Category Archives: Economics & Politics

What has the Government Done to our Money?

Posted on December 18, 2011 | 3 comments

Money

Once again it’s time to review basic economics. When we invest in equity, we take a dollar from current consumption to gain title to capital goods (a company) which will pay out dividends and/or our investment will eventually be sold for dollars for future consumption.

If you do not understand money in a free society and how government came to meddle with money, you will not understand our ponzi financial system.

A short, clear book on money by Murray Rothbard is excellent. http://mises.org/books/whathasgovernmentdone.pdf

If you read any book to understand our current situation read that one. To understand more about money, banking, and monetary history read the following:

  1. http://mises.org/books/mysteryofbanking.pdf  How fractional reserve banking works.
  2. http://mises.org/books/historyofmoney.pdf  The history of American Banking
  3. http://mises.org/Rothbard/AGD.pdf   The definitive study of the the cause of the Great Depression

Investors discussing the dangers of inflation in today’s investment environment

Julian Robertson Part 1: http://video.cnbc.com/gallery/?video=3000062558

Part 2: http://video.cnbc.com/gallery/?video=3000062485

Kyle Bass: part 1: http://watch.bnn.ca/library/#clip584881

Part 2: http://watch.bnn.ca/the-street/december-2011/the-street-december-13-2011/#clip584882

Economic ignorance Refuted

Here is an article by an investing pundit that is riddled with nonsense and ignorance. No wonder the writer blew up his clients as a securities analyst in the late 1990’s and early 2000’s. http://www.businessinsider.com/keynes-was-right-2011-12

A reply to the above article and an excellent blog: http://finance.townhall.com/columnists/jeffcarter/2011/12/18/obama_and_the_keynesians_total_fail/page/full/

If you read the above recommended books, you will have an excellent grasp of our current monetary chaos, possible solutions and the consequences of our nation’s current course of action. Ignorance is not an excuse.

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Strategic Logic Quiz, Review of Austrian Economics, and What about Tomorrow?

Posted on December 16, 2011 | Leave a comment

The three biggest achievements of the Cuban revolution are health, education, and low infant-mortality rates, and that its three biggest failures are breakfast, lunch, and dinner. — Government Worker, Habana, Cuba.

Strategic Logic Quiz

Last week, I promised the greatest business analysis ever done.  See here: http://wp.me/p1PgpH-cs

A reader, Logan, gave a strong hint for the solution.  Before I post the answer, let’s try another question.

Use Munger’s multidisciplinary thinking or Professor Greenwald’s strategic logic to find an answer to the following problem: The Cuban dictatorship collapses and property rights are restored. You have been given the job to develop a business in Cuba with barriers to entry.  You must build a business with the strongest combination of competitive advantages. What business would you choose, why and how would you build barriers to entry? How many advantages can you design for development? If you come up with a sensible plan, you will be given $5 million to start.

Two hints: the business can not be involved in cigars or tourism (like hotels or restaurants). A reading of Cuban business history would lead you to an answer, but I presume many have little knowledge of that history.

Tip: A great way to learn about businesses is to read corporate history or the biographies of business leaders.  You will sense how a business grows and develops advantages or loses them.

Austrian Economic Review

What are the markets telling us? Deflation has gold and commodities selling off?   I don’t think so. Never predict, but here goes………The Fed and the ECB both have the ability to print money and exchange good collateral for bad collateral with banks. What do central banks know how to do? What motivates central bankers? What are the monetary aggregates telling us?

The dollar is weak: http://scottgrannis.blogspot.com/2011/12/dollar-is-still-very-weak.html#links

Keeping an eye on longer-term investors: Insiders are long-term bullish. http://www.marketwatch.com/story/those-bullish-corporate-insiders-2011-12-07

Place facts into a coherent theory

How do we place facts into context? A rap video of Hayek (Austrian Economist) vs. Keynes (An Interventionist)http://www.youtube.com/watch?v=d0nERTFo-Sk

Bernanke vs. the Austrians during the housing bubble:http://www.youtube.com/watch?feature=player_embedded&v=MnekzRuu8wo

What confidence do you have in Bernanke’s planning ability or in bureaucrats controlling our monetary system?

Inflation today: http://www.economicpolicyjournal.com/2011/12/exposed-why-krugman-smoothed-inflation.html

Note the unusual bond yields.http://scottgrannis.blogspot.com/2011/12/bond-yields-are-out-of-whack.html

MF Global is an example of our Ponzi financial system in action: http://lewrockwell.com/french/french143.html

Murray Rothbard wrote, “If no business firm can be insured, then an industry consisting of hundreds of insolvent (banks) firms is surely the last institution about which anyone can mention ‘insurance’ with a straight face. ‘Deposit insurance’ is simply a fraudulent racket, and a cruel one at that, since it may plunder the life savings and the money stock of the entire public.”

Our Media

The videos below reinforce the need to read original documents or to speak to people who are actually involved in an industry or sent to war rather than believing our press. Excuse the political connotations.

A savage spoof of the media and our government that hits closer to the truth than I would like! Hitler reacts to Ron Paul’s Rise in the Polls: http://www.youtube.com/watch?src_vid=fFbc3sHl3Ic&annotation_id=annotation_162843&feature=iv&v=5ScPXDRcIfc

War and the importance of understanding history: http://www.youtube.com/watch?v=I8NhRPo0WAo&feature=youtu.be  Note that many against war are the folks who actually have experienced it.

Entrepreneurial Alertness

A podcast on finding opportunity: http://www.economicpolicyjournal.com/search/label/The%20Robert%20Wenzel%20Show  Scroll down to the second or third show.

Adapt or Die: Be Creative and Sell your Skills http://www.lewrockwell.com/north/north1073.html

Old (2007) but detailed Longleaf Interview:  http://www.palmerstongroup.com/articles/2007july/interview.html

Interesting Blog from a former Wall Streeter: Reading Fiction will Make You a Better Investor: http://interloping.com/

Have a great day and weekend.

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Interesting Lessons on Economics: The Cause of Booms and Busts

Posted on December 12, 2011 | Leave a comment

The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.

–Henry Hazlitt

 

Booms and Busts

Short two-to-three-minute videos on the causes of booms and busts:

The history of booms and busts: http://www.learnliberty.org/content/history-economic-booms-and-busts

The Myths of the Great Depression: http://www.learnliberty.org/content/top-3-myths-about-great-depression-and-new-deal

Govt. response to the 2008/09 Financial Crisis: Manipulation fails. http://www.learnliberty.org/content/2008-financial-crisis-government-response

Occupy Wall Street

I sympathize with the Occupy Wall Street protestors in their grievances against crony capitalism, government corruption and corporate welfare. Unfortunately, many of these protestors do not understand economic principles. More government intervention doesn’t solve problems caused by government control and interference in the free exchanges between individuals under a rule of law.

A short video on Occupy Wall Street Protestors: http://www.learnliberty.org/videos/occupy-wall-street-capitalism-professors-response

Ludwig von Mises on the First ‘Occupy Wall Street’

In his book Bureaucracy, Ludwig von Mises discussed the German youth movement that occurred in Germany the decade before the First World War. The similarity with OWS is quite remarkable:

In the decade preceding the First World War Germany, the country most advanced on the path toward bureaucratic regimentation, witnessed the appearance of a phenomenon hitherto unheard of: the youth movement. Turbulent gangs of untidy boys and girls roamed the country, making much noise and shirking their school lessons. In bombastic words they announced the gospel of a golden age. All preceding generations, they emphasized, were simply idiotic; their incapacity has converted the earth into a hell. But the rising generation is no longer willing to endure gerontocracy, the supremacy of impotent and imbecile senility. Henceforth the brilliant youths will rule. They will destroy everything that is old and useless, they will reject all that was dear to their parents, they will substitute new real and substantial values and ideologies for the antiquated and false ones of capitalist and bourgeois civilization, and they will build a new society of giants and supermen.

The inflated verbiage of these adolescents was only a poor disguise for their lack of any ideas and of any definite program. They had nothing to say but this: We are young and therefore chosen; we are ingenious because we are young; we are the carriers of the future; we are the deadly foes of the rotten bourgeois and Philistines. And if somebody was not afraid to ask them what their plans were, they knew only one answer: Our leaders will solve all problems.

It has always been the task of the new generation to provoke changes. But the characteristic feature of the youth movement was that they had neither new ideas nor plans. They called their action the youth movement precisely because they lacked any program which they could use to give a name to their endeavors. In fact they espoused entirely the program of their parents. They did not oppose the trend toward government omnipotence and bureaucratization. Their revolutionary radicalism was nothing but the impudence of the years between boyhood and manhood; it was a phenomenon of a protracted puberty. It was void of any ideological content.

If you want a concise, clear lesson on economics you can view the 3-hour video: 10 lectures on each chapter of Economics in One Lesson by Henry Hazlitt

http://www.youtube.com/watch?v=xR8F6oIG8Bg&feature=related

The book in pdf: http://www.fee.org/pdf/books/Economics_in_one_lesson.pdf

To grasp why understanding economics is critical view the errors of Prof. Milton Friedman on the Federal Reserve. Professor Friedman praised Alan Greenspan’s reign at the Federal Reserve while completely ignoring the distortions in the economy in 2005.

Milton Friedman on Charlie Rose: http://video.google.com/videoplay?docid=-2963837673813979186#

How a bad economic theory leads to a false interpretation of economic performance. An Austrian discusses Milton Friedman’s monetary theory: http://www.youtube.com/user/misesmedia#p/u/5/DMR-r0nrk60

The Importance of Critical Thinking

If you understand the lessons from Economics in One Lesson, you will see many false premises and the errors in logic here:

Thomas Friedman, the columnist for the New York Times is daft. How can innovation in one part of his essay cause human suffering while in another paragraph innovation will improve lives?

http://cafehayek.com/2011/12/business-school-argot-is-no-substitute-for-critical-thinking.html

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Buffett’s Favorite Economic Indicator, Job Interview with a Hedge Fund

Posted on December 9, 2011 | 2 comments

Rail Traffic

Didn’t Buffett say that if asked to choose one economic indicator his would be rail traffic?

See page 19 which shows a 90% correlation past six years between change in total carload rail traffic and GDP growth.

Recent carloads are up versus past year 2.3% (November 2010) and past month .9% (vs. October 2011).

http://alquemie.smartbrief.com/alquemie/servlet/encodeServlet?issueid=4FA97DA7-A207-4EAD-B420-C0BD4EA38067&lmcid=archives

 

Job Interview at a Hedge Fund (Video)

I thought readers would enjoy my recent job interview at a hedge fund: http://www.youtube.com/watch?v=5hWIr9_noRo

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The Best Blog for Behavioral Investing and Improving Your Thinking

Posted on December 5, 2011 | Leave a comment

The best blog for improving your thinking: www.simoleonsense.com.  You will learn about your own psychology and how you think—essential knowledge for becoming a better investor.  The material on this blog has excellent links.

New York Times Article on the Khan Academy

As previously mentioned, the Khan Academy is a great learning resources for you and for kids. Brush up on statistics, for example.

http://www.nytimes.com/2011/12/05/technology/khan-academy-blends-its-youtube-approach-with-classrooms.html?_r=1&scp=1&sq=khan%20academy&st=cse

Referred to here:http://csinvesting.org/placing-ev-and-ebitda-into-perspective-case-studies/

A Protest at the Federal Reserve

http://www.newschannel5.com/story/16181894/protestors-disgruntled-with-federal-reserve-bank. Expect many more of these protests as our currency debasement continues.

Attack on the Austrian View of the Great Depression

I like to read theories, thoughts, or facts contrary to what I think is correct. You test your thinking and, God forbid, you could be wrong. The Great Depression will help you understand the biggest business cycle and depression of the past two centuries. Read: mises.org/rothbard/agd.pdf (Copy and paste into your browser.)

An article on the Austrian view of the Great Depression and the criticism of that view: http://mises.org/daily/5826/Defending-the-Austrian-Explanation-of-the-Great-Depression-from-an-Internet-Attack

Planning Curriculum

I will start this week planning the curriculum to study strategic logic while developing the building blocks for valuation, then tying the two together.

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The Fed and Europe

Posted on December 1, 2011 | Leave a comment

Update on Value Vault

The gnomes are working overtime to upload the 17 videos and other materials. About 2/3rds completed.

Fed Joins Other Central Banks in Monetary Easing  December 01, 2011

“The Federal Reserve and other major central banks moved on Wednesday to help foreign banks more easily borrow and lend money, seeking to forestall a breakdown of global financial markets and giving Europe more time to wrestle with its debts. The latest round of interventions by central banks, including the expansion of an existing Fed program that lets foreign banks borrow dollars at a low interest rate, reflects growing concerns that Europe’s financial problems are hampering growth.” (New York Times)

In light of the Fed’s record, this should fill us all with confidence.

FEE Timely Classic  “‘F’ as in Fed” by Sheldon Richman (www.fee.org) is a recommended blog to learn about economics.

We have a report card on the entire Fed era that strongly supports the view that we’d be better off without it. At the very least, as the authors suggest, the burden of proof is squarely on those who would retain the central bank.

The report card comes in the form of a working paper from the Cato Institute: “Has the Fed Been a Failure?” by George A. Selgin, William D. Lastrapes, and Lawrence H. White.

The authors state in their abstract:

As the one-hundredth anniversary of the 1913 Federal Reserve Act approaches, we assess whether the nation’s experiment with the Federal Reserve has been a success or a failure. Drawing on a wide range of recent empirical research, we find the following: (1) The Fed’s full history (1914 to present) has been characterized by more rather than fewer symptoms of monetary and macroeconomic instability than the decades leading to the Fed’s establishment. (2) While the Fed’s performance has undoubtedly improved since World War II, even its postwar performance has not clearly surpassed that of its undoubtedly flawed predecessor, the National Banking system, before World War I. (3) Some proposed alternative arrangements might plausibly do better than the Fed as presently constituted. We conclude that the need for a systematic exploration of alternatives to the established monetary system is as pressing today as it was a century ago.

The dollar has lost 95 percent of its value since the Fed came into existence.

More on how debasement destroys economies:

http://www.thefreemanonline.org/featured/government%E2%80%99s-diminishing-benefits-from-inflation/

If Germany and France push the ECB to ease and buy (without sterilization) EZ government securities, markets in Europe will be very strong. If announcements along these lines do not occur, the Euro is history.

For those interested in European Stock Markets: http://www.scribd.com/doc/74371203/European-Stock-Market-Valuation

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Interesting links….

Posted on November 29, 2011 | 3 comments

Michael Burry, the self-taught investor, who shorted sub-prime in the Big Short by Michael Lewis is interviewed here: http://www.scribd.com/fullscreen/37453934

Don’t forget a favorite blog: Carl Icahn doing his bidding:http://greenbackd.com/2011/11/28/icahn-bids-for-commercial-metals-company-nysecmc/

A country in collapse (Cuba) where dissidents protest the dual currency system: http://pedazosdelaislaen.wordpress.com/2011/11/29/dissidents-arrested-for-demanding-one-currency/

Placing Europe in perspective: http://scottgrannis.blogspot.com/2011/11/putting-piigs-debt-into-context.html

Meanwhile guess what the Federal Reserve is busy doing?

M1

M2

MZM

Would investors be surprised by a “melt-up” in nominal values in the stock market?  I am not predicting this, just thinking where the greatest surprise could be.  Beware of US Treasuries.

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The Decline and Fall of the Roman Empire

Posted on November 27, 2011 | 8 comments

Time off from the hurly-burly of the markets….

I am reading the abridged version (1250 pages) of The Decline and Fall of the Roman Empire by Edward Gibbon published in 1776 which is a long, sad commentary on the history of a nation that gave up political liberty to become a superpower.   Gibbon’s work is considered one of the greatest works on history ever written in the English language.

My brief synopsis

  • Under the republican constitution that the Founding Fathers admired and Gibbon describes, Rome enjoyed a balance (30 B.C. – 476 A.D.) between the senate and the people, with a strong executive commander-in-chief.
  • Rome rose from a tiny city-state to become by the 1st century B.C., a diverse empire with tremendous affluence.
  • This affluence corrupted every aspect of the republican political system, elections were openly bought and sold, and political factions were so strong that the Roman senate was gridlocked. (Sound familiar?)
  • Finally, the Roman people lost confidence in their government and in the republican way of life. They wanted peace and order. Rome emerged as a bureaucratic, totalitarian state.
  • The Roman people gave up their political liberty and transferred all real power to a military dictator, their emperor. The first emperor was Julius Caesar, who was followed by the great statesman Augustus. Caesar and  a new order that brought peace and prosperity to Rome.
  • The Roman Empire reached its apex in the 2nd century A.D. It stretched from the North Sea to the Sahara and from Scotland to Iran. The inhabitants were joined in common allegiance to Rome.
  • Gibbon shows us that Rome collapsed because of its involvement in the Middle East and its failure to solve the problems there. The Middle East had come to absorb all the attention of the Romans. Rome had been involved in nation building for three centuries in the Middle East and had poured vast wealth into the region while keeping large numbers of troops there, which alienated the population.
  • While the Romans were distracted in the Middle East, they ignored the growing power of Germanic barbarians along the Danube and the Rhine Rivers. In the 3rd century A.D., these northern barbarians crashed through the Roman frontiers. The Roman Empire was no more. Almost 2,000 years would pass before another republican government would emerge in the world, America.

Plenty of lessons to be learned by America in the 21st century. Giving up your liberties for security brings neither.

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Market Expectations and Mean Reversion

Posted on November 23, 2011 | 2 comments

An interesting post here:

The market is currently extremely pessimistic even accounting for the expectations that corporate profits at 10% of GDP and (unsustainably) too high will decline.  If the US wants to create jobs then lower tax rates and allow foreign cash to return without penalty–unleash investment.

http://scottgrannis.blogspot.com/2011/11/corporate-profits-are-still-very-strong.html

Who said life was easy!

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Kyle Bass on Europe and US Monetary History

Posted on November 21, 2011 | Leave a comment

Kyle Bass on Europe

30 minute video: Kyle Bass on Europe’s problems. Highly recommended. http://www.economicpolicyjournal.com/2011/11/hot-why-japan-is-going-to-go-way-of.html

US monetary History: The Past and Perhaps Our Future

Larry Parks, Founder of the Foundation for the Advancement of Monetary Education (“FAME), testifies before Congress. The transcript provides a synopsis of US monetary history.

http://www.fame.org/Publications/Dr.%20Lawrence%20Larry%20Parks%20-%20FAME%20-%20TESTIMONY%20BEFORE%20THE%20US%20HOUSE%20COMMITTEE%20ON%20FINANCIAL%20SERVICES%20112th%20Congress.pdf

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