Category Archives: Economics & Politics

The Gravity of Our Situation; the DANGER of Net/Nets

Posted on October 17, 2013 | 5 comments

gravity

Excellent blog, www.oftwominds.com, on current issues. Read the article on why China’s Yuan can’t easily become the world’s reserve currency. Yes, the dollar is under pressure, but no viable alternatives exist–for now.

The Difficult Escape from Student Loan Debt-Serfdom 

October 17, 2013

Are We Approaching Peak Retirement?
October 15, 2013

The Impossibility of China Issuing a Reserve Currency   **** must read!
October 14, 2013

Have We Reached Peak Entitlements?
October 11, 2013

Obama Administration Proposes 2,300-Page “New Constitution”
October 10, 2013

It’s Definitive: We’ve Reached Peak Jobs
(October 8, 2013)

The (Needed) Revolution Emerging in Higher Education
(October 7, 2013)

Five Goals for the Era Ahead
(October 5, 2013)

Have We Reached Peak Federal Reserve?
(October 4, 2013)

The Shutdown Political Game: Inflict Maximum Pain to Score Cheap Points
(October 3, 2013)

Have We Reached Peak Government?
(October 2, 2013)

One More “The Status Quo Is Saved” Rally and Then…?
(October 1, 2013)

August 2013 entries

July 2013 entries

June 2013 entries

May 2013 entries

April 2013 entries

March 2013 entries

February 2013 entries

January 2013 entries

December 2012 entries

Trapped in Net/Nets

The danger of even net/net, “cheap” stocks or camouflaged value traps.

Barron’s Sept. 19, 2011.

James Grant: I invested in Japanese value stocks, and had occasions to regret over and over on the reluctance of the Japanese to admit error and re-price. Companies that deserved bankruptcy would often not be allowed to meet their just deserts, but were carried on the back of banks that themselves had no true claim to solvency but were supported by the government. Capitalism is not just about success–that is the easy part. It is also about failure, recognizing it, dealing with it, liquidating it, properly pricing it. The Japanese have been unable to do that, and this characteristic was on display in the 1920s as well, so I take this to be a salient Japanese trait.

You were a great believer in Japanese equities. What happened?

With my friend Alex Porter, I was a general partner in Nippon Partners from 1998 through the end of 2010. We invested in Japanese value stocks. We closed it in December of 2010, because we weren’t making money, and it was immensely frustrating. Japanese corporate managers, by and large, don’t own equity. They have a platonic interest in the stock price. In the absence of a lively market for corporate control, there is no check on management doing nothing. In 1998 we began investing in companies whose shares are trading well below their pro-rata share of net cash on the balance sheets. In this country, in 1974, 1975, there were a lot of companies like that they did rather well in the 1970s and the 1980s. But in Japan, many (companies like these) remained at these compelling valuations for year upon year upon year. You get tired. The last straw was when one of our companies was selling at a huge discount to everything, and announced that it would undertake a capital investment larger than its stock-market capitalization.  

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Posted in Economics & Politics, Risk Management, Search Strategies, Valuation Techniques

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The Fed and Your Money; Who Called the Housing Bust?

Posted on October 16, 2013 | Leave a comment

bubble and the fed

The modern banking system manufactures money out of nothing. The process is perhaps the most astounding piece of sleight of hand that was ever invented. Banking was conceived in iniquity and born in sin. Bankers own the earth. Take it away from them, but leave them the power to create money and control credit, and with a flick of a pen, they will create enough money to buy it back again. But if you want to continue as the slavers of bankers and pay the cost of your own slavery, let them continue to create money, and to control credit. –Sir Josiah Stamp, Director The Bank of England. 

How the Federal Reserve System Works (Short Video-MUST WATCH) http://www.hiddensecretsofmoney.com/

If you are unclear about what you see in the above video, then  read more:

The Case Against The Fed by Murray Rothbard: http://mises.org/books/fed.pdf

For the most detailed study of banking and credit cycles: http://mises.org/books/desoto.pdf

Question: Why aren’t you rioting in the streets over this?

Who Predicted the Housing Bubbles? 

Monetary policy during the 2000s: http://mises.org/daily/2936

thornton13 and Debate between Austrian and Mainstream

A reader asked about CEF:

cef-10-oct-2013

One of the best sentiment gauges for precious metals is whether investors are paying a premium, or if they are buying precious metals at a discount.

Central Fund of Canada (CEF) is a closed-end mutual fund that owns gold and silver exclusively — the metals, not stocks — at a ratio of about 45 oz. of silver to 1 oz. of gold. Closed-end funds trade based upon the bid and ask, without regard to their net asset value (NAV). Because of this, they can trade at a price that is at a premium or discount to their NAV. By tracking the premium or discount we can get an idea of bullish or bearish sentiment regarding precious metals.

Very recently CEF has been selling at about a –7.5% discount to the net asset value of the gold and silver it owns. Considering that CEF has experienced a -54% decline from its 2011 top, that is a remarkably small discount when compared to historical discounts of -15% to -20%. Even more remarkable it the fact that after the -50% CEF correction in 2008, CEF was still selling at about a +15% premium!

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Wall Street Won; James Grant on Gold/Tapering/The Fed; Housekeeping

Posted on September 16, 2013 | 3 comments

Oh, no my Red Flags are flying when I see a national magazine opine on the market. I feel like this: http://youtu.be/2bCwyzT0Z6E

BULL

 

 

 

 

 

 

 

 

 

 

 

 

“The Money They Can’t Print”

Gold and Silver

Jim Grant shared an email with (Fleckenstein) that he sent to an investment committee he is on. The committee was considering selling its gold position, and what follows are Jim’s reasons as to why that would be a bad idea:

“I just read the HSBC piece. It asserts, among other things, that gold’s bull run is over, that the future is ‘foreseeable’ and that ‘our average price forecasts for this year’ will rise.

“It seems that the analyst is just as confused as the rest of us. The future is not ‘foreseeable,’ neither by the central bankers nor anybody else. We may handicap the odds on future events, but that is a very different thing from foreseeing those events unfold.

“Naturally, in the gold market, price action is mesmerizing. The metal earns nothing and pays no dividend. Impossible to value by CFA-approved techniques, gold becomes its price chart. These days, the chart looks bad.

The One Time You Can Divide By Zero“But there is, ultimately, a kind of fundamental value. The gold price is finally the reciprocal of the world’s faith in the thoughts and methods of Ben S. Bernanke and of his successor at the Federal Reserve. The greater the confidence, the lower the price, and vice versa. If we, as a committee, trust the Federal Reserve to remove the trillions of dollars it has materialized out of nowhere, exactly when the time is ripe, we should be out of the metal and out of the mining shares. If, however, we continue to entertain well-founded doubts, I suggest that we stick. On further weakness, I suggest that we add.

“Gold’s latest sinking spell perversely coincides with the dwindling of America’s geopolitical status in the world. Gold is selling off as uncertainty grows about the identity and thinking of the next Fed chairman, about the efficacy of QE and about the world’s tolerance to endure even the slightest tightening in the Fed’s unprecedentedly easy monetary policy.

All In, Whether We Like It or Not“For the first time in history, the world is on a universal fiat-money standard. And for the first time in history, central banks are pressing interest rates to zero and doubling down on zero percent through quantitative easing.

“If I were about 30 years younger, I would assure you that these policies will certainly, absolutely and indubitably fail. Forty years ago, I could have given you the date. But I have learned enough to understand that, in markets, nothing is out of the question. Gold — especially now, when it is out of favor — is a hedge against what we can’t know but which, based on centuries of monetary history, we are well advised to suspect. Pure and simple, gold is the money they can’t print. It’s good to have a little.”

Value Investors on ABX (Amer. Barrick, Senior Gold Producer)

CSInvesting: The lesson here is to do YOUR OWN thinking. I am as bullish on some (certain, not all) mid-tier and junior gold companies as anybody, but note the last sentence: Plus, a big chunk of our recent purchases occurred at price levels where the stock was trading a dozen years ago when gold was $300+/ounce.  Such a deal?  What matters is not the absolute price of gold but the spread between the gold price and input costs like labor, oil, rubber, etc. Think through the implications.   I don’t see how they think ABX has a great balance sheet as compared to other competitors………..

Pitkowsky: Wally, over the last few months, we have significantly increased our holding in Barrick Gold (ABX), which had been a small position up until that point.

Gold over the last few months has experienced tremendous volatility in the price of the metal.  And the mining stocks have experienced even more volatility in their share prices.  Barrick has suffered over the last couple of years from a host of different mistakes: too much leverage; lack of focus on returns; political mistakes related to new developments they’ve been working on.

But there’s been a management change there.  And the new CEO clearly has a different focus and a different set of marching-orders from the board, which is to reduce the leverage, to continue to be the low-cost operator, to resolve the political issues they have, and to focus more on returns — not just getting bigger.  And we’ve taken note.

We added significantly to our holdings in Barrick Gold this spring as the price of gold and the gold miner stocks collapsed.  Barrick is a low cost producer and is worth much more if gold prices are stable or higher but there is risk if gold plummets.  The new CEO has a different focus than the prior CEO.  He is focused on returns not size and less leverage is better.  They have low-cost and world-class properties, and ABX is a business capable of generating attractive levels of free cash flow. We also like that ABX is a cheap and leveraged hedge against worldwide currency debasement policies being pursued by central banks.  We don’t spend a lot of time worrying about macroeconomics, but we have been concerned by the scale of central bank interventions.  Plus, a big chunk of our recent purchases occurred at price levels where the stock was trading a dozen years ago when gold was $300+/ounce. Read the whole interview:
Interview with Larry Pitkowsky and Keith Trauner of Goodhaven
(MSFT, HPQ, ABX)

—

Housekeeping:

A busy week, but I hope to have my introduction to CSInvesting Handbook posting by week’s end……………fingers crossed.

 

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Posted in Economics & Politics

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Wmt vs. Cost Analysis; A History of Debt and Gold in Charts

Posted on September 3, 2013 | 2 comments

Professor

Back to School!

The key is not to predict the future but to be prepared for it.–Pericles

Wal-Mart vs. Costco

Data         WMT      Cost Difference
Supercenters 3158 448
Discount Stores 561 0
Sam’s Clubs 620 0
Neighborhood Mkts 266 0
Foreign Stores 6,148 174
    10,753 622 17.3 times
Employees 2,200,000 147,000  14.97 times
Stock Keeping Units (SKUs) 70,000 3,600  19.4 times
Revs. ($bil.) 495 107       4.63 times
Return on Tot. Cap (VL) 15% 13% 2%
Ret. On Equity (VL) 22% 14.50% 7.50%
Gross Profit Margin 24% 10% 140%
Oper. Income/Margin 5.90% 2.85% 100%
Sales per square foot 437 976 110%
Book Value $25 $25 0%
Price Aug. 2 $78.55 $119.10
P/BV 3.1 4.8 55%
Debt 37000 4800
Equity 82,500 13,825
Debt to Equity 45% 35%
Est. Growth
     Sales 6.50% 8.50%
     Earnings 9% 11%

cost vs wmt

sm cost vs wmt

Comparing

I think when you compare numbers, what strikes you is the difference in # of SKUs between retailers. WMT’s business model is much more labor intensive coupled with a lower-income customer. The squeeze on the middle class has crimped WMT.  You would think with WMT’s higher ROC and ROE compared to COST’s that WMT would not be lagging CostCo’s in share price performance but remember that COST is growing faster above its cost of capital and has more room to grow than behemoth, Wal-Mart. In other words, CostCo can redeploy more of its capital at higher rates than WMT can (grow its profits faster).

That said, the market knows this and has handicapped Costco with a higher price to book and P/E ratio than WMT’s. As an individual investor, your time might be better spent looking at smaller, more unknown companies to find mis-valuation. Also, when a company gets as big as WMT (1/2 TRILLION $ in sales), the law of large numbers sets in and the company becomes a magnet for social engineering and protest. But if you had to have me choose what company to own over the next ten years, I would choose COST because its moat is stronger (greater customer captivity) shown by its huge inventory turns/high sales per square foot plus greater PROFITABLE growth opportunities.  However, I do see WMT becoming more focused rather than expanding overseas where their local economies of scale are lessened.

My analysis is cursory, but for those that picked out the main differences, you have a better grasp of whether WMT can raise its employees’ wages to the level of Costco’s. It can not unless it reduces its SKUs and employees.

More analysis from others:

Why Wal-Mart Will Never Pay Like CostcoBloomberg writer Megan McArdle hits the nail on the head with her analysis of the situation in Why Wal-Mart Will Never Pay Like Costco.Wal-Mart is trying to move into Washington, a move that said local housing blog has not enthusiastically supported. Hence, we’ve been treated to a lot of impassioned reheatings of that old standby: “Costco shows it’s possible” for Wal-Mart to pay much higher wages. The addition of Trader Joe’s and QuikTrip is moderately novel, but basically it’s the same argument: Costco/Trader Joe’s/QuikTrip pays higher wages than Wal-Mart; C/TJ/QT have not gone out of business; ergo, Wal-Mart could pay the same wages that they do, and still prosper.Obviously at some level, this is a true but trivial insight: Wal-Mart could pay a cent more an hour without going out of business. But is it true in the way that it’s meant — that Wal-Mart could increase its wages by 50 percent and still prosper?Upper-middle-class people who live in urban areas — which is to say, the sort of people who tend to write about the wage differential between the two stores — tend to think of them as close substitutes, because they’re both giant stores where you occasionally go to buy something more cheaply than you can in a neighborhood grocery or hardware store. However, for most of Wal-Mart’s customer base, that’s where the resemblance ends. Costco really is a store where affluent, high-socioeconomic status households occasionally buy huge quantities of goods on the cheap: That’s Costco’s business strategy (which is why its stores are pretty much found in affluent near-in suburbs). Wal-Mart, however, is mostly a store where low-income people do their everyday shopping.

As it happens, that matters a lot.  Costco has a tiny number of SKUs in a huge store — and consequently, has half as many employees per square foot of store. Their model is less labor intensive, which is to say, it has higher labor productivity. Which makes it unsurprising that they pay their employees more.

But what about QuikTrip and Trader Joe’s? I’m going to leave QuikTrip out of it, for two reasons: first, because they’re a private company without that much data, and second, because I’m not so sure about that statistic. QuikTrip’s website indicates a starting salary for a part-time clerk in Atlanta of $8.50 an hour, which is not all that different from what Wal-Mart pays its workforce.

Trader Joe’s is also private, but we do know some stuff about it, like its revenue per-square foot (about $1,750, or 75 percent higher than Wal-Mart’s), the number of SKUs it carries (about 4,000, or the same as Costco, with 80 percent of its products being private label Trader Joe’s brand), and its demographics (college-educated, affluent, and older). “Within a 15–minute driving radius of a potential site,” one expert told a forlorn Savannah journalist, “there must be at least 36,000 people with four–year college degrees who have a median age of 44 and earn a combined household income of $64K a year.” Costco is similar, but with an even higher household income — the average Costco household makes more than $80,000 a year.

In other words, Trader Joe’s and Costco are the specialty grocer and warehouse club for an affluent, educated college demographic. They woo this crowd with a stripped-down array of high quality stock-keeping units, and high-quality customer service. The high wages produce the high levels of customer service, and the small number of products are what allow them to pay the high wages. Fewer products to handle (and restock) lowers the labor intensity of your operation. In the case of Trader Joe’s, it also dramatically decreases the amount of space you need for your supermarket … which in turn is why their revenue per square foot is so high. (Costco solves this problem by leaving the stuff on pallets, so that you can be your own stockboy).

Wal-Mart’s customers expect a very broad array of goods, because they’re a department store, not a specialty retailer; lots of people rely on Wal-Mart for their regular weekly shopping. The retailer has tried to cut the number of SKUs it carries, but ended up having to put them back, because it cost them in complaints, and sales. That means more labor, and lower profits per square foot. It also means that when you ask a clerk where something is, he’s likely to have no idea, because no person could master 108,000 SKUs. Even if Wal-Mart did pay a higher wage, you wouldn’t get the kind of easy, effortless service that you do at Trader Joe’s because the business models are just too different. If your business model inherently requires a lot of low-skill labor, efficiency wages don’t necessarily make financial sense.

If you want Wal-Mart to have a labor force like Trader Joe’s and Costco, you probably want them to have a business model like Trader Joe’s and Costco — which is to say that you want them to have a customer demographic like Trader Joe’s and Costco. Obviously if you belong to that demographic — which is to say, if you’re a policy analyst, or a magazine writer — then this sounds like a splendid idea. To Wal-Mart’s actual customer base, however, it might sound like “take your business somewhere else.”
Read more at http://globaleconomicanalysis.blogspot.com/2013/08/wal-mart-is-not-costco-so-why-should-it.html#s5mT9QlDRl4fqLdG.99

 

From www.Morningstar.com

Concentrating on fewer stock-keeping units generates buying power for Costco on par with, or perhaps even greater than, larger mass merchants. At first glance, excluding gasoline, at about $60 billion in U.S. sales Costco seems at a scale disadvantage against Wal-Mart’s WMT $265 billion domestic purchasing power. However, Costco concentrates its merchandise purchases on 3,300-3,800 active SKUs per warehouse, compared with the average 50,000-75,000 SKUs at a Wal-Mart superstore. As an illustration, if we assume a straight average, that calculates to more than $16 million in sales per SKU at Costco compared with just over $3.5 million-$5 million per SKU at Wal-Mart. Moreover, the company limits its buys to only specific, faster-selling items. Costco turns its inventories in less than 30 days. This variable cost parity with larger mass merchants, along with the little or zero mark-up requirement of its membership business model, produces price leadership for Costco on the products it chooses to sell.

Note sales per square foot: http://www.wikinvest.com/stock/Costco_Wholesale_(COST)/Data/Sales_per_sq._ft

Unlike its big-box peers, Costco’s international operations generate returns above its cost of capital. The company owns about 80% of its properties, operates its business at an EBIT margin below 3%, and is at the earlier stages of international expansion but still generates on average 12% returns on invested capital because of its low fixed asset base. In its fiscal 2012 year, just 439 domestic warehouses generated roughly $60 billion in revenue (excluding fuel). That calculates to $135 million in sales per unit, or $960 per square feet, which we estimate is about 2.3 times higher than Wal-Mart supercenters. That powerful unit model also works in international markets, where sales productivity levels remain high at $900 per square feet. As result, despite likely lacking logistical scale, returns on net assets for operations outside of North America are roughly 12%, above the company’s cost of capital. This is in contrast to the 6%-7% RONA range for Wal-Mart’s international operations over the past decade.
Economic Moat 05/09/13

We assign Costco a narrow economic moat. We base this on its business model’s loss-leader capabilities and ever-increasing buying power. Membership fees are the main driver of operating profits, so Costco has the ability to sell virtually any consumer product at wholesale rather than retail prices. This makes it very difficult for other retail concepts to compete with Costco on price. Moreover, its price leadership position is reinforced because the company concentrates its merchandise buys on much fewer and faster-turning SKUs, which generates disproportionate purchasing power for its size. Additionally, the company does not advertise and its austere warehouse format requires much lower maintenance capital expenditures. Therefore, the membership wholesale business model has a sustained cost advantage versus other retail operators that sell the same product categories.

Costco WalMart Case   The document to read

COSTCO_Why Good Jobs Are Good for Retailers_ZTon

WMT Annual Report 2013  and Costco 2012 Annual Report (7)

 

For those who feel they DESERVE a prize simply email me at aldridge56@aol.com with PRIZE in the subject heading.

Gold, Debt and History

Gold-Bull-Debt-Bear-in-50-Charts-by-Incrementum-Liechtenstein

Note page 10, the Stock to flow ratio for gold is 65 years compared to about a year for both oil and copper. Gold is money.

Pages 60 to 61, how Austrian Economics is applied.

Notes: I hope to post my rough draft of the CSInvesting Analysis Handbook by the end of the week.  I have a book recommendation coming…….

 

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Posted in Economics & Politics, Risk Management, Search Strategies, Valuation Techniques

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140 Years of Monetary History in Ten Minutes

Posted on August 29, 2013 | Leave a comment

Home-Sales-Economic-Recovery

 

“Fighting for Peace is like Screwing for Virginity” — George Carlin.

A Must-See Video on Monetary History:

http://hiddensecretsofmoney.com/blog/140-Years-Of-Monetary-History-In-10-Minutes  (Yes, there is the fear sale–buy precious metals since the world will end, but look past that to learn about monetary history in an entertaining video.  You can also view Mike Mahoney’s other videos.) 

The difference between currency and money: http://hiddensecretsofmoney.com/videos/episode-1 (Hint: Money is a store of value.) www.moneyfornothingthemovie.org

Gold: https://www.valcambigold.com/charts.aspx

Things that make you go Hmmmm… ttmygh_26_aug_2013

Whenever a government puts restrictions or controls on a commodity, you buy!

India and Gold

Gold miners: http://denaliguidesummit.blogspot.ca/2013/08/hurricane-surge-for-gold-miners.html

1987 Edwards_0 Pzena_Commentary 2Q13 or Value vs. Growth Investors

RC&G_Investor_Day_2013 Sequoia’s Investor Day

Meet the New Federal Reserve Chairman

witchdoctor1

Aristotle on Tyrants

Submitted by Simon Black of Sovereign Man blog,

Nearly 2,400 years ago, Aristotle wrote one of the defining works of political philosophy in a book entitled Politics.

It’s still incredibly relevant today, particularly what he writes about tyranny.

The ancient Greeks used the word ‘turannos’, which referred to an illegitimate ruler who governs without regard for the law or interests of the people, often through violent and coercive means.

Aristotle attacks tyrants mercilessly in his book, and clearly spells out the criteria which make a leader tyrannical. You may recognize a few of them:

  1. Aristotle suggests that a tyrant rises to power by first demonstrating that he is a man of the people:

“He ought to show himself to his subjects in the light, not of a tyrant, but of a steward and a king.”

and

“He should be moderate, not extravagant in his way of life; he should win the notables by companionship, and the multitude by flattery.”

  1. But once in power, a tyrant uses all available means to hold on to power, including spying on his people:

“A tyrant should also endeavor to know what each of his subjects says or does, and should employ spies . . . and . . . eavesdroppers . . . [T]he fear of informers prevents people from speaking their minds, and if they do, they are more easily found out.”

  1. Furthermore, Aristotle tells us that a tyrant thrives by creating division and conflict– “to sow quarrels among the citizens; friends should be embroiled with friends, the people with the notables [the rich]. . .”
  2. Controlling the economy and stealing the citizens’ wealth is also another mark of a tyrant:

“Another practice of tyrants is to multiply taxes. . . [and] impoverish his subjects; he thus provides against the maintenance of a guard by the citizen and the people, having to keep hard at work, are prevented from conspiring.”

  1. And as Aristotle points out, a tyrant also attempts to disarm the people such that “his subjects shall be incapable of action” because “they will not attempt to overthrow a tyranny, if they are powerless.”
  2. Naturally, a tyrant “is also fond of making war in order that his subjects may have something to do and be always in want of a leader.”
  3. Aristotle also tells us that tyrants hunt down those who oppose their power:

“It is characteristic of a tyrant to dislike everyone who has dignity or independence; he wants to be alone in his glory, but anyone who claims a like dignity or asserts his independence encroaches upon his prerogative, and is hated by him as an enemy to his power.”

  1. Ultimately, though, Aristotle concludes that “No freeman, if he can escape from [tyranny], will endure such a government.”

He’s right. And in the past, people had to rise up in the streets to defeat tyranny.

Fortunately, there are many tactics available to freedom-oriented people today that don’t involve violent revolution.

For rational, thinking people who find themselves living in a state that is rapidly sliding into tyranny, one of the most important steps to take is reducing exposure to that government.

If you live, work, bank, invest, own property, run a business, hold your precious metals, store your digital data (email), etc. all in the same place, you are running some serious ‘sovereign risk’.

In many cases, you can move precious metals overseas, set up a foreign bank account, or create an offshore, encrypted email account with a few mouse clicks.

Take a look back at Aristotle’s points. If the majority of them look familiar, it may be time that you look around the world for alternatives.

US planned war on Syria (What a surprise!)

http://web.archive.org/web/20130129213824/http://www.dailymail.co.uk/news/article-2270219/U-S-planned-launch-chemical-weapon-attack-Syria-blame-Assad.html

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Skyscraper Index in China plus Boom, Bubble, and Bust Course!

Posted on August 24, 2013 | 3 comments

Skyscraper Index by Mises Updates         Friday, August 23rd, 2013

In the French daily Le Monde, Mark Thornton recently commented on the ongoing drive to build more and more skyscrapers in China.

In a feature from the business section entitled “Les villes chinoises veulent toutes leurs gratte-ciel géants,” La Mondetakes note of the phenomenon that is the skyscraper-dense Chinese city, and specifically, the completion of Shanghai Tower, now one of the tallest buildings in Asia.

http://bastiat.mises.org/2013/08/mark-thornton-on-skyscrapers-in-la-monde/

Mises Academy

3118

Bubbles, Booms, and Busts

 Econ_BBB_2013_D — with Mark Thornton

COST: $59   LENGTH: 6 WEEKLY LECTURES
DATES: SEPTEMBER 18, 2013 – OCTOBER 29, 2013  STATUS: UPCOMING

This course will cover special topics in Austrian Business Cycle Theory, including the “Skyscraper Index,” the art of predicting downturns, and the causes of the housing bubble and burst that led to the 2008 financial crisis.

Lectures

Lectures will be Wednesdays at 5:30 p.m. Eastern time.

Reading

All readings will be free and online. A fully hyper-linked syllabus with readings for each weekly topic will be available for all students.

Grades and Certificates

The final grade will depend on quizzes. Taking the course for a grade is optional. This course is worth 3 credits in Mises Academy. Feel free to ask your school to accept Mises Academy credits. You will receive a digital Certificate of Completion for this course if you take it for a grade, and a Certificate of Participation if you take it on a paid-audit basis.

Refund Policy

If you drop the course during its first week (7 calendar days), you will receive a full refund, minus a $25 processing fee. If you drop the course during its second week, you will receive a half refund. No refunds will be granted following the second week.

CRW_5998

MARK THORNTON

Mark Thornton is an American economist of the Austrian School.[1] Thornton has been described by the Advocates for Self-Government as “one of America’s experts on the economics of illegal drugs.”[2] Thornton has written extensively on that topic, as well as on the economics of the American Civil War, economic bubbles, and public finance. He successfully predicted the housing bubble, the top in home builder stocks, the bust in housing and the world economic crisis.

Thornton received his B.S. from St. Bonaventure University (1982), and his Ph.D. fromAuburn University (1989). Thornton taught economics at Auburn University for a number of years, additionally serving as founding faculty advisor for the Auburn University Libertarians. He also served on the faculty of Columbus State University, and is now a senior fellow and resident faculty member at the Ludwig von Mises Institute.[3] He is currently the Book Review Editor for the Quarterly Journal of Austrian Economics.[4]

PROHIBITION STUDIES

Libertarian organizations including the Independent Institute,[5] the Cato Institute,[6] and the Mises Institute have published Thornton’s writings on drug prohibition and prohibition in general. Thornton contributed a chapter[7] to Jefferson Fish‘s book How to Legalize Drugs. He has also been interviewed on the topic of prohibition by members of the mainstream press. His research and publications are the basis of the Iron Law of Prohibition which states that the enforcement of prohibition increases the potency and danger of consuming illegal drugs. [8] Thornton’s first book, The Economics of Prohibition, was praised by Murray Rothbard, who declared:

Thornton’s book… arrives to fill an enormous gap, and it does so splendidly…. The drug prohibition question is… the hottest political topic today, and for the foreseeable future…. This is an excellent work making an important contribution to scholarship as well as to the public policy debate.

ECONOMIC BUBBLES

Thornton has also written on economic bubbles, including the United States housing bubble, which he first described in February 2004.[9][10][11] He suggested that the “housing bubble might be coming to an end” in August 2005.[12] His work on market bubbles has been cited by journalists[13][14] and other writers.[15][16] Economist Joseph Salerno noted that “Mark Thornton of the Mises Institute was one of the first to jump on this—to start writing about the housing bubble.”[17] Similarly, economist Thomas DiLorenzo has written that “[i]t was Austrian economists like Mark Thornton . . . who were warning of a housing bubble years before it burst.”[1] He also called the top in the housing market. He developed and published his Skyscraper and Business Cycle model in 2005.[13] His Skyscraper Index Model successfully sent a signal of the Late-2000s financial crisis at the beginning of August 2007. [14][15]

Political activities

Thornton has also been active in the political arena, making his first bid for office in 1984, when he ran for the U.S. Congress. He became the first Libertarian Party office-holder in Alabama when he was elected Constable in 1988. He was the Libertarian Party Candidate for the U.S. Senate in 1996 (also endorsed by the Reform Party) coming in third of four candidates. Thornton also served in various capacities with the Libertarian Party of Alabama including Vice Chairman and Chairman. In 1997 he became the Assistant Superintendent of Banking and a economic analyst for Alabama Governor,Fob James.[2]

Thornton has been featured as a guest on a variety of radio and internet programs and his editorials and interviews have appeared in leading newspapers and magazines.

Books

ACADEMY COURSES

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Creature from Jekyll Island (The Fed’s History)

Posted on August 20, 2013 | 3 comments

U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called the printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.” –Ben Bernanke

The problem is that, as the 2007-2008 experience teaches, the lag between financial turbulence and economic damage may be fairly long, of the order of a year or more. In the meantime, the economic indicators may remain positive.” –Stephen Lewis.

The superior man, when resting in safety, does not forget that danger may come. When in a state of security he does not forget the possibility of ruin. When all is orderly, he does not forget that disorder may come. Thus his person is not endangered, and his States and all their clans are preserved. — Confucius (551 BC – 479 BC)

The Gold and Debt over the next decade chart shows the projection of U.S. debt, assuming gold will continue the same close relationship with debt as demonstrated in the historical gold and debt chart discussed earlier.

Conclusion

Gold’s price is directly proportionate to the massive amount of debt that is being created to keep the current fiat system alive. This will likely continue until a crisis, such as a severe global recession or hyperinflation, strikes one of the major developed economies. Either event will be bullish for the gold price, but for different reasons. The price is being driven by the physical market in the developing countries, especially India and China. China has to continue buying as much physical gold as possible if they expect to eventually compete for world reserve currency status.

CSInvestor: Do you see any problems with the above analysis?

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Comex Gold Inventories Dropping–Bullish?

Posted on August 8, 2013 | 1 comment

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value–Alan Greenspan

Pop Quiz:

Do you think the U.S. Gold price will go up to the moon as inventories of gold bullion drop? Will there be a short squeeze? If inventories drop it means demand is going through the roof and the price will soon follow?   Go to www.kingworldnews.com to see this argument used/hawked as a bullish case for gold.

What do you think of this argument?  How is gold different than copper, oil or steel?

More from www.zerohedge.com

“Hello HSBC, This Is JPMorgan – We Urgently Need Some Of Your Gold”

Tyler Durden's picture

Submitted by Tyler Durden on 08/07/2013 18:21 -0400

What happens when 63.5K ounces of registered gold in your warehouse (16% of total) just has their warrants detached and the vault is about to finds itself 63.5k ounces of gold emptier? If you are JPM you call the gold vault with most inventory in town, that of HSBC, and politely request that they transfer as much eligible gold as they can on short notice – in this case a tiny 6,444.936 oz to be exact.

None of which changes the fact that in a few days, the inventory in JPM’s gold vault will drop to another record low of only 380K ounces and the JPM “rescue” pleas from HSBC and other Comex members will become ever louder and more desperate until one day they may just go straight to voicemail.

Source: COMEX

P.S. Don’t be a “Goldbug” but understand economic reality.

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The Structure of Production

Posted on July 29, 2013 | 2 comments

Volatile

Why Are Gold and Commodities So Darn Volatile?

By Mark Skousen, Editor, Forecasts & Strategies

Why are commodities and commodity stocks so volatile? Commodity speculating is not for the faint of heart, and many investors give up on gold, silver, and mining stocks because they can lose 40-90% of their value in a short period of time. Gold’s recent drop from $1,900 to $1,200 is a case in point. You have to expect a volatile market.

The reason why commodity prices vary so much can be found in an understanding of Austrian economics, the free-market school that is endorsed by Doug Casey, Rick Rule, and many other commodity experts. As developed by Ludwig von Mises and Friedrich Hayek in the 20th century, the Austrian school of economics explains why commodity prices are so volatile.

Austrian economists call it “the structure of production.” As a follower of the Austrian school, I wrote a book titled The Structure of Production (New York University Press, 1990). Rick Rule told me he loves the book and has bought hundreds of copies to give to his clients.

Austrian economists emphasize the structure of the economy—the structure of interest rates, production, employment, and inventories. It is a complex theory, but the basic idea is that price volatility depends on how far away the product or service is from final consumption. Consumer prices are the most stable, producer or wholesale prices less stable, and commodities are the furthest from final use; therefore, those prices are the most volatile. You can see this difference in the graph below, where the Consumer Price Index (CPI) is far more stable than the RBA Commodity Index.

Take oil and gasoline, for example. Oil is far removed from final use (gasoline) and has varied from $30 to $140 a barrel during the past ten years… and yet the gasoline price (final consumption) is far more stable, varying from $3 to $4 a gallon.

But there’s a silver lining in this story. While commodity prices are far more volatile, it also means that commodities and commodity stocks can be much more profitable on the upside… if you buy right. And with commodity prices down 40% or more (with oil being an exception), now may be a great buying opportunity.

Mark Skousen Editor, Forecasts & Strategieswww.markskousen.com

—

You must understand the structure of production if you invest in any cyclical business (and what business isn’t cyclical?).  Understanding time is critical in investing. After the over-building in 2005, the housing bubble needed time to clear away mal-investments. All the demand pumping, interest rate manipulating, and subsidies could not change that process.  I highly recommend Skousen’s book.

To learn more: Structure_Production_Reconsidered

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Obama and Regan Discuss Economics

Posted on July 29, 2013 | Leave a comment

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