Tag Archives: Interest Rates

The Secret to Success: Being Ridiculed on Social Media; Hedge Fund Analyst Quiz; The End


Jesse Felder, a Contrarian Trader   Listen to the podcast and explore The Felder Report

Hedge Fund Quiz

The only way to win a date is to become a hedge fund analyst.  Your interview process requires you to analyze a real estate/mining company.

You look first at the balance sheet (Thanks Mr. Graham).   You notice that this mining company bought claims under a ski resort (Park City, Utah) where it bought acres in 1907 at five dollars an acre.

Then you notice that the company issued 20-year corporate bonds when interest rates were 9% for AA corporates about fifteen years ago.  Now similar companies can issue bonds at 5%.

How would you conduct your analysis? Good luck.

Interest rate decline

The End

So how will it all end? Dollars are created by computer key stroke when the Fed buys bonds, but the dollar is backed only by bonds (and a tiny bit of gold) and the bonds are payable in Federal Reserves Notes (the dollar) or just another form of debt. So debt is created to buy debt which, in turn, is payable in debt. Whoa?! No way this could ever be a problem. It’s magic. One thing bothers me, though, why do we need legal tender laws TO FORCE people to use dollars? I got a bad feelin’ on this.

But WHAT if more and more debt creates less and less “GDP” (let’s pretend it means something–govt spending creates economic growth, Ha Ha.) until each dollar of debt creates 0 or negative GDP growth. The Fed has to print to pay interest on the debt or the tail consumes the tiger.

Hemingway: We go broke slowly, then suddenly!

Anyone using CPI to gauge reality needs a reality check. You are a fool to buy gold as an “investment against “CPI inflation.” You own gold as a form of money to store wealth IF you lack confidence in central planning. So when it all comes down is when gold goes into permanent BACKWARDATION in gold. Holders of gold go NO BID on dollars. But don’t worry, the dollar derivatives like the Yen and the Euro will be earlier casualties. Meanwhile hope that the dollar rises against in order to buy more ounces. For others, Pray.
Now those who read the above my disagree, but know exactly fiat currencies do NOT go to 0 (or NO BID).

Reader Question: Investing in a Rising Interest Rate Environment


A Reader’s Question

I am a student at XXX.  To cap off my summer internship, I am working on a series of projects which I will present to the investment team at my firm. One idea I would like to pursue is “Investing in a Rising Interest Rate Environment.” Are there any books/resources you would suggest for this project?

My response:  Well, if you knew rates would rise over a long period of time (decades) then a ladder of short duration bonds would probably be wiser than 30- year  Treasury bonds.  But when you talk about interest rates–what rates? 3-month, 10 year? Government debt or corporate debt? Are real interest rates rising?  You could have nominal interest rates rising while inflation is rising faster so real rates become more negative–sort of like today’s financial repression. You can’t just look at interest rates without looking at changes over time in commodity prices and producer prices.

Ask, “What is an interest rate?” Find out by reading Man, Economy and State by Murray Rothbard–see Chapter 6: Production: The Rate of Interest and its Determination. Go to www.mises.org/books/mespm.pdf

Two great books on financial history:

A History of Interest rates (4th Edition) by Sidney Homer and Richard Sylla.

The Golden Constant: The English and American Experience 1560 to 2007 by Roy W. Jastram (reprinted with additional material 2009). See a discussion here: alc56_golden_constant

The Golden Constant was the first statistical proof of gold’s property as an inflation hedge over the centuries–a seminal study.

What does the research say:

Gold is a poor hedge against major inflation and that gold appreciates in purchasing power in times of deflation.  The conclusions make sense when you consider that gold prior to 1971 was considered money.  When prices rise, then, by definition, the value of money declines relative to goods and services that money is exchanged for.

Since the 14th Century, gold’s purchasing power has maintained a broadly constant level. To put this in practical terms, an ounce of gold has repeatedly bought a mid-range outfit of clothing. This was true in the fourteenth century, when an ounce of gold was worth £1.25 to £1.33; it was true in the late 18th century and it remained true at the beginning of this century (2000 to 2008), when an ounce of gold averaged £269 or $472. Even the exchange rate between gold and commodities has been relatively constant over the centuries.

On the other hand, the US dollar that bought 14.5 loaves of bread in 1900 buys only 3/4 of a loaf today. While inflation and other forces have ravaged the value of the world’s currencies, gold has emerged with its capacity for wealth preservation firmly intact. Being no-one’s liability, gold exhibits the same wealth preserving qualities in the face of financial turmoil, earning a reputation as a crisis hedge in addition to its credentials as an inflation hedge.

The Golden Constant: The English and American Experience 1560-2007 by Roy W Jastram with updated material by Jill Leyland. Published 2009 by Edward Elgar Publishing Ltd (www.e-elgar.com), hardback, 368 pages, ISBN: 978 1 84720 261 1.

How about today?

But from 1971 the opposite is true and we revert to what we today consider the more normal situation of gold acting as a hedge against inflation, as in the 1970s, or the fear of inflation, as in recent times (2009). Note that gold may hold its purchasing power through the decades, there are substantial deviations in price as compared to an index–which index to use?




The key takeaway after 453 years is that despite often substantial fluctuations, gold has held its purchasing power over the centuries in every country.  A German family owning a certain quantity of gold at the end of the nineteenth century would find, if it still owned it today, that it would still buy approximately the same quantity of good and services. In contrast, any quantity of German currency held at the end of the nineteenth century would today be worthless.

Since gold is no one’s liability, it can be viewed as the alternative to fiat money. Investors turn to it when confidence in fiat money, and particular in the US dollar as the world’s leading fiat money, falls. However, gold, despite severe fluctuations, does hold its real value over the centuries and the fact that it has repeatedly shown its ability to safeguard wealth through crises.

History combined with a solid grasp of economic principles allows us to place even gold into perspective.


There is, finally, the supremely important problem of combating general fluctuations of economic activity and the recurrent waves of large-scale unemployment which accompany them.  This is, of course, one of the gravest and most pressing problems of our time.  But, though its solution will require much planning in the good sense, it does not — or at least need not — require that special kind of planning which according to its advocates is to replace the market.  Many economists hope, indeed, that the ultimate remedy may be found in the field of monetary policy, which would involve nothing incompatible even with nineteenth-century liberalism.  Others, it is true, believe that real success can be expected only from the skillful timing of public works undertaken on a very large-scale.  This might lead to much more serious restrictions of the competitive sphere, and, in experimenting in this direction, we shall have to carefully watch our step if we are to avoid making all economic activity progressively more dependent on the direction and volume of government expenditure. But his is neither the only nor, in my opinion, the most promising way of meeting the gravest threat to economic security.  In any case, the very necessary effort to secure protection against these fluctuations do not lead to the kind of planning which constitutes such a threat to our freedom.–Hayek’s The Road to Serfdom, pp.121-22.


Your boss drops XRX’s 10K, www.yousendit.com/download/M3BscHBNTkxTRTdyZHNUQw on your desk. Then he asks, Should we sell out of this position since the company’s market cap is about $11 to $12 billion with $9 billion of debt and an underfunded Pension Fund?

Is this company dangerously over leveraged? Yes or no and why? Please reply in 20 minutes or less. If you feel you can’t adequately answer, then what would you need to find out? State your reply in no more than a sentence or two.

Value-Line Tear Sheet on Xerox for Reference:

Prize to be determined.

Long-Term Bonds

The cure (low interest rates) IS the disease: http://mises.org/daily/5164

If you own long-term government bonds then the question you have to ask yourself is……………………..http://www.youtube.com/watch?v=u0-oinyjsk0


I will post the analysis of Coke/Pepsi Case Study this weekend. And we have one final installment on ROIC before burying that dead horse.

Have a good weekend!