Category Archives: Economics & Politics

Fed Trap; Fragile by Design

Man

 In times of change learners inherit the earth, while the learned find themselves beautifully equipped to deal with a world that no longer exists–Eric Hoffer

Why the Fed is caught between its parabola of accelerating debt and money creation and debt collapse http://vimeo.com/102686694 (If short for time, start at the 18:30 minute mark).

Dan Oliver is a Director, Committee for Monetary Research and Education, one of the oldest and most respected organizations focused on our monetary system.

Some of the issues discussed were:

  1. Why has gold, when it was available, been the free-market preference for money worldwide for thousands of years?
  2. If gold is the preferred money, how come no country in the world uses it as money?
  3. Why does gold always move from spenders to savers, e.g., from the US to China?
  4. Goldsmiths/(banks) always issue more receipts for gold for which they do not have gold, sending all prices but gold higher. Reverse happens when the system collapses.
  5. Why, during a credit bubble, is gold always undervalued as compared to industrial commodities? What is the effect on gold producers?
  6. Why do politicians get corrupted by the bankers?
  7. Talk to how this plays out, especially the forcing abrogation of liberty
  8. What are the prospects for the relative valuation for gold and gold producers? What has to happen for these prospects to be realized?
  9. Where we are now: the money printed since 2008 is still mostly fallow, sitting in cash accounts.
  10. Can inflation occur in a stagnant economy or only when the economy “heats up”?

That interview of Dan Oliver of Myrmikan Capital provides a good synopsis of our (world’s) monetary crisis.  Profit from the Deluge_CMRE_Remarks_2011_05_12 and Economic-Consequences-of-Cheap-Money_Mises

Another Dan Oliver interview on Bloomberg TV: 
    https://www.youtube.com/watch?v=VVvrSPn34kY

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http://vimeo.com/102086456   Interview with Charles W. Calomiris who wrote Fragile by Design, the Political Origins of Banking Crises & Scarce Credit

(Csinvesting: This is an important, well-written book to understand why another banking crisis is inevitable plus you receive a history of U.S. and foreign banking systems.

Why are banking systems unstable in so many countries–but not in others? The United States has had twelve systemic banking crises since 1840, while Canada has had none. The banking systems of Mexico and Brazil have not only been crisis prone but have provided miniscule amounts of credit to business enterprises and households. Analyzing the political and banking history of the United Kingdom, the United States, Canada, Mexico, and Brazil through several centuries,Fragile by Design demonstrates that chronic banking crises and scarce credit are not accidents due to unforeseen circumstances. Rather, these fluctuations result from the complex bargains made between politicians, bankers, bank shareholders, depositors, debtors, and taxpayers. The well-being of banking systems depends on the abilities of political institutions to balance and limit how coalitions of these various groups influence government regulations.

Fragile by Design is a revealing exploration of the ways that politics inevitably intrudes into bank regulation. Charles Calomiris and Stephen Haber combine political history and economics to examine how coalitions of politicians, bankers, and other interest groups form, why some endure while others are undermined, and how they generate policies that determine who gets to be a banker, who has access to credit, and who pays for bank bailouts and rescues.

Charles W. Calomiris is the Henry Kaufman Professor of Financial Institutions at Columbia Business School and a professor at Columbia’s School of International and Public Affairs. His many books include U.S. Bank Deregulation in Historical PerspectiveStephen H. Haber is the A. A. and Jeanne Welch Milligan Professor in the School of Humanities and Sciences and the Peter and Helen Bing Senior Fellow at the Hoover Institution at Stanford University. His many books include The Politics of Property Rights.

Of Interest and for Reference: Bubbles

BUBBLES

I use this blog sometimes as a bulletin board so I can look back in time over events.

Yes, this is an equity bubble:

At present, the major risk to economic stability is not that the stock market is strenuously overvalued, but that so much low-quality debt has been issued, and so many of the assets that support that debt are based on either equities, or corporate profits that rely on record profit margins to be sustained permanently. In short, equity losses are just losses, even if prices fall in half. But credit strains can produce a chain of bankruptcies when the holders are each highly leveraged. That risk has not been removed from the economy by recent Fed policies. If anything, it is being amplified by the day as the volume of low quality credit issuance has again spun out of control. http://www.hussmanfunds.com/wmc/wmc140728.htm

What “Bubble?”  Crazy Chicken (Loco–the next Chipolte?)

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Real Estate

Here is a simple exercise that we all should do individually to help us with real estate related decisions:

30-yr-long-term

1.  Extend the above chart for the next 5 years.  What do you think it is going to look like?

2. Give this some thought.  Do you think real estate prices should be inversely proportional to the decline in mortgage rates?

3. Use your own real estate purchase as an example.  Mark the date of purchase and plot its price movements over the above chart.  If you think falling mortgage rates should stimulate prices, is that true in your case?

In conclusion, does Fed policy really have anything to do with the real estate market?  I believe Fed policies have been misguided for far too long, artificially propping up prices that should be much lower.

Whether you agree or disagree, does it appear that the Feds are finally at the end of the rope? http://www.acting-man.com/?p=32011#more-32011

TMS-2-w.o.

If one wants to identify bubbles, one must perforce study monetary conditions. The comparison of historical data on valuations and other ancillary factors can only take one so far. The problem is that in times of strongly inflationary policy, the economy’s price structure becomes thoroughly distorted, and that therefore a great many “data” can no longer be regarded as reliable. An added complication is that we e.g. cannot know in advance if the effects of the inflationary policy on prices will broaden out or not. Should “inflation expectations” (expectations regarding future CPI rates of change) rise markedly in the future, this would have a major impact on valuations, which would then begin to contract rather than continue to expand.

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However, a bubble can easily burst even if this doesn’t happen. Ultimately the question is whether brisk money supply growth will be maintained and whether the economy’s real pool of funding is still large enough to allow for additional diversions of scarce resources into bubble activities. Most of the time, it the eventual slowdown of money supply growth that brings a bubble to its knees.  http://www.acting-man.com/?p=32003#more-32003

Predicting is hard

A bullish call:

“Conditions for a hard economic landing — like slack in the labor market and weak balance sheets — are still largely absent.”

If the case for U.S. stocks is built on global growth and lower interest rates, other factors, too, suggest that the market is heading higher. For one, Washington is determined to avert a financial disaster, particularly in an election year….

Bull markets rarely end when the earnings yield on stocks — now around 6% — is higher than benchmark bond yields.

While some fear this year’s peak profit margins will wane, __________ says “margins will prove sticky at a high level” after years of cost-cutting. A 35% decline in leverage in the past five to seven years has made for healthier balance sheets, and continued stock buybacks are likely to keep boosting earnings per share.

Then there’s the market’s modest valuation. The S&P 500 trades today at just 15.6 times average estimated earnings — well below the average P/E of 18.6 times earnings during periods when inflation was at similarly muted levels in the past 57 years…

Stocks are “screamingly cheap relative to bonds.”

“The right time to get more aggressive [about the stock market] is closer to the end of the Fed’s easing cycle,”

“While the first half may look like death, second-half earnings will improve….

“The consumer is not dead!”

What’s more, the richest 20% of Americans drive 40% of the country’s consumer spending, and their outlays are less restrained by rising gasoline prices and higher mortgage rates. Dated Dec. 17, 2007

I think most investors have the wrong idea about what it means to be bullish or bearish about an asset class such as stocks. Being bullish or bearish is not an all or none decision. Believing that the US stock market is richly priced does not mean that all US stocks are richly priced. It just means that the market, taken as a whole, is priced at a level that involves an above average level of risk. That risk, as last year so amply demonstrated, may not be realized in the short run or even what some might consider the long run. But the risk still exists and investors should take it into account when allocating their assets.

Peter Bernstein, one of the greatest investors who ever lived, once said: Survival is the only road to riches. What that means to me is that, in a world where the future is unpredictable (that would be the one we live in), one must take into account the worst case scenario as an investor. What you shouldn’t do, as the quotes above prove, is take conditions as they exist today and assume they will continue into the future. Profit margins are always high when the economy is expanding and they always fall in a recession. You may not know when a recession will come but you know it will. Survival investing dictates that you take into account what happens to margins in a recession. Stock buybacks – at least since tax reform made them preferable – are always high when things are good and always disappear when the market needs them most.

You don’t have to know exactly how things will change just that they will. In any scenario with multiple potential outcomes you have to at least consider all the alternatives. No matter what you expect, you have to assign some probability to the opposite outcome. If you believe the economy will accelerate in the second half of the year, what are the consequences of being wrong? In a highly priced market, being wrong about future growth could prove quite costly. It is the consequences of being wrong that reveal your true risk level.

 More…http://www.alhambrapartners.com/2014/07/27/predicting-the-future-is-hard/

Chris Mayer: The US Debt Crisis That Will Never Happen  Posted July 23, 2014

Epstein doesn’t seem to understand that the U.S. government doesn’t need to borrow what it creates. The U.S. government creates dollars. The U.S. government doesn’t need to borrow them to spend them. This seems so simple to me it’s hard to believe anyone would believe otherwise.

… There is an economist, Scott Fullwiler, who explained this in a post at the New Economic Perspectives blog site:

“A currency-issuing government under flexible exchange rates can’t have such crises, because it doesn’t need to borrow its money; interest rates on its debt are a monetary policy variable. The doomsayers have been at this for decades now, but have not explained why the U.S., U.K. and Japan ran continually large deficits starting in 2008 at low interest rates while Greece, Spain, Italy, etc., could not… At some point, one would think the ‘U.S. could become Greece’ argument would be widely recognized as fraudulent, but if you’re in the wrong paradigm, it’s difficult to accept even a simple explanation of why the paradigm is wrong.”

Hopefully, you can accept a simple explanation.

It’s true there are constraints. For example, there’s the debt ceiling. But this is a self-imposed restriction.

There is no reason why the U.S. should have a fiscal crisis of any sort. Such a crisis could only be self-imposed. So the real risk is that policymakers don’t understand how their own fiat currency works. The real risk is that they listen to the CBO.

.. If you don’t get the realities, then you invest foolishly. If you believe Epstein is right, then you’ll likely miss out on all kinds of great investment ideas because you’ll be afraid of a looming debt crisis. Instead, you’ll put your money in junky gold stocks — as if that will protect you!

(What do YOU think?)

VIDEO: Austrian vs Modern Monetary Theory Debate

Inflation rearing its head in Dollar Based Panama:

Locals and foreigners alike pay US dollars for goods and services across Panama just as you would in Houston, Jacksonville, or Las Vegas.

This means that the country is subject to all the whims and consequences of US monetary policy; when the Fed conjures money out of thin air, the negative effects are quickly exported to Panama.

Yet while it suffers all of the downside of quantitative easing, Panama enjoys very little of the upside. Of the jobs that the Fed claims they have created by printing $3.7 trillion over the last few years, zero of those have ended up in Panama. Not to mention, the Panamanian government doesn’t have an endless supply of foreigners lining up to buy its debt.

So to get a true sense of US dollar inflation… and where it’s headed in the Land of the Free… one only need look at dollarized countries like Panama.

More.. no-inflation-friday-dollarized-panama-issues-price-controls-basic-goods

 

Victor Sperandeo on the Inevitability of U.S. Hyperinflation

Why we are doomed

debt-GDP

http://www.oftwominds.com/blogjuly14/interest-debt7-14.html

Update on Hyperinflation Talk Presented 2010 by Victor Sperandeo,

EAM Partners L.P.                                                                May 13, 2013

On February 16, 2010, I first gave a speech titled “Hyperinflation: A Statistical Inevitability” at a charity event in Dallas, Texas. In essence, the talk was a “warning” that unless the growth of the nominal debt versus nominal GDP changed to a more normal balance, the US would “eventually” suffer from hyperinflation.

Hyperinflation is a debt problem whose root cause is when a country’s level of debt rises to a level that when its economy goes into a deep recession (or depression) the country cannot borrow money or raise enough taxes to cover its expenditures, and therefore it is forced to print money to cover a greater percentage of its expenditures than the markets and investors think is sustainable. This concludes in the country’s inability to pay the interest on its debt, which progressively consumes its overall budget, causing the country to continue to print money to pay its ever increasing debts and interest thereon, which ultimately leads to a loss in confidence in its currency, ending with hyperinflation as the result.

Editor: Note the difference between inflation and hyperinflation (hyperinflation is NOT just an ultra-high rate of inflation) See links below.

Where the U.S. Stands Today

My original speech was based on the 2010 Congressional Budget Office’s Budget and Economic Outlook Fiscal Years 2010-2020. At the time, total US debt was growing at an unsustainable rate of 11.90% compounded from 2006 -2010 (fiscal years) while gross GDP was growing at a nominal rate of 2.75%. Debt was increasing at 4.3 x’s higher than growth. Clearly, this was an unsustainable situation.

Further, the reason that I state hyperinflation will occur “within” the next 10 years has a logical basis. If one takes the position that the net debt will grow at 5% a year, total U.S. debt will be $27.324 trillion in 10 years (not including current off-balance sheet items or unfunded liabilities). As the CBO does not project total U.S. debt, only public debt, the $27.324 trillion figure is based on my projection.

Now, what will interest rates be in 10 years? The CBO says an average yield is 4.6% (CBO 2/13 Report page 5), but let’s assume it reverts to the mean for bills and bonds of the last 52 years, or from 1961, which was 6.01%. Assuming that spending increases 5.08% a year from 2014-2023 (CBO 2/13 Report page 3), they say annual spending will be $5.082 trillion in 2023 net of annual interest.

However, annual interest in 2023 on my projected $27.324 trillion total U.S. debt (using the historic average interest rate of 6.01%) will be $1.642 trillion, or 32% of projected 2023 annual spending without interest and 24% of projected 2023 annual spending with interest. Today, interest is 6% of the budget. Therefore, one has to ask the question, where does the approximately 20% difference come from? I believe U.S. bond holders will sell what they own, the U.S. dollar will decline, and the Fed will print money at a rate that will make today’s Fed look like they are Shaolin Monks.

See full article here:Hyperinflation by Victor Sperandeo

A history of hyperinflation in pre-revolutionary France: Fiat_Inflation_in_France_by_White

Wheel

Children fiatburn fiatth

An Austrian economist, Joseph Salerno discusses in nineteen minutes the theory of hyperinflation (High School Lecture) http://youtu.be/xVDZVhdT2gY

I am interested to hear from readers how the U.S. will AVOID hyperinflation assuming our current trends continue. What will politicians try to avoid default.  What do YOU think?

Two short, six minute videos discussing Market Wizard, Victor Sperandeo: http://youtu.be/OBkb69tvVqs and http://youtu.be/8XfSz3MT3Xg

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Yamana valuation to be posted Friday.

Value Traps; The Dollar Crisis; Depression of 1929

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I owe my early success as an investor not to brains or knowledge, because my mind was untrained and my ignorance was colossal, The game taught me the game, And didn’t spare the rod while teaching.  

Whenever I have lost money in the stock market I have always considered that I have learned something; that if I have lost money I have gained experience, so that the money really went for a tuition fee.  –Jessie Livermore

Mark Sellers and PRXI Value Trap

He put over 50% of his fund into MCF:

MCF

I added an update to yesterday’s micro-cap post. http://wp.me/p2OaYY-2tX.  The point is to try and understand prior investment successes or failures. Any lessons there?

An excellent book on the inflationary 1970s The-Dollar-Crisis by Percy Greaves

I just like the old photos to capture the spirit of the times: The-Stock-Market-Crash-of-1929

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I am still in shock over Brazil’s World Cup blow-out.

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A fat tail event?

Austrian Investing in a Distorted World

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Investors and Austrian Economics

Mises Daily: Friday, July 04, 2014 by 

Robert Blumen, a software engineer with a background in financial applications, recently spoke with the Mises Institute about the Austrian School’s growing influence among investors.

Mises Institute: In recent years, we’ve seen more and more Austrian-tinged economic analysis coming from investors like Mark Spitznagel and Jim Rogers, to just name two. As someone personally involved in the investment world, have you yourself seen growth in Austrian ideas among investors and similar professionals?

Robert Blumen: There has been tremendous growth in interest in Austrian economics among financial professionals. I started an interest group for Austrians in Finance on LinkedIn which, in a few years, has grown to almost 2,000 members from the US, South America, East, Southern, and Central Asia, Africa, and Eastern and Western Europe. Peter Schiff appears regularly on financial shows. The Mises Institute drew hundreds of people from the investment world to an event in Manhattan.

Since 2002, a number of Austrian-themed books in financial economics have come out. Alongside titles from established writers such as James Grant, there is Detlev Schlichter’s Paper Money Collapse, and several books by Peter Schiff. There are many popular Austrian bloggers such as Grant Smith and Robert Wenzel. Over two million viewers watched a 2006 video in which a parade of condescending media hosts heap ridicule on Peter Schiff, who, to his credit, did not back down in the face of their smugness.

MI: Did the financial crisis of 2008 help increase the sympathy for Austrian economics?

RB: I have heard the same story from many people in finance. When the bust of 2000 (or 2008) happened, it did not fit what they had been taught in school, nor could it be explained within the belief systems of their colleagues in financial markets. Their next step was reading, searching for answers, and then, finding the writings of Mises, Hayek, or Rothbard that enabled them to make sense of what had happened.

To answer your question, yes, I think that the failure of the popular economic theories — evidenced by these inexplicable crises — has driven the search for superior ideas. The Mises Institute has been publishing for years, explaining these boom and bust cycles with Austrian economics. When people searched, many of them ended up at mises.org.

MI: In spite of lackluster growth on Main Street, Wall Street appears quite happy with growth over the past two years. For the casual observer, one might argue that the Fed has managed things well. What do you see as problematic with the current approach, and are there some in the finance world skeptical of the Fed’s current strategy?

RB: The Fed has a series of mistaken theories supporting their belief that higher stock prices indicate the success of their policies.

The first is the thinking that asset prices are actual wealth, when they are only the prices of the capital goods, which are a form of real wealth. Asset prices, in real terms, are the exchange ratios between consumption goods and capital goods. Artificially-boosted asset prices mean only that the owners of assets who bought them at lower prices have increased their consumption possibilities in relation to non-owners of assets. The owners of most assets, the so-called “1 percent” are the beneficiaries of Fed policies.

There is no systemic economic benefit to any particular value for stock prices. Young people saving for the future and entrepreneurs who are looking to pick up capital goods at bargain prices would find lower stock prices give them a better deal. This is the same as for any good.

Their second error is that higher stock prices create a “wealth effect,” in which people see their asset values rise, feel richer, and consequently save less and spend more. Their goal is to boost consumption through pumping up asset prices. As Keynesians, they are all in favor of this because they think that consumption drives production.

Sound economic thought has recognized, at least since the classical school, that production must precede consumption, and that production drives demand, not the other way around. The Fed understands none of this because they have no understanding of the purpose of capital goods in the production process, which is to increase the productivity of labor.

 A one page summary of ABCT: http://www.auburn.edu/~garriro/a1abc.htm

Courses on Austrian Business Cycle Theory: http://kristinandcory.com/Austrian_Business_Cycle_Theory_1.html  (Watch the first seven-minute video of Tom Woods for a quick synopsis. Common sense?)

Wreckage_Austrian_Business_Cycle_Theory_by_Aguilar (An attack upon the Austrian theory)  You always seek out the opposing view to test the logic, facts and theory behind the other view.

Misconceptions about Austrian Business Cycle Theory

They believe this about home prices as well, which is arguably an even greater fallacy because homes are consumption goods. A rising standard of living means that we are able to buy consumption goods at lower real prices over time, not higher.

And finally, they see the stock market as a sort of public referendum on their policies. They point to the stock market and say, “see, the market approves of what we are doing.” But when you realize that through its monetary expansion, the Fed itself is responsible for the rising stock market, that calls into question whether we can use it as independent measure of public opinion, or instead, the Fed voting for itself with money that it prints.

Austrian-informed financial thinkers understand this. There are hundreds of Austrian-oriented blogs and commentary sites, as well as some excellent heterodox sites with a very Austrian-friendly perspective such as Zero Hedge, Jim Rickards, Marc Faber, and Fofoa.

MI: We’ve mostly been talking about the US so far, but speaking globally, do you see any areas that are of particular concern, such as China or the Euro zone?

RB: Credit allocation in China is not market-based. They import the Fed’s inflation through their currency peg, which diverts dollars into their sovereign wealth fund where it is “invested” by bureaucrats in various forms of dollar-zone assets. Their domestic savings go into their banking system, where it is wasted on politically-favored projects due to non-market allocation of bank credit. The entire system is experiencing a series of bubbles in real estate and other sectors.

Their rate of infrastructure spending for comparably developed economies is about twice as high as normal. This is because the communist party officials are under great pressure to hit GDP targets — as if prosperity could be spent into existence by hitting a number. Infrastructure such as roads and empty cities present an opportunity to spend a large amount of money, all in one place, on a lot of Very Big Stuff, which under market-based economic calculation would be revealed as wasteful.

The problems in Europe are a combination of the massive debts that can never be paid back, the unfunded entitlements, and the growth in the burden on producers, a theme that I addressed in my recent Mises Daily article on Say’s law. This burden consists of the totality of regulation, taxation, inflexible prices and labor markets, and the threat to the confiscation of wealth. If you project these trends into the near future, I’m not sure where the lines cross, but the system is clearly unsustainable in its present form because it relies on sustaining current levels of consumption as fewer and fewer people produce.

Disruption; Comparative Advantage; Inflation Expectations

Print

Print

Read more about the declining survivability of corporations and the rising executive turnover:

http://marginalrevolution.com/marginalrevolution/2014/07/disruption-big-time.html

Comparative Advantage

Inflationary Expectations  If you only study one aspect of human action to understand our current environment, let it be this:

There is no scientific way to predict at what point in any inflation expectations will reverse from deflationary to inflationary. The answer will differ from one country to another, and from one epoch to another, and will depend on many subtle cultural factors, such as trust in government, speed of communication, and many others. In Germany, this transition took four wartime years and one or two postwar years. In the United States, after World War II, it took about two decades for the message to slowly seep in that inflation was going to be a permanent fact of the American way of life.

When expectations tip decisively over from deflationary, or steady, to inflationary, the economy enters a danger zone. The crucial question is how the government and its monetary authorities are going to react to the new situation. When prices are going up faster than the money supply, the people begin to experience a severe shortage of money, for they now face a shortage of cash balances relative to the much higher price levels. (page 67, The Mystery of Banking by Murray Rothbard). How banks create money in the modern economy   fractional-reserve-banking-and-the-fed_salerno   The Mystery of Banking

Curated Alpha; Update on the Resource Markets, Michael Marcus

Tin cup

 

A Blog worth exploring

http://www.curatedalpha.com/category/behavorial-economics/

An update on the resource market

Mr. Rule, a Graham and Dodder in the resource sector, is a smooth communicator, but move on and do your own work. Start here:

https://www.explorationinsights.com/

Free course on resource investing: http://www.sprottgroup.com/natural-resource-investing/investment-university/

http://oreninc.com/orenthink

One of the better gold funds:  www.tocqueville.com

Market Wizard, Michael Marcus Speech:

http://www.curatedalpha.com/2011/curated-interview-with-michael-marcus-from-market-wizards/

 

Soros on the 2008 Crisis and Reflexivity (History)

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I have started to develop a set of generalizations along these lines by introducing the concept of reflexivity.  Reflexivity can be interpreted as a two-way feedback mechanism between the participants’ expectations and the actual course of events.  The feedback may be positive or negative.  Negative feedback serves to correct the participants’ misjudgments and misconceptions and brings their views closer to the actual state of affairs until, in an extreme case, they actually correspond to each other.  In a positive feedback a distortion in the participants’ view causes mispricing in financial markets, which in turn affects the so-called fundamentals in a self-reinforcing fashion, driving the participants’ views and the actual state of affairs ever further apart.  What renders the outcome uncertain is that a positive feedback cannot go on forever, yet the exact point at which it turns negative is inherently unpredictable.  Such initially self-reinforcing but eventually self-defeating, boom-bust processes are just as characteristic of financial markets as the tendency towards equilibrium.

Instead of a universal and timeless tendency towards equilibrium, equilibrium turns out to be an extreme case of negative feedback.  At the other extreme, positive feedback produces bubbles.  Bubbles have two components: a trend that prevails in reality and a misconception relating to that trend.  The trend that most commonly causes a bubble is the easy availability of credit and the most common misconception is that the availability of credit does not affect the value of the collateral.  Of course it does, as we have seen in the recent housing bubble.  But that’s not sufficient to fully explain the course of events.

I have formulated a specific hypothesis for the crash of 2008 which holds that it was the result of a “super-bubble” that started forming in 1980 when Ronald Reagan became President of the United States and Margaret Thatcher was Prime Minister of the United Kingdom. The prevailing trend in the super-bubble was also the ever-increasing use of credit and leverage; but the misconception was different.  It was the belief that markets correct their own excesses.  Reagan called it the “magic of the marketplace”; I call it market fundamentalism.  Since it was a misconception, it gave rise to bubbles.

Read more…

  1. Soros Anatomy of a Crisis 
  2. George-Soros-Theory-of-Reflexivity-MIT-Speech

In Gold We Trust; A Reader’s Question

Gold   In-Gold-we-Trust-2014-Incrementum

The above 100-page report on gold will provide a good financial history lesson.

A Reader’s Question

I was thinking about how many people think that the sell-side is just wrong about everything and completely untrustworthy.  From what I can tell, they are pretty good with the facts and a really valuable source when you want to learn about a new industry via a primers or initiation reports.  This led me to think that most of the sell-side critics think that they have an analytical edge over the sell-siders.  Maybe even an informational edge (which I think is very unlikely since these analysts cover one industry full-time.) But certainly an edge in judgment or behavior.  This I think is possible if you have a longer-time horizon and no man-with-a-hammer syndrome.

What sort of edge do you think is most achievable over the markets in general for an investor that is dedicated?  I’m thinking about full-time investors.

It seems to me that analytic edges are often overstated.  What are some cases that the sell-side or entire markets are just completely off on their analysis?  Maybe the optimistic analysts during the bubble years?  Is this just misaligned incentives?

I would guess that the market usually mis-weighs the probabilities of what may happen in the future, but that would be more of a misjudgment in my opinion.  (Maybe this is just semantics.)
I’d love to hear your thoughts.

My reply: I agree that analysts can provide great overviews of companies and industries in their initiation reports.  I will read them as a supplement to my own reading of original source documents.  I would not read them for valuation or investment recommendations.  The idea that analysts can predict next quarter’s earnings is absurd. Finding a reasonable range of normalized earnings three years to five years out is what matters, not the next six months of earnings.

Another reason I might try to read analysts reports is not for new ideas, but to see the extent to which the market is already discounting my own views.  Note the universal calls from analysts at Goldman and UBS for gold to trade to $900 or $800 See www.acting-man.com:

“Goldman Sachs lowers gold price target to $1,050” (Bloomberg, Reuters, etc. sometime in January and repeated ad nauseam ever since)

“Moody’s lowers gold price target to $900”  (January)

“Morgan Stanley: Gold price won’t see $1,300 again” (April)

Also, analysts may overlook key values in a company because they fixate on the next six months. For example, the most common way of valuing an exploration and production company is an appraisal of net asset value, based on sum-of-the parts approach. But most appraisals tend to ignore exploration assets which are not going to be drilled within some arbitrary time period, say the next 6 to 12 months. For some companies, much of the value is in assets which are not going to be drilled in the next year.

I think most of an investor’s edge is behavioral. (See http://www.amazon.com/Inefficient-Markets-Introduction-Behavioral-Clarendon/)

Take Coach’s (COH) recent plunge.

Coach

Coh Comments June 2014  and June 23 VL 2014 The company has to increase its investment to rebuild its brand. Wall Street analysts then act like this:

Over the Cliff

Therein lies opportunity or maybe not.   But if the markets didn’t act that way, then markets would not overreact. Markets tend to over-discount a known risk or uncertainty and under-discount an unknown uncertainty.

Fire or Ice: Our Economic Future

I disagree with a few of the speaker’s conclusions, but he lays out the history of how the U.S. left behind traditional capitalism where business saves and invests to drive growth to government controlled credit creation to drive consumerism (“creditism”). He says we are reaching our limits to expanding credit because of the lack of income growth. In other words, the Fed is trapped. The Fed MUST INCREASE QE or allow collapse.

Please view this if you have the time this weekend. An excellent video.

Here is his description: My Best Interview                                     April 25, 2014

For anyone who is interested in understanding my views on the global economic crisis, this is the video I would recommend watching, if I could only recommend one. In it, I am able to address almost all of the ideas I have tried to convey through my books and speeches over the past ten years.

The interview was organized, produced and conducted by Tim Verduin. Tim is the CEO of The Resilience Group, an insurance and financial services agency located in Crown Point, Indiana. I thought he asked all the right questions.

Have a Great Weekend.    We will tackle a gold stock valuation next week.