Tuesday, September 23, 2014

GDP is Waste

By Charles Hugh Smith

Any system that has no way to measure, much less prioritize, opportunity costs and maximization of utility is not just flawed--it is terribly misguided and structurally destructive.
We're told the gross domestic product (GDP) measures growth, but what it really measures is waste: capital, labor and resources squandered in quixotic pursuit of waste masquerading as "growth." 

50 million autos and trucks stuck in traffic, burning millions of gallons of fuel while going nowhere? Growth! All that wasted fuel adds to GDP. Everyone who works from home detracts from "growth" since they didn't waste fuel sitting in traffic jams.

Repaving a little-used road: growth! Never mind the money could have been invested in repairing a heavily traveled road, or adding safe bikeways, etc.--in the current neo-Keynesian system, building bridges to nowhere is "growth."

GDP has no mechanism to measure mal-investment or the opportunity costs of squandering capital, labor and resources on investments with marginal or even negative returns
Buying a new refrigerator that could have been fixed by replacing a $10 sensor: growth! GDP has no mechanism for calculating the utility still remaining in roads, vehicles, buildings, etc. that are replaced--throwing away all the fixed-investment's remaining utility to buy a new replacement is strongly encouraged because it adds to "growth."

Building and maintaining extraordinarily costly weapons systems that are already obsolete: growth! The gargantuan future costs of interest paid by taxpayers on the debt borrowed to pay for the obsolete weapons is not calculated by GDP. The staggering costs of indebting future taxpayers is ignored by GDP--the only thing that counts in GDP is "growth."

Tearing out a functioning kitchen to install granite countertops and new appliances: growth! GDP has no mechanism to measure the decline of quality in new appliances, or the marginal utility of granite countertops over the existing surfaces.

Writing complex derivatives designed to defraud the buyers: growth! The immense profits booked by investment banks and the bloated salaries of the financiers who wrote and sold the guaranteed-to-default derivatives add greatly to GDP.

Creating another huge bureaucracy to oversee the financiers: growth! Squandering taxpayers' money on more layers of bureaucracy adds to "growth" and GDP--never mind that the labor is all wasted, since a 12-page law could have achieved the same results at near-zero cost.
GDP has no mechanism to measure the value of alternatives that use less capital, labor and resources to get the same results.

Tossing out an item of clothing that was worn once or twice in favor of the latest fashion: growth! GDP has no mechanism to measure what else could have been done with the oil burned to ship the new item of clothing across the Pacific and truck it to the retailer; if a consumer spends money on the new clothing, GDP registers that as "growth" (the only economic metric we measure and value) without calculating what else could have been done with the non-renewable resources squandered on frippery.

GDP is another outmoded part of the Keynesian Cargo Cult that worships "growth" and spending (a.k.a. aggregate demand) as the only goal. The Keynesian Cargo Cultists believe that paying people to dig holes and refill them is an excellent strategy for "growth:" ordering bureaucrats to bury wads of cash in abandoned mines and then turning the unemployed hordes loose to find the cash is Keynes' own example of worthy ways to generate "growth."

This narrow way of understanding the world completely ignores the non-renewable nature of fossil fuels and the critical concept of maximizing the utility of capital, labor and resources.
Any system that has no way to measure, much less prioritize opportunity costs (i.e. what else could have been done the capital, labor and resources) and maximization of utility is not just flawed--it is terribly misguided and structurally destructive.

Wednesday, September 17, 2014

A History Of Money & Banking In the United States- Part 1

Watch the Canadian Dollar

I would not jump out on a limb here and make any grand prognostication or hard call here, as everything may change come this afternoon. That said, we are seeing some interesting trading dynamics in the Canadian Dollar, represented here by the Currency Shares Trust- FXC. Lets look at the chart-

What is interesting here is that despite the Euro, the yen, and the pound all breaking down below recent or long-term support levels, the Canadian Dollar has held the line. Of course the trend may be more of a story concerning interest rates in Canada, but it may also indicate a lack of conviction by Canadian Dollar traders as it pertains to the possibility of an interest rate increase by the Fed. More so, significant upside volume has come in at the support levels, which may also be another indicator that traders in the Canadian/US cross rate see little to muted changes in the interest rate differentials between the two nations. The Canadian Dollar trade should probably be on your screen of indicators to watch.

The Fed Has A Big Surprise Waiting For You

from The Automatic Earth

The topic of potential interest rate hikes by central banks is no longer ever far from any serious mind interested in finance. Still, the consensus remains that it will take a while longer, it will take place in a very gradual fashion, and it will all be telegraphed through forward guidance to anyone who feels they have a need or a right to know. Sounds like complacency, doesn’t it?

Now, it seems obvious that the Bank of Japan and the ECB are not about to hike rates tomorrow morning. In Europe, dozens of national politicians wouldn’t accept it, and in Japan, it would mean an early end to many things including Shinzo Abe.

But the Bank of England and the Fed are another story. Though if the Yes side wins in Scotland next week, the narrative may change a lot of Mark Carney and the City. That leaves the Fed. And it’s important to realize and remember that, certainly after Greenspan entered the scene, speaking in tongues, the Fed has become a piece of theater. The Fed is about perception. About trying to make people believe something, and make them act a certain way that they choose for them.

That’s why after the Oracle left they pushed first a bearded gnome and then a grandma forward as the public face. The kind of people nobody would perceive as a threat. Putting a guy who looks like second hand car salesman in charge of the Fed wouldn’t work.

Not when a big financial crisis looms, and then continues on for a decade and counting. That makes keeping up appearances the no. 1 priority. That’s when you want a grandma, or you’d lose your credibility real fast. You need grandma for your theater, for the next play you’re going to stage.

That market volatility today is at record lows is part of a big play, or a big scene in a play if you will. And the goal is not to make markets look good, as many people think. Making markets look good, making the economy look good, is just an intermediate step designed to lure everyone in.

You make people believe you got their back. All the big investors. Because they make tons of money, while they thought maybe the crisis could have really hurt them. Even the public at large feels you got their back. Because they don’t understand what the sleight of hand is.

The big investors understand, but you got them believing you will play that hand forever, or let them know well ahead of time when you intend to fold. The big investors think you will skim the public, but not them. They think you’re all on the same side. And the public thinks you’re healing the economy, and saving their jobs and homes and pensions.

When rate hikes are discussed, like I did two weeks ago in This Is Why The Fed Will Raise Interest Rates, most people have similar initial reactions. ‘They can’t do that, it would kill the economy, or at least the recovery’.
But the truth is, there is no recovery. It’s just a scene in a play. And the economy is completely shot, it only appears to be left standing because the Fed poured oodles of money into it. Or rather, into a part of the economy that it can control, that it can get the money out of again easily: Wall Street banks. And Wall Street equals the Fed.

Charles Hugh Smith, in What If the Easy Money Is Now on the Bear Side?, notices that there are hardly any bears left in the market, and that shorts are disappearing as a source of revenue for bulls. Interesting, but he doesn’t yet connect all the dots. CHS thinks big money managers can make ‘the play’, that they can fool the rest of the market and unleash a tsunami that will bury the bulls.

I don’t think so. I think what goes on is that the Wall Street banks, many times bigger than the biggest money managers, see their revenues plunge. As they knew they would, because free money and ultra low rates are not some infinite source of income, since other market participants adapt their tactics to those things as well.
Which is what Charles Hugh Smith points to, but doesn’t fully exploit. And it’s not as Wolf Richter presumes either:
After years of using its scorched-earth monetary policies to engineer the greatest wealth transfer of all times, the Fed seems to be fretting about getting blamed for yet another implosion of the very asset bubbles these policies have purposefully created.
The Fed doesn’t fret. The Fed has known for years that the US economy is dead on arrival. They’ve spent trillions of dollars backed, in the end, by American taxpayers, knowing full well that it would have no effect other than to fool people into believing something else than what reality says loud and clear.

Philip Van Doorn, who I quoted two weeks ago, got quite a bit closer in Big US Banks Prepare To Make Even More Money
For most banks, the extended period of low interest rates has become quite a drag on earnings. Net interest margins – the spread between the average yield on loans and investments and the average cost for deposits and borrowings – are still being squeezed, since banks realized the bulk of the benefit of very low interest rates years ago
That is the essence, and that is why grandma will announce higher rates, against a backdrop of 4% GDP growth numbers and a plethora of other ‘great’ economic data and military chest thumping abroad.
The US economy is dead. The Fed has known this for a long time, but pumped it up to where it is now to draw in all the greater fools, the so-called big investors who have made money like honey from QE and ZIRP. They are the greater fools. The American real economy ceased being a consideration long ago.

We’re in for big surprises, and they won’t be pretty, they’ll be pretty nasty. There are far too many people who think of themselves as smart who don’t see the difference between a theater play and a reality show. And I don’t mean CHS or Wolf, they’re much more clever than your average investment advisor.

The Fed will raise rates because that will make the biggest banks the most money. There’s nothing else that matters. The Fed can’t revive the US economy, that’s just a foolish notion. But it can suck a lot of wealth out of it.

Cycles Suggest......... With David Gurwitz of Charles Nenner Research

 A rather interesting interview with David Gurwitz of Charles Nenner Research. Cannot say I have heard of the research firm before this but my guess is that I will doing some reading soon.

Tuesday, September 16, 2014

Creative Benefits of Boredom

A rather compelling article from the Harvard Business Review

In a past life, I used to be required to participate in quarterly sales meetings. These meetings followed a typical format: fly everyone in the company to an amazing destination, then lock them inside a hotel ballroom for 10 hours a day and force them to listen to speeches from sales leadership, as well as marketing, research, and legal departments (usually with a motivational speaker to close it all out). Try as they might, these meetings were boring. The real shame was that they were intended to rally troops and get the sales organization excited about new initiatives, as well as inspire them to think up new and better ways to increase sales in the field. The only saving grace: the late-night dinners. After 10 hours of being talked at, my colleagues and I would escape the hotel, find a local restaurant and talk to each other. Despite our best efforts, these dinner conversations were always about work – and good thing too. These chats were filled with new ideas for dealing with problem clients or increasing sales of new products. Late-night dinners became the source of the new and exciting our meetings were supposed to elicit.

Boredom at work (and meetings) is something nearly all of us feel at times, but admitting that boredom to coworkers or managers is likely something few of us have ever done. It turns out, however, that a certain level of boredom might actually enhance the creative quality of our work. That’s the implications of two recently published papers focused on the link between feeling bored and getting creative.

In the first paper, researchers Sandi Mann and Rebekah Cadman, both at the University of Central Lancashire, explained the creativity-boosting power of boredom in two rounds of studies. In both rounds, participants were either assigned the boring task of copying numbers from a phone book or assigned to a control group, which skipped the phone book assignment. All participants were then asked to generate as many uses as they could for a pair of plastic cups. This is a common test of divergent thinking—a vital element for creative output that concerns ones ability to generate lots of ideas. Mann and Cadman found that the participants who had intentionally led to boredom through the phone book task had generated significantly more uses for the pair of plastic cups.

The remainder of the article can be found here

Guessing this implies that if you want more creative and thought provoking investing ideas, undertake some boring objectives before your search.

Are Rate Hikes Now Off the Table

Judging by today's intraday action, either the market is pushing out their expectations for a rate hike further out or discounting the idea of Yellen raising interests at all.

The Dollar trade

The Gold/Precious metal trade



The oil trade

Medium term treasury rate- 5yr CBOE

and finally equities, the SPY

Stocks Going Up for the Wrong Reasons

Let me say this, I think that equities will continue to rise until they don't. That said, I have limited exposure to the broader market overall and would rather pick my spots carefully. My thoughts fall more in line with Schiff's below, the economy remains towards the weaker than assumed, but the money pumping should continue to help risk assets..... until it doesn't.

Monday, September 15, 2014

BIS: All Asset Prices Elevated

In its quarterly review, released Sunday, the Bank of International Settlements (BIS) stated that the Central Banks have elevated prices of all asset prices. As reported by Reuters-

In its quarterly review, the BIS said financial market volatility spiked higher in August on the back of geopolitical concerns and worries over economic growth, but quickly returned to "exceptional lows" across most asset classes.

"By fostering risk-taking and the search for yield, accommodative monetary policies thus continued to contribute to an environment of elevated asset price valuations and exceptionally subdued volatility," the BIS said.

The comments echoed the institution's warning earlier this year that rock-bottom interest rates had led to "worrying" signs of unsustainable growth in property and credit markets in some countries.
At some point,  manipulating asset prices will lead to another downturn, and with all prices being manipulated the risks we see an event paling the 2008/2009 recession are increased. But similar to the Heidelberg Uncertainty principle, you can place a probability on what or when but rarely both. Historically, downturn has corresponded with a contraction in the central banks balance sheet and/or high powered money, but will this time be different? Will it be a change in the rate of change that sends events down?

The Dollar Is Not What It Used to Be

Via- The Burning Platform blog

Let Banks Fail!- Dr. David Howden

From the Mises Institute

The Dollar Rally Won't Give Up the Ghost

The rally in the dollar just won't give it up.

This is as the many of the technical measures are flattening on the momentum side, and have been, while flashing the recent price rise has moved to more extreme levels relative to the recent past. However, this move in the dollar makes sense in regards to the analogy of saying the ugly sister looks beautiful relative to her even worse off siblings. Just look at the price trends of the British Pound, the Euro, and the Yen.




A virtual litany of who's-who in money printing and currency debasement. By proxy, and despite the unlikely event the Fed will reduce an overly bloated balance sheet that stands leveraged over 50-to-1, the dollar is the winner. When seeing this dynamic, I am reminded of comments from many Austrians For instance, like the comments from Jim Roger's below. 

“Brazil, China and Russia could easily put something together to compete with the US dollar,” Rogers said, leaving out one component of the BRICs alliance. “The US dollar is a terribly flawed currency. I’m an American. I hate to say that. But the US has serious problems, the world has serious problems. We need something else” and potentially a competing world currency could be developed. If this were to occur, the US and its economy might be put in a straight jacket as the ability to engage in large deficit spending could be curtailed." 

For now, the ugly sister that is the dollar is winning, but that does not make her pretty.

An Argument for Behavioral Finance/Contrarian Investing

I was reading this article from the WSJ earlier today and it provides a very good, indirect argument for contrarian investing.

It happened last Sunday at football stadiums around the country. Suddenly, 50,000 individuals became a single unit, almost a single mind, focused intently on what was happening on the field—that particular touchdown grab or dive into the end zone. Somehow, virtually simultaneously, each of those 50,000 people tuned into what the other 49,999 were looking at. 

Becoming part of a crowd can be exhilarating or terrifying: The same mechanisms that make people fans can just as easily make them fanatics. And throughout human history we have constructed institutions that provide that dangerous, enthralling thrill. The Coliseum that hosts my local Oakland Raiders is, after all, just a modern knockoff of the massive theater that housed Roman crowds cheering their favorite gladiators 2,000 years ago.
(For Oakland fans, like my family, it's particularly clear that participating in the Raider Nation is responsible for much of the games' appeal—it certainly isn't the generally pathetic football.)

In fact, recent studies suggest that our sensitivity to crowds is built into our perceptual system and operates in a remarkably swift and automatic way. In a 2012 paper in the Proceedings of the National Academy of Sciences, A.C. Gallup, then at Princeton University, and colleagues looked at the crowds that gather in shopping centers and train stations.

Other social animals have dedicated brain mechanisms for coordinating their action—that's what's behind the graceful rhythms of a flock of birds or a school of fish. It may be hard to think of the eccentric, gothic pirates of Oakland's Raider Nation in the same way. A fan I know says that going to a game is like being plunged into an unusually friendly and cooperative postapocalyptic dystopia—a marijuana-mellowed Mad Max. 

The remainder can be found here.

Fed Haters vs. Fed Cheerleaders

I am siding the with Austrians on this debate.

How to Stay Disciplined in Investing

Some great advice here. Jives with an article I was reading earlier today about crowd following.

Thursday, September 11, 2014

Our Pattern Loving Brains, Spooky Coincidences, Randomness, and Biases

Behavioral finance anyone?

Rising Rates and Gold

The market is most definitely factoring in a rise in interest rates, which is not only pressuring gold but also lighting a fire under the dollar. This has occurred in junction with the continuation of Abe's Japanese QE and talk that Draghi will implement a European style QE.

That said, the price of gold may have already factored the above scenario in. So says the folks at Kitco news.

The points presented appear valid. First off, look at the price of the dollar, here represented in the UUP.

Seems like a short-term parabolic move to me. A parabolic move that may be losing its upside luster. A pullback in the price of dollar, would likely lead to the alternative trade of higher gold prices.

More so, many of the gold/precious metal equities continue to bounce around their respective resistance levels. Lets turn to my go to guy in the space- RGLD.

Even though gold price are scooting around the $1,240 level, off from around the $1,300 per ounce level just a few weeks ago, RGLD refuses to give up the ghost. Not that it still can't give it up and test the 200 day moving average, the stock price, volume, and technical measures look more like a tentative consolidation. Look, I am still of the opinion that we may still see lower prices in the precious metal investment complex. Once we see fed change the language of their guidance, we are likely to see a reversal in the buy the rumor, and investors/traders may sell the news. I would not be surprised if we do not see some information released at this point, allowing for more informed decisions to be made.

And just for informational purposes, the gold timing models I employ have turned more positive.

6-month rolling timing model has dipped below the -1 demarcation. Negative results in the timing model suggests a more positive entry point in the precious metal equities and as gold prices follow the equities, the price of gold.

Wednesday, September 10, 2014

Blame the Fed for High Asset Price- Faber

 The folks at Wall St for Main St walk through Marc Faber's outlook on the markets, the fed, interest rates, precious metals, and the general investment climate.

How To Think About Hedge Fund Activism

This video below is a recording of Alon Brav detailing his research in to hedge fund activism and the return enhancement actions under taken by these funds. I presented this important research at least once, if not multiple times, but the following does add to the prior commentary.

Gold In the United States

Some worthwhile facts and history concerning gold in the US. Via the Visual Capitalist

When the Bull Market Will End- Jim Rogers

Sage thoughts from Mr. Rogers

Gold Consolidation Leads Increased Prices in Gold- CMP Group

To help frame your views on the precious metals.

Just Sitting on Your Hands with Precious Metals

I was out yesterday hemming and hawing with musings and insights into the general course of precious metal investments in regards to the central bank machinations, key movements in the currency markets, a dial down of international political flare ups, etc. Although I think we could see some more downside here in the precious metals complex, for my money, I am staying with the investment. Some of the my largest investment mistakes have come at the hands of attempting to be to cute, too 'fine tuned', and too on the ball when I should have just been sitting on my hands...... more so in regards with a thesis I believe remains in tact but I was attempting to hold gains. 

But lets face it, the dollar trade is the big mo trade at the momentum and that is unlikely to stop on a dime. Just look at that gain......

More so, yesterday's pullback in no way suggested a reversal moment, especially in regards to the action in the Yen and Euro. Here exemplified by the FXY and FXE.



That said, parabolic moves like we see on the dollar rarely maintain themselves in the long-term. If I was to reduce my precious metal positions, a pull back in the dollar signaling potential strength in the precious metals may be the time to do it.

Taking A Precious Metal Break With AAPL

Just to be fair, I have no skin in the game with AAPL shares. That said, AAPL is such a large share of the overall equity market, the share remain hard to ignore. Additionally, yesterday Apple hosted the big event where where the company not only announced iPhone 6 but the also the Apple Watch, which frankly I just don't get on why consumers would need an Apple watch but what do I know.

That aside, I thought the price action in yesterday's trading was amazing to watch. Lets look at the charts. F\

First the annual....

and then the intra-day chart

What is interesting here is that it appears some big investors were using the strength to get out in big way. Just look at that volatility in yesterday's trading. Outside of thinking that option traders probably made out well with the volatility, the other idea that crossed my mind was does this volatility portend to an increase in the market's risk. I guess we shall see. More to note and worrisome, we have seen two days with volume coming off the high on AAPL shares. This is as a gap is open at $76 while the RSI and MACD slow relative to the price trend. If owned AAPL shares, I would be concerned if the price AAPL pierced the 50 day moving average.

Tuesday, September 9, 2014

Risk Revisited- The Practical Guide to Behavioral Finance

Howard Marks of Oaktree Capital explains the difference between volatility and risk. Although the academic world, and in turn many aspects of the profession, look at volatility and risk synonymously, Marks explains why this cannot be so. Alternatively, you could view the below as a practical guide to behavioral finance.

And Marks' discussion on risk

The Business Of Movie Ratings

This take is a rather interesting look at the business of movies. the associated ratings, and in some respect society as a whole.

Gold Musings and the Patience of Job

I have to admit, I have been rather quiet the last few days. Aside from attending to my day job and more importantly family events, the real elephant in the room where it pertains to the investment universe has been the gold sell off. And to be honest, I really did not know how to comment in regards to what one should do. On one hand, I remain bullish long-term on the yellow metal and the precious metal equities. However on the other hand, and yes I am putting on an economists hat here, many of the precious metal equities have busted their May/June support levels, which could indicate further downside. The break in some of the equities has occurred in conjunction with the price of gold piercing the $1,265 support level. With many of those technical levels taken out, I have been debating holding the line on some of gains for year in the hopes of jumping back in later at better prices. To frame my thinking, the long gold trade has been hit from many sides in the last few weeks. Lets review some of these occurrences.

- The geopolitical environment has come off the boil with the Ukrainian cease fire accord with Russia

- QE is apparently coming to a close in the US, which has coincided with chatter from both the Fed and the investment community about an increase in interest rates sooner rather than later.

- The take-down in US QE, coincidentally right, has come with an indication that Draghi will now push the ECB in to a European style QE.

The latter two has pushed the price of the dollar higher, as the Euro price in the currency markets have plunged. just look at the charts.....

The dollar has gone nearly parabolic.

And inversely, the Euro has plunged.

This trading dynamic has put pressure on the price of gold and correspondingly the precious metal equities. Surprisingly though, the price of gold has held up well despite the parabolic moves in the currency trades. this is while the precious metal equities have remained stronger, technically, than the metals. Bottom line, I am unsure of a recommend course. I think we are sitting at a critical juncture in the precious metal space and prices could move in either direction. Although I have been accused of having the patience of Job, to a fault, I also understand doing nothing is sometimes the best course of action.

Monday, September 8, 2014

Everything (And More) on Bitcoin

Although I have shown you many views and opinions on Bitcoin, in conjunction with coming out saying the price some months ago was likely bubbly, in all actuality I really have no opinion on the crypto-currency. The machinations, the debates, the price changes are damn interesting to say the least, but as a money alternative or substitute for any other form of money...... I just don't know.

In that vein, I was watching a few pieces on Bitcoin over the weekend, and I thought I would share some of these with you.

First, on the fragility of the infrastructure.

Second, an older overview of everything Bitcoin.

Thursday, September 4, 2014

Biderman- Stay Bullish Until

Dealing with a cold today, but I thought this was so worth sharing, as it should frame your investment decision making and help provide some road signs as for what to watch to indicate the direction of the markets. My thoughts, I am bullish in as much as equities continue to make new highs, knowing that record highs presage record highs, but also side with the bearish camp long-term, understanding that the market is manipulating vis-a-vis the Fed's money pump.

Wednesday, September 3, 2014

The Fed Thinks You are Hoarding Cash

The folks at the St. Louis are out with a research paper, as reported by CNBC, claiming that U.S. consumers are hoarding cash and that has made the Fed's QE efforts infective. I guess the economists at the Fed don't take a look at their own data.

The personal savings rate has remained largely flat over the last five years. So unless consumers are shoving cash under their mattresses. I guess the economists also forgot to look at the banks reserve holdings, which have exploded over the same time frame.

This is nothing to the fact that financial inter-mediation makes the whole argument (that is unless the cash is literally going into mattresses) of cash on the sidelines, savings as negative, reserves lockup, and hoarding cash a red herring. But great job trying to make the argument that consumers are hoarding cash.

China's Slow Crash with Michael Pettis

You have undoubtedly heard of or read a quote pertaining to Michael Pettis' view on the coming crash of the Chinese market. Mr. Pettis delves deeper in to that thesis and gives listeners a broader view on what he sees coming for China.

Low Rate Hallucination and the Fed End Game

This video is a must listen to at least once, if not twice.And just to save you some time, the first half is far more interesting and worth your time versus the back half, with the first half dealing with the machinations of the Fed and how they are manipulating the market. The back half dips more in to the conspiracy theory waters and probably can be skipped.

7 Rules To Beat The Market

Some good advice here.Rule 5 especially 

By Charles Rotblut and posted to economatters
Last week, I discussed how beating the market is hard to do. I wrote the commentary to provoke an awareness of the challenge that faces anyone pursuing an active strategy. Bluntly put, if you try to handpick investments without a disciplined, rational, well-thought-out plan for doing so, (barring really good luck) you will underperform.
A task that is hard is not one that is impossible. Individual investors can do better than the S&P 500. Today, I’m going to give guidance on how. It will be guidance that applies to a wide variety of specific approaches, including value, growth and technical analysis. I’m going to intentionally keep the guidance broad for an important reason: Regardless of the investing style you like to follow, the overarching rules for success don’t change.

Rule 1: The optimal strategy is not one that maximizes return, but rather one that helps you stick to your long-term investing plan and achieve your goals. Big returns always sound enticing. Pitched by someone with a charismatic personality, a high-return strategy sounds even better. But if you can’t stick to the strategy because of its complexity, the volatility it incurs, the time commitment it requires, the number of transactions associated with it, your interest level or any other reason, then it’s not an optimal strategy for you. If you are unwilling to or can’t stick with a strategy, don’t use it.
Rule 2: Set up procedures to keep your emotions in check. The biggest threat to most people’s portfolios is not the economy, the Federal Reserve, valuations, or high-frequency traders, it’s their brain. The human mind evolved to cope with very different hazards than Mr. Market’s ever-changing moods. So be cognizant of what your emotional tendencies are and set up procedures to keep them in check. These can include pre-written sell rules, limiting how often you check your portfolio, triggers to periodically adjust your portfolio or consulting with a financial adviser.
Rule 3: Think and invest different. Your biggest advantage as an individual investor is that you are not tied to an investment objective. Rather, you are allowed to invest in anything your wealth, your financial goals and the tax code allow you to. So why focus on the 300 largest U.S. stocks when there are nearly 5,000 listed on the U.S. exchanges and a large choice of funds that invest in international securities? Better yet, why use the same strategy everyone else is or focus on the stocks currently making headlines? If you want to beat the market, you have to invest in a different manner than most people.
Rule 4: Use the wisdom of the crowds to your advantage. While market efficiency is a big hurdle for active strategies to overcome, there are benefits to be gained from paying attention to the collective thoughts of market participants. We (AAII) use relative valuation rules for managing our portfolios, letting the market help guide our views about what is cheap and what isn’t. The trend in earnings estimate revisions can tell you if a company’s outlook is brightening or worsening. Momentum indicators such as the 26-week relative price strength rank pair well with low-valuation strategies.
Rule 5: Higher Valuations = Greater Expectations = More Room for Disappointment. The more favorably people view a company, the smaller its margin for error. Far more money is made from buying stocks that are undervalued than from buying stocks that are overvalued. Even if you are a growth investor, make sure the stock is undervalued relative to its prospects (after ensuring those prospects don’t assume an overly optimistic outlook).
Rule 6: Lower your costs. Every dollar you pay in investment expenses and transaction costs is a dollar you will never see again. In addition to trading with less frequency, take advantage of the tax law. Put your most tax-efficient investments in your traditional brokerage accounts, and use your tax-sheltered accounts (e.g., IRAs) for your least tax-efficient investments and strategies. Your goal should be to maximize the benefit from what you spend.
Rule 7: Develop a consistent, well-defined approach to investing and stick to it regardless of what the market is doing. Being a successful active investor requires having a plan based on factors and strategies proven to work over the long term.

Bond Risks

Too Keynesian for thinking as to the outlook of the economic environment but many aspects of present market outlook are interesting to note.Additionally, one should stand up and take notice when a bond manager starts touting equities as a better investment.

That aside, you have to admire any investment professional in asset management touting cash as the best investment. 

Tuesday, September 2, 2014

The ISM Rings The Bell?

Just a quick comment on the yesterday's release of the Purchasing Managers Index from the Institute of Supply Management. Although the PMI print of 59 was one of the strongest in recent memory, mainly on the back of production and new orders, the markets apparently were looking for more. This is as the equity markets traded relatively flat on the day. More so, look at the inventory survey results in the table below, as presented by the ISM.




PMI® 59.0 57.1 +1.9 Growing Faster 15
New Orders 66.7 63.4 +3.3 Growing Faster 15
Production 64.5 61.2 +3.3 Growing Faster 6
Employment 58.1 58.2 -0.1 Growing Slower 14
Supplier Deliveries 53.9 54.1 -0.2 Slowing Slower 15
Inventories 52.0 48.5 +3.5 Growing From Contracting 1
Customers' Inventories 49.0 43.5 +5.5 Too Low Slower 33
Prices 58.0 59.5 -1.5 Increasing Slower 13
Backlog of Orders 52.5 49.5 +3.0 Growing From Contracting 1
Exports 55.0 53.0 +2.0 Growing Faster 21
Imports 56.0 52.0 +4.0 Growing Faster 19
OVERALL ECONOMY Growing Faster 63
Manufacturing Sector Growing Faster 15
Manufacturing ISM® Report On Business® data is seasonally adjusted for New Orders, Production, Employment and Supplier Deliveries indexes.

Both inventory and customers' inventory levels increased by more than 3 points and 5 points, respectively. Generally, inventory survey results remain below the 50 demarcation, as manufacturers typically run lean production lines and a build up in inventory levels can indicate a problem. Of course, that depends on production and new order levels. I would not be so bold to predict an outright decline in either at this point, but the customers' inventory survey results are flashing a warning of a slow down in new orders. Throughout the survey's history, customer inventory survey results have averaged around 45 and lower(higher) than averaged have typically presaged a pickup(slowing) in new orders. We will have to see if the ISM results have rang the bell.

Gold Breaks, but Watch the Equities

As of this writing, gold prices are off more than 1% and depending on the chart you may be looking appear have to broken some support lines. For instance, look at the GLD. This is as traders have come back from their August vacations and as a few wire houses have been noting that maybe September will not be as seasonally as strong as in past years.

That said, gold has not broken the 1,265 support line positioned by some, including Kitco's Wagner.

More importantly, the equities are still holding in their. As I have stated (supported by others' and my own analysis) numerous times, the equities tend to lead the yellow metal on the upside and the downside. Numerous equities can be held up as examples, but one of the companies most leveraged to the price of gold is Royal Gold- RLGD, and the stock refuses to break the support line. Just look at the chart of RGLD below.

The same pattern, albeit not showing the same relative outperformance, can be seen in the GDX and the XAU. As long as the equities hold the line, I will side on the thesis that we will see higher prices in the precious metal investment complex.

Keynesian Economist Uses The “D” Word And Why Q2 GDP Was Overstated

by Hunter Lewis at the Mises Economics Blog

Most Keynesian economists do not want to admit that we are in another depression.  They find the word painful.

They find it painful because it contradicts the idea that Keynesian economic ideas have ended depressions forever. It also contradicts the idea that the massive and continuing Keynesian stimulus applied by world governments since 2008 has worked. For this and other reasons, euphemisms such as the Great Recession have been embraced not only by Keynesian economists, but by their allies in government and in the mainstream press.

I argued that we were in a depression in a January article and again in April. Now Brad DeLong, one of the most prestigious Keynesians, a professor at Berkeley and former deputy assistant secretary of the Treasury under Clinton, says that he agrees. It really is a depression (http://www.project-syndicate.org/commentary/j–bradford-delong-argues-that-it-is-time-to-call-what-is-happening-in-europe-and-the-us-by-its-true-name).

DeLong doesn’t blame Keynesianism; that would be too much to expect. But he does call the thing by its right name, which is a major departure from the usual Keynesian style.

These are after all the people who call the government creating money out of thin air “ quantitative easing,” “ bond buying,” and the like, all of which are parroted by the press. When Keynes did this, he was often being impish, as when he called newly created money ““green cheese,” echoing the old nursery nonsense that  “the moon is made of green cheese.” His acolytes have adopted the style of dissimulation, but without the slightest trace of a sense of humor.

Although we are in a depression, it is not a depression for everyone, as is by now well known. Even so, the full hit on the middle class and the poor relative to the affluent is not adequately understood. Consider these figures from Larry Lindsey, who served Bush 2 as chief economist at the beginning of the first term, only to be booted from the White House for too much truth telling:

US Household Net Worth 2007- 2013

Top 1%         Up       1.9%
Next 9 %       Up       3.4%
Next 15%      Down   0.5%
Next 25%      Down  16.7%
Bottom 50%  Down   44.2%

None of the economic statistics we get from the government are reliable. Inflation is understated. Economic growth is overstated. Unemployment is understated.  But this chart of net worth is about as reliable as we can expect to get.

It tells the story of a middle class in the process of  being destroyed and of poor people who will never be able to get into it. It is also noteworthy that the nine percent below the top one percent have done best of all. Although a great many government employee households are in the top one percent, a larger number are in the next nine percent.

Sometimes the economic statistics are intentionally manipulated. It cannot be a coincidence that the method of calculating inflation changed so much under Bill Clinton. But keep in mind that the statistics also reflect Keynesian assumptions that do not make  sense.

In Keynesian theory, it doesn’t matter whether money is spent or invested or what it is spent on or invested in. In this cockeyed view, spending more money to put people into Medicaid, paid for by borrowing from overseas or printing new money, is just as good as Apple investing in new jobs.

We saw an example of this in the recent Gross Domestic Product numbers released by the government. Most of the new spending in the first quarter of this year was for health care and most of that for Medicaid expansion. But it wasn’t even actual, documented spending. It was just a wild, finger-in-the-wind guess by the government.

As a result, the first quarter was initially reported with a minus 1% economic growth, then revised to minus 2.9%. One idea floating around is that the Commerce Department’s revision reflected a decision to make the first quarter look worse in order to move healthcare spending to the second quarter and thus make it look better. If so, why would the second quarter have been deemed more important? Because it is leading up to the fall elections. The second quarter is currently reported at 4.2%.

The destruction of common sense economics by Keynesianism is a major reason for what has happened to the American middle class and poor. But our governing elites and special interests do not just love Keynesianism for its own sake. They especially  love the opportunity for crony capitalism that it affords. Keynes himself was not financially corrupt, and would have been appalled to see the corruption he unleashed.

Nor did our present problems arrive in 2007-08. They can be dated at least to the beginning of bubbles and busts during the Clinton administration and arguably even further back.

For example, if we look at what has happened to poor people since the War on Poverty began in the 1960’s, we see them earning less and less on their own and sinking even further into poverty, if we exclude growing welfare payments. Analyst John Goodman  (http://healthblog.ncpa.org/why-we-lost-the-war-on-poverty/) has calculated that economic growth cut the rate of poverty in half between the end of World War Two and 1964, when the War on Poverty was launched. Since then the percent of people poor would have increased, but for the extraordinary $15 trillion spent by the government, much of it with borrowed funds.

There are those among the top one and top ten percent of households who are working on this problem every day. They help the middle class and poor by working hard, saving, making wise investments, and hiring, or even by not investing or hiring until conditions are right. There are many others who make it steadily worse by feeding off a corrupt and swollen government and wasting trillions of borrowed of manufactured dollars.

We Are All Predictable Irrational

Having read many analyses on behavioral finance, the idea that we are all 'predictably' irrational presents a compelling case for active investment management, that is if you know what look for. Not that I am saying I have the tools or the talent to see the biases, but nonetheless.

Friday, August 29, 2014

Two Alternative Outcomes iwth Jim Grant

The below video is a reply of an interview with Jim Grant where Mr. Grant lays out his probabilistic outlook resultant from the Federal Reserve's efforts. Enjoy

Thursday, August 28, 2014

The End of The Bottoming Process with Ronald Stoeferle

Mr. Stoeferle. managing director at Incrementum AG, lays out the case for the end of the bottoming process now underway in gold and what this could mean for precious metal investors.

While the followings provide a background around various future scenarios based on growth and inflation/deflation assumptions.

and the below report lays out the case in its entirety. 

In Gold We Trust Report 2014

Keynesian Economics 101- Lesson 4

Keynesian Economics 101 Lesson 4