper judgement.

4) In his closing remark, Graham even warns that even while common stocks offer great opportunity, they may nevertheless fail to overcome the challenges of inflation, or currency debasement.

What’s Changed?

Much! Too much actually. As a matter of fact, from an economic standpoint America is no longer similar to the America Graham was familiar with. For one, America has lost its status as the world’s largest manufacturer of goods, and has gained a frightening lead in terms of consumptions and spending. (For those familiar with European history, this is how 16th Century Spain lost its position as the world leader in trade and commerce).

The world of currencies have also changed drastically. While I will not delve into the fascinating history of barter, trade and the properties of monetary exchange here, one enormous variable differentiates the Pre-1974 and the Common Eras. In ancient times, every single transaction took place with an element of exchange in mind. Whether it was sea shells, or cattle, or wooden sticks, the value of any transaction or credit was accurately measured in terms of a monetary exchange unit. With the agreement to terminate convertability from gold to Dollars in 1974, this all changed. No longer would the U.S. Dollar, the “ineffable” reserve currency of the world, be exchangeable for the gold metal.

Thus began, the current era of a universally-accpeted fiat (non-commodity based) currency. No longer would each transaction be measurable in accurate terms. And no longer would any Government, foreign or domestic, be compelled and obligated to abide to the regulations of supply and demand. So long as We The People would accept and stand loyal behind the mere faith and credit of the United States Government, so long would our ever-glorified Dollar endure.

4.
“What happens to the price of gold if people simply change their minds about its value?”

Adams’ question seems pertinently logical. However, there is one crucial question that he fails to address…

What is a currency?

The following I adapt from the works of Doug Casey:

In the 4th century BC, Aristotle defined 5 reasons why gold is money, and they are just as valid today as they were then. A good form of money must be: consistent, convenient, durable, divisible, and have value in and of itself.

Consistent. The lack of consistency is why we don’t use real estate as money. One piece is always different from another piece.
Convenient. That’s why we don’t use, for instance, other metals like lead, or even copper. The coins would have to be too huge to handle easily to be of sufficient value.
Durable. That’s pretty obvious – you can’t have your money disintegrating in your pockets or bank vaults. That’s why we don’t use wheat for money; it can rot, be eaten by insects, and so on. It doesn’t last.
Divisible. Again, obvious. It’s why we don’t use diamonds for money, nor artwork. You can’t split them into pieces without destroying the value of the whole.
Value of itself. The lack here is why you shouldn’t use paper as money.

A 6th reason that Aristotle may have overlooked since it wasn’t relevant in his age, and nobody would have thought of it: It can’t be created out of thin air!

This is not a gold bug religion, nor a barbaric superstition. It’s simply common sense. Gold is particularly good for use as money, just as aluminum is particularly good for making aircraft, steel is good for the structures of buildings, uranium is good for fueling nuclear power plants, and paper is good for making books. Not money. If you try to make airplanes out of lead, or money out of paper, you’re in for a crash.

That gold is money is simply the result of the market process, seeking optimum means of storing value and making exchanges.

Buffett’s Investment in Silver, Style and The Finale of an Era:

Buffett It should be noted, that Buffett did make a significant investment into Silver (not gold) in the late 90s, one that has come under sharp scrutiny in recent years, as few are knowledgeable of exactly what led Buffett to purchase over 100 million ounces of physical silver on the open market, and moreover what ever happened to the holding. Those who know him, have even mentioned his fascination with silver over the decades. All in all, we cannot say that Buffett “only” invested in common securities.

We may also add, that the majority of Buffett’s tenure as the “world’s greatest investor” coincided with an era that was quintessential for the class of Common Stocks. The 50s, 60s, 80, and 90s, were all part of a two-part secular bull-market that captivated the attention of Wall Street and Main Street, concluding in the most absurd valuations for up-and-coming Tech start-ups that had neither money nor model. However, one may realize that Buffett’s years of 50-100% returns are far behind him. With over $100 Billion under his management, investment opportunities are slim as: a) Stocks have become a staple of investment and speculation, thus raising valuations to their highest in modern history, and b) The potential for significant returns diminish greatly as the ability for a multi-national corporation to grow is minimal, if not non-existent. This is known in economic circles as The Law of Diminishing Returns.

All in all, it can be assumed that the heyday in common stock are over, as long as current valuations remain at their elevated levels, and investor exuberance and hopeful optimism remain.

Depleting Commodities:

In summation, I’d like to point out why investors and speculators have begun a gradual influx into commodities and precious metals in particular. In brief: They’re disappearing. This doesn’t mean that there will be none left soon, the same way that Peak Oil doesn’t mean that there’ll be no more oil. It simply means that these goods will no longer be available at these prices. This may sound reminiscent to anyone who experienced oil sky-rocket from $1.50/ barrel to over $40 in the late 70s. When the government capped the price level, supply and demand kicked in: Boom! No more gas! Extended lines of anxious cars waiting to be fueled but to no avail. There is no more gasoline left at the price it sells for.

This is why investors flood commodities when inflationary scenarios take hold. Because with all the over-investment into service companies, manufacturing facilities, tech stocks, real estate developments and paper currencies, people have completely forgotten the elements all that possible: physical goods. Oil, Lumber, Cotton,

So take Adams’ post as you wish. But bear in mind that markets aren’t very intuitive. They tend to evaluate the here-and-now and the probable, and don’t have much patience for abstract and the possible.

I only restate the famed Ben Graham’s empirical warning: “Be sure it’s yours before you go into it”.

Good investing!
Levik

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The Credit Crisis Visualized

07/30/2009

An entertaining and creative explanation of what led us into this debacle.

The Crisis of Credit Visualized – Part I (about 7:30)


The Crisis of Credit Visualized – Part II
(about 3:45)

Glad you enjoyed!

The Real Bubbles

05/04/2008

 

“It is the measure of wealth itself [the Dollar] that is overvalued, not the goods that it represents”

 

 

I’m beginning to understand what is going on. I hope this article will shed some light on a variety of issues, some of which have been fairly complicated for the common investor to digest.

I will begin with a paragraph of adages and mantras being proclaimed on Wall Street, followed by a thorough analysis of why they are either baseless or misconceived. For the sake of simplicity I won’t use references but they are all available.

Mr. Market says

“The Commodities Bubble has begin to blow over, with everything from gold to oil to potash collapsing from their artificially inflated prices to mediate norms. Much of these gains have been driven by speculator demand, from hedge funds and the like, as well as consumer demand, including China, India and Russia.

“Investors have bought in every premium into these contracts and optimism is high. Furthermore, commodities have been a very poor investment relative to stocks and bonds. Even gold has underperformed inflation. As equities recoup its gains and inflows of capital return, pushing inflation down with it, commodities will be a relic of the past.

“Recessions are times of diminishing consumer demand and this will further help in reducing prices. With much of the investing community already discounting shares due to recession we can expect a bottom in the stock market with a rally beginning just as the economy is officially in recession. Financials and Homebuilders are set to gain the most as they have been beaten down severely, looking awefully cheap from a value prospective.

“The Dollar is set to rally as stark pessimism has oversold it. Recession will strengthen the currency. This will bring in investment flow previously allocated to Euro, Yen and Gold.”

The Problems With Mr. Market and the rest of the Wall Street gang (CNBC)

1. Wrong Biases
Wall Street as we know it is not a the Mutual Fund Industry, a group Hedge Funds or even large network of multi-national corporations. It is simply the media’s opinion of the former. There are few companies that end up becoming large corporations and even fewer speculators-wanna-be-billionaire-investors who actually live up to their own aspirations.

This is due to its ill-conceived sentiment, nothing more. It has all the facts (most do at least) yet the small investor constantly fails to make the integral judgments necessary to fulfill his lifelong ambition of success, or even of financial independence. They run after Enrons, Devalued Russian Rubles and dot coms believing beyond any doubt that they have it made for themselves and they have indeed “beat the street“.

However, the only way to real gains is to bet against the crowd, to look where no one else is looking, or even better, to see past the unsound biases that have plagued investors since the Mississippi Scheme in the early 18th century.

2. Confusing Short and Long Term
This is probably the most extreme variable, one which offers the most profits to he who can see past its vile inadequacies. Many (not all) of the arguements presented in favor of the Dow 36,000 were in one way or another grounded fundamentally. The problem with the gushes of cash inflow was they were based on an economic phenomenon that was years into the future, results that we are only beginning to see today – and interestingly enough by quite a different group of influences. While investors were placing bets on Yahoo and Juno, Google wasn’t yet a public company.

3. Forgetting Premium and Discount
In addition, shares were discounted many times over yet speculators failed to realize it. Any price was a great price because in the mind of these irrational gamblers the gains were infinite it seemed. It was hard for investors themselves to understand that they were betting that the company of purchase was one of sound safety that would last, and therewith deliver on its earnings 100-1000 times over, without any interruption whatsoever.

4. Wall Street too has Seasons
There are financial equinoxes, waxing and waning over decades. Warren Buffett himself cautioned Saturday not to expect big gains from the stock market in future years. Indeed, there are periods when year after year people move from the New York Stock Exchange to the commodity pits of the Midwest in search of better returns.

5. In The Dollar We Trust
A currency is present only to act as a constant method of exchange between goods. Yet the U.S. currency is nothing of the sort. It has become a staple of growth and a signal of everlasting creditability. Unfortunately for many this will not last. Contrary to many pundits the present rally in the Dollar, however great it may seem, is a mere decoy and will be short-lived.

Even Treasury Secretary Paulson has advocated that a weak dollar is in America’s best interest. While this may or may not be a positive development, one thing may be guaranteed by any student of financial history dating back to Cicero in ancient Rome: every fiat currency has failed, frequently bringing its empire down with it.

6. Action and Consequence
Finally it pays dearly for the prudent investor, who has the sole initiative to first protect and only then appreciate his capital, to understand the elements of check and balance. Every action that does not act as a stimulus for long term growth but merely for short term gain will inevitably be met by an equal and opposite loss. Failing to understand this will, for the ignorant, deplete capital faster than you can say “Bear Sterns”.

Commodities will not blow over.
Long term investors understand the need for correction and rest. Things that go straight up are indeed called bubbles and we are not there yet. Like fire feeding off oxygen and fuel, so too do bubbles feed off of extreme optimism and public involvement, both of which can’t disappear over a few weeks. The perceptive analyst will look around and tell with utmost certainty there is no sign of a any euphoria. If anything the investor relies on solid fundamentals, all of which are intact, and buys when the crowds are telling him to be cautious. If he didn’t sell he is sorry but it is insignificant because a bottom is close at hand.

Has all the oil inventories been replenished with years of supply? Have investors the fear that would send each preferring a Krugerrand over a wad of hundreds? Are the cheerleaders over at CNBC telling you to buy Krugerrands and load up on more shares of Nemont Mining?

Market Norms
I have read through many books on markets, investment and financial history yet I have never seen evidence of such a thing. Everything has an intrinsic value and it either sells at a premium to that value or a discount. Professional Traders look for market “norms” in the sense that they seek a short term variable and attempt to trade within that range yet they abandon all affiliation when this trend is broken, that which all may be confident that it will.

The Real Bubble
With pundits of financially-based markets they seem to make two awfully wrong assumptions. Firstly, that the a Commodity Bubble exists in Dollar denominated form and secondly that it has been inflated by artificial and speculative demand.

The first misconception is one that one would almost fail to consider to begin with. After all, the U.S. Dollar has been on the center stage of international trade since the Bretton Woods Agreement shortly after the Great Depression in 1941. Yet since 1913 its intrinsic value relative to goods and services has fallen by over 93%. The fact that there is still any goodwill left to the Dollar at all resembles a Bubble of sorts. It is the measure of wealth itself that is overvalued, not the goods that it represents.

Thus, it is not the goods and services that rise but the Dollars that fall; their inability to maintain their value. Nevertheless instead of markets taking their natural course and correcting itself, the Government is artificially inflating the money supply whilst protecting the very economy that its currency stands for. This devaluing of the Dollar to be able to finance its debts is in no way different than if Enron was given the very ability to print its own currency to continue its business operations or pay out to its shareholders.

This explains the underlying developements we have seen in physical goods, not too different from what we experienced in the 1970s, with a dangerous undersupply of commodities, runaway deficits and financial derivatives of enormous proportions.

I ask of the conscious minded economist, “With over $500 trillion in financial promises, which now seems to be Dollar-backed and secured by the Federal Government, what meager value may be given to the price for real goods, that which feeds and sustains mankind? Furthermore, if demand for goods the world over is rising is it not reasonable to assume that prices rise with it, if not to curb demand, then to act as an incentive for the farmer to increase production? Finally, what would have offset the interest for the speculator to profit from these gains if the fundamental demand continues unabated?”

To quote Charlie Munger “We have convulsions now that make Enron look like a tea party.”

Critical Optimism
Does the financial community really believe that there is excess optimism in commodities? That gold bullion are selling off shelves? That people left and right are participating in buying goods that will benefit from real demand? On the contrary, I see that many have found an opportunity to sell the only gold that they may have in their possessions to take advantage of higher market. This denotes good business sense of buying low and selling high, but certainly not in the realm of exuberance that we have seen in previous meltdowns.

Physical vs. Fiscal
Commodities and Equities. Gold and The Dow. It is a subject that many seem to overlook from a generation-term prospective (considering that Buffett’s long term is 10 years). It is the flaw you will see in every commodity-bearish argument: “Commodities just don’t cut it relative to equities”.

But let us look at the origins for monetary protocol: Traders bartered goods in the marketplace. With many various items coming from numerous townships it was necessary to create a measure of value, a pivot whereby difference between supply and demand may mediate; a method by which payment may be expandable without the physical presence of currency.

Thus began the credit cycle. Producer sold to seller, who bartered with traders, who retailed to the marketplace, who took home their foods from their labor and fed their families.

This “Credit”, unlike the commodity-based currencies of old, had but one restriction: the tolerance of the lender. As long as the lender would risk would the industry borrow. It is of no coincidence that this cycle of credit take years to build and then years to crumble.

The “historical trend”, if we may call it, offers fairly simple advice to the novice merchant who wishes to conserve and grow his capital:

When in times of expansion… lend, invest and do business. In times of contraction and uncertainty… Pay debts, take inventory and accumulate capital.

Recessions of Supply and Demand
It is interesting how mainstream economists will focus on something specific in great detail and fanfare and at the same time fail to see its direct opposite exposure. For instance, it is assumed that a recession diminishes demand for goods and therefore lowers prices overall, not only in the U.S. but also in China. Consequently however, a loss of demand will hurt producers who may decrease production. This will have the opposite effect and raise prices.

Furthermore, it is assumed that as we move into recession, investors have already discounted all the possible losses and write downs. At first glance this possibility seems preposterous. How can a market, however “efficient” it may be, properly and throroughly account for the very speculations that everyone from the companies to the Federal Reserve can only guess at? Besides, it’s quite humorous that Wall Street can call the middle of a recession when they can’t even call the beginning, let alone its happenstance altogether.

It goes without saying that the same case may be made for commodities, in the sense that recessionary results have already been discounted and accounted for, or that they even sell at a discount relative to post-recessionary time-tables.

Capitalism that would make Marx smile?
Capitalism works. And for he who says it doesn’t should look no further than every innovation and technological advancement since the Middle Ages. Nevertheless, it is a process and it may not be looked at point blank. There are times when the advantages of Capitalism may overextend its true worth, while there may be times that it will seem to underestimate it (much like your average share price).

For the last 28 years we have lived in a credit expansion. Yes, there have been pitfalls – the Crash of 87, LTCM, the DotCom collapse – yet we have rolled on. The world has undergone quite a change in that time and has made people sentimentally and physically wealthier than ever before. Liquidity was fluid, credit was available for anyone who needed it, lending was commercialized and industrialized allowing the investor in China to buy equity in a startup in Australia. What the lender would risk would the industry borrow.

Yet now the payments are due, and the funds we have borrowed to finance this wonderful world we have built for ourselves must be paid in full. We are not veering off a path of success, not failing at our ambitions, we are merely paying for what we have taken.

Our past actions have now brought about the future results. For years we benefited when investors fled from commodities to purchase equities and financial paper, suppressing prices through shorting, or “selling forward”, neglecting the farmers and producers. Now we must compensate those to increase supply in order to feed a larger, hungrier, wealthier, more innovated world.

04/30/2008

The Reality of the Economic Stimulus Package

By Dave Barry

Q. What is an Economic Stimulus Payment?
A. It is money that the federal government will send to taxpayers.

Q. Where will the government get this money?
A. From taxpayers.

Q. So the government is giving me back my own money?
A. Only a smidgen.

Q. What is the purpose of this payment?
A. The plan is that you will use the money to purchase a high-definition TV set, thus stimulating the economy.

Q. But isn’t that stimulating the economy of China?
A. Shut up

Thanks Dave!

04/25/2008
So Who’s The Fittest?

“What a fool does in the end, the wise do in the beginning” (Spanish Proverb)

Whether or not we conform to the Evolutionary theories of Charles Darwin, there is most certainly an element of truth behind the prospect that there is indeed a “survival of the fittest”. He who flaunts his wealth, is released from it. He who mistreats his body, withers. He who disrespects other men, is himself reputed.

We see this in our world from every perspective possible. China remains to its thousands year old traditions, as it is, by a philosophy inherently averse to war. Presidents, world leaders, CEOs and Activists usually maintain the stamina throughout even the most challenging times since it was that inbred zeal that got them there in the first place. Many of the happenstances of our history are due not to mere chance but to the wiring of our very fiber.

Hitler failed not because the West defeated him in military strategy or intelligence, but because all hope was forfeited from the beginning; he couldn’t control his own faculties, how would he a nation, how would he the world?

In the makeup of Capitalism as we know it, the earliest laissez-faire economists realized that monies are safest in the private hands, and handiest in the possession of those who understand its value most. Wal-Mart together with its proprietors, the Waltons, is one of the wealthiest economies on the planet, yet at the same time it ranks as the second largest charitable institution on the planet.

Small Money and Smart Money
What has all this to do with practice investment application? Yesterday I was chatting with a friend of mine. She mentioned how she had recently pawned in her gold. “Why?” I asked. She said she wasn’t exactly sure, only that gold had run up quite some bit over the last few years and she decided to profit from it. “Do you reckon it could go any higher?” I asked with a smirk. “It’s already fallen!” she replied.

We may call the above example the Small Money. These are the people, most of society actually, who just go about their daily business and they act, well, pretty much because they are not quite sure.

Then there is what we may call the Smart Money (this does not necessarily Big Money). For examples of such we must look to large institutions that carry a sound sense of financial responsibility; Governments that provide the world with resources and labor, Funds that manage the wealth of many of the affluent with full regard to risk and reward (major ETFs and Mutual Funds may be included in this group), as well as value-conscious long-term investors.

While the Small Money (and so they shall remain) are selling – Real Estate and hard assets – the Smart Money is buying. We see this day after day as the mortgage predicament continues to unravel, but nowhere in economics does it have any mention of leaving bargains on the table.

Where I live there was a “W 55” building that was set to be completed. Unfortunately, the building went under as property values and lending fell. At auction each penthouse sold for $150,000 down from the 300s. 50 cents on the dollar!

Long Term Investors
So what are the long-term investors doing now? They are Buying. Many now see the perfect opportunity to get in on an ongoing commodity boom – read ‘Boom’ not ‘Bubble’. Gold and silver are down 12% and 20% off their highs, respectively. Where many see ‘correction’ others see ‘opportunity’.

Go out to any coin dealer and try to buy more than 50 ounces of silver. Firstly, you moat probably won’t find it. If you do it will probably be in small denominations with pictures of Brett Farve or the Twin Towers on them. The piles of metal from the mints seems rather depleted.

Secondly, you’ll face a hefty premium. It’s almost as if the real over-the-counter market has become completely estranged towards the paper market and fails to believe it. Go on eBay and try to buy silver. You’ll face premiums (outright or in the form of shipping) of $2-$10 per ounce! In a sense, the actual silver market hasn’t fallen much at all.

Many pundits of the industry stated that as prices rise, supply of scrap silver will flood the market. One thing for sure, it ain’t floodin’ it. If it is coming online, it’s coming too slow relative to demand. Regardless, it seems that higher prices are secured sooner than later.

Did someone say Rice? Let’s not even go there.

Funds and Institutions
What about the big funds? Buying. The iShares Silver Trust (SLV) has actually been accumulating physical silver as prices have fallen. This is probably in line with relative demand by the funds investors (I’m one myself).

Governments
Big Governments? Also Buying. It is said that the Central Bank of Russia has been adding to its capital gold reserves and for all we know China and others may be following suit.

“After all is said and done, more is said than done” as Aesop said and the markets seem to reflect that. Those who have bought are destined to be wealthy and those who have sold are destined to buy again.

Oh, and the essential difference between a ‘Boom’ and a ‘Bubble’ is that a boom is when everyone is trying to buy something which no one else owns but everyone else wants, while a bubble is when everyone wants to eventually sell that which everyone has and practically nobody needs.

04/25/2008
“Here’s To The Americans”

There has been strong argument recently shunning methods of accumulating wealth through unethical and socially unjust investing. These include, but are not limited to: shorting stocks, buying into the “Commodities Bubble” as a hedge against further inflation, leveraging, selling mortgages, and the list goes on.

Let us break apart a few of these fallacies one by one.

Shorting
Since the day of the earliest market exploiters, “shorting” (the act of selling an issue on loan and then later buying it back, offering the issue back to the creditor plus interest, dividends and fees) has been known as an act synonymous with treachery and monetary deceit.

While this may indeed be the case, it is so on the reverse side as well. Acts of manipulation are done with equal zeal, if not greater, on the “long-side”. I heard one older fellow say to me “They shorted all my shares of Citigroup! Those unamerican traders!” He probably meant traitors… But have these shares vanished? Are these traders really traitors?

Warren Buffett, once asked regarding his opinion on shorting said “Let them short as many shares as they want! Any share that is sold must eventually be bought back”. And indeed. From a purely economic perspective there is absolutely no loss whatsoever, merely trade of one good or service for another.

Buying Goods
“Buying Goods is bad” people say. Before we would even delve into the matter as it relates to the current state of affairs, I would like to pose some questions:

Are “goods” not made for the sole purpose of their distribution and thereafter consumption? Does the prudent minded not understand that when demand increases and production has diminished (partly due to the fact that producers got sick of shelving out product at a loss relative to cost) there are only two alternatives, a) shortage or b) price increase? Do we only care about ourselves and not the farmers, miners and drillers who put their capital and often their lives at risk for our wellbeing? Why must there be an emphasis on commodity price rises only in times of scarcity? What about the fact that we may be indebted to over 20 years of falling prices?

Leverage
I love this one. There are actually people who propose that the act of using leverage uncalled for. The arguement is that these traders use funds provided by banks and investment funds for greater and loftier profits.

My first question is this: What is “leverage”? Is leverage not another form of debt? If so, there can be nothing more American than to use credit to increase ones wealth, contrast with the actions of consumers the world over who use credit and mortgaged monies to purchase delicacies and pleasures that will very soon pass into worthlessness.

Are the banks and financial institutions at fault for loaning out this money that they will certainly retrieve plus a hefty interest that will, in one way or another be passed onto the very customers who hold interest yielding accounts by that bank?

Mortgages
This above would follow through for the argument of offering mortgages. Yes, there are in every day and age lenders who seek to profit from those who will be forced into higher rates due to their insolvency of credit, or even to foreclosure due to default.

But is this not inverse with the greedy borrowers who wished to bite far more than they can chew? Have the speculators and holders of maxed credit card not yet learned from where depression of wealth derives itself? After all, many of these brokers seemed to be merely offering a service that we, ourselves demanded.

These are the underlying factors of basic capitalism. Unfortunately many Americans, and even non-Americans, fail to understand them. America is the country that stands for nothing more than “Life, Liberty and The Pursuit of Happiness”. Yet, wealth is lost as easily, if not easier, than it comes. Babylon once the richest of the rich owed its empire to the prudence and discipline of its inhabitance.

For America to thrive throughout the 21st century it will be necessary to either learn monetary solvency or forever be lost to the tales of ancient Babylon, Greece and Rome.

04/25/2008
Parent’s Paying for Their Children’s Tuition With Taxes?

“Many former students, who took out loans to get through college, are finding it hard to pay the money back. Lenders are tightening up on the scholars too. And the Bush Administration is so alarmed at the thought of all the college keg parties that might be canceled; it has proposed to buy student loans from the lenders.

“Where will it get the money, you ask? From taxpayers, of course. Who are the taxpayers? The parents of the students, obviously. Then, why not let the parents keep their money and pay for their own children’s education?”

– The Daily Reckoning

This is what I like to call “Inverted Economics”. The professional community explains the issue one way while the classical economists laugh at its complexity.

Why do we pay taxes for things we may otherwise pay for ourselves? If there was need for a major highway, I would understand. No individual or business would want the burden, and besides, it would often be unprofitable. So we pool together our funds, give it to the government as a joint account to build roads for us. This contribution, or “social investment” if you will, is called “taxes”.

But what happens when we can otherwise pay for such things? Eventually taxes will be necessary to fund an ongoing war, a trade deficit and an exorbitantly high standard of living. Maybe in this case families with kids in college perceive themselves too foolish to personally hassle with the funds of tuitions and ask of the Government bureaucrats to instead just send them the bill, albeit in their tax form. [Unfortunately though, the country is shared by all and the bill will also be such].

Classical economics dating back to Adam Smith in the late 1770s, with history as its guide, has shown that all trade eventually comes full circle. The smart creditors who offer services to those in good standings, get paid. The foolish ones who cared more about their interests than their safety are taught the valuable lessons of risk and reward for the future, while their funds are handed, through the “invisible hand”, to those who will treat it with more respect, reserve and humility.

In the book “Economics in One Lesson”, Henry Hazlitt puts together the case that many economists today focus on short-term instances as oppose to also looking at the long-term effects, and on a specific group, without also considering the consequences, or rewards, of many groups, or to the economy as a whole.

Investing should be no different. We must always look beyond the horizon and pat attention to what the headlines may tell us tomorrow, not just what they “gibber” today.

Thus our multi-year investments still stand unscathed and unchallenged by the gyrations of both news, nuisances and markets.

Buy commodities! And for those of you who call such an act “unAmerican”: I’ll address that in the next article, G-d willing.

12/27/2007
Crude Oil – The Next AAPL?

Some things you may or may not know about oil, that makes some people think it’s going to $200 before $50.

  • 1 barrel oil for under $100 will produce the amount of labor equivalent to 12 men working all year. That’s 2,000 hours of wages for every dollar.
  • We currently pay about $6 for a gallon of water and $50 for a gallon of Starbucks coffee.
  • Gasoline – a derivative of oil is used in everything from cars, to trucks, to planes, to trains to ships.
  • 98% of all transportation energy comes from oil
  • The average car is manufactured with the use of at least 25 barrels of oil
  • The average computer – consumes 10x its weight in fossil fuels. The microchip – 630x weight.
  • Every calorie eaten in the U.S. requires 10 calories of hydrocarbon energy.
  • Oil liquids create the foundation for just about every product from cosmetics to clothes to rubber.

The Numbers: Supply and Demand…

  • There are over 6.4 billion people on the planet and that continues to increase. Most are well fed and their demand for fuel and products are increasing.
  • 20-35 billion barrels a year in global demand for fossil fuels.
  • 80 million barrels a day now needed worldwide to sustain growth. By 2030 this number will grow to 120. In other words, 200 million barrels will be needed to cover that demand as well as replenish depleting supply form current wells.
  • in 1970 U.S. production peaked at 10.5 million barrels a day – oil prices went through roof – as oil wells were scoured the nation over. 10 years later at 4x the capacity a mere 6.5 mil barrels were being produced daily.
  • Venezuela was, at one point, the largest exporter in the world, as was the U.S. until the 1950s.
  • The last 3 major oil discoveries were in Alaska, Siberia and the North Sea in 1967, 1968 and 1969, respectively.
  • Saudi Arabia, the world’s current largest producer, will need to produce 20-30 million barrels a day. They currently run at 12 million. If production has peaked in Saudi Arabia, then the world has peaked. Gawar, the largest oil well in the nation is now using water to push the oil out to the top. At some point it is no longer economical to do so and production ceases.
  • No one is exactly sure of how much oil the politically-run Middle Eastern countries actually have. When demand for oil rose in the 1970s many of these countries announced an increase of 50% of supply overnight. Nevertheless, as 9 million barrels continue to be produced daily the numbers of supply over the last 30 years hasn’t changed.
  • In 1970s major oil users were Europe, the U.S., the Former Soviet Union, Canada and Japan. Today everyone, including China, India, Africa, South America and the Middle East use oil.
  • Suburbia may suffer as their model of far commuting are based on cheap transportation and fuel.

The Critics for Alternative Energies

  • Hydrogen is 20-30 years out.
  • To replace today’s fuel usage you would need 10,000 of largest nuclear power plants.
  • Ethanol and Bio fuels would supply but a fraction of our needs compared to oil.
  • Wind is a less viable energy as it offers little wattage.
  • Sunlight is 10,000 times more powerful and plentiful than fossil fuels. However, we lack the knowledge of efficient usage and it runs heavy initial costs and maintenance.

The Future

Now of course there are doom and gloom theorists who see the world entering a decade of depression from the oil crisis. As capitalists however we know that anything of the sort will be short-term. It is not to be unaware of however that the consequences of not having acted sooner are enormous and the implications thereof do seem to be staggering.

The market will work its way out. At some point it becomes less important to use as much fuel and demand falls. Similarly as the price rises the incentive becomes greater for explorations and drilling – including places where the profits until now have not been sufficient. The demand and eagerness for alternative energies will rise exponentially, and relative to fuel costs home-based energy solutions will become more mainstream.

The price of oil may indeed need to rise 3 or 4 times before all that happens, but when it does chances are that we will have the supply that we won’t need.

Regardless of what your opinion or what you may have read… The Age of Easy Oil is Over.

12/23/2007
Some Thoughts on the Markets

On The Fed
Having a conversation with my Dad a few weeks back I was explaining how the Fed is really between a rock and a hard place and that Bernanke honestly has no clue what the future has in store for the U.S. economy. He then asked me a very simple question yet it answered the entire predicament for Federal Reserve policy as I know it. “Do you think Bernanke knows what’s coming?” Yes, I answered. “So then if you were Ben Bernanke what would you do differently?”. The truth is that I’d do everything the same. The Fed is there not for the speculators but for the economy. If faced with rising inflation and a declining housing market, as Bill Gross said “He really has no choice”.

It is also interesting to note once again that the Fed is there for the support and well-being of the economy as a whole. Not for global interests and not for the speculators in Greenwich, CT. Although rates are supposed to be calculated for 6-12 months in advance, right now he sees fear of recession and it’s his job to cater to it.

On Housing
The real question for housing is no longer will prices fall further but by how much. Any one with a brain in their head could have predicted a decline in housing prices (for those of you who weren’t sure when look no further than the Newsweek front-page “Housing Boom”). We have a definite inventory issue and that can and will only be settled through a decline in price – otherwise read as – an increase in demand.

Interest rates are a major part of that equation. The lower rates go the higher the floor for housing prices.

On The Economy and Long Term Rates
The next issue is a matter of mortgage and loan options, supported primarily by the housing industry, crunching up with banks less eager to loan out money (albeit at higher interest rates, something that inevitably force the Fed to raise short-term rates). This would not only affect the coming recession (if you’re still questioning that you may be all too liberal) but also the economic consensus over the next 10 years.

Interest rates will rise, it’s just a question of when and by how much. When that happens you can bet that people’s ideas will change from “how to make another dollar” to the frugal “how to save another dollar” mindset as higher materials prices and the credit “consolidation” (sounds a bit less harsh than “crunch”, no?) make this decade a tougher environment for business expansion and investment.

The Currencies
We are once again playing the famous game “who can cause their currency to depreciate faster”. It sounds amateur but in today’s global trade game that’s essentially what they are doing. The Fed instead of merely lowering rates, are flushing the market with “liquidity” – a BS term meaning more accurately – a weaker dollar. Why you ask? Well any Austrian will tell you that price is the differential between supply and demand. Problem in this case is that the price and demand for houses and commercial real estate – as well as commodities (“assets”) – go hand in hand. So naturally the Fed is ready for another round of inflation if it helps along the housing bubble, and they can’t take the chance to wait and see.

Extend this scenario to Great Britain’s Pound (Remember Northen Rock) and Europe’s Euro (think Spain’s housing bubble), and you can bet that those currencies have a lot more than just China to worry about. Meanwhile the Yen and Yuan seem to be holding up fairly well for these countries are on the way into financial speculation not out. As for Switzerland? Yeah, I think the Franc should hold up just fine. Oh, and as for the Loony, Real (someone say Buffett?), Ruble and Aussie Dollar the future never looked so bright. Which brings me to the next subject…

Oil and Gas
The thirst quencher of the world economy… and Canada, Brazil, Russia and Australia stand to profit some. Throw in the rest of the drilling, mining and farming subsidiaries and they stand to profit plenty. $100 oil and then $200, it’s inevitable. Remember that green energy plants are not here to substitute for fossil fuels – they are here to change an industry. It took years for the U.S. to migrate from coal to oil and it will take years to wane from it. Meanwhile oil wells will deplete completely if prices don’t rise high enough. People say $100 is dangerous but was the $99 a barrel we saw a few weeks ago not? Obviously prices have further to gain.

Many investors believe that gas prices follow oil but this may not be correct. Gasoline also has a futures market and is subject to the same speculation oil is prive to. Expect higher prices at the pump.

Stock Market
It’s all in the earnings. Remember that the stock market is a voting mechanism in the short-term (if you doubt this look at the Dow on Fed Meeting days) and a weighing machine in the long-term. What has been reflected in the prices of stocks has taken much of the past into account and some of the future, but not all of it. There will be surprises (yes, there is such a thing) in the future and this will be reflected in the Stock Market albeit on a more immediate term basis (think MBIA, Freddie, Fannie and Citibank).

There will be opportunities but I doubt there will be any significant bottoms at least until the recession officially begins. Even then remember that this is just the guillotine – we have a heck of a consolidation ahead of us. And bear in mind that during the second mini-bear market of the 70s (that of the 1974 business downturn) price-per-earnings ratios dropped significantly even from where we stand today. It may be a great company but expectation must wear out completely. Much like commodities…

The Goods
By now we’ve seen a historical high in just about every commodity from copper to wheat to eggs to soybeans to oil. Some have gotten close like gold, while some still lag their historic peaks (lumber, sugar, coffee). But some day this decade each of the above will have their day(s) in the sun. Visiting plants from water to honey over the past few months two things stick out every time. The first is that farmers and retailers can’t believe it. Some who have been around for year including the mighty 70s can’t remember times when prices were so strong.

At the same time they seem somewhat skeptical that prices will continue to rise. You hear the wheat producer complaining about all the speculation (I explained to him that this is made to help farmers not hurt them), and you hear how China seems still hesitant to jump into the precious metals arena.

But when demand is high and supply is low prices must rise, and if by any means they are manipulated or capped they will rise further in no different a logic than the what lead to most of the current problems in housing.

~~~~~~~~~~~~~~~~~~~~~~~

So what in 08?
There isn’t much we can be sure of in the next year other than the fact that more volatility and election jargon will be stuffed down our throats. It does seem plausible to point out a simple mistake I think much of the street is making. There is this general conception that during a recession prices of just about everything goes down. I assume that the logic behind this idea is that as demand slacks off, from the U.S. and then eventually from the rest of the world, prices will fall as well.

My problem with this may be understood from a reverse comparison. The above train of thought seems to permeate Keynesian economic theory. The theory the way I understand it, originating from John Maynard Keynes’ General Theory (circa 1936) states that as the economy and productivity rise this will subdue inflation and at the same time increase wages as the prosperity is filtered out to the labor market.

This theory almost went into oblivion during the inflationary 70s as just about every objection of logic and reason became obsolete. During the 60s wages rose minimally while a decade of rapid inflation followed.

This brings us to our current major business-cycle. The 80s saw a rapid expansion of industry while commodity and goods prices stagnated (improperly appropriated to the “ingeniousness” of retailers’ ability to increase capital efficiency and properly manage increasing corporate debts). This was followed by the 90s and the Internet Revolution when theories of a “new economy” arose increasing speculation of man’s ability to advance the world into euphoria and everlasting prosperity for all with yet another technological innovation.

It would seem reasonable to assess that as the economy grew and demand for goods and services grew in greater and greater capacity (after all every man, woman and child would never have to work another day in their life due to the ever rising stock market)… that commodity prices would rise in tangent. The exact opposite was true. Inflation fell and real rates soared. Wages may have risen but then fell, thus proving once again that economic prosperity has little or nothing to do with the price of goods. Yes a retailer may have temporary sale to work off excess inventory but he will eventually be selling at a loss, often intentionally, so at least to raise capital to implore elsewhere.

Recessions do decrease demand, but with a decrease in demand comes a decrease in productivity. Add in speculation for higher prices and it seems plausible that Wall Streets assumption of $50 oil in 2008 or declines in the precious metals may be way off target. In the event that commodities – even those associated with the economic downturn (lumber, copper, oil) – do for whatever decline in the short-term this should be seen as a buying opportunity.

The bull market in commodities is well underway and is set to continue for some time. I think that the coming recession will catch many investors with their pants down.

08/14/2007
Welcome the Seventies!

No, you won’t get back your Intel 4004, you won’t need to grow back that Afro, nor will you easily get a hold of some new records from the Beegees. But what you are most likely to see a heck of a lot more inflating prices of goods (your favorite dinner) and deflating financial values (your favorite stocks).

The reason why some things just don’t change, is because people don’t. After the roaring 50s and 60s, we had evolved from savers to spenders, from investors to speculators. As the markets began to deflate, the Federal Reserve, along with the help of the U.S. Government Mint, began injecting even more liquidity into the marketplace in attempt to cushion the fall of falling asset prices, such as stocks and bond ratings.

In doing so they created a giant ball of cash that was rolling nowhere since due to its gigantic size was being rejected by the average consumer in favor for safer assets, such as commodities and real estate, and eventually gold.

It’s happened before in the 1970s and before that in the 1930s. Before that at the beginning of the last century. As a matter of fact, it’s been recurring about every 30 years or so, in almost identical cycles: Years of solid growth, followed by years of higher company profits trailed closely by stock prices, and then a euphoric blow-off of speculation and ill-appreciated prosperity. Then came the bust, the “credit crunch” when debts come due, loans are recalled, intrinsic values revisited. All speculative action dies along with the spirits of those who were riding it.

The primary differentiation between the “inflationary” depression of the 1970s and the “deflationary” depression of the 1930s was a simple one: Liquidity. In 1929 after stocks crashed and banks were failing by the day, there was nothing to fall back on. Man’s trust was in gold and its supply was limited. The Treasury was by no means interested in sponsoring such an event with goods of limited supply and unlimited value to those in need.

Today the story has a twist. One that has been in motion since its inception in 1944 with the Bretton Woods Agreement when the U.S. Dollar, became the unilateral global currency, “always” to be redeemable in gold. This was scrapped in 1971 with the closing of the “gold window” when these dollars became backed, not by resource of limited nature rather by the faith and credit of the people, assumed its role as the world’s global currency. This enabled the powers that be with the ability to constantly replenish the world’s liquidity in times of necessity. Unfortunately, this resulted in the same failures seen in the 30s. The rich got richer because they owned things and the poor got poorer because they owed things. Furthermore, how much you had became significantly inferior to what you had.

This being the predicament it has become quite clear in my mind that the scenario to unfold will indeed be that of an “inflationary” depression. the European Central Bank announced that it would make “unlimited” funds available to the banking sector. The Fed will, predictably, react in the same way, running the printing presses overtime.

The only way for the Fed to limit the deflationary affect of illiquidity, would be to increase real value – earnings, commodities and gold. Unfortunately, and contrary to the belief in the Federal Reserve, that’s impossible.

Billions won’t be enough to mop up this mess, but trillions. Even then chances are good that amid the panic, much of that liquidity will get misallocated to places whom those injecting it don’t desire. There is no question in my mind that the damage has been done and one way or another values must realign.

Consumer costs will rise, while stock valuations (as measured between earnings and cost per share) will fall. Debt related issues will suffer, albeit not do to deflationary pressure, rather due to inflation and interest rates.

Tomorrow marks a significant day for hedgers as the deadline for withdrawal at the end of the quarter (45 days). This was obviously discounted as the Dow fell another 200 points.

Mark my words: These days will go down in history.

08/11/2007
Inverted Economics

As the market spews volatility I wish to reflect not on the frantic closing ticks, but rather on the dynamic aspects that determine them. When times such as these present themselves, many factors reveal themselves, many of which weren’t visible previously.

I call these factors Inverted Economics. Yes, it’s a made-up term, but it serves as a solid definition for what the successful investor understands about investing. In this segment I would like to focus on Short vs. Long. Not regarding the technical methods of trade but the reasoning for their sentiment of being.

It’s said that every investor is always trading. He may be trading security for prospect, financial for material, or uncertainty for absolution. In any event he must chose whether or not he will act or remain solvent.

Why We Buy – or go Long
Buying is usually done with cash. Cash is nothing more than a vehicle of value. One that just like stocks fluctuates day to day. However, the primary difference is that while a stock or bond represents equity in a company, that if positioned with the proper enterprise will often offer an increasing return, money on the other hand stands for the faith entrusted to it by the masses. Hence, we buy financial assets when this interest is low and sell out when interest for money is rising.

Why We Sell – or Short
Many discourage selling, while in truth this is nothing more than the second element of a trade. Shorting, which many consider to be unethical or “unamerican”, has the same ramifications of buying on margin. (As a matter of fact it is shorting itself that guarantees better results for the long-term investor). We sell when we feel our upside has become realized or is no longer greater than our downside.

First the Good News
When entering a Bull Market times are often rough to say the least. Let’s take a look at the beginning of the Bull Market which began in 1981. In 1980 financial assets in general were shunned while stocks in particular weren’t just considered risky, but also lacked a future. Interest rates were at 15% with banks desperate to coax every dime into savings, rather than into commodity futures and spending, both of which had contributed greatly to the inflationary prices of its day. The good news? We’re getting there.

Then it started. Slowly the gigantic tide of liquidity began to find its way into companies selling for 5 times earnings, with some selling far below book value. Suddenly, all news turned positive as earnings began to increase – rapidly. Stock prices began to rise, gold plummeted with commodity prices, interest rates receded enabling cash to be borrowed at far more favorable levels. This ushered in a new age of buyouts, debt accumulation and an inflation of the credit supply.

Fast forward about 18 years and we found ourselves in one of the largest bubbles ever known to the rational mind. Stocks were selling for 45 times their own earnings, while any company sporting a promise for a position in the infrastructure of the world wide web was guaranteed multiples many times that. Any news was good news as the misconception arose “Stock prices don’t fall”. Dow 36,000 or even 100,000 were no longer fantasies, but short-term goals.

And Now The Bad News
Within just a few months of this euphoria the paradigm had shifted. Just as in 1907, 1929, 1965, the South Sea Bubble in the 1700s and the Florida Real Estate of 1926, investors soon realized they were indeed mortal.

Suddenly, all news was bad news. This is primarily due to the fact that all the good news had already been paid for, while the bad news had never been discounted. Additionally, through the years many companies found a number of methods for obscuring bad information. Bad reports often came out on a Friday afternoon after the market had closed, when many traders were already gone from their desks for the weekend. Sometimes bad earnings didn’t get reported thanks to some advanced accounting techniques for deferring losses.

Remembering 1971
Many investors look back in time and some devastating events in the business cycle. Some lasted years such as the Great Depression while others were shorter but far more painful. One such event took place in 1971. When looked at on a nominal chart it barely exists, but for those who experienced it will long be remembered. What occurred was just short of fascinating. In a matter of months a strong economy fell apart. Debt related financing came under pressure, the dollar began losing ground as the gold window closed and earnings fell off a cliff sending a previously booming stock market into a free-fall.

How could so much go so bad so fast? In a sense, we may simply observe from the present. Since Dow 14,000 we have been faced with fears of a mortgage fall-out, demand for lower interest rates, a full blown crunch in the credit markets, numerous liquidations of hedge funds and lenders, and recession.

But in my opinion it is not over yet. My reasoning: Earnings. As in the early 1970s much of the debt and bad earnings were deferred. What this means is that companies pushed off reporting bad numbers until a rainy day. When that “rainy day” came along, businesses overall threw out all the bad at once in the same way investors sell lagging issues at year-end to offset the taxes of their gains. Naturally, any negative news was blamed on the economy rather than on sound business practices.

I feel that the same could be true today. As soon as the general gist of earnings become negative they may just get a bit worse as these entities rush to dump their loads, obviously hurting stock prices.

But maybe this won’t occur. Maybe there won’t be a market crash, no bad earnings reported and no major bank failures. Maybe the Fed will bail out all those who have lost heavy and within months the economy will be back strong with stocks well above their all-time highs.

Maybe, but I wouldn’t bet on it.

07/25/2007
Economics 101

With fiat-currency production surging, debt rising, corporate mergers and acquisitions at record proportions, we must grab our heads once again and remember the basics of all that is green and plentiful.

Economics 101: For every unlimited demand there is a limited supply.


In plain English, this means that eventually either the supply, price or demand for the commodity will reevaluate.

Too much money chasing too few goods was never a good thing.

07/19/2007
More Thoughts to Ponder…

Of all the great advertising techniques, why doesn’t NASA get a corporate sponsor for its Space Shuttle?

Last week the uranium price suffered its first losing week in 47 months! I was wondering when this would occur. $80… $100… $120? And now it has. You never know when the hype will end, but one thing is for certain… it always does.

Quoted from FT “Now that the market had broken its recent shackles, investors who were not positioned for that move face having to buy back stocks, that could push the market higher.” And from where comes the notion that much of this rally was generated through covering due to margin calls?

The U.S. is begging China to buy some Government-backed Mortgage securities. Maybe the U.S. will buy some Chinese railroad bonds? Analysts are just having a ball with this one.

“Japan is already the oldest society in the world, shrinking since 2005. The population peaked at 128 million in 2005 and is expected to fall below 100 million by the middle of the century. If, as expected, Japan’s aging grannies and housewives raise the share of foreign assets in their portfolios from 3 to 12 percent over time, the yen must weaken further. It is the dying currency of a dying country — albeit a charming one.”

Its quotes like these that make me think, “Bottom?” And this is from a rather conservative standpoint considering the carry trade and all.

They say wars are fought over money and energy. Iran is starting up with both.

Buffett rumors send Hovnanian shares up” This is interesting because even if Warren was indeed considering buying a substantial stake in Hovanian because of its attractive value, that idea exists no longer.

Bear Sterns has announced that its two hedge funds are worthless. (no surprises here). It does bring into question the assumed reassurances that this subprime fiasco (as we believe it will soon be known) is “contained”.

This disconnect in the marketplace will last no longer. Soon, after the hedge funds fall, the agencies adjust ratings, the investors panic and fingers get pointed, no one on Wall Street is going to trust anybody for a while. (That’s when we buy… big).

Those at Kitco believe that a rally in the precious metals may begin sometime in the Fall (we have long held the same, as do many analysts). What is everyone waiting for? The longer they wait the sharper the rally is going to be. Cover your shorts!

06/29/2007

History of Fiat Currency

Great article on the creation of worthless monetary systems backed solely by the good faith and credit of the nations that governed it. History does indeed repeat itself.

As a great economist once said “Only a government can take perfectly good paper, cover it with perfectly good ink and make the combination utterly worthless”.

Oh and if you are having trouble understanding the incredibly gold-illiterate society we live in today read this feed.

06/20/2007
Putting Your Pen Where Your Mouth Is

You gotta love the Daily Wealth. Its a wonderful newsletter put together by the likes of Steve Sjuggerud, Tom Dyson, Porter Stansberry and a list full of great writers and investors. But the most recent email just made me laugh in irony. Dan Ferris writes an article saying in one line “The message is clear: Forget the macro stuff.” Literally, down the page, a note is written “A Fund for the nNew Infrastructure Boom”. The “New Infrastructure Boom”… I love it! Althought it does seem a bit too macroeconomic, no?