Thursday, February 21, 2013
Back at it
I haven't done a post in a long time. Feel free to post your investment questions and I'd be happy to try to answer them.
Holmes
Friday, March 19, 2010
New Marc Faber
Marc Faber: We Have a New Gold Standard
Published: Thursday, 18 Mar 2010 | 5:53 AM ET
Text Size
By: Antonia Oprita
Web Producer, CNBC.com
The markets have created their own gold standard because of uncertainties regarding other asset classes, Marc Faber, author of "The Gloom, Boom and Doom Report," told CNBC Thursday.
Gold Bars
AP
"I think we already have now a gold standard … created by the market place," Faber told "Squawk Box Europe."
"We have the (exchange traded funds) that have proliferated and we have more and more physical buying of gold," he said.
Between 2001 and 2008, gold outperformed bonds and stocks, but starting with 2009 stocks outperformed, which means investors must own gold because generally retail investors cannot move in and out of different assets like institutional investors, Faber said.
For the next six months, the global economy will look better, particularly compared with March 2009 when the downturn was at its worst, he said, adding that he would buy oil and mining companies, especially Exxon [XOM 66.77 -0.62 (-0.92%) ], Chevron [CVX 74.28 -0.48 (-0.64%) ] and Schlumberger [SLB 64.18 -1.07 (-1.64%) ].
"I think that the oil price would rather go up than down. I think oil stocks would perform rather well, by the way also mining companies," Faber said.
Investors should have a minimum of 50 percent of their money in emerging economies because these are growing much faster than the developed world, he recommended.
Treasurys to Yield 10-20%
An extreme bubble in US Treasurys has been deflated for the moment and yields are likely to rise sharply over the next years, Faber told CNBC.com separately.
"I still think that Treasurys are overpriced," Faber said.
Yields on 10-year US Treasurys are likely to rise to between 10 and 20 percent over the next 5 to 10 years because of inflation and oversupply, he said.
Money-printing is just another way for governments to silently default on their debt Faber wrote in the latest "Gloom, Boom & Doom Report."
When a company or a government actually default on their payment obligations, the process is relatively fair because lenders get just 30, 60 or 80 cents a dollar for the money they lent, Faber wrote.
"But if a government decides to default through money printing, the burden of the default isn't shared equally," he wrote.
"Defaulting through money printing means the repayment of the creditors occurs in a currency whose purchasing power was severely curtailed through the money-printing process," Faber explained.
He said rising cost of living, a depreciating currency against other currencies or against precious metals and commodities are common symptoms of a loss in the purchasing power of a currency.
In an environment of inflation, cash and government bonds are "poison" although the current rally in stocks is partially caused by low interest rates, Faber told "Squawk Box Europe."
Investors should avoid bonds and cash over the next 10 years and choose stocks instead, he said, but warned that printing money will lead to an economic collapse in the end.
"Before we have the final collapse that will be a deflationary collapse, we will have more and more money printing."
"I think interest rates forever in the US will be at zero, by zero I mean below the rate of inflation," Faber predicted.
"It will result in a lot of inflation but inflation has a lot of different symptoms."
The financial sector, especially firms that know how to move money quickly between various asset classes, stand to gain from the increasing volatility, Faber said.
"In periods of money printing and debasing of currencies, wealth becomes concentrated in the Goldman Sachses [GS 177.00 -0.45 (-0.25%) ] of the world because they can move money quickly," he said.
There is a danger that US public debt will grow so much that "the government will need to print money just to pay the interest on the government debt," Faber wrote.
Interest payments on the US government debt could rise to between 35 percent and 50 percent of tax revenues within 10 years, from the current 13 percent of tax revenues, he also wrote.
Greece Must Be Bailed Out
In Europe, the situation is different, he told CNBC.com.
"Greece cannot print money, the US can," Faber noted. "If Greece wished to default through nonpayment of their internal debt they could devalue and exit the EU," he said.
Under EU legislation, European Union members with the exception of Britain and Denmark must all adopt the euro as their currency and those already in the euro zone cannot leave the monetary union.
But German chancellor Angela Merkel called for a change of the EU legislation to allow the expulsion of a country from the euro zone if it breaches fiscal rules repeatedly, signaling a willingness of European politicians to change the rules of the game.
"If Greece stays in, it has to be bailed out," Faber said.
"I don't regard the euro as a specifically better currency than the dollar," he also said.
Published: Thursday, 18 Mar 2010 | 5:53 AM ET
Text Size
By: Antonia Oprita
Web Producer, CNBC.com
The markets have created their own gold standard because of uncertainties regarding other asset classes, Marc Faber, author of "The Gloom, Boom and Doom Report," told CNBC Thursday.
Gold Bars
AP
"I think we already have now a gold standard … created by the market place," Faber told "Squawk Box Europe."
"We have the (exchange traded funds) that have proliferated and we have more and more physical buying of gold," he said.
Between 2001 and 2008, gold outperformed bonds and stocks, but starting with 2009 stocks outperformed, which means investors must own gold because generally retail investors cannot move in and out of different assets like institutional investors, Faber said.
For the next six months, the global economy will look better, particularly compared with March 2009 when the downturn was at its worst, he said, adding that he would buy oil and mining companies, especially Exxon [XOM 66.77 -0.62 (-0.92%) ], Chevron [CVX 74.28 -0.48 (-0.64%) ] and Schlumberger [SLB 64.18 -1.07 (-1.64%) ].
"I think that the oil price would rather go up than down. I think oil stocks would perform rather well, by the way also mining companies," Faber said.
Investors should have a minimum of 50 percent of their money in emerging economies because these are growing much faster than the developed world, he recommended.
Treasurys to Yield 10-20%
An extreme bubble in US Treasurys has been deflated for the moment and yields are likely to rise sharply over the next years, Faber told CNBC.com separately.
"I still think that Treasurys are overpriced," Faber said.
Yields on 10-year US Treasurys are likely to rise to between 10 and 20 percent over the next 5 to 10 years because of inflation and oversupply, he said.
Money-printing is just another way for governments to silently default on their debt Faber wrote in the latest "Gloom, Boom & Doom Report."
When a company or a government actually default on their payment obligations, the process is relatively fair because lenders get just 30, 60 or 80 cents a dollar for the money they lent, Faber wrote.
"But if a government decides to default through money printing, the burden of the default isn't shared equally," he wrote.
"Defaulting through money printing means the repayment of the creditors occurs in a currency whose purchasing power was severely curtailed through the money-printing process," Faber explained.
He said rising cost of living, a depreciating currency against other currencies or against precious metals and commodities are common symptoms of a loss in the purchasing power of a currency.
In an environment of inflation, cash and government bonds are "poison" although the current rally in stocks is partially caused by low interest rates, Faber told "Squawk Box Europe."
Investors should avoid bonds and cash over the next 10 years and choose stocks instead, he said, but warned that printing money will lead to an economic collapse in the end.
"Before we have the final collapse that will be a deflationary collapse, we will have more and more money printing."
"I think interest rates forever in the US will be at zero, by zero I mean below the rate of inflation," Faber predicted.
"It will result in a lot of inflation but inflation has a lot of different symptoms."
The financial sector, especially firms that know how to move money quickly between various asset classes, stand to gain from the increasing volatility, Faber said.
"In periods of money printing and debasing of currencies, wealth becomes concentrated in the Goldman Sachses [GS 177.00 -0.45 (-0.25%) ] of the world because they can move money quickly," he said.
There is a danger that US public debt will grow so much that "the government will need to print money just to pay the interest on the government debt," Faber wrote.
Interest payments on the US government debt could rise to between 35 percent and 50 percent of tax revenues within 10 years, from the current 13 percent of tax revenues, he also wrote.
Greece Must Be Bailed Out
In Europe, the situation is different, he told CNBC.com.
"Greece cannot print money, the US can," Faber noted. "If Greece wished to default through nonpayment of their internal debt they could devalue and exit the EU," he said.
Under EU legislation, European Union members with the exception of Britain and Denmark must all adopt the euro as their currency and those already in the euro zone cannot leave the monetary union.
But German chancellor Angela Merkel called for a change of the EU legislation to allow the expulsion of a country from the euro zone if it breaches fiscal rules repeatedly, signaling a willingness of European politicians to change the rules of the game.
"If Greece stays in, it has to be bailed out," Faber said.
"I don't regard the euro as a specifically better currency than the dollar," he also said.
Thursday, February 25, 2010
Aricle from Charlie Munger
Basically, It's OverA parable about how one nation came to financial ruin.
By Charles MungerUpdated Sunday, Feb. 21, 2010, at 3:30 PM ET
Wall Street.In the early 1700s, Europeans discovered in the Pacific Ocean a large, unpopulated island with a temperate climate, rich in all nature's bounty except coal, oil, and natural gas. Reflecting its lack of civilization, they named this island "Basicland."
The Europeans rapidly repopulated Basicland, creating a new nation. They installed a system of government like that of the early United States. There was much encouragement of trade, and no internal tariff or other impediment to such trade. Property rights were greatly respected and strongly enforced. The banking system was simple. It adapted to a national ethos that sought to provide a sound currency, efficient trade, and ample loans for credit-worthy businesses while strongly discouraging loans to the incompetent or for ordinary daily purchases.
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Moreover, almost no debt was used to purchase or carry securities or other investments, including real estate and tangible personal property. The one exception was the widespread presence of secured, high-down-payment, fully amortizing, fixed-rate loans on sound houses, other real estate, vehicles, and appliances, to be used by industrious persons who lived within their means. Speculation in Basicland's security and commodity markets was always rigorously discouraged and remained small. There was no trading in options on securities or in derivatives other than "plain vanilla" commodity contracts cleared through responsible exchanges under laws that greatly limited use of financial leverage.
In its first 150 years, the government of Basicland spent no more than 7 percent of its gross domestic product in providing its citizens with essential services such as fire protection, water, sewage and garbage removal, some education, defense forces, courts, and immigration control. A strong family-oriented culture emphasizing duty to relatives, plus considerable private charity, provided the only social safety net.
The tax system was also simple. In the early years, governmental revenues came almost entirely from import duties, and taxes received matched government expenditures. There was never much debt outstanding in the form of government bonds.
As Adam Smith would have expected, GDP per person grew steadily. Indeed, in the modern area it grew in real terms at 3 percent per year, decade after decade, until Basicland led the world in GDP per person. As this happened, taxes on sales, income, property, and payrolls were introduced. Eventually total taxes, matched by total government expenditures, amounted to 35 percent of GDP. The revenue from increased taxes was spent on more government-run education and a substantial government-run social safety net, including medical care and pensions.
A regular increase in such tax-financed government spending, under systems hard to "game" by the unworthy, was considered a moral imperative—a sort of egality-promoting national dividend—so long as growth of such spending was kept well below the growth rate of the country's GDP per person.
Basicland also sought to avoid trouble through a policy that kept imports and exports in near balance, with each amounting to about 25 percent of GDP. Some citizens were initially nervous because 60 percent of imports consisted of absolutely essential coal and oil. But, as the years rolled by with no terrible consequences from this dependency, such worry melted away.
Basicland was exceptionally creditworthy, with no significant deficit ever allowed. And the present value of large "off-book" promises to provide future medical care and pensions appeared unlikely to cause problems, given Basicland's steady 3 percent growth in GDP per person and restraint in making unfunded promises. Basicland seemed to have a system that would long assure its felicity and long induce other nations to follow its example—thus improving the welfare of all humanity.
But even a country as cautious, sound, and generous as Basicland could come to ruin if it failed to address the dangers that can be caused by the ordinary accidents of life. These dangers were significant by 2012, when the extreme prosperity of Basicland had created a peculiar outcome: As their affluence and leisure time grew, Basicland's citizens more and more whiled away their time in the excitement of casino gambling. Most casino revenue now came from bets on security prices under a system used in the 1920s in the United States and called "the bucket shop system."
The winnings of the casinos eventually amounted to 25 percent of Basicland's GDP, while 22 percent of all employee earnings in Basicland were paid to persons employed by the casinos (many of whom were engineers needed elsewhere). So much time was spent at casinos that it amounted to an average of five hours per day for every citizen of Basicland, including newborn babies and the comatose elderly. Many of the gamblers were highly talented engineers attracted partly by casino poker but mostly by bets available in the bucket shop systems, with the bets now called "financial derivatives."
Many people, particularly foreigners with savings to invest, regarded this situation as disgraceful. After all, they reasoned, it was just common sense for lenders to avoid gambling addicts. As a result, almost all foreigners avoided holding Basicland's currency or owning its bonds. They feared big trouble if the gambling-addicted citizens of Basicland were suddenly faced with hardship.
And then came the twin shocks. Hydrocarbon prices rose to new highs. And in Basicland's export markets there was a dramatic increase in low-cost competition from developing countries. It was soon obvious that the same exports that had formerly amounted to 25 percent of Basicland's GDP would now only amount to 10 percent. Meanwhile, hydrocarbon imports would amount to 30 percent of GDP, instead of 15 percent. Suddenly Basicland had to come up with 30 percent of its GDP every year, in foreign currency, to pay its creditors.
How was Basicland to adjust to this brutal new reality? This problem so stumped Basicland's politicians that they asked for advice from Benfranklin Leekwanyou Vokker, an old man who was considered so virtuous and wise that he was often called the "Good Father." Such consultations were rare. Politicians usually ignored the Good Father because he made no campaign contributions.
Among the suggestions of the Good Father were the following. First, he suggested that Basicland change its laws. It should strongly discourage casino gambling, partly through a complete ban on the trading in financial derivatives, and it should encourage former casino employees—and former casino patrons—to produce and sell items that foreigners were willing to buy. Second, as this change was sure to be painful, he suggested that Basicland's citizens cheerfully embrace their fate. After all, he observed, a man diagnosed with lung cancer is willing to quit smoking and undergo surgery because it is likely to prolong his life.
The views of the Good Father drew some approval, mostly from people who admired the fiscal virtue of the Romans during the Punic Wars. But others, including many of Basicland's prominent economists, had strong objections. These economists had intense faith that any outcome at all in a free market—even wild growth in casino gambling—is constructive. Indeed, these economists were so committed to their basic faith that they looked forward to the day when Basicland would expand real securities trading, as a percentage of securities outstanding, by a factor of 100, so that it could match the speculation level present in the United States just before onslaught of the Great Recession that began in 2008.
The strong faith of these Basicland economists in the beneficence of hypergambling in both securities and financial derivatives stemmed from their utter rejection of the ideas of the great and long-dead economist who had known the most about hyperspeculation, John Maynard Keynes. Keynes had famously said, "When the capital development of a country is the byproduct of the operations of a casino, the job is likely to be ill done." It was easy for these economists to dismiss such a sentence because securities had been so long associated with respectable wealth, and financial derivatives seemed so similar to securities.
Basicland's investment and commercial bankers were hostile to change. Like the objecting economists, the bankers wanted change exactly opposite to change wanted by the Good Father. Such bankers provided constructive services to Basicland. But they had only moderate earnings, which they deeply resented because Basicland's casinos—which provided no such constructive services—reported immoderate earnings from their bucket-shop systems. Moreover, foreign investment bankers had also reported immoderate earnings after building their own bucket-shop systems—and carefully obscuring this fact with ingenious twaddle, including claims that rational risk-management systems were in place, supervised by perfect regulators. Naturally, the ambitious Basicland bankers desired to prosper like the foreign bankers. And so they came to believe that the Good Father lacked any understanding of important and eternal causes of human progress that the bankers were trying to serve by creating more bucket shops in Basicland.
Of course, the most effective political opposition to change came from the gambling casinos themselves. This was not surprising, as at least one casino was located in each legislative district. The casinos resented being compared with cancer when they saw themselves as part of a long-established industry that provided harmless pleasure while improving the thinking skills of its customers.
As it worked out, the politicians ignored the Good Father one more time, and the Basicland banks were allowed to open bucket shops and to finance the purchase and carry of real securities with extreme financial leverage. A couple of economic messes followed, during which every constituency tried to avoid hardship by deflecting it to others. Much counterproductive governmental action was taken, and the country's credit was reduced to tatters. Basicland is now under new management, using a new governmental system. It also has a new nickname: Sorrowland.
By Charles MungerUpdated Sunday, Feb. 21, 2010, at 3:30 PM ET
Wall Street.In the early 1700s, Europeans discovered in the Pacific Ocean a large, unpopulated island with a temperate climate, rich in all nature's bounty except coal, oil, and natural gas. Reflecting its lack of civilization, they named this island "Basicland."
The Europeans rapidly repopulated Basicland, creating a new nation. They installed a system of government like that of the early United States. There was much encouragement of trade, and no internal tariff or other impediment to such trade. Property rights were greatly respected and strongly enforced. The banking system was simple. It adapted to a national ethos that sought to provide a sound currency, efficient trade, and ample loans for credit-worthy businesses while strongly discouraging loans to the incompetent or for ordinary daily purchases.
Print This ArticlePRINTDiscuss in the FrayDISCUSSEmail to a FriendE-MAILGet Slate RSS FeedsRSSShare This ArticleRECOMMEND...Single PageSINGLE PAGE
Yahoo! Buzz
Facebook FacebookPost to MySpace!MySpaceMixx MixxDigg DiggReddit RedditDel.icio.us del.icio.usFurl FurlMa.gnolia.com Ma.gnoliaSphere SphereStumble UponStumbleUponCLOSE
Moreover, almost no debt was used to purchase or carry securities or other investments, including real estate and tangible personal property. The one exception was the widespread presence of secured, high-down-payment, fully amortizing, fixed-rate loans on sound houses, other real estate, vehicles, and appliances, to be used by industrious persons who lived within their means. Speculation in Basicland's security and commodity markets was always rigorously discouraged and remained small. There was no trading in options on securities or in derivatives other than "plain vanilla" commodity contracts cleared through responsible exchanges under laws that greatly limited use of financial leverage.
In its first 150 years, the government of Basicland spent no more than 7 percent of its gross domestic product in providing its citizens with essential services such as fire protection, water, sewage and garbage removal, some education, defense forces, courts, and immigration control. A strong family-oriented culture emphasizing duty to relatives, plus considerable private charity, provided the only social safety net.
The tax system was also simple. In the early years, governmental revenues came almost entirely from import duties, and taxes received matched government expenditures. There was never much debt outstanding in the form of government bonds.
As Adam Smith would have expected, GDP per person grew steadily. Indeed, in the modern area it grew in real terms at 3 percent per year, decade after decade, until Basicland led the world in GDP per person. As this happened, taxes on sales, income, property, and payrolls were introduced. Eventually total taxes, matched by total government expenditures, amounted to 35 percent of GDP. The revenue from increased taxes was spent on more government-run education and a substantial government-run social safety net, including medical care and pensions.
A regular increase in such tax-financed government spending, under systems hard to "game" by the unworthy, was considered a moral imperative—a sort of egality-promoting national dividend—so long as growth of such spending was kept well below the growth rate of the country's GDP per person.
Basicland also sought to avoid trouble through a policy that kept imports and exports in near balance, with each amounting to about 25 percent of GDP. Some citizens were initially nervous because 60 percent of imports consisted of absolutely essential coal and oil. But, as the years rolled by with no terrible consequences from this dependency, such worry melted away.
Basicland was exceptionally creditworthy, with no significant deficit ever allowed. And the present value of large "off-book" promises to provide future medical care and pensions appeared unlikely to cause problems, given Basicland's steady 3 percent growth in GDP per person and restraint in making unfunded promises. Basicland seemed to have a system that would long assure its felicity and long induce other nations to follow its example—thus improving the welfare of all humanity.
But even a country as cautious, sound, and generous as Basicland could come to ruin if it failed to address the dangers that can be caused by the ordinary accidents of life. These dangers were significant by 2012, when the extreme prosperity of Basicland had created a peculiar outcome: As their affluence and leisure time grew, Basicland's citizens more and more whiled away their time in the excitement of casino gambling. Most casino revenue now came from bets on security prices under a system used in the 1920s in the United States and called "the bucket shop system."
The winnings of the casinos eventually amounted to 25 percent of Basicland's GDP, while 22 percent of all employee earnings in Basicland were paid to persons employed by the casinos (many of whom were engineers needed elsewhere). So much time was spent at casinos that it amounted to an average of five hours per day for every citizen of Basicland, including newborn babies and the comatose elderly. Many of the gamblers were highly talented engineers attracted partly by casino poker but mostly by bets available in the bucket shop systems, with the bets now called "financial derivatives."
Many people, particularly foreigners with savings to invest, regarded this situation as disgraceful. After all, they reasoned, it was just common sense for lenders to avoid gambling addicts. As a result, almost all foreigners avoided holding Basicland's currency or owning its bonds. They feared big trouble if the gambling-addicted citizens of Basicland were suddenly faced with hardship.
And then came the twin shocks. Hydrocarbon prices rose to new highs. And in Basicland's export markets there was a dramatic increase in low-cost competition from developing countries. It was soon obvious that the same exports that had formerly amounted to 25 percent of Basicland's GDP would now only amount to 10 percent. Meanwhile, hydrocarbon imports would amount to 30 percent of GDP, instead of 15 percent. Suddenly Basicland had to come up with 30 percent of its GDP every year, in foreign currency, to pay its creditors.
How was Basicland to adjust to this brutal new reality? This problem so stumped Basicland's politicians that they asked for advice from Benfranklin Leekwanyou Vokker, an old man who was considered so virtuous and wise that he was often called the "Good Father." Such consultations were rare. Politicians usually ignored the Good Father because he made no campaign contributions.
Among the suggestions of the Good Father were the following. First, he suggested that Basicland change its laws. It should strongly discourage casino gambling, partly through a complete ban on the trading in financial derivatives, and it should encourage former casino employees—and former casino patrons—to produce and sell items that foreigners were willing to buy. Second, as this change was sure to be painful, he suggested that Basicland's citizens cheerfully embrace their fate. After all, he observed, a man diagnosed with lung cancer is willing to quit smoking and undergo surgery because it is likely to prolong his life.
The views of the Good Father drew some approval, mostly from people who admired the fiscal virtue of the Romans during the Punic Wars. But others, including many of Basicland's prominent economists, had strong objections. These economists had intense faith that any outcome at all in a free market—even wild growth in casino gambling—is constructive. Indeed, these economists were so committed to their basic faith that they looked forward to the day when Basicland would expand real securities trading, as a percentage of securities outstanding, by a factor of 100, so that it could match the speculation level present in the United States just before onslaught of the Great Recession that began in 2008.
The strong faith of these Basicland economists in the beneficence of hypergambling in both securities and financial derivatives stemmed from their utter rejection of the ideas of the great and long-dead economist who had known the most about hyperspeculation, John Maynard Keynes. Keynes had famously said, "When the capital development of a country is the byproduct of the operations of a casino, the job is likely to be ill done." It was easy for these economists to dismiss such a sentence because securities had been so long associated with respectable wealth, and financial derivatives seemed so similar to securities.
Basicland's investment and commercial bankers were hostile to change. Like the objecting economists, the bankers wanted change exactly opposite to change wanted by the Good Father. Such bankers provided constructive services to Basicland. But they had only moderate earnings, which they deeply resented because Basicland's casinos—which provided no such constructive services—reported immoderate earnings from their bucket-shop systems. Moreover, foreign investment bankers had also reported immoderate earnings after building their own bucket-shop systems—and carefully obscuring this fact with ingenious twaddle, including claims that rational risk-management systems were in place, supervised by perfect regulators. Naturally, the ambitious Basicland bankers desired to prosper like the foreign bankers. And so they came to believe that the Good Father lacked any understanding of important and eternal causes of human progress that the bankers were trying to serve by creating more bucket shops in Basicland.
Of course, the most effective political opposition to change came from the gambling casinos themselves. This was not surprising, as at least one casino was located in each legislative district. The casinos resented being compared with cancer when they saw themselves as part of a long-established industry that provided harmless pleasure while improving the thinking skills of its customers.
As it worked out, the politicians ignored the Good Father one more time, and the Basicland banks were allowed to open bucket shops and to finance the purchase and carry of real securities with extreme financial leverage. A couple of economic messes followed, during which every constituency tried to avoid hardship by deflecting it to others. Much counterproductive governmental action was taken, and the country's credit was reduced to tatters. Basicland is now under new management, using a new governmental system. It also has a new nickname: Sorrowland.
Friday, January 29, 2010
Why I Hope Gold Falls to $1,000
Why I Hope Gold Falls to $1,000
by Jeff Clark
As a self-professed gold bug, why would I possibly want my favorite investment to fall in value? Have the long hours finally caught up with me?
Au contraire; my near-constant devotion to all things gold has only served to crystallize one of the things I really want out of this. Here's a hint.
I had lunch with a reader at a recent conference, and while talking about one of my favorite subjects - gold stocks - I asked why he was invested so heavily in them. "Greed," he said bluntly and with little hesitation. I appreciated the honesty.
Let's be frank: I'm here to make money, and so are you. And that's why I hope gold falls to $1,000 again.
Let's say Bob has taken our advice and has been storing cash. I'll use $1,000 as an example. If Bob buys Yamana Gold now, he'd get about 93 shares as I write (at $10.73 per share).
Now, let's say gold drops to $1,000, about a 10% fall from here, and due to its leverage, AUY sells off by a 2-to-1 margin, meaning 20%. So with that same $1,000, Frank, who's waited for the downturn, buys 116 shares at around $8.58. Thus, instead of owning 93 shares at $10.73, he owns 116 shares at $8.58.
When Frank sells, he doesn't just make the difference between $8.58 and $10.73 (an extra 25%), he also makes 125% on the extra 23 shares he owns if Yamana doubles in a couple years, which I expect it to. So two years from now, Bob would have $2,000, but Frank would have $2,500 because he bought more shares and at a lower price. Frank makes 25% more than Bob on the same dollar investment simply by buying when gold and gold stocks fall in price.
Got $5,000 saved up? Multiply the profit by 5. And with larger amounts, you can see we're talking serious money.
I don't know if we'll see $1,000 again or not, or if Yamana will fall that low, but I would point out that corrections in the gold price can range as high as 20% (2008 notwithstanding), so a further sell-off in price would not be out of the ordinary. A 20% correction from gold's peak at $1,212.50 on December 2 would equal $970. That's not necessarily a prediction, but it shows you that price is certainly possible.
Don't like my wish? Remember, it's called a bull market for a reason; it's not a cow market or a puppy market. It's going to try and buck you off. But a correction to $1,000 or even lower can give you the chance to buy more, cheaper. Don't view sell-offs as a bad thing but rather as an opportunity.
Bring on $1,000!
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Editor of BIG GOLD
Casey Research
by Jeff Clark
As a self-professed gold bug, why would I possibly want my favorite investment to fall in value? Have the long hours finally caught up with me?
Au contraire; my near-constant devotion to all things gold has only served to crystallize one of the things I really want out of this. Here's a hint.
I had lunch with a reader at a recent conference, and while talking about one of my favorite subjects - gold stocks - I asked why he was invested so heavily in them. "Greed," he said bluntly and with little hesitation. I appreciated the honesty.
Let's be frank: I'm here to make money, and so are you. And that's why I hope gold falls to $1,000 again.
Let's say Bob has taken our advice and has been storing cash. I'll use $1,000 as an example. If Bob buys Yamana Gold now, he'd get about 93 shares as I write (at $10.73 per share).
Now, let's say gold drops to $1,000, about a 10% fall from here, and due to its leverage, AUY sells off by a 2-to-1 margin, meaning 20%. So with that same $1,000, Frank, who's waited for the downturn, buys 116 shares at around $8.58. Thus, instead of owning 93 shares at $10.73, he owns 116 shares at $8.58.
When Frank sells, he doesn't just make the difference between $8.58 and $10.73 (an extra 25%), he also makes 125% on the extra 23 shares he owns if Yamana doubles in a couple years, which I expect it to. So two years from now, Bob would have $2,000, but Frank would have $2,500 because he bought more shares and at a lower price. Frank makes 25% more than Bob on the same dollar investment simply by buying when gold and gold stocks fall in price.
Got $5,000 saved up? Multiply the profit by 5. And with larger amounts, you can see we're talking serious money.
I don't know if we'll see $1,000 again or not, or if Yamana will fall that low, but I would point out that corrections in the gold price can range as high as 20% (2008 notwithstanding), so a further sell-off in price would not be out of the ordinary. A 20% correction from gold's peak at $1,212.50 on December 2 would equal $970. That's not necessarily a prediction, but it shows you that price is certainly possible.
Don't like my wish? Remember, it's called a bull market for a reason; it's not a cow market or a puppy market. It's going to try and buck you off. But a correction to $1,000 or even lower can give you the chance to buy more, cheaper. Don't view sell-offs as a bad thing but rather as an opportunity.
Bring on $1,000!
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Editor of BIG GOLD
Casey Research
Wednesday, January 27, 2010
Grantham remarks on Supreme Court
… and the Bad News
Supremely Extreme: Another “Day That Will Live in
Infamy”
Five Supreme Court justices today announced that not only
are corporations people and that their money is free speech
– this is old hat and a very ugly hat at that – but now, there
should be no limit to the money they spend to infl uence
political outcomes. This would be one thing if corporations
really were “democratic associations” of humans that the
Founding Fathers may have wanted to protect. They are,
instead, small oligarchies of top management. Thus, the
top management of major oil and coal companies can
decide what political outcomes they want to promote,
say, unlimited production of carbon dioxide (none of their
CEOs apparently has grandchildren!), utterly without
any approval of their decisions by the millions of actual
owners. The fi nancial power of corporations was already
in danger of overwhelming the democratic process in
Congress and this makes the damage potentially unlimited
and puts the Court’s seal of approval on it. So let’s do it in
style and have a name change. The U.C.A. has a familiar
look: The United Corporations of America!
Supremely Extreme: Another “Day That Will Live in
Infamy”
Five Supreme Court justices today announced that not only
are corporations people and that their money is free speech
– this is old hat and a very ugly hat at that – but now, there
should be no limit to the money they spend to infl uence
political outcomes. This would be one thing if corporations
really were “democratic associations” of humans that the
Founding Fathers may have wanted to protect. They are,
instead, small oligarchies of top management. Thus, the
top management of major oil and coal companies can
decide what political outcomes they want to promote,
say, unlimited production of carbon dioxide (none of their
CEOs apparently has grandchildren!), utterly without
any approval of their decisions by the millions of actual
owners. The fi nancial power of corporations was already
in danger of overwhelming the democratic process in
Congress and this makes the damage potentially unlimited
and puts the Court’s seal of approval on it. So let’s do it in
style and have a name change. The U.C.A. has a familiar
look: The United Corporations of America!
Wednesday, January 13, 2010
Thursday, January 7, 2010
Average Investor Too Bullish
By MarketWatch
ANNANDALE, Va. (MarketWatch) -- Finally, after a nearly 70% rally, a large number of bears are throwing in the towel.
And that's bad news, since it means the wall of worry that the bull market has been climbing is crumbling.
Consider the average recommended equity exposure among the shortest-term stock market timers tracked by the Hulbert Financial Digest. Over the last 24 hours it jumped another 6.5 percentage points to 65.2%.
That's the highest level since late December 2006, more than three years. As recently as early November, the average stood at just 3.2%.
A similar story is being told by the sentiment survey conducted weekly by the American Association of Individual Investors. In that survey, organization members visiting the AAII website are asked to report whether they think the stock market's trend is bullish, bearish, or neutral.
To consolidate those three percentages into a single barometer, researchers often calculate the ratio of the bullish percentage to the total percentage of those that are either bullish or bearish. That ratio currently stands at 68.2%, which is the highest level since February 2007.
Finally, consider the sentiment survey conducted weekly by Investors Intelligence, the latest of which was released this morning. That survey is based on the percentage of monitored newsletters that are bullish, bearish, or neutral.
The ratio of bulls to those either bullish or bearish now stands at 74.1%, which but for slightly higher readings in the last couple of weeks, is the highest since October 2007, the month of the stock market's all-time high.
The bottom line? Market appreciation over the coming weeks therefore will have to come without the sentiment winds blowing in stocks' sails.
ANNANDALE, Va. (MarketWatch) -- Finally, after a nearly 70% rally, a large number of bears are throwing in the towel.
And that's bad news, since it means the wall of worry that the bull market has been climbing is crumbling.
Consider the average recommended equity exposure among the shortest-term stock market timers tracked by the Hulbert Financial Digest. Over the last 24 hours it jumped another 6.5 percentage points to 65.2%.
That's the highest level since late December 2006, more than three years. As recently as early November, the average stood at just 3.2%.
A similar story is being told by the sentiment survey conducted weekly by the American Association of Individual Investors. In that survey, organization members visiting the AAII website are asked to report whether they think the stock market's trend is bullish, bearish, or neutral.
To consolidate those three percentages into a single barometer, researchers often calculate the ratio of the bullish percentage to the total percentage of those that are either bullish or bearish. That ratio currently stands at 68.2%, which is the highest level since February 2007.
Finally, consider the sentiment survey conducted weekly by Investors Intelligence, the latest of which was released this morning. That survey is based on the percentage of monitored newsletters that are bullish, bearish, or neutral.
The ratio of bulls to those either bullish or bearish now stands at 74.1%, which but for slightly higher readings in the last couple of weeks, is the highest since October 2007, the month of the stock market's all-time high.
The bottom line? Market appreciation over the coming weeks therefore will have to come without the sentiment winds blowing in stocks' sails.
Monday, December 28, 2009
Merry Christmas to the Markets
'Twas the day before Christmas, when all through the land
Not a trader was stirring, and isn't that grand;
The markets were recovered from the depths of despair,
In hopes that we'd never revisit that scare;
Hedge fund managers were nestled all snug in their beds,
While visions of met high water marks danced in their heads;
And mutual funds in their performance, and I on the sell side
Had finally settled down after capital raises left us just fried.
In December in the markets there arose such a clatter,
I sprang to my Bloomberg to see what was the matter.
Away to Dubai the news flew like a flash,
Reporting debt extensions, investors feared the next crash.
The moon on the breast of the Palm Island sand
Gave the luster of guarantees from the other Emirates hand,
When, what to my wondering eyes should appear,
But a wine induced flashback of the events of last year,
The year had a poor start, with this deep deep recession,
I felt at that moment we were in a Great Depression.
But more rapid than eagles the Fed programs they came,
And Bernanke whistled, and shouted, and called them by name;
Now, TAF! Now TALF! Now CAP and low rates!
On, MMIF! On AMLF! On SCAP! There’s no time for debates!
To the stress test results! To the capital shortfall!
Now raise away! Raise away! Raise away all!
As dry dollars that before the wild hurricane fly,
When they meet with a bank stock, mount to the sky,
So up to "normalized earnings" the investors they flew,
With a sleigh full of funds for bonds and equities too.
And then in a twinkling I saw in the banks
The lifting and raising as buyers closed up their ranks.
As I drew in my bear claws and was turning around,
Down the stairs all the bankers came with a bound.
They were dressed all in suits from the heads to their feet,
And their clothes were all rumpled and they really looked beat;
Huge bundles of stock they had flung on their backs,
And they looked like peddlers opening their packs.
Investors eyes -- how they twinkled! Their demand it was strong!
Their appetites whetted! They craved to be long!
These droll great big deals were drawn up in great haste,
Since the window was open there was not a moment to waste;
The bulk of these deals were held tight by the street,
And the rally it encircled the globe like a wreath;
Hybrids and credit had a nice round rally,
That extended the move for those keeping a tally.
Things rapidly felt better, a right jolly move,
That shook out the bears who were caught in their groove;
A drop in the VIX and tightening spreads,
Soon gave me to know I had nothing to dread;
Data began to improve as liquidity went straight to work,
And sent markets yet higher, then we got a small jerk,
As Dubai meant sovereign debt widened out,
Markets had a twitched, having a moment of doubt;
The Fed sprang to its sleigh, to low rates have a bow,
And away the fears flew with new highs for the Dow
So with great joy after this year fraught with great fright
I say HAPPY CHRISTMAS TO ALL AND TO ALL A GOOD-NIGHT"
Not a trader was stirring, and isn't that grand;
The markets were recovered from the depths of despair,
In hopes that we'd never revisit that scare;
Hedge fund managers were nestled all snug in their beds,
While visions of met high water marks danced in their heads;
And mutual funds in their performance, and I on the sell side
Had finally settled down after capital raises left us just fried.
In December in the markets there arose such a clatter,
I sprang to my Bloomberg to see what was the matter.
Away to Dubai the news flew like a flash,
Reporting debt extensions, investors feared the next crash.
The moon on the breast of the Palm Island sand
Gave the luster of guarantees from the other Emirates hand,
When, what to my wondering eyes should appear,
But a wine induced flashback of the events of last year,
The year had a poor start, with this deep deep recession,
I felt at that moment we were in a Great Depression.
But more rapid than eagles the Fed programs they came,
And Bernanke whistled, and shouted, and called them by name;
Now, TAF! Now TALF! Now CAP and low rates!
On, MMIF! On AMLF! On SCAP! There’s no time for debates!
To the stress test results! To the capital shortfall!
Now raise away! Raise away! Raise away all!
As dry dollars that before the wild hurricane fly,
When they meet with a bank stock, mount to the sky,
So up to "normalized earnings" the investors they flew,
With a sleigh full of funds for bonds and equities too.
And then in a twinkling I saw in the banks
The lifting and raising as buyers closed up their ranks.
As I drew in my bear claws and was turning around,
Down the stairs all the bankers came with a bound.
They were dressed all in suits from the heads to their feet,
And their clothes were all rumpled and they really looked beat;
Huge bundles of stock they had flung on their backs,
And they looked like peddlers opening their packs.
Investors eyes -- how they twinkled! Their demand it was strong!
Their appetites whetted! They craved to be long!
These droll great big deals were drawn up in great haste,
Since the window was open there was not a moment to waste;
The bulk of these deals were held tight by the street,
And the rally it encircled the globe like a wreath;
Hybrids and credit had a nice round rally,
That extended the move for those keeping a tally.
Things rapidly felt better, a right jolly move,
That shook out the bears who were caught in their groove;
A drop in the VIX and tightening spreads,
Soon gave me to know I had nothing to dread;
Data began to improve as liquidity went straight to work,
And sent markets yet higher, then we got a small jerk,
As Dubai meant sovereign debt widened out,
Markets had a twitched, having a moment of doubt;
The Fed sprang to its sleigh, to low rates have a bow,
And away the fears flew with new highs for the Dow
So with great joy after this year fraught with great fright
I say HAPPY CHRISTMAS TO ALL AND TO ALL A GOOD-NIGHT"
Thursday, December 17, 2009
Thoughts from Wayne Jett
FED PREDICAMENT EASES
Dollar Improves Slightly
By Wayne Jett © December 16, 2009
When America’s dominant elite began purging certain of Wall Street’s big players in 2008, Federal Reserve chairman Ben Bernanke stepped into the breach. He didn’t volunteer. He was taken there by the czar of purges, Treasury secretary and Goldman Sachs ex-CEO Henry Paulson. The experience must have changed his worldview, particularly his idea of the Fed’s place in the pecking order.
What Bernanke saw at the Bear Stearns tactical session was financial sausage-making. Securities & Exchange Commission chairman Christopher Cox was so shocked that he never came to another such session; something about concern on his part that he was supposed to be enforcing the securities laws.
The Purges of 2008
Bernanke was not expendable, as Cox was. Paulson needed the Federal Reserve to pump $25 billion in cash into Bear and guarantee another $29 billion or so of its financial assets before all of it was given to J. P. Morgan Chase, essentially for a big kiss. Did anyone mention that Morgan Chase is the giant international bank historically controlled by Rockefellers and Rothschilds?
Morgan Chase got fat on Bear, and Bear’s shareholders got skinned while Paulson held them upside down by their feet. Then the purge czar struck again, and again. Fannie Mae, Freddie Mac, Lehman Bros., AIG, National City (Ohio’s biggest bank), Merrill Lynch, Wachovia, Washington Mutual – each fell to his ax. The shareholders of these financial giants ate dirt as hundreds of billions of their invested capital poured into the pockets of fraudulent traders, thanks largely to “innovative” derivatives trading which counterfeited and “watered” their capital stock.
Chairman Bernanke dutifully waded from one slaughter to the next, doing as he was told, which meant providing financial backing for whatever terms the purge czar set for gifts to intended beneficiaries. Morgan Chase alone got both Bear Stearns and Washington Mutual, the Seattle-based national home mortgage lender. Morgan Chase’s CEO subsequently told his shareholders 2008 was the bank’s best year ever.
WaMu’s takedown emitted just as much stench of the purge czar as the other deals mentioned, even at the time. Recent reporting from Seattle investigators reveals FDIC’s Sheila Bair served as spearhead for the move against WaMu, which was seized when the firm had $29 billion in net liquidity, almost twice the five percent liquidity required. Subpoenas issued in bankruptcy proceedings are going after emails of others involved, including Morgan Chase and Goldman Sachs. Even without subpoena power applied by any criminal law enforcement agency, seizure of WaMu has all the earmarks of federal complicity in destruction of one private company for benefit of another.
The Fed’s Balance Sheet
As these financial purges were orchestrated, Chairman Bernanke found the Federal Reserve with a much enlarged balance sheet showing assets of an unprecedented nature. On his signature, the Fed advanced over $1.3 trillion for securities of varying nature, when the Fed’s total assets previously were $850 billion. Bernanke has been unwilling to say who sold him the securities, what prices were paid, or how prices were determined.
If the Fed were just another private bank, perhaps keeping confidences would seem acceptable. But the Fed, unlike other banks, prints the money it spends under license of the U. S. government. Every dollar issued by the Fed makes every other dollar held by Americans (not to mention people around the world) worth less than would be the case if the new dollar didn’t exist. This explains why some, even in Congress, want Bernanke to detail what he did with the $1.3 trillion before he is confirmed by the Senate for another term as Fed chairman.
When Bernanke was spending the money, he said he had no choice but to do it. Clearly someone made choices, because some banks were saved and some were slaughtered. As in Animal Farm, some banks are more equal than others, and the differences are not always apparent on their financial statements.
“De Plan, De Plan”
Bernanke also indicated he had a plan for extracting the new liquidity from the economy before the dollar’s value is swamped by it. But in a Senate hearing last week, Senator Jim Bunning revealed Bernanke told him by letter he has no such plan. Perhaps, again, the Fed chairman just doesn’t wish to talk about it.
In order to drain the $1.3 trillion in new liquidity, the Fed must dispose of the acquired assets at prices at least as high as were paid for them. If the assets were to prove worthless, the Fed simply could not drain the liquidity because it would have nothing to sell for it.
As previously reported here, the Fed bought those assets because their prices were being fraudulently manipulated lower by various maneuvers which created “toxic” images for them. The banks which owned the “toxic assets” were endangered by manipulation of their own share prices. The Fed bought in order to shield the assets and the banks from further attack, because the Fed itself was immune for naked short selling of its shares.
As previously warned, too, any sale of these “toxic assets” by the Fed might restart the bear attacks on their value and on the banks. In order for the Fed to proceed with confidence to market the assets and withdraw so much excess liquidity, fraudulent trading practices must be stopped. On this point a modicum of good news appears as a light in a tunnel.
Positive Developments
Bloomberg News reports leveraged loans rated below BBB- by S&P or below Baa3 by Moody’s have risen 49.3% in value this year, after falling 28.2% in 2008. BBB rated loans are said to be priced presently at about 55 cents on the dollar. Higher rated loans fell less, and have also recovered, rising from 69 cents to 89 cents on the dollar.
This is good news for Bernanke and the Fed, which might even sell the formerly toxic assets at a significant profit. If that were to happen, the Fed could actually strengthen the dollar by draining more dollars than it created to buy the assets. In reality, the Fed probably would not destroy those dollars, since its practice is to give excess “earnings” to the Treasury to spend. The markets noticed, of course, as the dollar recovered somewhat from above $1,200/oz gold.
The strong price recovery of collateralized debt obligations can be traced to incremental changes in market conditions which enabled their prices to be beaten down. By demand of Congress, the FASB modified or clarified its Rule 157, which had required “mark-to-market” accounting the value of these assets. The ABX.HE index was outed somewhat as an unreliable indicator of real market value of such assets. The SEC repealed its “Madoff exception” regulation which so importantly assisted bear attacks on financial shares, as it permitted market makers in credit default swaps and options to hedge by selling shares short without borrowing or delivering the shares sold within a definite time limit.
Reforms Left Undone
Each of these reforms was absolutely essential to achieve the meager amount of recovery, or slowing of the drop, seen in 2009. But so much more remains undone. Reform of oil price manipulation passed the House, but only in a larger bill containing more bad than good. By past performance of Wall Street and Congress, all of the good is likely to be stripped from the bill, assuming the Senate acts and legislation actually makes it to conference. Meanwhile, the SEC still has done nothing to stop High Frequency Trading (front-running all trades) or to restore the Uptick Rule, and is unlikely to act unless Congress requires it by statute.
Confirmation of Bernanke’s re-nomination as Fed chairman is due to be considered by the Senate on December 17, but may be delayed by request of an individual senator. A rumor is out that he may withdraw his name. Even with the positive development reported above, what he learned the past 22 months may lead him to think the predators are not finished. ~
Dollar Improves Slightly
By Wayne Jett © December 16, 2009
When America’s dominant elite began purging certain of Wall Street’s big players in 2008, Federal Reserve chairman Ben Bernanke stepped into the breach. He didn’t volunteer. He was taken there by the czar of purges, Treasury secretary and Goldman Sachs ex-CEO Henry Paulson. The experience must have changed his worldview, particularly his idea of the Fed’s place in the pecking order.
What Bernanke saw at the Bear Stearns tactical session was financial sausage-making. Securities & Exchange Commission chairman Christopher Cox was so shocked that he never came to another such session; something about concern on his part that he was supposed to be enforcing the securities laws.
The Purges of 2008
Bernanke was not expendable, as Cox was. Paulson needed the Federal Reserve to pump $25 billion in cash into Bear and guarantee another $29 billion or so of its financial assets before all of it was given to J. P. Morgan Chase, essentially for a big kiss. Did anyone mention that Morgan Chase is the giant international bank historically controlled by Rockefellers and Rothschilds?
Morgan Chase got fat on Bear, and Bear’s shareholders got skinned while Paulson held them upside down by their feet. Then the purge czar struck again, and again. Fannie Mae, Freddie Mac, Lehman Bros., AIG, National City (Ohio’s biggest bank), Merrill Lynch, Wachovia, Washington Mutual – each fell to his ax. The shareholders of these financial giants ate dirt as hundreds of billions of their invested capital poured into the pockets of fraudulent traders, thanks largely to “innovative” derivatives trading which counterfeited and “watered” their capital stock.
Chairman Bernanke dutifully waded from one slaughter to the next, doing as he was told, which meant providing financial backing for whatever terms the purge czar set for gifts to intended beneficiaries. Morgan Chase alone got both Bear Stearns and Washington Mutual, the Seattle-based national home mortgage lender. Morgan Chase’s CEO subsequently told his shareholders 2008 was the bank’s best year ever.
WaMu’s takedown emitted just as much stench of the purge czar as the other deals mentioned, even at the time. Recent reporting from Seattle investigators reveals FDIC’s Sheila Bair served as spearhead for the move against WaMu, which was seized when the firm had $29 billion in net liquidity, almost twice the five percent liquidity required. Subpoenas issued in bankruptcy proceedings are going after emails of others involved, including Morgan Chase and Goldman Sachs. Even without subpoena power applied by any criminal law enforcement agency, seizure of WaMu has all the earmarks of federal complicity in destruction of one private company for benefit of another.
The Fed’s Balance Sheet
As these financial purges were orchestrated, Chairman Bernanke found the Federal Reserve with a much enlarged balance sheet showing assets of an unprecedented nature. On his signature, the Fed advanced over $1.3 trillion for securities of varying nature, when the Fed’s total assets previously were $850 billion. Bernanke has been unwilling to say who sold him the securities, what prices were paid, or how prices were determined.
If the Fed were just another private bank, perhaps keeping confidences would seem acceptable. But the Fed, unlike other banks, prints the money it spends under license of the U. S. government. Every dollar issued by the Fed makes every other dollar held by Americans (not to mention people around the world) worth less than would be the case if the new dollar didn’t exist. This explains why some, even in Congress, want Bernanke to detail what he did with the $1.3 trillion before he is confirmed by the Senate for another term as Fed chairman.
When Bernanke was spending the money, he said he had no choice but to do it. Clearly someone made choices, because some banks were saved and some were slaughtered. As in Animal Farm, some banks are more equal than others, and the differences are not always apparent on their financial statements.
“De Plan, De Plan”
Bernanke also indicated he had a plan for extracting the new liquidity from the economy before the dollar’s value is swamped by it. But in a Senate hearing last week, Senator Jim Bunning revealed Bernanke told him by letter he has no such plan. Perhaps, again, the Fed chairman just doesn’t wish to talk about it.
In order to drain the $1.3 trillion in new liquidity, the Fed must dispose of the acquired assets at prices at least as high as were paid for them. If the assets were to prove worthless, the Fed simply could not drain the liquidity because it would have nothing to sell for it.
As previously reported here, the Fed bought those assets because their prices were being fraudulently manipulated lower by various maneuvers which created “toxic” images for them. The banks which owned the “toxic assets” were endangered by manipulation of their own share prices. The Fed bought in order to shield the assets and the banks from further attack, because the Fed itself was immune for naked short selling of its shares.
As previously warned, too, any sale of these “toxic assets” by the Fed might restart the bear attacks on their value and on the banks. In order for the Fed to proceed with confidence to market the assets and withdraw so much excess liquidity, fraudulent trading practices must be stopped. On this point a modicum of good news appears as a light in a tunnel.
Positive Developments
Bloomberg News reports leveraged loans rated below BBB- by S&P or below Baa3 by Moody’s have risen 49.3% in value this year, after falling 28.2% in 2008. BBB rated loans are said to be priced presently at about 55 cents on the dollar. Higher rated loans fell less, and have also recovered, rising from 69 cents to 89 cents on the dollar.
This is good news for Bernanke and the Fed, which might even sell the formerly toxic assets at a significant profit. If that were to happen, the Fed could actually strengthen the dollar by draining more dollars than it created to buy the assets. In reality, the Fed probably would not destroy those dollars, since its practice is to give excess “earnings” to the Treasury to spend. The markets noticed, of course, as the dollar recovered somewhat from above $1,200/oz gold.
The strong price recovery of collateralized debt obligations can be traced to incremental changes in market conditions which enabled their prices to be beaten down. By demand of Congress, the FASB modified or clarified its Rule 157, which had required “mark-to-market” accounting the value of these assets. The ABX.HE index was outed somewhat as an unreliable indicator of real market value of such assets. The SEC repealed its “Madoff exception” regulation which so importantly assisted bear attacks on financial shares, as it permitted market makers in credit default swaps and options to hedge by selling shares short without borrowing or delivering the shares sold within a definite time limit.
Reforms Left Undone
Each of these reforms was absolutely essential to achieve the meager amount of recovery, or slowing of the drop, seen in 2009. But so much more remains undone. Reform of oil price manipulation passed the House, but only in a larger bill containing more bad than good. By past performance of Wall Street and Congress, all of the good is likely to be stripped from the bill, assuming the Senate acts and legislation actually makes it to conference. Meanwhile, the SEC still has done nothing to stop High Frequency Trading (front-running all trades) or to restore the Uptick Rule, and is unlikely to act unless Congress requires it by statute.
Confirmation of Bernanke’s re-nomination as Fed chairman is due to be considered by the Senate on December 17, but may be delayed by request of an individual senator. A rumor is out that he may withdraw his name. Even with the positive development reported above, what he learned the past 22 months may lead him to think the predators are not finished. ~
Wednesday, December 9, 2009
Fidelity Comments
The Great Depression was actually two depressions. It started with World War One, which essentially bankrupted Europe in the 1920's. The
U.S.—via the Fed—lent a helping hand by extending easy money to Europe, around 1925-1927. However, in a classic example of the "laws
of unintended consequences," some of this easy money ended up in our own stock market, thus contributing to the massive bubble that burst
in 1929. This episode shows that the concept of "moral hazard" is not new. It existed as far back as the 1920's.
When the bubble burst in 1929, it unleashed a wave of deflationary debt deleveraging onto the U.S. economy, much like occurred in 2008
after the housing bubble burst. However, during the 1930's the Fed was on the gold standard, which made it impossible to just open up the
liquidity spigot like it did last year. In fact, the gold standard acted somewhat like a straight jacket and the Fed actually raised rates for a while,
which is obviously the last thing you one should be doing during an economic crisis. This "policy error" undoubtedly contributed to the 87%
blood bath in stocks from 1929 to 1932.
Bernanke knows this well, which is probably why he responded with such overwhelming force in the fall of 2008 following the collapse of
Lehman. Not only did the Fed lower rates to zero, but it expanded the monetary base. We call this "quantitative easing" or more simply
"printing money”.
The idea behind quantitative easing is that the Fed creates (out of thin air) excess banking reserves. Those reserves end up on the balance
sheet of the banks, who are then supposed to lend out these new reserves to consumers and businesses. That triggers what is known as the
money multiplier, which then expands the money supply and brings the economy back to life, and creates inflation (which under those
circumstances is a desired outcome).
The problem back then was that the Gold Standard prevented the Fed from doing this, until Franklin D. Roosevelt (FDR) came into power in
1933. FDR realized that the gold standard was limiting his ability to respond to the crisis, and in April of 1933 he changed it. He did this by
making it illegal to own gold. Holders of gold had to turn in their bullion and they received the stated conversion price of $20/oz. FDR then
changed the conversion price to $35/oz, and with the stroke of a pen he increased the money supply by 60% and devalued the dollar at the
same time. That was the catalyst for a 150% rally in the stock market and several years of very strong economic growth.
U.S.—via the Fed—lent a helping hand by extending easy money to Europe, around 1925-1927. However, in a classic example of the "laws
of unintended consequences," some of this easy money ended up in our own stock market, thus contributing to the massive bubble that burst
in 1929. This episode shows that the concept of "moral hazard" is not new. It existed as far back as the 1920's.
When the bubble burst in 1929, it unleashed a wave of deflationary debt deleveraging onto the U.S. economy, much like occurred in 2008
after the housing bubble burst. However, during the 1930's the Fed was on the gold standard, which made it impossible to just open up the
liquidity spigot like it did last year. In fact, the gold standard acted somewhat like a straight jacket and the Fed actually raised rates for a while,
which is obviously the last thing you one should be doing during an economic crisis. This "policy error" undoubtedly contributed to the 87%
blood bath in stocks from 1929 to 1932.
Bernanke knows this well, which is probably why he responded with such overwhelming force in the fall of 2008 following the collapse of
Lehman. Not only did the Fed lower rates to zero, but it expanded the monetary base. We call this "quantitative easing" or more simply
"printing money”.
The idea behind quantitative easing is that the Fed creates (out of thin air) excess banking reserves. Those reserves end up on the balance
sheet of the banks, who are then supposed to lend out these new reserves to consumers and businesses. That triggers what is known as the
money multiplier, which then expands the money supply and brings the economy back to life, and creates inflation (which under those
circumstances is a desired outcome).
The problem back then was that the Gold Standard prevented the Fed from doing this, until Franklin D. Roosevelt (FDR) came into power in
1933. FDR realized that the gold standard was limiting his ability to respond to the crisis, and in April of 1933 he changed it. He did this by
making it illegal to own gold. Holders of gold had to turn in their bullion and they received the stated conversion price of $20/oz. FDR then
changed the conversion price to $35/oz, and with the stroke of a pen he increased the money supply by 60% and devalued the dollar at the
same time. That was the catalyst for a 150% rally in the stock market and several years of very strong economic growth.
Friday, December 4, 2009
Marty Whitman & Joe Huber
Here’s a quick article from the great portfolio manager Marty Whitman. I sold most of the holdings I had in his fund last year because he held onto some stocks way too long. Whitman talks about the value one should pay when buying a stock. It’s not a bad way to buy stocks—provided the underlying assets don’t drop in value. They did last year. Whitman gave $25 million to my alma mater—Syracuse School of Management.
Also, I have a link to my friend Joe Huber’s mutual fund. Joe broke off from Hotchkiss & Wiley and put out his own shingle. One of his funds is up 81% year-to-date, number one according to the Wall Street Journal. If you want to talk to Joe, let me know.
http://online.wsj.com/fund/page/fund_scorecards.html?classification=106&returnTime=Daily_Tr_1Y~best&submit.x=1
StreetDogs: It will take more than a 45% loss to subdue this 85-year-old man
Published: 2009/12/03 06:47:47 AM
MARTIN Whitman, the 85-year-old chief investment officer of Third Avenue Fund, who once described it as “better than the toll booth on George Washington Bridge”, lost 45% of his fund last year.
Prior to 2007, Whitman, who is a legend at picking over the balance sheets of troubled companies in search of hidden treasures, had achieved a track record of approximately 17% a year going back to 1990.
Despite having lost 24% of the fund’s value during 1998 and 1999, Whitman — who calls himself the “safe and cheap” investor — only buys at a “big” discount to net asset value.
His definition of net asset value being what a company would sell for in a takeover or on auction.
So, how much of a discount? “Don’t pay more than 50%-60% of what a business is worth,” he advised in a 2006 interview.
“It is … crazy to pay more than 60c on a dollar for noncontrolling interests in businesses. Outsiders always face agency problems.”
Besides cheap, Whitman also wants a strong balance sheet; competent, shareholder-oriented management as well as “understandable and honest disclosure documents”. Balance sheets are much more important than the income statement, he says.
“Security analysis would be simpler if one focuses on the balance sheet while placing no emphasis on the income statement and earnings estimates.”
Whitman has developed the following rules of thumb for valuating various companies :
n Financial services: book value.
n Small banks: 80% of book value.
n Insurance: adjusted book value.
n Real estate: independent appraisal value.
n Operating companies: 10 times peak earnings or less than net asset value.
n Tech companies: twice book value, less than 10 times peak earnings, twice revenue and more cash than liabilities.
Whitman also doesn’t believe in traditional growth investing . “We are growth investors, too,” he says. “We buy into the kind of growth that is not generally recognis ed while most other growth investors buy into generally recognised growth and have to pay up for that.” The key is to figure out the value of future growth.
“Many people on Wall Street know the price of everything but the value of nothing.”
In a recent Shareholders Letter, Whitman says there are at least three lessons investors should have learned from the 2007- 08 debacle:
n Not to invest in the common stocks of companies that need continuous access to capital markets, especially credit markets. “The short sellers have become too powerful.”
n Not to borrow money to finance portfolio holdings. “Prices … are just too capricious to permit this activity to be undertaken safely.”
n Fund redemptions interfere with portfolio management, “forcing fund managers to sell precisely when they should be buying”.
Also, I have a link to my friend Joe Huber’s mutual fund. Joe broke off from Hotchkiss & Wiley and put out his own shingle. One of his funds is up 81% year-to-date, number one according to the Wall Street Journal. If you want to talk to Joe, let me know.
http://online.wsj.com/fund/page/fund_scorecards.html?classification=106&returnTime=Daily_Tr_1Y~best&submit.x=1
StreetDogs: It will take more than a 45% loss to subdue this 85-year-old man
Published: 2009/12/03 06:47:47 AM
MARTIN Whitman, the 85-year-old chief investment officer of Third Avenue Fund, who once described it as “better than the toll booth on George Washington Bridge”, lost 45% of his fund last year.
Prior to 2007, Whitman, who is a legend at picking over the balance sheets of troubled companies in search of hidden treasures, had achieved a track record of approximately 17% a year going back to 1990.
Despite having lost 24% of the fund’s value during 1998 and 1999, Whitman — who calls himself the “safe and cheap” investor — only buys at a “big” discount to net asset value.
His definition of net asset value being what a company would sell for in a takeover or on auction.
So, how much of a discount? “Don’t pay more than 50%-60% of what a business is worth,” he advised in a 2006 interview.
“It is … crazy to pay more than 60c on a dollar for noncontrolling interests in businesses. Outsiders always face agency problems.”
Besides cheap, Whitman also wants a strong balance sheet; competent, shareholder-oriented management as well as “understandable and honest disclosure documents”. Balance sheets are much more important than the income statement, he says.
“Security analysis would be simpler if one focuses on the balance sheet while placing no emphasis on the income statement and earnings estimates.”
Whitman has developed the following rules of thumb for valuating various companies :
n Financial services: book value.
n Small banks: 80% of book value.
n Insurance: adjusted book value.
n Real estate: independent appraisal value.
n Operating companies: 10 times peak earnings or less than net asset value.
n Tech companies: twice book value, less than 10 times peak earnings, twice revenue and more cash than liabilities.
Whitman also doesn’t believe in traditional growth investing . “We are growth investors, too,” he says. “We buy into the kind of growth that is not generally recognis ed while most other growth investors buy into generally recognised growth and have to pay up for that.” The key is to figure out the value of future growth.
“Many people on Wall Street know the price of everything but the value of nothing.”
In a recent Shareholders Letter, Whitman says there are at least three lessons investors should have learned from the 2007- 08 debacle:
n Not to invest in the common stocks of companies that need continuous access to capital markets, especially credit markets. “The short sellers have become too powerful.”
n Not to borrow money to finance portfolio holdings. “Prices … are just too capricious to permit this activity to be undertaken safely.”
n Fund redemptions interfere with portfolio management, “forcing fund managers to sell precisely when they should be buying”.
Sunday, November 15, 2009
Russell on Gold
ring to the surge in the gold price, the quote du jour this week comes from Richard Russell, 85-year-old author of the Dow Theory Letters. He said: “America’s Fed Chairman, Ben Bernanke, is convinced he knows the secret of avoiding hard times. The Fed can halt deflation and turn the picture into asset inflation. All it takes, thinks Bernanke, is zero interest rates and the creation of trillions of new dollars - and they will come, and they will spend. This is the path the Bernanke Fed has chosen. So far, it has not worked - they are not coming, and they are not spending. The Fed’s strategy has not even succeeded in bringing down unemployment. Bernanke’s solution - more of the same: ‘Whatever it takes, and as long as it takes.’
“Thus we have a strange and ironic situation. We have world deflation, and a Fed Chairman who believes he can manipulate the primary trend. Bernanke’s strategy is leading to a weakening dollar. The more dollars that are created, the weaker the dollar. As the dollar’s very status comes into question, wise and seasoned investors move to protect their wealth. They move to the time-honored ’safe haven’: the one unit of wealth that cannot be destroyed in that it is not a liability of any government. And, of course, I’m talking about the one unit of wealth that is never questioned - gold.
“So it’s the gold bull market that I trust and believe in. I think and I ponder - what can halt the gold bull market? The only thing that can halt the gold bull market is a complete reversal by the politicians and the Fed, and that would allow the US to sink into a state of deflation and depression. Unthinkable.”
“Thus we have a strange and ironic situation. We have world deflation, and a Fed Chairman who believes he can manipulate the primary trend. Bernanke’s strategy is leading to a weakening dollar. The more dollars that are created, the weaker the dollar. As the dollar’s very status comes into question, wise and seasoned investors move to protect their wealth. They move to the time-honored ’safe haven’: the one unit of wealth that cannot be destroyed in that it is not a liability of any government. And, of course, I’m talking about the one unit of wealth that is never questioned - gold.
“So it’s the gold bull market that I trust and believe in. I think and I ponder - what can halt the gold bull market? The only thing that can halt the gold bull market is a complete reversal by the politicians and the Fed, and that would allow the US to sink into a state of deflation and depression. Unthinkable.”
Tuesday, November 3, 2009
Great comments from Guild Investments
Guild Investment Global Market Commentary
Written: November 2, 2009
Last week, we had a short-lived rally in the U.S. dollar predicated on the unrealistic view that a weaker U.S. economy would send gold and oil down and the dollar up. Only algorithm writers who are completely ignorant about stock and commodity markets could believe that a poor U.S. economy is actually good for the U.S. dollar.
After a few days, the dollar’s rally reversed and began to decline again while gold and oil are once again rising. In our opinion, any declines in oil and gold prices over the next few months can be used as buying opportunities.
We expect oil to trade between $60 and $100 per barrel for the next two years. After that, we expect oil prices to rise much higher.
We favor gold bullion and gold shares, oil stocks, U.S. technology companies that are poised to serve the world market through exports, and companies in emerging countries with growth potential.
INTEREST RATES
Last week, interest rates were forced up by the market, with the yield for U.S. ten year paper rising as the Treasury tried to sell $140 billion of new bonds. Buyers are demanding higher rates, but the U.S. government is not going to raise short term rates until GDP growth increases substantially and remains good for a year or more. Although the market may continue to force up longer term interest rates, we do not expect the Federal Reserve to raise short term rates.
Indeed, the U.S. Federal Reserve wants interest rates to stay low. They realize that this is necessary to support asset values (even if they only move sideways). A U.S. asset deflation occurred in 2008 and 2009, and the government is trying desperately to reverse the trend. Although the stock market has succeeded in making a turnaround, real estate, cars, and many other asset prices remain deflated.
When it comes to keeping rates low and letting asset values rise, the U.S. Government clearly has a favorite method. They prefer to depreciate the unit of measurement: the U.S. Dollar.
Most commodities are valued in dollars, so if one weakens the dollar, prices rise in U.S. terms, but many are falling in terms of strong foreign currencies, gold, oil and other stores of values. While asset deflation continues in other currencies, asset prices have been rising in dollar terms.
CURRENCY CARRY TRADE
The currency carry trade occurs when investors borrow a given currency (let’s say the dollar) at very low interest rate and use the borrowed money to buy other currencies, stocks, and commodities. It also occurs when and investors sell dollars short and later buy them back with depreciated dollars. The carry trade is dependent on both interest rates and the value of the dollar. And it has been one of the biggest factors responsible for the stock market rally in recent weeks.
The dollar’s recent rally has some believing the carry trade is winding down. Perhaps fear of the big budget deficits and the low demand for U.S. Government bonds is causing investors to expect U.S. interest rates to rise sooner. When the fear of rising interest rates pervades the markets, this causes speculators to unwind their carry trade by buying dollars back and selling their stocks and commodities. In other words, the “carry trade” and the stock market rally are being endangered by potential higher interest rates caused by the big budget deficits.
We do not know if the market has reached its highs for 2009, but we do know that a small wave of fear is once again washing through investment markets. The big decline of 2008 and early 2009 was cathartic. The rally from this cathartic bottom has been normal, so any correction in global stocks and associated commodities will be short lived. Perhaps short-term fears of a technical market correction causes speculators to cut borrowing (on which the carry trade depends), and to sell stock positions.
U.S. DEBT
The Economist magazine echoes many of our arguments regarding U.S. debt and deficits. Last week’s Economist magazine had an important article entitled “Tomorrows Burden: Americas Debt Crisis will be Chronic Not Acute, and Long Lasting.” The article elucidates many of the points that we have repeatedly made in our commentaries over the last several years. It is well written, and I will take the liberty of paraphrasing the main points.
The author makes the point that there are three things that could lead to an acute crisis:
1.) A lender’s strike (no debt available)
2.) A crash in the dollar (possible not probable immediately)
3.) A rise in inflation (this seems remote to the Economist. It does not seem remote to us.)
The authors reason that the debt crisis will be long-lasting and chronic, but not acute. That is unless one of these three issues develops. We believe that we could experience all three of the above within a couple of years. For those who would like to read the entire article, please see this link:
http://www.economist.com/displayStory.cfm?story_id=14699754
THE NEXT U.S. FINANCIAL CRISIS IS ALREADY ON THE WAY.
It will be an inflationary crisis, and it will commence about 2012.
The U.S. Government has guaranteed banks and the housing market. It has borrowed hundreds of billions of dollars to strengthen the economy at the same time tax revenues are collapsing. Social Security and health care financing will add to the burdens. The banking crisis will probably turn into a long-term government debt crisis.
The United States has been living beyond its means, over-borrowing, and engaging in other irrational, unwise, and destructive behaviors. These behaviors have been encouraged and abetted by the Congress, former Federal Reserve Chairman Greenspan, and both Republican and Democratic administrations. A less powerful country, perhaps one which was not providing a military shield for much of the world, would have seen their currency and debt markets subjected to immense scrutiny and widespread suspicion and may have been forced to default long ago.
History has demonstrated two likely outcomes for the situation in which the U.S. currently finds itself. The first is that bond and currency market speculators make default the inevitable outcome. The second is that they devalue their currency substantially in order to pay back their debts in a diminished currency. The day approaches when the U.S. dollar will meet the fate that so many other currencies have faced over the millennia…it will suffer a substantial decline and inflation will resurge. This will probably occur no later than the end of 2012.
DEBT MARKETS
Contrary to the beliefs of some efficient market theorists, financial markets can remain highly irrational for extended periods of time. Few things prove this better than the behavior of the U.S. debt market.
The reality is that investors should be scared of the U.S. debt market. The U.S. continues to go to the markets with bond offerings, financing huge sums of borrowing to feed its ravenous appetite for spending that far exceeds the means of the taxpayers…or the logic of markets.
The markets continue to support the dollar beyond a reasonable level. This support can be partially explained by the many relationships and financial activities the U.S. Government currently undertakes. Over the years, the U.S. military’s largess and the dollar’s status as a world reserve currency have helped sustain the value of the dollar. For example, the U.S. still incurs a large percentage of the military protection costs of Germany and Japan 64 years after the end of World War II.
The value of the dollar has also been preserved because the major debt holders; Japan, China, Saudi Arabia, and Britain are large exporters to the U.S. and/or those that are allied with the U.S. militarily. Below is a chart from the U.S. Treasury Department:
ForeignHoldersofUSTBILLS-1.jpg picture by gimmarketing
LEVERAGE IN THE BANKING SYSTEM
Remember the terrible banking crisis of 2008-2009 that brought down Bear Sterns, Lehman, and Washington Mutual, and threatened others in the U.S. and Europe? You haven’t forgotten, and we haven’t forgotten, but it seems that Congress has. What’s more, they are squandering an opportunity to repair and revitalize the U.S banking system. Today, the U.S. banking system continues to be dangerously speculative and interconnected. Banks deny credit needed for small business, the major driver of employment, while engaging in unproductive speculation. And although this is clearly a serious defect in the system, Congress has failed to address it.
Even more disconcerting is that the banking lobby has Congress’ ears. Instead of listening to the proven, wise, and honest former Fed Chairman Paul Volcker, Congress is listening to the folks that brought us the last crisis. So when Volcker makes the reasonable suggestion that banks and speculative trading activities should be separated, and that only banks with no involvement in trading for their own account should get government guarantees and bail outs, Congress isn’t listening. Sadly, we fear that Congress’ unwillingness to face down the banking lobby guarantees that a new crisis is on the agenda for future years.
This is in sharp contrast to Holland, where the country’s largest bank is forced to sell its U.S. Internet banking operations and its insurance company in order to attain and maintain the use of government funds. In Britain, the trend toward breaking up large banks is being pushed by the top economists at the Bank of England, and in other countries there are demands that banks stop speculation for their own account. In our opinion, disallowing speculation by commercial banks is the only effective method to forestall the next system-wide financial crisis.
Written: November 2, 2009
Last week, we had a short-lived rally in the U.S. dollar predicated on the unrealistic view that a weaker U.S. economy would send gold and oil down and the dollar up. Only algorithm writers who are completely ignorant about stock and commodity markets could believe that a poor U.S. economy is actually good for the U.S. dollar.
After a few days, the dollar’s rally reversed and began to decline again while gold and oil are once again rising. In our opinion, any declines in oil and gold prices over the next few months can be used as buying opportunities.
We expect oil to trade between $60 and $100 per barrel for the next two years. After that, we expect oil prices to rise much higher.
We favor gold bullion and gold shares, oil stocks, U.S. technology companies that are poised to serve the world market through exports, and companies in emerging countries with growth potential.
INTEREST RATES
Last week, interest rates were forced up by the market, with the yield for U.S. ten year paper rising as the Treasury tried to sell $140 billion of new bonds. Buyers are demanding higher rates, but the U.S. government is not going to raise short term rates until GDP growth increases substantially and remains good for a year or more. Although the market may continue to force up longer term interest rates, we do not expect the Federal Reserve to raise short term rates.
Indeed, the U.S. Federal Reserve wants interest rates to stay low. They realize that this is necessary to support asset values (even if they only move sideways). A U.S. asset deflation occurred in 2008 and 2009, and the government is trying desperately to reverse the trend. Although the stock market has succeeded in making a turnaround, real estate, cars, and many other asset prices remain deflated.
When it comes to keeping rates low and letting asset values rise, the U.S. Government clearly has a favorite method. They prefer to depreciate the unit of measurement: the U.S. Dollar.
Most commodities are valued in dollars, so if one weakens the dollar, prices rise in U.S. terms, but many are falling in terms of strong foreign currencies, gold, oil and other stores of values. While asset deflation continues in other currencies, asset prices have been rising in dollar terms.
CURRENCY CARRY TRADE
The currency carry trade occurs when investors borrow a given currency (let’s say the dollar) at very low interest rate and use the borrowed money to buy other currencies, stocks, and commodities. It also occurs when and investors sell dollars short and later buy them back with depreciated dollars. The carry trade is dependent on both interest rates and the value of the dollar. And it has been one of the biggest factors responsible for the stock market rally in recent weeks.
The dollar’s recent rally has some believing the carry trade is winding down. Perhaps fear of the big budget deficits and the low demand for U.S. Government bonds is causing investors to expect U.S. interest rates to rise sooner. When the fear of rising interest rates pervades the markets, this causes speculators to unwind their carry trade by buying dollars back and selling their stocks and commodities. In other words, the “carry trade” and the stock market rally are being endangered by potential higher interest rates caused by the big budget deficits.
We do not know if the market has reached its highs for 2009, but we do know that a small wave of fear is once again washing through investment markets. The big decline of 2008 and early 2009 was cathartic. The rally from this cathartic bottom has been normal, so any correction in global stocks and associated commodities will be short lived. Perhaps short-term fears of a technical market correction causes speculators to cut borrowing (on which the carry trade depends), and to sell stock positions.
U.S. DEBT
The Economist magazine echoes many of our arguments regarding U.S. debt and deficits. Last week’s Economist magazine had an important article entitled “Tomorrows Burden: Americas Debt Crisis will be Chronic Not Acute, and Long Lasting.” The article elucidates many of the points that we have repeatedly made in our commentaries over the last several years. It is well written, and I will take the liberty of paraphrasing the main points.
The author makes the point that there are three things that could lead to an acute crisis:
1.) A lender’s strike (no debt available)
2.) A crash in the dollar (possible not probable immediately)
3.) A rise in inflation (this seems remote to the Economist. It does not seem remote to us.)
The authors reason that the debt crisis will be long-lasting and chronic, but not acute. That is unless one of these three issues develops. We believe that we could experience all three of the above within a couple of years. For those who would like to read the entire article, please see this link:
http://www.economist.com/displayStory.cfm?story_id=14699754
THE NEXT U.S. FINANCIAL CRISIS IS ALREADY ON THE WAY.
It will be an inflationary crisis, and it will commence about 2012.
The U.S. Government has guaranteed banks and the housing market. It has borrowed hundreds of billions of dollars to strengthen the economy at the same time tax revenues are collapsing. Social Security and health care financing will add to the burdens. The banking crisis will probably turn into a long-term government debt crisis.
The United States has been living beyond its means, over-borrowing, and engaging in other irrational, unwise, and destructive behaviors. These behaviors have been encouraged and abetted by the Congress, former Federal Reserve Chairman Greenspan, and both Republican and Democratic administrations. A less powerful country, perhaps one which was not providing a military shield for much of the world, would have seen their currency and debt markets subjected to immense scrutiny and widespread suspicion and may have been forced to default long ago.
History has demonstrated two likely outcomes for the situation in which the U.S. currently finds itself. The first is that bond and currency market speculators make default the inevitable outcome. The second is that they devalue their currency substantially in order to pay back their debts in a diminished currency. The day approaches when the U.S. dollar will meet the fate that so many other currencies have faced over the millennia…it will suffer a substantial decline and inflation will resurge. This will probably occur no later than the end of 2012.
DEBT MARKETS
Contrary to the beliefs of some efficient market theorists, financial markets can remain highly irrational for extended periods of time. Few things prove this better than the behavior of the U.S. debt market.
The reality is that investors should be scared of the U.S. debt market. The U.S. continues to go to the markets with bond offerings, financing huge sums of borrowing to feed its ravenous appetite for spending that far exceeds the means of the taxpayers…or the logic of markets.
The markets continue to support the dollar beyond a reasonable level. This support can be partially explained by the many relationships and financial activities the U.S. Government currently undertakes. Over the years, the U.S. military’s largess and the dollar’s status as a world reserve currency have helped sustain the value of the dollar. For example, the U.S. still incurs a large percentage of the military protection costs of Germany and Japan 64 years after the end of World War II.
The value of the dollar has also been preserved because the major debt holders; Japan, China, Saudi Arabia, and Britain are large exporters to the U.S. and/or those that are allied with the U.S. militarily. Below is a chart from the U.S. Treasury Department:
ForeignHoldersofUSTBILLS-1.jpg picture by gimmarketing
LEVERAGE IN THE BANKING SYSTEM
Remember the terrible banking crisis of 2008-2009 that brought down Bear Sterns, Lehman, and Washington Mutual, and threatened others in the U.S. and Europe? You haven’t forgotten, and we haven’t forgotten, but it seems that Congress has. What’s more, they are squandering an opportunity to repair and revitalize the U.S banking system. Today, the U.S. banking system continues to be dangerously speculative and interconnected. Banks deny credit needed for small business, the major driver of employment, while engaging in unproductive speculation. And although this is clearly a serious defect in the system, Congress has failed to address it.
Even more disconcerting is that the banking lobby has Congress’ ears. Instead of listening to the proven, wise, and honest former Fed Chairman Paul Volcker, Congress is listening to the folks that brought us the last crisis. So when Volcker makes the reasonable suggestion that banks and speculative trading activities should be separated, and that only banks with no involvement in trading for their own account should get government guarantees and bail outs, Congress isn’t listening. Sadly, we fear that Congress’ unwillingness to face down the banking lobby guarantees that a new crisis is on the agenda for future years.
This is in sharp contrast to Holland, where the country’s largest bank is forced to sell its U.S. Internet banking operations and its insurance company in order to attain and maintain the use of government funds. In Britain, the trend toward breaking up large banks is being pushed by the top economists at the Bank of England, and in other countries there are demands that banks stop speculation for their own account. In our opinion, disallowing speculation by commercial banks is the only effective method to forestall the next system-wide financial crisis.
Monday, November 2, 2009
Excellent Article on risk of ETFs
Ban swap-based ETFs, says ex-chief of Eurizon
By Chris Newlands
Published: November 1 2009 09:14 | Last updated: November 1 2009 09:14
Swap-based exchange traded funds that target retail investors should be banned, according to former Eurizon chief executive Francis Candylaftis.
Mr Candylaftis, whose departure from Italy’s Eurizon was announced last month, believes European regulators should outlaw synthetically structured ETFs that track an index. He says they do not comply with the transparency rules or expectations Ucits vehicles claim to have. Providers, he says, should instead buy the physical assets.
EDITOR’S CHOICE
Milestone auction for European CDS - Oct-22
CDS probe opens new ‘can of worms’ - Jul-15
US probe just what the CDS sector do not need - Jul-14
Insight: Effective rules require sound knowledge - Jul-07
Insight: SEC gets tough on Wall St tribalism - Jun-25
Exchange plan for derivatives welcomed - Jul-12
“The growth of ETFs in Europe is based on the myth that ETFs are transparent whereas most ETFs in Europe – with the exception of Barclays’ – are swap-based, something completely unknown to investors,” says the former head of Italy’s largest asset manager.
According to Manooj Mistry, UK head of db x-trackers, more than 50 per cent of ETF assets under management are held in synthetically-replicated index products – a trend db x-trackers is unconcerned by. Most new providers, he adds, now only adopt this structure.
This, however, angers Mr Candylaftis. “I do not understand the distinction between structured products and ETFs. Most of the time ETFs are indeed structured products that should not have Ucits status,” he says.
“ETFs are okay for institutional investors who are supposedly aware of all these features and can evaluate them, but they are much less suitable for retail clients.”
Mr Candylaftis wants European regulators to either ban ETFs that use swaps or strictly enforce the 10 per cent counterparty-risk rule.
“It is a paradox that ETFs are meant to be very transparent instruments compared to traditional funds when, in fact, they are the opposite,” he says, adding that he wants retail-focused providers that replicate an index to actually buy the physical stocks instead of using the swap markets.
Mr Mistry, whose firm only promotes synthetically-replicated index products, disagrees. “All ETFs in Europe comply with Ucits III regulations, whether they are swap-based or not,” he says. “The question really should be which method – traditional or synthetic – works and performs best for investors, and we think that is swap-based products.”
Proponents of fully synthetic replication say it offers the advantage of being able to replicate pretty much any asset class exposure. Some areas, such as various domestic emerging debt markets, are difficult to access using physical replication because of tax disadvantages that can exist for overseas investors.
Swap-based tracking also removes the settlement and tracking error risk from investors and passes them on to a third party on the date a trade is made. When working with a liquid benchmark index and a well-tested settlement system like the DTCC in the US these concerns may seem minor, but in less developed markets this can offer real benefits to investors, experts say.
Axel Lomholt, head of product development for iShares Europe, which leans heavily towards traditional replication, says he understands these advantages but adds that his firm will always purchase the physical stocks when it can.
“Our first approach is to always try and buy the underlying assets,” he says. “It’s not always easy but you’d be surprised how far you can go with that route.
“Others will tell you it is too difficult or too expensive to buy the physical stocks but a lot of exposures can be replicated traditionally if you have the platform and the scale to do so – and we have.”
He adds: “Clients prefer ETFs that are backed by the physical assets. Research shows this to be true and that is why we go down that route when we can.”
Mr Lomholt, however, does not go so far as to agree with Mr Candylaftis that swap-based ETFs should be outlawed from the retail market. “They are an extremely useful tool,” he says. “We don’t overly rely on them like some houses because of the counterparty risk that exists but I don’t agree that swaps should be banned from the world of ETFs.”
Under European Ucits rules any counterparty exposure is limited to 10 per cent of a fund’s net asset value but, in practice, many ETF issuers manage this exposure to a lower maximum percentage of 0-5 per cent.
Nevertheless, fears over possible bank failures, stemming from the Lehman collapse last year, were sufficient to drive many investors away from swap-based ETFs in favour of the more traditional ETF structure in which the fund owns all or a representative sample of the securities in the index.
“This was a big topic when Lehman collapsed, and rightly so,” says Mr Mistry. “But we fully collateralise the majority of our funds and over-collateralise on all our equity, commodity and hedge fund ETFs. We do this to remove any fears investors might have regarding counterparty risk.
“Almost 50 per cent of ETFs are fully synthetic and so it’s not true to say people now don’t want these products.”
All iShares’ fixed income ETFs use traditional index replication but Mr Lomholt concedes Mr Mistry’s point: “Counterparty risk has been a worry since the Lehman collapse but the ETF market has not itself experienced a problem up until now, even though we have been through some extreme times. That’s important to remember.”
By Chris Newlands
Published: November 1 2009 09:14 | Last updated: November 1 2009 09:14
Swap-based exchange traded funds that target retail investors should be banned, according to former Eurizon chief executive Francis Candylaftis.
Mr Candylaftis, whose departure from Italy’s Eurizon was announced last month, believes European regulators should outlaw synthetically structured ETFs that track an index. He says they do not comply with the transparency rules or expectations Ucits vehicles claim to have. Providers, he says, should instead buy the physical assets.
EDITOR’S CHOICE
Milestone auction for European CDS - Oct-22
CDS probe opens new ‘can of worms’ - Jul-15
US probe just what the CDS sector do not need - Jul-14
Insight: Effective rules require sound knowledge - Jul-07
Insight: SEC gets tough on Wall St tribalism - Jun-25
Exchange plan for derivatives welcomed - Jul-12
“The growth of ETFs in Europe is based on the myth that ETFs are transparent whereas most ETFs in Europe – with the exception of Barclays’ – are swap-based, something completely unknown to investors,” says the former head of Italy’s largest asset manager.
According to Manooj Mistry, UK head of db x-trackers, more than 50 per cent of ETF assets under management are held in synthetically-replicated index products – a trend db x-trackers is unconcerned by. Most new providers, he adds, now only adopt this structure.
This, however, angers Mr Candylaftis. “I do not understand the distinction between structured products and ETFs. Most of the time ETFs are indeed structured products that should not have Ucits status,” he says.
“ETFs are okay for institutional investors who are supposedly aware of all these features and can evaluate them, but they are much less suitable for retail clients.”
Mr Candylaftis wants European regulators to either ban ETFs that use swaps or strictly enforce the 10 per cent counterparty-risk rule.
“It is a paradox that ETFs are meant to be very transparent instruments compared to traditional funds when, in fact, they are the opposite,” he says, adding that he wants retail-focused providers that replicate an index to actually buy the physical stocks instead of using the swap markets.
Mr Mistry, whose firm only promotes synthetically-replicated index products, disagrees. “All ETFs in Europe comply with Ucits III regulations, whether they are swap-based or not,” he says. “The question really should be which method – traditional or synthetic – works and performs best for investors, and we think that is swap-based products.”
Proponents of fully synthetic replication say it offers the advantage of being able to replicate pretty much any asset class exposure. Some areas, such as various domestic emerging debt markets, are difficult to access using physical replication because of tax disadvantages that can exist for overseas investors.
Swap-based tracking also removes the settlement and tracking error risk from investors and passes them on to a third party on the date a trade is made. When working with a liquid benchmark index and a well-tested settlement system like the DTCC in the US these concerns may seem minor, but in less developed markets this can offer real benefits to investors, experts say.
Axel Lomholt, head of product development for iShares Europe, which leans heavily towards traditional replication, says he understands these advantages but adds that his firm will always purchase the physical stocks when it can.
“Our first approach is to always try and buy the underlying assets,” he says. “It’s not always easy but you’d be surprised how far you can go with that route.
“Others will tell you it is too difficult or too expensive to buy the physical stocks but a lot of exposures can be replicated traditionally if you have the platform and the scale to do so – and we have.”
He adds: “Clients prefer ETFs that are backed by the physical assets. Research shows this to be true and that is why we go down that route when we can.”
Mr Lomholt, however, does not go so far as to agree with Mr Candylaftis that swap-based ETFs should be outlawed from the retail market. “They are an extremely useful tool,” he says. “We don’t overly rely on them like some houses because of the counterparty risk that exists but I don’t agree that swaps should be banned from the world of ETFs.”
Under European Ucits rules any counterparty exposure is limited to 10 per cent of a fund’s net asset value but, in practice, many ETF issuers manage this exposure to a lower maximum percentage of 0-5 per cent.
Nevertheless, fears over possible bank failures, stemming from the Lehman collapse last year, were sufficient to drive many investors away from swap-based ETFs in favour of the more traditional ETF structure in which the fund owns all or a representative sample of the securities in the index.
“This was a big topic when Lehman collapsed, and rightly so,” says Mr Mistry. “But we fully collateralise the majority of our funds and over-collateralise on all our equity, commodity and hedge fund ETFs. We do this to remove any fears investors might have regarding counterparty risk.
“Almost 50 per cent of ETFs are fully synthetic and so it’s not true to say people now don’t want these products.”
All iShares’ fixed income ETFs use traditional index replication but Mr Lomholt concedes Mr Mistry’s point: “Counterparty risk has been a worry since the Lehman collapse but the ETF market has not itself experienced a problem up until now, even though we have been through some extreme times. That’s important to remember.”
The Economy is So Bad.....
The economy is so bad that Barack Obama changed his slogan to "Maybe We Can!"
The economy is so bad that Sarah Palin is only shooting moose for food, not for fun.
The economy is so bad that when Bill and Hillary travel together, they now have to share a room.
The economy is so bad that instead of a coin toss at the beginning of the Super Bowl in February, they will play "Rock, Paper, Scissors."
The economy is so bad that Angelina Jolie had to adopt a highway.
The economy is so bad that my niece told me she wants to dress up as a 401(k) for Halloween so that she can turn invisible.
The economy is so bad that I ordered a burger at McDonald's (MCD) and the kid behind the counter asked, "Can you afford fries with that?"
The economy is so bad that I saw four CEOs over the weekend playing miniature golf.
The economy is so bad I saw the CEO of Wal-Mart (WMT) shopping at Wal-Mart.
The economy is so bad that Bill Gates had to switch to dial up.
The economy is so bad that rapper 50 Cent had to change his name to 10 Cent.
The economy is so bad that they Pequot tribe built a reservation on the site of one of their casinos.
The economy is so bad that the Treasure Island casino in Las Vegas is now managed by Somali pirates.
The economy is so bad that if the bank returns your check marked "Insufficient Funds," you call them and ask if they meant you or them.
The economy is so bad that I bought a toaster oven and my free gift with the purchase was a bank.
The economy is so bad that the only company hiring this week is the one that sends people to scrape bankers off of Wall Street sidewalks.
The economy is so bad that I went to my bank to get a loan, and they said, "What a coincidence! That's just what we were going to ask you!"
The economy is so bad that a picture is now only worth 200 words.
The economy is so bad that Hot Wheels stock is trading higher than GM.
And the No. 1 sign how bad the economy is...
The economy is so bad that the guy who made $50 billion disappear (Madoff) is being investigated by the people who made over $1 trillion disappear (our policymakers)!
The economy is so bad that Sarah Palin is only shooting moose for food, not for fun.
The economy is so bad that when Bill and Hillary travel together, they now have to share a room.
The economy is so bad that instead of a coin toss at the beginning of the Super Bowl in February, they will play "Rock, Paper, Scissors."
The economy is so bad that Angelina Jolie had to adopt a highway.
The economy is so bad that my niece told me she wants to dress up as a 401(k) for Halloween so that she can turn invisible.
The economy is so bad that I ordered a burger at McDonald's (MCD) and the kid behind the counter asked, "Can you afford fries with that?"
The economy is so bad that I saw four CEOs over the weekend playing miniature golf.
The economy is so bad I saw the CEO of Wal-Mart (WMT) shopping at Wal-Mart.
The economy is so bad that Bill Gates had to switch to dial up.
The economy is so bad that rapper 50 Cent had to change his name to 10 Cent.
The economy is so bad that they Pequot tribe built a reservation on the site of one of their casinos.
The economy is so bad that the Treasure Island casino in Las Vegas is now managed by Somali pirates.
The economy is so bad that if the bank returns your check marked "Insufficient Funds," you call them and ask if they meant you or them.
The economy is so bad that I bought a toaster oven and my free gift with the purchase was a bank.
The economy is so bad that the only company hiring this week is the one that sends people to scrape bankers off of Wall Street sidewalks.
The economy is so bad that I went to my bank to get a loan, and they said, "What a coincidence! That's just what we were going to ask you!"
The economy is so bad that a picture is now only worth 200 words.
The economy is so bad that Hot Wheels stock is trading higher than GM.
And the No. 1 sign how bad the economy is...
The economy is so bad that the guy who made $50 billion disappear (Madoff) is being investigated by the people who made over $1 trillion disappear (our policymakers)!
Tuesday, October 13, 2009
Bill Gross of Pimco
The world is turning “green” – global warming or not. Electric cars, free-range chickens, and White House vegetable gardens are the wave of the future, but the defining badge of environmentalists may be none of those and might, in fact, be colored blue, as opposed to green. Dog owners would be the first to acknowledge it. Having converted reluctantly to felines nearly ten years ago, I myself am only forced to humble myself by emptying the litter box once or twice a year when Sue is visiting the relatives. But dogs? Well, Bowser has to be walked, and Bowser owners these days are being forced to subserviently follow in step, holding those little blue “doo-doo” bags at the ready that keep the neighbors’ grass green instead of brown and minimize the number of summer flies to a billion per square mile. No longer will the current generation be allowed to use pooper-scoopers; they must in fact be pooper “stoopers,” bending down, turning the bag inside out to form a glove, and then – EEECH – making the grass environmentally friendly again by picking it up, reversing the bag and hurriedly looking for the nearest neighbor’s garbage can who might conveniently be at church or shopping at the grocery store. One can only hope that Fido is mildly constipated, if you get my drift. I can recall the diaper days with my three kids. It wasn’t a pleasant experience, but those non-environmentally friendly Pampers at least afforded one-stop dropping – easy on, easy off – no touchy, no feely. In those days, a doggie bag was something you asked for in a fine restaurant to take home the steak bones. Now it’s a blue plastic reminder that the world is changing and in many respects our daily routine is becoming a dog’s life.
A similar metaphor could be applied to the 45 million citizens of the State of California. Once “golden” and the land of entrepreneurial opportunity, the state has turned from filet mignon to ground chuck and its residents are now on a short leash as opposed to masters of their own universe. Unemployment at 12.2% is near the nation’s highest and its Baa bond rating is the country’s lowest. Its schools are abysmal, competing with Louisiana and Mississippi for the lowest rating in the federal government’s National Assessment of Educational Progress. While the air is much cleaner than it was 20 years ago, the freeways are stereotypically jammed and increasingly less free – the age of the toll road serving the exasperated (or simply the Mercedes owners) is upon us.
Our canine existence has many fathers. Perhaps more than any other state, California has been affected by its perverted form of government, requiring a two-thirds vote by state legislators to effectively pass a budget. In addition, the state’s laws are almost tragically shaped by a form of direct democracy more resemblant of the Jacksonian era, where the White House furniture was constantly at risk due to unruly citizens, high on whisky, and low on morals and common sense. Propositions from conservatives and liberals alike have locked up much of the budget, with Proposition 13 in 1978 reducing property taxes by 57% and Prop. 98 in 1988 requiring 40% of the general fund to be spent on schools. Recently, much of any excess has been gobbled not only by teachers, but unbelievably by a prison lobby that would be the envy of any on Washington’s K Street.
The result has been a $26 billion deficit that was supposedly “closed” in recent weeks, but which largely was a “kick the can” accounting scheme that postponed the pain, or better yet, pled for a federal solution to self-inflicted wounds. State budgets of course are required to be balanced each year, but that has long been a fiction throughout most of the country. Still, California’s 2009 fix was perhaps the longest kick of the can in history, refusing effectively to raise taxes, superficially cutting expenses, and shaming its fading image by refusing to disburse required billions to local counties and communities, as well as using accounting tricks that couldn’t fool a grade-schooler. In the process, they managed to reinvent the IOU, paying bills in virtual scrip that then traded at substantial discounts on eBay of all places. They have issued tax anticipation notes of all sorts with a multitude of lettered configurations that anagram aficionados would revel in. Just last week the state extended its begging bowl for $8 billion of “RANs” (Revenue Anticipation Notes) at an onerous money market rate of 1 1⁄2%. Previously they had issued “RAWs” (Revenue Anticipation Warrants). “BAGs” might be next – blue BAGS, that is, full of the doo-doo that California citizens have grown used to picking up.
There are signs that California voters are ready to make some tough choices, having recently refused to pass five propositions that would have extended tax hikes and failed to address spending. Whether or not Governor Schwarzenegger and legislators will agree to a constitutional convention to address the poisonous proposition plebiscite itself is a larger question that will likely be affirmatively answered only if the state economy continues to remain in the tank, which it likely will. But California’s problems, while somewhat unique and self-inflicted, are really America’s problems, and not just because the California economy is 15% of national GDP. While California’s $26 billion deficit is not directly comparable to the federal gap of $1 trillion-plus, they both reflect a lack of discipline and indeed vision to perceive that the strong growth in revenues was driven by the same excess leverage and the same delusionary asset appreciation that was bound to approach cliff’s edge. California’s property taxes, income taxes, and sales taxes were all artificially elevated by national and indeed global imbalances as the U.S. manufactured paper, and Asia manufactured things in mercantilistic exchange. Total tax revenues have actually fallen 14% over the past 12 months in California and substantially more in other states. At some point, that Fantasyland merry-go-round had to stop and whether the defining moment was marked by Bear Stearns, Lehman Brothers, or the tumultuous week that followed in September of 2008 is really not the point.
What is critical to recognize is that both California and the U.S., as well as numerous global lookalikes such as the U.K., Spain, and Eastern European invalids, are in a poor position to compete in a global economy where capitalism is morphing from its decades-long emphasis on finance and levered risk taking to a more conservative, regulated, production-oriented system advantaged by countries focusing on thrift and deferred gratification. The term “capitalism” itself speaks to “capital” – the accumulation of it and the eventual efficient employment of it – for growth in profits and real wages alike.
What California once had and is losing rapidly is its “capital”: unquestionably in its ongoing double-digit billion dollar deficits, but also in its crown jewel educational system that led to Silicon Valley miracles such as Hewlett Packard, Apple, Google, and countless other new age innovators. In addition, its human capital is beginning to exit as more people move out of the state than in. While the United States as a whole has yet to suffer that emigration indignity, the same cannot be said for foreign-born and U.S.-educated scientists and engineers who now choose to return to their homelands to seek opportunity. Lady Liberty’s extended hand offering sanctuary to other nations’ “tired, poor and huddled masses” may be limited to just that. The invigorated wind up elsewhere.
Now that our financial system has been stabilized, one wonders whether California’s “Governator” and indeed the Obama Administration has the capital, the vision, and indeed the discipline of its citizenry to turn things around. Our future doggie bags can hold steak bones or doo-doo of an increasingly familiar smell. For now investors should be holding their noses, their risk orientation, as well as their blue bags, until proven otherwise. Specifically that continues to dictate a focus on high quality bonds and steady dividend paying stocks that can survive, if not thrive, in our journey to a “new normal” economy of slower growth, muted profit gains, and potential capital destruction via default, abrogation of property rights, and dollar devaluation.
William H. Gross
Managing Director
A similar metaphor could be applied to the 45 million citizens of the State of California. Once “golden” and the land of entrepreneurial opportunity, the state has turned from filet mignon to ground chuck and its residents are now on a short leash as opposed to masters of their own universe. Unemployment at 12.2% is near the nation’s highest and its Baa bond rating is the country’s lowest. Its schools are abysmal, competing with Louisiana and Mississippi for the lowest rating in the federal government’s National Assessment of Educational Progress. While the air is much cleaner than it was 20 years ago, the freeways are stereotypically jammed and increasingly less free – the age of the toll road serving the exasperated (or simply the Mercedes owners) is upon us.
Our canine existence has many fathers. Perhaps more than any other state, California has been affected by its perverted form of government, requiring a two-thirds vote by state legislators to effectively pass a budget. In addition, the state’s laws are almost tragically shaped by a form of direct democracy more resemblant of the Jacksonian era, where the White House furniture was constantly at risk due to unruly citizens, high on whisky, and low on morals and common sense. Propositions from conservatives and liberals alike have locked up much of the budget, with Proposition 13 in 1978 reducing property taxes by 57% and Prop. 98 in 1988 requiring 40% of the general fund to be spent on schools. Recently, much of any excess has been gobbled not only by teachers, but unbelievably by a prison lobby that would be the envy of any on Washington’s K Street.
The result has been a $26 billion deficit that was supposedly “closed” in recent weeks, but which largely was a “kick the can” accounting scheme that postponed the pain, or better yet, pled for a federal solution to self-inflicted wounds. State budgets of course are required to be balanced each year, but that has long been a fiction throughout most of the country. Still, California’s 2009 fix was perhaps the longest kick of the can in history, refusing effectively to raise taxes, superficially cutting expenses, and shaming its fading image by refusing to disburse required billions to local counties and communities, as well as using accounting tricks that couldn’t fool a grade-schooler. In the process, they managed to reinvent the IOU, paying bills in virtual scrip that then traded at substantial discounts on eBay of all places. They have issued tax anticipation notes of all sorts with a multitude of lettered configurations that anagram aficionados would revel in. Just last week the state extended its begging bowl for $8 billion of “RANs” (Revenue Anticipation Notes) at an onerous money market rate of 1 1⁄2%. Previously they had issued “RAWs” (Revenue Anticipation Warrants). “BAGs” might be next – blue BAGS, that is, full of the doo-doo that California citizens have grown used to picking up.
There are signs that California voters are ready to make some tough choices, having recently refused to pass five propositions that would have extended tax hikes and failed to address spending. Whether or not Governor Schwarzenegger and legislators will agree to a constitutional convention to address the poisonous proposition plebiscite itself is a larger question that will likely be affirmatively answered only if the state economy continues to remain in the tank, which it likely will. But California’s problems, while somewhat unique and self-inflicted, are really America’s problems, and not just because the California economy is 15% of national GDP. While California’s $26 billion deficit is not directly comparable to the federal gap of $1 trillion-plus, they both reflect a lack of discipline and indeed vision to perceive that the strong growth in revenues was driven by the same excess leverage and the same delusionary asset appreciation that was bound to approach cliff’s edge. California’s property taxes, income taxes, and sales taxes were all artificially elevated by national and indeed global imbalances as the U.S. manufactured paper, and Asia manufactured things in mercantilistic exchange. Total tax revenues have actually fallen 14% over the past 12 months in California and substantially more in other states. At some point, that Fantasyland merry-go-round had to stop and whether the defining moment was marked by Bear Stearns, Lehman Brothers, or the tumultuous week that followed in September of 2008 is really not the point.
What is critical to recognize is that both California and the U.S., as well as numerous global lookalikes such as the U.K., Spain, and Eastern European invalids, are in a poor position to compete in a global economy where capitalism is morphing from its decades-long emphasis on finance and levered risk taking to a more conservative, regulated, production-oriented system advantaged by countries focusing on thrift and deferred gratification. The term “capitalism” itself speaks to “capital” – the accumulation of it and the eventual efficient employment of it – for growth in profits and real wages alike.
What California once had and is losing rapidly is its “capital”: unquestionably in its ongoing double-digit billion dollar deficits, but also in its crown jewel educational system that led to Silicon Valley miracles such as Hewlett Packard, Apple, Google, and countless other new age innovators. In addition, its human capital is beginning to exit as more people move out of the state than in. While the United States as a whole has yet to suffer that emigration indignity, the same cannot be said for foreign-born and U.S.-educated scientists and engineers who now choose to return to their homelands to seek opportunity. Lady Liberty’s extended hand offering sanctuary to other nations’ “tired, poor and huddled masses” may be limited to just that. The invigorated wind up elsewhere.
Now that our financial system has been stabilized, one wonders whether California’s “Governator” and indeed the Obama Administration has the capital, the vision, and indeed the discipline of its citizenry to turn things around. Our future doggie bags can hold steak bones or doo-doo of an increasingly familiar smell. For now investors should be holding their noses, their risk orientation, as well as their blue bags, until proven otherwise. Specifically that continues to dictate a focus on high quality bonds and steady dividend paying stocks that can survive, if not thrive, in our journey to a “new normal” economy of slower growth, muted profit gains, and potential capital destruction via default, abrogation of property rights, and dollar devaluation.
William H. Gross
Managing Director
Monday, October 12, 2009
John Mauldin's latest email
+ Each year we allow almost 1 million immigrants into the US, mostly family of people already here. I suggest that for the next two years we stop that. Instead, let anyone who can buy a home, passes basic screening, and can demonstrate the ability to pay for health insurance immigrate to the US and get a temporary green card. If they behave, then the card becomes permanent after four years.
We almost immediately put a floor on the housing market, absorb the excess homes, and within a year the housing-construction market, along with the jobs that are now gone, will be back. That is stimulus that costs the taxpayers nothing.
+ While I can't believe I am writing this, taxes are going to have to rise, if for no other reason than this Congress is hell bent on raising taxes. But rescinding the entire Bush tax cuts, plus adding a 10% surcharge as Congress wants to do in one fell swoop, is an absolute guarantee of a recession. So do it gradually over (say) 4 years, and then reinstitute the cuts when the deficit is under 2% of GDP. Remember the negative tax-multiplier effect of raising taxes. And the definitive work on that was done by Obama's chairman of the Council of Economic Advisors, Christina Romer.
We should consider a VAT tax and a major cut/reorganization of the corporate tax. We need to encourage corporations to hire more, and you do that by taxing less. Let's make our corporations more competitive, not less. Our taxes are much higher than those of any of our major competitors. And please forget that insane carbon tax. If you want to cut emissions, do it straightforwardly by raising taxes significantly on gasoline. Don't back-door it on consumers. (And I am NOT advocating such a policy.)
+ An aggressive tax benefit for new venture-capital money that is invested in new technologies will result in new industries. The only way we can grow our way out of this mess is to create whole new industries, like we did in the late '70s and '80s. (Think computers and the internet and telecom.)
+ Unemployment is likely to continue to rise and last longer than ever before. We have to take care of the basic needs of those who want work but can't find it. Unemployment insurance should be extended to those who are still looking for work past the time for benefits to expire, and some program of local volunteer service should be instituted as the price for getting continued benefits after the primary benefits time period runs out. Not only will this help the community, but it will get the person out into the world where he is more likely to meet someone who can give him a job. But the costs of this program should be revenue-neutral. Something else has to be cut.
+ We have to re-hink our military costs (I can't believe I am writing this!). We now spend almost 50% of the world's total military budget. Maybe we need to understand that we can't fight two wars and support hundreds of bases around the world. If we kill the goose, our ability to fight even one medium-sized war will be diminished. The harsh reality is that everything has to be re-evaluated. As an example, do we really need to be in Korea? If so, why can't Korea pay for much of the cost? They are now a rich nation. There are budgetary fiscal limits to being the policeman for the world.
+ Glass-Steagall, or some form of it, should be brought back. Banks, which are subject to taxpayer bailouts, should not be in the investment banking and derivatives-creating business. Derivatives, especially credit default swaps, should be on an exchange, and too big to fail must go. Banks have enough risk just making loans. Leverage should be dialed down, and hedge funds selling what amounts to naked call options in any form, derivative or otherwise, should be regulated.
Let me see, is there any group I have not offended yet? But something like I am suggesting is going to have to be done at some point. There is no way we can continue forever on the current path. At some point, we will hit the wall. The fight between the bug and the windshield always ends in favor of the windshield. The bond market is going to have to see a credible effort to get back to a reasonable deficit, or we risk a very difficult economic environment. The longer we wait, the worse it will be.
It is not going to be easy to persuade a majority of Americans that we need to do something now. More realistically, we are going to probably have to begin to experience a crisis of some type to get politicians motivated to do something.
This last Tuesday, I spoke to the Financial Leadership Association at the University of Texas at Dallas. It was mostly undergraduates, and my assigned topic was how financial research impacts our investment decisions. In touched on the topic above, in less detail, but pointing out that at some point we are going to have to bring the deficit under reasonable control. I got some push-back, as some could not understand why we just couldn't keep running deficits, as we simply owe it to ourselves. I tried to explain, but for a few of them I was not getting through (though I think most got it). And these were the finance students! I shudder to think what the sociology department would be like.
We are not going back to normal, although it is likely we will see some form of Statistical Recovery. But we cannot get complacent. Somewhere out there is the real potential for another crisis, which will dwarf the last one. You will not want to be long much of anything when it happens, except hedged or liquid investments. Though admittedly, this could go on for a long time. I just don't know how long "long" is. Other than it will be too long and then not long enough.
We almost immediately put a floor on the housing market, absorb the excess homes, and within a year the housing-construction market, along with the jobs that are now gone, will be back. That is stimulus that costs the taxpayers nothing.
+ While I can't believe I am writing this, taxes are going to have to rise, if for no other reason than this Congress is hell bent on raising taxes. But rescinding the entire Bush tax cuts, plus adding a 10% surcharge as Congress wants to do in one fell swoop, is an absolute guarantee of a recession. So do it gradually over (say) 4 years, and then reinstitute the cuts when the deficit is under 2% of GDP. Remember the negative tax-multiplier effect of raising taxes. And the definitive work on that was done by Obama's chairman of the Council of Economic Advisors, Christina Romer.
We should consider a VAT tax and a major cut/reorganization of the corporate tax. We need to encourage corporations to hire more, and you do that by taxing less. Let's make our corporations more competitive, not less. Our taxes are much higher than those of any of our major competitors. And please forget that insane carbon tax. If you want to cut emissions, do it straightforwardly by raising taxes significantly on gasoline. Don't back-door it on consumers. (And I am NOT advocating such a policy.)
+ An aggressive tax benefit for new venture-capital money that is invested in new technologies will result in new industries. The only way we can grow our way out of this mess is to create whole new industries, like we did in the late '70s and '80s. (Think computers and the internet and telecom.)
+ Unemployment is likely to continue to rise and last longer than ever before. We have to take care of the basic needs of those who want work but can't find it. Unemployment insurance should be extended to those who are still looking for work past the time for benefits to expire, and some program of local volunteer service should be instituted as the price for getting continued benefits after the primary benefits time period runs out. Not only will this help the community, but it will get the person out into the world where he is more likely to meet someone who can give him a job. But the costs of this program should be revenue-neutral. Something else has to be cut.
+ We have to re-hink our military costs (I can't believe I am writing this!). We now spend almost 50% of the world's total military budget. Maybe we need to understand that we can't fight two wars and support hundreds of bases around the world. If we kill the goose, our ability to fight even one medium-sized war will be diminished. The harsh reality is that everything has to be re-evaluated. As an example, do we really need to be in Korea? If so, why can't Korea pay for much of the cost? They are now a rich nation. There are budgetary fiscal limits to being the policeman for the world.
+ Glass-Steagall, or some form of it, should be brought back. Banks, which are subject to taxpayer bailouts, should not be in the investment banking and derivatives-creating business. Derivatives, especially credit default swaps, should be on an exchange, and too big to fail must go. Banks have enough risk just making loans. Leverage should be dialed down, and hedge funds selling what amounts to naked call options in any form, derivative or otherwise, should be regulated.
Let me see, is there any group I have not offended yet? But something like I am suggesting is going to have to be done at some point. There is no way we can continue forever on the current path. At some point, we will hit the wall. The fight between the bug and the windshield always ends in favor of the windshield. The bond market is going to have to see a credible effort to get back to a reasonable deficit, or we risk a very difficult economic environment. The longer we wait, the worse it will be.
It is not going to be easy to persuade a majority of Americans that we need to do something now. More realistically, we are going to probably have to begin to experience a crisis of some type to get politicians motivated to do something.
This last Tuesday, I spoke to the Financial Leadership Association at the University of Texas at Dallas. It was mostly undergraduates, and my assigned topic was how financial research impacts our investment decisions. In touched on the topic above, in less detail, but pointing out that at some point we are going to have to bring the deficit under reasonable control. I got some push-back, as some could not understand why we just couldn't keep running deficits, as we simply owe it to ourselves. I tried to explain, but for a few of them I was not getting through (though I think most got it). And these were the finance students! I shudder to think what the sociology department would be like.
We are not going back to normal, although it is likely we will see some form of Statistical Recovery. But we cannot get complacent. Somewhere out there is the real potential for another crisis, which will dwarf the last one. You will not want to be long much of anything when it happens, except hedged or liquid investments. Though admittedly, this could go on for a long time. I just don't know how long "long" is. Other than it will be too long and then not long enough.
Monday, September 28, 2009
Monday, September 21, 2009
Cash for Clunkers and CPI
I read that the government is going to use the $4500 for the Cash for Clunkers as a price reduction for new autos. That means that the Consumer Price Index will be reduced, as autos make up part of the index. Social security and other programs use the CPI to compute payments.
Holmes
Holmes
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