Category Archives: Economics & Politics

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

https://monetary-metals.com/arizona-considers-issuing-a-gold-bond/

Deep Value Investor: 2016-05_conference_transcript

HAVE A GREAT WEEKEND!

Surf the Lquidity; Gold Stocks

Nude

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…. http://play.pointacross.com/Player.aspx?gmid=866sfb2zve21

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.

BDI_blog_120716

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.

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: http://basehitinvesting.com/the-market-value-fluctuations-of-the-10-largest-companies/

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 https://www.marinemoney.com/sites/marinemoney.com/files/325%20Panel%20-%20Dry%20Cargo%20Discussion.mp3 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:


HAVE A GREAT WEEKEND!

P.S. Check out Fund Seeder

 

 

Stating the Obvious: Our Monetary System is Flawed

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My main takeaway from this book published in 2016:

The quote on page 6: TODAY THE WORLD ECONOMY REMAINS IN A DEPRESSED STATE. ENTHUSIASM FOR POLICY STIMULUS IS BACK IN FASHION, AND THE WHEEL HAS TURNED FULL CIRCLE.

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

DEEP VALUE INVESTOR IN THE JUNIOR GOLD MINERS

https://jayant.liberty.me/   His Blog

Bhandari-High Risk High Reward in Junior Mining Companies

Game on or con on: Fraud in Junior Mining Equities:  http://insider.kitco.com/GyBhN/mining-equities/  or having fun with your money. The key is the lack of quality deposits!

Let me know what YOU think.

 

Time to Sell Some Miners, But Not Much

Junior Miners

There is no training, classroom or otherwise, that can prepare for trading the last third of a move, whether it’s the end of a bull market or the end of a bear market. Paul Tudor Jones

I am selling about 1/5 to 1/6 of my speculative miners like Minco Silver. It was trading back in Jan. 2016 at about 30 cents.

Minco one yr

This miner didn’t fit all my criteria like jurisdiction and top-flight management, but it had $1 per share in cash and short-term investments and $2.00 per share (basic shares outstanding) in book value with no debt.  I viewed the stock as a cheap call option.  My position was not a full position but diversified in these type of exploration/pre-development type of companies.

MSV_2015YE_FS  Minco Financials

Minco Presentation

This bull market is starting to smell like the 1970 rally!

Bear-market-comparison-Gold-768x685

So, I expect this bull market to last perhaps years or for miners to multiply several times over.  You make your money SITTING.  But when you start feeling smart or, worse, other people think you are smart (where were you in 2015 when my accounts were down 35% to 40%?), it is time to peel some positions off.   Sell into strength. Note the past history of the miners.

bgmi

I wanna go back to the 70’s.

An educational video on the Federal Reserve or why you should own some gold

Have a Great Weekend!

The Problem: Too Much Debt

There are two ways to conquer and enslave a nation. One is by the sword and the other is by debt–John Adams, 1826

An excellent book from the 19th Century excoriating the idea of debt-based currency. Organization of Debt into Currency and Other Papers_2

Returns of 100 to 1? First Understand Returns on Incr. Capital; Reader’s Question

Cap investments

The best long-term investments tend to be companies that can reinvestment over and over again at high rates of return.  Those high rates of return attract competitors so you must also understand barriers-to-entry.  But first study how to calculate incremental returns on capital or marginal returns on invested capital (“MROIC”).   There are several links and documents below to help you.  The effort is worth it if you can find: WMT_50 Year SRC Chart (up to 2000). WMT had regional economies of scale until it out-grew them. 

From John Huber of Base Hit Investing

  1. Eridon855 says:

May 30, 2016 at 10:44 am

Is there a way to calulate return on reinvested earnings?

  • John Huber says:

May 30, 2016 at 2:57 pm

One quick and dirty way is to look at the amount of capital the business has added over a period of time, and compare that to the amount of incremental growth of earnings. Last year Walmart earned $14.7 billion of net income on roughly $125 billion debt and equity capital, or just under 12% return on capital. Not bad, but what we really want to know if we are going to buy Walmart is a) how much of their earnings will they retain and reinvest in the business going forward? and b) what will the return on that reinvested capital be?

10 years ago in fiscal 2006, Walmart earned $11.2 billion on roughly $83 billion of capital, or around 13.5%. But in the subsequent 10 years, they invested roughly $42 billion of additional debt and equity capital ($125b invested in 2016 and $83b invested in 2006), and using that incremental $42 billion they were able to grow earnings by about $3.5 billion (earnings grew from $11.2 billion in 2006 to around $14.7 billion in 2016). So in the past 10 years, Walmart has seen a rather mediocre return on the capital that it has invested during that time (roughly 8%).

We can also look at the last 10 years and see that Walmart has retained roughly 35% of its earnings to reinvest back in the business (the balance has been primarily used for buybacks and dividends). As I’ve mentioned before, a company will see its intrinsic value will compound at a rate that roughly equals the product of its ROIC and its reinvestment rate. So if Walmart can retain 35% of its capital and reinvest that capital at an 8% return, we’d expect a modest growth of intrinsic value of around 3% per year. Stockholders will see total returns higher than that because of dividends, but the value of the enterprise will likely compound at roughly that rate. And we can see that over the previous 10 years, Walmart’s stock has grown around 45% not including dividends. So unless you are banking on an increase in P/E ratios, you’re unlikely to achieve a great result buying a business that can only invest a third of its earnings at 8% returns.

This is a really rough measure, and this back of the envelope method works okay with a large, mature company like Walmart. But what you really want to know is what will the business retain going forward and what will the return be on the capital it retains and reinvests? Of course, there are different ways to measure returns (you might use operating income, net income, free cash flow, etc…) and there are many ways to measure the capital that is employed. But hopefully this is a helpful example from a general point of view.

Calculating Incremental Returns on Capital

ALSO, read and study these articles:http://basehitinvesting.com/tag/roic/

For extra study go here:

Reader’s Question

Hi John,
I love the “no hope” strategy for finding ideas. See http://csinvesting.org/2016/06/04/search-process-no-hope-dry-bulk-shipping/

I suppose there is always headline risk with things that have been in multi-year bear markets.

I am curious if you have any thoughts about political consequences of increased isolationist sentiment in the US and Europe?   Reply: Actually, the recent sell-off in the shippers this past week (June 17th, 2016) has partially been (I believe) due to Brexit.  You always want to look where sentiment is the worst and then try to determine if the price reflects the known news.   So on the one hand the rising fears over isolation give me comfort that a lot of bad news is being priced in.  Also, if the EU breaks up, why should trade go down?   Britain already sells more to the EU than it imports.   Switzerland isn’t in the EU and it has one of the strongest economies in Europe.   The EU makes no logical economic sense–how can central planning EVER work?  Nations have a natural interest to trade with each other since individuals benefit. What Trump says and can do (even if elected) are two separate issues.   I really don’t know how to handicap.   What I want is terrible news to encourage ship owners not to order new ships and to scrap the ones that they have.  

Also curious about your thoughts on the surge in low-cost vessels that came from Chinese ship makers in the last several years.   Reply:  This has been one of the reasons this shipping cycle has been the worst in forty years.   Easy credit/subsidized loans created a boom in Chinese ship builders (See May 7th, 2016 Economist issue and http://www.economist.com/news/leaders/21698240-it-question-when-not-if-real-trouble-will-hit-china-coming-debt-bust.  Now some Chinese ship builders are close to bankruptcy.   So, yes, this oversupply will make this cycle–already a long one–drag out, but who knows for how long?.

I subscribed to Trade Winds (shipping trade magazine) a couple of years ago, to keep abreast of the industry and try to find when industry sentiment started to pick up. So far, it’s still been abysmal, although this years spike in iron ore was pretty interesting. Especially because Wall Street analysts are still telling everyone iron ore is going lower and this is just a blip.  Reply: Wall Street just tells you AFTER the fact or projects the trend/obvious.    As one ship owner said (Diana Shipping) said, “The bulk shipping market will turn when no one believes it will turn.”   

Ordered the book just now. Really interested to learn more about the industry, and it’s cool that it’s in novel form. I think some of these shippers may start getting close to scrap value pretty soon.  Reply: The Shipping Man was an educational and enjoyable read.   I may even search for other book like Viking_Raid_Excerpt

Explore:

Just remember that the shipping industry has big demarcations. A company like Navigators’ Holdings (an LPG shipper) has different market dynamics than a dry-bulk shipper like Scorpio Bulkers.   One shipper operates in more of a oligopoly market than a purely competitive one though both, obviously, are cyclical.

I highly recommend the 800 page opus, Maritime Economics (3rd Edition) by Martin Stopford. If you wish to dig into the shipping industry, then read the annual reports/presentations of several shippers.   I have a ways to go to understand this market. The author: https://youtu.be/e2TToPf5iDs

Speculating in shippers is a bit like playing poker.  You don’t want the ship owners to start ordering new ships if freight rates start to rise.   You want the other owners to disbelieve a sustained rise.  When supply is constrained for a few years coupled with a spike in demand, the shipping market explodes like in 2007–no wonder a large supply of ships eventually came into the market and the boom went to bust.  The SIZE of the prior boom has led the depth of this bust.

A Money Problem

1964-money-problem2

We Don’t Have a Wage Problem; We Have a Money Problem

FYI: GAAP Acccounting gatech_finlab_lifo_42216

Coal’s Sunset/The Capital Cycle; Graham Bangs the Table

millenniumforce02wide

http://csinvesting.org/2016/01/13/more-on-the-capital-cycle/ was our last discussion on the capital cycle.

Coal_Haul_Truck_at_North_Antelope_Rochelle

Now, look at these two excellent posts on Coal.

A perspective on current conditions in other markets:

The Big Long – Final Feb 28 2016 The writer promises a follow up to discuss catalysts–which, I believe, will be the change in supply and demand dynamics and the capital cycle. See article referred to here: 2_Buffett and Graham Call the 1974 Market Bottom

and for more historical and emotional perspective: