sidney

Case-Shiller Still Predicts Massive 45% Fall from Today’s Values

The point of QE is to lower the purchasing power of the US$ thus raising the cost of building a home which should also raise the nominal prices of existing homes. Throw in artificially low FHA rates which are assumable in the future and you have a situation that should probably not be combined with the use of this chart. The dollar has not held its value steadily over this time period. This kind of analysis typically has caveat's like "holding everything else contstant" such as the value of the dollar. IE we need to separate out the reason why home values are flying up(was it due to a speculative bubble or was it due to a exploding supply of US$ in circulation. I will not buy into the idea of drawing a linear line from the past price data when I know what QE has been doing to the dollar. Instead we will need to somehow alter the price line for a general inflation level. Since most of the current inflation statistics the government likes to use are showing negatives those probably won't help. One can observe the asset price inflation due to the printing of money in most other markets however such as the stock markets, gold, oil, wheat, corn, even the softs like cotton. Not to mention Sugar. Bottom line is I don't trust this graph anymore in terms of predicting where housing prices will go in the future. If the money comes out of the stock market and commodities into real estate again look out above you. I think the real question is are we following the Japanese experience of decades of deflation such as this graphical interpretation suggests or are we looking at a 1920ish global story of hyperstagflation? This analysis seems to pick the deflation route ala Japan regardless of the quantity of the QE. Clearly there are a lot of investors predicting inflation given the QE we've felt and the QE they assume will have to come. The burning question remains will we continue on with QE, default, or actually be able to balance our budget by cutting spending and raising taxes. I'm not voting for the third outcome. I can see the benefits from fessing up and just defaulting but it seems politically we don't have the will to stop the madness and will just print our way out of it... which would suggest that this graphs prediction doesn't fly in light of increasing commodity costs associated with a falling dollar. Frankly I haven't understood the lack of desire to open up the US borders to a Massive influx of immigration to mop up the excess housing... target Chinese immigration tied with Chinese sovereign fund investing in new businesses (say with a Singapore like 15 year tax free status for companies forming jobs) and we might have a future.

If U.S. Stopped Issuing Treasuries, Would It Go Broke?

The only thing you are missing is the timing. Printing money has an immediate impact on the supply of money in circulation thus should impact inflation assuming everything else held constant of course. Whereas if the fed borrows money via a treasury they presumably are getting money from investors with the agreement they will pay interest plus pay the return of principle later. The assumption is that they will turn around and spend that money via transfer payments or some other item that would put the borrowed money back into circulation. So there is a pretty big difference in the amount of new money going into circulation is there not? In the case of longer term treasuries they would be injecting the new money in the form of interest over longer periods of time. Unless the interest payments are covered by taxes(revenue) or additional borrowings from new treasury issues the interest payments would have to be a result of "quantitative easing" ie printing money(electronically) to cover the interest. As long as there are new lenders to buy the US$ treasuries then the interest payments could continue to be funded by the new issues and perhaps not be considered inflationary...what it does do however is crowd out investment dollars that might have been used for other more productive purposes than transfer payments. Whereas printing money doesn't crowd out investment dollars but rather lower the purchasing power of the currency(it should take more $ to buy the same thing if more $ are printed) perhaps increasing the costs of every investment denominated in US$...

4 Cheap Japanese Stocks

Why not consider 9984 or 8473? How often do you get a chance to buy a venture capital company via a public company? What is your view about Softbank's continued top ranking in new subs vs NTT?

Frontier Market ETFs Can’t Handle U.S. Dollar Volatility

I'm going to go out on a limb and say that Mobius would completely disagree and suggest that the frontier markets offer the best valuations and have the most to gain in absolute terms regardless of the dollar. He would say that they are more concerned long term with selling to China not the USA. The key difference is that the hot money doesn't flow to the frontier markets like the emerging markets. There is simply not enough liquidity to handle the inflows. Thus Franklin keeps its frontier market fund tucked away. The interesting thing about the frontier market closed end funds is that investors would just be pushing up the premium rather than impacting the NAV if they piled in. It seems somewhat dangerous to have a frontier market etf... given the lack of liquidity..

Zuckerman on Paulson: The All-Time Greatest Trade?

it would be interesting to compare to the 4200% return in 10 years that Soros/Rogers made in the quantum fund. I wonder if its more or less in those terms or should we wait another 7 years to find out what his 10 year return is?

Homebuyer Tax Credit: Update

I think the economic concept that housing prices increase by the amount of the subsidy is way off base in this scenario. My experience in applying the first time home buyer credit was to sit back and watch the housing price of the house I was considering fall about 10k every 2 weeks before I pulled the trigger... the house cost 290K to build and I bought it for 177.5 and was sent a check for 8K+interest by the gov't. There was no evidence that the housing price increased due to this credit. What DOES HAPPEN is that after I bought the home I spent money. I hired a gardener to touch up the lawn(weeding, mulching, etc), I bought shades, I bought kitchen stuff. Hunter Douglas loves me. Bed Bath and Beyond loves me. Home Depot Loves me. Never mind whether the home buyer credit will simply adjust prices up by the credit... this bill is designed to kick people off their lazy renting butts and spend money like mad like every other home buying fool and at least temporarily revive the economy with real demand. The supply of too many homes is the problem for home prices and to probably the home buyer credit won't solve that so I don't expect prices to rise instantly upon the credit being extented. What does seem strange though is if it is extended to move-up's then maybe it becomes a bewildering mess of musical chairs.... at the very least folks might switch homes to get the $ to pay for the refinancing at these crazy low FHA rates... The winners might end up being Uhaul and other movers in the great move-up of 2010...

China's Huge Property Bubble

I've been following this story as well for a few months at least and I thank you for your contributions to the historically significant bubble forming. However, what I would like to see is a list of executable actions that can be taken by a US based investor who wants to bet against this bubble. This list should enforce risk management techniques ala the hedge fund manager Paulson's bet against the US housing bubble using by only putting part of the portfolio down at a time leaving room to be wrong longer...(bubbles have a tendency to outlast shorts...). While there may be no CDO market to short like Paulson did, what other means might be available to the average investor to invest in such a bubble bursting theme. What ADR's might have out of the money put options that could be bet on a little at a time that would offer a huge pay out if the theme turns out correct. This theme suggests that a "black swan" type strategy is appropriate. It is not enough to lay out the theme... we need to offer a plan... We should be able to look at the domino effect that played out in the US and European bubbles bursting to further strengthen the plan. It seems the crisis rippled through industries slowly in US and Europe. Plenty of time to act as long as you plan out the different stages in the ripples. Look to the early Roubini work prior to the bubble crashing for his ~20 steps and apply them to China. How many still fit... can you lay out a case that China would see the same ripples and lay out the black swan bet across the calender...

Romance Stocks: No Matter What, Don't Fall in Love

Surprised you didn't pick up on Tencent or Alibaba in addition to BIDU if you were looking into the Chinese tech space...

Romance Stocks: No Matter What, Don't Fall in Love

One of the near future "romance stocks" will no doubt be PANL The Fool's already picked up on it in their Rulebreaker's portfolio.
I wonder if that is what they are attempting to do with Rulebreakers. Do they have a better articulated criteria for finding the next Romance stock? And do you have to wait for them to be a romance stock or try to catch them before they become a romance stock?

Bogle: Investors 'Getting Killed' in ETFs

Some investors do struggle to defy human instinct and buy when everyone panics and sell when everyone is euphoric. Taking that approach(and it is indeed very difficult to fight the crowd pressure emotionally). Within my Vanguard 403B(having only ~90 mutual funds to choose from) I was able to achieve(as of 5/31/09) a 1 YR 40% ,3 YR 21.6%, 5YR 22.8 % annual rates or return. By paddling against the crowd behavior I managed to outperform the entire universe of mutual fund managers on a 1 YR and 3 YR basis(14K, 12K) and all but 5 mutual fund managers on a 5 YR basis. This was using Vanguard funds but allocating them against the herd grain. If I picked the long term treasury fund to park my assets instead of the money market fund I could have done even better.
Bottom line is that the mutual fund managers are not going to reallocate to cash when things get overheated and buy when they get oversold. Neither individual investors as a group or professional money managers have much success in "market timing". Mutual fund managers simply don't do it. They are so concerned with following their benchmark that when they get to much cash coming in that they can't invest fast enough they close their funds instead of letting the cash position build up for the rainy day where they could go on a parade buying stocks when their cheap or using that extra cash to meet the redemption from shareholders so they don't have to add additional price pressure by liquidating even more of the stocks that are down in price. The fear of under performance drives mutual fund managers from the long term asset allocation decisions to protect capital. When the crowd panics, individuals sell stocks, ETFs, hedge funds, and mutual funds. Prices collapse. This is THE time to buy and when markets are down 50% its a John Templeton generational moment to step up and buy as much as you can and borrow as much as you can to buy more.
The only vehicle I know of that might allow a manager to reallocate to cash might be a Closed End Fund. By being protected from the flows of Investors the CEF manager can go to cash and back without fear of under performance. Paramount is retaining the NAV of the fund so their fees go up. Consider Russian CEF that Mobius managed, I remember him once saying the risks are too high I've gone mostly into Cash, by doing so he avoided a big crash and could readily buy up bargains after the crash. I doubt an open end manager could have done this. I tend to think an ETF couldn't have done this either.
THE CEF provides the manager room to flex. CEFs also provide valuable financial behavior data(premium/discount) about how investors are willing to pay for a basket of assets relative to their worth.

What Use Is Economic History?

It is important to understand that academically speaking there is a civil war within the community divided across the Atlantic. The English variation of the theme is to house the economic historians in the history department thus freeing them from the shackles of the prevailing preferred economic models that would be imposed if housed within an economics department. Whereas in the USA the economic historians are typically housed within the economics departments and have had to force their students to back up such models as EMH, CAPM, Modern portfolio theory etc. based on rational behavior, perfect information, and normal behavior in markets etc. Within the USA there were a few excpeptions to this split betwee England and USA. Yale's history department stood out most as one that continued to house the economic historians within. Occasionally students of the Yale school such as Dennis M. P. McCarthy(Iowa State University) would land tenure in history departments outside of Yale and thus the Yale model would germinate outside occasionally. Dr. McCarthy is now emerits so no doubt Iowa State University opted to bring the next economic historians back into the economics department. THE MOST important classes I have EVER taken with respect to my appreciation of the big picture understanding of finance in economics were in fact tought by Dr. McCarthy; no offense to my economcs professors at ISU but DMPM was not limited in respect to reviewing real events by the models I was being tought in my economics classes. Instead he typically used multi-factor models discussing the signficance of the various fators on the economic growth(or decline) and comparing and contrasting the various economic history of cultures over time and places. I was somewhat naive in thinking I would be able to pursue economic history within a history department beyond the towers of ISU but much to my surprise I found the EH shackled by the economics department in the USA. I did not want to become a pseudo math PHD spouting out endless papers applying calculus to the review of economic data. Calculus has ruined economics in the sense that it could not handle the fractal relationships that an economic historian is free to observe, describe, and draw conclusions from. Instead Chaos theory, complexity theory, fuzzy logic should have been the basis upon which economics departments should have drawn upon thus linking up a typical qualitative approach of economic historians with the quantitative approach of economic study.

GlaxoSmithKline: Witty's Management Is Reason for Optimism

you neglect the impact of SIRT based products in GSK's pipeline?

China's Latest Hunting Trip

Lets set the story straight on China and its so called Silver standard. China didn't avoid the great depression because it repeated the mistakes of the Europeans in the 1920's IE it hyper inflated instead of acting in fear of repeated hyperinflation due to unsound money policies of the 20's.
The Republic of China went through the worst inflation 1948-49. In 1947, the highest denomination was 50,000 yuan. By mid-1948, the highest denomination was 180,000,000 yuan. The 1948 currency reform replaced the yuan by the gold yuan at an exchange rate of 1 gold yuan = 3,000,000 yuan. In less than 1 year, the highest denomination was 10,000,000 gold yuan. In the final days of the civil war, the Silver Yuan was briefly introduced at the rate of 500,000,000 Gold Yuan. Meanwhile the highest denomination issued by a regional bank was 6,000,000,000 yuan (issued by XinJiang Provincial Bank in 1949). After the renminbi was instituted by the new communist government, hyperinflation ceased with a revaluation of 1:10,000 old Renminbi in 1955.
Which Silver standard were you referring to? And how is hyper inflation any better than a great depression?

Is a Hard Landing in Store for China's Economy?

Another question might be to what extent the market sentiment has already priced in a hard landing. I might suggest that the negative sentiment already reached an extreme that factored in a worst case hard landing...

Strong RMB, Yen Not Good for the World

The problem isn't too much appreciation in the RMB but rather its not enough; not even close. There is no way the RMB has appreciated enough for the Chinese middle class to replace the USA middle class in purchasing power. Clearly China can force the US to default at anytime by no longer purchasing US treasuries and floating(that is where gov't doesn't intervene) the RMB. Once the RMB explodes up the Chinese consumer can buy their own goods(this is where stuff is produced); they can import raw goods into China just like the USA did for decades while they produced the finished products. By delaying the appreciation of the RMB they are just assuring a more crushing defeat later for the USA. Enough already. The game is over. China won. Now stop making everyone suffer longer while you think you can move every last ounce of manufacturing to China. Haven't you gained enough capacity and US$ reserves? Is 2 trillion not enough? Aside from floating the currency China should allow its citizens to invest anywhere and travel anywhere. By letting the RMB float the Chinese citizens will want to come back to China thus you can drop the stupid ransom paid by every Chinese traveler abroad. The Chinese middle class needs to be able go visit the USA and rub their new found wealth around a bit. The Chinese investor needs to be able to choose where they put their money. Who are the old Japanese, European, or American's supposed to sell their assets to if the Chinese investor is locked behind the curtain. The WTO people should be fired for letting such imbalances exist with currency,travel, and investment restrictions in place. "Free travel" and "Free investing" should have been rock solid requirements for WTO's "Free trade". China will win WWIII without firing a shot as a result of the world going along with its "Free Trade/Locked RMB/Locked investment" strategy. Without a way for the Chinese consumer to get access to the surplus and send it back in some form(spending(imports or travel) or investment) China essentially is a vampire sucking the life blood of the world. Now that the US is so clearly "printing" money how long will the Chinese consumer tolerate the inflation that results from China printing RMB to give to the exporters in exchange for US$? Right now USA gets to export inflation to China. Of course right now deflation is rampant around the world so while that is true US should just kick 5-10 trillion US$ China's way and see how much we can buy before someone in China realizes we took them to the cleaners with funny money.