E.D. Hart

Why I'm Not Worried About the Market

Read "Black Swan" by Taleb. He pretty much demolishes the argument that "we always manage to make it somehow, so this wont be that bad". A Thanksgiving turkey reason that each day he is fed by the farmer he is safe because he has always been taken care of before. THe turkey has no idea of his fate. Ok, just one of many examples in the book.

In fact, prior to WW1, people were dancing in the streets in London (AND US) as war was declared, with no concept of what the war would extact from the country in blood and treasure. Same for the US civil war. The markets didnt react harshly at frst.

Countless examples exist of exogenous shocks that people seem to to deny, then ignore, then dig in to wait out, thinking it can't get any worse, and then finally seeing each year getting worse....for years. (Take a look at Japans recent market history--Nikkei still hasnt recovered from 1989)

We are witnessing the end of the US Dollar hegemony and the unwinding of 30 years + of profligate monetary policy. To say it is all gonna be dandy because it always works out shows little understanding of monetary history. It may be devastating, or it may simply be awful, but it makes sense to hedge your bets and ask "what if Im wrong?"

Well what if Im wrong? If Im wrong and the housing, financial, and stock markets rebound in a year or two, and we all go back to happyville, then I didnt really lose out because my insurance policy is GG, SLW, XTO, PAL, XES, and other stocks that are about 50% of my portfolio. The rest is blue chips.

Buy and insurance policy and hedge your bets, and ask "what if your wrong?"

Platinum is on Fire, Will Gold Be Hot?

Yep, you pretty much nailed it. Yet, I disagree with your assertion that over the long haul, gold looks superior to the PGM.

The world has tons of gold in vaults around the world, that no doubt will increase in value over the next decade. But the palladium supplies of the planet are virtually unknown. Whos to say that a palladium rush wont be similar to the rhodium rush that is simply phenomenal? I dont have the answer, but its possible.

Commodity Analysts Believe the Party's Over

When Apple, Google, RIM and others soar year after year, traders, and even investors believe that they must be good investments.

When asked why, people usually say something about expectations for future earnings growth and a confidence based on the fact that they have gone up in the past. (look at that chart!)

People often ignore that technology earnings growth rates are priced for higher and higher expectations, until they are priced for perfection, and then a disapointing earnings report sends the stock back to earth. That, and the fact that technology earnings are very cyclical.

But, when investing in stocks, its a good thing to see a rising upward line.

However,when commodities soar, people see a correction looming and look for them to fall. (oh my gawd, gold topping at $800, time to sell!)

I bought gold in every year from 1997 to present, and early on, people everywhere pointed to golds low price as an indicator that gold was a rotten investment, BECAUSE OF ITS LOW PRICE.

And because it hadnt kept pace with inflation (never that it was undervalued).

Fast forward to a decade later and the same magazines newsletters and commentators are saying that gold in a bad investment, BECAUSE OF ITS HIGH PRICE. (never that the trend is intact, and its still undervalued)

Finally, its true there is no published calculation (that Ive seen) exists that can tell you how to compute a given commodities value (unlike stocks where you can compute intrinsic value)--there is nevertheless a pent up demand and a supply that isnt keeping pace, ergo higher prices.

Look at palladuim and natural gas as two great examples--I dont need to be able to calculate their present intrinsic value, because I cant.

Everything I know and read points in the same direction---that the current and forseeable future supply isnt sufficient for current and future demand.

But, its all very imprecise.
I would rather be roughly right than precisely wrong.

1970s Style Stagflation? I Don't Buy It

Gentlemen,
Im particularly keen to agree with the statements of strutzma--we may be "entering"--so perhaps this is more like 1968 than it is 1974, and that we have anther, oh, lets say, 15 years of higher inflation ahead of us.

Why have we had such high rate of growth in the money supply, but such little apparent inflation until recently? Two reasons (1) globalization has absorbed much of those excess dollars in currency reserves and global trade, particularly by the Chinese, and (2) the US government supplies bogus inflation data that is beset with fudge factors to make the number come out right.

Agree or diagree with Soros' politics, but I'm inclined to believe him when he says we are entering a new era of the decline of the US Dollar hegemony. Already petrodollar nations are looking for ways to diversify out of the US currency, and this is likely to happen incrementally, between nations at first, and in larger market later. When the world no longer needs our dollars to purchase oil, this will accelerate the decline of our currency.

But it may take a decade, or two.

Commodity Analysts Believe the Party's Over

"Expectations arbitrage" is the way to make money here.

Furthermore: the fact that markets act to substitute commodities keeps some rising when others drop. (that is some commodities are undervalued with respect to others)

If oil does drop to $ 80, I would still expect natural gast to rise north of $12 mmbtu based on equivalent heat value. (not drop)

or look at the substitution of palladium for platinum...if platinum falls 10% (possible) from $2200 to $1980 (roughly), I would expect palladium to increase from its current $510 per ounce or so (havent checked today) to between $700 and $900 per ounce.

The expectations are just that...expectations..a... a wonderful way to arbitrage what the market expects and is signaling in todays prices, with what is a likely future outcome, based on substitutions and historical patterns, that results in higher prices, given a sufficiently long time horizon.

GMO: Stocks Will Lag Historical Average for Next 7 Years

Why don't they include commodities? (other than timber)

Thursday Outlook: The Inflation Con Game

I'll stay away from the political banter and focus on something else the media almost all get wrong.

For the record: Shadow stats is a legitimate and respectable website that I have much confidence in. In the governments cpi figures:none

Humor me and estimate something: how much have prices increased--for real--since 1980? Then apply this back of the envelope calculation to gold, oil, silver.

First: Look at the shadow stats graph of inflation for 1980 through 2008. Look at the SGS alternate line blue) and estimate inflation over that 28 years.

I get 7% if I'm generous,(give or take, no?)

That means, roughly, that prices double every 10 years.

Second, take the high for Gold in 1980 ( chose 850, or 875).

Third, project, (always dangerous) to the end of 2009. Thats 30 years from 1980 to 2009.

30 years divided by 10 years to double and you have three doublings which equals--up by a factor of 8. Yikes!

Fourth, take 8 times 850 and you get $6800 for gold/ounce or if you prefer 8 times 50/ ounce for silver and you get $400.

I don't pretend to predict what will happen--I'm aware of multiple faults in my methodology--I'm merely stating what is possible, given the current environment. People aren't panicked because theyve been lied to, and the media isn't savvy or courageous enough to report it.

But the tsunami of dollars that are circulating in the world will eventually hit our shores (as US Dollar loses its reserve status ever so gradually) and we will see much higher inflation for a decade or more. That is a prediction.

Interesting eh?

Inflating Our Way into Recession

Some investors are empirical and skeptical, constantly question themselves, and look at the data daily or weekly , and are constantly on the lookout for changes that may put their investments at risk. Or where they may gain.

Some investors are more ideological,(or subject to Platonicity, as Taleb would say) and have a theory worked out about how the world should behave, and invest accordingly. In my experience, they are usually quite outspoken, and highly confident.

Guess which is worse for your portfolio?

Reviewing John Mauldin's Economic Cycles Chart

We shouldn't listen to the popular "wisdom" of the crowds: houses never decline in value, and commodities are at a peak....riiiiiiiiiiigg...

Big Oil's Big Problem: Time is Running Out

Or how does, "Im just a simple soldier, and I hope a good one" (Indonesian Dictator) resonate with, "Were just an Oil company, meeting Americas energy needs" (XOM).

I'm a die hard capitalist, with libertarian leanings, to a point...but is it off topic to mention that the US Governments preoccupation with the Iraqi war, the Afgahistan war, the War on Terror, and whatever the next war may be...has extracted an incredible opportunity cost on the American taxpayer. Let me explain: we blew a chance to have a Manhattan Project for Energy--because we are spending 1 or 2 or 3 trillion dollars for decades into the future.

We've boxed ourselves in a corner...

Kraft Foods: Buffett's Commodity Prediction

I'm from Omaha, and Im a big Buffett fan but....your reasoning and evidence will determine if you're correct, not who agrees with you.

Another possible logical conclusion to BRK purchase of Kraft shares: Buffett is wrong and Kraft's moat will not protect it sufficiently from input inflation; that consumers will shift to off label brands; that Kraft will undergo longterm margin compression, that this was not a good purchase for Berkshire.

Basic Consumer staple brands will only protect you if the consumer thinks that the extra quality is worth the extra cost. But lets be honest, I might buy a brand name box of cereal for $5, but not for $8, at which point, (for example) I will switch to a store brand, or off label.

Look what happened to big Pharma---undercut by generics as they come off patent protection, yes, but also this was due to consumers becoming educated that the name brand drug at twice the cost doesn't have twice the benefit of the generic drug. Big Pharma is experiencing margin compression partly due to generic competition.

The analogy with food and drugs is not perfect, obviously, but I don't agree that Kraft will just be able to raise prices to meet the input cost as they rise--they are competing against alot of other brands out there that may lose loyalty when the prices get past a certain point.

A better bet: Big Tobacco, Big Alcohol, and Natural Gas---these are stocks that are much more likely to survive the inflationary period we are entering.

WTF Headline of the Day: "Dow 18,500? Believe It"

Using valuations to predict the direction of the markets over the short to medium term is a poor way to go about predicting. More important is the changing economic macro-environment. I agree with Mr. Ritholz. Its amusing...

but also perplexing why peoples mental models don't get revised.

Consider: rising inflation of both PPI and CPI last year that pegs inflation between 4-6% (this is from Gov. numbers which are bogus and vastly understate inflation), likely interest rate increase after the elections, a recessionary environment going forward in the US, falling home prices, and all time peak corporate margins that can only revert to the mean--what does this spell?

I don't know, but its a good bet that its not DOW 18,500.
Commodities anyone?

Dow 15,000 Will Be Here Sooner Than You Think

I respectfully disagree with most everything this writer has penned. Not only will we not see 15,000 soon, we may not see 15,000 for another ten years. See US market history over the last 100 years.

Barron's has correctly pointed out that valuations are only compelling if you assume that margins stay at their historical highs, which is highly unlikely.

A possible scenario to consider: Inflation finally becomes anchored this year, and interest rates are effectively prevented from falling further; (maybe another cut before the election, to be undone after the election) consumers cut spending as unemployment ticks up, and home values drop, thus depriving the US economy of its great horsepower; the combination of higher interest rates in 18 months, and lower growth results in a stagflation lite; companies p/e compress as growth expectations are dimmed; historically high margins come down from their peaks to a reverted mean; under this scenario--currently the DOW is overvalued by 25%-33%.

My prediction is DOW 9,000 by 2010. If I was wagering $100 as to which was more likely by 2010--DOW 15,000 or 9000, I would inclined to take the DOW 9,000 bet .

Money indeed will go where return are greatest, but failure to take into account eroding earnings, rising interest rates (after the election), and rising inflation will not result in a good risk adjusted trade.

Switching to Value and Cutting Exposure to the Inflation Trade

Oil inventory reports are notoriously unreliable.(todays close $91.77) Trading them is beyond my area of expertise.

However, oil is not the key driving inflation, its the money spigots around the world open at full throttle. Moreover, gas will be a good value even if oil drops to $50. Deliveries are being taken in Japan and Asia for $18 mmbtu, which is what you would expect for a less polluting fuel that should trade at a slight premium to its equivalent BTU value. (i.e.-at equivalent btu value: when oil is at $91.77, natural gas should be approximately $15.26 mmbtu). Because gas is less polluting, it should eventually trade at a premium, as LNG trades globally.

Opinions inevitably vary, but I'm buying VGZ and XTO with both hands. Recession or not, the long term trend in gas and gold are going up, up, and away.

In fact, recession is almost irrelevant to gold and oil...Yuan will likely revalue this year up 7-10%, which alone will increase demand for oil, gold, and gas.

"The financials and homebuilders haven’t yet come back far enough to tempt me, but I continue to watch and wait."

You may have quite a wait.

John Lee Responds to Nobel Laureate Stiglitz's Subprime Thesis

Mr. Lee,
Your libertarian free market philosophy, if taken to its logical conclusion, leads to some interesting conclusions:

1) Most of our governments intervention in markets would be eliminated, including the SEC
2) Federal reserve would be eliminated
3) FDIC insurance eliminated
4) and really, why not have each state defend its own borders (by private contractors) instead of the socialized national defense we have now?

Let each person fend for themselves and see what happens.

Apart from the fact that the vast majority of the public doesn't support these objectives, the contradictions inherent in the ideology would ultimately do it in.

A major reason that so many investors flock to the US with their dollars is that we have well (mostly) regulated markets. Take away that regulation and you seriously curtail the flow of capital across borders. See Zimbabwean stock market...

"Let the careless and the weak fall, isn’t that what capitalism, evolution, and free markets are all about?" Well actually no. Read Adam Smith before the "Wealth of Nations". He states quite clearly the need for some governmental controls.

Do we truly want our markets to be unrestrained evolutionary experiments? Then you would have to accept Exxon/Chevron/Conoco-P... and Mircosoft/oracle/yahoo... as mega monopolies.

It is true that governments often over regulate...but the current mess is not an example of this over regulation.

"Set the market truly free" ? Be careful what you wish for...
Mr. Hart