Category Archives: Economics & Politics

Curated Alpha; Update on the Resource Markets, Michael Marcus

Posted on July 1, 2014 | Leave a comment

A Blog worth exploring

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

An update on the resource market

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

https://www.explorationinsights.com/

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

http://oreninc.com/orenthink

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

Market Wizard, Michael Marcus Speech:

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

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Posted in Economics & Politics, Investing Gurus, Risk Management

Tagged Behavioral Investing, market wizard, Michael Marcus, Resource Markets, Rick Rule

Soros on the 2008 Crisis and Reflexivity (History)

Posted on June 25, 2014 | 2 comments

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

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

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

Read more…

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Posted in Economics & Politics, Investing Gurus

Tagged 2008 Crisis, History, Reflexivity, Soros

In Gold We Trust; A Reader’s Question

Posted on June 24, 2014 | Leave a comment

In-Gold-we-Trust-2014-Incrementum

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

A Reader’s Question

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

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

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

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

I’d love to hear your thoughts.

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

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

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

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

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

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

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

Take Coach’s (COH) recent plunge.

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

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

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Posted in Economics & Politics, Risk Management, Search Strategies, YOU

Tagged Analysts, Coach, COH, In gold we trust

Fire or Ice: Our Economic Future

Posted on June 20, 2014 | Leave a comment

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

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

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

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

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

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

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Posted in Economics & Politics

Tagged credit creation, economy, FED, Gold, Richard Duncan

Niche Franchise Breached? Value Trap

Posted on June 19, 2014 | 4 comments

Taxi Medallions have been one of the best performing assets over the past twenty years: http://www.dailyfinance.com/2011/11/16/the-best-investment-on-wall-street-a-new-york-city-taxi-medalli/

However, you as an investor, must require a very high discount rate when you depend upon government licenses. If Uber makes inroads?http://www.bizjournals.com/sanfrancisco/print-edition/2013/05/17/uber-takes-the-pain-out-of-hailing-a.html?page=2

Then:

“Value” investors may flock to the seductive yield: http://seekingalpha.com/article/2246123-medallion-financial-hail-this-high-yield

But csinvesting.org readers know their history when technological change or a catalyst for regulatory change Airline_deregulation upends an incumbent, then the plunging price becomes a value trap versus an opportunity. Reflexively reaching for this 8% yield by not turn out well.

Of course, the future is uncertain, but after a five year bull run, failure to advance after last quarter’s earnings beat and pricing pressure from UBER, then TAXI’s high valued medallions may become less so. The government is placing an artificial restriction to keep supply low while boosting prices that hurt consumers’ choices and pocketbook. I wonder how this fight will turn-out? I will be watching this unfold.

What do YOU think?

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Posted in Competitive Analysis, Economics & Politics, History

Tagged TAXI, UBER

Be Fearful

Posted on June 4, 2014 | Leave a comment

It’s fascinating how investors come to forget that markets move in cycles and not perpetual diagonal lines. As value investor Howard Marks wrote in The Most Important Thing, “Rule number one: most things will prove to be cyclical. Rule number two: some of the greatest opportunities for gain and loss come when other people forget rule number one.” A normal, run-of-the mill cyclical bear market wipes out more than half of the preceding bull market advance.

http://www.hussmanfunds.com/wmc/wmc140602.htm

Where we are today

http://globaleconomicanalysis.blogspot.com/2014/06/investor-bets-in-risky-vs-safe-assets.html

All of the above doesn’t mean an imminent reversal of trend only that investors are acting as if risk is low. Remember Buffett’s line, “Be fearful when people are greedy and greedy when people are fearful.”

Skyscraper Index (or curse)

http://library.mises.org//media/Audio/The New 20 Skyscraper Curse.mp3

http://wiki.mises.org/wiki/Skyscraper_Index

Central Bank Stimulus Will Not Work

The governments and central banks of the world are engaged in a futile effort to stimulate economic recovery through an expansion of fiat money credit. They will fail due to their ignorance or purposeful blindness to Say’s Law that tells us that money is the agent for exchanging goods that must already exist. New fiat money cannot conjure goods out of thin air, the way central banks conjure money out of thin air. This violation of Say’s Law is reflected in loan losses, which cannot be prevented by any array of regulation or higher capital requirements. In fact rather than stimulate the economy to greater output, bank credit expansion causes capital destruction and a lower standard of living in the future than would have been the case otherwise. Governments and central bankers should concentrate on restoring economic freedom and sound money respectively.

http://www.oftwominds.com/blogjune14/buying-time6-14.html

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Posted in Economics & Politics, Risk Management, YOU

Tagged credit cycles, market diary, skyscraper index

A Very MEAN Regression

Posted on May 28, 2014 | Leave a comment

John Hussman discusses mean reversion: globaleconomicanalysis.blogspot.com/2014/05/wine-country-conference-ii-videos.html

Toll Brothers: Why All the Debt? http://investmentresearchdynamics.com/if-toll-brothers-earnings-are-so-strong-why-all-the-debt/

Stock Prop

whats-propping-up-the-market-behold-the-corporate-stock-buyback-ponzi-and-nearly-all-borrowed

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Posted in Economics & Politics, Risk Management

Tagged Hussman, IPOs, Regression to the mean

Free Seminar in NY on The Future of Money

Posted on May 14, 2014 | Leave a comment

The Future of Money: Bitcoin, the Gold Standard, and Free Banking

With the rise of Bitcoin and the continuing discussion of the gold standard as solutions to our current monetary woes, the Sound Money Project of the Atlas Network is organizing a reception and panel discussion on alternatives to the current monetary system.

IS Bitcoin money? Bitcoin-CMRE

Location:

Penn Club of New York

30 W 44th Street

New York, NY 10036

Time:

Tuesday, June 3, 2014

from 6:00 PM to 8:00 PM (EDT)

Speakers:

Daniel Oliver, Committee for Monetary Research & Education

Lawrence H. White, George Mason University

A representative from the Bitcoin Embassy, Canada

Moderator: Gonzalo Schwarz (Atlas Network)

Heavy hors d’oeuvres and drinks will be served. The first 50 attendees to arrive will receive a copy of Notes on the Establishment of a Money Unit by Thomas Jefferson and with a forward by Atlas Senior Fellow Judy Shelton.

For more information contact Brittany Cobb at Brittany.Cobb@AtlasNetwork.org or (973) 826-2003.

Dan Oliver graduated from Columbia Law School with honors in 2001 and practiced law at Simpson Thacher & Bartlett. He left Simpson Thacher to obtain an MBA from INSEAD in 2005. After co-founding two venture compnaies, Mr. Oliver joined Bearing Capital, LLC, a private equity firm in Buenos Aires focused on Latin American commodities investments. Mr. Oliver founded Myrmikan Capital in 2009, an investment firm specializing in micro- capitalized gold mining companies. Mr. Oliver is currently a Director of the Committee for Monetary Research & Education and a National Review Institute Fellow.

Lawrence H. White is Professor of Economics at George Mason University. He specializes in the theory and history of banking and money, and is best known for his work on free banking. He received his A.B. from Harvard and his M. A. and Ph.D. from the University of California, Los Angeles. He previously taught at New York University, the University of Georgia, and the University of Missouri – St. Louis.

In 2008 White received the Distinguished Scholar Award of the Association for Private Enterprise Education. He has been Visiting Professor at Queen’s University Belfast, Visiting Fellow at the Australian National University, Visiting Research Fellow and lecturer at the American Institute for Economic Research, visiting lecturer at the Swiss National Bank, and a visiting scholar at the Federal Reserve Bank of Atlanta. He co- edits a book series for Routledge, Foundations of the Market Economy. He is a co-editor of Econ Journal Watch, and hosts bi-monthly podcasts for EJW Audio. He is a member of the board of associate editors of the Review of Austrian Economics and a member of the editorial board of the Cato Journal. He is a contributing editor to the Foundation for Economic Education’s magazine The Freeman and lectures at the Foundation’s annual seminar in Advanced Austrian Economics. He is an adjunct scholar of the Cato Institute and a member of the Academic Advisory Council of the Institute of Economic Affairs.

Gonzalo Schwarz (moderator) manages the Awards and Grants program at the Atlas Network that include the prestigious Fisher Memorial Award and Templeton Freedom Awards. Additionally he manages the Latin American Program. He currently holds an MA in Economics from George Mason University and is looking to pursue other graduate studies. He is originally from Uruguay and has lived in four other countries throughout his life. In the past he worked in academics and other non profits. He enjoys participating in academic seminars and was also part of the Koch Foundation Fall internship in 2009. His main hobbies are sports, reading and spending time with his family.

Have questions about The Future of Money: Bitcoin, the Gold Standard, and Free Banking? Contact Atlas Network

READING

Rules of Thumb for Junior Mining Speculators and A Light at the End of the Tunnel

GMO_QtlyLetter_1Q14_FullVersion

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Posted in Economics & Politics, Free Courses

Tagged bitcoins, Free Banking, Gold

Greatest Trades Ever; Monetizing Debt

Posted on May 12, 2014 | 4 comments

Monetizing Government Debt

In the nineteenth century, the monetary theorist and gold standard advocate Henry Dunning MacLeod, graphically drew attention to the similarity between Law’s plan and the standard practice of the Bank of England (and of modern central banks) of ‘monetizing government debt.” With reference to the latter procedure, MacLeod wrote:

…it is perfectly clear that its principle is utterly vicious. There is nothing so wild or absurd in John Law’s Theory of Money as this. His scheme of basing a paper currency upon land is sober sense compared to it. If for every debt the government incurs an equal amount of money is to be created, why, here we have the philosopher’s stone at once… But let us coolly consider the principle involved in this plan of issuing notes upon the security of the public debts. Stated in simple language, it is this: That the way to CREATE money is for the Government to BORROW money. That is to say, A lends B money on mortgage, and, on the security of the mortgage is allowed to create an equal amount of money to what he has already lent!! Granting that to an extent this may be done without any practical mischief, yet, as a general principle, what can be more palpably absurd.

Today, instead of manipulating the supply of money by printing up and exchanging notes for lands and mortgages, the Federal Reserve System, for example, creates additional bank reserves and check-able deposits in the economy by purchasing Treasury and mortgage securities from the public and the banks.

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Posted in Economics & Politics

Tagged Debt, Macleod, monetizing debt