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  • Where We Should Be Investing: The Paradox of Thrift [View article]
    This is the best article I have ever read here and one of the best anywhere not written by Bonner. Thank you for having a clue.
    Jul 31 10:10 AM | 1 Like Like |Link to Comment
  • 'Limits? What Limits?' - Hypothetical Fedspeak [View article]
    otbricki, every huge drop is a great buying opportunity until the last one. Also, give our author some credit - nowhere did he say anything that could be interpreted as the sky is falling. There is a real problem here. How about acknowledging it and then suggesting how you think it will be solved? After all, if this is an "historic buying opportunity" then the problem gets solved in the next 5-15 years; GDP is stagnant but debt is already about 73% of GDP and is rising at about 3.6% of GDP per year. Worse, the rate of increase is also accelerating. Eventually our lenders will have had enough. It's fine to argue that the time for that is not now and you don't expect to live long enough to see it. It's another thing altogether to ignore it completely.
    Jul 30 11:19 PM | Likes Like |Link to Comment
  • About That Silver Lining, Erin [View article]
    Alpo, you wonder? Surely not. For starters, if you bought an asset for $100k in 2000 and could now sell it for $100k, you have lost somewhere between 25 and 40% of your purchasing power to debasement and inflation. You have also gained some of that back; any debt you still owe has also lost value. But then the one-way costs get factored in, as you mention, and it's all over. Owner-occupied housing is simply not an investment. Over the long term, you at best break even. If you time your purchase and/or sale poorly, you will lose a fortune. The smart move is to buy low with expensive money, refinance when interest rates fall, and never move out. Consider the interest, fees, taxes, insurance premiums, and other costs you do not recover through lower taxes to be rent paid. If anything is left after that, it is likely to have been inflated away. If the rent you paid to own was lower than the rent you'd have paid to lease, you got a good deal. If not, you probably didn't. Most people who bought in the last 15 years and did not sell before 2006 will lose huge. Sorry.
    Jul 30 12:19 AM | Likes Like |Link to Comment
  • Stock vs. Bond Valuations [View article]
    James Cullen gets the prize.

    And Charlie, uhhh... exclude the 1970s because inflation was abnormally high? Is it not abnormally high now? And if not - perhaps you think 5% is a normal baseline - why not exclude the 1990s when it was abnormally low?

    Furthermore, despite very high inflation today, the back half of the Treasury curve has done well. No, I do not know why. No, I do not care. This is an anomaly and the market will in time correct it.
    Jul 29 11:52 PM | Likes Like |Link to Comment
  • Covered Bonds Are Indeed Covered - By You [View article]
    I used to get angry about funding these bailouts, too. Now I just short Treasuries. It's remarkably refreshing to know that, whatever harebrained schemes the politicians and their banker buddies come up with, I won't be paying for them and indeed may even profit. I've checked out, in effect. And if everyone did the same, the schemes wouldn't even be possible; they could never afford to finance them. It's both a solution and a way to become a disinterested bystander, looking on in amusement as America destroys itself. I highly recommend it.
    Jul 29 11:02 AM | Likes Like |Link to Comment
  • Are the Tides Turning for the Canadian Dollar? [View article]
    Canada would do well to divest itself of any attachment to the US. It has the natural resources; it's time to start walking up the value chain. The US cannot and will not invest what's needed to make that work. How about doing it yourselves? I'm tired of watching Canada parallel the Us on account of a bunch of carmaker suppliers. How about you go make your own fortune for a change?
    Jul 29 01:13 AM | Likes Like |Link to Comment
  • Bank of Canada: Why Follow a Failed Policy? [View article]
    Very sad. Canada has a chance to show that North America's problems are US-specific rather than regional. With plenty of gold, oil, fertiliser, crops, and base metals, the country does not need any kind of monetary or fiscal stimulus to grow. In face, interest rates should be rising. Instead it is left to Mexico to show that the US is a house of cards. Poor Canada. So rich, yet so poor in leadership. Still, I'll invest. Real value makes itself known.
    Jul 29 01:06 AM | Likes Like |Link to Comment
  • Five Great Quality Companies: Are They Too Expensive? [View article]
    All very interesting, and yes these are good picks for good but overvalued companies. One interesting point that has been made by several commenters is that GOOD and AAPL generate lots of cash. Very true, and an excellent attribute for any company. Both also have little or no debt - another huge positive. But my question for those of you long these guys is what are they using their cash for? They're growing sales, but not in ways that seem to make use of the cash. From what I can see it's just piling up on their balance sheets. Do you think they're keeping their powder dry for the real downturn yet to come, planning to invest it in something great, or just not bothering to pay their shareholders? I'd love to see these guys on the dividend achievers list. They belong there. But they both pay nothing. Why?
    Jul 29 12:09 AM | Likes Like |Link to Comment
  • Jason Zweig on Graham and Bank Stocks: 'The Un-Intelligent Investor' [View article]
    If you use rents to value real estate, you will find that prices are still absurdly high. Go ahead, try it. It really is a great way to look at valuation.
    Jul 29 12:00 AM | Likes Like |Link to Comment
  • Has the Dollar Bottomed? [View article]
    "The Fed and Treasury now see a stronger dollar as strategically important in battling inflation and the credit crunch fallout."

    Which is why they've raised interest rates 7 times in the past ... oh, wait. I meant cut; that's why they've cut interest rates 7 times in the past year. To keep the dollar strong. It's worked, too; it's up almost 3% from its all-time low. And with the fancy new colours on the notes, further strength is sure to follow.
    Jul 28 10:24 AM | Likes Like |Link to Comment
  • Northern Oil May Be Headed South - Barron's [View article]
    Which is more likely, $40 or $200? I guess I'd have to go with $200. Personally I expect $100 to be the rule of thumb for a while, and it's unclear to me that Bakken is worth that much at $100. NOG does indeed look quite speculative. XTO itself looks much better all around.
    Jul 28 01:17 AM | Likes Like |Link to Comment
  • The Top 5 Looming Financial Issues [View article]
    Oil is not the most important of the five problems you describe. Or rather, it may be the most important if by "our way of life" you mean the suburban/exurban tendency to build cheap houses on large lots far from centres of commerce and employment, and move people around individually or in small family units by means of privately-owned automobiles. That may be your way of life, but it is surely not mine nor should it be considered inevitable or desirable.

    In fact this "lifestyle" has only been in existence for about 60 years; for an equal time before that, the nation was more evenly divided between rapidly growing, highly dense urban settlement and rural agrarianism. The notion of choosing to live 5 or 25 miles away from one's job would have seemed insane. You either lived on your farm or ranch and worked there or lived in a rowhouse or apartment in a city and walked (or, perhaps for a few, took a streetcar) to work no more than a few miles away. If you needed to travel - and you had to need to, for it was not cheap - you took a train.

    Even if we suppose that plough animals were diesel tractors and local horse drayage trucks, the oil-intensity of that pattern of living is insignificant. And that time happened to coincide with a dramatic expansion in American wealth and power. Clearly it would be no great loss to redirect some of our resources away from "our way of life" today toward more productive purposes and alter our living patterns to more closely approximate those prevalent from 1840-1910.

    The real threat is not expensive oil. America has the proven ability to survive, grow, and prosper without any oil at all. Intelligent use of small amounts of oil could add great marginal improvements to our quality of life, but the wasteful usage patterns in place today actually degrade society and distort land use while raising the cost of living for all. It would not hurt America en toto to abandon this foolishness. Those who are mentally incapable of coping with the destruction of suburbia as a way of life will be pushed to the margins of society by their own poverty if forced to bear its true cost and in time the value system behind it will be mercifully extinguished from the national character.

    If instead we suppose that "our way of life" means freedom from tyranny, individual opportunity for achievement, economic strength, and belief in the free market system, the greatest danger is debt. Public debt, private debt. And not only the debt itself, crushing though it is - the greater danger still is the ethos behind the accumulation of that debt. Debt comes in two main flavours: that which is taken on with a sound plan for investing the proceeds in a productive enterprise, and that which is taken on so that one might enjoy today what he hopes he might afford tomorrow. The key distinction is whether the proceeds of the debt will be used toward some productive goal. Not every such borrower will succeed, of course, but their reasoning is sound: if I borrow now, I can repay with the productive capacity I build /with what I borrowed/ and have profits left over. This type of borrowing is healthy; it is a force for growth and expansion. The other kind is destructive, and it is this second kind that occupies most of the Treasury's, banks', and individuals' balance sheets. It is debt borne of greed and profligacy. One who borrows to buy nonproductive assets or to squeeze just a little more out of some paper investment is not investing the money he borrows; he is speculating and hoping. The public debt was not, by and large, incurred to build infrastructure or protect the nation from invaders. It is primarily the product of giveaways and handouts, promises and pandering. We did not buy dams or bridges or railroads or oil wells with that money. We did not do scientific research or provide education with it. Instead, we bought our own votes for the politicians who borrowed abroad on our behalf and offered to give some of it to a few of us or to use it to espouse some bit of ideology a vocal few of us found attractive.

    It is hard to imagine a more harmful kind of debt than the one just described, but it does get worse. Individuals in America have taken on crushing levels of debt as well, and for no better purposes. The evils of consumerism have been well-covered by others and I do not feel the need to discuss them in detail here. Suffice it to say that "owning" a nonproductive asset worth many times one's prospective income while borrowing heavily at punitive interest rates to finance the purchase of inessential and nonproductive baubles and status symbols such as cars, televisions, furniture, knickknacks, and kitchen remodels is the height of stupidity.

    In the end, debtors have three main choices: they can increase their productivity and decrease consumption to pay down the debt, they can repudiate it, or they can hope that their income will rise more quickly than the rate of interest they are paying. There is no reason to believe Americans are considering the first of these; public and private debt levels continue to rise despite the so-called credit crunch, so we will not consider this further. Repudiation is in vogue with individuals and will surely remain so for some time as bankruptcy filings continue to rise. We've even coined a clever phrase for repudiating housing debt: jingle mail. But repudiation of public debt has broad geopolitical and even military consequences, especially when your debt forms most of the world's reserves. We will have to assume that the Treasury does not intend outright default or repudiation of its debt, especially while most of America's depleted armed forces are occupied with foreign quagmires. That leaves the last option - one that would appear to consist of little more than crossing one's fingers and hoping for better conditions tomorrow. Indeed, there is plenty of evidence of this behaviour among American politicians. But when you control the currency in which you have borrowed, you can do better than just crossing your fingers. You can devalue and debase that currency, raising your nominal tax take while your debt load - absent new borrowing, of course - remains constant. Consider the tax consequences of holding TIPS, the instruments the government would prefer you use to hedge against the rising prices caused by currency debasement. Even though the real value of TIPS is intended to remain constant and the only real profit you are offered is the coupon, you are obligated to pay income tax on the increase in the bond's value due to price rises! Imagine that - the government created tax revenue out of nothing! But TIPS at least cost the government something; what of other assets? We see the same everywhere; if the cost of a gallon of milk or gasoline rises 10%, so do sales tax revenues. If workers receive 5% cost of living increases, income tax revenues rise - probably by more than 5% - even though the workers are receiving no more real income than they were before. Many writers have discussed the virtues of inflation to destroy debt at the cost of savers, but in fact inflation is even more insidious; by controlling the level of inflation the government can effectively raise or lower its own tax revenues as a percentage of real GDP without changing one line of the tax code. The losers, as always, are workers and savers - as well as bondholders. The winners? The politicians - remember, they've already received the benefit of the money you borrowed: your vote. You in all likelihood got nothing; at best you got a handout worth a few percent of the money you'll pay over your lifetime in interest and lost purchasing power. But what do you care? You're busy looking the wrong way, whining about the price of oil instead of adapting to it. And demanding, of course, that the government "do something" about it. You'll get your wish.
    Jul 27 10:23 PM | 1 Like Like |Link to Comment
  • It's All a Matter of Incentives [View article]
    Instead of trying to monkey with the incentives - which are always there and human nature dictates we act on them - Congress can limit the excesses by dismantling the Fed. This source of easy money makes it possible, and cheaper, to pursue greater excesses. There will always be booms and busts. By using honest money and letting nature impose limits on its growth, excesses and the severity of busts will be reduced. This by itself is not sufficient, of course; we had a strong gold standard in the late 1920s. An end to the entire fractional reserve banking system would fill in the rest of the puzzle. If we feel we simply must keep it, increase banking margin requirements to match those applied to the stock market: 50/30. If a bank does not have 30% equity in its loan book, it has failed and must be liquidated. Today even the best banks rarely have even 10%.
    Jul 27 03:08 PM | Likes Like |Link to Comment
  • Stagflation and Peak Oil: How Related Are They? (Part II) [View article]
    A good summary. Unfortunately your very first suggestion is all but useless. TIPS track the CPI, which is not a realistic measure of price increases. They may do somewhat better than ordinary Treasuries, but ultimately the understatement of price rises and the tax disadvantages (see also gold - is it shocking to anyone that inflation protection is taxed so brutally?) will cause them to lose purchasing power.

    Then there's the supply problem. The deficit is already enormous and is growing as more bailouts and "stimulus packages" force the Treasury to borrow ever more. For now demand appears to be keeping pace, but there are limits. When (not if, when) foreign central banks decide they've had enough, this game will come to an end and interest rates will rise abruptly. TIPS all have intermediate to long duration (no 1-year TIPS, sadly) and will be crushed when 10-year rates inevitably hit 10% while the CPI continues to be reported at benign levels like 4-5%.
    Jul 27 02:44 PM | Likes Like |Link to Comment
  • Are Stocks a Good Hedge Against Inflation? [View article]
    Inflation kills growth, which kills stocks. The stock market's function is to price risk. What is risk? The variability of future returns. The thesis here seems to be that the rate at which the currency in which a stock is priced is losing purchasing power, or is expected to be losing purchasing power, is positively correlated with the price of stocks. But even if this is true, remember that what matters is not the paper value of future returns but the purchasing power of those returns. When the value of the currency in which those returns will be paid is highly uncertain, so is the value of the returns themselves. That translates to higher risk which, all else being equal, means lower prices. And in fact this is exactly what we see when we look at the price of stocks in terms of purchasing power (i.e., in terms of gold).

    Price expansion is killer for growth; it drains away money that might have been invested and directs it instead to assets that are not investments, like cash, gold, silver, food, and oil. Do not be misled by paper gains. Even if the government's CPI lies to you, the market will not. Price your stocks and their prospective future returns in gold to evaluate their true worth. When your home currency once again becomes a reliable store of value, if it ever does, its value against gold will stabilise and you can once again look at traditional paper-denominated charts. Until then, they are useless.
    Jul 27 02:04 PM | Likes Like |Link to Comment