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Book Review: The Death of Money

Sunday, April 20th, 2014

103729This is a hard book to review. I have respect for the author, and most of his opinions.  But extraordinary claims require extraordinary proof.  There is evidence here, but not extraordinary proof.  I agree that we are in a bad spot, and that there is reason to be cautious.  To claim that the current international monetary system will disappear by 2020 or so requires more than the book delivers.

Let me begin by saying the book is worth buying.  It will make you think.  Thinking is a valuable exercise in which few engage.  Most of us imitate, which is far easier to do than thinking, and usually saves time on common issues.

The author focuses on the weaknesses of US economic policy, but is less critical of bad economic policies being pursued around the world, with the poster children being Japan, China, and the EU.  The US has its problems, but also its unique strengths.  Though I am a critic of US economic policy, we are better off than most other large nations.

One criticism of the book is that it is not focused.  Make your case, and don’t go down many “rabbit trails.”  That said, the rabbit trails are interesting, and you will learn a lot from them, though they don’t support the central thesis of the book.  I think the book needed a better editor, because a tighter book would have made the case better.

Here’s the main difficulty: Okay, so the US Dollar is not a great store of value.  Imagine another nation who wants a better store of value, who lets their currency rise, and their politically powerful exporters scream.  Who will likely win?  The exporters.  At least, that has been the way it has worked for the last 30 years.

In order for a gold-backed currency to be introduced, there will be sacrifices, and under most conditions, it will produce some deflation.  It is not at all certain that the nation(s) that might do this will take the short-term punishment.  Our world is geared toward short-termism, and it harms us all.

Quibbles

The book is far too kind to the IMF, an incompetent institution, and far too kind to China, which faces a collapse in its financial system far more quickly then the US will see.

The book is also too kind to the EU, which continues the experiment of monetary union without political union, which has never worked  before on a large scale.

Who would benefit from this book: Anyone could benefit from this great book.  If you want to, you can buy it here:The Death of Money: The Coming Collapse of the International Monetary System.

Full disclosure: I asked the PR people for a copy of the  book, and they sent it.

If you enter Amazon through my site, and you buy anything, I get a small commission.  This is my main source of blog revenue.  I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip.  Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book.  Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.  Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.  Whether you buy at Amazon directly or enter via my site, your prices don’t change.

Sorted Weekly Tweets

Saturday, March 1st, 2014

Bitcoin

 

  • Mt Gox: The brief reign of bitcoin’s top exchange http://t.co/9jSwvxrzOJ What happens when u neglect basic acctg & programming controls Mar 01, 2014
  • Bitcoin Exchange Mt. Gox Files for Bankruptcy Protection http://t.co/aobpHTmsYi B wary of opaque transaction systems, clever may steal $$ Mar 01, 2014
  • Where Did the Bitcoins Go? The Mt. Gox Shutdown, Explained http://t.co/0OkksL8TPG Currencies can’t exist apart from legal systems $$ $BTCUSD Feb 26, 2014
  • The Bitcoin Collective Delusion http://t.co/t51GGmuWbw Inevitable that gov’ts get involved in currencies & trade 4 punishment of fraud $$ Feb 26, 2014

 

Companies & Industries

 

  • Wall Street Hates JPMorgan Fee 4 $1T Junk Loans http://t.co/laoAXelOIr It is a private market; if the distortions r bad enuf, biz will leave Mar 01, 2014
  • Line Builds $15B Value With Teddy Bears, Wicked Witches http://t.co/ccGFjIVQsQ Freemium model applied to Asian messaging, watch 4 IPO Mar 01, 2014
  • Old Mutual Plans IPO of US Unit After Profit Increases http://t.co/a28VUvS23r The final reconciliation of a decade-plus of mis-investment $$ Feb 28, 2014
  • Oil Giants Sell Pipelines as Shale Strength Drives Deals http://t.co/OBVZ66Tm5y They expect oil prices 2rise as they c cheap oil scarcity $$ Feb 28, 2014
  • Dream of US Oil Independence Slams Against Shale Costs http://t.co/eFRnOdt0aX If debt funds a large part of drilling, time 2b nervous $$ Feb 28, 2014
  • $MSFT ‘s Culture Is Like ‘ $IBM Circa 1990,’ New Chairman Says http://t.co/gzy5NzCaAX Use MSFT Office/Windows Cash Cow 2build new biz $$ Feb 27, 2014
  • What is ‘Forbes’ worth? http://t.co/mHpDgpfkpi The Internet chgs everything; formerly important publications get digitally hollowed out $$ Feb 26, 2014
  • Rolls-Royce Drone Ships Challenge $375B Industry http://t.co/CCC9L0rynT Problems here r considerable- control in bad weather, piracy, etc $$ Feb 26, 2014
  • US Issues Emergency Testing Order To Crude Oil Rail Shippers http://t.co/bU5AuY7Ixd Reasonable precautions 4 general safety $$ $UNP $CSX Feb 26, 2014
  • Japan Post Prepares for IPO http://t.co/yE7k137VjT Lotsa assets, but the Q is what can be done w/them. Fuzzy situation w/no hurry $$ $EWJ Feb 26, 2014
  • Zuckerberg Dines With Phone Frenemies Fretting Over Profits http://t.co/NMga2US13J Monet 2b made in solving mobile payments problem $$ $FB Feb 26, 2014
  • Rising Premiums May Hit Small Firms http://t.co/nBA1wjigHP The lies told by the administration regarding cost control r astounding $$ Feb 26, 2014
  • Saudi’s Allure Undimmed for Bechtel to DaVita Amid Fallout http://t.co/ikppxlukf3 Someone has 2 buy from the US; $DTA helps w/diabetes $$ Feb 26, 2014
  • $BAC Reaches Deal With Buffett on Preferred Stake http://t.co/bLpgqOMJzT Buffett gets better call protection, divs can b waived in crisis $$ Feb 26, 2014
  • Woes of Megacity Driving Signal Dawn of ‘Peak Car’ Era http://t.co/npHTO6NtcJ It may take ~10 yrs, this will right itself, w/fewer cars $$ Feb 26, 2014
  • Google Buses Fuel Inequality Debate as Boom Inflates Rents http://t.co/CaQ4msqBnW I f you can’t afford living in San Francisco, move out $$ Feb 26, 2014
  • How ARM Holdings Dominates the Chip World http://t.co/CCFJDitgh1 $ARMH vs $INTC – 2 clever approaches that r utterly different. Who wins? $$ Feb 26, 2014
  • Health Law Already Has Impact on Bottom Lines http://t.co/o4k5u6uWgB Fitting that health insurers r getting hosed 4 cooperating w/Obama $$ Feb 26, 2014
  • Repsol Agrees to $5B Deal W/Argentina on $YPF http://t.co/piwKwxqS70 $REP decides half a loaf is better than none, nondefaultable bonds $$ Feb 26, 2014

Rest of the World

 

  • China’s Yuan Slides Against US Dollar http://t.co/VLBVTrLPEf The Yuan is still a rigged market, we need 2c it float to ascertain value $$ Mar 01, 2014
  • Bulgaria’s Currency Board versus Ukraine’s Chaos http://t.co/w1lAYExWuF A currency that is anchored leads 2 better results in many ways $$ Feb 28, 2014
  • China’s Central Bank Engineered Yuan’s Decline http://t.co/WmwpCa0H4L It remains 2b seen where the yuan will trade when it freely floats $$ Feb 28, 2014
  • War Crimes Evident in South Sudan, Human Rights Watch Says http://t.co/1AfsvPMYmG Easiest way 2 call off dogs of war is not 2 loose them $$ Feb 27, 2014
  • Abe’s Southeast Asia Push Adds to US Ties Amid China Rift http://t.co/3BDgdNznN4 Example of entangling alliances: Will US defend Asia? $$ Feb 26, 2014
  • Ortega’s Zara Fashions Tax Avoidance by Shifting Profits to Alps http://t.co/RGBMJ4Xmzc Govts have an interest in unifying tax policy $$ Feb 26, 2014
  • Crisis Gauge Rises to Record High as Swaps Avoided http://t.co/hLKrltiEVk Chinese corp spreads widening, same for their TED spread $$ $FXI Feb 26, 2014
  • Investors Mount Attack on Norway in $20B Oil, Gas Row http://t.co/VOPMQgMZKE Norway becomes less predictable, may chase developers away $$ Feb 26, 2014
  • Ukraine Pledges to Protect Deposits as Kiev Rally Called http://t.co/iMGsdLODA2 Must ring hollow in Cyprus as EU moves 2 support Ukraine $$ Feb 26, 2014

 

US Politics & Policy

 

  • How ADA, a Chemical Used in Rubber, Got Into 500 Food Products http://t.co/moZqNNco85 Just because it’s not natural doesn’t mean it’s bad $$ Mar 01, 2014
  • Federal audit calls new school lunch rules a failure http://t.co/RyEd0JpP7j Missing middle ground where kids get yummy nutritious food $$ Mar 01, 2014
  • Study Finds SEC Staff Sold Shares B4 Cases Made Public http://t.co/8xRzyCfIgx SEC staffers don’t know what 2 buy, they know what 2 sell $$ Feb 28, 2014
  • GOP Targets Hillary Clinton With Obamacare Attacks http://t.co/QKlHYwHUeG It is fair to ask her what she would do differently than Obama $$ Feb 27, 2014
  • Here’s How Much People Are Actually Paying for Health Insurance http://t.co/AeC4xs3y2d Interesting, not sure what to make of it $$ Feb 27, 2014
  • Busted State Obamacare Websites Haven’t Caught Up to Healthcare gov http://t.co/LLee1ovP2y OR, MA & OR r worse than Fed’l website 4 PPACA $$ Feb 27, 2014
  • What Does Eric Schneiderman Know That the Rest of Us Don’t? http://t.co/aI4Crec3EZ Oversteps his bounds, but gets sellside firms 2 stop $$ Feb 27, 2014
  • Dave Camp: How to Fix Our Appalling Tax Code http://t.co/lx4VM2kHNz Complex tax codes allow the wealthy 2 eliminate taxes that poor can’t $$ Feb 26, 2014
  • When the Minimum Wage Goes Up, the Menu Price Also Rises http://t.co/ukEWzIjoje The pain has 2go somewhere, including reducing employment $$ Feb 26, 2014
  • America’s 10-Year Experiment in Broadband Investment Has Failed http://t.co/hjGuuu7JA0 We need to free up competition in the “last mile” $$ Feb 26, 2014
  • How Dodd-Frank Might Kill the CLO Market http://t.co/ztV9PMdums & we won’t miss it, b/c securitized credit is not accounted 4 properly $$ Feb 26, 2014
  • High-Priced Hydrogen Cars to Challenge Electrics http://t.co/3akLFwjJuG Hydrogen is not the solution, it is just fossil fuels in disguise $$ Feb 26, 2014
  • Truth About Hydrogen Power http://t.co/McG32mWHyT Old article, explains y hydrogen is no panacea b/c it takes fossil energy 2 produce it $$ Feb 26, 2014
  • The same is true of fusion power. The costs of creating Tritium at a scale needed to power a city would be astounding. $$ Feb 26, 2014
  • A Surprise Guest at the SEC’s Annual Gathering http://t.co/R15fMul7CU @mcuban shows what a measured & classy guy he can b @ SEC meeting $$ Feb 22, 2014

 

US Economics & Monetary Policy

 

  • Foreclosures Climaxing in New York-New Jersey Market: Mortgages http://t.co/NPQeYY7Rc3 Judicial foreclosure states catching up rest of US $$ Feb 26, 2014
  • Home Prices in 2013 Notch Biggest Annual Gain Since 2005 http://t.co/FjTjdA7YcU Demand from investors pads purchases, rates higher now $$ Feb 26, 2014
  • America’s Hottest Housing Market Has Suddenly Cooled Down http://t.co/00uIJ4gSo3 Phoenix RE rises out of ashes on speculative demand $$ $Z Feb 26, 2014
  • March 4 Hearing for Three Fed Nominees http://t.co/McV2Tt7p29 One bullet & 2 blanks in the gun. Stanley Fischer will bring some wisdom $$ Feb 26, 2014
  • Fed Crisis Transcripts Highlight Futility of FSOC Crystal Balls http://t.co/XComU1xA5K Bureaucrats can’t/won’t predict disaster coming $$ Feb 26, 2014
  • The Fed knows less than average http://t.co/cnA4nBBwU0 & http://t.co/5wG84hxPGi & http://t.co/C5y3re8ajV 2008 Transcripts show clueless $$ Feb 26, 2014
  • How to Profit from the Yellen Fed http://t.co/4oAiBUdXDr Yellen is core 2 the M.O. of the Fed, it’s like jazz, they make it up as they go $$ Feb 26, 2014

 

 

Market Impact

 

  • Banks Averting Bond Losses With Accounting Twist http://t.co/VC83ByMGNC Switching bonds from available 4 sale 2 held 2 maturity $$ Feb 26, 2014
  • The switch limits flexibility b/c u can’t change back w/o poss changing all back; also doesn’t change economics, moves losses 2 future $$ Feb 26, 2014
  • Greed Turning Losers to Leaders in Russell 1000 Index http://t.co/vpGTVXkD9t Could this b a harbinger of a change in the markets? $$ $SPY Feb 26, 2014
  • Outcome or process — what investment focus succeeds over time? http://t.co/edXLqAX9pg @Ritholtz tells us to focus on process not results $$ Feb 26, 2014
  • Social psychology: Market madness http://t.co/BtaVXAYWYZ This is y the 1st priority of investment is risk control; can’t sleep @ night $$ Feb 26, 2014
  • 10 Value Investing Blogs You’d Be Crazy Not To Follow http://t.co/mt8tZkGRAq Happy 2b featured among this great group of blogs $$ Thanks! Feb 26, 2014

 

Other Business

 

  • Harvard Brainpower Joins MIT Fueling Boston Sports Teams’

Titles http://t.co/OZNC8wCIJi Bright guys using math2analyze sports in Beantown $$ Feb 28, 2014

  • Big Data Comes to the Farm, Sowing Mistrust http://t.co/ayBsxp8qAt Farmers worry that data used to help them will b used against them too $$ Feb 28, 2014
  • Corporate Economists Are Hot Again http://t.co/DUn5O7Idjz An alternative would b actuaries, they r usually better at practical models $$ Feb 27, 2014
  • Dwindling Midwest High School Grads Spur College Hunt http://t.co/iVURNV69EU Demographics now fight against colleges, many weak will die $$ Feb 26, 2014
  • The Joy and Freedom of Working Until Death http://t.co/wkGRoRSJIg Find something that u enjoy doing that supports u & yours well forever $$ Feb 26, 2014

 

Medical

 

  • Dad May Join Two Moms for Disease-Free Designer Babies http://t.co/yiXUO0sLok Designer babies:many embryos die in order 2 produce 1 child $$ Feb 26, 2014
  • Your Heart May Be Older Than You Are http://t.co/46PbtkWQ7h Cute way 2 get people to take care of themselves; may have false negatives $$ Feb 26, 2014
  • Mystery Medical Symptoms Hit a Surprising Number of Patients http://t.co/6DoJnAjt6w Stress can trigger pains; this teaches stress control $$ Feb 26, 2014

 

Pimco & Bill Gross

  • Pimco’s Gross: ‘U don’t always produce productive family by sweet talking&always being inclusive’ http://t.co/sjKnhN76jh Allianz happy w/him Mar 01, 2014
  • Counterpoint: It’s time for Bill Gross 2 retire http://t.co/UB1ikZhTlI Everybody Should Get Off Bill Gross’s Back http://t.co/hbbAYRXuBN $$ Feb 26, 2014
  • Inside the Showdown Atop Pimco, the World’s Biggest Bond Firm http://t.co/kVtk8Zf5d8 Gross developed the theories guide Pimco & he stays $$ Feb 26, 2014

 

Wrong

  • Wrong: Templeton Braving China’s Housing Bubble http://t.co/rjVSQUXoAe China looks like Japan in 1989, or the developed world in 2007 #avoid Mar 01, 2014
  • Wrong: NASA Scientists Discover 715 New Planets http://t.co/6KhRpp2Y5A Life is finely tuned on Earth +/- 10% in size of Earth -> no life $$ Feb 27, 2014
  • Wrong: Fed s Tarullo Eyes New Tools to Limit Interest Rate Risk http://t.co/fA4l6omDVi Dreams 2 undo effects of bad policy w/o undoing it $$ Feb 26, 2014
  • Wrong: It Takes How Much Water to Grow an Almond?! http://t.co/u8kpW7kJFj Misses the idea that water does get reused many times: rain $$ Feb 26, 2014
  • Wrong: Can Amazon Dominate in Insurance, Too? http://t.co/zAP8GkunSx Except 4 simple products, Insurance is too complex 4 people to pull $$ Feb 24, 2014

 

Comments, Replies & Retweets

  • @jasonzweigwsj @AlexRubalcava I wrote an article on the problems w/zero cost investing recently http://t.co/ALu1ijgVev ”sand in the gears” Mar 01, 2014
  • RT @AlexRubalcava: Zero commission stock trading sounds like a product tailor made to amplify investors’ behavioral finance mistakes. Mar 01, 2014
  • “Currencies & trade cannot exist in a vacuum apart from legal systems, because fraud is a crime…” — David_Merkel http://t.co/7fJX26SEyP $$ Feb 26, 2014
  • ‘ @GSElevator Tattletale Exposed (He Was Not in the Goldman Elevator) http://t.co/S1NVy13sZn I don’t get out much, 1st I’ve heard of this $$ Feb 26, 2014
  • “Regarding First Data, many might think it quite desirable to step out of the spotlight @ $JPM &…” — David_Merkel http://t.co/COHGctym2A $$ Feb 26, 2014
  • . @dpinsen The ancient retirement tripod of course http://t.co/k06EUCbHa1 unless the modern one works. $$ Feb 26, 2014
  • @dpinsen That was icky, and more… gotta go wash my brain out… brrr. Feb 22, 2014

Book Review: Rule Based Investing

Friday, January 3rd, 2014

Everyone would like a “money machine.”  Follow simple rules, and “Wow, this makes money.”  This is that kind of book but it has better foundations than most in its class.

The book examines three types of investing, most of which are foreign to average investors.  Most investors don’t invest in equity by shorting it, and most investors are not currency traders.

But that is what the book encourages.  I’m going to digress here, because I have to explain some salient matters, and say what I think, so that my later critique makes sense.

Volatility and credit are cousins.  After all when markets go nuts, and everything is in disarray, those that have been trying to borrow at low interest in one currency, and invest at higher interest in another currency get hosed.  Why?  Because in volatile times, the riskier currencies face capital flight versus safer currencies that have the confidence of the markets.

All of the methods mentioned in this book as a result are making bets on volatility/credit, and try to control the bet by monitoring implied volatility, credit spreads, and momentum.  They limit when they are in the market and when they are out.

I don’t have a problem with the theory here, but with the ability of average people to carry it out.  This book would be good for quantitative hedge fund managers; I am less certain about individuals here.

As an aside, what the book describes is how PIMCO has done so well at bond investing over its history — shorting volatility to pick up yield.

But the main criticism is this: the author optimized the book to fit her full data set.  When you read the last chapter, and see that you could have earned 30%+/year for 13 years, if you were as clever as the author, you should think, “Yes, if I had 20/20 foresight.”  The methods will not do as well in prospect as in retrospect.

Quibbles

There is little that I disagree with in the book on a theoretical basis.  Where I differ comes in two areas: individual investors will not have the fortitude to carry out what is a complex method of investment.  Secondly, when enough hedge fund money adopts these strategies, the pricing in the market will shift, and the hedge funds will no longer have easy money.

Who would benefit from this book: If you are willing to do the work of a volatility-selling hedge fund manager, this is the book for you.  If you want to, you can buy it here: Rule Based Investing.

Full disclosure: The publisher sent me the book after he offered me a review copy.

If you enter Amazon through my site, and you buy anything, I get a small commission.  This is my main source of blog revenue.  I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip.  Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book.  Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.  Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.  Whether you buy at Amazon directly or enter via my site, your prices don’t change.

 

Book Review: Currencies after the Crash

Tuesday, November 5th, 2013

Sara Eisen is smart.  How smart is Sara Eisen?  She can write twelve pages on currencies, invite some clever and opinionated people to write articles for her, and serve as editor of the book, and thus get top billing for a moderate amount of work.

There are other reasons why I think she is smart — she is an able interviewer, and maybe there is not a lot of difference between choosing people to write articles for you, and knowing what to ask someone that you choose to interview.  Both require understanding the views of the person in question.

Be that as it may, the ten writing the represent different points of view.  Let me briefly describe each one:

1) Gary Shilling — The US Dollar has its weaknesses, but is stronger than all of the alternatives, because the US possesses a lot of strengths not found in the rest of the world.

2) Stephen L. Jen — The Chinese Yuan will become a reserve currency, but it is highly unlikely that it will significantly replace the US Dollar in the intermediate term.

3) Jorg Asmussen — The Euro can be an alternative to the US Dollar if it overcomes integration issues, and continues to deepen economic integration.

4) John Taylor — Assuming the Euro survives its imbalances, a shrinking population and sclerotic economic policies will make the Eurozone less important by 2050.

5) Megan Greene — The Eurozone will be better off if weaker nations leave.

6) Anoop Singh & Papa N’Diaye — Even though rebalancing to internal growth through increased domestic consumption will slow down Chinese growth, in the long run it will lead to a better, healthier Chinese economy and currency.

7) James Rickards — Competitive devaluation is leading to currency wars, but embracing deflation and austerity as the Euro has is the right path.  We can do the same thing globally through the IMF with their SDRs.

8 ) Peter Boockvar — We need to tie the hands of the Central Bankers, because they overshoot and make economic volatility worse.  One way to do so is through a gold or other commodity standard.

9) Robert Johnson — Much like the authors in Chapter six, except more pessimistic about whether it will happen.

Do You Want a Conclusion or Not?

This  book offers no unified point of view or conclusion, and that is a strength, because it mirrors the debate that exists in the world today.  If you are not confused, you don’t get it.  That said, the book could have been much stronger if the ten authors were allowed to respond to the other authors briefly, with a brief rebuttal from the original author.  The weakness of the book is that there is no interaction, no attempt to see how the views fight or agree with each other.  This could have been a better book, but I recommend it as it is.

Quibbles

Already expressed.

Who would benefit from this book: If you want to learn nine different views on currencies and global macroeconomics, this could be the book for you.  If you want to, you can buy it here: Currencies After the Crash: The Uncertain Future of the Global Paper-Based Currency System.

Full disclosure: The publisher sent me the book after asking me if I wanted it.

If you enter Amazon through my site, and you buy anything, I get a small commission.  This is my main source of blog revenue.  I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip.  Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book.  Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.  Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.  Whether you buy at Amazon directly or enter via my site, your prices don’t change.

Sorted Weekly Tweets

Saturday, May 25th, 2013

Companies

  • Delta Sees S&P 500 in Reach as Credit Ratings Rise http://stks.co/rEBE  I would b cautious here, airlines have destroyed a lot of capital $$
  • Berkshire’s Weschler Holds Almost $150 Million of DaVita http://stks.co/pEIf  FD: + $BRK.B | The slow takeover of Davita continues $$
  • The real Apple tax scandal http://stks.co/gWz1  Scrap the corporate income tax & raise taxes on realized capital gains & dividends $$
  • Berkshire Hathaway Seeks Release of ResCap, Ally Financial Report http://stks.co/dVOD  Wants 2c if there was any fraudulent conveyance $$
  • Oil Revolt Generates $35 Billion as Icahn-Singer Agitate http://stks.co/jWnd  Many activist investors trawling in energy stocks $$
  • Inside Google’s Secret Lab http://stks.co/qE31  “Since its creation in 2010, Google has kept X largely hidden from view.” Long but good $$
  • Explaining Apple’s Irish Tax Dodge http://stks.co/hXHa  A good transfer pricing accountant is worth his weight in gold $$
  • Deal of the Week: Penney Holds Real Value http://stks.co/rDoO  $JCP needs to turn around its retailing much more than managing property $$
  • After all, that’s how BK conservation is done in the insurance industry, taxpayer never gets on the hook (please ignore $AIG) $$
  • Customer Service Is Next Job for IBM’s Watson http://stks.co/tDcy  Could Watson replace the grunts that take care of customer service? $$
  • “…insurance giants such as ACE Ltd and Endurance Specialty Holdings Ltd” http://stks.co/qDeA  $ACE is a giant @ $31B , $ENH not @ $2B $$
  • $VOD to Keep $VZ Payout Amid Europe Struggles http://stks.co/cV0K  Not surprising they stalemated on VZW, & no special div | FD: + $VOD $$
  • Regulators Scrutinize Firms’ Ties to Insurers http://stks.co/sDXn  How much unsafe assets are held by life companies of $APO $HRG $GS ? $$

 

Market Dynamics

  • Murray International’s Stout Says Stocks Too Expensive http://stks.co/aVhD  This means invest in cash, long Tsys or gold if correct $$
  • Bargain-Hunting Buoys Treasurys [sic] http://stks.co/rEBC  Strength Returns as Bargain-Hunters Appear, but Prices Still Fall 4 the Week $$
  • EVERGREEN VIRTUAL ADVISOR http://stks.co/eVjh  A very good publication this week. If u beg, u can get on the distribution list. $$
  • Richard Band notes that the S&P 500’s prices-to-sales ratio is 1.5 to 1, almost 60% above its average since 1955 http://stks.co/gX6Z  $$
  • Paul Tudor Jones: Macro trading, babies r a ‘killer’ 2a woman’s focus http://stks.co/gX54  Any significant outside activity harms focus $$
  • Is This the Best Time for Investors? Don’t Bet On It http://stks.co/cVSF  Long term valuation measures r flashing red, play defense $$
  • 3 articles on gold http://stks.co/pE4K  & http://stks.co/sDwa  & http://stks.co/rDwK  New hedging, record shorting, paper gold $$ $GLD
  • Follow the Leader @mktanthropology http://stks.co/jWlB  Global economy feeling deflationary; stock markets poised to follow down $$
  • Goldman raises S&P 500 targets through 2015 http://stks.co/gWYI  Not impossible historically, but not likely, profit margins would b2hi $$
  • James Surowiecki: Is There a Stock-Market Bubble? http://stks.co/sDac  Argues profit margins sustainable: lower taxes, globalization $$
  • Looking for Investments With Higher Yields in a Low Interest-Rate World http://stks.co/pDgr  Grab hi yields now= walk tightrope; no net $$
  • Gold in Yen and SP500 and Bitcoin : Back to the Future http://stks.co/fWYb  Gold almost back to peak in yen terms & much more $$
  • Gold Bear Bets Reach Record as Soros Cuts Holdings http://stks.co/jWKK  Market delivers pain to the gold longs: bears now overextended? $$
  • Gold Rebounded After Moody’s Says U.S. May Face Downgrade http://stks.co/qDZq  People want certainty somewhere, whether in Govt or gold $$
  • Junk Stocks Spur Broadest Equity Advance Since 1995 http://stks.co/qDZm  Highly indebted firms take the lead in the equity market $$

US Politics & Economic Policy

  • Obama Bully Pulpit Bullied With Congress Probes Obscuring Agenda http://stks.co/jWz8  Maybe we should limit Presidents to one 4-yr term $$
  • Fannie Mae Profiting as Market Middleman Angers Lenders http://stks.co/sEB4  If we really want 2wind down F&F, we should end purchases $$
  • Goldman Sachs Research Disputes TBTF Subsidy http://stks.co/aVW5  In quiet times, advantage difficult to detect, easy during crisis $$
  • Unaccountable Executive http://stks.co/rDwj  If President doesn’t run government, who does? Can delegate authority, not responsibility $$
  • The Prisoner’s Dilemma of Central Banks [pdf] http://stks.co/rDwg  Everyone has an incentive 2 inflate, which leaves everyone worse off $$
  • The Fed Is Squeezing the Shadow-Banking System http://stks.co/tDy5  As they should: repo market was a big part of the financial crisis $$
  • The FED & F-35: Still no Rules of Engagement http://stks.co/pDwg  The Fed doesn’t know what they are doing; making it up, smiling a lot $$
  • Sheila Bair: Dodd-Frank really did end taxpayer bailouts http://stks.co/jWPv  Will follow BK pecking order, after that charge industry $$
  • Naming Names in the Dodd Frank Mess http://stks.co/jWPr  Mark Wetjen manages to stymie Dodd-Frank reforms; some of it is good, some bad $$
  • What Strong Dollar? US Boom Provides Oil Hedge http://stks.co/tDcb  W/more energy produced in the US, $$ has less impact on oil prices
  • White House urges Senate to cut crop insurance in farm bill http://stks.co/cV18  Difficult to beat the Ag lobby on crop insurance $$
  • Health Law Costs: Employers Eye Bare-Bones Plans http://stks.co/tDXo  Obamacare messes up the health system; avg person less well-off $$
  • Puerto Rico Statehood Bid Gets New Push http://stks.co/pDdM  Sensing future bankruptcy, Puerto Rico reconsiders a permanent liege-lord $$
  • Does Rand Paul’s Rise Signal A Broader Libertarian Moment? http://stks.co/aV62  Somehow I think this one will end in disappointment too $$
  • US Immigration Plan Encounters Business-Labor Rift http://stks.co/hWgM  Fascinating how seeming certainty of immigration bill has gone $$
  • The end of QE? http://stks.co/rDKW  @izakaminska tells us why more QE won’t help, & why the process will have to end soon. $$ #becareful

Rest of the World

  • Turkey Moves 2Curb Alcohol Sales http://stks.co/hXJT  This will b an interesting test of govt power; vodka is delivered quietly in Iran $$
  • Foreign Fighters Enter Syria to Defend Shiites and Al-Assad Regime http://stks.co/tEAp  “Islam is a religion of peace” “Islam is a…” $$
  • The Great Chinese Property Bubble: a Wall of Worry? http://stks.co/pEH3  2 much 2 occupy; prices 2 high; enough debt 2b troublesome $$
  • BRICS risk ‘sudden stop’ as dollar rally builds http://stks.co/cVY1  EM blowups often preceded by rise in $$ | Good 4 EM exporters though
  • Wrong:Avoid These 3 Stocks on Japan, Says Expert http://stks.co/dVX1  An expert that doesn’t understand insurance trashes $AFL | FD:+ $AFL
  • Asia Goes on a Debt Binge as Much of World Sobers Up http://stks.co/sE8v  Over-indebted economies don’t grow rapidly; complexity chokes $$
  • 2 articles on Japan http://stks.co/fWuS  & http://stks.co/hX67  Rising bond yields & trade deficit, monetary policy drives both $$
  • Two articles on the Tokyo market rout http://stks.co/qE7K  & http://stks.co/rE2d  Abenomics is stretching the limits of the possible $$
  • Nobel Laureate Phelps Warns Against EU as Iceland Abandons Talks http://stks.co/fWui  Iceland gets smart, doesn’t join the Eurozone $$
  • Death in Parched Farm Field Reveals Growing India Water Tragedy http://stks.co/cVN6  Water shortages r big factor 4 India’s development $$
  • The Abenomics Experiment: Major Risks for Banks http://stks.co/gWlx  If interest rates rise 2much, banks in Japan go to neg net worth $$
  • Experts call for urgent measures to tackle debt http://stks.co/qDtR  One advantage of US over China; we resolve troubled debts better $$
  • Stockholm Riots Continue for Third Night http://stks.co/gWlk  If this can happen in Stockholm, it can happen in a lot of other places 2 $$
  • Hollande Bonds Without AAA Shine Brighter Than Gold http://stks.co/dUzy  Similar things worked 4 Japan 4a while, but now may b shifting $$
  • World’s Biggest Volatility Jump Spurs Fund Outflow http://stks.co/gWTm  Investors invest outside Japan 2 escape perpetually falling yen $$
  • China April housing inflation quickens to two year high http://stks.co/fWM5  Chinese inflation is the endgame for many globally $$ #theend

Wrong

Other

  • Soldiers Turn Entrepreneurs as One Million Exit Military http://stks.co/gX55  Military training has similarities w/entrepreneurship $$
  • The Exercise Equivalent of a Cheeseburger? http://stks.co/cVY6  Exercise is good; too much exercise is worse than little exercise $$
  • How Rail is Reshaping America’s Energy System http://stks.co/iWqJ  Summary piece on how tank cars r taking cheap fuel to the coasts $$
  • Wined, Dined, Canned http://stks.co/tDq6  Inside the insiders game that is the Cannes film festival $$ Movie about the business of movies
  •  Teen’s invention could charge cellphone in 20 seconds http://stks.co/eVD0  Wonder how stable supercapacitor will b? Might b an issue $$
  •  “I’m going to be setting the world on fire,” she said. http://stks.co/jWPq  Having seen overpowered capacitors burn, could b literal $$
  • The Tech Innovator Who Almost Killed Saddam Hussein http://stks.co/dV1x  Long interesting article; Sabra becomes rich computer maven $$
  • Getting Along With the Original Other Woman—Your Mother-in-Law http://stks.co/iWbp  Husbands, support your wives. Mothers, bow out $$
  • New Rival Emerging for Bloomberg Chat http://stks.co/bV4p  Bloomberg may learn the hard way: messaging security can’t be compromised $$

Comments, Replies, & Retweets

  • @Sir_Strangelove Had not caught that, thanks for correcting me
  • “There is one thing you neglected: Baa bond yields are 3% lower than in 1999. That roughly comports…” — D_Merkel http://disq.us/8d7ha9  $$
  • @joshuademasi It’s like long-tail reinsurers in the mid-’80s, most were technically insolvent, but book capital was +; losses eaten slowly
  • “Jeff Matthews is correct; Dealbook, though usually good, is wrong.” — David_Merkel http://disq.us/8d735b  $$
  • “This is a failure of the regulators, that they let this happen at all. They have the power to top it” — D_Merkel http://disq.us/8d730h 
  • @danielckoontz I know that dividend swaps exist, can imagine the possibility of leverage, don’t think it’s done much though, I hope
  • @danielckoontz So long as there isn’t any leverage on the person holding the dividend paying stocks, generally it should self-limit

FWIW

  • My week on twitter: 35 retweets received, 1 new listings, 66 new followers, 30 mentions. Via: http://20ft.net/p 

The Gold Medal Gold Model, Tarnished?

Saturday, April 27th, 2013

From one of my longtime readers:

I just wanted to toss this suggestion your way and the motivation is partly selfish, but given the decline in gold the last 3-4 days (I actually exited all my long positions around 1500-1505 last Friday based on the breach of the technical support level at 1525-1535 and am now short in my trading account from that same level) I’d be interested to get your qualitative thoughts and maybe an update on your refined quantitative model with negative real interest rates and where it says gold should be trading.

If it turns out substantially above the current price of 1360, I’d be curious if you think that model isn’t valid or if gold is a bargain here.  This article here got my wheels turning that bases on a gold price model on ratio to CPI:

http://www.marketwatch.com/story/golds-fair-value-is-800-an-ounce-2013-04-16?link=MW_story_popular

But to come up with an estimate of gold’s fair value, they calculate a ratio of gold to inflation going back as far as they were able to obtain data. They report that this ratio, when expressed in terms of the U.S. Consumer Price Index, has averaged about 3.2-to-1. Even at $1,400 an ounce, this ratio stands at 6.03-to-1, or nearly double this average. 

From a qualitative standpoint, the negative interest rate model made the most sense to me simply from a critical thinking standpoint.  The relationship to CPI seems less reasonable to me if one starts with premise that gold is an alternative currency.

Anyways, thanks for any response or addressing this on your blog.

Links: The Gold Medal Gold Model, Gold does Nothing.

I updated my gold model.  This is what it looks like without re-estimating the parameters:

Eddy's Gold Model_16809_image001

And this is what it looks like after re-estimating the parameters:

Eddy's Gold Model_11787_image001

The real cost of carry in holding gold is negative, and it has been consistently negative for the last five years. and mostly so for the last ten years.  Thus the run-up in the price of gold over the last 10 years.

Now models are just that, models.  I can make three seemingly contradictory statements about this model:

  • The old models did not predict the path of the gold prices well.
  • The re-estimated models fit the data better than the old models.
  • If the model is accurate, there is economic pressure to make the price of gold rise.

My hypothesis at this point in time is that easily tradable products based on gold encouraged speculative pressure, leading the price of gold to overshoot, and now it is correcting.  That said, when the real cost of carry is so negative, gold should appreciate.

Alternatively, we could try to develop a supply-driven model of gold, where we estimate the marginal costs of mining an additional ounce of gold.  Ore depletion is significant, but the effect is relatively constant compared to demand for gold.  It also helps to explain why the stocks of most gold miners have not done well, even with a rising gold price.

We often like to think that if a commodity price is rising, the stock of the producer must do even better.  Not always true, if the prices of extraction/production rise faster than the commodity price, as it has been with gold producers, the stocks will be a bad investment.

My final opinion is this: if you have a 5-year time horizon, I think you will do well with physical gold, where you take delivery, and store it yourself.  With easily tradable paper versions of gold, it is less clear, because you would need to analyze the actual assets.  There might be some credit risk involved.

I don’t think the currency devaluation competition is going away anytime soon, so gold will likely do well against paper.  The real question is when will some major country decide to give up and raise taxes dramatically, inflate, or default.  Aside from the raising taxes scenario, gold should do pretty well.  I might get less optimistic if the gold miners began making significant money,producing much more gold, but producing gold remains a hard business.

Sorted Weekly Tweets

Friday, April 19th, 2013

Market Dynamics

 

  • Gold Volatility Beats US Stocks and May Last: Chart of the Day http://t.co/7Bo9dvOKaN Bodes ill 4 gold in short-run, good in the long-run $$ Apr 19, 2013
  • S&P500, & their friends: Market Fatigue? Confirmation Signs?http://t.co/OCmnASBP4b Momentum failing in small cap stocks, not a good sign $$ Apr 18, 2013
  • Some (more) crushing news for goldbugs http://t.co/PQOeK0IRxp Depletion is the bane of gold producers, pushing up the cost of ore $$ Apr 18, 2013
  • Just Before the Crash http://t.co/8t7EYWI5mP Institutions create their own crises by herding into risky asset classes & fleeing en masse $$ Apr 18, 2013
  • End of the supercycle looms: commodities, stocks sell off http://t.co/PvQzo907SZ Calling end of cycle is gutsy when resource demands r up $$ Apr 17, 2013
  • Commodities Crushing Stocks http://t.co/nh08C1eAIJ One day does not make a market; that said, increased volatility is a negative $$ Apr 17, 2013
  • Gold’s fair value is $800 an ounce http://t.co/w3AYvPu1Qn Way too low, unless inflation will remain negative 4 some time $$ Apr 17, 2013
  • 4 Signs That The Housing Recovery Is Stalling http://t.co/R0Q8VoGbgX Interesting set of charts; feels like a dead cat bounce in Res RE $$ Apr 16, 2013
  • Busting Sell in May and Go Away Myth http://t.co/QrNPXFLLYo Buy&Hold best in LR, then buy November, sell April $$ C: http://t.co/eoV7EtmcSv Apr 16, 2013

 

Companies & Industries

 

  • Caterpillar and Federal Express: Two Global Bellweathers, Two Worries  http://t.co/GKzv0om5Ia Where did all the ppl go talking of growth $$ Apr 19, 2013
  • Chevron Defies California On Carbon Emissions http://t.co/edOiu38VaJ California’s policies r2 strict, another reason y CA state is failing $$ Apr 19, 2013
  • $VZ Says Tax Hurdle 2 $VOD Wireless Buyout Fixable http://t.co/9loiR5KxCl $VZ should buy $VOD, spin off what it doesn’t want | FD: + $VOD $$ Apr 19, 2013
  • More Cracks Undermine the Citadel of TV Profits http://t.co/3ilOm7dN19 How 2 keep information bundles together, good subsidizing mediocre $$ Apr 16, 2013

 

United States

 

  • Boston Bombings Bring Americans Closer to Living on Edge http://t.co/zpkw58VB4v Free societies have to live w/risk or we destroy freedom $$ Apr 18, 2013
  • Clinging to Guns—and Abortion http://t.co/2W3Dvh9WyR Hadn’t heard story about Kermit Gosnell; really surprised it isn’t a bigger story $$ Apr 18, 2013
  • Route Change Forces Keystone Foes to Shift Focus http://t.co/pbrXMdWBYt Environmentalism is intellectually bankrupt, a prime example here $$ Apr 18, 2013
  • Is making US banks foresee trouble more trouble than it’s worth? http://t.co/b6IBN7AA5v Done fairly, no. If abused, yes. Analysts needed $$ Apr 17, 2013
  • Retirement Account Cap With Obama Budget Buoys Insurance http://t.co/wsK7ZSj8cQ A positive for life insurance among the most wealthy $$ Apr 17, 2013

 

China

 

  • Chinese Go Nuts After a Bumper Crop http://t.co/CGbhVKwYe1 knew Chinese liked peanuts so much; thought their favorite nut was cashews $$ Apr 19, 2013
  • China’s Potential growth may slow later in decade: Older population shrinks labor force http://t.co/Okz3WtKwnD Pop growth -> Econ growth $$ Apr 19, 2013
  • Study Finds Massive Europe Investment by Chinese State Companies http://t.co/e33I5YwjVJ Does China get how difficult it will b2 get out $$ Apr 18, 2013
  • China Local Authority Debt ‘Out of Control’ http://t.co/wpO6dmaJ7H Yet another sign of debt disarray in China; Govt will take losses $$ Apr 18, 2013
  • Has China’s Economy Hit a ‘Dead End’? http://t.co/Cbb4dMdNcj You bet. it is similar to Japan in 1989, and the USSR in 1965: Stagnation $$ Apr 18, 2013
  • Slower China Growth Signals Days of Miracles Are Waning http://t.co/Bp1zuogXWO Capital productivity declining in China; hard landing $$ Apr 16, 2013

 

Rest of the World

 

  • Risky Economic Plan for Japan Inspires Hope and Fear http://t.co/airp5vkGJL Gambler Abe presumes that inflation can help Japan $$ #FTL Apr 19, 2013
  • Chavez Heir to Be Sworn in as Vote Dispute Roils Investors http://t.co/ZxI0disbOc Somehow this doesn’t feel stable. Electronic vote audit? $$ Apr 19, 2013
  • Spanish Squatters Invoking Robin Hood Deter Investment http://t.co/sKuX9C6S87 What is not paid 4 is not valued, Spain is dying slowly $$ Apr 18, 2013
  • Spanish Pension Reserve Fund:All In For Spanish Debt! http://t.co/wYG9HBLR7L Not all that different from Social Security; backed by taxes $$ Apr 18, 2013
  • The ECB Fragmented Monetary Policy http://t.co/w9lFbXbJSf DIfficult 4 the EZ 2b anything other than a 2-tier capital mkt: feast & famine $$ Apr 16, 2013
  • The riddle of Europe’s single currency with many values http://t.co/W8n5p7YOXL A euro isn’t equal everywhere in EZ, time 2 end the euro $$ Apr 16, 2013

 

Other

 

  • 10 things Coke, Pepsi and soda industry won’t say http://t.co/IRvqvnqvTm Avoid sweetened fizzy drinks; they aren’t good 4u $$ #simple Apr 17, 2013
  • The spreadsheet error in Reinhart and Rogoff’s famous paper on debt sustainability http://t.co/hPdw3VPh4Q Oops, even professors goof $$ Apr 16, 2013
  • Inside Bloomberg’s Twitter A-List (Well, At Least a Fraction of It) http://t.co/zCeVLZM2nB Brings best tweets of the moment to BB users $$ Apr 16, 2013

 

Wrong or Late

 

  • Wrong: To Boost Retirement Savings, Stop Giving Tax Breaks on 401(k)s http://t.co/JnZPEDvn7W “Nudges” eventually fail, tax breaks don’t $$ Apr 19, 2013
  • Late: Efforts to Revive the Economy Lead 2 Worries of a Bubble http://t.co/RpfWgT2v9w Bubble will b revealed when Fed 1st hints 2 tighten $$ Apr 18, 2013
  • Wrong: Economic Data Galore, but No Certainty http://t.co/My3ixW60y9 1 thing is certain, the ability of economists 2 forecast is abysmal $$ Apr 17, 2013

 

Replies, Retweets & Comments

  • W/all the white flower petals falling off trees, it looked like a blizzard 4a while. I said 2 my youngest, “Look, Snow.” She just smiled $$ Apr 19, 2013
  • @Tubulus In the short-run, no. In the long-run, yes. Those who need more spending $$ will eventually undo the enrollment & move 2 cash Apr 19, 2013
  • @finemrespice No, not sure, but to me slowly is a number of years, which we are well into. Cyprus was fast. Apr 18, 2013
  • “You didn’t ask him about the purchase of Scottish Re, which lost a lot of $$ . Y the free pass?” — David_Merkel http://t.co/esyopPA0U4 Apr 18, 2013
  • “Sadly, neither really succeeded. The debt started growing uncontrollably in their terms, leading…” — David_Merkel http://t.co/0YFxMOUJGM Apr 18, 2013
  • ‘ @StockGravity It is not certain that money will b printed, though I believe that will happen. I do think gold is cheap here. $$ Apr 17, 2013
  • RT @LauricellaTom: Pimco’s El-Erian: Easy money policies mean stocks, bonds “trading at very artificial levels” @MoneyBeat @Pimco #WSJ … Apr 16, 2013
  • @edwindearborn How do you define viral? I get that level almost every day when you add in everything… and I am not that big. Apr 16, 2013
  • @portfolio14 @Greenbackd I said no in my piece, but here is the advice for market bottoms: http://t.co/d13GQgp7TI $$ Apr 16, 2013

FWIW

  • My week on twitter: 42 retweets received, 2 new listings, 53 new followers, 25 mentions. Via: http://t.co/cPSEMLXpb8 Apr 18, 2013

 

At the Towson University Investment Group’s International Market Summit, Part 2

Thursday, April 18th, 2013

Here are some questions submitted in writing that did not get asked.  Here are some questions & answers:

1        What do you make of the move towards energy independence in America and what are some benefits that accommodate it?

Any innovation that lowers costs is a good thing.  Energy independence is a a shibboleth that many bow to but is meaningless, absent embargoes or war.

The important thing is to deregulate exports of energy from the US, so that it can be done freely, allowing energy companies the ability to send crude oil and LNG to the places that value it the most.  We also need to permit pipelines, and ignore the shortsighted environmentalists who don’t realize that pipelines minimize pollution relative to rail.

There will be some benefit to other US industries, which will get cheap energy because they don’t have high energy transport costs.

2        You can argue that we are in the midst of a bond bubble.  What are the implications on markets in the event this bubble bursts?

We aren’t in a bond bubble, at least not yet.  Bubbles are typically asset-liability mismatches, where long assets are financed short.  For a bond bubble to pop, you need the short financing rate to rise above the yield of the long bonds being financed.  In more plebeian terms, you need the yield curve to invert.  Bubbles pop when investors have to feed the asset in order to hold the position, and that never lasts long.

3        What are some risks of the global stimulus taking place?

We are involved in a colossal ”race to the bottom.”  Those with low exchange rates can temporarily stimulate their own economy, until another major country devalues their currency.  The main risk is stagflation.  Little growth, and depreciation of purchasing power.  Personally, I would have preferred a deeper recession that eliminated bad debts.

4        How big of a risk is the European Union and Euro instability given the unprecedented circumstances in Cyprus where depositor monies are at risk?

The risk is big.  Why should anyone hold money in a non-core Eurozone bank?  Better to put it under your mattress where it can’t be confiscated.

Cyprus demonstrated that a Euro is not a Euro; value depends on where the Euro is.  Far better to have many predictable currencies than a single unpredictable currency.

The Cyprus experience teaches two main lessons to those in stressed nations:

a) The deposit guarantees mean nothing.

b) Your money has a safer home buried in your yard.

You don’t want that to be the case.  Runs on banks in weak nations compound all the other problems.  Why help create the conditions of the Great Depression?

5        What do you make of the transparency (or lack thereof) in China? How big of a threat does this pose to investors and companies that do business in China?

Regardless of how cheap an asset is, you never trade away transparency.  If you don’t understand an asset, you will never be able to trade it properly.  It is a huge threat; avoid situations like this.

As an aside, China does not have the “rule of law.”  They have “rule by law.”  The distinction is significant, because under “rule of law” the government is subject to the law.  Under “rule by law” the government controls the legal process.  You are only as safe as your government connections are strong, and that is not very reliable as a foreigner.

6        With the suggestions from the president to increase the minimum wage, what are some of the effects that it might have on unemployment, foreign and business investment, and the market in general?

7        Should state minimum wages be tied the federal minimum wage and will the change in minimum wage at the federal level have any effect on states since they are not tied to federal minimum wage law?

You can’t get something for nothing.  Any government intervention changing a price will have less impact than commonly believed.  The free market should regulate wages, not the government.

But away from that, many corporations are penny wise, pound foolish.  There are virtues in paying your employees an above-market wage where you:

  1. Train them
  2. Instill loyalty
  3. Make them part of the decision-making process
  4. Give them a sense of ownership, and offer profit-based bonuses.

If you pay your employees the minimum, expect minimum or worse efforts.  Pilferage often comes from employees who realize their efforts are not appreciated.

I suspect this will go 2-3 more pieces.  I hope you enjoy them.

Sorted Weekly Tweets

Friday, March 15th, 2013

US Politics & Economic Policy

 

  • Employers Blast Fees From New Health Law http://t.co/FfuBRO2HQp Phases in the added costs of covering sick people previously uninsured $$ Mar 15, 2013
  • Conservative Groups Warn GOP Lawmakers About Deals With Obama http://t.co/vui4GOINCw If this were a 2-player game, would have been solved $$ Mar 15, 2013
  • Gundlach: Investors are asking the Wrong Question http://t.co/xA1UgvCica ht: @ReformedBroker QE as a permanent affair w/which we have 2 live Mar 15, 2013
  • New Group Pushes Corporate-Tax Overhaul http://t.co/P3dwgqQON6 Trying 2 End Double Taxation of foreign profits. Hasn’t worked so far $$ Mar 14, 2013
  • The Almighty Dollar Is Back http://t.co/F3iP3Zblyk Skeptical. Waiting for the Fed to announce increase of QE to send the $$ back down Mar 14, 2013
  • GIs Fighting Nazis Last Time Factory Workers Toiled Longer http://t.co/pVMlMGFRQ0 This is optimistic for new hiring $$ Mar 14, 2013
  • Grand Bargain Taxes, Entitlements Cuts Await Deal Makers http://t.co/gJZ2c4Uc17 My sense is that we r heading 4 another deadlock $$ Mar 14, 2013
  • Refusal to Expand Medicaid May Cost Employers $1 Billion http://t.co/kpxJmCeZvT Pressure is going to grow to eliminate PPACA & Medicaid $$ Mar 14, 2013
  • US Growth = Inventories http://t.co/dOIp5n9sPH Much of the presumed growth in the US is just rebuilding of inventories to a peak level $$ Mar 12, 2013
  • GOP Budget Establishes Contrast With Democrats http://t.co/ocLQndOvsP No chance of it being passed, but gives an idea of where 2 sides r $$ Mar 12, 2013
  • SEC Charges Illinois Over Pension Funding http://t.co/MxEF6hPYPy This is how it should be. No one gets punished in the slightest. $$ Mar 12, 2013
  • Note from last tweet: a lot of ppl want to punish bankers, what about state officials who lie – they r much bigger, where is the outcry? $$ Mar 12, 2013
  • Fed mulls putting a ‘not for sale’ sign on its assets http://t.co/uZAcaHmLeO A sign of weakness from the Fed; they know they r trapped $$ Mar 10, 2013

 

Roman Catholic Church

 

  • Jesuits Had Past Struggles With Popes http://t.co/P8Vy8YEifr In the RC church, they have top liberation theologians &their top opposition $$ Mar 14, 2013
  • Ten things you probably didn’t know about the Jesuits http://t.co/tFijZNMkV9 If the Church have defined anything to be black… amazing $$ Mar 14, 2013
  • The sins of the Argentine church http://t.co/FTzKlsq1I7 New Pope may have been complicit w/Military Dictators killing their enemies. $$ Mar 14, 2013
  • The Changing Church http://t.co/mDPol6orR5 Interesting 2c change in locations of Cardinals. Size of RC church overstated, many not active $$ Mar 14, 2013
  • How Is the Pope Elected? http://t.co/j8p5L9dB5I A little late, but I thought this was an interesting infographic on papal elections $$ Mar 14, 2013
  • African Catholics Look to Black Pope to Safeguard Tradition http://t.co/vxZrJJDgvv US Media does not get how traditional most Catholics r $$ Mar 13, 2013
  • Black Smoke Signals No New Pope http://t.co/9qp8nzlbRb More & less unity in RCC than commonly thought. More: Europe, Less: elsewhere $$ Mar 12, 2013

 

Financial Markets

 

  • To all of the fixed income followers out there: someone asked me today to recommend good bond blogs. What would you recommend? Mar 15, 2013
  • Highest Bond Yield at Auction in a Year Could Be Sign of Things to Come http://t.co/fShhD5iAlp Or it could be a buying opportunity $$ Mar 15, 2013
  • $OAK Founder Knows How to Get an Edge in Investing http://t.co/TaRQSiK5gI “Experience is what u get when u didn’t get what u wanted.” $$ Mar 14, 2013
  • Smallcap Stock Volatility Index Hits All-Time Low http://t.co/l6tCXV7VS4 Complacency is the rule of the the day among small cap stocks $$ Mar 14, 2013
  • 5 ways Warren Buffett invests that you don’t http://t.co/AeCs8fqe6g Good job describing what parts of Buffett’s strategies can b mimicked $$ Mar 14, 2013
  • Team Alpha Retirement Portfolio: Dividend Investing Vs. Annuity Purchasing http://t.co/HNHqI40vDP Example of y I don’t read Seeking Alpha $$ Mar 14, 2013
  • New Carlyle Group Fund Lowers Bar for Investors http://t.co/xiCTwy07Zk As @reformedbroker aptly put it, “Muppet Bait” Avoid. Avoid. $$ Mar 14, 2013
  • Fidelity to Expand ETF Relationship With BlackRock http://t.co/d4PIiCb7oh Fidelity says “Me 2,” by partnering with $BLK . No value added $$ Mar 14, 2013
  • moving down-market http://t.co/qP0YSWKubG @researchpuzzler has it right, inviting small accounts in means opportunities r getting worse $$ Mar 14, 2013
  • Historical S&P 500 Price to Sales (P/S) Chart http://t.co/dm2ZhDDgtE Useful little chart – around avg now, but profit margins r a record $$ Mar 13, 2013
  • SP500 Bull and Bear Factors – Not so Fun Damentals! http://t.co/5OjwvLbLPw Bull factors: QE, Buybacks, Yen. Bear: Econ data, Earnings mo $$ Mar 13, 2013
  • Gold Sales From Soros Reveal 12-Yr Bull Run Decay http://t.co/ze7DSsdIkN Makes me want 2 do a piece on $$ weighted vs time weighted on $GLD Mar 13, 2013
  • Why (Most) People Hate Good Financial News http://t.co/PZcf1usKD1 Regret is a strong force in psyche of amateur investors: missing out $$ Mar 12, 2013
  • How Much Of The Stock Market’s Growth Is Caused By Its Shrinking? http://t.co/Kfxipqvr1Y I would be skeptical here; capital changes weak $$ Mar 12, 2013
  • Securities Lending: Worth The ‘Risk’ http://t.co/AZxSKFzM2T When done right, sec lending is almost free money, the risks r low. $$ Mar 12, 2013
  • New ETF Underway for Distressed Debt http://t.co/Wp3ZPwaZqj Bad idea. Creating indexes for distressed bonds will be hard, Won’t attract $$ Mar 12, 2013
  • Firms Send Record Cash Back to Investors http://t.co/n0vNv0ppei A sign of economic weakness; there are few places to invest for growth $$ Mar 10, 2013

 

Wrong

 

  • Wrong: Amazon Preparing Bid For Barnes And Noble? http://t.co/qYB3yE6u8U Combination would not be allowed by the FTC $$ Mar 13, 2013
  • Wrong: Why Insurers May Be Unprepared for the Next Big Storm http://t.co/WuJIpvtVBj Most P&C insurers have more than adequate reserves $$ Mar 13, 2013
  • Wrong: The US can’t afford a Chinese economic collapse http://t.co/9vskptvxvx We can afford it; China won’t affect much in the US $$ Mar 12, 2013

 

Rest of the World

 

  • China s Next Potential Bubble: Hello, Anybody Home? http://t.co/IstgcTQZCN Trapped. Potential sellers need prices 2 stay high, buyers low $$ Mar 15, 2013
  • Embrace consumption, IMF’s Zhu urges China http://t.co/TAc5toyktZ Easier said than done. Party not ready to give people more freedom. $$ Mar 15, 2013
  • Nordic Testicular Cancer Mystery Prompts Chemicals Probe http://t.co/LqwH8klTLq Interesting, might be a combo of genetics & environment $$ Mar 15, 2013
  • Jeffrey ♥’s Japan Stocks http://t.co/lvhM6LFXAv♥s-japan-stocks/?utm_source=dlvr.it&utm_medium=twitter Weak yen drives Japan stocks up $$ Mar 15, 2013
  • Recent cyberattacks could be part of a Chinese military strategy started nearly 20 years ago http://t.co/NxZ99g2ZKo Explains what is up now Mar 14, 2013
  • Brazil’s Richest Family Forging $13 Billion Niobium Dream http://t.co/2MHbOkhHPd Stronger flexible steel from a Brazilian tech company $$ Mar 14, 2013
  • Even Berlusconi Can’t Slow Bulls Boosting Euro View http://t.co/PV2mGvfHRr Great 4 core Eurozone, bad news 4 the fringe Eurozone $$ Mar 13, 2013
  • Chinese inflation hits 10-month high http://t.co/rGZJHoZsqj The end of the cycle comes when Chinese inflation gets out of control $$ Mar 13, 2013
  • Snow Causes European Travel Chaos http://t.co/tz3afCLET9 That’s one thing about weather & climate, constantly changing & always will $$ Mar 13, 2013
  • Should You Bond With Azerbaijan? http://t.co/gpE429eGa8? by @jasonzweigwsj | Emerging market govts are better run than developed govts $$ Mar 12, 2013
  • Norway Fund Flees Currencies Tainted by Stimulus Addiction http://t.co/X7YasIGkKn Rational response2 depreciating currencies: hail Norway $$ Mar 12, 2013

 

Banks

 

  • JP Morgan’s Jamie Dimon showed too much hubris and too little humility http://t.co/4feQB2Q6Jx @moorehn highlights cultural problem @ $JPM $$ Mar 15, 2013
  • Bubble Exchange: Technology vs Financials http://t.co/BJKoaFfjdo Suggests that financials, not tech, will do better in the future $$ Mar 15, 2013
  • EU Said to Plan Concession on Tax Credits as Bank Capital http://t.co/Ss3J4KBGbv Deferred Tax Assets should not be allowed as capital $$ Mar 15, 2013
  • Deferred Tax Assets r only valuable if a company makes $$ in the future, which for a bank in distress is less likely; should not b capital Mar 15, 2013
  • Beware of a New Banking Bubble http://t.co/gr5c2S9NaI Three recent deals involved premiums of 32% to 83% above tangible book value $$ #fire Mar 14, 2013
  • Fisher and Rosenblum: How to Shrink the TBTF Banks http://t.co/pNfzML2A22 Could work, roll back safety net, keep pieces small, holdcos fail Mar 14, 2013
  • 5 Big Questions for the Future of Retail Banking http://t.co/sCKi6QjfCu Branches buy/sell, online/mobile, layoffs, interest margins down $$ Mar 14, 2013

 

Companies & Industries

 

  • Lawmakers Examine Ethanol Credits’ Affect on Gas Prices http://t.co/5RHXnKcuFG Wasteful program doesn’t aid conservation adds 2 pollution $$ Mar 15, 2013
  • 5 beloved tech products that were sentenced to death http://t.co/bg4S90UHlZ Impending death of Google Reader makes writer wax nostalgic $$ Mar 15, 2013
  • Google and Bing Say the Future of Search Is Conversational http://t.co/mx2gfh6oSr Software improves ability 2 understand contextual data $$ Mar 15, 2013
  • Herbalife short-seller sues banks, Icahn over alleged fraud http://t.co/NaL4X9aXW3 Losing investor throws good $$ after bad, will not win Mar 14, 2013
  • Evolv, Making Hourly Workers More Profitable, Lands $15 Million http://t.co/DDEyoCk7Ay Improves retention of the employees u want 2 keep $$ Mar 14, 2013
  • Lincoln’s Cooper Shuns Shoot-For-Moon Funds After Goldman http://t.co/7PdLGT5TGb This does not make me feel better about $LNC. Avoid. $$ Mar 14, 2013
  • How Benjamin Franklin Invented the Mail-Order Business http://t.co/TC6DmWsZck A look at the precursors to mail-order retail. Interesting $$ Mar 14, 2013
  • Lego Builds New Billionaires as Toymaker Topples Mattel http://t.co/jxkqNatzZk Family controls 75% of the operation through Kirkbi A/S $$ Mar 14, 2013
  • 8 Megatrends Defining the Oil & Gas Industry http://t.co/Taz5Dsujwh Nationalization, Ending subsidies, Green, New frontiers, LNG, M&A $$ &c Mar 14, 2013
  • Blackstone Said to Get $2.1 Billion Loan for Home Purchases http://t.co/qDg7DrSBGk I’m skeptical, don’t think renting homes is scalable $$ Mar 14, 2013
  • Many hospitals, doctors offer cash discount for medical bills http://t.co/ckLOHxh1TH ht: @dpinsen | Sometimes ucan pay less w/o insurance $$ Mar 13, 2013
  • Gas Rigs Drop to Fewest Since 1999 as Drilling Declines http://t.co/b3YztqbTqs Almost like the old days when they would flare off natgas $$ Mar 13, 2013
  • Starr Proceeds With Fight Over $AIG Rescue http://t.co/WPNIOyib7B I don’t think he will win, but Greenberg will get his day in court $$ Mar 13, 2013
  • Beating The Downturn By Degrees http://t.co/9BT69ix6Fs Good summary article on the for-profit educators $$ Mar 13, 2013
  • Liberal-Arts Colleges Dangle Deals to Woo Students http://t.co/v3Qd07x8AD Pay for 4 years & never have 2 pay again; u *can* finish 4 free $$ Mar 13, 2013
  • InTrade Online Betting Site Shuts Down Abruptly http://t.co/Rb0Ppald2u A long shot from the start, current bettors may b stuck w/the loss $$ Mar 12, 2013
  • Green Cars Have a Dirty Little Secret http://t.co/wk5UfvYiYn Producing and charging electric cars means heavy carbon-dioxide emissions. $$ Mar 12, 2013
  • Uninsured Americans Get Hit With Biggest Hospital Bills http://t.co/6QeybZMIz8 First value of insurance is buying power lowering prices $$ Mar 12, 2013

 

Other

 

  • Jim Gaffigan Is the King of (Clean) Comedy http://t.co/RhUM30krSU Heartening 2c clean humor getting attention; certainly harder 2 do $$ Mar 15, 2013
  • The Bearded Man http://t.co/ub5n07UjFZ I’m no trendsetter. If you’re out of fashion long enough, eventually u accidentally get in fashion $$ Mar 15, 2013
  • Does money taint the sharing economy? http://t.co/yTjd3w8ThO If you want an organization to last, there must be a profit margin $$ Mar 15, 2013
  • Scientists find how deadly new virus infects human cells http://t.co/YLfoqPbvJ1 Disease is similar to SARS. Infected 15, killed 9 $$ Mar 14, 2013
  • Former Ravens May Outnumber Ravens http://t.co/SIxpATVmC6 Noticed in Baltimore; curse of the Joe Flacco contract; less $$ for rest of team Mar 14, 2013

 

Retweets & Replies

  • ‘ @tradewins @moorehn The problems are concealing data from the regulators, & Dimon perhaps concealing what he truly knew at the time $$ Mar 16, 2013
  • @TWealthMgmt Yeah, they are good, & I mentioned them. Seems many bond blogs have folded; they had a finite maturity ;) Mar 15, 2013
  • @nelson3748 Railroads r scarce; impossible to replicate; has a big moat w/pricing power; trucking has no moat; scale is needed Mar 14, 2013
  • I just left a comment in “5 ways Warren Buffett invests that you don’t – Jonathan Burton’s Life Savings – MarketWat…” http://t.co/2tjAaDwkV7 Mar 14, 2013
  • Yes, but the nice thing about Pi day is that it has been a round RT @EddyElfenbein: Celebrating Pi Day seems so irrational. Mar 14, 2013
  • @EliHoffmann Don’t get me wrong I *like* dividends & have for a long time. They r more frail than the new advocates assume Mar 14, 2013
  • @EliHoffmann There r other things he got wrong re insurance, but the faith in dividends is naive. They get cut in bad periods like the ’70s Mar 14, 2013
  • @EliHoffmann Annuities r guaranteed by state guarantee funds Mar 14, 2013
  • @DavidSchawel Thanks, but r u bullish on it or neutral? Mar 14, 2013
  • @DavidSchawel How successful? Mar 14, 2013
  • No RT @pdacosta: VZ president says Chavez, now close to Christ, had a hand in choice of South American pope http://t.co/WYR2izYIsk Mar 14, 2013
  • “Pretty cool. Billy Joel took a chance on the student, and it was beautiful. Kid had moxie.” — David_Merkel http://t.co/YBUfXDNSGH $$ Mar 14, 2013
  • UCan say that again RT @ReformedBroker:Muppet Bait MT @researchpuzzler:Don’t miss your chance 2 play w/big boys of PE http://t.co/5fg2tLPXS3 Mar 14, 2013
  • Listening to broadcasters in Rome, it reminds me of the Super Bowl when the power went out; gotta say something, but not much to say… $$ Mar 13, 2013
  • . @scott_matagrano Also, $AIG’s domestic life companies were BK until rescued b/c of sec lending… long story: http://t.co/EmnSclWqVS $$ Mar 13, 2013
  • @scott_matagrano Not *quite* riskless. There were some bond trades I could not execute b/c we could not get the shares back. Mar 13, 2013
  • @merrillmatter I don’t but some of my clients do. Mar 13, 2013
  • @ReformedBroker Hey Josh, where is that indicator now? Mar 12, 2013
  • @weelifeworkplay Saw that, but property tends not to vary in value as much as currencies do. Owning land tends to preserve value, mostly $$ Mar 12, 2013
  • @prchovanec In a word, overvalued. P/E measurements of value fluctuate too much b/c earnings varies more than sales or book $$ Mar 12, 2013
  • @exMBB I avoid life companies that primarily write variable business; the accounting quality is poor. No opinion on $PNX $$ Mar 12, 2013
  • @SagittaCapital I’m afraid that one is a ‘No.” I don’t have a lot to say there. Mar 12, 2013
  • @60Minutes @sherylsandberg That’s dumb. It could just be rudeness, or ego, and the same applies to boys. Will to power <> leadership $$ Mar 11, 2013
  • @prchovanec P/E is more significant in the short-run. CAPE10 & Q-ratio more significant in the long run. $$ Mar 10, 2013

 

FWIW

 

  • My week on twitter: 48 retweets received, 11 new listings, 51 new followers, 55 mentions. Via: http://t.co/cPSEMLXpb8 Mar 14, 2013

 

Book Review: The Great Rebalancing

Friday, February 22nd, 2013

great rebalancing

I’ve been waiting for this book for over 10 years.  When Michael Pettis wrote The Volatility Machine, he explained how emerging market countries imported the monetary policies of the developed countries.

Now, in the present mess of economic policies put forth by most governments in our world, he explains how the debt and trade imbalances will eventually have to balance.

We’ve had other economic eras where trade did not balance.  In the era of mercantilism, trade did not balance, because  the mercantilistic countries sought gold, and adopted policies that favored exports, so that their nation would receive gold.  Smart, huh?

Well,  no.  Gold is good; I like it, and it preserves value better than anything else, but when you take actions to disproportionately get gold, you overpay for it.  Then when you realize your error, and start to sell gold for goods, the market knows that you are selling, and the value of gold falls.

That is why countries that force growth tend to lose.  Because they force growth through overinvestment, they look like stars for a time, but eventually the declining marginal productivity of capital catches up with them, as it did with Japan in the late ’80s or early ’90s, and the Soviet Union in the 1970s.

Governments are no good at directing growth.  We knew in the late ’70s that import substitution did not work.   It took 20-30 years more to realize that export promotion does not work long-term.  Happily, my old professor Bela Belassa never lived to see his theories repudiated.  (He was a cold guy, but not totally; he had mercy on me once, and for that I am grateful.)

Back to Pettis: his main argument is that the surplus countries must take losses over loans to deficit countries.  The loans were made in bullish times, and from any reasonable standpoint, they were bad loans.  Therefore the lenders should compromise with the borrowers, and both sides take losses.

This applies to China versus America.  China will not get repaid in the same purchasing power as they lent.  If China wants to thrive, it will need to take steps it has been unwilling to take politically, and free much more of the economy from government and Party control.  Only that can boost domestic consumption as a fraction of GDP.

This applies to Germany versus the rest of the Eurozone.  They won’t get paid back in the same terms; either there will be discounts in Euro terms, or some nations will leave the Eurozone.  The alternative is Federal Europe, where losses are shared across the nation, much as California subsidizes Maryland.

One way or another, just as the mercantilists lost, so will the surplus nations lose today.  It’s just a question of when and how.

Quibbles

I can’t get into  SDRs [Strategic Drawing Rights] of the IMF as a currency.  Currencies either need gold or taxation authority behind them.  Further, taxation authority requires police power to enforce taxation, which is not the case.  SDRs are a cute idea that some academics fall for, but are not a real world solution.

For those who read his e-mails regularly, 25% of the book will be “old hat.”

Who would benefit from this book: Anyone who wants to understand international economics better will benefit from this book.  I cannot recommend it more highly.  If you want to, you can buy it here: The Great Rebalancing: Trade, Conflict, and the Perilous Road Ahead for the World Economy.

Full disclosure: I received a free copy from the publisher.  Though I have never met him, I have conversed with the author via e-mail.

If you enter Amazon through my site, and you buy anything, I get a small commission.  This is my main source of blog revenue.  I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip.  Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book.  Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.  Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.  Whether you buy at Amazon directly or enter via my site, your prices don’t change.

Disclaimer


David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.


Also, though David runs Aleph Investments, LLC, this blog is not a part of that business. This blog exists to educate investors, and give something back. It is not intended as advertisement for Aleph Investments; David is not soliciting business through it. When David, or a client of David's has an interest in a security mentioned, full disclosure will be given, as has been past practice for all that David does on the web. Disclosure is the breakfast of champions.


Additionally, David may occasionally write about accounting, actuarial, insurance, and tax topics, but nothing written here, at RealMoney, or anywhere else is meant to be formal "advice" in those areas. Consult a reputable professional in those areas to get personal, tailored advice that meets the specialized needs that David can have no knowledge of.

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