Posts Tagged ‘Economy’

Spade Question #3: What’s Missing In Fashion?

01/04/2011
  • Last Week’s Brainstorm: No more prisons.
  • This week’s brainstorm: What’s missing in fashion?

Each week (on Monday) we feature our weekly brainstorm. This week we focus on the fashion industry at large.

What’s missing in the fashion industry that caters to the ever growing need for design differentiation, customization and consumer preference?

About The Fashion Industry

Ask any fashionista and they’ll tell you that fashion definitely ain’t what it used to be. Here’s why:

We got some insights from an article entitled “What’s Wrong With Fashion?” from fashion blogger Tricia Royal.

The economy: If you’ve been following the news over the past few months you’ll know that its no longer the roaring 90s and the American consumer (read: world consumer) is just about tapped out. As credit lines get tightened and families start to cut-back their budgets to within their means, people will be less willing to shell out their dollars each fashion season. This may begin a phase of second-hand shopping for bargain wear.

Not to mention the exorbant prices now demanded for high-end designer wear. Conversely, this may actually help to differentiate the Saks Fifth Avenues from the Stein Marts.

What is interesting is that some people would still rather spend good money of the latest gadgets (think: iPhone) something that ensures long-lasting, practical use, than buy lots of (inevitably) trendy, disposable clothes. It’s not just that the American consumer is tapped out, but that there’s nothing to tap them back in.

Lack of color: Many critics are beside themselves with regard to the schemes and design palates in recent lines. Black seems to be dominant. “People want and connect with color, but designers aren’t offering it” says Royal. “These dark colors for clothing seem almost funereal, and are, interestingly enough, an apt metaphor for the malaise and fear in the air culturally, politically and economically”.

The overhyped fashion industry machine: “Stuff is churned out so fast and slammed into our face so much – via magazines, blogs, websites and the like – we lose sense of what season we’re in and what’s really significant at any given moment stylistically”. Fashion seems to have sped up to the speed of churning out bulk runs of an identical item. As retailers push new, relevant designs out to their floors constantly, pleasing the customer, big designers have a hard time keeping up.

To make up for this glut, the industry “off-kilter delivery cycle puts clothing on the racks and shelves of stores months before a season actually starts. But people want to wear what they buy RIGHT NOW. Why stash it away for later?? Think putting out spring threads in the dead of winter, fall clothes in the heat of summer.”

In the fashion industry people like to see new and upcoming designs or design a selection of their own. What’s missing from the sales-end is the hit-single, the “must-have” item in the market.

So what’s the consumers biggest complaint and what can we expect in the future?

“Clothes are just blah in terms of style (non-comittal, non-novel, bland details). They are made cheaply of cheap materials. People want to feel their buying an item of value” Tricia tells us.

People want to look good and they want to look different and special. The one-model-fits-all-then-outsource-to-China model concept isn’t working anymore. People want diversity, options and fuction. Gucci and Donna Karen are so last century.

In an age where globalization and niche markets are all the rage, a one-off beats the fashion line any day of the month. The problem is that this model requires intense focus on the niche, and dedication to their marketing “NEADS“, as well as the funding necessary to attend to those neads.

In century 21 the consumer rocks, not the fashion artist. Today, you can create an entire line and be celebrated for one unique feature. Once upon a time an item was just an item – all flash, no fire. Today comfort matters (check these out!). Today affordability matters. Today function (durable, wrinkle-free, machine-washable) takes precedence over form. One could add a pocket here, or a flower there but when you put out a line for athletes that absorbs moisture better, or jeans for teenagers who like a tighter fit (if you have Facebook) – that’s a killer!

It seems that people want to design their own clothes more and more. And those who don’t at least want someone who “gets” them. The fashion market – like the music industry and the publishing industry – is customizing, moving gradually away from the industrialized model, and into the new-age phenomenon of long tails.

Today, thanks to the internet, niches can find niches, and anyone can become their local version of Vercace or Aramani. When this happens, while its true that the power-laws still stand strong (yes, Armani will still outsell most generic brands), small time designers (yourself included) may find their niche.

Lastly, the recent phenomenon of earth-friendly greener ways of living will make a deep impact on fashion (see fact #10). In the same vein, the need to express ourselves will have to go in a very different direction than simply believing that “less is more”. Our ethical and moral standard have been shot to hell, along with what the fashion industry has stood for up until the late of last century.

In the near future the attentive designer will outperform the insensitive ones. Everything will be custom to YOU. Glasses that suit YOU. Suits that fit YOU. Fit and preference that matches YOU. Styles and patterns that cater to your personality. Wear that compliments not compromises your convictions.

“What would YOU like to say” will become an industry-wide trademark.

So today our spade question (is it still?) takes on a different nature. Instead of focusing on a specific problem we are brainstorming ideas for future ideas. The question opens the floor to an array of new ideas and we want to hear them!

What’s missing in the fashion industry that caters to the ever growing need for design differentiation, customization and consumer preference?

We want your ideas! And after that, send the link to some friends. Let’s hear what they have to say!

The Economy: Is It Really Getting Better?

03/03/2010

What We See

People are optimistic, The Dow remains above 10,000, inflation fears seem over-estimated, and the financial crisis seems isolated in places like Greece, California, and random long-expected lay-offs.

I just met with a manufacturer of fashion apparel and she was telling us how many designers who were previously afraid to launch their collections are now coming out of the woodwork with some very risky and ultra-modern designs. So we have throngs of risk-taking designers in the already cut-throat industry of fashion design. IS the economy picking up?

What We Get

Sometimes in science, and in economic models we can often assume what something is by what it’s missing. In this case: Fear. Is there caution? Absolutely. But the open-eyed cold-faced pessimism we saw in March of last year seems to have gone into a long winter hibernation. This is the problem. Fashion designers, manufacturers and central bankers are all sharing the same sense of false security.

Here are some reasons why:

  • The VIX (which tracks market volatility, otherwise known as the “Fear Index”) is touching all-time lows. This means people are discounting any chance of risk in the market.
  • Gold and Silver are slowly and quietly creeping up towards their all-time highs, a sign that financial security is again coming under question.
  • Commercial Real Estate, Rising Unemployment, Too Low Interest Rates, Government Irresponsibility, and High Stock Valuations are all playing a major role in the potential for another crisis.

Here are some insights from top banking insider and billionaire, Andy Beal: http://bit.ly/ahi5s4.

When was the last time you prepared for any worst case scenario?

What We Do

One of the best and easiest lessons I ever learned in finance was as follows, bear with me:

Income (money that comes into your pocket) – Expenses (money that leaves your pocket) = Cash Flow (“my money”)

With this in mind there are 3 things you have to do:

1) Stop Spending! Buy used, buy less, buy what you need. This is a timeless and necessary action if you ever want to be happy financially. A used book on Amazon is rarely any different than a new one… but its far cheaper.

2) Get out of debt! There’s no good reason to spend 101% of your income(s). Start paying cash, pay off far more than your minimums, and stop paying someone else 15-30% for everything you buy.

Everyone knows the first two suggestions but few focus on this next one...

3) Make More! Don’t just mope and cry about how you now have money in the bank, but feel broke. Get out there and challenge yourself! Make some more sales calls, do things to get promoted, start your own business (YES in a recession). If you want to have anything significant in life, you’ve got to go get it. Be proactive and MAKE it happen!

No matter what happens, you will always be you, and there will be good times, and not so good times. Your job is to ensure that you and your family are protected and comfortable, both financially and emotionally, no matter what life brings!

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

Thoughts on the Economy

08/16/2009
I don’t like to post on markets that often, as I reserve this blog for more optimistic success-related material that focus more on proactive personal-development than on reacting to news and sentiment.

Nevertheless, in the dog-eat-dog world we live in, I believe its highly important to have a sound knowledge of what the external forces that govern our lives entail.

The one theme I keep noticing time after time in the selective articles I read (no major media, only hand-picked analysts who have proven themselves over time) is: Deflation or Inflation?

Unfortunately, many many people are misinformed when it comes to money. It’s not that they lack an MBA or didn’t understand what they’ve been reading, rather that they misinterpret what seems to be a paradox, but goes hand in hand in reality.

Deflation in Austrian terms is defined as an contraction in the loans of credit provided by a Government (pulling down assets). Inflation is its cousin-scenario where credit is expanded wildly (pushing up assets).

The mistake many make is in confusing the value of the Dollar and the credit/money supply. One is demand, while the other is supply. They may work either together or against each other.

I believe that what we are about to witness, on a grand scale, is a whiplash effect of contracting credit and strengthening currency on one hand, and a failing economy on the other. This will crush the average debt laden consumer as they battle with BOTH rising costs of interests and debt AND the rising costs of living due to monetary inflation.

This is due to a currency who’s printing presses are under no control and MUST outrun any effects of deflation – from real estate, stocks and Dollar buying. The irony here is that the Fed will soon have to choose between letting the Dollar appreciate on its own or pushing it down further. Chances are that they will always choose a falling currency over a rising one due to: a) its bi-centennial policy of monetary easing, and b) the fact that while the US has experienced an intense deflationary scenario (1930-38), we have yet to experience a “hyper-inflationary” one – induced by over-supplying credit and money – at least since Continental scrip was flushed away following the Civil War.

The savvy individual who will deflect such a predicament will be the low-debt high-asset frugal-consumer. This will eliminate high interest payments, appreciating assets and low expenses.

Note that the above applies to both the lower and upper class, since interest on debt and assets effect both the same.

Advice: Own Things! Real estate, commodities, physical gold and silver and strategic undervalued assets all comply. Areas of extreme caution: Stocks of companies that are either overvalued or financially unstable, toxic derivatives and high-interest debt.

~~~

It should also be noted that the generational-trends (10-17 year) remain intact: a) generally rising interest rates b) falling P/E ratios in stocks, and c) a falling Dow/Gold ratio.

This implies that Gold acts a safe haven regardless of whether the Dollar/Economy/Market does well since what we are expecting is not a monetary or nominal increase in price but an aggregate reversion to mean and true value.

Over the long run (next 7-10 years) bonds/fixed-income will mostly outperform capital appreciation for stocks, and hard assets will continue to outperform fiscal contracts.

The mindset will shift from growth to value and from wealth creation to wealth preservation. There will be those who do well, but only those who shy away from the general sentiment of things and focus on their own growth and productivity.

Finshing for Bottom

05/05/2009
Bernanke says that we are due for an economic recovery by year-end. In economic English this would mean that the stock market “should” find a bottom somewhere around June-July… 6 months prior to the recovery.

04/30/2008
It’s Time to Revisit The Markets

It’s time to reflect on the predicament of the markets. We ran two editorials in late December entitled “Are You Ready for The “Blue” Year?” and “Some Thoughts on the Markets“. We defined a general outlook for the economy for the year of 2008.

We are constantly reminded that “The more things change, the more they stay the same”, it is far easier to predict what we may see in the future. With that I would like to offer clarity to the confused investor.

Dow/Gold Ratio
The ratio currently stands at 15, with a low of 12.5. Our immediate term goal is 7 with an eventual decline to 3 before the economy pulls itself out of recession.

During the brutal 1973 downturn the Dow Jones Industrial Average fell from 1050 to 570, a decline of 45%! Yet this wrecking fall was cushioned by a counter-rally from 800 to 1000, within 5% of its all-time high. Interestingly gold, during this same period, rose throughout the downturn, from 70 to 195 over the 2 years period. Over 178%!

If I were to rewrite that paragraph but multiplying all 1973-75 dates respectively, it would read as follows:


During the brutal 2007 downturn the Dow Jones Industrial Average fell from 14,000 to 7600, a decline of 45%! Yet this wrecking fall was cushioned by a counter-rally from 10,650 to 13,300, within 5% of its all-time high. Interestingly gold, during this same period, rose throughout the downturn, from 700 to 1950 over the 2 years period. Over 178%!

Obviously, history will not repeat itself, but it sure as hell does rhyme. I believe that the DJIA will push above 13,000 temporarily and then resume its decline to 7600 vicinity. While gold will trend ultimately to the $2000 level by late 2009.

[One may ask based on these calculations, that Dow 7600 / Gold 2000 = 3.8, well above our factor of 3. Nevertheless, it is most probable that gold won’t peak at the exact time that the Dow bottoms].

Thus the prudent investor will seek refuge in some words from our December article.

“The truth is, however inverted it may seem, bad is good, bear is better than bull, bust beats boom”.

This simply means the investor can do phenomenally well by simply paying little attention to the media and markets and instead focus on the short yet profitable buying opportunities that present themselves.

With that we move on to some predictions we made back in December of 2007, results since then and what we can expect going into 2009.

The Economy

“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

This sums up what we’ve been seeing over the last few months, and it can be expected to continue into 2009. The media will keep calling bottoms while credit and leveraged conditions deteriorate.

“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

This in my eyes was a no-brainer. Tension was all too high and much of the markets movements were based on speculation rather than solid fundamentals.

“Corporate profits will fall causing either p/e’s to rise or prices to fall as well. Don’t be surprise to see us approaching single-digit ratios for the Dow”

This may have been too short an outlook, however it is expected before markets bottom. It’s not if, but when.

“Expect to see more and more consumers turn to their retirement accounts and credit cards to keep them afloat”

This has been seen slightly and is significantly increasing. Foreclosures have doubled year-to-date and increasing amounts of home-owners are just walking away.

Inflation

Whether or not [we have a Recession]… expect some sort of ‘flation.

So far GDP has been positive so there is no “official” recession. But ‘flation indeed! Stocks have fallen and since found some relief, while commodities have boomed and since corrected. Yet the investor should not be fooled by this.

Interest Rates

“He [Bernanke] really has no choice… right now he sees fear of recession and it’s his job to cater to it”

With rates lowered from 6.25% to 2%, all Fed Discount Windows were opened and inflows have been supplied to the market, not to mention the bailing out of Bear Sterns.

Currencies

“The Yen and Yuan seem to be holding up fairly well… As for Switzerland? Yeah, I think the Franc should hold up just fine… for the Loony, Real, Ruble and Aussie Dollar the future never looked so bright”

This was mostly due to a declining Dollar. The Dollar may have now found a bottom and this will be sustained when the Fed turns to raising short term rates. Yet if markets follow any similarity to the 1970s, this rally will be short-lived, with the Dollar testing new lows come 2010.

Housing

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

Any economist would agree that the potential damage has been avoided. Yet we are faced with the worst housing recession since the Great Depression and the results will be felt. Low interest rates cannot makeup for decades of careless credit policy.

“Prices fell a record amount for this year. Buffett says it will continue into late 2008. Others say into 2009. Jeff Saut says prices have to either fall 25% tomorrow or streamline for 5 years in order to reevaluate on an price/income basis.

According to the Schiller Index prices are down 12% in many U.S. cities.

Oil and Gas

“Oil at $150? …I think oil has more to run… many others say $150 or even $200 before the year is out… Expect higher prices at the pump”.

Right on the money! Oil has risen as high as $120 recently. (with gas prices expected to possibly reach $8 a gallon before the year is out). This may be due to the fact that many airline fuel storages, were running low. Acting as a catalyst this replenishing pushed up prices.

“Recessions do decrease demand, but with a decrease in demand comes a decrease in productivity… Wall Street’s assumption of $50 oil… may be way off target”

This can be seen with regard to possible production decreases in Nigeria, and with regard to metals production from South Africa.

The Stock Market

“It’s all in the earnings… there will be surprises… there will be opportunities but I doubt there will be any significant bottoms at least until the recession officially begins”.

Earnings have yet to plummet as stocks are currently down a mere 8% from their highs. Yet while we find ourselves amidst a speculative, yet predictive, short-term rally, we remain within a well defined long-term downtrend. (Is the Dow really selling for 64x earnings?)

Small Banks and Homebuilders

“I say not yet. Will I be wrong? Possibly, but at least I’ll be empty handed on the downside risk, and there is some. I still don’t believe Wall Street has revisited pure unadulterated pessimism. A P/E of 8 doesn’t seem that bad until you recognize its all in the denominator.”

This call is still up in the air. Average bottoms have been presented with indexes selling below book value. They currently sell for 1.3x book.

Commodities and Precious Metals

“When people want food, prices rise”

If I say “Rice, Wheat, Soybeans”, need I say more?

“This will benefit all commodities, as well as gold (The Street gives a $1000 projection). Of course Silver has much further to rise as it regains some historical ratio.”

Talk about psychological resistance! Commodities benefited greatly and Gold went straight to $1000 before correcting strongly. In the case of the Gold/Silver ratio now major advancement was seen. The ratio hovered around 48 before heading as high as 53.5

“In the event that commodities… decline in the short-term this should be seen as a buying opportunity”

We have since been offered this buying opportunity.

China

“China’s bubble will blow over, but not before the Olympics… After that I suggest you get out, especially if USA Today is announcing record high stock prices.”

China has corrected together with the world markets, but has since regained much losses.

Another great quote from the last article

“The perma-bulls tell you to remain 100% invested in the ‘long run’ as stocks are the highest returning asset class over very long periods, like 100 years… But I have yet to meet an investor that either has a 100 year time horizon or can actually sit through all of the bear markets that occur during 100 years.”
Bennet Sedacca

The Audacity of the Patient Investor

03/20/2008

I believe someone by the name of Peter Schiff has just earned my financial respect, not merely for his fundamental economic stance that he portrays but moreover by the strength and confidence he adds to it amidst a full fledge bull market (notice the Dow at 13,500, Oil at 71 and Gold at 660). This following clip is from July 2007. Enjoy! (it’s a 10 minute piece so feel free to skip to the near end – always more exciting).

 

~~~~~~~~~

Just some more CNBC comic relief for you… while I was listening on XM (for my utter pleasure, enjoyment or otherwise contrarian viewpoints) they were interviewing a CEO of a major financial firm. One woman asked “So how do you see things in the long-term… say the next 1-2 years?”. So, deliberately or not, he responds “Well, we don’t like to ponder on the day to day movement of markets”

Good times!

 

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.

08/18/2007
Back to Normal

Many financial gurus took a swing on the market’s volatility this week.

Because many of these institutions are highly leveraged, the difference between “model” and “market” could deliver a huge whack to shareholders’ equity.
– Warren Buffett

When subprime issues first surfaced this spring, many major institutions said they had none, but recent quarterly write-offs show they did. They weren’t lying; they just didn’t know what they had.
Wilbur Ross

We are unmistakably experiencing volatility in our financial markets… that provides a solid base for financial markets to continue to adjust.
– Secretary of Treasury, Hank Paulson

The markets will eventually normalize.
– John Mack, CEO of Morgan Stanley

These sorts of things are what’s known to the academics as “endogenous to the system” – that is to say, they’re normal.
– Bill Miller

Any overreactions will be areas for people to look for bargains ultimately. But I don’t think we’re anywhere close to that yet.
– Jim Chanos

The selling might accelerate. On the other hand the markets could easily rally. But in the end risk will be repriced. Whether it’s now or in 18 months, risk premiums will be more normal.
– Jeremy Grantham


With all this “marking-to-market” it seems that investors are beginning to realize what “normal” really means; stock prices don’t always rise, earnings don’t always increase, P/E ratios do fall, and that over-performance most definitely ought to be followed by under-performance.

When we say normalize, we don’t say it as a matter of personal opinion (the 200-day average), rather one of historical certainty (the 200-year average).

Logic will dictate that stock prices can only rise as fast as earnings. This equates to an estimated 6% per annum. But fast is the analyst to correct you and shout how equity prices have surged over 11% over the past few years! While this may be true, one must be prune in understanding how stocks prices operate.

“In the short-term the market is a voting machine, but in the long-term it is a weighing machine”. Any speculator has the right to “vote” as to what prices equities may sell for in the future. However, these prices will be determined solely by the economic forces that govern them. If the consumer spends less (due to a credit crunch let’s say), earnings will slow (as they have begun to) and stocks prices will factor this in (enough said). This is why stock prices have always fallen prior to recession.

People keep asking me how much further share prices may fall. My answer: I don’t know (and neither does Warren Buffett!). Sure you can have a guess, but its just as good as anyone else’s. We buy at value and sell at prime, it’s that simple. If we don’t know, we don’t buy. That is the mindset of safety and it will take some time for the market to understand that.

Portfolio Assessment
The following is a quick look at the various asset classes. My personal recommendation in the short-term is to be “long” safety – gold, commodities – and “short” risk – anything derivative with an abbreviated name that you can’t understand (like CDO).

Precious Metals
Gold has fallen is recent days (silver more so) and I am not surprised. I knew my downside and had ample cash on the sidelines for future buying opportunities. This seems like a short-term buying opportunity and nothing we haven’t seen in the past. Funds have been selling all sorts of assets to cover their losses in equity related investments and margin calls. In addition, Friday’s COT report showed an increase in the total short position (850 contracts for the Commercials). This paints an even more bullish picture for the long-term investor.

Stocks
Stocks may continue to come under serious pressure especially if the retail investor begins to panic. Many small investors I have spoken with who initially felt we were due to see an immediate rebound, are beginning to realize that the decline may be deeper. This, albeit contrary to successful investing philosophy, may lead to further short-term selling.

If you do own stocks on a long-term basis, review your portfolio and be wary of anything that may be debt-related or vulnerable to speculation. As for buying, I believe we’re getting there but not there yet. Until we see a handful of companies with P/E ratios under 10 and higher dividends per share, we have time.

Bonds
Fixed-income investments have generally been the alternative for the conservative investor, however they are currently vulnerable, as they are a) subject to ratings downgrades by agencies such as S&P and Moody’s, and b) they are Dollar related.

The Dollar
The Dollar finds itself under enormous pressure as prices for goods rise, but interest rates hold steady or may even lower in order to cushion the decline in housing prices. Also, is the worry of recent threats from China to dump reserves if Congress proceeds with its trade sanctions.

My speculation is that the Dollar is now in a counter-rally and should continue to around 83, after which it should once again test its all-time lows of 79.

Other Currencies
This week the carry-trade began to unwind once more. This is important as it exemplifies a) the fleeing from speculative trades, and b) how fast these scenarios can unravel (the Yen surged 7% in a bit over 5 hours). The safest currency in my opinion is the Swiss Franc (currently 1.20 to the US Dollar).

Commodities
Energy prices have declined somewhat, but are still speculative as Hurricane Dean gathers strength off the shores of Texas. Grains have remained stable, and should continue to do so to meet adequate demand.

Remember, Risk is defined as the differential between perception and reality.

07/05/2007
2007, Part II

“Economics is not science, at least not in the sense that repeated experiments always produce the same results.”
– The Bank of International Settlements

Now I realize why July 4th is such a celebrated day in America. It’s the day when each financial analyst turns to the one to his side and says “Well, we did it the first half. Lets do it again”.

But what should we expect from the rest of the year? Todd Harrison from Minyanville gives his undertaking, here is a synopsis of what the future may hold.

Meanwhile, Tim Ianco from TheMessThatGreenspanMade has done a phenomenal job in predicting 2007. Here’s how he did so far and what we should expect for Part 2.

Currencies – “The Dollar will continue its decline and be positioned firmly in the mid seventies by the end of the year. The Euro will gain prestige as never before, old-Europe will look pretty smart, and Asian currencies will finally unhinge from the greenback a little more, but not too much.”

So far, so good. Although we may expect a near-term rally in the dollar made possible as a function of negative sentiment, a dollar is still a worthless IOU that seems to have more risk than reward.

Stocks – “Amid plunging home prices in the U.S., equity markets will continue higher… Where else are you going to put money? In the bank? There will be a couple of nasty sell-offs and short sellers will be confounded for yet another year.”

We saw the first such sell-off in February and we may see another heading into the second half. Large caps should outperform small and mid-caps, on a relative basis, and energy and metals will take the leadership baton from tech and financials.

The Precious Metals – “Gold will spike to around $800 an ounce and will finish the year in the high $700 range. Silver will almost hit $20 an ounce and finish the year close to $18. There will be at least two gut-wrenching corrections that will cause many new investors to make an early exit from this sector.”

We have yet to see…

Debt – With $2 trillion in adjustable rate mortgages reset in 2007, specter of higher global rates and a whole bunch of CDOs lined up to get marked-to-market the era of easy money seems to have begun its tightening. Once again, steer clear of the financials.

Hedge Funds – With Blackstone now public and many others in the IPO pipeline one must ask themself “Is this the last bastion of liquidity, one that could potentially spark a blow-off phase or echo-bubble, or is this a clarion call that those in the know are beginning to bottleneck at the last, remaining exit?”

Commodities – Merger & acquisition activity should pick-up in the hard-asset space as smaller niche players are absorbed in a global effort to scale.

Interest Rates “The Fed will leave short-term rates at 5.25 percent and long-term rates will hover around 4.5 to 4.7 percent. The Fed will talk tough on inflation when it’s appropriate and threaten to raise rates.”

Long-term rates just rose to 5.2 percent and now they look like they’re headed higher, at least for the time being (mostly due to credit spreads). This is the first clear miss in predictions. The lock between the housing woes and higher inflation risk seems tighter than ever.

Inflation – More people will realize that the government’s inflation numbers are bogus. They won’t be happy about it.”

This is happening very slowly, but it is happening.

Real Estate“We should see a 10 percent decline in the year-over-year national OFHEO resale price data – not refinancings, just resales. At some point in time, making sub-prime, option-ARM, interest only, 50-year loans no longer makes business sense.”

Notice the subprime mention. We seem to be on track. Todd says that persistent supply may be keeping prices afloat.

Energy “Oil will average $70 per barrel in 2006 and will finish the year at about $75, after spiking to $90 sometime during the spring or summer. Russia will become increasingly important in global energy production and they will become increasingly difficult to work with.”

This one was great Tim!

Volatility This year should see an up tick in overall market volatility.

The Economy –Growth will Slow, Consumption will Continue. Trillions of dollars of home equity that hasn’t been spent yet will be spent in 2007. Much of this will be in the form of reverse mortgages for senior citizens in order to make ends meet. Economic growth will continue to slow coming in just below 2 percent for the year with a recession starting in the fourth quarter.

The business of reverse mortgages for senior citizens is one of the hottest sectors in banking today. Recession is still in the cards.

As Brian Tracy says that the brain warrants positive impulses. So on the bright side, I think right now it pays to be bullish on bearishness.

06/26/2007
What is Inflation?

After pondering the issue for sometime I was finally struck with the answer. It was during a conversation with a friend explaining him the ramifications of the financial system and where financial and physical assets play a role.

We will begin with the difference between commodities and money. We will then explain how they relate to each other.

The Difference Between Commodities and Money
Commodities are real things – they are actual wealth and are made of the stuff that we eat, build and travel with. Money by contrast derives itself from the physical asset and wealth represents, a credit for something real.

Over the course of a generation, the amount of credit will expand to accommodate business growth, borrowing for investment and for the sake of increasing the amount and efficiency of actual goods and services. This will then contract and will leave each own with his profit or loss.

The Credit Cycle
It is this ratio – goods to derived goods – that paint the economic picture of tomorrow. When the Dow is selling for an ounce of gold, one can be sure that the physical and fiscal assets have realigned. However, when the economy is flush with liquidity and the Dow is selling for 44 gold coins then the future, although it may contain more of an expansion, it is nonetheless bound for a retreat.

Inflation and Deflation
Now that we have these extremes, it is a simple matter of equalizing the ratios, an x-factor, that has yet to be either extended or narrowed. And there are two ways of this occurring.

The first is by raising the lower quotient (Commodities), this is what the investing public now refers to as “Inflation”. The second scenario is by a lowering of the higher quotient (Fiscal Assets).

Realize that the choice inherent to obtain the objective is a lesser of two evils. Either the holders of the physical will be happy and the holders of the financial assets unsettled (due to the fact that their goods now sell at a more expensive price). This is the “Inflation” we saw so vividly during the 1970s. The financial institutions aimed at increasing liquidity.

Or the holders of the financial assets will be, for lack of a better word “deflated” and the holders of physical assets content. This is “Deflation” by Keynesian definitions, that occurred during the debacle of the 1930s. Then the financial institutions allowed the liquidity to dry up itself.

Depression and Recession
Obviously the term Depression was provided for the latter, and the term Recession for the former since psychologically it is far more painful to lose $1000 than for your $1000 to be worth less, albeit with the same result – mediocrity of value.

In Summery
We now understand the difference between the common use of the terms “Inflation” and “Deflation” used to describe a nominal expansion and contraction of the money supply and the practical definition of those terms that relate primarily to the increasing spread between actual and monetary assets.

Inflation
According to its common and generally defined term Inflation refers solely to an increase in prices. The reason this description is so vague, is because the goods with one wishes to refer to as a guide may be relatively important to one individual but at the same time irrelevant to another. The proper term of Inflation refers not to the monetary price of goods but rather, more importantly, the ability to buy more goods at a better value. For example, if $100 now buys you 100 apples instead of 90, this would be an inflation of the credit supply.

Deflation
This categorize the opposite effect. The modern and widely used term Deflation refers to falling prices. While the proper and more appropriate term refers to falling valuations. – $100 buying you 90 apples instead of 100. This means that Inflation and Deflation in the modern sense refer only to prices which change daily as does the dollar, and is thus harder to grasp. The proper terms refers to value – the only reason money was created in the first place.

“The fools are those who know the price of everything and the value of nothing”

06/26/2007
Checkmate!

The game of “Let’s keep this Credit Expansion going for as long as possible” may finally be up.

In the Financial Times we read a rather interesting analysis from Tim Lee, founder of financial economic consultancy Pi Economics

Central banks are likely to attempt to ratify current inflated asset values by inflating prices and incomes to avoid a deflationary economic collapse. Unfortunately, sharp reductions in interest rates in the US, UK, and the euro area will lead to a rapid unwinding of the global carry trade, perversely threatening to worsen problems in the credit markets.

The solution would have to involve massive unsterilized intervention by the Japanese authorities, which would have the effect of inflating Japanese prices to a level consistent with the current yen exchange rate, thereby alleviating huge upward pressure on the yen as the carry trade unwinds.

Combined with a similar inflation in the US, this “solution” would require roughly a doubling of the Japanese price level, destroying the real value of Japanese savings.

If the losses are to manifest purely in real terms — via inflation — then they must occur mostly where the savings have been, which is certainly not in the US.

If the Japanese authorities balk at the prospect of such a huge inflation, then global deflationary collapse will be inevitable once the credit bubble bursts.

Checkmate indeed!

06/25/2007
Playing Tag

Noticing that the Precious Metals have fallen over the weekend, if you look at the equity markets it may explain why. As you may remember, after the sell-off we had back in late February both gold and silver declined as well, most probably due to fund selling to cover losses or to rebalance. (You will also recall that both metals came back strong since then as did the market).

From the viewpoint of gold, the DJIA has indeed declined 2% for the week. This displays a) that most funds have added gold as a hedge to their existing stock portfolios and not as an asset of its own and b) that we are still mid-bear cycle in terms of the historical Dow/Gold ratio. The ratio has been above 20 since late May.

06/20/2007
News Bits…

People worry about China’s reserves, but how about Japan? The Japanese now hold over $650 billion of U.S. Treasury notes in reserve. In a speech Wantabe said that he doesn’t see the Carry Trade affecting the Japanese economy. No kidding! It will affect the dollars that have been bought with Yen, while the Yen by contrast will soar.

Central Banks are finally back on speaking terms with the BIS. Well with over $400 trillion in derivative speculation, for contracts that many people who call themselves investors think they understand, I would hope so.

Bonds are getting tricky. With Repos now a prime and standard in the speculating community it seems that its about time the governments get involved. May explain recent volatility.

In the Silver Market the “Major Shorts” (4 or less largest traders which Ted Butler has decided to label the T. Rex’s) continue to increase their inevitably reckoning position of short contracts to 50,000 representative of 250 million ounces (also known as $3.3 billion on the open market of silver that is not known to exist above ground).

06/14/2007
Critically Speaking

From the Daily Reckoning we read…

Money makes the world go round. Which is why watching money is so entertaining. It is like watching the Three Stooges – it’s one absurd pratfall after another.

While Wall Street redistributes wealth from the novices to the pros – from ‘weak hands” to strong ones, as the pros themselves put it – corporate America does its own share of redistribution, taking it from the soft hands of retail investors and pensioners and putting it into the calloused paws of elite insiders.

But we remind readers that the shows change. Sometimes, it’s a gay farce that viewers want to tune in to. Other times, it is a sour tragedy. Sometimes, investors are perfectly happy to pay their hired hands millions; other times, they get stingy and hold back every cent in case they need it. Sometimes too, they rush to buy whatever Wall Street offers them. Other times, the poor stockbrokers wait by silent phones.

The difference lies in the quantity of money. When credit expands, people get a little free and easy with it. They spend and lend recklessly, sure that there will always be more of it. Inevitably, they get too much of a good thing. Soon, people can’t pay their bills…lenders get scared…consumers cut back…investors panic. Then, the whole spectacle changes. No more light-hearted tap-dancing. Instead, viewers want to see the proud protagonists punished. They want to see the powerful humbled and the rich roasted.

How will you know when the playbill changes? Watch the bond market. Bond yields have been rising. This makes it tougher for the housing market to recover and pokes a hole in the huge credit bubble. So far, it is just a tiny puncture. But the hissing sound is probably enough to discourage the Fed from raising rates. And if it grows louder, it could signal the end of the biggest show on earth.


Now you might say “Come now. Why the stark pessimism?”. We reply simply with the words of the man that so many have come to know, but so few seem to understand. “Be greedy when others are fearful, and fearful when others are greedy” Warren Buffett said. Like Ben Franklin before him he is known as the world’s greatest capitalist. To transfer money begs for no more than a degree in finance, but to create wealth requires a strong sense of “frugality and industry”.

So are we being too pessimistic or are we just thinking more critically, revising our biases and attempting to rationalize an unkempt reality? To find out for sure we catch up with Big Al…

The Book of Greenspan

Alan Greenspan, the former Fed chairman, was the world’s most powerful government leader from 1987 until 2006. He was paid a reported $8.5 million advance for his forthcoming book, The Age of Turbulence: Adventures in a New World – the second highest advance ever for a non-fiction book (Bill Clinton got $10 million).

Normally, one wouldn’t expect to pay such a handsome fee for a straight-laced economist and dry government official, but Greenspan promised to deliver some “shocking surprises” in his 640-page memoir due out in September.

Sources who have been admitted to a closed interview with Greenspan explain his take on the global financial markets. He was fearful after the Stock Market Crash in October 1987. “We were on the edge of a world-wide financial collapse,” he said. It was “scary.”

Similarly, in 2001 after the terrorist attacks on New York and Washington, Greenspan again categorized the scenario as “scary” injecting over $40 Billion dollars of new liquidity, as well as slashing interest rates to a mere 1%.

Greenspan is apparently deeply worried about another case of “irrational exuberance” in the financial markets. “The biggest surprise to me is that real interest rates all over the world are at near historical lows!” he quoted in warning. He reiterated how all crises’ are “unpredictable”. The October 1987 crash, the 1997 Asian currency crisis, the 2001 terrorist attacks – they all were like “black swans,” to use Nassim Taleb’s term for unforeseeable events. Greenspan’s conclusion: “Because we cannot forecast these events, we must be prepared to deal with them when they occur.”

What should you do to get prepared? Mark Skousan tells us, “If you are currently invested in stocks (something we advise not to commence at the moment) use protective stops to get you out in times of a stock market collapse. Buy gold and silver coins for survival protection and keep a large position in cash. If Alan Greenspan and his successor Ben Bernanke are preparing for future “black swans,” maybe you should too”.