Category Archives: Economics & Politics

The Stock Market, Credit, and Capital Formation


(The epub edition here:

A continual rise of stock prices cannot be explained by improved conditions of production or by increased voluntary savings, but only by an inflationary credit supply–Fritz Machlup

I won’t kid you, this is a tough read, but it will pay richly. The author was both a businessman and economist who had practical experience during the Great Depression. The book helps you understand cyclical stocks–and what stocks aren’t cyclical? See the review below:

on March 18, 2010
The book was originally published in 1931 in German. It was one of the series of tracts issued under the name of Beitrage Zur Konjunkturforschung by the Austrian Institute for Trade Cycle Research of which F.A. Hayek was the director. The book made its appearance not very long after the stock market crash of 1929 and the latter event had a strong bearing on its subject matter.

Fritz Machlup is a champion of the stock exchange and the book solidly refutes most of the charges that are commonly made against it. The most serious of such charges is that the stock exchange absorbs capital either permanently or temporarily and thus deprives the industries of capital. Machlup answers this charge by pointing out that there may be a permanent absorption of money capital only where this absorption is productive, i.e., where it leads to the formation of new real capital. When new issues are sold in the Stock market, the proceeds of the sale are utilized in the purchase of machinery and other forms of capital goods. In all other cases of security transactions which do not involve any new issues of securities, there is a mere transfer of funds from one person to another. B receives what A pays. The proceeds of the sale of securities by a speculator who withdraws from the stock market flow back into the economic system.

Even when there is a chain of security transactions before anybody withdraws from the stock market, the chance of a temporary “tying up” of funds is greatly reduced by the Clearing House method of offsetting mutual indebtedness among the brokers and jobbers. The settlement procedure adopted by the stock exchange members renders any considerable use of money unnecessary. The private speculator who is not a member of the stock exchange may not avail himself of clearing facilities and the payments between brokers and private speculators may require cash or bank deposits. But even this difficulty is greatly removed by the extensive use by private speculators of what is called “brokerage deposits”. A private speculator who sells securities may leave the sale proceeds on account with his broker until he buys other securities. The broker will not usually maintain idle balances but is more likely to use them to grant loans to other private speculators who want to buy securities.

Customers keep on selling and buying and their accounts with brokers perform the function of money. The balances held by Stockbrokers on behalf of their customers are called “brokerage deposits”. They constitute a special type of medium of exchange and are much used in the security transactions between the regular customers and brokers. It is only in the event of an excess of customers’ withdrawals of balances over new deposits that payment by check is necessary. But even that is unlikely to take place except when a large number of outside speculators who are not regular customers of brokers enter the speculative market. This only happens in times of credit inflation by banks through an “easy money” policy. There may be a temporary tying up of funds in a chain of security transactions only when a large volume of such transactions are carried out with cash or check payments, and that is rendered possible through credit inflation by banks. The blame for temporary “tying up” is therefore on the inflationist policy of banks rather than on stock exchange.

A second charge against the stock exchange is that speculation is at the root of business cycles. The charge is based on three grounds. It is said that speculation causes mal-investment and overinvestment. Secondly, it causes credit inflation and lastly it makes credit dear. The author refutes each of these allegations and concludes that it is not speculation per se but credit inflation which causes all these disturbances both in the capital market and in the money market.

There is nothing inherently wrong in fluctuations in prices of securities. They may be due to changed expectations of returns and transactions may be carried on both in a rising or a falling market without any fresh funds being brought into the stock market. It is only when inflationary credit is placed at the disposal of speculators that new issues of securities are floated at random and funds are absorbed in investments which are unsatisfactory. Inflationary credit whether given direct to industries or to the stock exchange from which it flows into industries causes disproportionalities in the production structure.  (To learn more see: skousen-structure-production). More funds are invested in the purchase of fixed capital and in roundabout processes than is justified by the savings of society. When the flow of inflationary credit ultimately dries up, the fixed capital becomes unremunerative and is either worked at a loss or has to be scrapped. It cannot be said that financing of industry through the stock exchange causes any greater malinvestment or overinvestment than financing of industry direct. The effect of inflationary credit is the same in both cases.

As for stock exchange speculation causing inflation the author argues that one must blame the elastic supply of credit by the banking system rather than the increased demand for funds by speculators in a rising security market. Unless there is a latent capacity and willingness on the part of bankers to extend more credit, the demand of speculators alone cannot cause inflation. If the banks are prevented from inflating credit through regulation of reserves, discount policy, etc., then stock exchange speculation can do no harm.

Nor is stock exchange speculation to blame for making credit dear. The stock exchange is only a convenient means of attracting capital for long term investment. Higher security prices mean a lower rate of interest and hence cheaper capital for industry. It is not the stock market which competes with industry for funds. It is industrial long term credit which competes with industrial short term credit. As a result of higher security prices, in the absence of any inflationary credit, the long term rates fall and short term rates raise which close the usual gap between the two rates and thus exert an equilibrating influence. It is only when credit is inflationary that short term rates may go above the long term rate and the complaint about “dear money” is heard.

In short Machlup reveals inflationary credit as the underlying cause for all those disturbances for which blame is usually laid on the stock market. The book is exhaustive with regard to the field it seeks to cover. It bears every mark of patient research and painstaking reasoning. It is with great delight that the Mises Institute has brought it back into print.

And look what’s coming!


So why do we lose?



Gold is the worst investment in history

Brian Lund-originally published Feb 5, 2015    Lesson: Think for yourself. 



Nobody wants to be the bearer of bad news. Nobody wants to crush people’s dreams. But in the world of investing, cold, hard facts, not dreams, are what make you money. And the fact of the matter is, historically speaking, buying gold is the worst possible investment you can make.

I am very sensitive to the fact that what I just said has probably caused some readers to go apoplectic, and for that I apologize. I know that I will never convince the gold bugs, inflation hawks or doomsday preppers of this thesis, nor my own personal position that gold will eventually be worthless. But for the rest of you, let me lay out the case to avoid gold as an investment.

The Numbers Don’t Lie

In his seminal book “Stocks for the Long Run,” renowned economics professor Jeremy Siegel looked at the long-term performance of various asset classes in terms of purchasing power — their monetary wealth adjusted for the effect of inflation.

With a $1 investment each in stocks, bonds, T-bills and gold, beginning in 1802 and ending in 2006, Siegel calculated what those assets would then be worth.

Stocks were the big winners, growing the initial dollar investment into $755,163. Bonds and T-bills trailed dramatically, returning only $1,083 and $301 respectively. But the big surprise was in how badly gold fared during that time, only growing to $1.95.

An Inefficient Investment Vehicle

In addition to its miserable historical performance, gold also has many other failings as an investment, not least of which are the cumbersome and inefficient options available to own it and the prevalence of less than reputable salespeople in the precious metals space.

Owning physical gold in the form of bullion has many drawbacks. Wide bid and ask prices on physical gold ensure that the moment you purchase it you are already underwater on your investment. In addition, shipping costs for the heavy metal will further add to your cost basis.

Once you get your gold, you then have to decide how to store it. Keeping it at home exposes it to the risk of theft, fire or natural disaster. Taking it to the bank requires the rental of a safe deposit box, the cost of which will eat into your profit as well.

Firms will store your physical gold on site, but they charge for the service, and the idea of having your yellow treasure held by someone somewhere else, commingled with that of others, is not very appealing.

Enter the Modern World

Ultimately, gold is a legacy investment vehicle from a time before mass communications, ease of global travel, and the internet. It no longer is the default store of value that it once was, and financial and technological advances have made it an investment best suited for collectors and hobbyists, but certainly not for serious investors.

For Full Article Click WayBack

Even money says this post attracts the GOLD IS DOOMED advertisement on the page

Editor: Too bad gold isn’t an investment but just money.

Misconceptions about gold S&D













I post these charts for a historical reference point. I do not use them to predict where prices will go.  Note though that rising CinC (currency in circulation) doesn’t always correlate to rising asset prices.

Update: Oct 6th: A contrarian:

Using Technical Analysis Fundamentally; Mea Culpa


au-stocksUsing Technical Analysis for a Fundamental View:



The Trend is not your friend

There’s an old saying in the financial markets that the trend is your friend, meaning that you will do well as long as you position your trades in line with the current price trend. This sounds good. The only problem is that you can never know what the current trend is; you can only know what the trend was during some prior period. How is it possible for something you can never know to be your friend?

Market ‘technicians’ often make comments such as “the trend for Market X is up” and “Market Y is in a downward trend” as if they were stating facts. They are not stating facts, they are stating assumptions that have as much chance of being wrong as being right.

A statement such as “Market X’s trend is up” would more correctly be worded as “I’m going to assume that Market X’s trend is up unless proven otherwise”. The proving otherwise will generally involve the price moving above or below a certain level, but the selection of this level is yet another assumption and the price moving above/below any particular level will provide no factual information about the current trend.


Mea Culpa: sequoia-may-2016-transcript  Not much to glean.

However, a question for you:  Is it better to buy franchises or net/nets?

If you could choose between a fair coin that was gold or a rusty tin coin that each paid off 4 to 1 on choosing heads or tails, which one would you prefer?

In October those near Philly Microcap Conference



Perspective on the Gold Miners; Management

Miners long term

SP long term

lt cape

Gold and Nixon

2Q 2016 Tocqueville Gold Strategy Letter – Final

The above charts came from this article.  I would ignore the conclusions but focus on the historical perspective.


Enterprise Product Partners August 2016 Presentation

Note the information they give investors. How management communicates is important. Do they provide sufficient detail for you to assess their capital allocation skills and operational performance. Note page 5.

Celebrate when your stock gets downgraged

Analyst Recommendations Do they add value

Helicopter Money?

Helicopter money

The source and root of all monetary evil is the government monopoly on the issue and control of money. –Friedrich Hayek

An interesting discussion 

Pivotal to the investment process is interest rates. For entrepreneurs to control capital, interest rates must reflect its real cost rather than merely the cost of printing money. Otherwise the money printers will dominate investment.

Zero interest rates rob future generations by bidding up the value of current government assets and privileges.   A bubble of current assets inflated by near-zero –interest loans does nothing to fund the future.   Retirees face a prospect of shriveled pensions and support and watching their children and grandchildren live slow motion lives. –George Gilder from The Scandal of Money: Why Wall Street Recovers But The Economy Never Does

I’d come to Wall Street for validation. I believed my value was in achievement, that achievement was conferred by instituions and rendered in money. I’d joined an army of bright young men and women dressed in business-casual uniforms, streaming into the service of massive corporation without any sense of why we’d chosen to dedicate our lives to further enriching the already rich, except that we needed proof that we were valuable, because at heart we didn’t really believe we were.  –Sam Polk from The Love of Money

Moving towards a solution

Deep Value Investor: 2016-05_conference_transcript


Surf the Lquidity; Gold Stocks


surf bigSurf the liquidity

Below is a link to six videos that analyze the global debt problem.  A good review of our monetary system and the current/impending problems. Do YOU agree with the analysis? Your thoughts welcome.

Santiago Capital: What Massive Debt Means….

Gold Stock Update from Myrmikan Capital.

Myrmikan’s error in 2011 was an underappreciation of the forces the central banks brought to bear to reverse the credit collapse. Quantitative Easing was the least of the tools: it was the trillions of dollars of guarantees and the suspension of market-tomarket accounting that allowed the banks to puff the bubble even larger. And, there may remain policies that can lead into another round of even greater insanity, which would weigh on gold. Former Chairman Ben Bernanke, for example, recently traveled to Japan to educate them on “helicopter money.” According to Bloomberg, Bernanke suggested the government issue non-marketable, perpetual bonds with no maturity date and that the Bank of Japan directly buy them.

Read more Performance_Update_2016_06

Pinpoint Bottom in Drybulk Shipping Stocks!

shipwreckThe result for investors in shipping stocks–sinking more than 50% in 2015 alone or 95%+ since 2011.


A correlation between the Baltic Dry Index for Shipping with the Goldman Commodity Index. So, here’s an idea: Rather than piling onto the bearish bandwagon, when the real price of an indispensable service or commodity drops to a multi-decade low it might make more sense to be bullish. Read more Shipping rates will never go to zero

tsx perspective

Shame on you if you thought I or anyone could predict the bottom of any shipping cycle.  That impossibility allows reward for the investor who can use time arbitrage. You can use a longer time-frame (three-to-five years) than 99.999999% of all investors.  You can listen to an excellent shipping conference here: Marine Money NY Conference.  The whole conference is worth listening to so you develop an understanding the industry.  See 910 Adam Kent – From the Weeds to the Trees and 855 Jeff Pribor Marine Money Presentation and 250 Panel – Untitled, Uncut and 910 Adam Kent – From the Weeds to the Trees and Falling Knife or Bargain 855 and Jeff Pribor Marine Money Presentation.

At that conference, analyst Andrew Horrocks said that institutional investors all say to him, “Yes, Andrew we have the same data as you–assets are at generational lows and supply looks to be diminishing, but call us in 2017 or ‘just before the cycle turns!’ See chart below of drybulk shippers.


Read his handout Andrew Horrocks on the shipping market and go to page six, then listen to Horrocks Talk to Investors. At minute 11 he points out the good news for drybulk shipping. Supply is waning. There is high scrapping rates, low crude prices, and ordering of new ships is practically nil.  Mr. Horrocks says to never underestimate the dimension of time in investing. Even though public institutional investors see the same data, they can’t afford a longer-term investment horizon than six-to-twelve months.  Therein lies our opportunity.

See more on time arbitrage:

The reason prices for drybulk ships are at 35-year lows is because of simultaneous over-supply met with falling demand from a weaker global economy. Prices adjusted rapidly. Smart ship owners who have been through several cycles are snapping up second-hand ships for cents on the dollar using cash and then expecting to wait three or more years for the cycle to turn.   But for investors in shipping companies, we face the dangers of high debt loads and future dilution. The shipping companies that survive will go up 5, 10 even 30 times or go to ZERO ($0.00). The opportunity/dilemma.

Mr. Bugbee, the president of Scorpio Bulkers (SALT) whose company has diluted shareholders several times to survive, points out that the key is to survive to the other side of the cycle. Go to minute  11 and 24 Massive Opportunity or Bankruptcy? Bugbee discusses the opportunities and dangers as Mr. Bugbee talks about survival in this cycle.

He says, ” I have NEVER seen a market that is so EXCITING in the long-term but that is so TERRIFYING in the short-term. Capital is HARD TO COME BY. there is no cash flow in the the market. We hope the market stays ugly for another eighteen months to allow for scrapping rates to clear up the supply, but we should be careful what you wish for. The KEY is to get your company to the OTHER SIDE of this cycle.   Meanwhile investures face DAILY or WEEKLY performance pressures.

And finally, always remember:


P.S. Check out Fund Seeder



Stating the Obvious: Our Monetary System is Flawed


My main takeaway from this book published in 2016:


Whoa!  I better clutch my gold tight then!  God help us all.

The End of Alchemy: Money, Banking, and the Future of the Global Economy by Mervyn King, former governor of the Bank of England.

“Mervyn King may well have written the most important book to come out of the financial crisis. Agree or disagree, King’s visionary ideas deserve the attention of everyone from economics students to heads of state.” –Lawrence H. Summers.

Well, what Mr. Summers describes as visionary ideas was discussed and warned about over a hundred years ago by Ludvig von Mises in The Theory of Money and Credit, 1912

From the book jacket: The Industrial Revolution built the foundation of our modern capitalist age. Yet the flowering of technological innovations during that dynamic period relied on the widespread adoption of two much older ideas: the creation of paper money and the invention of banks that issued credit. We take these systems for granted today, yet at their core both ideas were revolutionary and almost magical. Common paper became as precious as gold, and risky long-term loans were transformed into safe short-term bank deposits. As King argues, this is financial alchemy―the creation of extraordinary financial powers that defy reality and common sense. Faith in these powers has led to huge benefits; the liquidity they create has fueled economic growth for two centuries now. However, they have also produced an unending string of economic disasters, from hyperinflations to banking collapses to the recent global recession and current stagnation.

As readers of this blog know, I suggest studying the works of the Austrians, however, I don’t agree with all their theories such as their dislike of Real Bills Doctrine (Feteke)

I always try to seek out opposing views, so I eagerly picked up a book by an English central banker.  Though Mises foresaw the evils of fiat currency and fractional reserve deposit banking over a hundred years ago, I enjoyed seeing an insider discovering the dangers in our current monetary system for the “first” time.  Alas, I view his solutions as lacking since they don’t address the fatal flaw of central planning—Hayek’s Fatal Conceit. Dispersed information and knowledge, incentives, and the economic calculation problem mean that a centrally planned monetary system will inevitably fail as shown by the 2008 to ? financial crisis.

At least Mr. King realizes that our current system is flawed. From page five: “The idea that paper money could replace intrinsically valyuable gold and precious metals, and that banks could take secure shor-term deposits and transform them into long-term risky investments, came into its own with the Industrial Revoluton in the eighteenth century. It was both revolutionary and immensely seductive. It was in fact financial alchemy—the creation of extraordinary financial power that defy reality and common sense. Pursuit of this monetary elixir has brought a series of economuic disasters—from hyperinflation to banking collapses. Why have money and banking, the alchemists of a market economy, turned into its Achilles heel?

If Mr. Kind had turned to Murray Rothbard, the great Austrian economist in What Has The Government Done To Our Money (Rothbard) or Man, Economy, And State (Rothbard), Mr. Rothbard would say fractional reserve deposit banking is an inherently inflationary Ponzi scheme and that central bank quantitative easing distorts people’s time preferences and the economy’s structure of production.

At least one central banker realizes that our current monetary system is a disaster, but his prescriptions are flawed.  I wish he studied Mises and Rothbard’s writings Or the words of a common man who explains his suffering under the yoke of central banking:

A reader in Amazon’s comment section beautifully expresses what is happening to the common man:

You cite one of the purposes of money is as a store of value. When interest rates are set below the rate of inflation how does money fulfill that requirement? How are the actual people who are forced to live under central bank policies to determine how much money they will require for the future when the price of a can of beans increases in cost by 500% over 20 years while interest rates dramatically decline? This leads to my issues with the ‘pawnbroker model’. On the surface it sounds perfectly reasonable and to the uneducated eye one might wonder why this model hasn’t been in place all along. The reason of course is human nature. I submit that the inherent human desire for ‘something for nothing’ or ‘I’ll gladly pay you Tuesday for a hamburger today’ is what actually underlies all these efforts to ‘optimize’ the economy. What makes you or any sane person believe that a ‘pawnbroker’ that can print money will value assets at a rate which will be sufficient to cover losses in a crisis? What makes you believe the bankers would stand for it or that anyone has any idea how bad the next crisis will be?

The final issue I want to bring up is “inside money”. I am sure you are aware that this money is not created nearly as simplistically as you describe. We are in an era of creditalism and leverage and there is a paper trail created by fractional reserve lending that a curious person could follow…if they were so inclined. My point is that it isn’t so much that borrowing/lending creates money as it is HOW MUCH money it ends up creating and how it is distributed. In the model as you described it borrowing/lending not only creates money it creates goods and services. I am at a loss to understand how most financial engineering produces much beside a huge wealth gap.

In summation, the issues I’ve raised (and a multitude more) could be easily addressed if the authors of books and the seekers of knowledge merely submitted their ideas and theories to audiences of real people. This is to say, if they left their cloistered environments where everyone agrees on ‘certain fundamentals’ they might discover many of these precepts are fundamentally flawed. They might also notice that their spreadsheets are a dismal representation of real individuals, in all their complexity of desire and behavior. Of course, if they ever did this, they would soon also discover they are in way over their heads!



Greenwald: The Death of Manufacturing; Deep Value Investing in Juniors

Prof. Greenwald on competitive advantage, the shift to services and why profit margins are so high and may remain so.

Most recent interview of Prof. Greenwald

You should think through Prof. Greenwald’s thoughts. Regarding investing, it is the art of the specific, so don’t let the the above macro talk affect your investing too much. I do agree that service companies develop competitive advantage through either product economices of scale or regional economies of scale.

Ajit Jain: 32_KeyInfluencers_AjitJain


Bhandari-High Risk High Reward in Junior Mining Companies

Game on or con on: Fraud in Junior Mining Equities:  or having fun with your money. The key is the lack of quality deposits!

Let me know what YOU think.