In Search of Golden Enlightenment

November 18th, 2010

Kopin Tan of Barron’s has the honor of having his photo accompanying his Streetwise column, and my Keen Mogambo Eyesight (KME) notices that he appears to be an Asian-type person.

Suddenly I was alert to the possibility that he, as an Asian, could be chock-a-block full of Asian wisdom, and of the kind that I can understand, unlike the advice that the Dalai Lama gave Groundskeeper Carl Spackler in the movie Caddy Shack, which was, as I recall, “Gunga da gunga,” which makes no sense to me or anybody I ask.

I could ask Bill Murray himself, I guess, but he is like me, in that he is too busy trying to get his golf swing under control to be answering some stupid question by some stupid guy with the stupid name Mogambo Guru about some stupid ad-lib he did in a movie he made 25 years ago.

In the case of Mr. Murray, I actually remember the time, back when I first started this newsletter, when I called him to get his opinion about the wisdom of buying gold and silver in response the inflation that will be caused by Alan Greenspan, the then-chairman of the Federal Reserve, creating so much money.

I recall that the phone rang and rang, but I let it ring and ring. I knew he was home because it was about 6:00 a.m., his time out there in California, so I knew he had to be home! “Simple deduction, my dear, Dr. Watson!”

Finally, as predicted in the previous paragraph, he finally answers, all groggy and half-asleep, “Hello?”

To help wake him up, I was deliberately perky and up-tempo, and I said, “Hello, Bill! This is your old pal Mogambo, and I was just calling to confirm your opinion about how you are sure that Alan Greenspan creating so much money and credit is going to result in inflation and more bubbles in stocks, and bonds, and houses, and derivatives, and the sheer size of the government and its many dependents, which is not to mention simmering, constant inflation in the prices of everything else, and how you were discussing that Exact Freaking Point (EFP) with the Dalai Lama when you were working as his looper in Tibet, which is a tasty tidbit of celebrity gossip that I want to use in my newsletter!”

I could hear him breathing on the end of the line, so I continued, “Well, Bill, old buddy old pal, since we are talking about the Dalai Lama, when he told you ‘gunga ga dunga,’ was he saying, literally, ‘money get money’? And does that translate into colloquial English as, ‘Get gold and silver?’ Does it, Bill? Does it?”

He didn’t answer right away, so I urged him on, “Does ‘gunga ga dunga’ mean ‘gold and silver’ or not? Yes or no, ya moron? Or are you such a conceited hotshot that you think you are too big and too important to tell me just because I have a ‘problem’ and I live in a closet, and nobody knows me or reads my newsletter because the CIA and the FBI and the NSA are censoring me? Is that it? Is that what you think, Murray, you worthless piece of Hollywood crap?”

Well, for some reason, that is when he rudely hung up on me, so we never finished our terrific interview, and the Mogambo Guru newsletter piece ended up with me putting words into his mouth about how the Federal Reserve’s insane expansions of the money supply has created so much inflation in prices that the dollar has lost 97% of its purchasing power since the Fed took over in 1913, and how he now plays a lot of golf and urges everyone to rise up in angry rebellion and march on Washington, DC to tear down the Federal Reserve building.

But that was then, and this is now, and so naturally I was hoping that Mr. Tan would reveal something as pithy as “gunga ga dunga” that would suddenly, in a moment of blinding, transcendent enlightenment, miraculously put my whole miserable life aright, where suddenly I would not care that everyone was plotting against me and talking about me behind my back, and I would be complacent as the Federal Reserve is creating so much excessively outrageous amounts of money that ruinous inflation in prices is guaranteed and how we’re freaking doomed as a result.

And mostly I would be the height of serenity about whether I already had enough gold, silver and oil instead of obsessively hoarding more and more of them, always more and more as the only defense against the foul Federal Reserve’s creating inflation.

You can see that I was primed to something transformational, and so it is with enhanced pleasure that I read his opening sentence with a bias towards an Asian-type of fortune-cookie Zen, so that his “Extraordinary measures rarely produce merely ordinary consequences” became subtly profound.

And then scary! And then running like hell to the Mogambo Big Bubba Bunker (MBBB) in a panic and taking up a defensive position, which I did just ahead of the arrival of his going on that “all that money we’re printing has to go somewhere, and faster-growing emerging markets – and the commodities they gobble up – offer some of the more obvious and compelling stories.”

I bring this up not because the possible satori in Mr. Tan’s “Extraordinary measures rarely produce merely ordinary consequences” remark, nor how it is all bound up in a whirling hurricane of uncanny philosophical links to many other fascinating economic theories (none of which I actually understand), but how Mr. Tan quotes John Roque of WJB Capital saying, “$1,000 bought you nearly 50 ounces of gold in 1930 and less than an ounce today, but gold has no more surged than the dollar has slipped nearly 99% over that stretch.”

He’s so right that it makes me angry in a Mogambo Howl Of Outrage (MHOO) kind of way because every percentage loss of buying power during those last 80 years is written in the tears and suffering of the unemployed, the unemployable and those living on fixed incomes, all of whom must pay higher prices even though they don’t have more money, or any money at all.

To deliberately increase the suffering of the poor by making prices go up as a result of the Federal Reserve creating so much money is actually shameful, and it is the shame of all the yahoo huckster “economists” like the execrable Ben Bernanke of the Federal Reserve and the odious Paul Krugman of Princeton and who spreads his insane economic opinions through the fellow-traveler leftist New York Times, a newspaper whose obvious hypocrisy is a foul stench in my Sensitive Mogambo Nose (SMN).

But this is not about how we Americans are morons who believe that you can live well, and probably forever, by spending more money than you have by just creating more money, nor about how we think that every other government in all of history didn’t do this amazing trick because they were so stupid and we are so smart.

Obviously, I am working my way into a Hysterical Mogambo Rant (HMR), cleverly averted by Mr. Roque bringing me back to reality by appealing to my greed when he went on to say, “Besides, at about 1.15, the ratio of gold to the Standard & Poor’s 500 is still below the long-term average near 1.5,” which a little deft calculator work reveals is either equal to a nice “spring back” potential for a 30% rise in the price of gold “just to revert to the historical norm,” or a 3,000,000,000,000 % rise, I don’t really know which because percentages, fractions and calculators are so confusing to me.

But even the lower estimate of a 30% rise has me licking my Greedy Mogambo Chops (GMC) about how much I would like a 30% rise in the price of gold, and how many fun toys I could buy with those profits, but which would inevitably meet with howls of protest from the wife and children about how they are “dressed in rags” and eat only a cheap imitation gruel that I buy from a guy who sells it out of the trunk of his car down by the 4th Street bridge, while I invest all our remaining money into gold, silver and oil, except for the part I use to selfishly indulge my every frivolous whim.

Their whine, whine, whine is part of the downside of gluttony, I tells ya, as it really takes away some of the thrill of self-indulgence!

So you can imagine how I got really excited when he went on that the ratio of gold to the Standard & Poor’s 500 went to levels “pushing 3 in the 1970s,” which implies either a 261% rise in the price of gold to equal the S&P500, or the S&P500 falling to equal a third of an ounce of gold!

Perhaps it is this fabulous fact that makes me leap suddenly to my feet and excitedly exclaim, “Buy gold, silver and oil, you morons, because it is so obvious, so cheap and so mindlessly simple that even a guy as stupid as I am can see it, instantly recognize its significance, and be thrilled that ‘Whee! This investing stuff is easy!’”

The Mogambo Guru
for The Daily Reckoning

In Search of Golden Enlightenment originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
In Search of Golden Enlightenment




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Commodities, Uncategorized

India Supply Concerns Boost Sugar ETFs

November 18th, 2010

Heavy rainfall and inclimate weather have taken its toll on India’s second largest producing state having many investors worried that global supply for sugar will not meet demand sending prices higher and providing positive price support to the iPath DJ-UBS Sugar TR Sub-Idx ETN (SGG), the PowerShares DB Agriculture Fund (DBA) and the UBS E-TRACS CMCI Agriculture TR ETN (UAG).

Elevated demand for sugar has resulted in a diminishing supply of global sugar stock levels, pushing levels to their lowest point in 20 years and prices of raw sugar prices back up towards their 30-year high levels.  Furthermore, yields in Uttar Pradesh, which is India’s second largest sugar producing state, have been cut enhancing fears that India may not produce the expected 25 million ton crop that the global market place has been hoping for, reports Caroline Henshaw of the Wall Street Journal. 

As for the near future, global demand for sugar is expected to remain elevated and continue to increase as the global population grows and the purchasing power of emerging nations increases.   This global imbalance in supply and demand will likely provide positive price support to the previously mentioned ETFs.

  • iPath DJ-UBS Sugar TR Sub-Idx ETN (SGG), which is a pure play on sugar. SGG is an unsecured, unsubordinated debt security linked to an index designed to reflect the returns available on an unleveraged investment in futures contracts on sugar.
  • PowerShares DB Agriculture Fund (DBA), which gives exposure to agricultural-based commodities through the use of futures contracts; DBA allocates 12.5% of its assets to sugar futures.
  • UBS E-TRACS CMCI Agriculture TR ETN (UAG), seeking to track the performance of the UBS Bloomberg CMCI Agriculture Index Total Return, which measures the collateralized returns from a basket of 10 futures contracts representing the agricultural sector; UAG currently allocates 16.58% of its assets to Sugar #11 futures contracts and 4.28% to Sugar #5 futures contracts.

Although an opportunity seeks to exist in the sugar markets, it is equally important to consider the inherent risk and volatility involved with investing in the agriculturally-driven commodity.  To help mitigate the effects of these risks and volatility, the use of an exit strategy is important.  Such a strategy can be found at www.SmartStops.net.

Disclosure: No Positions

Read more here:
India Supply Concerns Boost Sugar ETFs




HERE IS YOUR FOOTER

Commodities, ETF, Uncategorized

Three Reasons to Consider the Chilean Peso

November 18th, 2010

Investments in China and Brazil are a bit overdone at the moment. Don’t get me wrong, there’s still plenty of upside for both currencies — but not quite at the rate of the last few years.

So, where can an international investor seek higher rates of return? Try the Chilean peso. Although the currency has enjoyed brief run-up in recent quarters, there is still plenty of upside room left. Let’s take a quick look at why.

For one thing, Chile’s economy is absolutely booming. It is expected to grow by 5.1% this year and rise to 6.1% next year. Central Bank of Chile Governor Jose De Gregorio is even [don’t be wishy-washy] more optimistic — setting growth estimates in the 5.5%–6.5% range.

Most of those gains will come from Chile’s extensive copper exports. Chilean mines have been the top global copper producers for many years — producing approximately 6 billion metric tons last year. The base metal is a necessity for both industrial and commercial uses. And being in South America gives Chile relatively easy access to markets in the United States, the European Union and major economies in Asia, not to mention nearby Brazil.

In fact, not surprisingly, trade with China and Brazil has been booming for three years now, thanks to their insatiable hunger for Chile’s copper. Their steady and increasing demand for the versatile metal will lead to further appreciation in the currency as importing nations exchange pesos to complete their trades.

The country’s rapid pace of growth is also being fueled by accelerations by a healthy employment rate. President Sebastian Pinera promised to create approximately 200,000 new jobs over the next four years. And while politicians all over the world have been making the same promises, Pinera has actually done that and better. So far, 290,000 new jobs have been added — and many economists are estimating a possible top out of 300,000 before the year is over.

The phenomenal increases in employment are helping increase the country’s corporate investment and spending. But more importantly, the gains in the labor force are helping to support income growth and personal spending. Chilean domestic consumption skyrocketed in the first three months of the year — vaulting higher by over 11%.

This is a far cry from comparable spending in the United States — which is rising by only 2.6% so far this year. Should Chile’s domestic growth continue — and all signs say it will — rest assured that domestic consumption will continue to rise, adding to the country’s growth prospects.

Now, as with any other booming economy, you must consider the risk of higher inflation rates. As the Chilean economy expands, higher consumer prices are inevitable — but so are higher central bank rates.

Since the 2008-09 financial crisis, the Central Bank of Chile has raised rates for five straight months. Its overnight lending rate went from a record low of 0.5% to 2.75% in an effort to combat 2% inflation. And more rate hikes are expected before the year is out and heading into 2011. These higher interest rates are going to attract more foreign investors searching for a retail return that’s higher than current rates.

With higher economic prospects for the Chile thanks to stable demand for copper, growing employment and foreseeable interest rate hikes, it’s difficult to see how the Chilean peso won’t be a great and appreciable currency in the long term.

Richard Lee
for The Daily Reckoning

Three Reasons to Consider the Chilean Peso originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Three Reasons to Consider the Chilean Peso




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

Three ETFs Influenced By Black Friday

November 18th, 2010

With Thanksgiving right around the corner, the nation’s single busiest shopping day is about to unleash, and whether or not the retail sector will get a boost this holiday season is ambiguous, however, the Retail HOLDRs (RTH), the iShares Dow Jones US Consumer Services (IYC) and the SPDR S&P Select Retail (XRT) are likely to be influenced regardless of the outcome.

A poll conducted by the National Retail Federation shows that up to 138 million shoppers may visit the nation’s shopping malls over the Black Friday weekend, an increase of nearly 3 percent from last year.  Many are expected to flock to the blockbuster bargains that are being offered by retailer like Wal-Mart (WMT), Target (TGT) and Best Buy (BB).  Wal-Mart is expected to offer DVDs for as little as $1.96, Blue-Ray Disc Movies for $10 and some kitchen appliances for under $3, while Target is following a similar path and is also expected to offer a 40 inch LCD HDTV for under $300 and Best Buy is advertising netbook computers starting at under $150.   

On the positive side for retailers, it appears that consumers have already adjusted their spending habits and have started to open up their wallets.  According to the Commerce Department, retail sales trended upward for the fourth straight month in a row in October indicating that consumption growth could be gaining some traction. 

On the negative side, special promotional sales put together by retailers to entice consumers during the year may end up having an adverse affect and on Black Friday revenues in that some consumers may have already made their big purchases for the year. 

At the end of the day, there will be a lot of traffic in and out of retail stores on Black Friday with numerous deals to capitalize on.  Regardless of whether or not consumers will act on these deals and continue the recent upward trend of spending, the aforementioned ETFs will likely be influenced.

  • Retail HOLDRs (RTH), which includes 18 holdings in the retail sector and allocates 19.63% of its assets to Wal-Mart, 8.57% to Target and 3.83% to Best Buy.
  • iShares Dow Jones US Consumer Services (IYC), which is a highly diversified play on the retail sector including 194 different holdings of companies in the retail sector and allocating 7.31% of its assets to Wal-Mart and 2.34% to Target.
  • SPDR S&P Select Retail ETF (XRT), which includes 66 different holdings of companies who derive their revenues through consumer spending.

To help protect from the downside risks involved with investing in the retail sector, such as macroeconomic forces like unemployment, the use of an exit strategy is a good idea.  Such a strategy can be found at www.SmartStops.net.

Disclosure:  No Positions

Read more here:
Three ETFs Influenced By Black Friday




HERE IS YOUR FOOTER

ETF, Uncategorized

Guest Columnist for Steven Sears at Barron’s

November 18th, 2010

It may just be a coincidence, but each time I have been tapped as a guest columnist for The Striking Price on behalf of Steven Sears at Barron’s, there has been a spike in volatility just as I sit down to draft some thoughts. Perhaps Steven knows something I don’t, but if he does, he’s not telling.

Today in There’s Opportunity in Uncertainty, I build on some themes from a previous September column, Will Market Volatility Return to Crisis Levels? and discuss why I think those who have been earning a nice living by selling options steadily for the past two years or so may still be able to carry that strategy forward.

In today’s column, I also mention the sentiment cycle pioneered by Justin Mamis in The Nature of Risk. As that graphic has never appeared on the blog, I have decided to include it below for reference.

I will take up some of the ideas presented in the Barron’s column, including information risk and price risk, in this space going forward.

Related posts:

Previous Barron’s contributions:

Disclosure(s): none



Read more here:
Guest Columnist for Steven Sears at Barron’s

OPTIONS, Uncategorized

Dear Uncle Sucker…

November 18th, 2010

[Ed. Note: This article originally appeared at “The Big Picture”]

For many years, I’ve been a fan of Warren Buffett’s long term approach to value investing. Understanding the value of a company, regardless of its momentary stock price, is a great long term investing strategy.

But it pains me whenever I read commentary from Buffett that glosses over reality or is somehow self-serving. His OpEd in the NYT – Pretty Good for Government Work – paints an artificially rosy picture of the Bailout, ignores the negatives, and omits his own financial interest in government actions.

What might he have written if Sir Warren was dosed with some sodium pentothal before he sat down to pen that “Thank you” letter? It might have gone something like this:

DEAR Uncle Sam Sucker,

I was about to send you a thank you note for bailing out the economy…but then some nice men dressed in Ninja outfits came in and shot me full of truth serum. That led me to make one more set of edits to my letter thanking you for saving the economy.

It also helped me recall some things I seemed to have forgotten in my other public pronunciations about the bailouts.

I suddenly recalled who it was who allowed the banks to run wild in the first place: You. Your behavior before, during and after the crisis was the epitome of a corrupt and irresponsible government. You rewarded incompetency, created moral hazard, punished the prudent, and engaged in the single biggest transfer of wealth from the citizenry of the United States to the Wall Street insiders who created the mess in the first place.

Kudos.

Before I get to the bailouts, I have to remind you that in:

  • 1999, you passed the Financial Services Modernization Act. This repealed Glass-Steagall, the law that had successfully kept main street banking safely separated from Wall Street for seven decades. Even the 1987 market crash had no impact on Main Street credit availability, thanks to Glass-Steagall.
  • 1997-2010, you allowed the Credit Rating Agencies to change their business model, from Investor pays to Underwriter pays – a business structure known as Payola. This change effectively allowed banks to purchase their AAA ratings, and was ignored by the SEC and other regulators.
  • 2000, you passed the Commodities Futures Modernization Act. It allowed the shadow banking industry to develop without any oversight by the Commodity Futures Trading Commission, the SEC, or the state insurance regulators. This led to rampant creation of credit-default swaps, CDOs, and other financial weapons of mass destruction – and the demise of AIG.
  • 2001-04, the Fed, under Alan Greenspan, irresponsibly dropped fund rates to 1%. This set off an inflationary spiral in housing, commodities, and in most assets priced in dollars or credit.
  • 1999-07, the Federal Reserve failed to use its supervisory and regulatory authority over banks, mortgage underwriters and other lenders, who abandoned such standards as employment history, income, down payments, credit rating, assets, property loan-to-value ratio and debt-servicing ability.
  • 2004, the SEC waived its leverage rules, allowing the 5 biggest Wall Street firms to go from 12 to 1 to 20, 30 and even 40 to 1. Ironically, this rule was called the “Bear Stearns Exemption.”

These actions and rule changes were requested by the banking industry. Rather than behave as adult supervision, you indulged the reckless kiddies, looking the other way as they acted out. You were the grand enabler of the finance sector’s misbehavior. Hence, you helped create the mess by allowing the banking sector to run roughshod over decades of successful constraints. (Kudos again on that).

There were voices warning about the upcoming crisis, but you managed to turn a deaf ear to them: Warnings about subprime lending, problems with securitization, against the false claim that residential real estate never went down in value, or that the models forecasting VAR were wildly understating risk. An economy driven by growth dependent upon credit-fueled consumption was unsustainable, and yet you encouraged that reckless credit consumption. The compensation schemes for Wall Street were hilariously short term (ignored by you); the crony capitalism of Boards of Directors that undercut market discipline was similarly ignored. You encouraged the hollowing out of the US economy, allowing it to become increasingly “Financialized” at the expense of industry and manufacturing. What was once a small but important part of the economy became dominant, yet unproductive, with your blessing.

Bottom line: You were at a loss for understanding the many factors that led to the crisis in the first place.

When the crisis struck, you did not seem to understand the role you should play. Instead of stepping up to halt the financialization, to unwind it, you gave away the shop. You failed to extract concessions from firms on the verge of bankruptcy. Your negotiating skills were embarrassing. In the face of meltdown, you panicked.

You could have undone the decades of radical deregulation at that moment. You could have fired the incompetent management, wiped out the shareholders who invested in insolvent companies, given the creditors and bond holders a major haircut for their foolish lending. Instead, you rewarded them for their gross incompetence.

The solutions you ran with were ad hoc, poorly thought out, improvised. You crossed legal boundaries, putting the Fed in the position of violating its charter and exceeding its mandates. You created a Moral Hazard, the impact of which may not be felt until decades in the future.

Very few of your senior elected and appointed officials understood what was going on.

Rather than offer an intelligent response to the crisis, you delivered brute force: Trillions of dollars were thrown at the problem, papering over its symptoms but not its underlying causes.

Well, Uncle Sam, you delivered a motherload of cash. Considering the dollar sums involved, your actions were remarkably ineffective. What was left over afterwards was a wildly over-leveraged consumer whose credit limits had been reached; State and municipal budgets were heavily dependent upon that excess consumer spending, creating huge budget holes because of it. Net net: The resultant economy was in the worst recession since the Great Depression.

As a student of the Great Depression, Ben Bernanke should have had the best grasp – but his bailout of Bear Stearns revealed him to be just another banker, intent on saving the banks – banking system be damned. To give you a clue of exactly how lost Hank Paulson was, he spent his time praying, and creating documents that exempted himself personally for liability. He’s from Goldman, so we know that “team first” ain’t exactly his style. Tim Geithner, who did such a stupendous job overseeing the banks in the first place, was in way over his head. And while I never voted for George W. Bush, I give him great credit for hiding under the bed and pretty much staying out of everyone else’s way. I would call him clueless, but that wouldn’t be fair to the legions of clueless around the world.

Sheila Bair grasped the gravity of the situation earliest, and put numerous failed banks through the insolvency process. If we were smart, we would have allowed her to work her way through the entire finance sector, effecting a GM-like prepackaged bankruptcy for Citigroup, Bank of America, Merrill Lynch, Morgan Stanley, AIG, etc. It would have been painful as hell, but we would be much better off had we allowed her to tear the Band-Aid off quickly. Instead, we are suffering through a death of a 1000 cuts, Japanese style.

I would be remiss if I failed to mention my personal positions in this: I made a killing in Goldman Sachs and GE. My investments in Wells Fargo would have been a disaster if not for you. Don’t even get me started with me being the largest shareholder in Moody’s – that was some joyride. And considering all of the counter-parties that Berkshire Hathaway has, we risked being just another insolvent investment firm along with everyone else had nothing been done.

So I must say thanks to you, Uncle Sam, and your aides. In this extraordinary emergency, you came through for me – and my world looks far different than if you had not.

Your grateful but wide-eyed nephew,

Warren

Regards,

Barry Ritholtz
for The Daily Reckoning

Dear Uncle Sucker… originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Dear Uncle Sucker…




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Commodities, Real Estate, Uncategorized

Dear Uncle Sucker…

November 18th, 2010

[Ed. Note: This article originally appeared at “The Big Picture”]

For many years, I’ve been a fan of Warren Buffett’s long term approach to value investing. Understanding the value of a company, regardless of its momentary stock price, is a great long term investing strategy.

But it pains me whenever I read commentary from Buffett that glosses over reality or is somehow self-serving. His OpEd in the NYT – Pretty Good for Government Work – paints an artificially rosy picture of the Bailout, ignores the negatives, and omits his own financial interest in government actions.

What might he have written if Sir Warren was dosed with some sodium pentothal before he sat down to pen that “Thank you” letter? It might have gone something like this:

DEAR Uncle Sam Sucker,

I was about to send you a thank you note for bailing out the economy…but then some nice men dressed in Ninja outfits came in and shot me full of truth serum. That led me to make one more set of edits to my letter thanking you for saving the economy.

It also helped me recall some things I seemed to have forgotten in my other public pronunciations about the bailouts.

I suddenly recalled who it was who allowed the banks to run wild in the first place: You. Your behavior before, during and after the crisis was the epitome of a corrupt and irresponsible government. You rewarded incompetency, created moral hazard, punished the prudent, and engaged in the single biggest transfer of wealth from the citizenry of the United States to the Wall Street insiders who created the mess in the first place.

Kudos.

Before I get to the bailouts, I have to remind you that in:

  • 1999, you passed the Financial Services Modernization Act. This repealed Glass-Steagall, the law that had successfully kept main street banking safely separated from Wall Street for seven decades. Even the 1987 market crash had no impact on Main Street credit availability, thanks to Glass-Steagall.
  • 1997-2010, you allowed the Credit Rating Agencies to change their business model, from Investor pays to Underwriter pays – a business structure known as Payola. This change effectively allowed banks to purchase their AAA ratings, and was ignored by the SEC and other regulators.
  • 2000, you passed the Commodities Futures Modernization Act. It allowed the shadow banking industry to develop without any oversight by the Commodity Futures Trading Commission, the SEC, or the state insurance regulators. This led to rampant creation of credit-default swaps, CDOs, and other financial weapons of mass destruction – and the demise of AIG.
  • 2001-04, the Fed, under Alan Greenspan, irresponsibly dropped fund rates to 1%. This set off an inflationary spiral in housing, commodities, and in most assets priced in dollars or credit.
  • 1999-07, the Federal Reserve failed to use its supervisory and regulatory authority over banks, mortgage underwriters and other lenders, who abandoned such standards as employment history, income, down payments, credit rating, assets, property loan-to-value ratio and debt-servicing ability.
  • 2004, the SEC waived its leverage rules, allowing the 5 biggest Wall Street firms to go from 12 to 1 to 20, 30 and even 40 to 1. Ironically, this rule was called the “Bear Stearns Exemption.”

These actions and rule changes were requested by the banking industry. Rather than behave as adult supervision, you indulged the reckless kiddies, looking the other way as they acted out. You were the grand enabler of the finance sector’s misbehavior. Hence, you helped create the mess by allowing the banking sector to run roughshod over decades of successful constraints. (Kudos again on that).

There were voices warning about the upcoming crisis, but you managed to turn a deaf ear to them: Warnings about subprime lending, problems with securitization, against the false claim that residential real estate never went down in value, or that the models forecasting VAR were wildly understating risk. An economy driven by growth dependent upon credit-fueled consumption was unsustainable, and yet you encouraged that reckless credit consumption. The compensation schemes for Wall Street were hilariously short term (ignored by you); the crony capitalism of Boards of Directors that undercut market discipline was similarly ignored. You encouraged the hollowing out of the US economy, allowing it to become increasingly “Financialized” at the expense of industry and manufacturing. What was once a small but important part of the economy became dominant, yet unproductive, with your blessing.

Bottom line: You were at a loss for understanding the many factors that led to the crisis in the first place.

When the crisis struck, you did not seem to understand the role you should play. Instead of stepping up to halt the financialization, to unwind it, you gave away the shop. You failed to extract concessions from firms on the verge of bankruptcy. Your negotiating skills were embarrassing. In the face of meltdown, you panicked.

You could have undone the decades of radical deregulation at that moment. You could have fired the incompetent management, wiped out the shareholders who invested in insolvent companies, given the creditors and bond holders a major haircut for their foolish lending. Instead, you rewarded them for their gross incompetence.

The solutions you ran with were ad hoc, poorly thought out, improvised. You crossed legal boundaries, putting the Fed in the position of violating its charter and exceeding its mandates. You created a Moral Hazard, the impact of which may not be felt until decades in the future.

Very few of your senior elected and appointed officials understood what was going on.

Rather than offer an intelligent response to the crisis, you delivered brute force: Trillions of dollars were thrown at the problem, papering over its symptoms but not its underlying causes.

Well, Uncle Sam, you delivered a motherload of cash. Considering the dollar sums involved, your actions were remarkably ineffective. What was left over afterwards was a wildly over-leveraged consumer whose credit limits had been reached; State and municipal budgets were heavily dependent upon that excess consumer spending, creating huge budget holes because of it. Net net: The resultant economy was in the worst recession since the Great Depression.

As a student of the Great Depression, Ben Bernanke should have had the best grasp – but his bailout of Bear Stearns revealed him to be just another banker, intent on saving the banks – banking system be damned. To give you a clue of exactly how lost Hank Paulson was, he spent his time praying, and creating documents that exempted himself personally for liability. He’s from Goldman, so we know that “team first” ain’t exactly his style. Tim Geithner, who did such a stupendous job overseeing the banks in the first place, was in way over his head. And while I never voted for George W. Bush, I give him great credit for hiding under the bed and pretty much staying out of everyone else’s way. I would call him clueless, but that wouldn’t be fair to the legions of clueless around the world.

Sheila Bair grasped the gravity of the situation earliest, and put numerous failed banks through the insolvency process. If we were smart, we would have allowed her to work her way through the entire finance sector, effecting a GM-like prepackaged bankruptcy for Citigroup, Bank of America, Merrill Lynch, Morgan Stanley, AIG, etc. It would have been painful as hell, but we would be much better off had we allowed her to tear the Band-Aid off quickly. Instead, we are suffering through a death of a 1000 cuts, Japanese style.

I would be remiss if I failed to mention my personal positions in this: I made a killing in Goldman Sachs and GE. My investments in Wells Fargo would have been a disaster if not for you. Don’t even get me started with me being the largest shareholder in Moody’s – that was some joyride. And considering all of the counter-parties that Berkshire Hathaway has, we risked being just another insolvent investment firm along with everyone else had nothing been done.

So I must say thanks to you, Uncle Sam, and your aides. In this extraordinary emergency, you came through for me – and my world looks far different than if you had not.

Your grateful but wide-eyed nephew,

Warren

Regards,

Barry Ritholtz
for The Daily Reckoning

Dear Uncle Sucker… originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Dear Uncle Sucker…




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Commodities, Real Estate, Uncategorized

India and China Continue to Drive Gold Demand

November 18th, 2010

The World Gold Council’s (WGC) latest quarterly recap shows global gold demand is getting stronger despite rising gold prices. Gold rose 28 percent to record the highest average price for a quarter ever at $1,226.75 an ounce while gold demand jumped 12 percent on a year-over-year basis to 921.8 tons during the quarter.

Jewelry demand, which increased 8 percent on a year-over-year basis, accounted for 57 percent of overall demand, while investment demand rose 19 percent to account for 31 percent of total demand.

It appears consumers and investors, especially in India, China, Russia and Turkey, are growing accustomed to higher gold prices. At the end of the third quarter, gold demand in India had already exceeded that of 2009 and demand levels in China are ahead of last year’s pace.

The WGC says “these results demonstrate that consumers in these countries are becoming accustomed to high price ranges…and consumers are preferring to make gold jewelry purchases at current prices in order to avoid purchasing at higher prices in [the] future.”

Investment demand rose despite a 7 percent decline in investment in ETFs, which has been the biggest driver in investment demand of late.

Chinese investors seeking protection from rising interest rates directed a considerable portion of their savings into gold products, causing demand for gold bars to jump 44 percent. Net retail investment in China reached 45 tons, breaking the previous record of 40 tons set in the first quarter of 2010.

We’ve said this many times, as the economy recovers and per capita incomes in countries such as China and India rise, consumers and investors within those countries will likely see gold as a key investment vehicle because of the cultural connection carried over thousands of years.

Additionally, the official sector—central banks—were net buyers of gold with Russia, Sri Lanka, Thailand and Philippines increasing their holdings. This offset the International Monetary Fund’s continued selling of gold under the current Central Bank Gold Agreement.

Regards,

Frank Holmes,
for The Daily Reckoning

P.S. For more updates on global investing from me and the U.S. Global Investors team, visit my investment blog, Frank Talk.

India and China Continue to Drive Gold Demand originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
India and China Continue to Drive Gold Demand




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Commodities, ETF, Uncategorized

India and China Continue to Drive Gold Demand

November 18th, 2010

The World Gold Council’s (WGC) latest quarterly recap shows global gold demand is getting stronger despite rising gold prices. Gold rose 28 percent to record the highest average price for a quarter ever at $1,226.75 an ounce while gold demand jumped 12 percent on a year-over-year basis to 921.8 tons during the quarter.

Jewelry demand, which increased 8 percent on a year-over-year basis, accounted for 57 percent of overall demand, while investment demand rose 19 percent to account for 31 percent of total demand.

It appears consumers and investors, especially in India, China, Russia and Turkey, are growing accustomed to higher gold prices. At the end of the third quarter, gold demand in India had already exceeded that of 2009 and demand levels in China are ahead of last year’s pace.

The WGC says “these results demonstrate that consumers in these countries are becoming accustomed to high price ranges…and consumers are preferring to make gold jewelry purchases at current prices in order to avoid purchasing at higher prices in [the] future.”

Investment demand rose despite a 7 percent decline in investment in ETFs, which has been the biggest driver in investment demand of late.

Chinese investors seeking protection from rising interest rates directed a considerable portion of their savings into gold products, causing demand for gold bars to jump 44 percent. Net retail investment in China reached 45 tons, breaking the previous record of 40 tons set in the first quarter of 2010.

We’ve said this many times, as the economy recovers and per capita incomes in countries such as China and India rise, consumers and investors within those countries will likely see gold as a key investment vehicle because of the cultural connection carried over thousands of years.

Additionally, the official sector—central banks—were net buyers of gold with Russia, Sri Lanka, Thailand and Philippines increasing their holdings. This offset the International Monetary Fund’s continued selling of gold under the current Central Bank Gold Agreement.

Regards,

Frank Holmes,
for The Daily Reckoning

P.S. For more updates on global investing from me and the U.S. Global Investors team, visit my investment blog, Frank Talk.

India and China Continue to Drive Gold Demand originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
India and China Continue to Drive Gold Demand




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Commodities, ETF, Uncategorized

Printing Money Causes the Wrong Kind of Inflation

November 18th, 2010

The Great Correction…still in business…

The latest news suggests that we’ve been right all along. Housing starts are down a surprising 12% – with house prices still soft or falling in most areas.

Jobs? Forget it. Joblessness continues to be a major headache…with no significant relief in sight.

And both consumer and producer prices are flatter than expected. In fact, the core CPI reading is at a record low. For all the talk of “inflation” – there isn’t any. Ben Bernanke is right, at least about “core” inflation. Prices for people who neither eat, nor travel, nor heat their houses are flat.

Yes, dear reader. We’re in a great correction. We just don’t know what it intends to correct. Not yet.

“US inflation moves close to zero,” says the BBC.

And here’s Bloomberg, with the details:

The cost of living in the US probably rose for a fourth month in October, led by higher gasoline and food prices that aren’t filtering through to other goods and services, economists said before reports today.

The consumer-price index increased 0.3 percent after a 0.1 percent gain the prior month, according to the median forecast of economists surveyed by Bloomberg News before the Labor Department report. Excluding food and fuel, so-called core costs may have increased 0.7 percent from October 2009, matching a record low. Another report may show housing starts last month fell to the lowest level since July.

We were watching the descent of consumer prices this past spring. It looked like the CPI would approach zero by the end of the summer…and then head into negative territory.

But then, with all the excitement around quantitative easing, we kind of lost track. The feds were printing money intentionally, right out-in-the-open and without even a “sorry” or an “excuse me.”

Everyone knew it was “inflationary.” And it was – to the extent that it inflated the monetary base. But it didn’t inflate consumer prices. Why not?

“It’s the economy, stupid.”

When an economy is de-leveraging you get a phenomenon that John Maynard Keynes described as “pushing on a string.” You can push money into the system. But the other end of the string…where you find consumer prices…doesn’t move.

And now, it looks like Keynes was right. The Fed is pushing in $600 billion. Consumer price increases are still going down.

So we might be tempted to think that the feds can push on the string all they want; they’ll never get consumer prices to rise.

But it’s not that simple. It may be true that you can’t increase consumer prices simply by putting money into the banking system. But the Fed is now going one step further. It’s funding the US budget deficit – practically the whole thing. That frees all the money that would have gone into US Treasuries to go elsewhere. Where? Darned if we know.

But just look at cotton prices. And gold. And farmland in Iowa and Indiana. Farmland yields (not crop yields…financial yields, from renting out the land) are at an extreme low. Prices have been bid up – thanks to record low interest rates and record high agricultural output prices.

And look at prices of Indian stocks. They’re selling near record levels too.

All over the world, prices are going up – especially in emerging markets, where economies are growing fast.

But in America, consumer prices – when you take out food and energy – are going nowhere.

Just what you’d expect in this strange correction.

Bill Bonner

for The Daily Reckoning

Printing Money Causes the Wrong Kind of Inflation originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Printing Money Causes the Wrong Kind of Inflation




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

Rationalizing the Fight Against Deflation

November 18th, 2010

“A cynic,” Oscar Wilde famously remarked, “is one who knows the price of everything, but the value of nothing.” A Federal Reserve Chairman is not so different.

Ben Bernanke seems to know the seasonally-adjusted, hedonically refined, government-calculated price of everything, but he seems incapable of determining the real-world value of a banana…or of a dollar bill for that matter.

Chairman Bernanke says the forces of deflation are encroaching upon the US economy. The government bean-counters tell him so. They tell him that the Consumer Price Index (CPI) increased only 1.2% during the past 12 months…and that the seasonally adjusted “core” CPI barely budged at all.

This disinflation/deflation stuff is a serious threat to economic recovery, Bernanke believes, and it must be quashed. If not, the bean-counters will walk into his office one of these days and tell him that seasonally-adjusted, hedonically refined prices are falling. And that would be a really bad thing.

Why? We are not really sure. But the rationale for Bernanke’s deflation-fighting campaign seems to go something like this:

Ben Bernanke was a good student; Ben Bernanke studied the Great Depression at MIT; the good student learned that the Great Depression was really bad; therefore, things that happened in the Great Depression were also really bad; deflation happened during the Great Depression; therefore, deflation must be bad [along with jazz and temperance]; bad things should not happen; therefore, deflation should not happen…and neither should jazz or temperance.

Even though the cause-effect relationship between deflation and the Great Depression are highly debatable, Bernanke countenances no debate whatsoever. He simply proceeds doggedly under the assumption that deflation is a cause of bad stuff and that it must be vanquished so that inflation can work its therapeutic marvels.

Therefore, the Federal Reserve must continue printing dollars and funneling them into the US economy until the “threat” of deflation becomes so remote that the Bureau of Labor Statistics removes the minus signs from its computer keyboards.

Putting aside for a moment the wisdom or idiocy of printing money to combat deflation, let’s examine merely the idiocy of combating an enemy that does not exist. Deflation is missing in action; it has already fled the battlefield. This fact seems obvious to everyone except the BLS, Ben Bernanke and the thinning ranks of 30-year T-bond buyers. Inflation is the real enemy, and Bernanke is inadvertently consorting with it.

What is a $600 billion quantitative easing operation if not a “supply line” to the forces of inflation?

But the chairman doesn’t see it that way. He sees things like contracting credit, rising savings rates, sluggish economic activity and meager employment growth as sure-fire signs of a dangerous deflationary trend. He also sees the press releases from the BLS that tell him prices are, as he would put it, “failing to rise.” But the truth of the matter is that the Consumer Price Index (CPI) is one big seasonally-adjusted, hedonically refined lie.

Officially, year-over-year CPI is up 1.17%. Officially, it is also up 8.51%. That’s right; based on the official CPI-calculation methodology in use prior to 1982, the year-over-year inflation rate would be soaring north of 8%. (Deflation looks nothing like that). This fascinating insight emerges from the always-fascinating work of John Williams at Shadow Government Statistics.

If the Shadow Stats inflation data would fail to convince the Chairman that inflationary phenomena are at least as prevalent as deflationary ones, he could take a peek at commodity prices (up 11% yoy) or at health insurance costs (up 12.5% yoy). Easier still, he could examine his grocery bill.

“It’s getting harder and harder for Americans to put food on the table,” The Classic Liberal reports, “our basic food costs have increased by an incredible 48% over the last year (measured by wheat, corn, oats, and canola prices). From the price at the pump to heating your stove, energy costs are up 23% on average (heating oil, gasoline, natural gas). A little protein at dinner is now 39% higher (beef and pork), and your morning cup of coffee with a little sugar has risen by 36% since last October…

“You don’t need a Harvard PhD in economics to understand what this means,” The Classic Liberal concludes.

Very true, but you do need a Harvard PhD in economics to not understand what this means. “You can always tell a Harvard grad,” the century-old saying goes, “you just can’t tell him much.”

Ben Bernanke did not merely graduate from Harvard, he graduated summa cum laude. The PhD came later, and not from Harvard. Be that as it may, we would never try to tell the Chairman anything about inflation or deflation. (He knows more about all of that stuff than we could ever hope to forget). We would simply tell him to look around…out in the real world where prices don’t conceal themselves inside hedonic refinements.

He wouldn’t have to look very far. Heck, he wouldn’t even have to look outside of academia. The price of a four-year college education is soaring, even though the value of that education is going nowhere. For more than a decade, college tuition has been increasing at triple the rate of CPI. As a result, 100 colleges or universities are now charging more than $50,000 per year for tuition, fees, room, and board, according to the Chronicle of Higher Education – that’s up from 58 last year and only five colleges two years ago. As recently as 2004, no college or university charged more than $50,000 per year.

The rising price of a college education is not synonymous with inflation, but it’s close. In the halls of academia, the only thing that’s deflating is the value of a college degree. According to the National Association of Colleges and Employers, more than half of all 2007 college graduates who had applied for a job had received an offer by Graduation Day. In 2008, that percentage tumbled to 26%, and to less than 20% last year. Meanwhile, the unemployment rates for all college graduates – both recent and ancient – have doubled from 2% to 4% during the last year.

Ergo, college prices up; value down.

Number of College Presidents Receiving Over $500,000 Per Year

But don’t try telling that to a college president. The number of college presidents receiving more than half a million dollars per year has been soaring at a 27% annualized rate during the last six years. The value of these presidents may or may not have soared commensurately. Either way, the aspiring youths who attend these universities are paying ever-higher prices to pursue their aspirations…and are assuming ever-larger quantities of student debt.

Student Loan Debt vs. Credit Card Debt

Earlier this year, for the first time ever, the total value of student loans outstanding exceeded the value of credit card debt outstanding. And this trend is accelerating. According the website Critical Mass, “The number of college students graduating with over $25,000 in student loan debt has tripled in the past decade alone. Today, 66% of students borrow to pay for college, taking on an average of $23,165 in debt. Twelve years ago, 58% borrowed to pay for college, taking on only $13,172 in debt.”

Is this inflation? Maybe not, but it sure as shinola isn’t deflation.

Eric Fry
for The Daily Reckoning

Rationalizing the Fight Against Deflation originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Rationalizing the Fight Against Deflation




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

Rationalizing the Fight Against Deflation

November 18th, 2010

“A cynic,” Oscar Wilde famously remarked, “is one who knows the price of everything, but the value of nothing.” A Federal Reserve Chairman is not so different.

Ben Bernanke seems to know the seasonally-adjusted, hedonically refined, government-calculated price of everything, but he seems incapable of determining the real-world value of a banana…or of a dollar bill for that matter.

Chairman Bernanke says the forces of deflation are encroaching upon the US economy. The government bean-counters tell him so. They tell him that the Consumer Price Index (CPI) increased only 1.2% during the past 12 months…and that the seasonally adjusted “core” CPI barely budged at all.

This disinflation/deflation stuff is a serious threat to economic recovery, Bernanke believes, and it must be quashed. If not, the bean-counters will walk into his office one of these days and tell him that seasonally-adjusted, hedonically refined prices are falling. And that would be a really bad thing.

Why? We are not really sure. But the rationale for Bernanke’s deflation-fighting campaign seems to go something like this:

Ben Bernanke was a good student; Ben Bernanke studied the Great Depression at MIT; the good student learned that the Great Depression was really bad; therefore, things that happened in the Great Depression were also really bad; deflation happened during the Great Depression; therefore, deflation must be bad [along with jazz and temperance]; bad things should not happen; therefore, deflation should not happen…and neither should jazz or temperance.

Even though the cause-effect relationship between deflation and the Great Depression are highly debatable, Bernanke countenances no debate whatsoever. He simply proceeds doggedly under the assumption that deflation is a cause of bad stuff and that it must be vanquished so that inflation can work its therapeutic marvels.

Therefore, the Federal Reserve must continue printing dollars and funneling them into the US economy until the “threat” of deflation becomes so remote that the Bureau of Labor Statistics removes the minus signs from its computer keyboards.

Putting aside for a moment the wisdom or idiocy of printing money to combat deflation, let’s examine merely the idiocy of combating an enemy that does not exist. Deflation is missing in action; it has already fled the battlefield. This fact seems obvious to everyone except the BLS, Ben Bernanke and the thinning ranks of 30-year T-bond buyers. Inflation is the real enemy, and Bernanke is inadvertently consorting with it.

What is a $600 billion quantitative easing operation if not a “supply line” to the forces of inflation?

But the chairman doesn’t see it that way. He sees things like contracting credit, rising savings rates, sluggish economic activity and meager employment growth as sure-fire signs of a dangerous deflationary trend. He also sees the press releases from the BLS that tell him prices are, as he would put it, “failing to rise.” But the truth of the matter is that the Consumer Price Index (CPI) is one big seasonally-adjusted, hedonically refined lie.

Officially, year-over-year CPI is up 1.17%. Officially, it is also up 8.51%. That’s right; based on the official CPI-calculation methodology in use prior to 1982, the year-over-year inflation rate would be soaring north of 8%. (Deflation looks nothing like that). This fascinating insight emerges from the always-fascinating work of John Williams at Shadow Government Statistics.

If the Shadow Stats inflation data would fail to convince the Chairman that inflationary phenomena are at least as prevalent as deflationary ones, he could take a peek at commodity prices (up 11% yoy) or at health insurance costs (up 12.5% yoy). Easier still, he could examine his grocery bill.

“It’s getting harder and harder for Americans to put food on the table,” The Classic Liberal reports, “our basic food costs have increased by an incredible 48% over the last year (measured by wheat, corn, oats, and canola prices). From the price at the pump to heating your stove, energy costs are up 23% on average (heating oil, gasoline, natural gas). A little protein at dinner is now 39% higher (beef and pork), and your morning cup of coffee with a little sugar has risen by 36% since last October…

“You don’t need a Harvard PhD in economics to understand what this means,” The Classic Liberal concludes.

Very true, but you do need a Harvard PhD in economics to not understand what this means. “You can always tell a Harvard grad,” the century-old saying goes, “you just can’t tell him much.”

Ben Bernanke did not merely graduate from Harvard, he graduated summa cum laude. The PhD came later, and not from Harvard. Be that as it may, we would never try to tell the Chairman anything about inflation or deflation. (He knows more about all of that stuff than we could ever hope to forget). We would simply tell him to look around…out in the real world where prices don’t conceal themselves inside hedonic refinements.

He wouldn’t have to look very far. Heck, he wouldn’t even have to look outside of academia. The price of a four-year college education is soaring, even though the value of that education is going nowhere. For more than a decade, college tuition has been increasing at triple the rate of CPI. As a result, 100 colleges or universities are now charging more than $50,000 per year for tuition, fees, room, and board, according to the Chronicle of Higher Education – that’s up from 58 last year and only five colleges two years ago. As recently as 2004, no college or university charged more than $50,000 per year.

The rising price of a college education is not synonymous with inflation, but it’s close. In the halls of academia, the only thing that’s deflating is the value of a college degree. According to the National Association of Colleges and Employers, more than half of all 2007 college graduates who had applied for a job had received an offer by Graduation Day. In 2008, that percentage tumbled to 26%, and to less than 20% last year. Meanwhile, the unemployment rates for all college graduates – both recent and ancient – have doubled from 2% to 4% during the last year.

Ergo, college prices up; value down.

Number of College Presidents Receiving Over $500,000 Per Year

But don’t try telling that to a college president. The number of college presidents receiving more than half a million dollars per year has been soaring at a 27% annualized rate during the last six years. The value of these presidents may or may not have soared commensurately. Either way, the aspiring youths who attend these universities are paying ever-higher prices to pursue their aspirations…and are assuming ever-larger quantities of student debt.

Student Loan Debt vs. Credit Card Debt

Earlier this year, for the first time ever, the total value of student loans outstanding exceeded the value of credit card debt outstanding. And this trend is accelerating. According the website Critical Mass, “The number of college students graduating with over $25,000 in student loan debt has tripled in the past decade alone. Today, 66% of students borrow to pay for college, taking on an average of $23,165 in debt. Twelve years ago, 58% borrowed to pay for college, taking on only $13,172 in debt.”

Is this inflation? Maybe not, but it sure as shinola isn’t deflation.

Eric Fry
for The Daily Reckoning

Rationalizing the Fight Against Deflation originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Rationalizing the Fight Against Deflation




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

Go for Profits with International ETFs

November 18th, 2010

Ron Rowland

Let me ask you a question. Suppose you have the ability to invest in any stock market in the world. One of the largest markets has lagged badly for many years now. And there are few reasons to think the situation will improve.

Would it make sense to put the bulk of your assets in that relatively weak market?

“No, of course not,” you will probably say. Good for you!

Unfortunately, most U.S. investors are making the wrong choice … and many so-called “experts” are cheering them on. How can this be?

Simple: The weak lagging market I mentioned above is the U.S.! And sadly, thousands of professional financial advisors tell their clients to stick with the “safety” of U.S. stocks.

U.S. stocks aren't always
U.S. stocks aren’t always “safe.”

I wish I knew why so many of my peers refuse to face reality. Maybe it’s just a force of habit.

However, those investors do have the ability to invest around the world — with hundreds of international exchange traded funds (ETFs).

So today I’m going to give you three challenging questions you should ask any investment advisor, stock broker or newsletter editor who tells you to keep most of your money in U.S. stocks, mutual funds or ETFs.

Challenging Question #1:
Is it hard for me to invest in
non-U.S. stock markets?

There was, in fact, a time when practical considerations made it very difficult for American investors to get overseas exposure. Many brokers couldn’t process foreign trades, the tax paperwork was complicated, and it was hard to get news from off-the-beaten-path places.

These barriers are no longer relevant — and anyone who tells you otherwise is sadly uninformed. Let’s look at them in order …

  • With a few mouse clicks or a quick phone call, you can buy or sell an ETF like iShares MSCI Singapore (EWS) just as easily as an S&P 500 index fund. Both trade on the same exchanges. No need to get up in the middle of the night and call a broker on the other side of the world.
  • Tax paperwork? You’ll have to speak with your Congressman if you want to get rid of it completely. A good interim step is the simple tax reporting that you can get even from discount brokers today. You don’t have to frustrate yourself trying to calculate your cost basis … unless you just enjoy that sort of thing.
  • International news is easy to find on the web now. Sometimes the sources are questionable. But there is no shortage of basic news and analysis, even on the most obscure exchanges. You can read the local newspapers online at the same time as Wall Street’s analysts.

Therefore, the argument that investing overseas is somehow hard for the average investor just doesn’t hold water.

Challenging Question #2:
Which ETFs have the best short-term
and long-term performance?

The table below shows you the top ten best-performing unleveraged equity ETFs for the one-year and five-year periods ended 11/12/2010. All are readily accessible to U.S. investors.

International ETFs dominate the winner's list!
International ETFs dominate the winner’s list!

You’ll notice that most of the top-ranked ETFs for one year, and ALL of the top-ranked for the last five years, specialize in international markets, particularly emerging markets. Yet relatively few investors have money in them!

This brings us to our third and most important question:

Challenging Question #3:
Why should I invest my money anywhere else?

To me, the answer to this question is quite obvious. Global economic power is shifting away from North America and Western Europe. The new leaders are in Asia and Latin America.

I’ve written about that mega-trend many times. Of course, I’m not saying there are never any opportunities to profit in the U.S. Obviously there are. My point is the potential is even greater elsewhere.

And to me, the logical answer is to follow the momentum wherever it leads.

Momentum is now with the emerging markets.
Momentum is now with the emerging markets.

Are international and emerging markets ETFs volatile? Yes, of course. They’re subject to political unrest … currency turmoil … natural disasters … and assorted other risks.

These are pretty much the same risks you take in U.S. stocks!

Like it or not, risk is everywhere. You can’t escape it — but you can use it wisely. I think international ETFs are one of the wisest risks an investor can take. That’s why I use them extensively. You should do likewise if you want to survive and profit in the coming decades.

You can get specific buy and sell recommendations for many global ETFs in my International ETF Trader service. Martin Weiss and I made a free video presentation to tell you more. Click here to check it out.

Best wishes,

Ron

P.S. This week on Money and Markets TV, we look ahead to the holiday shopping season. I’ll be among a panel of experts to explain why it’s so important for the retail industry, the overall economy and how you can profit with ETFs.

So tune in tonight, November 18, at 7 P.M. Eastern time (4:00 P.M. Pacific). Simply go to www.weissmoneynetwork.com and follow the on-screen instructions. Access is free and no registration is required.

Read more here:
Go for Profits with International ETFs

Commodities, ETF, Mutual Fund, Uncategorized

Go for Profits with International ETFs

November 18th, 2010

Ron Rowland

Let me ask you a question. Suppose you have the ability to invest in any stock market in the world. One of the largest markets has lagged badly for many years now. And there are few reasons to think the situation will improve.

Would it make sense to put the bulk of your assets in that relatively weak market?

“No, of course not,” you will probably say. Good for you!

Unfortunately, most U.S. investors are making the wrong choice … and many so-called “experts” are cheering them on. How can this be?

Simple: The weak lagging market I mentioned above is the U.S.! And sadly, thousands of professional financial advisors tell their clients to stick with the “safety” of U.S. stocks.

U.S. stocks aren't always
U.S. stocks aren’t always “safe.”

I wish I knew why so many of my peers refuse to face reality. Maybe it’s just a force of habit.

However, those investors do have the ability to invest around the world — with hundreds of international exchange traded funds (ETFs).

So today I’m going to give you three challenging questions you should ask any investment advisor, stock broker or newsletter editor who tells you to keep most of your money in U.S. stocks, mutual funds or ETFs.

Challenging Question #1:
Is it hard for me to invest in
non-U.S. stock markets?

There was, in fact, a time when practical considerations made it very difficult for American investors to get overseas exposure. Many brokers couldn’t process foreign trades, the tax paperwork was complicated, and it was hard to get news from off-the-beaten-path places.

These barriers are no longer relevant — and anyone who tells you otherwise is sadly uninformed. Let’s look at them in order …

  • With a few mouse clicks or a quick phone call, you can buy or sell an ETF like iShares MSCI Singapore (EWS) just as easily as an S&P 500 index fund. Both trade on the same exchanges. No need to get up in the middle of the night and call a broker on the other side of the world.
  • Tax paperwork? You’ll have to speak with your Congressman if you want to get rid of it completely. A good interim step is the simple tax reporting that you can get even from discount brokers today. You don’t have to frustrate yourself trying to calculate your cost basis … unless you just enjoy that sort of thing.
  • International news is easy to find on the web now. Sometimes the sources are questionable. But there is no shortage of basic news and analysis, even on the most obscure exchanges. You can read the local newspapers online at the same time as Wall Street’s analysts.

Therefore, the argument that investing overseas is somehow hard for the average investor just doesn’t hold water.

Challenging Question #2:
Which ETFs have the best short-term
and long-term performance?

The table below shows you the top ten best-performing unleveraged equity ETFs for the one-year and five-year periods ended 11/12/2010. All are readily accessible to U.S. investors.

International ETFs dominate the winner's list!
International ETFs dominate the winner’s list!

You’ll notice that most of the top-ranked ETFs for one year, and ALL of the top-ranked for the last five years, specialize in international markets, particularly emerging markets. Yet relatively few investors have money in them!

This brings us to our third and most important question:

Challenging Question #3:
Why should I invest my money anywhere else?

To me, the answer to this question is quite obvious. Global economic power is shifting away from North America and Western Europe. The new leaders are in Asia and Latin America.

I’ve written about that mega-trend many times. Of course, I’m not saying there are never any opportunities to profit in the U.S. Obviously there are. My point is the potential is even greater elsewhere.

And to me, the logical answer is to follow the momentum wherever it leads.

Momentum is now with the emerging markets.
Momentum is now with the emerging markets.

Are international and emerging markets ETFs volatile? Yes, of course. They’re subject to political unrest … currency turmoil … natural disasters … and assorted other risks.

These are pretty much the same risks you take in U.S. stocks!

Like it or not, risk is everywhere. You can’t escape it — but you can use it wisely. I think international ETFs are one of the wisest risks an investor can take. That’s why I use them extensively. You should do likewise if you want to survive and profit in the coming decades.

You can get specific buy and sell recommendations for many global ETFs in my International ETF Trader service. Martin Weiss and I made a free video presentation to tell you more. Click here to check it out.

Best wishes,

Ron

P.S. This week on Money and Markets TV, we look ahead to the holiday shopping season. I’ll be among a panel of experts to explain why it’s so important for the retail industry, the overall economy and how you can profit with ETFs.

So tune in tonight, November 18, at 7 P.M. Eastern time (4:00 P.M. Pacific). Simply go to www.weissmoneynetwork.com and follow the on-screen instructions. Access is free and no registration is required.

Read more here:
Go for Profits with International ETFs

Commodities, ETF, Mutual Fund, Uncategorized

Muni Market Collapsing – How Do Active Muni ETFs Compare?

November 18th, 2010

The chart above is not a pretty sight. The US municipal bond market started a massive leg down on November 8th which has now turned into what looks like an all-out collapse. In the space of a week and a half, the iShares S&P National Municipal Bond Fund (MUB: 100.54 0.00%) which is the largest ETF for the US municipal bond market with a market cap in excess of $2 billion, has fallen by 4.55%. This may not sound like much compared to equity market movements, but it is a huge move in the muni market, as is evident from all the tiny daily moves in the chart above before November.

Municipal bonds have traditionally been held widely amongst tax-sensitive investors, especially those in higher marginal tax brackets. This is because municipal bonds provide income that is free from federal taxes and often from taxes of the state in which they are issued. However, since 2008, many states and municipalities in the US have had trouble keeping their budgets in line and have suffered large deficits. A prime example is, of course, California. Due to California’s budget problems, the state’s bonds have suffered badly. In fact, since November 8th, CMF, which tracks an index holding municipal bonds issued in California, has fallen much more than MUB, dropping close to 6%.

What is behind the panic?

Interestingly, most commentators haven’t been able to pin-point any one single trigger that may have sparked the sell-off in the general muni bond market. However, there are plenty of underlying problems that have been festering in the market for a while.

First off, as mentioned earlier, nearly every state in the US has had trouble balancing its budget and budgetary problems have reduced confidence in the ability of the issuers to meet their debt obligations. California will be auctioning off $14 billion in bonds this month to help bridge its deficit gap, in turn creating an over-supply of bonds when demand for them is dropping. Another reason speculated to be behind this recent move down has been the pending closure of the Build America Bond program. The program has been hugely successful since its launch as issuers capitalized on a cheaper way to finance their capital needs because of the credits they receive on interest payments from the government. The program though is due to expire at the end of 2010 and there has been no word on previous discussions in the US Congress of extending this program till the end of 2012. Due to the upcoming deadline, states and municipalities are rushing to issue bonds under the program, again causing a supply glut.

How do Active Muni ETFs stack up with Passive Muni ETFs?

One good opportunity that this panic does provide us with is an ideal testing ground to evaluate whether active management adds any value in times like this. In other words, are active managers earning their marks in times when they would be expected to. There are currently two actively-managed ETFs in the US that compare well, in terms of maturity, with the iShares S&P National Municipal Bond Fund (MUB) which can be taken as the passive proxy – PIMCO’s Intermediate Municipal Bond Fund (MUNI: 50.86 0.00%) and the Grail McDonnell Intermediate Municipal Bond ETF (GMMB: 49.11 0.00%). The chart below shows how the 3 funds have fared in the last month.

Where MUB has fallen in excess of 5% in the last 1 month, MUNI and GMMB have been able to restrict their losses to about 2%. So at least in this panic situation, it appears that whatever active decisions that the managers made helped them avoid the worst of the downfall.

What explains the outperformance?

But what are the specific differences between MUB and PIMCO’s MUNI for example, that helped MUNI outperform. For one thing, the portfolio managers behind MUNI are not obliged to hold every single security in the index regardless of the credit quality of the issuer. This fact shows up in the portfolio composition of those two ETFs. Where MUB held a whopping 1,144 bonds as of Nov 16th, MUNI held a select 98 securities and GMMB held an even narrower selection of 22 securities. In terms of its top holdings, because it follows a cap-weighted index following the municipal bond market, it should come as no surprise that the largest holding of MUB was a California State Bond.  This is the classic “bums” problem that is a favourite argument of the fundamentally-weighted indexing proponents. Cap-weighted indices like the one that MUB tracks give more weight to issuers that issue more debt – in this case California. As a result, investors holding MUB end up with California bonds as their biggest holdings at a time when they are probably the riskiest. To prove the point, just over the past month, CMF – an ETF which tracks the California municipal bond market – has underperformed NYF – which tracks the New York municipal bond market – by more than 1.5%. So in contrast to MUB, a California issued bond was not to be found in MUNI’s top 10 holdings. That should provide some indication of the value of credit analysis done by active managers from PIMCO for MUNI and from McDonnell Investment Management for GMMB.

How do Premium/Discounts compare?

Another area where the actively-managed ETFs seem to be performing better in this panicked market is in keeping the discount/premium from NAV to a minimum. In general, ETF shares trade at a premium to NAV when demand is high and trade at a discount to NAV when the demand is low. Bond ETF discounts were a big problem in 2008 when credit markets locked up. At one point in October 2008, the largest bond ETF at that time, iShares Lehman Aggregate Bond ETF (AGG: 107.21 0.00%), traded at an 8.9% discount.  Hence, that discounts in bond ETFs are definitely another metric that needs to be assessed in times of market stress.

According to the iShares’ website, MUB had a discount of 186 basis points to its NAV at the close on Nov 16th, a substantial discount given that the largest discount recorded for MUB in 2010 up till September was just 16 basis points. In comparison, PIMCO’s MUNI had a premium of 6 basis points as of market close on Nov 17th, a substantial difference. Grail’s GMMB though had a harder time, but still fared better than MUB as Grail’s website reported GMMB having a discount of 161 basis points as of Nov 17th.

ETF

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