prudentinvestor

Tuesday Outlook: Commodities, Global Markets

I must confess to being jealous of these courageous folks who fly as seen in the video. Ditto for the duantless who buy at today's levels!

IMHO, what we have begun is a multi-year return to fundamentals, in which investors will slowly relearn that the value of equities is really based on dividends, and the liklihood of their increase with time, not "accounting earnings" and their liklihood of increase; and not on the presumption of a greater fool down the line paying more for a stock that pays no dividend. As this realisation becomes mainstream, it may result in averages close to current levels ten years from now.

Hold the champagne before celebrating China's economy, says the American Enterprise Institute's Michael Auslin - there's an asset bubble and resource-allocation problems on the underside that make the country look a lot like '80s Japan.

China looks more like 1960's Japan than 1980's Japan; and barring socio-political collapse, still has two decades of strong growth before it stalls.

We know about the laws of supply and demand, but what if economics violates the laws of physics? Some academics are arguing that a model for consistent economic growth ignores diminishing energy supplies. As one professor puts it: "Neoclassical economics is inconsistent with the laws of thermodynamics."

Whilst I lack formal credentials in economics, I have been a successful investor for several decades, obtaining returns much better than market averages over time. My background is in physical sciences, especially thermodynamics.

The paradigm of indefinite and exponential growth of consumption is physically impossible, and none who comprehend the exponential function would dispute this obvious reality. The question is when, not if, this paradigm breaks down. Neoclassical economics presumes that "when" is far enough into the future, that we need not worry about it now. My own opinion, for what its worth, is that the limit to this paradigm is impending, within the lifetimes of many of our younger people, if not due to energy supply limits, then due to environmental degradation effects.

John Meriwether Is Back - Risk Must Be Too

So why should'nt investors pour billions into a fund run by a known failure? After all, shareholders keep re-electing directors and CEO's who nearly bankrupted their companies; politicians keep re-appointing treasury secretaries and fed chairmen who created financial calamities; and the public keep re-electing politicians who passed laws that had disastrous consequences.

We have sadly reached a point where failure is routinely rewarded, and productivity and prudence routinely penalised.

Real Cause of This Financial Crisis? Global Hunger for Savings Instruments

Your opening sentence is great, ".. Every sort of idiotic expanation is offered by academic economists for the financial crisis ...", but I would also extend it to the vast majority of MSM commentators.

It is obvious to anyone with any intelligence that artificially low interest rates promote bubbles and mis-allocate capital and resources, and this is indeed the single root cause of this crisis. Every other explanation has this simple, obvious fact as its underlying root.

It is unbelieveable that "educated" policymakers and professors should be oblivious of such a basic fact, so perhaps they are aware of it, but choose to pretend otherwise since the politicians, the vocal elements of the MSM, and the underproducing but overconsuming sections of the populace all loves bubbles.

Walgreen's Rewards Shareholders with $2 Billion Repurchase Program

Elementary math shows that buybacks reward executives who hold options to a far greater extent than they reward shareholders. A 3% increase in share price can double or triple the value of an option, but only gives a shareholder a 3% gain.

If the company wants to reward shareholders, they would increase the dividend. An increase in dividend would be of equal benefit to both shareholders and executives (who also own shares).

It is astonishing that very few investors seem to be aware of the basic fact that buybacks are just a way for executives and crony boards to reward themselves disproportionately to the paltry benefit received by the real owners, aka the shareholders.

Harley Davidson Executives, Investors Wear Generational Blinders

Fully agree with your logic, and have now gratefully exited from the remainder of my HOG position for a tidy profit. May wade into it again, if and when reality returns to the equities market.

U.S. Economy: Partying Like It's Still 2005 and How to Turn Things Around

"... We are not going back to normal, although it is likely we will see some form of Statistical Recovery ..."

Which "normal" are you talking about ? It is all a matter of your age and perspective. Those under 30 years old probably think the bubble years 1995-2008 were normal. Those who have keen observation and who are over 50 probably see them as an astonishing aberration, unlikely to be reincarnated no matter how hard the alchemists try.

U.S. Economy: Partying Like It's Still 2005 and How to Turn Things Around

".... But that will mean some painful choices. It is not a matter of pain or no pain, it is just deciding when and how bad it will be. The longer we wait, the worse the consequences....."

It is also a matter of how our rulers decide to apportion the pain amongst us. So far, it seems that savers, producers, and entrepreneurs have been selected as the sacrificial elements, whereas asset speculators and financial manipulators have been selected as those most worthy of being protected and having their profits secured and guaranteed. This apalling direction of current policies is the real disaster for our long-term prospects.

The Dogma of Low Interest Rates Is Wrong

You make an excellent point. It has been understood, by a few, for centuries that bubbles mis-direct human resources and lead to an inverse "division of labor", where people apply their talents to sectors that provide artificial rewards, which free markets would not allow, thereby failing to apply their talents to the most productive uses.

Adam Anderson, an officer of the South Sea Company, is reported to have written in the aftermath of the South Sea bubble:

" It is hoped that the year 1720 ' .... may serve for a perpetual memento to the legislators and ministers of our own nation, never to leave it to the power of any, hereafter, to hoodwink mankind into so shameful and baneful an imposition on the credulity of the people, thereby diverted from their lawful industry' .."

By "lawful industry", I believe he meant applying their talents in the most productive way as judged by a free market economy, rather than the most profitable way set by a manipulated economy.


On Oct 07 11:04 AM a fat panda wrote:

> "I could go on, but when you start saying things like "low interest
> rates do not stimulate the real economy" then your thinking gets
> so far away from the "facts" and "evidence" that it is, to be frank,
> laughable."
>
> Harry, The problem with low interest rates is more than just the
> carry trade. It lowers the cost of risk, and encourages people who
> have no business owning a business to go into business. If you look
> at the house flippers, as an extreme example, they surely stimulated
> the economy, but did so by pushing demand forward and pulling resources
> away from productive uses. That is to say, that it creates a "real"
> economy that isn't real.
>
> The cost of this is much more than the loss in the house. The cost
> is going to be terrible once you factor in the retraining costs to
> get these 'business people' back in the workforce. People who left
> real jobs to become house flippers now have stale resumes. They are
> going to have to re-invent themselves. This can be a trival cost
> in some industries, but for people who work in say the IT world a
> year off is a killer.

Saudi Arabia emphatically denies reports Gulf Arab states are in secret talks to replace the U.S. dollar in oil trading. Britain's Independent quoted unidentified sources as saying Gulf Arab states were in secret talks with Russia, China, Japan and France to turf the dollar.

An inevitable response, sooner or later, to Greenspan/Bernanke's irresponsible policies. It should have hapened sooner, at Greenspan's first ZIRP in 2003, but these folks could not see the righting on the wall. Had they began moving in this direction back then, they would have saved themselves a lot of losses, and also saved us from the recent housing/equity bubble, and everyone would have been better off today.

Simon Johnson's question for the NY Fed: If Goldman Sachs (GS) is now a bank holding company, how come it's still acting like a private-equity fund?

Because GS is so special, it is above the rules. After all, its alumni and cohorts make the rules, so they can decide to whom they apply and who is exempt.

In 2009, roughly 47% of households (71M) will not owe any federal income tax - up from an earlier estimate of 38%.

Looks like we are on track to become more socialist than Europe.

Friday Roundup: Reality Bites Bulls

The market surged under Clinton because of the dot.com bubble, not because of higher taxes! The dot.com bubble was the first wave in the mess we now have, thanks to Greenspan's ultra easy money.

The market fell under Reagan because Volcker held rates high to stamp out inflation, encourage savings, and thus set the stage for a long period of prosperity.

Economies have high inertia, and long response times. Regan's and Volcker's actions caused long-term prosperity, long after they were gone, and Clinton's and Greenspan's actions caused an immediate feel-good bubble that undermined basic fundamentals, and we are seeing its aftermath now.


On Oct 03 10:36 AM jerrydd wrote:

>
> While it may have been a bull market in technical terms, until 93
> it was way overrun by inflation as has it been since 2001 which in
> real terms, what stuff costs, has been over 100% in the 7 yrs of
> Bush. The only real bull that increased real wealth was 93-2000 when
> Clinton ruled. We even balanced the budget then which is what curbed
> real inflation and increased real wealth.
>
> The Fortune 400 lost 30% of it's wealth with lower taxes by 4%. Which
> is better, slightly more taxes and a good economy or a bad economy
> and slightly lower taxes?

"They're treating taxpayers as if they're infants. Human infants in the early months of their life figure out that if you throw a blanket over something, it doesn't really disappear," cash flow analyst Janet Tavakoli tells Max Kaiser (video, 10 min.). "Our meltdown risk today is greater than it was in 2007." (via)

This lady makes sense. It is quite amazing that there has been no investigation into what appears to have been rampant and massive fraud in originating and securitizing all sorts of loans into false and misleading securities.

Confidence cannot return if the system is uninterested in enforcing its own laws regarding securities fraud, and neither taxpayers nor entrepreneurs, nor investors are infants as the lady correctly stated.