by ilene - December 28th, 2010 10:09 pm
Charles Hugh Smith agrees with us on the wisdom of cash: One Investment Strategy for Q1 2011: Cash, Baby, All the Way - Ilene
Courtesy of Charles Hugh Smith
In response to readers’ requests, I disclose my own amateur’s Investment Strategy for Q1 2011: cash is king, and the U.S. dollar looks good simply because almost everyone expects it to collapse.
Despite my oft-avowed amateur-market-observer status, readers often ask me for advice or opinions on where to put their capital. This is not advice (please read the HUGE GIANT BIG FAT DISCLAIMER below), it is a disclosure of my own personal opinion, what we might call "one investment strategy of many possible investment strategies" for the first quarter of 2011: cash, baby, cash all the way.
Why am I in cash? Because I don’t trust the parallel rallies, and I am extremely skeptical of the various "stories" which are driving the rallies. Why am I skeptical? Because everybody and their sister has bought into the stories, and a one-sided trade is rarely the winning one.
Yes, it’s my contrarian nature: when everyone is a believer in a "story" that is too good to be true, then I become skeptical. This often gets me in trouble. When everyone was buying GM at $50, I was shorting it. When everyone was buying Fannie Mae at $60, I was shorting it (via puts). Both GM and FNM were obviously, painfully insolvent, but it took practically forever for reality to intrude on the fantasy/narrative that each firm was a "solid blue chip" investment with numerous analyst recommendations. In the meantime, I lost money treading water for quarter after quarter.
So even though the market is clearly top-heavy, the short-side trade may yet be ground down by the Fed’s prop-job and the Wall Street/Central State partnership’s desperate desire to use a rising stock market as a propaganda proxy for the "recovery."
(Hey, just borrow and squander roughly 13% of GDP, year after year after year (roughly 45% of the entire Federal budget), and you might stimulate a modest "recovery," too.)
So let’s examine each of the "stories" driving the rallies.
1. The global recovery is solid, and Central State stimulus and quantitative easing will keep growth rising and interest rates low. This narrative drives capital into "risk assets," i.e. stock markets, commodities, FX carry trades, Chinese real estate, junk bonds, etc.
by ilene - October 14th, 2010 2:52 pm
Courtesy of The Pragmatic Capitalist
Here’s something I’d never seen done before – an analysis of Warren Buffett’s risk adjusted returns. Insider Monkey has run an interesting analysis on the Buffett portfolio calculating his alpha since 1977. The conclusion – as Buffett has aged and grown in size his returns have become substantially worse on a risk adjusted basis:
“Warren Buffett had a phenomenal annual alpha of 19% between 1956 and 1968. Our current analysis shows that his alpha was more than 30% between 1977 and 1981. During the 80′s and 90′s, his annual alpha declined but was still better than 12%. For the ten years leading to mid-2003, his annual alpha stayed around 12% per year. Since then, it started a steep decline; by the end of 2004 it was (still a respectable) 6% per year. Between 2005 and 2008 Buffett’s alpha averaged only 3% per year. Finally, in the ten years ending in 2009, it went virtually to zero. (For regression results and Buffett’s style drift, visit Insider Monkey)”
Is Warren Buffett another casualty of the tough investment environment? Looks like we can chalk this up under the “many myths of Warren Buffett” file.
by ilene - September 23rd, 2010 9:40 pm
and Keep Its Economic Surplus for Itself
Courtesy of Michael Hudson
CDES Conference, Brasilia, September 17, 2010
I would like to place this seminar’s topic, ‘Global Governance,’in the context of global control, which is what ‘governance’ is mainly about. The word (from Latin gubernari, cognate to the Greek root kyber) means ‘steering’. The question is, toward what goal is the world economy steering?
That obviously depends on who is doing the steering. It almost always has been the most powerful nations that organize the world in ways that transfer income and property to themselves. From the Roman Empire through modern Europe such transfers took mainly the form of military seizure and tribute. The Norman conquerors endowed themselves as a landed aristocracy extracting rent from the populace, as did the Nordic conquerors of France and other countries. Europe later took resources by colonial conquest, increasingly via local client oligarchies.
The post-1945 mode of global integration has outlived its early promise. It has become exploitative rather than supportive of capital investment, public infrastructure and living standards.
In the sphere of trade, countries need to rebuild their self-sufficiency in food grains and other basic needs. In the financial sphere, the ability of banks to create credit (loans) at almost no cost on their computer keyboards has led North America and Europe to become debt ridden, and now seeks to move into Brazil and other BRIC countries by financing buyouts or lending against their natural resources, real estate, basic infrastructure and industry. Speculators, arbitrageurs and financial institutions using “free money” see these economies as easy pickings. But by obliging countries to defend themselves financially, their predatory credit creation is ending the era of free capital movements.
Does Brazil really need inflows of foreign credit for domestic spending when it can create this at home? Foreign lending ends up in its central bank, which invests its reserves in US Treasury and Euro bonds that yield low returns and whose international value is likely to decline against the BRIC currencies. So accepting credit and buyout “capital inflows” from the North provides a “free lunch” for key-currency issuers of dollars and Euros, but does not help local economies much.
The natural history of debt and financialization
by ilene - September 12th, 2010 4:03 pm
Farmer Brown here again. One of my key longer-term themes for growth investing is and has been the Agriculture Play for a few years now. The global demographics, while seemingly moving at a glacial pace to the short-term thinkers, are simply undeniable over the intermediate to longer term.
A recent landmark piece of research from Goldman Sachs suggests that stock market capitalization in emerging countries may grow fivefold over the next 20 years to more than $80 trillion. Keep in mind that this is the same research department that nailed owning the BRIC country stocks as the Market Call of the Last Decade.
More prosperity reaching the developing world (a majority of the earth’s population) means a historic shift in the world’s diet from simple grains to meats. The first thing a Third World peasant farmer-turned-industrialist goes upscale on is his food. And once you go chicken and beef, it’s mighty hard to go back to sprouts. Unless you think that globalization and gentrification will reverse, this shift probably represents the most monumental investing opportunity of our lifetime.
The theme is becoming a well-known one, but now we’ve reached the juncture where we must ask the age old question of "What’s the trade?". If there was one takeaway from the book The Greatest Trade Ever, it’s that lots of folks saw the housing and mortgage crash coming, but only a few figured out how to express that awareness into a profitable trade.
The Ag Story is every bit as fat a pitch coming down Broadway for investors as the real estate crash was. The flash food riots that rippled around the globe briefly in early 2008 were likely a mere preamble to something much bigger, but how do we set ourselves up for it? The considerations here are getting the timing right, owning the correct vehicles, staying perspicacious in the event that the winners start breaking away from the pack early and, finally, having enough bases covered that you don’t nail the theme but miss the upside (also known as mis-expressing the trade).
by ilene - September 7th, 2010 11:24 am
Courtesy of Joshua M Brown, The Reformed Broker
I had an interesting conversation with a pal the other day about the potential for continued and exacerbated deflation.
For some background, my friend is the opposite of me in his spending proclivities – his consumer footprint is probably twice the size of mine. He’s got two parking garage spots in Manhattan, one by his apartment and the other by his office, both of which cost him $300-something a month. You can extrapolate from there to get a sense of what kind of bills this kid is seeing each month.
Anyway, he’s in the commercial real estate brokerage biz which is basically Ground Zero for the deflationary spiral right now. In the absence of businesses expanding and forming, prices per square foot are plummeting pretty much up and down NYC and around the clock. No one’s bringing in new employees so taking more space is literally the furthest thing from their minds. In a city that recently had eleventy-five hedge funds starting up each weekday that were willing pay whatever you quoted them for space, even the most sought-after buildings now sit at fractions of full capacity. What’s worse, there is no burgeoning industry waiting in the wings to take up all the recently vacated hedgie offices – there are only so many law firms and bankruptcy specialists after all!
My friend the broker may be profligate, but he is also realistic and sees that, because of capacity slack, this could continue for quite some time. His question is, short of moving to Tahiti with an easel and paint brushes, what can we do to counter the deleterious effects of this deflationary miasma?
My answer? Not having lived through any periods of sustained deflation in my own lifetime (born in ’77), I gave him the only answer I could, one based on common sense. I told him to Get Small.
Reducing the expenditure footprint allows you to preserve both cash and cash flow, two of the most valuable commodities of all when prices and returns on investment are falling all around us. Many will be forced to puke up properties, investments, businesses and crown jewel assets in a deflationary environment – but kings are made on the other side. The kings would be the counter-cyclically prepared, the guy showing up to the estate sale with an unencumbered bankroll.
by ilene - July 28th, 2010 10:23 pm
I met with Yves Smith of Naked Capitalism on the weekend, at a superb Japanese restaurant that only New York locals could find (and I’ll keep its location quiet for their benefit–too much publicity could spoil a spectacular thing). Yves was kind enough to post details of my latest academic paper at her site in a post she entitled “Steve Keen’s scary Minsky model“.
Yves found the model scary, not because it revealed anything about the economy that she didn’t already know, but because it so easily reproduced the Ponzi features of the economy she knows so well.
I have yet to attempt to fit the model to data–and given its nonlinearity, that won’t be easy–but its qualitative behavior is very close to what we’ve experienced. As in the real world, a series of booms and busts give the superficial appearance of an economy entering a “Great Moderation”–just before it collapses.
The motive force driving the crash is the ratio of debt to GDP–a key feature of the real world that the mainstream economists who dominate the world’s academic university departments, Central Banks and Treasuries ignore. In the model, as in the real world, this ratio rises in a boom as businesses take on debt to finance investment and speculation, and then falls in a slump when things don’t work out in line with the euphoric expectations that developed during the boom. Cash flows during the slump don’t allow borrowers to reduce the debt to GDP ratio to the pre-boom level, but the period of relative stability after the crisis leads to expectations–and debt–taking off once more.
Ultimately, such an extreme level of debt is accumulated that debt servicing exceeds available cash flows, and a permanent slump ensues–a Depression.
There are 4 behavioural functions in the model that mimic the behaviour of the major private actors in the economy–workers, capitalists and bankers. Workers wage rises are related to the level of employment and the rate of inflation; capitalists investment and debt repayment plans are related to the rate of profit; and the willingness of banks to lend is also a function of the rate of profit.…
by ilene - July 6th, 2010 7:37 pm
Courtesy of Karl Denninger of The Market Ticker
How many times have you heard that: "Corporations are flush with cash; they have record amounts of free cash on their balance sheets"?
It’s touted as a positive thing.
Corporations hoard cash when they are convinced that things are going to get bad. No corporation hoards cash if it has somewhere better to deploy it - that is, somewhere it is convinced it can invest and produce a return for the business.
So what does a "record level of cash" tell us about business prospects? Simple: Business sucks today and forward prospects are deteriorating, not improving.
Simply put, businesses not only fear the need for all that cash, they have no compelling places to invest in the growth of the company’s revenues and profits. They can’t make the argument for expanding their plant, hiring, an M&A deal or even a stock buyback. They expect a hard rain or worse, an outbreak of tornadoes, not smooth sailing and fair skies.
Don’t be suckered by the mainstream media.
by ilene - June 19th, 2010 5:55 pm
Courtesy of Tom Lindmark at But Then What
Here is some further heretical thinking on 30-year fixed rate mortgages from, believe it or not, an economist who works for the federal government’s housing cabal. His name is Patrick Lawler and he works for the Federal Housing Finance Agency.
James R. Hagerty wrote of Mr. Lawler’s comments in the WSJ Developments blog. Here is the gist of what he had to say from Mr. Hagerty:
Now, Americans are very attached to their 30-year fixed-rate freely prepayable mortgages. They like not having to fuss about the possibility of 28% interest rates in 2032, even though most of us will move or die long before then. They love to refinance every time rates drop and then brag to their neighbors about how much they are saving per month.
What they don’t stop to realize often enough is that they are paying a very large price for that privilege– twice.
In the first place, mortgage rates are higher than they otherwise would be. That’s because lenders and mortgage investors must build in protection for the risk that we will prepay and stick them with a lower yield than they were anticipating. Mr. Lawler estimates that Americans pay at least an extra 0.25 to 0.50 percentage point in rates because of this option to prepay without penalty. They also pay another premium-–sometimes a percentage point or two–for having a long-term fixed rate. Over 30 years, that translates into some real money, but no one ever mentions that when bragging to the neighbor.
In the second place, our nation has created the likes of Fannie, Freddie and the FHA to facilitate these oddball 30-year fixed-rate loans, which aren’t normally provided by the private market. For a long while, that seemed like a free lunch. Fannie and Freddie, we were told, were far better able to handle those complex risks than we dumb consumers ever could. But since the government had to rescue Fannie and Freddie in 2008, the taxpayers’ tab for this indigestible lunch has swollen to $145 billion, and it’s still rising. So that’s the second time we’ll pay for our irrational love of American-style mortgages – only this time, we all pay, not just mortgage borrowers.
Meanwhile, other wealthy nations–notably Canada–do without our kind of mortgages and yet somehow manage to have homeownership rates
by ilene - June 10th, 2010 2:46 pm
Courtesy of The Pragmatic Capitalist
Ben Bernanke is confused. And no, it’s not just the monetary system that continues to confound him. This time it’s gold prices. During yesterday’s Congressional testimony Bernanke was asked about the surging price of gold and if that is a sign of no confidence in fiat currencies. He responded:
“Well the signal that gold is sending is in some ways very different from what other asset prices are sending. For example, the spread between nominal and inflation index bonds remains quite low – suggesting just 2% inflation over the next 10 years. Other commodity prices have fallen recently quite severely including oil prices and food prices. So gold is out there doing something different from the rest of the commodity group. I don’t fully understand the movements in the gold price, but I do think there’s a great deal of uncertainty and anxiety in financial markets right now and some people believe that holding gold will be a hedge against the fact that they view many other investments as being risky and hard to predict at this point.”
Mr. Bernanke is no dummy. I know I am a bit hard on him at times, but that is only because he is supposedly the Michael Jordan of the financial system so expectations are high. Unfortunately, he has performed more like Luc Longley (no offense to the superb Aussie readers here). Nonetheless, Mr. Bernanke understands that inflation pressures remain very low (even though he has failed to apply or promote the proper solution to our current balance sheet recession). Aside from gold prices there are no signs of inflation in the economy. But I believe gold prices are moving higher due to the public’s opposition to fiat currency, fiscal stimulus and what is generally viewed as continued “money printing”. This is highly irrational in the long-term in my opinion and creates the potential for gold to turn into a bubble is looking increasingly high.
Gold prices have surged this year as the Euro crisis has created increasing concerns over the viability of fiat money. I have previously discussed the great irony here. Gold is viewed as a hedge against the potential collapse of paper currencies . It is seen as the ultimate safe haven currency. The Euro…
by ilene - June 2nd, 2010 12:29 pm
Courtesy of Mish
Students fresh out of college, six-figures deep in debt, face decades of debt slavery. Both parents and students are wondering what went wrong. Please consider Placing the Blame as Students Are Buried in Debt.
Like many middle-class families, Cortney Munna and her mother began the college selection process with a grim determination. They would do whatever they could to get Cortney into the best possible college, and they maintained a blind faith that the investment would be worth it.
Today, however, Ms. Munna, a 26-year-old graduate of New York University, has nearly $100,000 in student loan debt from her four years in college, and affording the full monthly payments would be a struggle. For much of the time since her 2005 graduation, she’s been enrolled in night school, which allows her to defer loan payments.
This is not a long-term solution, because the interest on the loans continues to pile up. So in an eerie echo of the mortgage crisis, tens of thousands of people like Ms. Munna are facing a reckoning. They and their families made borrowing decisions based more on emotion than reason, much as subprime borrowers assumed the value of their houses would always go up.
The Project on Student Debt, a research and advocacy organization in Oakland, Calif., used federal data to estimate that 206,000 people graduated from college (including many from for-profit universities) with more than $40,000 in student loan debt in that same period. That’s a ninefold increase over the number of people in 1996, using 2008 dollars.
No one forces borrowers to take out these loans, and Ms. Munna and her mother, Cathryn, have spent the years since her graduation trying to understand where they went wrong.
She started college at age 17 and borrowed as much money as she could under the federal loan program. To make up the difference between her grants and work study money and the total cost of attending, her mother co-signed two private loans with Sallie Mae totaling about $20,000.
When they applied for a third loan, however, Sallie Mae rejected the application, citing Cathryn’s credit history. She had returned to college herself to finish her bachelor’s degree and was also borrowing money. N.Y.U. suggested a federal Plus loan for parents, but that would have