Ebola Outbreak to Help US Economy

EBOLA

Ebola Comes to America: Krugman & Stiglitz Must Be Delighted

By Daniel Oliver

Oh! What a Lovely Pestilence!

Ebola has come to America.  Paul Krugman and Joseph Stiglitz must be delighted.

The core story of Keynesian economists is that government demand, as ideally embodied in war spending, enables economic growth. To illustrate, in a column called “Oh! What A Lovely War!” Krugman asserted: “World War II is the great natural experiment in the effects of large increases in government spending, and as such has always served as an important positive example for those of us who favor an activist approach to a depressed economy.”

It is never quite explained how removing millions of young men from the work force – many of whom never return – to sink ships, destroy factories, and level cities could possibly create wealth; nor how shortages and price controls on the home front could be good for the economy.

But fellow Nobel laureate Joseph Stiglitz agrees with Dr. Krugman’s prescription: “What we need to do instead is embark on a massive investment program-as we did, virtually by accident, 80 years ago. . . . Can we actually bring ourselves to do this, in the absence of mobilization for global war? Maybe not.”

Or maybe so. Last month Lakeland Industries announced the U.S. government had placed an order for 160,000 of its hazmat suits. The stock jumped 30% after the first confirmed case of Ebola on American soil. No Federal Reserve stimulus programs were necessary to create this wealth effect.

lakeland

If the often-fatal disease spreads, demand for hazmat suits will surge, not to mention hospital clinics, workers to build barricades, security guards to man quarantine checkpoints, probate officers, orphanages, and a host of other government services. It’s a good bet ammunition sales would also rise, along with canned food, firewood, and funeral services, stimulating the private economy. A lovely pestilence could create just as many jobs as a global war.

Former Obama advisor Christina Romer has pointed out: “The lesson [of World War II] is that demand is crucial – and that jobs don’t go unfilled for long. If jobs were widely available today, unemployed workers would quickly find a way to acquire needed skills or move to where the jobs were located.”

And if those jobs were located in the middle of a hot zone, even better. Leftist economists have bemoaned the low price of labor for over a century, advocating various artificial means to raise it, such as boosting the minimum wage and forming unions. But reducing the supply of labor could boost wage rates naturally and permanently.

As Krugman wrote recently about China: “to put it crudely, it’s running out of surplus peasants. That should be a good thing. Wages are rising.” History supports his analysis. The plague in medieval Europe killed between 30% and 60% of the population, which resulted in a sustained increase in wage rates that taught the capitalists a lesson by retarding economic growth for centuries. Ebola similarly offers a chance to solve America’s surplus labor problem and stick it to the capitalists harder than any of Thomas Piketty’s proposals.

As an added bonus, Ebola would save the government trillions. Obamacare Architect Ezekiel Emanuel wrote last month that it is pointless to live past the age of 75. The mind slows, senses weakness, productivity crashes, creatively vanishes: I have liv’d long enough: my way of life / Is fall’n into the sear, the yellow leaf.

And it’s expensive. Most healthcare spending is at the end of life, not surprisingly, when people are the least healthy. If people die young, Obamacare and Medicare will be saved. And, like aborted fetuses in the U.K., the bodies could be used as fuel to heat hospitals, reducing their carbon footprints.

The trillions saved could be spent on more stimulus. In fact, the more people die, the more savings there would be, and the more stimulus would be available to boost the economy for whoever is left. Imagine how rich the survivors would be!

Sadly, Ebola-stricken Liberia is unfamiliar with progressive economics. News outlets report that people are abandoning the fields and factories, leading to shortages, especially of food and fuel. Activity in the services sector has fallen by over 50%. Inflation has doubled. Civil war threatens.

Perhaps what West Africa needs is not more doctors, but a few Keynesian economists. Let us hope Krugman and Stiglitz volunteer.

Daniel Oliver Jr. is the founder of Myrmikan Capital, LLC, and is President of the Committee for Monetary Research and Education.

Have a Great Weekend!

Nowhere to Run, Nowhere to Hide

The story of Fed policy and the stock market.

“The final outcome of the credit expansion is general impoverishment.”–L. Mises

“If the Fed doesn’t INCREASE QE, then this sucker is going down.” Chicago Slim

“Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, one by one.”

Charles Mackay, Extraordinary Popular Delusions and the Madness of Crowds

“In February 1720 an edict was published, which, instead of restoring the credit of the paper, as was intended, destroyed it irrecoverably, and drove the country to the very brink of revolution…”

Charles Mackay, Extraordinary Popular Delusions and the Madness of Crowds

“In reading The History of Nations, we find that, like individuals, they have their whims and their peculiarities, their seasons of excitement and recklessness, when they care not what they do. We find that whole communities suddenly fix their minds upon one object and go mad in its pursuit; that millions of people become simultaneously impressed with one delusion, and run after it, till their attention is caught by some new folly more captivating than the first.”

Charles Mackay, Extraordinary Popular Delusions and the Madness of Crowds

“Nations, like individuals, cannot become desperate gamblers with impunity. Punishment is sure to overtake them sooner or later.”

Charles Mackay, Extraordinary Popular Delusions and the Madness of Crowds

“It happens that crashes and panics often are precipitated by the revelation of some misfeasance, malfeasance, or malversation (the corruption of officials) engendered during the mania. It seems clear from the historical record that swindles are a response to the greedy appetite for wealth stimulated by the boom. And as the monetary system gets stretched, institutions lose liquidity, and unsuccessful swindles are about to be revealed, the temptation to take the money and run becomes virtually irresistible.”

Charles Kindleberger

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http://www.acting-man.com/?p=33555

 

Deep Value Master, Walter Schloss

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Walter Schloss had a phenomenal track record over many decades.  His accounts returned profits almost every year, so the amount he managed stayed small.  His approach is a good one for individual investors. he would buy cheaply and average down. However, now might be a difficult time to practice his approach with many sectors of the market lacking a margin of safety unless you delve into (horrificly cyclical) certain mining companies, oil-drillers, and community banks.  But if you are interested in the deep value approach, you must study Schloss.  Does your personality match his approach?

The Superinvestors of Graham and Doddsville by Warren Buffett

Schloss_May_8_2008

schloss_lecture

Profit_Guru_Walter_Schloss_interview

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16 Investing Rules from Walter Schloss

Walter Schloss – OID Interview

Walter Schloss Lecture: http://youtu.be/v-7e_97icWY

Learning from Schloss (excellent review) http://youtu.be/5KM9eY7BbzA

What do YOU think? 

Value Investing Series Seminar (Free) This Saturday

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If you are free Saturday then check this out:

http://vip.marketfy.com/valueinvestingseries/

From my friend, Toby Carlisle, of Deep Value Investing Fame.

HAPPY WEEKEND!

Reading the Financial News; Microdocumentary on Boom/Bust

As Gold Rises; Gold Miners Fall Down By Johanna Bennett

The price of gold may be rising, but gold mining stocks are getting hammered today. And do you know why?

They are still stocks.  (What does THAT mean?)

On the heels of yesterday’s late-day price surge, the Market Vectors Gold Miners ETF (GDX), of fell more than 4.5% amid a broader market selloff that sent the Dow dropping more than 300 points and the S&P 500 declining almost 2%.

The dovish minutes from the Federal Reserve’s September policy meeting have gold bugs buzzing. The precious metal touched a two-week high today, amid easing concerns that the Fed is near to raising interest rates, reviving gold as an inflation hedge.

Gold prices rallied to $1,234 a troy ounce, their highest level since Sept. 23, a day after minutes from the Fed’s September policy meeting revealed officials were worried weaker growth in Asia and Europe could curtail U.S. exports. The central bank also highlighted a stronger dollar as a barrier to U.S. inflation climbing toward the Fed’s 2% target, stoking hopes for a sustained period of low interest rates.

The most actively traded contract, for December delivery, was ended the day at $1,225.10 a troy ounce on the Comex division of the New York Mercantile Exchange, up $19.10, or 1.59% after earlier today climbing as high as $1,380.

ETFs linked to the commodity prices saw little improvement today. The SPDR Gold Trust(GLD) rose 0.25% to $117.76, while the iShares Gold Trust (IAU) inched up 0.21%.

But while worries regarding a weak economy can lift gold prices they can squeeze gold mining companies. GDX has plunged more than 60% over the past two years with the likes of Barrick Gold (ABX) falling more than 65% during that same time span and Newmont Mining (NEM) falling 59%.

The above is an article from an “elite” financial publication (Barrons) where the theme is that miners are being hurt/squeezed because they are stocks.  I ask my readers how are miners hurt LONG-TERM (the next decade) if the REAL price of gold is rising?  Sure miners may have been sold today due to leveraged investors selling to go into cash, but how does that “squeeze” the mining business if gold is risng RELATIVE to input costs like crude oil and commodities? Mining is a spread business. You make money on the spread between input costs and output revenues.  Never take what you read on face value.

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Gold commodities

 

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Miners realtive to gold in the chart above.

Four Boom and Bust Cycles and the Implications for today’s Cycle (Microdocumentary)

This microdocumentary video examines in detail 4 major booms in the last 100 years and explains how monetary policy and interest rate manipulation has led to the inevitable bust:

  1. The great depression of the 30ies
  2. The recession of the 90ies
  3. The dot com bubble
  4. The housing bubble

http://www.safehaven.com/article/35401/microdocumentary-the-truth-about-boom-and-bust-cycles   A bit simplistic, but a good introduction to the dangers of excess credit growth.

Rap Video on the Boom Bust Cycle or Hayek vs. Keynes

The Problem with Bubbles

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housing bubbles

Debt Based Fiathouse distortion

It’s the timing.   Babson was two years early, so by the time the bubble peaked, no one cared.   Sort of like today with six years of easy money/credit and rising prices in the US stock markets.

Note the housing bubble.   Home prices were far above owner’s equivalent rent (the cash flow/income to support home prices) in 2002/2003 but then two to three years later the apex was reached.   Soros in his theory of Reflexivity would propose to ride the bubble knowing you were in a bubble and then reversing course once it burst (the most marginal buyer has bought).  Not easy in the hurly-burly world of investing.

King Dollar or Listening to Pundits

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The dollar “breaks-out” and

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Sentiment and consensus rally–a new KING DOLLAR for many years to come.

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Gold, of course, sells off on King Dollar, stronger US economy, and less inflation fears.

This post illustrates the HUGE swings in sentiment from the DEATH of THE DOLLAR in 2011 when this was occuring:

dollar gold

Back to today (Oct. 2014)

Dollar

King Dollar, with the obvious understanding that it’s dominance has only just begun (Dennis Gartman at minute 2 proclaims a bull run for the US dollar-click on this link). My have we come a long way from the new moon of the dollar cycle low in late April of 2011, where many of the same players and pundits openly declared the dollar crisis in full swing and just getting started. Back then, the mood in the markets was decisively dimmer, from both the usual suspects – to the ominous warnings from leaders in the private sector that the US consumer would soon face “serious” inflation in the months ahead.

Lesson: The same pundit, Dennis Gartman, who was proclaiming the Death of the Dollar in 2011 near the absolute low is now, four years later, trumpeting that the Dollar is King. No one knows the path of the dollar or gold. We can make our own probabilities but to be CERTAIN is the sin.  I gave up watching CNBC then years ago. 

from: http://www.marketanthropology.com/

And what do the pundits say about this on CNBC?

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I hear crickets…………..

Evolutionary Development of Contrarians; Letter to An Analyst

What does it mean to be a true contrarian? (www.truecontrarian.com) Steve explains the fundamentals of his investment philosophy and how to apply it to real-world situations. He details how human herding, group following, and projection of the recent past into the indefinite future enabled our ancestors to survive thousands of years ago, while weeding out those who were contrarians. This has caused contrarian behavior to be quite rare in modern times because it goes against our hard-wired emotions. Steve analyzes why the financial markets often act most irrationally during the first hour of each trading week. He also describes the reasons that financial analysts at major corporations are unable to invest in a contrarian fashion even if they know intellectually why they should be doing so.

Letters to an Analyst    http://researchpuzzle.com/

The Education of a Value Investor Part III: The “Ugly”

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Everyone has a plan ’till they get punched in the mouth. –Mike Tyson

The author describes in Chapter 7: The Financial Crisis, Into the Void, his trauma. He learned not to be leveraged and to turn off the Bloomberg to avoid the daily carnage.  But I wonder why—if the experience was so searing—he didn’t reflect deeply on the causes for what had happened. Like after seeing the dead and wounded in your safari camp after an elephant stampede and then wondering if changing the color of your tents would stave off disaster.  Perhaps studying elephant migratory patterns would help. Value investors like Seth Klarman and Jim Grant were howling about rapidly burgeoning mortgage debt and centrally-planned interest rates.  Mr. Spier should dust off his Mises and Rothbard texts on the Austrian theory of the business cycle.

On page 80, he believes that people’s human excesses and moral compromises helped cause the financial crisis. Poppycock!  And even if true, then what lessons could be learned? People are always and everywhere greedy, kind, cruel, amoral, and just plain human. Forget the inner scorecards, Robert Cialdini, author of the book Influence, would be saying, “look at incentives.”  The U.S. banking system is inherently flawed.  Since 1840 the US has had 12 major banking crises, while Canada has had none—not even during the Great Depression. See Fragile by Design by Charles W. Calomiris and Stephen Haber. I don’t believe Canadians are less prone to humanness than Americans? Ever been to a hockey game?  The author makes an assertion without theory, evidence or fact. That’s ugly.

The author seems to lack curiosity as to what happened to him.  However, he did listen to Michael Burry’s warnings about the mortgage crisis, but he didn’t share what he thought happened. He bet that policymakers would use every available tool to avert disaster.  But why should the politburo at the Federal Reserve intervene to pile more debt upon debt? To what effects and consequences? What about the crisis of 1920? The Fed did nothing and the result was the fastest and strongest recovery in US history. View: http://youtu.be/czcUmnsprQI.

Now the US labors under high private debt, too-big-too-fail banks, absurd Dodd Frank bank regulations (10,000 pages and counting of rules), and a $4 trillion dollar Fed balance sheet.   Imagine if the Fed did the right thing and shut down.   The panic of 2008 was a global banking crisis. Wealth would have been unaffected, however titles to that wealth would change from the profligate to the prudent.  Now, in 2014, bubbles and moral hazards abound.

My questions are not only asked of Mr. Spier but also of Mohnish Pabrai and Bill Miller.  Mr. Miller once mentioned how cheap housing stocks were at 6 times earnings during 2006 http://www.bloomberg.com. Yet homebuilder company earnings were at 200-year peaks.  Mr. Miller may have lacked understanding of how much mal-investment occurred along with a host of other reasons (community reinvestment act that forced banks to lend to poor credit risks so they could be rechartered). Mr. Pabrai can clutch a check-list but that won’t help in a credit crisis if he owns a subprime lender.

Ironically, Mr. Spier mentions sub-prime auto dealer/lender, Carmax (KMX), as a risk.  Now with massive Fed intervention with QE, QE2, QE3, and QE Forever, why be a value investor? Move over Graham and Buffett, own the most leveraged, subprime lenders you can find like: KMX

But be sure to sell in time:

Conn

Balance sheets matter when bubbles pop. Right now–for now–bubbles abound.

May Mr. Spier enjoy his nirvana, but I can’t recommend this book for anybody who is forging their own way.  You are better off to read Buffett and Graham’s writings while thinking of your own strengths and weaknesses. Follow Mr. Spier’s example and keep a diary of your progress. It’s YOUR journey.

I won’t be doing other book reviews unless I am 100% behind recommending the book to you. I would like to next look at DEEP VALUE by Toby Carlisle. Ten thumbs up.

Tutorial on Gold and the Mining Business from the Denver Mining Show

Very good overviews of gold and mining

Updating the Bullish and Bearish Cases For Gold http://bit.ly/1B6LHte 

Gold Bullion and the Need for Systematic Insurance. http://bit.ly/ZLb0pc  An excellent review of market risk.

How Not to Blow it Next Time http://bit.ly/1tYZYYI 

The Education of a Value Investor: Part II, The “Bad”

 

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We do not see things as they are. We see them as we are.  – The Talmud

Part II: The “Bad”

To be fair, the author delivered exactly on his promise in the first paragraph of his book:

My goal in writing this book is to share some of what I’ve learned on my path as an investor. It is about the education of this investor, not any other investor. This story is not an investment how-to. It’s not a road map. Rather, it is she story of my journey and of what I’ve learned along the way. With my own flaws and foibles and idiosyncratic abilities—and despite my considerable blind spots.

I titled this part of the review, “Bad” because I was hoping for so much more from the author. Much of his description of his investment process is cursory and his analysis seemed a mile wide and a half-inch thick.  Examples will be discussed in part III.   He never promised that in his opening paragraph, but more experienced investors will then have little to learn from this book.

If you want to learn about the psychology of investing and trading then start with the classic, Reminiscences of a Stock Operator by Edwin Lefevre.  Tudor Jones calls it a textbook for speculation.

Another relatively unknown classic, Why You Win or Lose by Fred Kelly (1930) See a synopsis here:WHY_YOU_WIN_or_LOSE_Fred_Kelly (1)

Investing is something you do. Like sex, reading about another’s activities will only take you so far in understanding it. You must apply yourself, actually invest, and review your results.

Two excellent books on having an investment process and managing emotions:

Trader Vic-Methods of a Wall Street Master and Trader Vic II-Principles of Professional Speculation by Victor Sperandeo.

Back to a hardcore value investor. Read, There’s Always Something To Do, The Peter Cundill Investment Approach.   Cundill was a Canadian Graham and Dodder.

An interesting romp through the investing world, The Money Game by Adam Smith.

Simple But Not Easy by Richard Oldfield is another interesting overview by an old pro.

Then if you want to understand why you must fit investment to YOUR OWN approach, read about all the different ways there are to trade and invest by reading the Market Wizard books by Jack Schwager or Free Capital by Guy Thomas.

Of course, go to the original sources and read all the investment letters from Buffett, Munger, Klarman, Tweedy Browne. Type in their names in the csinvesting.org search box and see where the links lead you.

In Part III, the “Ugly” I take off the gloves and point out the author’s fuzzy thinking regarding the financial crisis.