Market notes
Wolf Waves
From a collective financial standpoint the US is now deeply into an increasingly violent and potentially terminal process.
Fire and Ice
"There is no salvation in becoming adapted to a world which is crazy."
Henry Miller(1891 - 1980)
In a fire and ice world the forces at play are opposite and extreme. On the one
hand deleveraging simply has to take place to restore the natural flow of credit
and risk taking. Yet, on the other hand, this could get out of hand if it happens
too quickly and turn the financial system to ice.
The Fed's remedy of extreme measures sets a very dangerous precedent in accelerating
the measures and intensity with which monetary support can be injected into the
financial system. Although this can provide short term relief, these actions
are simply an acceleration of the interventions that got us into so much trouble
in the first place, and ultimately produce the fire for inflation.
Making predictions in this environment is more than usually hazardous. Investors
simply need greater awareness of the situation, and more extensive stress testing
of their portfolio, as well as clear rules for the risk management of their assets,
as instability becomes a greater risk.
The key change is that now the financial structure itself has become a major issue.
The Dollar Myth
"The current crisis is not only the bust that follows the housing boom, it's basically the end of a 60-year period of continuing
credit expansion based on the dollar as the reserve currency... Now the rest of the world is increasingly unwilling to accumulate
dollars," - George Soros, January 2008
The US has been blessed with an enormous financial privilege for over 60 years as a direct consequence
of the status of the US dollar as the world's reserve currency. However, the US dollar's status is now in
steep decline. This decline takes with it the financial foundations that so many Americans have come to
take for granted. Understanding and managing the dollar's decline will likely be one of the most important
components of any investment plan in the years ahead, and it may also have far reaching lifestyle and social consequences.
Lets Be Real
"Men occasionally stumble over the truth, but most of them pick themselves up and hurry off as if nothing had happened." - Winston Churchill
A reality check has become a matter of urgency. What we find is that in many ways the economic world has been turned up side down over the
last two decades, but economic statistics are trying harder and harder to pretend it didn't happen.
Being real today applies not only to our assessment of the economy but also to our investment choices. Appropriately chosen real
assets need to form a sizeable part of any allocation. Also, without any substantive changes, we must continue to assume that
disguised inflation remains the real economic policy.
Credit Super Cycle Endgame
After an extraordinary period of excessive credit creation, and financial engineering of staggering proportions we have now entered a new
phase of the credit super cycle. Confidence is fickle and unpredictable, but more than likely the market turbulence of the last two
months heralds a new and possibly chaotic period for the markets.
Many will argue that if the markets seem stable and well behaved that all is well. However, it is important to distinguish between
short term palliatives, providing the appearance of stability, and deep seated issues that have gone well beyond the point of a quick fix.
At this stage the credit super cycle changes character. The cumulative build up in credit makes the continued management of business
cycles much harder and increasingly prone to much greater instability. In short this is point at which the credit super cycle has reached the endgame.
More than likely we are now at a point where stagflation seems like the best option. Growth will probably remain weak as the real value of debt
falls with sustained higher levels of inflation. As Hyman Minsky once said, "Stagflation is the price we pay for the success we have in avoiding
a great or serious depression".
The Dhandho Investor
"The Dhandho Investor" by Mohnish Pabrai is short, very simple to read and understand,
and yet provides a highly comprehensive and effective approach to successful value investing.
Finding low risk situations is the key to long term investment success, and low risk does not
mean low return. This is the key to becoming a "Dhandho" Investor, and for most the surest
path to becoming a very successful investor.
Your Money and Your Brain
It's not that we are intellectually deficient, or that we are not capable of being rational. It's just that when it comes to emotional
intelligence, we have no idea. Jason Zweig's new book "Your Money and Your Brain", which will be out in a few months, examines the
reasons why most investors, including professional investors, are so often their own worst enemy.
By examining how the brain works, we can learn a great deal about investing. Not just how groups of investors behave but also
how we ourselves react as individuals.
Sovereign Bankruptcy US Style
It is rare indeed to find any person, family, corporation or government entity that has concluded both of the following:
1. It is on course for bankruptcy.
2. It is going to do nothing about it, or is going to make bankruptcy even more likely.
Don't believe this ever happens? Take a look at the US federal government.
If anyone should know about the US federal government's finances, it is David Walker. Walker is the nation's
chief accountability officer and head of the U.S. Government Accountability Office (GAO). His "60 minutes" interview
is currently available in the Video section. The interview displays Walker's
conviction that urgent action is needed to avoid bankruptcy for the US federal government. It also suggests that most
politicians in Washington do not disagree with his basic conclusion, but the most remarkable part is that apparently
no-one wants to talk about it, because no-one wants to do anything about it!
This may or may not be disturbing to you, as this is a long term issue and a "tipping" point still seems several
years away. However, as an investor, I believe this issue can no longer be ignored. This note discusses how and
why the coming "Sovereign Bankruptcy US Style" is already having an impact. It could be influencing your
investments much sooner than you realize.
Hedge Funds: "Heads they win, Tails you lose?"
Hedge funds have grown dramatically in recent years. There are now some 8000 hedge funds,
somehow attracting institutional investors as well now, so that total assets amount to
about $1.2 trillion. Yet hedge fund returns have averaged below 10% over the last six years.
Maybe a hedge fund manager will provide a better return, and maybe not, it will surely be hard
to tell in advance. However, there can hardly be any doubt that the cost and structure of a
relationship with a Registered Investment Adviser is far more attractive to the investor. The
optimal strategy for most investors should therefore be clear. Find a Registered Investment
Adviser, who can manage your capital to your liking.
Creating free options Using
options and an appropriate money management system not only helps investors make
decisions, but it can also significantly improve their returns while minimizing risks.
Will I have enough?
How to move towards true wealth and avoid a nasty surprise. Financial planning has gone
badly wrong in the case of many defined benefit pension plans. What went wrong? What are
the lessons for your own financial planning?
Trade of the decade
Its too bad that the Dow Jones Index has broken down to new lows in 2006, continuing its
downtrend since the peak in 1999. What? You think its near its all time high? Oh!
You must be measuring it the old fashioned way, in terms of US dollars. Don't worry!
There is still time to take advantage of the trade of the decade.
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Articles
4 April 2012, The Worst of All Monetary Policies
This article very well demonstrates the path monetary policy took from the early 1970s and the consequences for equities, stocks,
and commodities in terms of the very big picture. The tragedy of this policy approach is that the only solution to the economic
problems it creates is more of the policies that created the problem in the first place. We have reached the point where changing
policy becomes increasingly difficult even though the ultimate outcome from staying the course is most likely even more problematic.
The theory on this is very well founded and has been demonstrated in practice on numerous occasions throughout history, even
if not in the lifetimes of the great majority of people who live in "developed" countries.
21 March 2012, Profit margins, the key to long term equity returns
Jamer Montier provides crucial analysis into the most overlooked element of equity market valuation - profit margins.
Right now profit margins are at a new extreme for the post war period. Without an understanding of the key drivers of
profit margins you could be very badly blindsided. His firm, GMO, has one of the best long term asset allocation track
records in the investment management business. They currently have a diametrically opposed view to Wall Street about
the outlook for profit margins.
16 Dec 2011, MF Global shows fractional reserve banking as a chain of lost ownership for someone else's benefit
It is clearly time to become more aware of what you are involved with in the current banking system.
28 Sept 2011, Understanding
What Happens Next - Chris Martenson
In this article, Chris Martenson has summarized the current situation
exceptionally well. The chart of debt growth since 1970 really says it all. This
shows that we are now at a point where our unsustainable monetary system may
have reached significant limits.
24 June 2011, The Unconstitutional U.S. Monetary System - Dr. Edwin Vieira, by David Galland
Edwin Vieira, Jr., holds four degrees from Harvard: A.B. (Harvard College), A.M. and Ph.D. (Harvard Graduate School of Arts and Sciences), and J.D. (Harvard Law School).
For more than thirty years, he has practiced law, with emphasis on constitutional issues.
22 June 2011, The EMU as a Self-Destroying System
When property rights in money are poorly defined, negative external effects develop. The institutional setup of the euro,
with its poorly defined property rights, has brought it close to collapse and can be called a tragedy of the commons.
21 Apr 2011, Fear the Boom, Not the Bust
"The sooner the boom ends, the better. The boom destroys capital; the bust replenishes capital through savings. The
economy needs savings, which are the foundation of production. The current fad, promoted by all central banks worldwide,
is exactly the opposite. Central banks want everyone to believe that it is spending that drives the economy, not savings.
This is called "Shop-Until-You-Drop Economics," and it is inherently flawed and unsustainable."
The Failure of Western Style Democracy
Here is an interview with Hans-Hermann Hoppe the author of "DEMOCRACY, THE GOD THAT FAILED. The Economics and Politics of Monarchy,
Democracy, and Natural Order."
The End of Sound Money and the Triumph of Crony Capitalism - David Stockman
"In the immortal words of George W. Bush, our most economically befuddled President since FDR,
"I've abandoned free market principles in order to save the free market system."
Based on the panicked advice of Paulson and Bernanke,
of course, the president had the misapprehension that without a bailout "this sucker is going down." Yet 30 months after the fact,
evidence that the American economy had been on the edge of a nuclear-style meltdown is nowhere to be found.
In fact, the only real difference
with Iraq is that in the campaign against Saddam we found no weapons of mass destruction; by contrast, in the campaign to save
the economy we actually used them — or at least their economic equivalent."
Stay Out of the ROOM
The key to successful retirement planning is understanding the Safe Withdrawal Rate, the percentage of assets that it is safe to withdraw on an
annual basis for living expenses. This article provides an exceptionally good perspective on this crucial issue. The additional new key
point this article makes is that realistic return assumptions and risk management are also key components. The ROOM stands for Running Out Of
Money, and this is no joke if it happens when you are 85. Although the averages say this may be a low probability based on certain assumptions,
always remember that for you in particular this is most likely an unacceptable outcome. In this case it makes sense to increase your probabilities
above what these models suggest in any way you can.
Hazlitt and Keynes: Opposite Callings
It is hard to form a truly valuable economic viewpoint unless you have studied the evolution of economic ideas, and understood
the personal history of some the main contributors to economic thought. This outstanding article lays out the parallel lives
of Keynes and Hazlitt, who lived through the same times, but whose characters were as different as their economic thinking.
Clarity on the Gold Standard and Fractional Reserve Banking
In order to get to the root cause of our economic problems we have to understand the natural fraud that exists at the
foundation of our money system. The truth is that fractional-reserve banking amounts to violating the nature of the
law of property rights. This does not seem to be understood by even the chief economics commentator of the Financial Times.
The simple core economic flaw
On June 13 and 24, 1844, Robert Peel pointed out in the House of Commons that in each one of the previous monetary crises
"there was an increase in the issues of country bank paper" and that "currency without a basis … only creates fictitious value,
and when the bubble bursts, it spreads ruin over the country and deranges all commercial transactions."
Why the IMF Meetings Failed and the coming Capital Controls - Michael Hudson
On the deepest economic plane today’s global financial breakdown is part of the price to be paid for the Federal Reserve and U.S.
Treasury refusing to accept a prime axiom of banking: Debts that cannot be paid, won’t be. They tried to “save” the banking system
from debt write-downs in 2008 by keeping the debt overhead in place while re-inflating asset prices. In the face of the repayment
burden shrinking the U.S. economy, the Fed’s idea of helping the banks “earn their way out of negative equity” is to provide
opportunities for predatory finance, leading to a flood of financial speculation.
Larry Summers and the
Subversion of Economics - Charles Ferguson
Over the past 30 years, the economics profession—in economics departments, and in business, public policy,
and law schools—has become so compromised by conflicts of interest that it now functions almost as a
support group for financial services and other industries whose profits depend heavily on government policy.
The route to the 2008 financial crisis, and the economic problems that still plague us, runs straight through
the economics discipline. And it's due not just to ideology; it's also about straightforward, old-fashioned money.
Black Swans and Bank Leverage - Gary North
"There is no solution to black swan events for as long as central bank protection is available to the largest banks,
which are too big to fail"
Six Impossible Things - John Mauldin
"Of course, the fixers have no idea what they are doing. All they have is a crackpot theory about the way an economy works. They stick with it despite the fact that it makes no sense in theory...and has never actually worked in practice.
In the real world, Mr. Market always wins. He always wins because he IS the real world." - Bill Bonner
The Financial Crisis is Far From Over
"The twin pillars of Keynesianism, official deficits and monetary inflation, are being tried on both sides of the pond but they are not working as they have in the past. Debt saturation has sapped the ability of either policy to work and, because of this lack of traction, you can be sure that additional financial crises lurk in the shadows ready to pounce.
The odd part in this story to me are how few people, especially finance professionals that should know better, seem to really understand and accept the idea that the game has fundamentally changed."
Chris Martenson once again explains what everyone should know but desperately wants to ignore.
14 Risks with Supposedly "Safest" Securities
There is no prospectus for investors when they buy US Dollars, or Treasuries, but it is a legal requirement for any other security or investment. What would that prospectus say? What should every investor be fully aware of as an owner of US Dollars or Treasury. Are you fully aware of all these 14 points?
Sovereign Debt Defaults and You
"The idea that our entire system of money and promises is bankrupt is at once both simple to prove and nearly impossible to internalize and accept. But there it sits, unmoving, and it is our job to come to grips with it as best we can."
A very clear and simplifying article on this subject from Chris Martenson.
40 year trend in gold - By Dr. Steve Sjuggerud
With the recent underperformance of gold this might be an ideal time to familiarize yourself with the 40 year trend in how gold performs in the long term.
Executive Summary - By Chris Martenson
As is increasingly the case it is crucial to look deep into real data, and not accept conventional opinion.
The current investment euphoria provides a crucial opportunity to reallocate you assets in a sustainable direction.
The markets are never more dangerous than when consensus is at bullish extremes and investors are complacent
about risks.
In this article, Chris Martenson does an outstanding job of setting out the immense risks underlying financial markets.
Zimbabwe: A Fresh Start - By Alf Field
The history of Zimbabwe provides the latest episode of the tyranny and inevitable traumatic collapse of a fiat monetary system. Fortunately, Zimbabwe is now improving very quickly. Debt has been wiped out and there is no longer any control or currency manipulation within the country over the currency in use. Equality and confidence are returning at lightening speed, and well as peace and prosperity.
We would all be well served to consider where other countries are in their own cycle, and learn the timeless lessons of the history of monetary systems unbacked by tangible assets. If this was widely understood, why would any intelligent majority ever choose a fiat monetary system?
Economics and Moral Courage - by Llewellyn H. Rockwell Jr.
"To be an economist with integrity means having to say things that people don't want to hear and especially to say things that the regime does not want to hear. It takes more than technical knowledge to be a good economist. It takes moral courage, and that is in even shorter supply than economic logic."
Lew Rockwell
Audit the Fed - by Thomas E. Woods, Jr.
The superstitious reverence that Americans have been taught to have for the
Federal Reserve is unworthy of the dignity of a free people. The Fed enjoys a
government-granted monopoly on the creation of legal-tender money. It is not an
unreasonable imposition for Americans to demand to know about the activities of
such an institution. It is common sense.
Property Rights Take a Hit
"... the fact that two of the highest-ranking government
officials can conspire to violate both securities laws and private property rights is abhorrent to everything America supposedly
stands for. If they get away with it, which I believe they will, the precedent and the message will be chilling."
Peter Schiff
The End Game Draws Nigh – The Future Evolution of the Debt-to-GDP Ratio
The
debt-to-GDP Ratio is the ultimate determinator of the success or ruin of any nation.
This article explains why an original Obama supporter has never been more concerned.
This is perhaps the best economic analysis that I have read this year.
Can Congress Write Any Laws It Wants? - Andrew P. Napolitano
"Some men think the Earth is round, others think it flat… But, if it is flat, will
the King’s command make it round? And if it is round, will the King's command flatten
it? … NO."
Europe On the Ropes - Niels C. Jensen
This is an excellent article comprehensively setting out the scale, character and depth of the enormous financial issues facing Europe.
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Financial and Investment
Advice
The real
purpose of financial planning and investing is to enable financial
freedom and security. The less we have to worry about our finances,
the better able we are to have peace of mind and enjoy life to the
full. The sooner we realize this and take control of our own
financial future the better, because getting on the right track at
an early stage makes it easier to achieve our financial
goals.
Financial
Planning
Mostly financial planning amounts
to understanding one's own financial position as well as possible,
and setting your self goals. You need to be clear about your assets
and liabilities, your income and expenses. Then you need to
formulate an achievable plan. This is where you need to take some
care and Market Notes 64
describes the issues and provides a very simple and effective
approach.
Investment
Advice
Now you are in a good position to
consider investing your savings in the context of your financial
plan. You may be able to invest on your own, but as described in
Market Notes 67 most investors are not very successful at
investing their own money. If you decide to seek out investment
advice you need to be aware of the alternatives that are available
in order to find the best advice for
you.
Different Levels
of Investment Advice and
Protection
There is
considerable confusion in the investment community regarding
financial advice and the people who dispense it. In the financial
world there are basically two types of advice. One comes from
stockbrokers, and the other comes from Registered Investment
Advisers.
Not only do
most investors not know the difference between these two kinds of
advice. In fact, most aren't even aware a difference exists. The
distinction is very important to understand because it will directly
influence the quality of advice and level of protection the investor
receives.
TD Ameritrade
have conducted an awareness and opinion survey on investor
perceptions on this issue, as well as a note on Financial Advice
which explains the difference.
TD Ameritrade Investor perception study (pdf)
TD Ameritrade Financial Advice difference explained (pdf)
These
articles reveal the substantial ignorance about the distinctions,
and also once explained, shows a clear preference for Registered
Investment Advisers. Its not hard to understand why when you look at
the discrepancies.
Chris Belchamber Investment Management believes
that investment advice can only be genuinely focused on the clients
best interests if the adviser is solely
remunerated by clients. An exceptional service also needs to be cost
effective to the client, and backed up with experience, a track
record, and provided with transparency and
dialogue.
Full Brochure
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