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John Galt
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When at the age of twelve, at the time of the Russian revolution, I first heard the Communist principle that Man must exist for the sake of the State, I perceived that this was the essential issue, that this principle was evil, regardless of any methods, details, decrees, policies, promises, and... More
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  • Bernanke's half truth
    Last Sunday Ben Bernanke was given a softball interview on 60 minutes by Scott Pelley.  It wasn't even an interview, it was 10 minutes of a free advertising - PR campaign.  When you see Ben Bernanke or President Obama go on 60 minutes, you know they are getting desperate as public support for their policies are falling.  In the interview Bernanke made two controversial comments.  "He's not printing money", and he's "100% sure" he can control inflation.  The comments are disingenuous at best and their validity depends on your definition of inflation and certainty.
    One myth that's out there is that what we're doing is printing money.  We are not printing money.  The amount of currency in circulation is not changing.

    Saying he didn't print more money for circulation is true but it's a misleading statement.  QE2 involves trading one asset for another and not printing new money or creating a new asset.  He's hoping the banks do the creating of money.  Bernanke is trading (cash) an asset for bonds ( an asset).  Bernanke's hope is to give banks more cash so that they lend it and expand the money supply and economy.  He can print or trade assets all he wants but he can't force banks to lend and he can't force overleveraged borrowers to borrow.

    What is money?
    M0 & M1 have to deal with how much money the Fed is creating:
    - They've been doing up during the depression and won't increase from QE2

    M3 has to deal with how much money people have:
    - M3 has gone down during the Depression but he's hoping QE2 will increase M3.

    Note:  The Fed stopped reporting M3, go figure

    The U.S. lost trillions of dollars worth of value in real estate and the stock market.  If you want a quick gauge of the money supply, look to see if the value of your home, investment accounts, and cash in bank.  If it's up then we have inflation if it's down we have deflation.   Even with Ben's printing the US economy lost trillions in nominal value.

    Credit expansion (bank lending) expands the money supply.
    In 1929 people were going on 10% margin to buy stocks.  New propserity after The Great War in the roaring 20's made robust high tech industries like the railroads sure bets.  Popular economists said we were recession proof and lending stardards were weak.  Grandpa could have put down $100 bucks to buy $1,000 dollars worth of Union Pacific railroad stock. 

    Fast forward to Party like it's 1999 during the Tech bubble.  "The internet is going to change the way we live".  We were recession proof.  Even though the internet changed the way we live that doesn't mean is worth a billion dollars.  In 2006 housing "couldn't go down".  Remember, " they aren't building anymore land", "people need a place to live", "housing is the best investment" and "don't get priced out of the market"?  Anybody with a pulse got a loan.  The wide swing in housing - most people's largest expense  -  led traditional measures like CPI understated inflation where as now CPI is understating deflation. 

    If a bank collects a million dollars in deposits, government regulators allow them to legally lend 10x that.  When a bank collects 1 million in reserves and lends out 10 million, that's where the money supply is truly expanding.  They have 1 million real dollars but put 10 million dollars into consumers hands due to fractional reserve banking.

    When credit is created, the bank lending the money is taking a risk that the borrower will pay them back.  When you are buying an overpriced house you can't afford that is a huge risk.  The fact that banks weren't keeping the loans, but dumping them off to Fannie, Freddie or somewhere else helped degenerate lending standards.  "Who cares if Mr. and Mrs. Jones can't afford this house, if we are just doing to dump the loan off to the suckers and Phoney and Fraudie"?  Too many people that shouldn't have bought homes did, builders responded by building unnecessary homes.  It's called mal-investment and is extremely counterproductive.  There are many players you can point the finger at but it was a party living off of Ben Bernanke's keg.

    We do have Deflation
    Over the last 12 months, the index for all items less food and energy has risen 0.6 percent, the smallest 12-month increase in the history of the index, which dates to 1957.

    The food index has risen 1.4%, with both the food at home index and food away from home index rising the same 1.4%".

    The energy index has risen 5.9% over that span with the gasoline index up 9.5%.

    Yes energy costs have risen despite record capacity in the oil industry.  On top of that we are swimming in natural gas in the U.S.

    Is that inflation you can believe in?  Whatever inflation there is in the economy it's entirely due to speculation.  This inflation is being created by investment banks like Goldman Sachs being given money by the Federal Reserve.

    Commodity prices always revert to prices near production costs.  Let's take sugar.  Prices have doubled in the last six months.  Producers are scrambling to plant more cane and sugar beets while consumers are looking for cheaper substitues or cutting back.  The higest costs of production with sugar are 15 cents per pound and the price is nearly double that.

    So what's going to happen?  Not much for a while.  The extra supply will probably be siphoned off by the speculators at first.  However supply and demand data at some point will scare off said speculators and when they look to dump, look out below.  Speculation induced inflation always ends in disaster.  Always has always will. 

    Quantitative stealing hurting the poor/middle class
    Inflation is a hidden form of taxation.  It benefits government, wealthy, well connected who print and touch the new money first at the expense of those who touch the new money last.  Wealthy people tend to own assets that rise in value with inflation, where as poor/middle class people tend to own cash that loses purchasing power with inflation.  It punishes savers and rewards borrowers and spenders.  Inflation is better described as a "reduction in purchasing power" instead of a "rise in prices".  The shop keeper isn't really rising prices, it's the Fed.  The shop keeper is just responding to watered down money and businesses are the ones that are often scapegoated by greedy governments.  The dollar has lost 97% of its value since the Fed took over in 1913.

    We currently have 10% unemployment, 20% underemployment and 42% of the people out of work have been out of work for over 6 months.  You mean to tell me with a straight face that inflation is good for them?  Defenders of the Fed will bring up the myth of the deflationary spiral to scare and trick people out of common sense.  Deflation is the after effects of of the massive credit expansion/easy money that we saw from Greenspan/Bernanke. 

    Bernanke being 100% right
    This goes back to Bernanke being desperate to go on 60 minutes.  Public support for the Fed is falling.  It was a PR campaign.  A quick youtube search documents how he's been so wrong in the past.  To say that he's 100% sure of anything takes some serious Chutzpah.  Bernanke went on 60 minutes to quell the masses, the fact that the "journalists" bought it is amazing.  People wonder why there is a market for wikileaks.  The traditional media isn't doing their job.  When you have pinheads like Scott Pelley conducting interviews then Julian Assange is the natural response.  Who is John Galt?



    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Dec 10 12:55 PM | Link | Comment!
  • Globalization is Americanization: Invest in America
    What was the American mindset like a decade ago? 
    In the earlier part of the decade I can remember people were very nervous after 9/11 and the bursting of the Tech bubble.  The stock market deflated and a lot of people came to the realization that it was in fact a bubble and we weren't getting back to where we were anytime soon.  It was like yeah, that was a Tech bubble but now what, are stocks undervalued or was there more pain to come?  People were nervous to get on an airplane and people wondered if they were going to get attacked while going to work or a crowded baseball game.  There was just a lot of fear around 2002-2003.  I took a look at the globe and thankfully bought into International equities for a lot of the reasons people are buying today.  Today though, you want to invest in America.

    What is the American mindset like today?
    Today people are still fearful ( there is always something to fear huh?).  Today people fear not having enough money for retirement, impending tax increases, drying up pension plans, Obamacare, too much debt, unemployment and China.  Our media bombards us with tales of fantastic returns from emerging markets and International funds on the other side of the world.  China is growing and the emerging markets gain is America's loss or so they tell you.

    Emerging markets explored.
    Have you talked to many Brazilians, Russians, Indians or Chinese citizens?  Ask them how life is back home and they will all tell you that it sucks!  American poverty isn't even on the same scale as emerging markets.  In the streets of Brazil people get robbed at gunpoint by thugs with AK-47s.  Even in decent 4 star international hotels in the rich part of China people do #2 in a hole in the ground at restrooms.  Russians will tell you that the cost of living back home is similar to America but their salaries are a fraction of what they are here so they are collectively poor.  Oh and don't complain about the government because you might be beaten in public.  Indian poverty has been documented.  In America the fattest people are the poorest people, in India if you are poor you don't eat.  "Poor" Americans live better than middle class citizens of the emerging markets and most of the emerging market residents I talk to have a resounding message, " My country is FUBAR, don't invest in it".

    Don't chase returns.
    You can ignore me and invest in emerging markets and international equities anyway.  Maybe you want to buy some BRIC stocks or funds in companies you've never heard of because you've been lured by the sirens seductive tales of fantastic growth rates and returns.  The bottom line is that no matter what anyone says about growth rates, you can't make real money investing in emerging markets unless that nation has a good rule of law and Bric countries sadly do not.

    Oh what a difference a decade makes.
    A decade ago BRIC countries were called "Third world economies" and today they are given a much more marketable name of "Emerging Markets".  Isn't that a contrary indicator in itself?  If your broker told you he wanted to invest your hard earned money in "junk bonds", what is your first reaction?  If your broker told you he wanted to invest your hard earned money in "high yield bonds" do you have the same reaction?  Do you want to invest in "Third world economies", "Undeveloped markets", or "Emerging Markets"?  One name sells because it sounds good, the other two don't.  I'm here to tell you that emerging markets are still third world markets.

    Where to invest?
    If you really want to invest in an emerging market, invest in the greatest emerging market in the history of mankind America.  The United States of America was once England's emerging market.

    Globalization is Americanization.  You could invest in BRIC stocks you've never heard of and can't pronounce or you can invest in strong US Multinationals that have a history of success and are good at business.  If India grows will ICICI Bank benefit?  Sure but won't Coca-Cola, Johnson & Johnson, Proctor and Gamble and Microsoft as well?  As people come out of poverty and eventually join the global middle class will they drink Coke, put band aids on scraped knees, wash with Tide and use Microsoft Office?

    Yound people around the world want to live like Americans.  They see our movies, TV shows and music and think America is cool.  Americans had more immigrants in the last century than the rest of the world combined.  Europeans always  seem to cynically have that blank stare in their photographs as they are told to live in the collective for somebody else.   Americans have smiling bleached white teeth, are enouraged to pursue their dreams and accumulate lots of stuff that makes them happy.  Young people around the world would rather drink coke, listen to their ipod, check facebook, and pile into a booth at McDonalds with their closest friends on a Friday night than the alternative.  Different places will always have different customs but Globalization is Americanization and not the reverse. 

    America is on sale.  I've never seen people so negative on this country.  The grass is always greener somewhere else.  We have problems and there are things to be fearful about, yes but there always are.  People have been betting against America since the very inception of this country.  The S&P 500 is the same price it was 12 years ago.  In ten years a portfolio comprised of US Large Cap Multi Nationals with reinvested dividends will outperform a portfolio comprised of BRIC securities.  America's best days are most certainly ahead.

    Disclosure: Author is long KO, MSFT, AAPL at the time of this writing.

    Disclosure: Long KO, MSFT, AAPL
    Oct 26 6:46 PM | Link | 3 Comments
  • Year to date Market Returns
    So now that we are in the 9th month of the year, what has happened year to date?

    Let's look at the return for some areas of interest...
    SPY = (2.67)%
    GLD = 13.4%
    TLT = 17.9%
    BRK-B = 23.1%
    AAPL = 18.79%
    CMG = 80%

    SPY: When I look at "The market", I don't consider the Dow 30, I like the S&P 500 as a better overall proxy for the market.  The S&P 500 is down 2.67% for the year.  Equity investors earning market returns have lost money up until this point.

    GLD:  There are still a lot of gold bulls out there, I'm just not one of them.  I continue to believe that Gold has gone up for the wrong reasons and is overvalued but you can't argue with a 13.4% return when the market is down 2.67%.  Gold investors have made some money.

    TLT: Nobody wanted bonds going into this year, because many investors were scared of hyperinflation and in that world you don't want to own dollar denominated assets. or lend money.  Well owning long bonds would have given you a fat 17.9% return where as the stock market has lost you money.   The long bond money lenders are beating stock investors and gold investors, who wudda thunk it?

    Brk-B.  Mr. Buffet is at it again solidly beating the market.  This time the market is down, but the conservative value investor is up 23.1%.  Who said value investing had to be slow and boring?  Buffet is not a bad coat tail to ride at 23.1%.

    AAPL:  Everybody loves Apple right?  The company is growing like a weed and they seem to be doing everything... almost everything right ( iphone antenna).  Well the stock is up nearly 20% in a negative market, can't complain with that.

    CMG:  My other capital appreciation stock, and my favorite burrito joint is now up 80% in a negative market. 

    Going into this year everybody hated the dollar, hated bonds, and thought inflation was coming down the pike.  Well we've seen the dollar appreciate vs the Euro, bonds have outperformed stocks, and we haven't had inflation.

    Q: Interest rates have nowhere to go but up right? 
    A: Wrong.  Low interest rates can go lower and stay low.

    Q:Bananna Ben was printing money like a mad man and increasing the money supply which would increase inflation right? 
    A: Wrong.  We haven't had inflation and the bond market doesn't see inflation for many YEARS.  The thing most people don't realize is that even though Ben Bernanke was printing money like a mad man, the money supply actually shrank! 

    Q:  That's where we've been  so now where are we going?
    A:  Nobody knows the true answer, but I do believe America is in a Depression.

    Disclosure: Long: BRK-B, AAPL, CMG
    Sep 01 9:27 PM | Link | Comment!
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