Smarty_Pants

As Bond Prices Sink, Hold on to Gold

"Interestingly, both problems have the same source: central banking. This makes the solution elegant: eliminate central banks. In one fell swoop we eliminate moral hazard and initiate a stable currency." - SWRichmond

As an engineer I can appreciate elegant solutions. However, to extend the above comment, eliminating central banking won't "eliminate" moral hazard entirely. It will only serve to diffuse it and compartmentalize it.

Even during the so called 'free banking' era of the late 19th century local banks would issue banknotes beyond their supply of gold. The amount of excess was much smaller than today (they usually had over 50% in reserves), but it was there and did serve to inflate the circulating money supply from time to time.

The occasional banking panics of that era were caused by independent fractional reserve actions of many banks, to a lesser extent than they do today with FED backing. However, when things came undone back then, banks failed. No FED to supply a last minute bailout fund.

This potential for failure also played a part in keeping bankers (and money) honest. Troubled banks would find themselves subject to runs and out of business if they couldn't meet demand. They had to walk a fine line and maintain a sterling reputation.

SWRichmond's comment is correct, but so long as the public allows exchangable paper to substitute for the physical specie, there will always be some banker who will try to rig the system for his own benefit. Moral hazard will always exist.

Crossing the Rubicon: Monetizing the Long Bond

"Ben, do not cross the Rubicon."

Surely you jest.

Ben is going to use his helicopter to cross. The traditional boat is far too slow for his needs.

Is Buying Bonds Really a Good Idea?

Felix is right. Anyone who looks at a chart of the price on 30 year US bonds will see that it's a bubble that will burst eventually.

stockcharts.com/h-sc/u...=$USB&p=D&b=5&...

As the article noted it's very unlikey that yields will go down much further, so the upside to price is limited, while it's very possible that yields might rise causing the price to drop considerably.

Even a small increase in current yield would drop prices enough to wipe out several years of interest earned on a bond bought today. The risk to reward is far higher for bonds than cash in today's environment.

Rule #1 is return OF capital before return ON capital.

There are better places to put your money now.

Thursday Market Preview: The Bears Are Firmly in Control

On Nov 20 10:48 AM Louisa wrote:

> In light of all this awful news about the markets, I am wondering
> if anyone has opinions/advice about alternative investments?
> I am trying to learn more about alternative investments
> in general, any thoughts would be appreciated!

Tangible and productive assets with good returns will be the things to find.

One alternative you may find interesting:

www.tropicalhardwoods..../

Please, Let October Be the Worst of It

An expected lament from one whose view toward the market is that "diversification ... reigns supreme". Buy and shuffle for the long term without any truly significant thought for excessive risks.

Back in November Mr. Piscerno was willing to admit that being 'overweight' in cash might be worth the lost opportunity, but that one shouldn't give up on one's diversified portfolio. Simply massage the proportions a bit at the edges.

Well, if that's your approach then you have to take the lumps that follow. My cash/short positions since that time have rewarded me quite nicely.

To me "speculate" means being willing to go entirely to cash when it looks like a huge haircut is coming my way, and it doesn't mean moving 2% out of stocks and into cash while holding for the "long term".

If you're going to profess 'nibbling at the edges' as a stragegy, then you shouldn't be complaining about sustaining a disastrous month or two as a result of your neglect to safeguard from large losses.

Sometimes markets go down. That's why true speculators are willing to sell everything and go to cash.

Those who 'trimmed' neatly last year and are down 40% since then now have to make a 66% gain to get back to even. Those who saw great risk and sold everything can afford to wait for a clear bottom, miss the first 20% of the upmove, and still come out ahead.

Buy and hold is great for a bull market, but the last bull ended in November 2007. The successful rules for bear markets aren't the same.

Largest Bond ETF Now Trading At a Massive Discount

Half empty: You could always sell to the USTreasury bailout fund.

BORROW $8.5 Billion, buy the ETF, then claim you are underwater and need 'saving'. Sell to the FED at $9.4 Billion, repay loan.

Retire.

Bailout Cost, per Taxpayer, by Income

Purchasing bad debt won't eliminate the losses that it represents. At best it will transfer them.

Three cases:

A) Treasury buys toxic securities at original values - original owner avoids losses, taxpayers take them.

B) Treasury buys toxic securities at true value - original owner forced to realize the loss NOW, taxpayer avoids loss.

C) Treasury buys toxic securities between full value and true value - original owner forced to realize partial losses NOW, taxpayer gets partial losses.

No matter what, any schedule 3 asset that is not bought at full value will put an immediate loss in the company's bottom line (which is the fact we're trying to avoid right?). This still leaves the original owner with the same problem NOW instead of later.

Any other option requires the taxpayer to take the hit instead. Blather about "holding until profitable" is just that, Blather. If that were truly the case, Warren Buffett would be buying level 3 assets instead of loaning money to Goldman and GE at 10% interest with warrants.

The reason Warren Buffett isn't buying toxic assets is that there's no way to make money on them without risking a huge loss.

Bailout Cost, per Taxpayer, by Income

iThinkBig:

Too bad the world is going to end on December 21, 2012, per the Mayan Calendar. We'll never see the start of the next bull market. :-)

Seriously though, you're right. Things will get worse before they get better. ARM resets will continue until at least 2010 and foreclosures will follow the resets. Housing prices will continue down until the excess inventory clears. New building will slow to a crawl and economic activity with it. Hunkerdown and look for bargain basement prices on things of value to build your net worth on. Until then, protect your savings and add to them every chance you get.

Bailout Cost, per Taxpayer, by Income

New short form tax return for the post-bailout world:

1040-TARP

1) Write down your income: $____________

2) Send it in.

Make checks payable to the US Treasury.