One of the most interesting speeches for investors that I heard at the Milken Conference was on convertible bonds. John Calamos, king of converts, spoke. He said that the average convertible did 5% over the last 10 years. Beats the heck out of stocks by a large margin. This might be a good place to make a buck.
Holmes
Thursday, April 30, 2009
Milken Conference
I just got back from the Milken Conference in Beverly Hills. It had an A list of speakers including: Rupert Murdoch, Senator John Ensign, Schwartzeneger, economist Gary Shilling, Congressman Henry Waxman, Steve Forbes, Eli Broad, Pete Carroll, and the list goes on and on. Check out the web site at http://www.milkeninstitute.org/events/gcprogram.taf?function=speakers&eventid=GC09.
Holmes
Holmes
Wednesday, April 22, 2009
Economy
I wanted to give a simplistic example of the challenges that our economy faces. Let’s pretend that there are two people—one builds tables and the other farms chickens. They trade back and forth, ten chickens for one table. That becomes cumbersome so they use gold as an intermediary. You can’t easily produce more gold so it has a high value. But it’s heavy and not divisible, so they switch to paper currency.
If ten chickens are $10 and one table is $10, every time one buys products from the other, it’s counted as gross domestic product. So over the course of the year, if 50 chickens and five tables are purchased, the GDP is $100. GDP is calculated as the velocity of money times the currency. In this example, $50 X 1 + $10 X 5 = $100. The more traded, the higher the GDP.
Then the government gets involved. The paper currency used to be backed by gold but the government ended this program. The government decided how much currency could be printed.
Then banks got involved. The banks loaned the table builder $1,000 at 10% interest. As long as he sold 30 tables, he could cover his $100 in interest. The banks got the money from the government, which created the money from thin air and selling bonds to foreign governments. The table builder was able to use additional credit and buy cheap goods from the foreigners. The foreigners paid their employees less because their countries had experienced devastating wars a few decades ago and had a less educated work force.
The problem is that demand for the tables dried up. The customers were growing older and didn’t need to buy new tables. Because sales fell, the table maker couldn’t make his payments and went into default. This in itself wasn’t a problem for the bank but for every $30 in loans it had outstanding, it had $29 in customers’ deposits. It took only a few bad loans to put the bank out of business.
The government had some ex employees of the bank in charge of government finance. There is a process called bankruptcy where the bond holders take control of the bank and the managers are fired. This didn’t happen. Instead, the government bought stock in the companies, which is rare. The management stayed on. Again, the government printed money from thin air to pull this off.
So the banks were back in business. The problem was that all of the people whom the banks were trying to loan to were in the same predicament as the table builder—their goods were not in high demand. People didn’t want them anymore.
On the other hand, we have the chicken farmer. People would come to his farm and offer their services. Foreigners wanted the chickens and would use their strong currency to compete with locals. A stock broker tried to trade financial advice to the farmer but the farmer wasn’t interested. He pointed out that the stock broker wasn’t able to predict the financial mess and the company whom he worked for couldn’t even manage its own finances. A loan broker came by but the farmer didn’t want a loan. However, a doctor was able to cure the farmer’s cough and was able to procure 30 chickens for his services.
Foreign countries were dependent on people like the table maker to buy their cheap goods. People like the table maker stopped spending, so the foreign countries had to begin trading amongst themselves. Though the foreign countries had problems, their problems paled in comparison and their foreign currencies strengthened. The stock and loan broker had to go back to school and become like the doctor whose services were valued. The government got smart and stopped printing money because it was hurting their currency and causing goods that the foreigners wanted, like chickens, to skyrocket. The government had to cut its spending and raise taxes to take care of the people who were growing older whom the government had made financial promises. Everyone eventually changed their ways but it took several years.
THE END
If ten chickens are $10 and one table is $10, every time one buys products from the other, it’s counted as gross domestic product. So over the course of the year, if 50 chickens and five tables are purchased, the GDP is $100. GDP is calculated as the velocity of money times the currency. In this example, $50 X 1 + $10 X 5 = $100. The more traded, the higher the GDP.
Then the government gets involved. The paper currency used to be backed by gold but the government ended this program. The government decided how much currency could be printed.
Then banks got involved. The banks loaned the table builder $1,000 at 10% interest. As long as he sold 30 tables, he could cover his $100 in interest. The banks got the money from the government, which created the money from thin air and selling bonds to foreign governments. The table builder was able to use additional credit and buy cheap goods from the foreigners. The foreigners paid their employees less because their countries had experienced devastating wars a few decades ago and had a less educated work force.
The problem is that demand for the tables dried up. The customers were growing older and didn’t need to buy new tables. Because sales fell, the table maker couldn’t make his payments and went into default. This in itself wasn’t a problem for the bank but for every $30 in loans it had outstanding, it had $29 in customers’ deposits. It took only a few bad loans to put the bank out of business.
The government had some ex employees of the bank in charge of government finance. There is a process called bankruptcy where the bond holders take control of the bank and the managers are fired. This didn’t happen. Instead, the government bought stock in the companies, which is rare. The management stayed on. Again, the government printed money from thin air to pull this off.
So the banks were back in business. The problem was that all of the people whom the banks were trying to loan to were in the same predicament as the table builder—their goods were not in high demand. People didn’t want them anymore.
On the other hand, we have the chicken farmer. People would come to his farm and offer their services. Foreigners wanted the chickens and would use their strong currency to compete with locals. A stock broker tried to trade financial advice to the farmer but the farmer wasn’t interested. He pointed out that the stock broker wasn’t able to predict the financial mess and the company whom he worked for couldn’t even manage its own finances. A loan broker came by but the farmer didn’t want a loan. However, a doctor was able to cure the farmer’s cough and was able to procure 30 chickens for his services.
Foreign countries were dependent on people like the table maker to buy their cheap goods. People like the table maker stopped spending, so the foreign countries had to begin trading amongst themselves. Though the foreign countries had problems, their problems paled in comparison and their foreign currencies strengthened. The stock and loan broker had to go back to school and become like the doctor whose services were valued. The government got smart and stopped printing money because it was hurting their currency and causing goods that the foreigners wanted, like chickens, to skyrocket. The government had to cut its spending and raise taxes to take care of the people who were growing older whom the government had made financial promises. Everyone eventually changed their ways but it took several years.
THE END
Monetary Supply
This is from a newsletter from John Mauldin.
M2 has increased by over a 14% annual rate over the past six months, which is in the vicinity of past record growth rates. Liquidity creation or destruction, in the broadest sense, has two components. The first is influenced by the Fed and its allies in the banking system, and the second is outside the banking system in what is often referred to as the shadow banking system. The equation of exchange (GDP equals M2 multiplied by the velocity of money or V) captures this relationship. The statement that all the Fed has to do is print money in order to restore prosperity is not substantiated by history or theory. An increase in the stock of money will only lead to a higher GDP if V, or velocity, is stable. V should be thought of conceptually rather than mechanically. If the stock of money is $1 trillion and total spending is $2 trillion, then V is 2. If spending rises to $3 trillion and M2 is unchanged, velocity then jumps to 3. While V cannot be observed without utilizing GDP and M, this does not mean that the properties of V cannot be understood and analyzed.
The historical record indicates that V may be likened to a symbiotic relationship of two variables. One is financial innovation and the other is the degree of leverage in the economy. Financial innovation and greater leverage go hand in hand, and during those times velocity is generally above its long-term average of 1.67 (Chart 4). Velocity was generally below this average when there was a reversal of failed financial innovation and deleveraging occurred. When innovation and increased leveraging transpired early in the 20th century, velocity was generally above the long-term average. After 1928 velocity collapsed, and remained below the average until the early 1950s as the economy deleveraged. From the early 1950s through 1980 velocity was relatively stable and never far from 1.67 since leverage was generally stable in an environment of tight financial regulation. Since 1980, velocity was well above 1.67, reflecting rapid financial innovation and substantially greater leverage. With those innovations having failed miserably, and with the burdensome side of leverage (i.e. falling asset prices and income streams, but debt remaining) so apparent, velocity is likely to fall well below 1.67 in the years to come, compared with a still high 1.77 in the fourth quarter of 2008. Thus, as the shadow banking system continues to collapse, velocity should move well below its mean, greatly impairing the efficacy of monetary policy. This means that M2 growth will not necessarily be transferred into higher GDP. For example, in Q4 of 2008 annualized GDP fell 5.8% while M2 expanded by 15.7%. The same pattern appears likely in Q1 of this year.
The highly ingenious monetary policy devices developed by the Bernanke Fed may prevent the calamitous events associated with the debt deflation of the Great Depression, but they do not restore the economy to health quickly or easily. The problem for the Fed is that it does not control velocity or the money created outside the banking system.
Washington policy makers are now moving to increase regulation of the banks and nonbank entities as well. This is seen as necessary as a result of the excessive and unwise innovations of the past ten or more years. Thus, the lesson of history offers a perverse twist to the conventional wisdom. Regulation should be the tightest when leverage is increasing rapidly, but lax in the face of deleveraging.
Thursday, April 16, 2009
World Food Suppy: BUY FARMLAND!!!!!
I got this information from one of the only publicly traded ag distributors: Viterra. It's a Canadian company. Viterra gets paid to haul, ship, and store grain. The higher the price of grain, the more the farmers grow. The more that is grown, the more that is shipped. Higher prices behoove Viterra.
In 1950, there were 2.5 billion people and .52 acres of farmland per person.
In 1975, 4.1 billion people and .34 acres.
In 2000, 6.1 billion people and .25 acres.
In 2025, it's estimated that there will be 8 billion people and .16 acres of farmland per person.
BUY FARMLAND!!!!!!!!!!
In 1950, there were 2.5 billion people and .52 acres of farmland per person.
In 1975, 4.1 billion people and .34 acres.
In 2000, 6.1 billion people and .25 acres.
In 2025, it's estimated that there will be 8 billion people and .16 acres of farmland per person.
BUY FARMLAND!!!!!!!!!!
Tuesday, April 14, 2009
Fidelity's Thoughts on Gold
Diversification opportunities
Given its atypical characteristics, the performance
of gold has had little or no correlation to other asset
classes, such as stocks and bonds. As a result,
making an allocation to gold
may be an effective way to achieve diversification
benefits. So far this decade, a position in gold would
have provided a boost to a diversified portfolio, as
gold bullion prices soared 216%, while U.S. stocks
and bonds returned -36% and 75%, respectively.iii
However, gold has a history of being an extremely
volatile asset class. For example, throughout the
gold bullion bull market this decade, gold-related
stocks have had five corrections of at least 25%,
with a near 70% decline during the most recent
drawdown.iv As a result, maintaining only a small
allocation to gold might be a reasonable approach.
Given its atypical characteristics, the performance
of gold has had little or no correlation to other asset
classes, such as stocks and bonds. As a result,
making an allocation to gold
may be an effective way to achieve diversification
benefits. So far this decade, a position in gold would
have provided a boost to a diversified portfolio, as
gold bullion prices soared 216%, while U.S. stocks
and bonds returned -36% and 75%, respectively.iii
However, gold has a history of being an extremely
volatile asset class. For example, throughout the
gold bullion bull market this decade, gold-related
stocks have had five corrections of at least 25%,
with a near 70% decline during the most recent
drawdown.iv As a result, maintaining only a small
allocation to gold might be a reasonable approach.
Monday, April 6, 2009
Mining Stocks
Sometimes clients bring many accounts and some of these accounts only have a few thousand dollars. Maybe a Roth IRA or a college savings account. It is difficult to buy individual stocks, as these accounts are too small.
Today, I bought a Fidelity fund, Fidelity Mining (FSAGX). It's a no-load fund and has low fees (.86%). It has all of the big miners that I like: Goldcorp, Yamana, Barrick, etc.
People want to know when I'm getting back in the market. Technically, I'm back in. However, gold mining stocks will probably perform well if the overall market does poorly.
Holmes
Today, I bought a Fidelity fund, Fidelity Mining (FSAGX). It's a no-load fund and has low fees (.86%). It has all of the big miners that I like: Goldcorp, Yamana, Barrick, etc.
People want to know when I'm getting back in the market. Technically, I'm back in. However, gold mining stocks will probably perform well if the overall market does poorly.
Holmes
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