Tag Archives: James Grant

How Cheap It Was: The 1920-21 Stock Market


Chapter 19: America on the Bargain Counter (The Forgotten Depression, 2014) (pages: 197 to 200)

On August 24, 1921, the low point of the Dow, many stock prices translated into multiples on 1923 earnings of less than five times. That held true of the steel companies but also of the kind of consumer-products companies that had enjoyed a relatively prosperous depression. Thus, Coca-Cola, at $19 a share—500,000 shares were outstanding, providing a stock market capitalization of all of $9.5 million—was valued at what would prove 1.7 times 1922 earnings and 2.5 times 1923 earnings; the shares provided a dividend yield of 5.26%. Gillette Safety Razor Company, which was selling as many razors and blades in 1921 as it had in 1920, was quoted at a little more than five times forward earnings and yielded 9.23 percent. Radio Corporation of America, not yet revealed as one of the great growth stocks of the 1920s, could be purchased in the market for about as much as the company earned in 1923: $1.50 a share.


As a matter of course on Wall Street, bargains hold no appeal at the bottom of the market. In August 1921, stock prices had been sliding for almost two years. At such junctures, the memory of losing money is usually more vivid than the imagined prospect of making it.

It didn’t take much imagination to recognize the value of F.W. Woolworth Company, the five-and-dime chain merchandiser that was finishing its tenth year as a fused corporate unit. Frank W. Woolworth himself, founder and builder of the gothic corporate headquarters tower at 233 Broadway in lower Manhattan, had died in 1919, but his successors had distinguished themselves in the depression. They had stopped buying any but essential merchandise after the break in whole sale price in June 1920, while customers, happily, had kept right on buying. Now 1921 sales were on track to surpass the total for 1920. While other chain stores had raised prices, Woolworth hewed to the letter of its five-and dime appellation (15; cents was the top ticket west of the Mississippi). And how was this exemplar of deflation-era merchandising—about to close its year without bank debt and with no mis-priced inventory—valued in the stock market on August 24, 1921?  At a price of $105 a share, or 3.7 times imminent 1922 earnings and 3.3 times what would turn out to be 1923 earnings.  The stock yielded 7.62 percent.

James Grant Explains The Forgotten Depression

Sentiment vs. Money Supply Growth; Find Cheap Options



Market Sentiment and Money Supply update: http://www.acting-man.com/?p=31559

James Grant’s Investment Approach (Video) June 12, 2014

Jim Grant: Buy Gold

Editor: Focus on how Mr. Grant approaches investing not necessarily the current object of his affections.

James Grant: “The Fed’s policy will inevitably fail because hyper-aggressive leveraged finance always seems to step in front of a bus.”

“Macro-economic forecasting is not a useful endeavor. It seems a better way is to consider the panoply of risks and then after having pondered them, look for mis-priced and cheap options on likely but uncertain outcomes.”


[Note: Grant’s comments on gold begin at the 7:12 minute mark.]

“Gold is an example to me of an opportunity,” James Grant, editor of Grant’s Interest Rate Observer said in an interview this week. “[It] exhibits so many of the characteristics of a corpse, although it does occasionally toss and turn.”

“Gold stocks certainly look as if they were dead—but nobody even bothers to poke them with a stick.”

Gold is a cheap option on the failure of price control. Observe how the future is handicapped. We now have low levels of volatility and terrific embedded complacency. You will be paid well if the consensus makes a mistake. Invest in the monetary failure of an improvised monetary system run by tenured professors (Yellen).

Investing is when you want people to agree with you not now but in the future.

“Gold and gold mining shares are very, very cheap-and certainly widely detested options on the failure of this massive world-wide experiment, or the demonstration of the hopelessness of the technique of price control.”


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

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














“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


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


A Reader’s Book Suggestion; Opposing Views of the Manipulated Boom; Lonely Bear


Everyone holds his fortune in his own hands, like a sculptor the raw material he will fashion into a figure. But it’s the same with that type of artistic activity as with all others: We are merely born with the capability to do it. The skill to mold the material into what we want must be learned and attentively cultivated–Johann Wolfgang von Goethe

A Lonely “Bear” on the Market:

As a side note, the Federal Reserve presently has a balance  sheet of about $3 trillion, on total capital of about $54.7 billion, meaning  that the Fed is leveraged about 55-to-1. At an average maturity of over  10-years, the duration of the Fed’s portfolio is about 8 years, meaning that a  100 basis point move in interest rates impacts the value of the Fed’s holdings  by about 8% (about $240 billion). Since July, interest rates have increased by  about 60 basis points, which has undoubtedly wiped out the Fed’s capital,  making it technically insolvent (fortunately for Ben Bernanke, the Fed doesn’t  mark its capital to market). As a practical matter, the only effect is that the  interest that the public pays on Treasury debt cannot actually be remitted by  the Fed back to the Treasury as usual, but must instead be retained by the Fed  in order to recapitalize itself due to losses on the bonds it holds. The losses  therefore effectively represent an unlegislated fiscal expenditure. Moreover,  assuming an average interest rate of about 2.5% on Fed holdings, each further  increase of 30 basis points in interest rates would wipe out a full year of  additional interest payments. Needless to say, nobody cares. These observations  aren’t central to our current concerns, but it’s worth understanding how  reckless Fed policy has already become.

On the subject of Fed policy and market behavior, Bill Hester wrote an outstanding research piece this week - Fed Leaves Punchbowl, Takes Away Free Lunch (of International Diversification). It provides good perspective on the link between economic performance and international market returns, also highlights the growing importance of country selection in international investing. I’ve included a second link to that article at the end of the Fund Notes section.



A reader makes a book suggestion


A new title that arrived yesterday via Amazon (AMZN) that you’ll also enjoy is Ravee Mehta’s The Emotionally Intelligent Investor. Mehta, the eldest son of immigrant parents, graduated summa cum laude from the University of Pennsylvania with degrees from the Wharton School of Business and also School of Engineering, and later worked for George Soros and Karsch Capital before retiring at a young age to travel the world, teach, and study philosophy at Oxford. Now Mehta manages his own funds and enjoys the freedom of working for himself.

While not having a boss is liberating, I suspect Mehta realizes that he needs a certain amount of structure (as we all do), so he can stay independent and not have to get a job with another financial services firm. In this paperback, whose title is a nod to Ben Graham’s landmark The Intelligent Investor, Mehta tells us what he learned from his search for an investing framework, including the behavioral errors that separate us from our money.

“After writing this book, I have developed daily and weekly routines to understand myself and others better, deal with my particular vulnerabilities, prioritize my to-do list, evaluate investment opportunities, empathize with other market participants, monitor my portfolio, learn from prior decisions, leverage the intuition of others and anticipate danger with individual investments and more overall portfolio’s construction. I also make sure that my investment approach fits with my personality and motivations.

Mehta’s The Emotionally Intelligent Investor, like Train’s The Money Masters, is loaded with useful tips. Despite just 200 pages in length, this is a “big” book.

The companion website: http://theemotionallyintelligentinvestor.com/

Another link: http://www.amazon.com/The-Emotionally-Intelligent-Investor-self-awareness/dp/0615688322/ref=lh_ni_t?ie=UTF8&psc=1

Manipulated Boom: 

James Grant: http://www.economicpolicyjournal.com/2013/02/lauren-lyster-talks-to-james-grant.html

Contrast that video with Krugman calling the artificial boom a “virtuous circle.”


Enroll in a Critical Thinking Course


FPA Crescent Fund Annual Letter: crescent-2012-q4-1-24-138663BD8AD6C2 . This letter is an excellent read for understanding the current quandary that investors face today. The PM even quotes Von Mises. BRAVO!


Money and Inflation Video; Jim Grant on QE3; Mason Hawkins

Hopefully–and thanks to all the good wishes–I am in recovery or….a moment of silence.

Money and Inflation

Video: Money and Inflation with Greg Rehmke http://youtu.be/efDGIMpE3OE

 Perpetual Fed Intervention and Manipulation

James Grant   Blasts Fed AgainThu 20 Sep 12    http://video.cnbc.com/gallery/?video=3000117340We are in a market without the yield. We shouldn’t have this. There is a great stampede in the corporate debt, in speculative grade debt by   people that are not getting paid for the risk.They’re looking for yield.  The credit markets when they are left un-manipulated convey information.A struggling issue will pay more than a sound issue. You read the financials, and that is priced in the marketplace. When there’s a stampede for yield bond, the credit markets convey no information except for the one and only important piece of information — this is what they want to have it be priced at.Maria at CNBC: “Let me ask you about the implications or –you’re talking about long-term implications.”

James Grant: “The implications for the saver — there are some very short term implications as well. yeah, I mean — if you are and you are confronting zero percent. Your options are all together unpalatable.  And they are the options the government presents you. I heard somebody — I heard a former fed guy the other day castigate Mitt Romney for daring to challenge the independents of the fed. Who said the fed was the   fourth branch of government?  These guys are answerable to Gongress, right? Congress, under the constitution has the power to coin money and regulate the value thereof. Where do these guys get off?

Maria of CNBC: “And yet the Congress is not doing anything, in terms of their own fiscal policy.”

James Grant:  “They’re on vacation. Exactly.  What is the best way to invest around these realities that we face?

We recognize that the Fed keeps bailing everybody out, we recognize this is going to be the case until 2015. How do I make   money on this story? We have written favorably, recently about General Motors. GM was trading 6.5 times or so, the 2013 estimate. It’s got all manner of hair on it, beneath the hair, there’s a sound post balance sheet — post bankruptcy balance sheet, we think even adjusted for immediate pension difficulties.

There is the fact that the American   odometer is at near record highs. People are driving old cars. We think GM is in a pretty good place with respect to its product, And the stock is cheap on the numbers. So what we think one ought to do is to look for a margin of safety in equity like investments that will stand to benefit from these monetary exertions.    We are all living in a world of   speculation and manipulation. It’s not so easy. But there are things to do.

Your latest cartoon, “Darling, you’re so quantitative.”  “Yes, not   everyone hates this policy. This is a policy for Greenwich, Connecticut (Home   of Hedge Funds). It’s great if you can fund zero%. if you are on the inside   and know when they are going to do what they’re going to do, it’s great. Your asset prices levitate. It’s good for commercial real estate probably; good for a lot of things, but we don’t know all together what it’s bad for. We have a general sense, but we’ll find out more in about three years.

“When do you think the Fed should start raising interest rates?”

James Grant: “Two years ago. I think that rates are prices, and price control is a demonstrated failure as a public policy. Chairman Bernanke himself castigated the Nixon administration for imposing price controls 1971. He was right, price control fails. What he’s doing is controlling prices. He’s suppressing interest rates, and this phrase, the investment portfolio balance channel or some such. He’s attempting to press — to lift equity markets, because that will, he says, induce economic growth. Shouldn’t equity markets respond or discount wholesome growth rather than be muscled higher? The answer to that question is yes.”

Maria, “You’re a free markets guy, I agree, you want the markets to work the way the markets ought to work. Is there any reason to believe that you don’t want — you want to get in front of this train, that is the stock market?”

James Grant:  “I think it’s where security analysis comes in, I think it’s where an investment in gold and silver comes in. Central Banks around the world are bound and determined — either through actions or   words to debase their currency. They’re telling us. How high can gold go in   this scenario? The nice thing about gold, it has no PE multiple. There’s no   telling. Gold is a speculative assets — it earns in yields, gold is a   speculation on an anticipated macro economic outcome. That macro economic   outcome being the systematic debasement of currencies by the central banks. They’ve done qe 3, right? The economy appears not to be in the best of   health.

Why wouldn’t they do Quantitative Easing 4? What intellectual argument do they have against doing it again and again and again? That’s one of the risks, right? Well, it’s open ended already. Maybe they didn’t need it, because we know it’s open ended. They can save the paper in the press release.

Maria: You mentioned real estate. One of the unintended consequences in Hong Kong because of the dollar relationship. There is an argument to be made that you want to be buying hard assets like a gold, like real estate.

James Grant: I think it depends how it’s valued. in some markets in this country, you can finance them at all time — certainly generational low interest rates in the mortgage market. That’s not a bad way to hedge against the currency.

Maria: “I know Bernanke knows you have been so critical. What is his   answer to you, when you raise these points?”

James Grant:  “We don’t talk any more.”

Maria: ” Thank you   so much. Jim Grant for joining us, founder of Grant’s Interest Rate Observer.

Look at the distortion of MBS compared to US Treasuries

Mason Hawkins of Longleaf Partners Interview with GuruFocus

Sep 17, 2012 | About: DIS -0.06%DTV +1.05%LVLT +0.04%TRV +0.12%L +0.51%BRK.A -0.63%BRK.B -0.34%

Mason Hawkins is chairman and chief executive officer of Longleaf Partners, an investment advisory firm with $34 billion in assets under management. He recently took investing questions from GuruFocus readers. Here are his responses:

Investment Philosophy

Question: You manage more than $30 billion, but most of the assets are in the top 10 names. Why do you run such a concentrated portfolio?

We believe that holding a limited number of financially strong, competitively entrenched businesses at a significant discount to intrinsic value has lower risk of capital loss and better return opportunity than owning a large number of inferior businesses at higher prices. Statistical analysis shows that security-specific risk is adequately diversified after 14 names in different industries, and the incremental benefit of each additional holding is negligible. We own 18-22 companies to allow us to be amply diversified but have the flexibility to overweight a name or own more than one business within an industry. Finding investments that meet our disciplines at any given time is normally difficult. When one qualifies, we want it to have an impact when value is recognized. Limiting the portfolios to our 20 most qualified investments allows us to know the companies we own and their managements extremely well while providing ample security-specific diversification. As Longleaf’s largest investor group, we want our capital in competitively advantaged companies run by competent managements that sell at materially discounted prices.

Question: We know that you assign every investment an appraised value. How does quality play a role here? Question: In your opinion, what kind of companies are high-quality companies?

We view quality through the lens of a business owner. We want to own companies with the following qualitative characteristics. 1) Unique assets having distinct and sustainable competitive advantages that enable pricing power, long-term earnings growth, and stable or increasing profit margins. 2) High returns on capital and on equity as measured by free cash flow rather than earnings. 3) Capable management teams with operating skills, capital allocation prowess, and properly aligned, ownership-based incentives. While most agree that growing businesses that generate high returns meet the quality definition, many also want earnings stability. Our long-term horizon gives us the opportunity to own quality businesses at deep discounts at points when their earnings may be temporarily depressed. By focusing on a company’s competitive advantages and what the value will be in 3-5 years, we can buy companies such as Disney (DIS) after September 11, 2001, or Philips today that are dominant leaders in their industries and will grow with high returns, but have short-term earnings challenges.

Question: A fan of yours from nearby, in Jonesboro, Ark. – I’m curious what initial measures/qualitative factors catch your attention? Is it a depressed stock price? Secular shifts in an industry? Great business or management? Price/FCF?

We are attracted by all of the above and more. We run numerous screens to source new ideas including price to cash flow, insider purchases and ownership, corporate buy backs, industries/sectors out of favor, and the new low lists for example. We also keep a master list of appraisals for 600+ good businesses that we would like to own at the right price. Because of the short investment time horizons in the markets today, we often get the chance to buy businesses that we have previously owned. Generally, companies and managements that we have lived with successfully in the past come with fewer unknowns and therefore less appraisal risk.

Value Investing Environment

Question: Your investment performance target is 10% plus inflation. You historically achieved this goal over ten year periods through mid- 2007. What factors have been preventing you from achieving this goal in the 10 year periods since then? Do you think the value investing landscape has changed?

The value investing landscape is certainly out of favor today with investors clamoring for what they perceive to be safety – whether in bonds, high dividend stocks, or stocks that are viewed as “higher quality” meaning more stable. Most companies with a degree of economic cyclicality or some financial leverage have been ignored for much of the past year. We have faced previous periods when intrinsic value investing was out of favor, and we know that the key to delivering outsized long-term returns is owning good businesses at large margins of safety of value over price and remaining patient. Any time a performance period includes a negative return, an absolute return goal becomes challenged. Fortunately, in our almost 40 years as a firm and 25 years managing Longleaf Partners Fund, we have had few down years. The worst of those, however, was in 2008 with the economic crisis. Strong absolute returns are required to make up for that year, but we do not believe the world has changed in a way that will make achieving inflation plus 10% difficult. Over Southeastern’s history, including the post 2008 period, we have achieved our absolute return goal 78% of the time over quarterly rolling 10 year periods. The current end point for reviewing performance incorporates an environment that the U.S. had not encountered since the Great Depression. That was the only other period when bonds outperformed equities over 10 years, and the S&P dividend yield was higher than the 10 year Treasury yield. We think that the view that broad equity returns are limited to around 3% going forward based on an expected low GDP growth plus dividend yield misses the importance of retained earnings and its significant capital compounding benefit. As an active manager who is selecting good businesses and capable management teams that are undervalued out of the broader universe of equities, we expect to deliver better than the broad market returns over time as we have over Southeastern’s history.


Question: You have been a long-term investor of Level 3. The company has been doing poorly and in a lot of financial stress. What is your thesis in investing in Level 3 (LVLT)? Isn’t it a value trap?

Level 3 is among the world’s largest internet backbone service companies offering a unique combination of long-haul and metropolitan fiber routes spanning 45 countries on 3 continents. No other single provider offers the same range of global coverage. Demand is rapidly growing aided by the increase in mobile and cloud computing as well as growth from voice, data and video traffic across the internet. Over the last ten years, rising demand combined with industry consolidation have enabled pricing strength as excess capacity from overbuilding in the dot.com era has declined. Because of the high contribution margins in this largely fixed cost business, revenue increases will drive large free cash flow and value growth. The current top line value growth makes Level 3 one of our most compelling investments.

The company sells far below our appraisal for several reasons including the perception of “financial stress” echoed in your question. While Level 3 has a history of being highly levered, the company has successfully managed its capital structure even through the challenge of the financial crisis. Last year’s acquisition of Global Crossing essentially removed the company’s debt strain as EBITDA to Net Debt greatly improved. The acquisition also added three board members from Temasek, the Singaporean fund, who will bring additional focus on successful sales execution. While some would argue that the company sells near industry EBITDA multiples, those views do not account for Level 3’s lower required capex and a substantial tax advantage relative to competitors.

Question: What is your view on Travelers (TRV)’s competitive advantage? How troubling is the huge fixed-income portion of their investment portfolio (in relation to future inflation)? How much do you like Jay Fishman? I really like the fact they are aggressively repurchasing shares and the fact that it is trading at book value, which I estimate to earn around 13% (ROE).

Travelers’ main competitive advantages are its depth of product offerings as well as its leading edge technology platforms that make the company a preferred provider for insurance agents. In regards to their fixed income portfolio and future inflation, longer-term we prefer higher interest rates since interest income is normally a major source of earnings. While book value could get marked down some with inflation, earnings from interest income would increase. In the meantime, the company is reducing capital invested in the business and wisely buying shares at a discount to book and to our appraisal value. Jay Fishman is both a capable operator and an astute capital allocator as evidenced by the company’s strong ROE and growing value, even during the past soft pricing period in the insurance industry. He’s led the industry’s improved pricing environment.

Question: Considering the margin of safety with which Longleaf invests, how much of the loss in ACS is permanent impairment of capital and how much is paper loss? If there is permanent impairment of capital, what were the mistakes made in the investments? If the thesis hasn’t changed why haven’t you added heavily to this investment due to the bargain that it would theoretically represent at this price?

We believe that ACS represents an unrealized paper loss, not a permanent impairment of capital, based on our conservative appraisal for the company today combined with the substantial dividends we have received during our investment. However, we consider ACS a mistake from our initial purchase in November 2007, as appraisal value has declined over the holding period primarily due to the company’s ill-timed, leveraged purchase of 20% of Iberdrola. ACS’s price over the last year has been primarily impacted by concerns over its stake in Iberdrola and to a lesser extent, its 50% stake in Hochtief. The appraisal decline was driven largely by the company selling approximately half of its Iberdrola stake at around €3.50 a share vs. our appraisal of over €5 a share. Since ACS purchased Iberdrola shares using leverage, the appraisal decline was amplified. In our appraisal of ACS, we carry the remaining Iberdrola stake at market, which is down over 30% from its December price. Broader concerns over the Spanish and European economy have further pressured ACS’s price. Spain’s main index, the IBEX 35 where ACS is listed, contains 35 companies, many with low free float. As a result, ACS has become a proxy for betting against Spain with over 30% of the stock’s free float being shorted. We added to our position in late April 2012 as price fell below €14 and today maintain a slightly overweight position in Longleaf Partners International Fund. While our average cost for ACS is higher, we have received €9.90 per share in dividends over the course of our investment.

Question: How do you think about DIRECTV (DTV) in terms of competitive advantage and valuation?

DIRECTV is the largest satellite broadcaster in the U.S. and has rapidly growing, dominant market share in Latin America. Domestically, the company offers better quality and programming to attract high-end customers that pay premium rates with little churn. Pricing power has driven rising ARPU (average revenue per user). Because viewers will “unplug” for some of their viewing over time, we place a lower multiple on the U.S. than in the past. But live sports where DTV has unique offerings are much less vulnerable to delayed viewing. In Latin and South America, DTV has almost no competition in most countries because cable has not been and will not be installed in less developed places with minimal infrastructure. Although the stock is multiples above our cost in DTV, the price remains below our appraisal as value has grown steadily from management’s reinvestment of the cash coupon into high-returning Latin America and discounted shares.

Question: Have you ever looked at Leucadia (L), particularly since it’s trading at 80% of book value?

We purchased Leucadia in the second quarter in Longleaf Partners Small-Cap Fund. Since it is a new position, we prefer not to comment on the company specifics at this time. We have high regard for our partners, Ian Cumming and Joe Steinberg.

Question: Have you ever looked at buying Berkshire Hathaway (BRK.A)(BRK.B)? If so, what do you think is the best way to value the company?

We recently purchased Berkshire Hathaway for the second time in our history when the stock fell near book value. The appraisal is based on a sum of the parts analysis which has become more relevant as the non-insurance businesses have become a larger part of the company. Berkshire’s capital strength, investment success, and underwriting knowledge provide an advantage in the insurance businesses, which comprise just over half of our appraisal. The competitively entrenched operating companies include the railroad, Burlington Northern, the utility and pipeline business, MidAmerican, and a number of smaller companies. We have superior partners not only in Warren Buffett, but also in the next level of management responsible for the different pieces. His recent share repurchase reflects his view that the stock is discounted. Additionally, the board is structured to insure a consistent approach and culture long past Buffett’s tenure.

As a result of the investment opportunity created by the fear and dislocation we have discussed in this interview, we have decided to launch the Longleaf Partners Global Fund in the 4th quarter of this year. While we have been managing global separate accounts for over 10 years, we believe the current market environment makes this a compelling time to make a global mutual fund available to our partners.

Ben Graham Meets An Austrian Economist

 Information Overload

Columbia business student to Richard Pzena of Pzena Investment (www.pzena.com) why do you think there will be value opportunities with so much more available information?

Pzena, “Because of this…as he slaps a 700-page 10-K on a desk in front of his lecturn. Nobody reads these because there is too much information. You must know what to look for.

Austrian Economics and Value Investing

Ben Graham meets Mises

Lessons and Ideas from Benjamin Graham by Jason Zweig:Lessons-Ideas-Benjamin-Graham_Zweig_AIMR

Value Investing from a Austrian Perspective, A paper on Ben Graham and Mises: http://mises.org/journals/scholar/Leithner.pdf


More Lessons

February 28, 2004 by

 The Australian web site of Leithner & Co., Pty. Ltd.contains a wealth of material combining economic theory, financial economics, and Benjamin Graham’s views on investing. Some interesting places to start:

Interview with Chris Leithner


Monday, July 11, 2011 at 8:45PM

Today we had the pleasure of interviewing Dr. Chris Leithner. He has lived in Australia for the last twenty years and is the author of The Evil Princes of Martin Place.  The book delineates the evils of all central banks and has some unique perspectives on Australia’s central bank, the Reserve Bank of Australia (RBA).

We took this opportunity to ask Chris about his thoughts on central banking, investing and his views on the RBA, the Australian dollar and Australian stocks.

The Dollar Vigilante (TDV): Thanks for taking the time to speak with us, Chris.  To begin, give us some background on yourself.

Chris LeithnerChris Leithner (CL): Sure, I came to Australia from Canada in 1987, in order to take a postgraduate degree. After a few years of further study in the UK, I returned to Oz in 1991. After a couple of years, I became a jaded academic; and after a few more I became an ex-academic. I learnt that the adage “those who can, do; and those who can’t, teach” has more than a ring of truth to it. Partly for that reason, and also because in the 1990s I also discovered Austrian School economics, Ben Graham and their commonalities, in 1999 I formed Leithner & Company (http://www.leithner.com.au). It’s a private investment company, based in Brisbane, which adheres strictly to the “value” approach to investment pioneered by Graham and to the economic insights of Carl Menger, Ludwig von Mises and Murray Rothbard.

TDV: How did you first get exposed to Austrian economics?

CL: Increasingly repelled by the absurdities and outright falsehoods of the economic and financial mainstream, I found Austrian Economics in exactly the way that the Austrian School shows how so many things happen: by accident rather than by design. I found it almost everywhere except at university; and as I think back, the more of it that I found, the more repugnant academic life became. I read Mises, Rothbard and others on capital, value, interest rates and the business cycle. I also read Lionel Robbins, The Great Depression (1934) and Wilhelm Röpke, Crises and Cycles (1936). Although Robbins later disavowed Austrian methods and insights, I realised that both he and Röpke provided clear and forceful expositions of the mechanics of the Austrian interest-rate and business-cycle model. Amazingly, within a couple of years of the Great Depression’s nadir, they published more theoretically and empirically rigorous accounts than (for example) Ben Bernanke’s Essays on the Great Depression, Princeton University Press, 2004.

Not only has the mainstream learnt nothing since the 1930s: it has unlearnt what’s worth knowing!

TDV: Yes, it’s not what they don’t know but it is what they know that just ain’t so.  So, why did you write The Evil Princes of Martin Place?

CL: I sought to demonstrate to an audience of interested laypeople, both in Australia and other countries, that there’s little new under the sun: the “Global Financial Crisis,” as the events of 2007-2009 are commonly known in Australia, is merely the latest in a long series of economic and financial crises that have punctuated the history of the past 250 or so years. Like its predecessors, three of which (namely the Panic of 1907, the Depression of 1920-1921 and the Great Depression of 1929-1946) the book analyses in detail, interventionist policies – in particular, legal tender laws, fractional reserve banking and central banking – are the GFC’s ultimate causes. Accordingly, only when we recognise that monetary central planning is the ultimate source of our financial and economic distemper, and when it either collapses or is consigned to the dustbin of history, and when 100%-reserve banking and sound money replace fractional reserve and central banking and fiat currency, will the ruinous cycle of boom and bust become as thing of the past.

TDV: Tell our audience generally what the book is about

CL: Sure, Part I (Chapters 1-5) uses basic logic and evidence to isolate the causes of the GFC, Panic of 1907, etc. It demonstrates, in short, that these crises are failures of government – and not of liberty. Following Herta de Soto, it demonstrates that deposits are not (and can never legitimately be) loans, that the history of fractional reserve banking is the history of bank crises and failures. Following Rothbard and Mises, it also shows how fractional reserve banks misappropriate and counterfeit.

Part II (Chaps. 6-9) analyses counterfeit money, the central bank and the welfare-warfare state. It demonstrates, following a long line of scholars, that fractional reserve banking is logically absurd, utterly fraudulent – and hence legally untenable. It also outlines the basic operations of central banking (e.g., open market operations, etc.). Conceiving the central bank as a monetary central planner, it also demonstrates (following Mises, who did it did for central planning generally) that monetary central planning inevitably fails. Finally, following Hoppe, who demonstrated in Democracy: The God That Failed (Transaction Books, 2002) that private property (i.e., individual ownership and rule) and democracy (i.e., collective ownership and majority rule) are incompatible, it outlines the invidious moral and ethical consequences (which it calls the “monetary roots of democratic pathologies”) of fractional reserve and central banking.

Part III (Chaps. 10-14) provides historical analyses of where we’ve been, where we are now and where we’re headed. It puts the Depression of 1920-21 and Great Depression into an Austrian context; so too with Australia’s “miracle economy” of 1991-2007 and the Commonwealth Government’s reaction to the GFC. It concludes that its reaction has merely set the stage for a later and bigger crisis.

Finally, Part IV (chaps 15-16) outlines where we should go – namely outlaw fractional reserve and central banking – and provides further reading for those who are interested.

TDV: We find all of your subject matter interesting but the main reason I wanted to interview you was to give the TDV audience some perspectives on what is going on in Australia right now.  Tell us some of your thoughts about Australia’s central bank, the Reserve Bank of Australia.

CL: Australians have become a bit cocky in recent years, to the point where “Australian Exceptionalism” or something akin to it swells many hearts; it’s not just The Lucky Country: to many people, it’s apparently The Country That Deserves to Be Lucky.

TDV: The same thing has been happening in Canada.  It’s amazing what living in a place with some natural resources in the ground and a currency performing relatively well can do to puff out the chests of some people!

CL: Haha, yes.  One of my intentions in The Evil Princes of Martin Place is to remind them that the laws of economics are universal across time and space – and therefore, that, just as fractional reserve and central banking inflated the booms that have burst in Europe and the U.S., so too they’ve inflated the booms that will bust in China and Australia.

TDV: Explain to us how the RBA is different, or similar, from the other central banks we are more familiar with like the Fed, BoE and BoJ

CL: For all practical purposes, it seems to me that central banks’ similarities (which The Evil Princes emphasises) are far more important than their differences. As an analogy, the Fierce Snake (Oxyuranus microlepidotus), Common Brown Snake (Pseudechis australis) and Taipan (Oxyuranus scutellatus) are the world’s three most-venomous snakes. For all I know (I don’t), their diets, reproductive habits and habitats, among other things, differ. But what’s most relevant from my point of view is that each is very poisonous – and is an Australian native. Similarly, a mainstream economist might assert that over the past decade the RBA has targeted the CPI more formally than the Fed. Both, however, relentlessly undertake the open market ops that ignite the boom that eventually busts, and it’s that commonality that I try to keep uppermost in mind.

TDV: The Australian Dollar (AUD) has been on a wild ride the last few years… how do you explain this from your Austrian viewpoint and from what you know about the AUS central bank?

CL: Because Leithner & Co. invests almost exclusively in Australia and New Zealand, I’ve never thought about it.  Well, that’s not quite true: the $A is a fiat currency; and as such, its purchasing power almost constantly falls. But I have no insight whether it will melt faster than the £, €, $US, etc. I suspect, but obviously don’t know, that taking short-term or even medium-term positions on the price of the $A vis-à-vis another currency is either a waste of time or a rod for one’s own back. Certainly I don’t know anybody who’s made a living – let along accumulated significant wealth – trading the $A or any other currency.

Your question prompts me to reflect that, when it comes to the currency, I am very Grahamite; that is, I concentrate on the micro (the security) rather than the macro. Your question also brings to mind Buffet’s observation in 1994: “If Fed Chairman Alan Greenspan were to whisper to me what his monetary policy was going to be over the next two years, it wouldn’t change one thing I do.” In effect, in 2009 Glenn Stevens, Ben Bernanke and all the sordid rest DID shout what their monetary policies were going to be, and it hasn’t changed either my approach to investment or my highly jaundiced attitude towards central bankers and central banking.

TDV: Give us an overview of the current political/central banking climate in AUS… what’s your thoughts? Should we be buying AUS stocks? AUD? Or selling?

CL: Well, let’s first take the mainstream’s prevailing attitude towards central banking in general and the RBA in particular: central planning rules! Not just in Oz, but in all Western countries (and Eastern ones, for all I know) the state has embedded its protections of fractional reserve and central banks so deeply within its legislation and regulations – in other words, it has extended such enormous privileges to these banks for such a long time – that virtually nobody now recognises bankers for what they have long been: massively featherbedded white-collar wharfies (for decades until a decade or so ago, longshoremen were the most notoriously protected, overpaid and arrogant workers in Australia). The events of the past couple of years have alerted the man in the street to the reality that something is rotten in Denmark — or, more precisely, Australian and other banks — but he can’t quite put his finger on it.

In Australia, economists, investors and journalists babble endlessly about the level at which the Reserve Bank should “set” the “official interest rate” (by which they mean the Overnight Cash Rate). Alas, almost nobody bothers to ask why it should be set, or whether it actually can be fixed. After all, the benchmark price of (say) wheat isn’t set: it’s discovered throughout the day at the Chicago Mercantile Exchange. Similarly, the spot price of copper is constantly discovered and rediscovered at the London Metals Exchange. More generally, the impersonal forces of supply and demand determine many prices. Yet, for reasons rarely discussed and never justified, virtually nobody baulks at the notion that a short-term money market rate of interest must be “set” by a committee of price-fixers and central planners in Martin Place, Sydney.

Hence, an inconvenient question: given that most “right thinking” people like mainstream economists and financiers (correctly) believe that the production of goods such as motor cars, frozen vegetables, etc., should occur within a régime of market competition, why do the Good and the Great insist – some of them quite vehemently – that “we” must exclude the production of money from market forces? Why, in an allegedly free society, must the government monopolise the definition of money? Why must its production and regulation be entrusted to a deified government monopolist called the central bank? Nobody in mainstream Australia is ever able to answer these questions; instead, they ridicule or simply ignore them.

Yet even to consider these questions is to grasp that the Global Financial Crisis is not a “market failure.” Rather – and in a way that parallels the collapse of Communist economies – the GFC is the inevitable consequence of the hubris of central planning. Communism epitomised general economic central planning, and it eventually collapsed. Central banking, whether in Australia, Britain, China or the U.S., is monetary central planning; as a result, it too will ultimately be consigned to the dustbin of history. From the repudiation of the gold clause and confiscation of gold in 1933 to the closing of the “gold window” in 1971, the chairman of the Board of Governors of the Federal Reserve System, as well as his counterparts in the Reserve Bank of Australia, etc., have increasingly deprived market participants of market signals – that is, of real information in the form of unfettered rates of interest. In particular, market participants have been deprived of a key warning signal and great source of discipline (the right to exchange dollars for gold). Central bankers, in short, have caused credit markets to emit false signals; as a result, these markets don’t tell the truth about time.

TDV: We totally agree, of course.  And also find it so bizarre that hardly anyone questions having communist style central planning embedded at the very heart of the so-called capitalist system.  What is your take on Australian stocks?

CL: In Leithner & Co.’s current Newsletter to its shareholders, I note a paradox: those who didn’t see the GFC coming (and remained wilfully blind after it erupted) – the very people who incurred big losses in 2007-2009, which they’ve not recouped – today remain resolutely upbeat about the future. They were diametrically wrong then; why should anybody think they’re less wrong today?

In sharp contrast, the doughty few who anticipated trouble and who have consistently generated profits since 2007 remain downcast today. It’s demonstrably false to assert, as the mainstream has since 2007, that “nobody saw it coming.” What’s certainly true is that the few who foresaw the GFC and now see that we’re merely in the eye of the storm, were then and today remain, from a mainstream point of view, “nobodies.”

A second point is that in a Newsletter dated 26 June 2009, I posited assumptions and conducted an analysis that yielded nine estimates of the All Ordinaries Index’s “fair value.” If earnings fall to their long-term trend and bearish multiple emerges, then the All Ords’ fair value is 1,688 – roughly half the level of its low in March 2009 and one-third of its level (4,700) in early July 2011. If earnings remain constant and the “bullish” multiple suddenly prevails, then fair value is 5,512 – a modest 67% above the March 2009 trough. Mid-range assumptions with respect to both earnings and the multiple generate an estimate of 3,127 – just below the March low. Re-reading that analysis and considering its premises, I think its conclusions remain sound: Australian investors need to incorporate into their plans the possibility that Australian indexes fall by 50% or more.

A third point is that, recent decades in Australia, have not, in economic and financial terms – and as the Commonwealth Government, RBA and their sock-puppets in the media and universities strenuously insist –  been truly stable. In The Evil Princes I noted that for seven decades Communism in the Soviet Union was apparently secure. But it was hardly durable, as its sudden and unexpected (to the Western mainstream) collapse demonstrated. I also show that since the early 1990s the much-vaunted “fundamentals” of the Australian economy have hardly – despite the mainstream’s ubiquitous and often strident insistence – been sound. Since 2007, it’s become obvious in Europe and the U.S. that the “stability” of the past few decades was – like the “strength” of the Soviet Union – apparent rather than real. The truth is that the long Australian boom since the early 1990s has not reflected the success of the mainstream’s interventionist policies. The ructions since 2007, however, have revealed the artificiality of the conditions these interventions created.

Alas, like the Bourbons of old, today’s politicians, central and fractional reserve bankers have forgotten nothing and learnt nothing from the financial and economic catastrophes they’ve repeatedly fomented – and thereby expose the rest of us to the next crisis. Unfortunately, the lesson of history seems to be that the politicians people admire most extravagantly are (like Franklin Roosevelt) the most audacious liars; conversely, the ones they erase from memory are, like Warren Harding, those who dare to tell them the truth.

Accordingly, since 2007 governments around the world have intervened massively and lied flagrantly. Their frenzied “fiscal stimulus” and hysterical “monetary stimulus” have ignored the lessons of the “Good Depression” of 1920-1921 and reprised many of the errors committed during the Great Depression of 1929-1946. Most notably, major central banks are presently moving heaven and earth to suppress market rates of interest; the appropriate course is to abandon the intervention and to let rates rise. Similarly, Western governments are increasing expenditure and incurring huge deficits; the correct policy, of course, is to slash spending, taxes and deficits, and to use the resultant surplus to retire debt. Since 2007, in short, central bankers and politicians – as much in Oz as in Europe, China and America – have been energetically inflating the next bubble and thereby stimulating the next crisis. My prognosis is therefore sombre.

TDV: We agree with you on that count as well.  You certainly, more than 99.9% of money managers out there, really know what is going on thanks to your grasp of Austrian economics.  For those interested, please let them know about how they can take advantage of your investment services.

CL: A short summary of our results since inception can be seen here, and an extended analysis of our results during the past decade and its strategy for the next ten years can be seen here.

Leithner & Co. accepts new investors. It caters primarily to professional and sophisticated investors as defined in sections 708(8) and 708(11) of the Australian Corporations Act. In plain English, that means investments of at least $A500,000. Also, because Leithner & Co. is a company and not a fund, its investors own shares in a private company rather than units in a unit trust (or what Americans would call a mutual fund). Unlike units, these shares are illiquid. So not just as a result of its investment philosophy, but also as a consequence of its structure, Leithner & Co. probably isn’t suitable for most people.

Learn more:http://www.leithner.com.au/archives.htm

Other Austrian Value Investors


Another Investor who combines his value investing philosophy with Austrian economics: http://www.bestinver.com/prensa.aspx?orden=estudios

James Grant

Note what Jim Grant says in the video interview, “The value that you see is the result of manipulated interest rates? We are in a BUBBLE of perceived “SAFE” Haven assets (think 30 years bonds at sub-2.5% or two year bonds at 0.003%)


A Reader’s Question on Integrating Austrian Economics with Investing

Subject: Re: Economics (Austrian?) and its relevance to Value Investing

A Reader implores, “One last question. I’ve actually bought all of James Grant’s books but where does his book fit into the framework of Austrian economics?Should I read it first before reading Austrian economics? Afraid I’d get confused.

I’m a bit embarrassed really, but since you’ve already taken the road, I’m hoping not to have to ‘reinvent the wheel’, so to speak… either that or I’m just plan lazy.

Reply: James Grant has said he is a big fan of Ropke http://library.mises.org/books/Misesorg/Who%20is%20Wilhelm%20Roepke.pdf.

The book Grant mentions is Wilhelm Ropke’s Crises and Cycles (1936) in his excellent book, The Trouble with Prosperity: A Contrarian’s Tale of Boom, Bust and Speculation.

Try reading Ropke’s book: http://library.mises.org/books/Wilhelm%20Ropke/Crises%20and%20Cycles.pdf

 Flash that tome on your blind date! It didn’t work so well for me: http://www.youtube.com/watch?v=dvB_Ck2zFzs.

I then had to spend a lot of time travelling with my brother to get back home where I belong. http://www.youtube.com/watch?v=RN0DczbPznY&feature=related

Or start here: How to study Austrian Economics: http://www.libertyclassroom.com/learn-austrian-economics/

My suggestion is to start with The Trouble with Prosperity and note your questions, then look at Jim Grant’s notes and bibliography–read some of his sources. But keep learning economics–the proper way.

Good luck and let me know if that helps.

Surprise on the UPSIDE? James Grant

I’m a glass half full type of guy, but perhaps there could be surprises on the upside–James Grant

Six-minute video:



The Federal Reserve–Watch What They Do Not What They Say

Money Supply Growth is Declining

The Fed is shrinking their balance sheet: See this CNBC video interview of Jim Grant and the graph of money supply growth is shown about 1.5 minutes into the interview….http://video.cnbc.com/gallery/?video=3000094677&play=1

The Fed was very stimulative up until the Spring of 2011, but in the past three months the Fed has been withdrawing stimulus. At the margin, the Fed is tight. Unless QE3 occurs or there is a reverse of fear money into US Treasuries, market may struggle. This is not a reason to sell good, undervalued stocks.; just be aware of conditions.


CNBC Money Honey (“MH”):Let’s solve this, All right. Welcome back it’s the hot topic on wall street. Are we going the way of Europe and headed for recession? Warren Buffett told the economic council that we’re not smarter than the people in the 1930s. We just have a system that works that’s been working since 1776. He has under his wing, I think, 80 or 79 operating companies and he’s got one of the better views on the macro economy.

Let me ask you (James Grant) about the Federal Reserve’s testimony tomorrow. Ben Bernanke is back before congress tomorrow. What are you expecting him to say? A lot of debate in terms of suggestion of more stimulus, QE 3, what do you think?

James Grant, “I think we should plan for platitudes but there’s a difference between what the FED is saying and notice what they are doing. They have increased their balance sheet and the maximum rate of growth occurred a year ago in the spring of 2010. In the last three months it’s mainly treasuries, securities, and mortgages, that has totalled an annual rate of almost 10%. The FED is withdrawing stimulus even as more and more of the governors and reserve bank presidents are talking about QE 3.  Something to bear in mind when you listen to Bernanke talk.  What is he actually doing? And what they is actually doing at the margin is shrinking the money supply.

MH: What do you think about that? Give me your analysis on that.

Jim Grant: Unless they continue buying securities, some of these bills, bonds, and mortgages mature and run off. That’s what is happening now. The portfolio is shrinking just by the natural tendency of things to come to the end of their financial lives. So unless there is some new initiative, the portfolio will continue to shrink and as the FED asset shrinks, so does the stimulus and the accumulation of those assets. I expect that there will be QE 3.

MH: “You do?”

James Grant: “I do. I think that very little prodding to do what they have done continuously almost for four or five years and….” – MH: “look, Jim, let’s face it. We had a terrible jobs number. 69,000 jobs created in the last month. I know you’re not a fan of all of this stimulus.

James Grant, “It’s market manipulation in the past. Isn’t it a fun drug?  They keep on printing the stuff and we keep on expecting more and today I think part of the source of the levitation was in Wisconsin. People are maybe discounting the prospect of something like freer or if not free markets come the fall if the GOP wins but a good part of what is going on in the market is the presence of hope of QE3, withdrawal of that hope. It is a grand manipulation.

MH, “I think you brought up a very important part with the Wisconsin thing (Public Unions lost their recall vote against the Wisconsin Governor). I’ve been asking this thing, are investors going to look at this data as it keeps on worsening and say, “Are going to have a new president and then start rallying on the expectation that it’s a Romney rally?

James Grant: I think so. I think that in a way the worst is better.  The supreme court is going to hold forth on whether Obamacare is constitutional. I can see a GOP victory and the market will discount that. If in fact we were to see more expectations that President Obama loses the re-election, then this market rallies? That’s the best hope for this stock market? It’s one hope and it’s not in I think it’s one bullish feature to be aware of.

MH, “Give me the long-term implications for all of this money. Let’s say we get QE3. Long-term implications are bad. There is nothing free in this life, in money least of all. The world I think has 2008 in its brain. The world is preoccupied with the awful memories of the 2008 and 2009. If you look at the market and volatility market, people are buying protection against a deflationary collapse. The bank regulators are demanding a deflationary event. Unexpectedly it began to generate higher than expected rates of inflation, what if interest rates went up. That might be the surprise. That’s what I’m thinking about, that we have all designated on the one hand risk assets. On the other hand, nonrisk assets, right? How about if the labels were stuck up wrong? Which they may very well be.

MH, “Are you worried about Europe?  How much of an issue is Europe?  At the end of the day I want you to button up and say, how is the investment play here? let me answer it with one short breath. We are looking for microeconomic specific opportunities in Europe.  Equities, distressed debt, busted LBOs, cheap real estate. We can’t know the future.  We can’t really handicapped these macroeconomic outcomes. But what we can do is troll for opportunity.  That’s what we’re doing. How about just cool, calm, and collected analysis? That’s what we’re trying to do. That usually works.

MH, “Jim Grant, fantastic analysis, as always.

3 Months      6 Months         12 Months

M-1 Growth Rates                  4.3%              10.1%                 17.1%

M-2                                            4.0                  5.9                      9.1

M Zero Maturity                     5.0                  6.9                     8.6

Note the deceleration of Money Growth–Yellow Lights Flashing

Last week, the Fed numbers came in with 13-week annualized seasonally adjusted money supply (M2) growing at 5.5%. Non-seasonally adjusted growing at  5.4%. And most dramatic is the simple month versus 4 month out money supply growth. It has now gone NEGATIVE with an annualized growth rate of -1.9%.

This is a major crash in money supply growth. That said, the potential for a reversal is very strong. If hot money flows into the U.S. reverse, money supply will rocket. Further, it appears that the Fed appears ready, in co-ordination with the European Central Bank, to start a new money pumping scheme. But if at least one of these factors doesn’t kick-in, pressure in the economy and stock market are likely.

What must be watched very closely is the trend of hot money flowing into the Treasury market. This hot/scared money, by putting downward pressure on rates, is causing the Fed to drain reserves because of its target Fed funds rate at 0.15%

Where’s this hot money coming from? It’s domestic and foreign money. The demand among average U.S. investors has swelled so much, in fact, that they bought more Treasury securities in the first quarter than by foreigners.

U.S households picked up about $170 billion in the low-yielding government debt during the quarter, while foreigners increased their holdings by $110 billion.

When this money moves out of Treasury securities, it will push rates higher very quickly and cause the Fed to add reserves (and grow the money supply very rapidly) The switch in the direction of Treasury security hot money can occur very quickly. (Source: www.economicpolicyjournal.com)

James Grant’s Speech to the Fed and More

James Grant argued for a return to the classical gold standard at the New York Federal Reserve. Note Grant’s command of financial and economic history. He references several books which you might find of interest. The beauty and purpose of the gold standard is that it takes monetary policy out of the control of moneyed elites and allows the market to work.  Critics will say that the nation had recurring booms and busts while on the classical gold standard, but they may be confusing the chaos of fractional reserve banking (being able to pyramid loans on top of deposits with fiduciary media) with the classical gold standard (the citizenry is able to convert currency into a fixed amount of gold).

Grant’s Speech to the New York Federal Reserve

My annotated copy is here:James Grant Speech on Gold and the FED April 2012

Robert Wenzel Speech

Another excellent critique of the Federal Reserve is Robert Wenzel’s speech on April 25th, 2012 http://www.mises.org/daily/6028/New-York-Fed-Leave-the-Building.

An excerpt: I simply do not understand most of the thinking that goes on here at the Fed, and I do not understand how this thinking can go on when in my view it smacks up against reality.

Please allow me to begin with methodology. I hold the view developed by such great economic thinkers as Ludwig von Mises, Friedrich Hayek, and Murray Rothbard that there are no constants in the science of economics similar to those in the physical sciences.

In the science of physics, we know that water freezes at 32 degrees. We can predict with immense accuracy exactly how far a rocket ship will travel filled with 500 gallons of fuel. There is preciseness because there are constants, which do not change and upon which equations can be constructed.

There are no such constants in the field of economics, because the science of economics deals with human action, which can change at any time. If potato prices remain the same for 10 weeks, it does not mean they will be the same the following day. I defy anyone in this room to provide me with a constant in the field of economics that has the same unchanging constancy that exists in the fields of physics or chemistry.

And yet, in paper after paper here at the Federal Reserve, I see equations built as though constants do exist. It is as if one were to assume a constant relationship existed between interest rates here and in Russia and throughout the world, and create equations based on this belief and then attempt to trade based on these equations. That was tried and the result was the blow up of the fund Long Term Capital Management — a blow up that resulted in high-level meetings in this very building.

It is as if traders assumed a given default rate was constant for subprime mortgage paper and traded on that belief. Only to see it blow up in their faces, as it did, again, with intense meetings being held in this very building.

Yet, the equations, assuming constants, continue to be published in papers throughout the Fed system. I scratch my head.

Origin of the Federal Reserve

The Origins of the Federal Reserve by Murray N. Rothbard (128 pages) http://library.mises.org/books/Murray%20N%20Rothbard/The%20Origins%20of%20the%20Federal%20Reserve.pdf


If you read and understand the above articles and book, you will have a good inkling of why the rich become richer and the poor become poorer.