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  Quotations - Invest  
[Quote No.30975] Need Area: Money > Invest
"[In the current recession] The papers are full of stories about companies laying off workers and governments trying their best to 'do something' to help. It seems to us that there is a major problem with the entire thought process of how to 'solve' the current economic problems. The main problem is everyone is convinced we are currently experiencing a once in a lifetime event. In fact, the reality is that although the magnitude of the events may be greater than anything we have personally experienced, the actual events themselves are simply what happens to businesses and the economy every day. It is just a more extreme version of the business cycle. No-one normally expects government to be involved in the daily running of businesses, yet that is exactly what is happening right now. And business, to its long-term detriment [and the detriment of the capitalist free market, which demands the survival only of the fittest] is encouraging this by holding out its hand for assistance. The normal business cycle helps business and consumers to regulate their own spending. As they spend too much they cut back. Businesses that have overproduced also cut back. This may - in the short term - keep prices down until consumers are comfortable to spend again. And so the cycle continues. Naturally, it is more complicated than that, but the basics of the principle are very simple. Too much government intervention will simply distort the [price signals within the] market and prolong the effects of the economic downturn. Perhaps it just needs someone in the mainstream media to let everyone know that the solution isn't quite as difficult as is being made out - Do nothing! [This is all just the normal ebb and flow of the business tide and to try to stop it is as foolish as Canute the Great (995-1035), King of England, Denmark, and Norway, who is celebrated for his failed attempt to hold back the sea's tide.]" - Kris Sayce
Financial journalist. Published in 'Money Weekend', 17 January 2009
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[Quote No.30976] Need Area: Money > Invest
"A recession is defined as two consecutive negative quarters of economic growth, a fall in real gross domestic product. Even a modest fall of 0.1 percentage points each quarter can have dire consequences for an economy. A depression, on the other hand, is an economic slump of 10 percentage points or an economic contraction that lasts three years or more. For now, at least, it appears the world is not entering another Great Depression. Another definition of a recession, according to ANZ chief economist Saul Eslake, is a spike in unemployment of at least 1.5 percentage points in 12 months or less... A recent paper by Eslake recalls another joke used by Ronald Reagan in the 1980 US presidential campaign: 'A recession is when your neighbour loses his job; a depression is when you lose yours.' The problem, says Commonwealth Bank chief economist Michael Blythe, is that recessions preceded by a period of financial distress are typically larger and longer than normal recessions. 'The type of financial stress also matters,' Blythe says. 'Recessions related with banking system stress are typically more painful than those following periods of securities markets or foreign exchange markets stress.' [and]... longer than the post-war average of 10 months." - Clive Mathieson
Financial journalist. Published in 'The Australian' newspaper, January 17, 2009.
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[Quote No.30982] Need Area: Money > Invest
"A liquidity trap is a situation in monetary economics in which a country's nominal interest rate has been lowered nearly or equal to zero to avoid a recession, but the liquidity in the market created by these low interest rates does not stimulate the economy. In these situations, borrowers prefer to keep assets in short-term cash bank accounts rather than making long-term investments. This makes a recession even more severe, and can contribute to deflation." - Wikipedia.com

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[Quote No.30991] Need Area: Money > Invest
"You don't need a weatherman, To know which way the wind blows." - Bob Dylan
Lyric from his 1965 song 'Subterranean Homesick Blues'.
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[Quote No.30998] Need Area: Money > Invest
"Contango is a term used in the futures market to describe an upward sloping forward curve (as in the normal yield curve). Such a forward curve is said to be 'in contango' (or sometimes 'contangoed'). Formally, it is the situation where, and the amount by which, the price of a commodity for future delivery is higher than the spot [immediate delivery] price, or a far future delivery price higher than a nearer future delivery. The opposite market condition to contango is known as backwardation. A contango is normal for a non-perishable commodity which has a cost of carry. Such costs include warehousing fees and interest forgone on money tied up, less income from leasing out the commodity if possible (e.g. gold or oil). The contango should not exceed the cost of carry, because producers and consumers can compare the futures contract price against the spot price plus storage, and choose the better one. Arbitrageurs can sell one and buy the other for a risk-free profit too. If there is a near-term shortage, the price comparison breaks down and contango may be reduced or perhaps even reverse altogether into a state called backwardation. In that state, near prices become higher than far (i.e., future) prices because consumers prefer to have the product sooner rather than later and because there are few holders who can make an arbitrage profit by selling the spot and buying back the future. A market that is steeply backwardated — i.e., one where there is a very steep premium for material available for immediate delivery — often indicates a perception of a current shortage in the underlying commodity. By the same token, a market that is deeply in contango may indicate a perception of a current supply surplus in the commodity." - Wikipedia.com
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[Quote No.31000] Need Area: Money > Invest
"[How can recessions and market crashes - caused by over-indebtedness be addressed by government and the investor? Here is one over-arching perspective that provides a good summary of the markets and economy. There are many very insightful theoretical observations in this quote which are fleshed out with editorial annotations. Firstly though there is a very useful indicator that is helpful to understanding how the various asset class values are interrelated around the world. In investment circles this study of the interconnections between markets is called 'intermarket analysis'. The indicator is called FRODOR. It is an indicator of global liquidity which is used to measure the rate of change in the quantity [i.e money supply - MZM, M0, M1, M2, M3, M4 -please note and refer to how loan growth, especially through the fractional reserve banking system effects and multiplies the growth of the money supply, especially the liquidity - M1 of a country and its economy] of the official global/world reserve currency, the US dollar, which is particularly important because it is used to denominate most international trades of commodities/basic goods, like food, oil and minerals including the industrial and precious metals. Most countries therefore keep a good portion of their foreign reserves in US dollars and then store it as US sovereign debt/bonds which are very quick and easy to liquidate when they are ready to use the funds, even in great times of global economic difficulty, which is part of their great appeal. Also those countries trying to sell exports to the very large US market buy US bonds and sell their own currency in order to try to keep their own currency pegged to the US dollar so their prices don't become uncompetitive, so they regularly buy and hold US bonds. The more the more they are selling to the US. The US benefits by having many countries willing to buy their sovereign debt at yield lower than they otherwise would be able to sell them for. It's a little like vendor financing where the manufactures outside the US finance the US government and banks to lend to the US consumer and business so they can buy the goods they export to the US. [As they have exchanged the US dollars used to pay their exporters for their own currency in order not to flood their market with increased money supply and create unwanted inflation they often sterilise/remove this new money supply in their economy by selling bonds to their citizens, banks, insurance companies, etc.] The economist Ed Yardeni developed the measure called FRODOR, for Foreign Official Dollar Reserves held by central banks around the world, to be a LEI - leading economic indicator along with the other LEI's -for example the OECD's LEI for all OECD countries, the US Conference Board LEI's for selected countries, ECRI's WLI for the US - for people to follow. But why follow it? The reason most people follow it is that statistically it has correlations to most asset markets and therefore helps investors anticipate market behaviour through the business cycle as well as prepare for booms and busts. It is positively correlated to - moves in same direction as - : gold, commodities -soft and hard - especially copper, non AAA bonds so corporate bonds, real estate, share markets - especially Asian share markets, inflation and GDP in general. It has negative correlations to - moves in opposite direction to - : credit spreads -which characteristically widen when more risk is perceived, and the US Dollar - which is considered a defensive risk-off currency that people buy and drive up in price when they think there is more risk around in the global economy. The USD itself is inclined to move with US interest rates as higher rates from the Federal Reserve are designed to slow down the economy especially inflation through reducing the money supply base and thereby credit growth and consumer consumption and business investment, which should contract the US trade deficit as there is less buying which should in turn mean that the many emerging markets - especially in Asia - that manufacture and export to the US require less raw commodities as selling and making less, so the price of commodities falls and thereby inflation around the globe falls as the global economy slows with the US economy, which explains why investors watch the US so closely. This is why they say, 'If America sneezes the rest of the world catches a cold.' America sneezed a lot in 2007 and the world faces perhaps the worst economic slowdown since the 1930's Great Depression. The article that follows looks at what might happen:] GREAT EXPERIMENT: The late Nobel Laureate, Milton Friedman, noted in his 1963 book, 'Monetary History of the United States' (co-authored with Anna Swartz), that the money stock decreased by a massive 31% in the Great Depression. The turnover of that money, called velocity, fell 21%. Nominal GDP equals money multiplied by velocity. Consequently, from 1929 to 1933 the breakdown of both measures resulted in a contraction in nominal GDP of approximately 50%. However, Friedman postulated that if the Fed had not let money shrink, velocity would have been steady and the Great Depression would have been averted, i.e., nominal GDP would not have collapsed. Our current Fed Chairman, Ben Bernanke, is an expert on the Great Depression, and he has, in fact, adopted Friedman's strategy to greatly expand the money supply [as the monetary policy while fiscal policy has been drawn from the economist John Maynard Keynes, of Keynesian economics renown, so government has been increasing 'stimulus' spending, reducing taxes and borrowing to make up this fiscal deficit in order to make up for the loss of aggregate demand in the economy - knowing that GDP is made up of consumer spending plus business investment plus net trade plus government spending = nominal GDP = total money supply in theory = M3 X 'the velocity of money', inflation, CPI rather than PPI, was usually correlated to M3 X 'velocity of money' growing faster than GDP and deflation growing less, but now central banks have deliberately stopped publishing M3 and admitted - see Ben Bernanke's 2002 'helicopter' speech footnote no.6 - that they are using inflation measuring methods that understate inflation which we assume is in order to inflate away excessive debt at the expense of savers and cash holders - refer the euphemism, 'financial repression'. This has long been the belief of certain sections of the investing public - shadowstats.com and the precious metal investors, affectionately called the 'gold bugs' who also believe in the concept of 'sound money' based on the gold standard to restrain governments from increasing the money supply and distorting interest rates refer GATA.org. Then there is the question of how is the money supply used and 'velocity of money' and the different measures of money supply MZM, M0, M1, M2, M3 goes some way to indicate the preference for spending and credit -including the fractional reserve banking expansion of money on deposit, or saving]. Whether this prescription for economic stability will work in a period of over indebtedness [government debt to GDP is approaching the dangerous level of greater than 90% of GDP which Rogoff et. al. have shown results in GDP growth reduction - and therefore the potential for 'stagnation' and worse 'stagflation' - poor growth and high inflation - and sovereign debt default on reduced government revenue/tax growth, plus financial intermediary, i.e. bank, etc., debt and business and private debt levels are also dangerously high - overleveraged requiring deleverage which is deflationary], such as now exists in the U.S., is most uncertain. Indeed, this could be called the 'great experiment' since this economic theory has yet to be thoroughly tested in the real world. Presently, major sectors of the U.S. economy are experiencing a debt deflation that is causing a massive destruction of wealth, thereby curtailing jobs, income and spending. Irving Fisher who, according to Friedman, was the most brilliant of all U.S. economists has noted that when the economy enters a period of 'debt and price disturbances', those forces will eventually engulf the economy. Fisher developed that concept by examining the 1929-33 depressionary period, as well as the depressions of 1837 and 1873, as examples of when excessive debt and subsequent price declines controlled 'all or nearly all' other economic variables. This theory of excessive debt and its pernicious and unrelenting deflationary impulse to the economy has been best chronicled by other notable economists: Charles P. Kindleberger (1910-2003), Hyman Minsky (1919-1996), Nikolai Kondratieff (1892-1938) and Joseph A. Schumpeter (1883-1950). Fisher contends that once extreme over indebtedness occurs, fiscal and monetary policy become impotent in spurring economic growth because money velocity will decline - something that is currently happening. Individuals and businesses struggle to repay debt with harder dollars, and saving begins to rise as caution prevails. The [total of government, bank, business and private] debt level of the U.S. has reached unprecedented proportions (300% in 1933, 366% in 2008). More important than the level, however, is the fact that for the last few years the debt was improperly loaned and financed [with poor risk management so high loan to value/income ratios on unsustainably high collateral valuations and often for purposes of consumption rather than for productive assets which will increase the ability to repay the debt, while consumption won't. This experience of borrowing for non-productive consumption and mispricing of assets/collateral due to poor price signals - cost of money -interest rates kept too low for too long, according to Austrian economic theory, in particular the economists Ludwig Von Mises and the Nobel Prize winning, Friedrich Hayek, is called malinvesting into malinvestments]. In the words of the late economists Minsky and Kindelberger, this type of lending activity implies there is little likelihood of repayment of principal and interest. Stock prices have plunged, and with home prices plummeting, and commercial and industrial properties losing value [this collateral on bank books of allowed to be marked to market would require massive equity raising and share dilution and would still probably not stop banks becoming insolvent/bankrupt and there being many bank runs as people tried to remove their deposits from failing banks as they did in the Great Depression despite the FDIC limited deposit insurance so the FASB, the Financial Accounting Standards Board, has changed accounting rules at the encouragement of the Federal Reserve Bank and the US Congress to allow banks, to mark the collateral to model rather than market so that the loans are not 'technically' insolvent. Banks however know they are really insolvent and asset values for collateral are likely to continue to fall and therefore are very reluctant to extend credit/debt and have increased lending standards for example loan to value/income ratios and reduced 'riskier' lending - ie business lending and therefore the ongoing high unemployment and 'employment less recovery', suppressing credit growth and the velocity of money even while money supply has increased therefore suppressing GDP growth], a deflation of assets has clearly begun while the underlying debt remains constant. Will this deflation overwhelm the best efforts of the Federal Reserve, invalidate Friedman's theory and prove Fisher correct? Most naturally feel and hope that the superiority of unbridled monetary and fiscal stimulus will overwhelm incipient price declines and stem the expanding cyclical downturn in economic growth. Our judgment is that the power of monetary policy revolves around the ability to initiate a new borrowing and lending cycle. This can only happen if lenders are willing to lend and borrowers are wanting and able to borrow. Presently, neither are so inclined. If price declines in assets continue, then Shakespeare's admonition of 'neither a borrower nor a lender be' will become the economic mantra, meaning that a period of very low nominal growth will likely extend for a decade. Moreover, fiscal policy actions may not be helpful either and could produce unintended negative consequences. Conventional wisdom is that the current economic contraction is nothing more than a typical post war recession. In the ensuing paragraphs we intend to frame an argument that is contrary to this conventional wisdom. CAN FED POLICY CONTROL ECONOMIC DESTINY? To respond to the country's severe economic problems the Fed has invented many new vehicles for injecting liquidity into the economy, but few outward signs suggest that these actions are engendering a recovery. Total [Federal Reserve Bank] reserves in the latest twelve months increased a record 1,897%. In the latest three months the M2 money stock jumped at an 18.2% annual rate, one of the largest quarterly increases on record. Many feel this is tantamount to the Fed printing money. However, nominal GDP is not equal to the stock of money but, as noted above, it is equal to the stock of money multiplied by its turnover, or velocity [of money]. Friedman and Bernanke both believe that if the money supply is increased sufficiently velocity will stabilize and Fed actions will at least be able to keep nominal GDP stable or growing slightly. Fisher, on the other hand, argues that if a generalized debt deflation takes hold, velocity will decline, just as it did during the Great Depression. Our analysis suggests that the Fed will not achieve the desired results of stable velocity. Velocity is a function of financial innovation, rising during periods of new innovations and falling when these innovations are reversed or unchanging [financial innovation, for example investment bank and hedge fund product innovation, is a corollary of 'financial liberation'. Increased financial regulation as is the political attitude and intent at present suppresses this - refer 'financial repression']. Fisher also suggested that velocity rises when leverage [debt/credit] increases and falls when leverage abates. So far the evidence at hand suggests that velocity is thwarting the efforts of the Fed. In the fourth quarter velocity plummeted, completely offsetting the increase in M2. Thus, nominal GDP declined at a very rapid rate. Monetary policy works by creating the environment for a renewed borrowing and lending cycle. This cycle would require that the debt to GDP ratio, which is already at a record level, grow even higher. Would such an outcome really be that desirable when the controlling problem of the U.S. economy is too much improperly financed debt? If the Fed were able to engender an increase in the debt to GDP ratio, this might merely serve to postpone the reckoning of the current debt levels while laying the foundation for an even more vicious unwinding down the road [a mere 'kicking the debt can down the road' - delaying the 'ultimate day of reckoning']. ARE MASSIVE FISCAL DEFICITS A CURE? The major debate in Washington surrounds the issue of how large the fiscal stimulus should be. In this case, as in many such debates, the question being raised is probably not the right one. In 2008, the consensus opinion was that a stimulus program based on tax rebates and one time transitory payments would be sufficient to halt the recession. Discussions were based on the need to make such payments timely and targeted. Hardly any discussions were held in either official or non-official circles as to whether such a program was desirable. Had there been such discussions, the funds might not have been so badly wasted. Numerous studies had shown that consumers have a very limited tendency to spend transitory [one-off, non-recurring] income, and that prior efforts to stimulate the economy through tax rebates had failed. Nevertheless, the political process barrelled through with a program with no reasonable expectation that it would work. Now the economy is even deeper in recession and the country has an additional $177 billion in debt on which the taxpayers will pay interest in perpetuity. About 17% of the rebates were spent, a tad less than during the rebate program of 2001. The minimal spending response was exactly in line with the consumption functions under Friedman's permanent income hypothesis [save rather than spend a one-off, non-recurring windfall when in severe debt with few other prospects for paying it down quickly], as well as the equivalent Modigliani's life cycle [demographics - peak spending on consumption is in the 35-55 years - refer the 'baby boomers' mostly past that] hypothesis. These pioneering works demonstrated conclusively that consumers have a far greater tendency to spend permanent rather than transitory income. Fiscal stimulus will not work well, and may even be counterproductive, and this applies to both spending programs and to certain tax programs as well. One of the major problems on the expenditure side is that the government sector is smaller than the private sector [except if goes to war and country is 'fully mobilised' - which is why governments often go to war when faced with these financial difficulties, when they wouldn't if the finances were less disastrous]. In the third quarter, real government spending, including the federal defense and non-defense sectors, as well as the state and local sectors, totalled $2.1 trillion, comprising 17.8% of real GDP. If there is a desire to increase government spending, the federal government must either increase taxes on the far larger private sector, an option that would presumably be precluded under the present circumstances, or borrow funds in the financial markets that would have gone to the private sector ['crowding out' the private sector by reducing the available spare credit and therefore the cost of the credit due to supply and demand issues]. At this point we have to ask which sector has the better track record of growing the economic pie—private or government expenditures? The private sector has demonstrated the greater flexibility and creativity [innovation] to expand the economic pie, increasing productivity and thereby improving living standards for all. The risk is that increased federal borrowing will stunt the private sector's ability to grow. The only really viable option for federal stimulus is a permanent reduction in the marginal tax rates, as highlighted in the research of Christina Romer, incoming Chair of the Council of Economic Advisors. This would have the benefit of raising after tax rates of return [discretionary income], but the drawback in the short run of still having to be financed by an increased budget deficit [due to the fall in government revenues/taxes]. Over time, a massive reduction in marginal tax rates would be beneficial, but the operative word is time. Refunds, or transitory tax relief, will have no better results in stemming the recessionary tide in 2009 and 2010 than it did in the spring of 2008. An important offset to the increased spending by the federal sector is a massive cutback in state and local expenditures. If transfer payments are excluded from federal expenditures, the spending of state and local governments totalled $1.9 trillion in the third quarter, much greater than the $1.1 trillion spent by the federal government. Further, state and local governments employed 19.8 million workers versus 2.8 million for the federal sector. J.P. Morgan estimates that state and local governments will have a $400 billion shortfall in funding this year, an economic drag since balanced budgets [rather than deficit spending which the Federal Government is allowed to do that states aren't] are required in all but one of the fifty states. Thus, spending will be curtailed or [state and municipal] taxes will rise [as well as services like fire dept., education and police will be reduced or capped]. MAJOR HEADWINDS FOR CONSUMER SPENDING: Consumer spending is contracting at a near record pace despite: (a) a strenuous effort by the Fed to loosen monetary conditions; (b) a $170 billion fiscal stimulus package that occurred in the second quarter of 2008; (c) the enactment of a troubled asset recovery program [called TARP] totalling $750 billion, and (d) promises for a major additional fiscal stimulus in 2009. These monetary and fiscal actions were overwhelmed primarily by an unprecedented decline in household wealth (more than 20%)[when that 20% to many was in the equity of their homes which have now fallen in value which for over 2 million means negative home equity where they owe more than the house is now worth on the market. In the past the growth of house prices, now understood to be unsustainable, was used by many as a 'magic pudding' ATM where, lived beyond their income by borrowing from the 'ever-rising' value of the equity in their homes. Also the borrowing was for consumption for non-productive assets like better cars - SUV's, flat screen TV's, super-duper computers, jewellery 'bling', overseas holidays, etc. That has all reversed now leaving them with unsustainable debt loads!]. Moreover, the wealth loss is now being augmented by significant job losses and a shorter work week. From the final quarter of 2006 through the third quarter of 2008, the real value of homes fell $3.5 trillion, while households' real holdings of stocks fell $2.1 trillion, resulting in a $5.6 trillion loss in total household wealth. The wealth loss may exceed $10 trillion when the fourth quarter figures are tabulated. The Fed's econometric model indicates that a one dollar decline in real wealth will reduce total expenditures by 7.5 cents over three years [the resulting reduction in spending and tighter budgets is called 'a negative wealth effect', the reverse of 'a positive wealth effect']. This means that the drag on consumer spending from declining wealth will be 3.4% per annum this year and for the next two years. By comparison, from 2000 to 2007 the annual increase in consumer spending was 2.9%. Additional losses in household income and wealth are likely in 2009. With consumers confronting such hostile wealth and income prospects, the saving rate is likely to rise sharply as it did after the Great Depression and, excluding the distortions created by World War II, continued to do for a half century [which obviously slows the velocity of the money supplied]. If the deflation now apparent in specific sectors of the economy spreads, the rise in the saving rate is likely to continue for a very long time. In the past, debt deflations have caused consumers to avoid at all cost the pattern of living beyond their means. Thus, the rising saving rate will constitute a major headwind for the U.S. economy. [Also in inflationary times, people are in a hurry to spend before prices rise -instant gratification mentality - therefore the increased use of credit regardless of interest as well as principal to pay off rather than saving for the money to buy, but in deflationary times, because prices falls rather than rise with time, it is rational to wait and save which reduces credit, the velocity of money and hastens ongoing price deflation and all the attendant debt payment issues for banks and debtors as well as the deteriorating value of debt collateral.] GLOBAL IMPLICATIONS: As a percent of GDP, the trade deficit has fallen from 6% to 4.9% in nominal terms and 5.5% to 3% in real terms over the past two years. Real imports in constant dollars have declined by 3.5% in the latest four quarters, a dramatic reversal from the sharp increases of recent years. This drop in imports reflects the loss of consumer wealth and income, creating lower spending for imports, and this drag will persist for at least three more years. Therefore, further and even sharper declines in imports are likely. This will continue to transmit U.S. economic weakness to the rest of the world [which has relied on the U.S. consumer], while at the same time gradually and irregularly reducing the U.S. trade deficit. [It is possible therefore to counteract this, while allowing US companies to report increased nominal value of their foreign earnings and asset revaluations and, better price competitiveness in the US domestic market and in foreign markets, which have floating currencies that will rise as the USD falls, that the Federal Reserve will embark on a weak US dollar policy, which as the world reserve currency in which most commodities, like food, oil/fuel and minerals are denominated will result in inflation world-wide and in many poor countries - ie MENA - Middle East/North Africa, where food makes up a much higher proportion of the disposable income spend - say 50% to the US's 15%, there will be 'food and fuel riots' and political unrest as the mostly young populations will want their governments to help them or want to remove them and replace them with more helpful governments. An unintended, unexpected, unhelpful, political consequence - possibly leading to more authoritarian political and sectarian crack-downs and the consequential wars for liberty and resources affecting geo-politics and strategic and tactical foreign affairs/relations/policy? Conflict in the oil producing critical areas in MENA would likely result in a risk premium being added to the price of oil, above and beyond the increase in the oil price due to the deliberate devaluing of the US dollar in which it is denominated, which will result in negating the reduction in the trade deficit the lower USD was designed to achieve in the first place, as the US is a net importer of oil, so the increased price of oil with a risk premium especially if oil reaches greater than $120 USD, as such a rise has historically usually caused a recession or in this case now a 'double dip'. Also countries that have pegged their currencies to the USD, especially if their economies are doing all right re GDP and GDP growth, trade surplus, etc - for example many of the fast developing emerging markets/economies like the Asian developing countries and the BRIC countries - Brazil, Russia, India and China, may also find themselves with a serious inflation problem because the US monetary policy to stimulate the depressed US economy may not be the right monetary policy setting for them, which they 'inherit/import' through their foreign exchange/currency peg as their economies are not as depressed resulting in overheating - growth that's too strong - causing problems with inflation, asset bubbles and over-investment in productive capacity - that will eventually become deflationary, under-utilised, over-capacity when the USD reverts or they adjust their currencies to make them stronger to reduce the inflation or allow foreign exchange market financial liberation and their currencies rise to no longer be artificially undervalued by government repression/regulation/fiat.] Although the current account will narrow and fewer funds will recycle into the U.S., it is important to review the portfolios of foreign investors. Based on the latest available figures, the foreign sector held $9.1 trillion of long-term securities. The Treasury department considers long term securities to be those with an original maturity of more than one year. ...equities comprise 34% of foreign holdings, the highest for any category, followed by 30% in corporate bonds, 22% in Treasury securities and 14% in Federal Agency securities. The holdings of U.S. Treasury securities are primarily in the short end, with 70% held in 5 year or less maturities, 23% in 5 -10 year maturities, and just 7% in greater than 10 year securities. Thus, the shrinking U.S. capital account surplus is likely to have its greatest funding impact on the corporate bond and equity markets. The short-term Treasury market could be adversely affected, but the Fed is able to control the short-term rates. HISTORY OF DEBT BUBBLES AND LONG-TERM INTEREST RATES: In the world's three most recent debt deflations – the U.S. from the 1870s to the 1890s, the U.S. from the 1920s to 1940s, and Japan from the 1980s to the very present – the low in long term interest rates occurred about 15 years after the end of the debt mania (Chart 5). Even 20 years after the end of the debt boom, interest rates were not much above their yearly average lows. Using this history as a guide, it would not be surprising to experience a decade of low and declining interest rates. During 2008, long term Treasury bond yields fell from 4.5% to 2.7%, producing an extremely strong total return for such investments, as typified by the Wasatch-Hoisington Treasury Bond Fund (WHOSX), which returned 37.7%. Credit problems affected returns elsewhere in debt markets, limiting returns on the Barclays Capital U.S. Aggregate Bond Index (formerly the Lehman Index) to 5.2%. The decline in long Treasury yields reflected the intensification of recessionary forces as well as a collapse in inflationary expectations. While the historical record indicates that the ultimate low in Treasury yields lies years away, the path to the ultimate low will be anything but smooth or linear as significant volatility continues. As the experience from U.S. and Japanese history indicates, many 'false dawns' will occur, with investors assuming that the long-delayed cyclical recovery in economic activity is at hand. During these pleasant but relatively short interludes, stock prices will probably rise dramatically and bond yields will increase [bond prices fall]. If history is a guide, however, these episodes will further drain wealth and will be thwarted by the persistent forces of the debt deflation. With yields in the long Treasury market very low in nominal terms, the real return will be greater if deflation sets in. Moreover, in Japan from 1988 to the present, as well as in the U.S. from 1872 to 1892 and 1928 to 1948, the total return on Treasury bonds exceeded the total return on stocks [held for the duration rather than traded - buy low sell high]. Such a condition cannot happen for the long run, but it did happen in these three instances spanning two decades. As a hedge against a recurrence of a prolonged debt deflation, some investors may want to consider even larger positions in high quality, long term Treasury securities. [even though many other advisors are now stating that Treasury securities are the latest bubble and will soon bust, when investors decide their yields are not worth it and put their funds first into either gold to protect against a possible future bout of inflation or higher risk investments like shares.]" - Van R. Hoisington and Lacy H. Hunt, Ph.D.
Analysts with Hoisington Investment Management Company (www.hoisingtonmgt.com), which is a registered investment advisor specializing in fixed income portfolios for large institutional clients. Located in Austin, Texas, the firm has over $4-billion under management, composed of corporate and public funds, foundations, endowments, Taft-Hartley funds, and insurance companies. Published in their Quarterly Review and Outlook - Fourth Quarter 2008.
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[Quote No.31020] Need Area: Money > Invest
"Investment must be rational; if you can’t understand it, don’t do it." - Warren Buffett
Highly successful value investor and one of the richest men in the world.
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[Quote No.31022] Need Area: Money > Invest
"Debt deflation occurs when the collateral for a loan decreases in value while the value of the loan remains the same. On an economy-wide basis, it occurs as a result of extreme over-indebtedness associated with an asset bubble. So as asset values fall as the asset bubble bursts in the inevitable recession, the debt value remains and people become fearful of being left with no equity and only debt and so focus on reducing debt and saving rather than spending, thereby further reducing the country's Gross Domestic Product, increasing unemployment and still further reducing asset values in a vicious cycle down into, at worst, an economic depression. The world in 2009 is now in the grip of a massive debt deflation that is destroying wealth on an unprecedented scale. The world has experienced these serious economic issues before. The three most recent debt deflations were:– the US from the 1870s to 1890s, the US from the 1920s to the 1940s, called The Great Depression, and Japan from the 1980s to the present. Debt deflations are particularly difficult to solve usually simply requiring long periods of falling asset prices and debt levels while savings rise until sustainable levels are reestablished. Neither monetary nor fiscal policies (as advocated by Keynesian economic theory) have worked to solve the problems in the past any faster than if they hadn't been attempted. In fact there is a lot of evidence to suggest, contrary to the hopes of politicians and constituents, that they make the problems worse and longer lasting. The only way to handle debt deflation is by prevention because once it occurs it can't be cured except by time and pain. Therefore it is important that governments, in an attempt to sustain an unsustainable GDP, prop up an economy during a war or before an election, or recover from a recession, never encourage or allow interest rates or lending standards to fall too low (such as too high loan to value or disposable income ratio) for too long because these encourage businesses and consumers into unsustainable levels of debt (supported by unsustainable asset values) which can only be unwound by wealth and lifestyle destroying debt deflation." - Seymour@imagi-natives.com

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[Quote No.31045] Need Area: Money > Invest
"...you can have a rule, for example, to prevent another real estate bubble [and the subsequent credit crisis, real estate crash and stock market bust that we are currently enduring]. You just require that anybody bought a house to put 20% down and make sure that the payments were not more than a third of their income. Now we would not have a big bust ever in real estate again, but we also would have people screaming that you’re denying home ownership to all these people, that you got a home yourself and now you’re saying a guy with a 5% down payment shouldn’t get one. So I think it’s very tough to put rules out. I mean, I can design rules that will prevent it but it will have other consequences. It’s like I say, in economics you can’t just do one thing. And where the balance is struck on that, will be a political question. My guess is that it won’t be struck particularly well, but that’s just the nature of politics... [Regarding consumer debt:]...consumer debt within reason makes sense. It makes sense to take out a mortgage and own a home, particularly if you aren’t buying during a bubble. You are normally going to see house price appreciation if you don’t buy during a time when people are all excited about it. So I don’t have any moral feelings about debt... I think people should only take on what they can handle though and that gets to their income level." - Warren Buffett
Highly successful value investor, Chairman of Berkshire Hathaway Inc, and one of the richest men in the world. Also he was an economic advisor to Democratic President Barrack Obama during his successful 2008 presidential campaign. This quote is from an interview Warren Buffett gave Susie Gharib of the 'Nightly Business Report' to mark the PBS program's 30th anniverary, on the 22nd of January, 2009, in the midst of the credit crisis and real estate and share market crash.
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[Quote No.31046] Need Area: Money > Invest
"Any stock I buy I will be happy owning it if they close the stock market for five years tomorrow. In other words I am buying a business [that I want to own]. I’m not buying a stock. I’m buying a little piece of a business, just like I buy a farm. And that doesn’t change. And all the newspaper headlines of the world don’t change that. It doesn’t mean you can’t buy it cheaper tomorrow [or in five years time if they or the economy has a problem then]. It may turn out that way. But the real question is did I get my money’s worth when I bought it? [with a margin for safety from the unforeseen, with what I knew and could forecast at the time]" - Warren Buffett
Highly successful value investor, Chairman of Berkshire Hathaway Inc, and one of the richest men in the world. Also he was an economic advisor to Democratic President Barrack Obama during his successful 2008 presidential campaign. This quote is from an interview Warren Buffett gave Susie Gharib of the 'Nightly Business Report' to mark the PBS program's 30th anniverary, on the 22nd of January, 2009, in the midst of the credit crisis and real estate and share market crash.
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[Quote No.31047] Need Area: Money > Invest
"When considering buying shares in a company it is important to think long term about its prospects as well as its current asking price. This is because owning shares mean that you own a piece of that business rather than just a claim on a piece of paper that goes up or down in price from day to day, and may or may not pay a dividend from time to time. So ask yourself will people still buy the company's products in ten years time and will this company be responsive enough over that time to still be serving the needs of customers well and profitably? [For example, were they around ten years ago and how have the products, markets, company and its competitors changed in that time and are there any trends or threats to this in the next ten years. How much would they conservatively earn per year over the next ten years to cover the ups and downs of the economy and the business cycle, and then discount this a bit for unforeseen issues and decide on a price to earnings and price to book value that would be good for that business and that type of business and then wait for the opportunity to buy it at that price or lower [without being upset it if goes still lower temporarily]. Your price may never come but often it will. By buying a variety of businesses in this way you can diversify your risk and over the long term you should do okay.]" - Seymour@imagi-natives.com

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[Quote No.31048] Need Area: Money > Invest
"I don't judge how Berkshire [or any company] is doing by its market price, I judge it by how our [or the company's underlying] businesses are doing." - Warren Buffett
Highly successful value investor, Chairman of Berkshire Hathaway Inc, and one of the richest men in the world. Also he was an economic advisor to Democratic President Barrack Obama during his successful 2008 presidential campaign. This quote is from an interview Warren Buffett gave Susie Gharib of the 'Nightly Business Report' to mark the PBS program's 30th anniverary, on the 22nd of January, 2009, in the midst of the credit crisis and real estate and share market crash.
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[Quote No.31049] Need Area: Money > Invest
"I am unquestionably optimistic about the long-term. I’m more than a little pessimistic about the short-term, but that doesn’t mean I am pessimistic about the stock market. We bought stocks today. If you tell me the economy is going to be terrible for 12 months, pick a number, and then if I find something that is attractive today, I am going to buy it today. I am not going to wait and hope that it sells cheaper six months from now. Because who knows when stocks will hit a low or a high? Nobody knows that. All you know is whether you’re getting enough for your money or not." - Warren Buffett
Highly successful value investor, Chairman of Berkshire Hathaway Inc, and one of the richest men in the world. Also he was an economic advisor to Democratic President Barrack Obama during his successful 2008 presidential campaign. This quote is from an interview Warren Buffett gave Susie Gharib of the 'Nightly Business Report' to mark the PBS program's 30th anniverary, on the 22nd of January, 2009, in the midst of the credit crisis and real estate and share market crash.
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[Quote No.31051] Need Area: Money > Invest
"One of the best ways to approach buying and owning shares is to think about them from the point of view as a part owner of the business itself and if it is a business that serves its customers well you can justifiably take joy and pride in that [and feel confident that over time it will do okay financially too]. Then its up and down price movements on the share market, which is notoriously manic-depressive, aren't as emotionally disturbing as if your worth is only dictated by the price of your shares and your net worth, that day or that year, especially in times of recession." - Seymour@imagi-natives.com

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[Quote No.31070] Need Area: Money > Invest
"We [Charlie Munger and Warren Buffett] both insist on a lot of time being available almost every day to just sit and think. That is very uncommon in American business. We read and think. So Warren and I do more reading and thinking and less doing than most people in business. [because it is necessary to gain insights and make good decisions]" - Charlie Munger
Lawyer, investor, property developer, philanthropist, author and business partner, as Vice President of Berkshire Hathaway, Inc, of the legendary value investor, Warren Buffett.
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[Quote No.31082] Need Area: Money > Invest
"Short sellers can't bring down a large, healthy firm. But when they see a Humpty Dumpty like Lehman [Brothers - a U.S. stock broking house that went broke, due to massive debt and unrealistic asset carrying values, in 2008] on the wall, they give him a push. [Then momentum and chart investors respond to the downward price trend and its coverage in the media, driving the share price down further, until debt covenants related to asset and equity values are broken and the stock price falls dramatically until eventually the company either becomes insolvent and is delisted from the stock exchange, or patient, deep value investors start buying at prices well below its true 'going-concern' value to give them a margin of safety. Then, as the price stabilizes or even rises, short sellers buy to cover their shorts and the price rises still higher to get closer to its 'fair' value.]" - Bill Bonner
Financial journalist
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[Quote No.31083] Need Area: Money > Invest
"When a corporation is desperate, it issues a lot more shares. [This significantly dilutes the value of existing shares.] When a government is desperate, it issues a lot more currency. [This significantly dilutes the value of the money in your pocket and your bank account.]" - Stock market axiom

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[Quote No.31084] Need Area: Money > Invest
"What about gold? We keep harping on about it. And yes, it's still shiny and money-like. But it did fall back under US$900 overnight. What gives? The big driver of the gold price this year will be, as always, weakness in the U.S. dollar [because it is denominated in it]. Granted, gold is rising against other currencies too (the euro and the British pound). But it's the large increase in the supply of U.S. dollars that will ultimately catapult the yellow metal higher. Keep in mind, though, that the unwinding of the dollar standard is not going to be a rapid affair. Too many people have too much to lose from a rapid dollar depreciation. We'd expect gold's move to be driven by gradual investor capitulation on common stocks and government bonds. And THAT will be driven by market returns and inflation concerns (both of which should mount as the year progresses). Another date to watch for is September 26th, 2009. That's when the current European Central Bank Gold Agreement (CBGA) on sales expires. The first CBGA was signed in 1999, and depending on whom you ask, had a rather ambiguous goal. European central banks agreed to limit and publish their announced gold sales. The reason, we suspect, is that European Central Banks own gold as a reserve asset. Signatories of the first CBGA controlled 43.6% of the world's above ground gold reserves, according to the World Gold Council. The second CBGA was signed in 2004 and limited sales to a maximum of 500 tonnes per year over five years (2,500 tonnes over the length of the agreement). With the expansion of the EU, CBGA signatories now control 46.1% of the above ground gold reserves. So why cap official CB sales? As much as they prefer their own product- [fiat] paper money -central banks own gold as a reserve asset [perhaps because they can then increase their money supply, devaluing their currency and making it easier for them to pay their domestic debts, while increasing the competitiveness of their exchange rates and therefore their exporting industries, while increasing the value of their gold reserves in their own currency]. In 1999, the gold price languished at just US$252/ounce. For the CBs [central banks], this meant that value of a reserve asset was falling. And with the market wary that further CB sales could flood the gold market with excess supply at a time of lethargic demand, something had to be done to put a floor under the gold price. In order to assure the market that Central Bank sales would not (at least publicly) be used to suppress/depress the gold price, the CBGA was signed. Since then, it's provided transparency to planned central bank sales of gold. According to the WGC [World Gold Council], France and Switzerland were sellers of gold least year, while Russia was a notable buyer. What will happen, then, when the current five-year agreement expires on September 26th of this year? Well, there's every chance a new agreement will replace it. But since we're in the business of looking for Black Swans [rare events], let us entertain the possibility that Central Banks abandon the agreement this year. Why would they do so? Global central banks are also large holders of U.S. dollars and U.S. dollar-denominated bonds. How reliable do you think either of those as reserve assets? Hmm. Also keep in mind that gold is now accessible to retail investors in a way it wasn't in 1999. Gold ETFs (if you take them at their word) own over 1,000 tonnes of gold. This makes ETFs the sixth-largest holder of above ground gold (behind the U.S., Germany, the IMF, France, and Italy). It's not a rash speculation to suggest that Central Banks will prefer to hold on to their gold this year rather than sell it at all. As competitive currency devaluation sweeps the globe in an all-out effort to fight asset deflation and recession, gold will become much more desirable as a reserve asset worth owning (not selling). Bankers are bankers, after all. Their product is money. But they have gold in their vaults for a reason. It was money before paper was money. So September 26th may mark the end of the orderly and coordinated management of gold sales by European Central Banks. And it may mark the beginning of a new monetary era where gold reasserts its importance as money. Is this good for gold miners? You bet it is! [so long as they can still get affordable funding during the current credit crisis]" - Dan Denning
Financial journalist. Published in 'The Daily Reckoning - Australia' on 28 January 2009.
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[Quote No.31085] Need Area: Money > Invest
"The bubble economy of 2002-2007 had all the appearance of a happy, healthy financial system. Trouble was, it was having far too much fun [rising too fast]. People can't party [borrow] that hard without getting sick. We waited for them to start throwing up. ...now, people are retching [losing money and jobs] all over the place. We're no longer waiting for them to get sick. We're not on Bubble Watch any more. Now, we're on Quack Watch...waiting to see how the quacks [governments] put them out of their misery. At every level, the politicians are getting out their black bags [talking about Keynesian government spending] and taking 'command' of the situation... This is where it gets interesting... looking to see how much [long-term] damage the [well meaning but not necessarily competent] fixers do." - Bill Bonner
Financial journalist and founder and publisher of Agora Publishing. Published in 'The Daily Reckoning - Australia' on 28 January 2009.
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[Quote No.31087] Need Area: Money > Invest
"This week the House is expected to pass an $825 billion economic stimulus package. In reality, this bill is just an escalation of a government-created economic mess. As before, a sense of urgency and impending doom is being used to extract mountains of money from Congress with minimal debate... There is a lot of stimulus and growth in this bill – that is, of government. Nothing in this bill stimulates the freedom and prosperity of the American people. Politician-directed spending is never as successful as market-driven investment. Instead of passing this bill, Congress should get out of the way by cutting taxes, cutting spending, and reining in the reckless monetary policy of the Federal Reserve." - Ron Paul
U.S. Congressman [Republican - Texas]. Quoted January 26th, 2009.
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[Quote No.31093] Need Area: Money > Invest
"It would be irresponsible in the extreme for an individual to [attempt to] forestall a personal recession by taking out newer, bigger loans when the old loans can’t be repaid. However, this is precisely what we are planning on a national level. I believe these ideas [from Keynesian economics] hold sway largely because they promise happy, pain-free solu-tions. They are the economic equivalent of miracle weight-loss programs that require no dieting or exercise. The theories permit economists to claim mystic wisdom, governments to pretend that they have the power to dispel hardship with the whir of a printing press, and voters to believe that they can have recovery without sacrifice. As a follower of the Austrian School of economics I believe that market forces apply equally to people and nations. The problems we face collectively are no different from those we face individually. Belt tightening is required by all, especially governments. Governments cannot create but merely redirect [money to ideas, areas and people which best meet their political motives and self-interests]. When the government spends, the money has to come from somewhere. If the government doesn’t have a surplus, then it must come from taxes. If taxes don’t go up, then it must come from increased borrowing. If lenders won’t lend, then it must come from the printing press, which is where all these bailouts are headed. But each additional dollar printed diminishes the value of those already in circulation [increasing inflation]. Something cannot be effortlessly created from nothing." - Peter Schiff
Fund manager. 'There’s No Pain-Free Cure for Recession' , 'The Wall Street Journal', 27 December 2008.
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[Quote No.31096] Need Area: Money > Invest
"Vigilance [not complacency] and doubt [skepticism rather than confidence] is the price of liberty and prosperity." - Chris Leithner
Fund manager with Leithner and Co. Pty Ltd. Quoted from his 'Leithner Letter' No. 111-113, 26 March - 26 May 2009.
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[Quote No.31097] Need Area: Money > Invest
"What happens when central and commercial banks, succumbing to pressure from the government and the crowd, connive to reduce rates of interest? They make saving less rewarding and the accumulation of debt less costly. As a result, the amount of genuine credit – that is, credit based upon savings, which is the very stuff required to finance a genuine and healthy recovery – decreases. At the same time, given that credit has become unnaturally cheaper, investments and projects that would otherwise get the boot suddenly (and falsely) become appealing. But regardless of the amount of credit created out of thin air, and no matter how low these artificially-set interest rates, real resources do not suddenly become more abundant. In a free market of genuine credit, lower interest rates reflect the actual greater availability of investible savings. But in the mainstream’s financial fantasyland (i.e., the corrupted market of ersatz credit), artificially-low rates are the consequence of the funny-money 'injected' into the financial system. Hence what Austrian School economists call 'malinvestments.' When interest rates are lower than they would be in a free market, investment projects which do not accurately reflect the real state of demand and availability of resources see the light of day. This drives up prices in the sectors where the funny-money flows. Eventually, however, investors realise that their projects are not viable; consumers who clamoured to borrow recognise that they cannot afford what they bought at inflated prices; and financial institutions stagger under bad debts. If little genuine credit is available today [2009], it’s because – thanks to the government, which is moving heaven and earth to prevent the liquidation of the mistakes of the past and is thereby creating even bigger mistakes for today and tomorrow – it’s stuck in these malinvestments. In addition, there’s little genuine credit because there is little true savings to resupply credit markets. Although they have risen somewhat over the past couple of years, and although households are trying to do the right thing, personal rates of savings rates remain anaemic [because too low interest rates and too easy lending standards in the past made saving unrewarding and unnecessary]. Finally, as long as they cannot ascertain who is solvent and who is not, those who have money to lend will remain reluctant to do so. The lesson is that the questions investors should ask about interest relate not to its level or stability, but to its integrity. From the mid-1990s until 2007, artificially low and stable rates masked the distortions caused by the government’s funny-money. Hence investors must regularly ask themselves: given the state’s pervasive tampering in credit and financial markets, do the prices of assets and rates of interest convey accurate signals and sensible information? Acting on them, would individuals make reasonable choices? Or would they undertake 'malinvestments' that must be liquidated when the boom inevitably ends? These days, many obsess about the reassuring vagaries spoken by central bankers such as Glenn Stevens, Ben Bernanke, etc. Alas, nobody recalls the bracing and crystal clear words of the Weimar German central banker Hjalmar Schacht. In 1927, with the clouds of bust already forming, he protested: 'don’t give me a low rate. Give me a true rate; and then I shall know how to put my house in order.' " - Chris Leithner
Fund manager with Leithner and Co. Pty Ltd. Quoted from his 'Leithner Letter' No. 111-113, 26 March - 26 May 2009.
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[Quote No.31098] Need Area: Money > Invest
"In a free market for credit, interest would find a natural level that matched the supply of savings and the demand for debt. The more people are willing to post-pone consumption, the more savings there will be and the lower interest rates will be, thus facilitating investments. Conversely, higher demand for credit will place upward pressure upon rates and encourage people to save. This is how unfettered financial markets co-ordinate the actions of creditors and debtors over time. Clearly, the vital lesson for investors is that what is needed for sound economic and investment conditions is a free market for savings and capital goods – and not subsidised credit [through government's monetary policy interventions artificially lowering interest rates and therefore savings levels] and consumption." - Chris Leithner
Fund manager with Leithner and Co. Pty Ltd. Quoted from his 'Leithner Letter' No. 111-113, 26 March - 26 May 2009.
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[Quote No.31099] Need Area: Money > Invest
"A price is a ratio at which the 'most eager' buyer(s) and 'most eager' seller(s) [at that time] voluntarily exchange some specified good, service or commodity. A buyer is 'most eager' in the sense that he is willing to exchange it for the greatest amount of some other commodity such as money. A seller is 'most eager' in the sense that he is prepared to accept less money for it than is any other seller. Hence a security’s least optimistic present owner and most optimistic non-owner determine its price. In the words of John Burr Williams ('The Theory of Investment Value', 1938), 'the margin will fall between owners and non-owners, the ins and outs, the ayes and nays; and at this margin, opinion, mere opinion, will determine actual price.' The price of a stock, bond or other security at any point in time reflects marginal opinion at that time. It follows that a particular price is unique to a given buyer(s) and seller(s), the security being exchanged, their attitude towards it and their information about it. All of these determinants of a security’s price are subject to sudden and unexpected change; accordingly, so too is its price. A stock’s price may thus tell us something about the value imputed to it by an eager buyer and an eager seller at a particular point in space and time; but it tells us nothing about the value attributed to it by other owners and by non-owners. Still less does it tell me the value I should impute to it. A stock’s price and its value, then, are very distinct things; in any given exchange the one will not equal the other; and current price may differ greatly from my estimate of its value. Only if the current price differs considerably from my own assessment of its value and no better investment opportunity presents itself does this price give me an incentive to act. According to [highly successful value investor] Warren Buffett ('Forbes', 4 January 1988), 'the market is there only as a reference point to see if anybody is offering to do anything foolish.' He added ('The New York Times Magazine', 1 April 1990) 'for some reason, people take their cues from price action rather than from values. What doesn’t work is when you start doing things that you don’t understand or because they worked last week for somebody else. The dumbest reason in the world to buy a stock is because it’s going up.' The price of a security, then, is determined by marginal opinion. But opinions are not the same as facts, and the opinions of marginal buyers and sellers are not necessarily informed opinions. Market participants, in other words, are neither omniscient nor prescient; nor are the prices they set in markets." - Chris Leithner
Fund manager with Leithner and Co. Pty Ltd. Quoted from his 'Leithner Letter' No. 111-113, 26 March - 26 May 2009.
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[Quote No.31100] Need Area: Money > Invest
"The Great Depression was the very unpleasant but absolutely necessary consequence of the distortions and excesses of the previous boom – and of the frenzied interventionism after 1929. America’s stock market crash represented the most visible sign of a correction in an economy that had been artificially inflated by expansionary [government] monetary policy. Unfortunately, instead of allowing the necessary and salutary liquidation, the great humanitarian and engineer but hopeless economist, Herbert Hoover, attempted to resuscitate the economy through interventionist measures (including protectionism) which drove it further into the ground. FDR built upon this sorry record and embarked on a disastrous course of even more comprehensive central planning [which has been proven again and again to be unable to respond to the needs of the population as quickly and effectively as free markets and their unimpeded price signals can]. The Second World War did not reverse the Depression, and the economy didn’t fully recover until many [government interventions and] controls were lifted or abandoned after the War. Economists who possess a detailed knowledge of history understand that the prescriptions peddled by today’s [Keynesian economic] mainstream, which reprise those of the 1930s, are making and will continue to make matters worse. As theatre, propaganda and a vehicle for FDR’s ambitions, the New Deal was a spectacular success; as economics, it was a dismal failure. In an address to Congressional Democrats in May 1939 – that is, after almost a decade of Hooverveltian interventionism – the U.S. Treasury Secretary, Henry Morgenthau, frankly confessed its abject failure. He thereby foretold the direction in which today’s anointed are leading the benighted: 'We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and if I am wrong ... somebody else can have my job. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises [to achieve these] ... I say after eight years of this Administration we have just as much unemployment as when we started ... and an enormous debt to boot!" - Chris Leithner
Fund manager with Leithner and Co. Pty Ltd. Quoted from his 'Leithner Letter' No. 111-113, 26 March - 26 May 2009.
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[Quote No.31102] Need Area: Money > Invest
"Never underrate the importance of asset allocation. Investing is not about owning only common stocks. Nor are historical stock returns a sound guide to future returns. Virtually all investors should keep some 'dry powder' in their portfolios in the form of high-grade short- and intermediate-term bonds. Investors who failed to learn that lesson fell on especially hard times in 2008. How much in bonds? A good place to start is a bond percentage that equals your age. Although I don't slavishly adhere to that rule, my bond position accounted for about 65% of my personal portfolio in early 2000. Because returns on my bond funds since then have totaled 50% and returns on my stock funds were negative 25%, bonds are now about 75% of my portfolio, still close to my advancing age. With all the focus on historical returns that greatly favor stocks, don't ignore bonds. Consider not only the probabilities of future returns on stocks, but the consequences if you are wrong." - John C. Bogle
Famous share investor and founder and former chief executive of the Vanguard Group of Mutual Funds. Quote from an article he wrote in the Wall Street Journal, 8th January, 2009.
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[Quote No.31104] Need Area: Money > Invest
"What we do is look for extremes in markets: very undervalued or very overvalued. Austrian theory has certainly given us an edge. When you have a theory to work from, you avoid the problem that comes with stumbling around in the dark over chairs and nightstands. At least you can begin to visualise in the dark, which is where we all work. The future is always unlit. But with a body of theory, you can anticipate where the structures might lie. It allows you to step out of the way every once in a while." - James Grant
Editor of the highly aclaimed financial newsletter, 'Grant’s Interest Rate Observer'. Quoted from 'The Austrian Economics Newsletter' (1996).
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[Quote No.31110] Need Area: Money > Invest
"Hope on, and save yourself for prosperous times." - Virgil

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[Quote No.31113] Need Area: Money > Invest
"It's coming dear reader. No doubt about it. The only questions are: When? How much? We're talking about inflation. First a word of caution. Everything that MUST happen DOES happen. But it doesn't always happen when and how you think it should. We warned about the coming end of the Bubble Epoque for 10 years before it actually happened. Now, we're warning about inflation coming. Readers may draw their own conclusions. 'In a world of debt and deflation,' writes Crispin Odey in the Financial Times, 'inflation is our friend.' The Financial Times is required reading among policy makers. They read it to find out about the latest fashions in their trade. In a matter of days, they are wearing the season's new styles themselves. The world's financial authorities have a duty to maintain the integrity of the financial system...which means, maintaining the value of the currency. Those that lived through the '70s have a horror of inflation [because with inflation every day each dollar in bank accounts or earned at work is worth less and therefore everything costs more. Gold prices go up too, not only because of inflation but also, because they will become even more in demand as throughout history gold has been a store of wealth and purchasing power in difficult economic times]. They feel they must fight against it...protect against it...and keep an eye out for it. Yet, in front of them is the worst financial crisis since the Great Depression... Bloomberg reports that 236,000 houses were foreclosed in 2008. In California, house prices are already down 42% from their peak...and still falling [deflation]. And just yesterday, Boeing lost its first order for 787 Dreamliner...and announced that it would have to let 10,000 workers go. Starbucks said it would turn 6,700 of its people loose. And the International Labor Organization in Geneva estimated that as many as 50 million people worldwide could lose their jobs 'if the situation continues to deteriorate.' The situation is continuing to deteriorate. 'There's not a moment to spare,' says [U.S.] President Obama. We have to fix things. But how? There are only three choices, says Martin Wolf in the Financial Times. Liquidation. Inflation. Or Boondogglization. Here at The Daily Reckoning , we'll take the first solution. Let the chips fall where they may...clear the market [capitalism's creative destruction or economic survival of the fittest and financially strongest and most needed]...and then get on with things. 'To choose that option must be insane,' says Wolf. Ooooh... Well, we're not going to be provoked by that kind of low-bred name calling. We'll take the high road... He - and most of the 'responsible' commentators - like the third solution, a devil's pudding of sugar-coated carrots and wet-noodle sticks including Keynesian spending, bailouts, massive infrastructure projects, giveaways, new regulations, new programs...a little of this...a little of that...adding trillions in public debt and hoping that the economy grows its way out of it. In the confusion of the crisis, you can also expect the Obama government to sneak in a total overhaul of the nation's health care system...and maybe its education system too. So far, boondogglization is the policy the feds have favored. It's as though a liquor truck had over-turned in a bad neighborhood. Within minutes, people are out in the street grabbing every unbroken bottle. In Mr. Obama's relief plan, for example, there are free drinks for almost everyone. Wall Street financiers. Bankers. Homeowners. Builders. Steelmakers. The House of Representatives - guardians of the nation's purse - took a hard look at it...red-penciled $6 billion out of $825 billion...and let it pass. But little by little...day by day...the policy makers are being drawn towards the second solution: inflation. Boondoggles aren't enough. Borrowing and taxing alone won't do it. A dollar borrowed or taxed merely transfers it from the hands of the person who earned it to the hands of someone who didn't. What the system needs is new money. More money. Money that isn't stolen or defrauded from someone else. And economists are beginning to realize it. The opinion mongers are softening up the world's head. Inflation is not such a bad thing, they keep saying. A little inflation will, in fact, be a good thing. Crispin Odey's analysis is closer to our own than most others. The problem, he says, is not credit; it's debt. The authorities may be able to increase credit by throwing money to the banks; but people who are deeply in debt are still bad credit risks. Martin Wolf, at the Financial Times , outlines the size of the debt problem: 'Let us start with some facts. The ratio of US public and private debt to gross domestic product reached 358% in the 3rd quarter of 2008. This was much the highest in US history. The previous peak of 300% was reached in 1933, during the Great Depression. 'Nearly all of this debt is private. That reached an all-time high of 294% of GCP in 2007, a rise of 105 percentage points over the previous decade. 'Particularly remarkable is the composition of the increased debt. In the early 1930s, most US private debt was owed by non-financial companies, so balance sheet deflation occurred in companies, as was also the case in Japan in the 1990s. This time, however, the big increase in debt was in the financial and household sectors. 'Over the past three decades the debt of the US financial sector grew six times faster than nominal GDP. The consequent increases in its scale and leverage explain why, at the peak, the financial sector allegedly generated 40% of US corporate profits.... 'Household debt - most of based on rising housing values - rose from 66% of US GDP in '97 to 100% in '07.' What to do with all this debt? 'If central banks and governments are aggressive enough, they can generate inflation which will lower the debt burden,' Wolf writes. 'But they will imperil - if not terminate the experiment with un-backed fiat (or man-made) money that started in 1971.' Yes...exactly...that is what we expect. 'The world's total outstanding debts have to be reduced,' continues Mr. Odey, clearheadedly. 'Our populations and companies need the means and the time to pay them off. These means are profits and pay rises.' Not much the feds can do about profits and pay rises - at least not directly. But the last part of Odey's formula sounds like a winner to us: 'The other thing we need is inflation... 'Inflation will allow debt to reduce day by day. Price rises will make companies going concerns, earning their way back to profit. Pay rises will enable households and consumers to pay down what they owe while saving more and spending some. And inflation allows interest rates to rise but still remain negative in real terms. It is healthier that people receive an annual pay rise than take out an extra annual loan - as they have been doing since 2000. This package will allow markets to breathe again.' Inflation is coming back into style. Count on it. We promised an interview with the master. Forget Keynes. Forget Friedman. The economist that everyone should be paying attention to is Gideon Gono. Inflation is coming back in style. And Gideon Gono is its star. While other central bankers flounder, he's proven that you can have inflation...and have it more abundantly than you want. Gono, if you haven't heard of him, is Robert Mugabe's right hand man. And Robert Mugabe is the number one man in Zimbabwe, an African country with a real 'riches to rags' story. It was one of the wealthiest and safest countries in Africa when it was run by Ian Smith in the '70s. But the meddlers and world-improvers couldn't leave well enough alone. They helped put Mugabe in power. Since then, the place has gone to Hell. Gideon Gono, 47 years old, lives in a 47-bedroom mansion in Harare. He says he doesn't drink, only sleeps 4 hours a night, and runs regularly. He is known as 'Mr. Inflation' for his Olympian efforts to increase the country's money supply. He does this the old fashioned way - by printing pieces of paper will lots of zeros on them. Newsweek Magazine seems to have found him in a talkative mood: Asked what he thought of the worldwide credit crash, he replied: 'I sit back and see the world today crying over the recent credit crunch, becoming hysterical about something which has not even lasted for a year, and I have been living with it for 10 years. My country has had to go for the past decade without credit... Out of the necessity to exist, to ensure my people survive, I had to find myself printing money. I found myself doing extraordinary things that aren't in the textbooks. Then the IMF asked the US to please print money. I began to see the whole world now in a mode of practicing what they have been saying I should not.'" - Bill Bonner
Financial journalist and author. Published in 'The Daily Reckoning - Australia' 30th January, 2009.
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[Quote No.31132] Need Area: Money > Invest
"Trying to determine if the share market, as a whole, is fairly priced is not a precise science, especially as the market swings between being underpriced and overpriced. Three methods have been found to have some merit. Firstly, the long-term mean growth rate of the stockmarket - approximately 7% so it should double every twn years or so - can help. Secondly the long-term average price to earnings ratio of the particular market and thirdly Tobin's Q. Tobin's q ratio is the ration between the combined market value of all the companies on the stock market and the replacement cost of all the company assets. It was originally formulated by Yale University professor James Tobin, a Nobel laureate in economics. The theory behind the ratio is the combined market value of companies on the stock market should be equal to the replacement cost of company assets. According to Argus Research, 'When the stock market trades at a ‘discount’ to its replacement cost, the market is inexpensive, or cheaper to buy than build. This discount possesses ‘q’ ratios that are less than 1.0. When 'q' exceeds 1.0, the market trades at a premium. The run-up from 1996-2000 had ‘q’ approaching the unthinkable value of 2.0. Encouragingly, the most recent (1Q08) level of 0.68 implies a reasonable valuation of market conditions [but it should be remembered that the market and Tobin's Q often overshoots on the way down as it does on the way up. For example Tobin's Q during the 1930 Great Depression and the 1982 recession was 0.3]. The long-term average for Tobin’s ‘q’ is 0.75.' According to the website, Money Terms, 'A Tobin's Q of more than one means that the market value of assets (as reflected in share prices) is greater than their replacement cost. This means it is likely that capex will create wealth for shareholders. This means companies should increase capex, raising more money to do so if necessary, but should not make acquisitions. This should reduce share prices and increase asset prices, pushing Q towards one. A Tobin's Q of less than one suggests that the market value of the assets is less than replacement cost, making acquisitions cheaper than capex; buying cheaper than setting up from scratch. This should increase share prices and reduce asset prices, again pushing Q towards one. Current Tobin Q values can often be found on the internet by Googling it. When it appears that these three market indicators suggest the market is high, it is worth considering having a lower proportion of your assets invested in [or allocated to] shares, as the long term returns are likely to be poor, even disasterous, although that is not to say that the market will not go higher in the short to medium term before correcting in a market crash, recession or secular bear market." - Seymour@imagi-natives.com

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[Quote No.31138] Need Area: Money > Invest
"Education [in investing, especially in shares] is the path from cocky ignorance to miserable uncertainty. [and how to handle it, through methods including a 'margin of safety' in valuations, dollar cost averaging, diversification and a long-term perspective]" - Mark Twain

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[Quote No.31140] Need Area: Money > Invest
"[It is important to take very sceptically any economic forecasts by anyone, especially encumbent politicians, as they have the responsibility for talking up confidence while there is any doubt. For example what politicians said during the Great Depression and more recently, the Australian Labor Prime Minister...] We won't let there be a recession. [22 Mar 1990]... The accounts do show that Australia is in a recession. The most important thing about that is that this is the recession that Australia had to have. [29 Nov 1990]" - Paul Keating
Australian Prime Minister [Australian Labor Party]. He had previously been the county's Treasurer and had won the accolade 'The World's Greatest Treasurer'. Even with an an undoubted mastery of government finance and practical economics, he left it till it was undeniable to tell the electorate.
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[Quote No.31146] Need Area: Money > Invest
"[When considering any country's/government's budget, keep in mind the Euro Zone's Stability and Growth Pact, which] is the main tool to keep economic policies (and hence performance) broadly synchronized within the [countries of the] euro zone. The pact states that no member country's gross stock of debt must exceed 60% of GDP and that the public deficit in any year must not exceed 3% of GDP. However, the pact allows for these limits to be broken under certain circumstances. [Therefore if government income/revenue from taxes, etc is about 30% of GDP, Gross Debt to income/revenue ratio shouldn't exceed 4:1 and Public (Fiscal) Deficit (spending above income/revenue) to year's income/revenue should not exceed 110%]" - Niels Jensen
Managing Partner of fund managers, Absolute Return Partners, based in London.
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[Quote No.31155] Need Area: Money > Invest
"[Stock markets have long periods when they do well - secular bull markets, and long periods when they stagnate and fall in inflation adjusted terms - secular bear markets. Within these secular movements you still get the normal ups and downs of the business cycle. In the following essay, one of the world's most successful share investors, Warren Buffett, explains why this is and a way to measure what the future for share investing may be like.] The last time I tackled this subject, in 1999, I broke down the previous 34 years into two 17-year periods, which in the sense of lean years and fat were astonishingly symmetrical. Here's the first period. As you can see, over 17 years the Dow gained exactly one-tenth of one percent. Dow Jones Industrial Average • Dec. 31, 1964:- 874.12 • Dec. 31, 1981:- 875.00 And here's the second, marked by an incredible bull market that, as I laid out my thoughts, was about to end (though I didn't know that). Dow Jones Industrial Average • Dec. 31, 1981:- 875.00 • Dec. 31, 1998:- 9181.43 Now, you couldn't explain this remarkable divergence in markets by, say, differences in the growth of gross national product. In the first period - that dismal time for the market - GNP actually grew more than twice as fast as it did in the second period. Gain in Gross National Product • 1964-1981:- 373% • 1981-1988:- 177% So what was the explanation? I concluded that the market's contrasting moves were caused by extraordinary changes in two critical economic variables - and by a related psychological force that eventually came into play. Here I need to remind you about the definition of 'investing,' which though simple is often forgotten. Investing is laying out money today to receive more money tomorrow. That gets to the first of the economic variables that affected stock prices in the two periods - interest rates. In economics, interest rates act as gravity behaves in the physical world. At all times, in all markets, in all parts of the world, the tiniest change in rates changes the value of every financial asset. You see that clearly with the fluctuating prices of bonds. But the rule applies as well to farmland, oil reserves, stocks, and every other financial asset. And the effects can be huge on values. If interest rates are, say, 13%, the present value of a dollar that you're going to receive in the future from an investment is not nearly as high as the present value of a dollar if rates are 4%. So here's the record on interest rates at key dates in our 34-year span. They moved dramatically up - that was bad for investors - in the first half of that period and dramatically down - a boon for investors - in the second half. Interest rates, Long-term government bonds • Dec. 31, 1964:- 4.20% • Dec. 31, 1981:- 13.65% • Dec. 31, 1998:- 5.09% The other critical variable here is how many dollars investors expected to get from the companies in which they invested. During the first period expectations fell significantly because corporate profits weren't looking good. By the early 1980s Fed Chairman Paul Volcker's economic sledgehammer had, in fact, driven corporate profitability to a level that people hadn't seen since the 1930s. The upshot is that investors lost their confidence in the American economy: They were looking at a future they believed would be plagued by two negatives. First, they didn't see much good coming in the way of corporate profits. Second, the sky-high interest rates prevailing caused them to discount those meager profits further. These two factors, working together, caused stagnation in the stock market from 1964 to 1981, even though those years featured huge improvements in GNP. The business of the country grew while investors' valuation of that business shrank! And then the reversal of those factors created a period during which much lower GNP gains were accompanied by a bonanza for the market. First, you got a major increase in the rate of profitability. Second, you got an enormous drop in interest rates, which made a dollar of future profit that much more valuable. Both phenomena were real and powerful fuels for a major bull market. And in time the psychological factor I mentioned was added to the equation: Speculative trading exploded, simply because of the market action that people had seen. Later, we'll look at the pathology of this dangerous and oft-recurring malady. Two years ago I believed the favorable fundamental trends had largely run their course. For the market to go dramatically up from where it was then would have required long-term interest rates to drop much further (which is always possible) or for there to be a major improvement in corporate profitability (which seemed, at the time, considerably less possible). If you take a look at a 50-year chart of after-tax profits as a percent of gross domestic product, you find that the rate normally falls between 4% - that was its neighborhood in the bad year of 1981, for example - and 6.5%. For the rate to go above 6.5% is rare. In the very good profit years of 1999 and 2000, the rate was under 6% and this year it may well fall below 5%. So there you have my explanation of those two wildly different 17-year periods. The question is, How much do those periods of the past for the market say about its future? To suggest an answer, I'd like to look back over the 20th century. As you know, this was really the American century. We had the advent of autos, we had aircraft, we had radio, TV, and computers. It was an incredible period. Indeed, the per capita growth in U.S. output, measured in real dollars (that is, with no impact from inflation), was a breathtaking 702%. The century included some very tough years, of course - like the Depression years of 1929 to 1933. But a decade-by-decade look at per capita GNP shows something remarkable: As a nation, we made relatively consistent progress throughout the century. So you might think that the economic value of the U.S. - at least as measured by its securities markets - would have grown at a reasonably consistent pace as well. That's not what happened. We know from our earlier examination of the 1964-98 period that parallelism broke down completely in that era. But the whole century makes this point as well. At its beginning, for example, between 1900 and 1920, the country was chugging ahead, explosively expanding its use of electricity, autos, and the telephone. Yet the market barely moved, recording a 0.4% annual increase that was roughly analogous to the slim pickings between 1964 and 1981. Dow Industrials • Dec. 31, 1899:- 66.08 • Dec. 31, 1920:- 71.95 In the next period, we had the market boom of the '20s, when the Dow jumped 430% to 381 in September 1929. Then we go 19 years - 19 years - and there is the Dow at 177, half the level where it began. That's true even though the 1940s displayed by far the largest gain in per capita GDP (50%) of any 20th-century decade. Following that came a 17-year period when stocks finally took off - making a great five-to-one gain. And then the two periods discussed at the start: stagnation until 1981, and the roaring boom that wrapped up this amazing century. To break things down another way, we had three huge, secular bull markets that covered about 44 years, during which the Dow gained more than 11,000 points. And we had three periods of stagnation, covering some 56 years. During those 56 years the country made major economic progress and yet the Dow actually lost 292 points. How could this have happened? In a flourishing country in which people are focused on making money, how could you have had three extended and anguishing periods of stagnation that in aggregate - leaving aside dividends - would have lost you money? The answer lies in the mistake that investors repeatedly make - that psychological force I mentioned above: People are habitually guided by the rear-view mirror and, for the most part, by the vistas immediately behind them. The first part of the century offers a vivid illustration of that myopia. In the century's first 20 years, stocks normally yielded more than high-grade bonds. That relationship now seems quaint, but it was then almost axiomatic. Stocks were known to be riskier, so why buy them unless you were paid a premium? And then came along a 1924 book - slim and initially unheralded, but destined to move markets as never before - written by a man named Edgar Lawrence Smith. The book, called Common Stocks as Long Term Investments, chronicled a study Smith had done of security price movements in the 56 years ended in 1922. Smith had started off his study with a hypothesis: Stocks would do better in times of inflation, and bonds would do better in times of deflation. It was a perfectly reasonable hypothesis. But consider the first words in the book: 'These studies are the record of a failure - the failure of facts to sustain a preconceived theory.' Smith went on: 'The facts assembled, however, seemed worthy of further examination. If they would not prove what we had hoped to have them prove, it seemed desirable to turn them loose and to follow them to whatever end they might lead.' Now, there was a smart man, who did just about the hardest thing in the world to do. Charles Darwin used to say that whenever he ran into something that contradicted a conclusion he cherished, he was obliged to write the new finding down within 30 minutes. Otherwise his mind would work to reject the discordant information, much as the body rejects transplants. Man's natural inclination is to cling to his beliefs, particularly if they are reinforced by recent experience - a flaw in our makeup that bears on what happens during secular bull markets and extended periods of stagnation. To report what Edgar Lawrence Smith discovered, I will quote a legendary thinker - John Maynard Keynes, who in 1925 reviewed the book, thereby putting it on the map. In his review, Keynes described 'perhaps Mr. Smith's most important point ... and certainly his most novel point. Well-managed industrial companies do not, as a rule, distribute to the shareholders the whole of their earned profits. In good years, if not in all years, they retain a part of their profits and put them back in the business. Thus there is an element of compound interest (Keynes' italics) operating in favor of a sound industrial investment.' It was that simple. It wasn't even news. People certainly knew that companies were not paying out 100% of their earnings. But investors hadn't thought through the implications of the point. Here, though, was this guy Smith saying, 'Why do stocks typically outperform bonds? A major reason is that businesses retain earnings, with these going on to generate still more earnings - and dividends, too.' That finding ignited an unprecedented bull market. Galvanized by Smith's insight, investors piled into stocks, anticipating a double dip: their higher initial yield over bonds, and growth to boot. For the American public, this new understanding was like the discovery of fire. But before long that same public was burned. Stocks were driven to prices that first pushed down their yield to that on bonds and ultimately drove their yield far lower. What happened then should strike readers as eerily familiar: The mere fact that share prices were rising so quickly became the main impetus for people to rush into stocks. What the few bought for the right reason in 1925, the many bought for the wrong reason in 1929. Astutely, Keynes anticipated a perversity of this kind in his 1925 review. He wrote: 'It is dangerous...to apply to the future inductive arguments based on past experience, unless one can distinguish the broad reasons why past experience was what it was.' If you can't do that, he said, you may fall into the trap of expecting results in the future that will materialize only if conditions are exactly the same as they were in the past. The special conditions he had in mind, of course, stemmed from the fact that Smith's study covered a half century during which stocks generally yielded more than high-grade bonds. The colossal miscalculation that investors made in the 1920s has recurred in one form or another several times since. The public's monumental hangover from its stock binge of the 1920s lasted, as we have seen, through 1948. The country was then intrinsically far more valuable than it had been 20 years before; dividend yields were more than double the yield on bonds; and yet stock prices were at less than half their 1929 peak. The conditions that had produced Smith's wondrous results had reappeared - in spades. But rather than seeing what was in plain sight in the late 1940s, investors were transfixed by the frightening market of the early 1930s and were avoiding re-exposure to pain. Don't think for a moment that small investors are the only ones guilty of too much attention to the rear-view mirror. Let's look at the behavior of professionally managed pension funds in recent decades. In 1971 - this was Nifty Fifty time - pension managers, feeling great about the market, put more than 90% of their net cash flow into stocks, a record commitment at the time. And then, in a couple of years, the roof fell in and stocks got way cheaper. So what did the pension fund managers do? They quit buying because stocks got cheaper! Private Pension Funds % of cash flow put into equities • 1971:- 91% (record high) • 1974:- 13% This is the one thing I can never understand. To refer to a personal taste of mine, I'm going to buy hamburgers the rest of my life. When hamburgers go down in price, we sing the 'Hallelujah Chorus' in the Buffett household. When hamburgers go up, we weep. For most people, it's the same way with everything in life they will be buying - except stocks. When stocks go down and you can get more for your money, people don't like them anymore. That sort of behavior is especially puzzling when engaged in by pension fund managers, who by all rights should have the longest time horizon of any investors. These managers are not going to need the money in their funds tomorrow, not next year, nor even next decade. So they have total freedom to sit back and relax. Since they are not operating with their own funds, moreover, raw greed should not distort their decisions. They should simply think about what makes the most sense. Yet they behave just like rank amateurs (getting paid, though, as if they had special expertise). In 1979, when I felt stocks were a screaming buy, I wrote in an article, 'Pension fund managers continue to make investment decisions with their eyes firmly fixed on the rear-view mirror. This generals-fighting-the-last-war approach has proved costly in the past and will likely prove equally costly this time around.' That's true, I said, because 'stocks now sell at levels that should produce long-term returns far superior to bonds.' Consider the circumstances in 1972, when pension fund managers were still loading up on stocks: The Dow ended the year at 1020, had an average book value of 625, and earned 11% on book. Six years later, the Dow was 20% cheaper, its book value had gained nearly 40%, and it had earned 13% on book. Or as I wrote then, 'Stocks were demonstrably cheaper in 1978 when pension fund managers wouldn't buy them than they were in 1972, when they bought them at record rates.' At the time of the article, long-term corporate bonds were yielding about 9.5%. So I asked this seemingly obvious question: 'Can better results be obtained, over 20 years, from a group of 9.5% bonds of leading American companies maturing in 1999 than from a group of Dow-type equities purchased, in aggregate, around book value and likely to earn, in aggregate, about 13% on that book value?' The question answered itself. Now, if you had read that article in 1979, you would have suffered - oh, how you would have suffered! - for about three years. I was no good then at forecasting the near-term movements of stock prices, and I'm no good now. I never have the faintest idea what the stock market is going to do in the next six months, or the next year, or the next two. But I think it is very easy to see what is likely to happen over the long term. Ben Graham told us why: 'Though the stock market functions as a voting machine in the short run, it acts as a weighing machine in the long run.' Fear and greed play important roles when votes are being cast, but they don't register on the scale. By my thinking, it was not hard to say that, over a 20-year period, a 9.5% bond wasn't going to do as well as this disguised bond called the Dow that you could buy below par - that's book value--and that was earning 13% on par. Let me explain what I mean by that term I slipped in there, 'disguised bond.' A bond, as most of you know, comes with a certain maturity and with a string of little coupons. A 6% bond, for example, pays a 3% coupon every six months. A stock, in contrast, is a financial instrument that has a claim on future distributions made by a given business, whether they are paid out as dividends or to repurchase stock or to settle up after sale or liquidation. These payments are in effect 'coupons.' The set of owners getting them will change as shareholders come and go. But the financial outcome for the business' owners as a whole will be determined by the size and timing of these coupons. Estimating those particulars is what investment analysis is all about. Now, gauging the size of those 'coupons' gets very difficult for individual stocks. It's easier, though, for groups of stocks. Back in 1978, as I mentioned, we had the Dow earning 13% on its average book value of $850. The 13% could only be a benchmark, not a guarantee. Still, if you'd been willing then to invest for a period of time in stocks, you were in effect buying a bond--at prices that in 1979 seldom inched above par--with a principal value of $891 and a quite possible 13% coupon on the principal. How could that not be better than a 9.5% bond? From that starting point, stocks had to outperform bonds over the long term. That, incidentally, has been true during most of my business lifetime. But as Keynes would remind us, the superiority of stocks isn't inevitable. They own the advantage only when certain conditions prevail. Let me show you another point about the herd mentality among pension funds - a point perhaps accentuated by a little self-interest on the part of those who oversee the funds. In the table below are four well-known companies - typical of many others I could have selected - and the expected returns on their pension fund assets that they used in calculating what charge (or credit) they should make annually for pensions. Now, the higher the expectation rate that a company uses for pensions, the higher its reported earnings will be. That's just the way that pension accounting works - and I hope, for the sake of relative brevity, that you'll just take my word for it. As the table shows, expectations in 1975 were modest: 7% for Exxon, 6% for GE and GM, and under 5% for IBM. The oddity of these assumptions is that investors could then buy long-term government noncallable bonds that paid 8%. In other words, these companies could have loaded up their entire portfolio with 8% no-risk bonds, but they nevertheless used lower assumptions. By 1982, as you can see, they had moved up their assumptions a little bit, most to around 7%. But now you could buy long-term governments at 10.4%. You could in fact have locked in that yield for decades by buying so-called strips that guaranteed you a 10.4% reinvestment rate. In effect, your idiot nephew could have managed the fund and achieved returns far higher than the investment assumptions corporations were using. Why in the world would a company be assuming 7.5% when it could get nearly 10.5% on government bonds? The answer is that rear-view mirror again: Investors who'd been through the collapse of the Nifty Fifty in the early 1970s were still feeling the pain of the period and were out of date in their thinking about returns. They couldn't make the necessary mental adjustment. Now fast-forward to 2000, when we had long-term governments at 5.4%. And what were the four companies saying in their 2000 annual reports about expectations for their pension funds? They were using assumptions of 9.5% and even 10%. I'm a sporting type, and I would love to make a large bet with the chief financial officer of any one of those four companies, or with their actuaries or auditors, that over the next 15 years they will not average the rates they've postulated. Just look at the math, for one thing. A fund's portfolio is very likely to be one-third bonds, on which - assuming a conservative mix of issues with an appropriate range of maturities - the fund cannot today expect to earn much more than 5%. It's simple to see then that the fund will need to average more than 11% on the two-thirds that's in stocks to earn about 9.5% overall. That's a pretty heroic assumption, particularly given the substantial investment expenses that a typical fund incurs. Heroic assumptions do wonders, however, for the bottom line. By embracing those expectation rates shown in the far right column, these companies report much higher earnings - much higher - than if they were using lower rates. And that's certainly not lost on the people who set the rates. The actuaries who have roles in this game know nothing special about future investment returns. What they do know, however, is that their clients desire rates that are high. And a happy client is a continuing client. Are we talking big numbers here? Let's take a look at General Electric, the country's most valuable and most admired company. I'm a huge admirer myself. GE has run its pension fund extraordinarily well for decades, and its assumptions about returns are typical of the crowd. I use the company as an example simply because of its prominence. If we may retreat to 1982 again, GE recorded a pension charge of $570 million. That amount cost the company 20% of its pretax earnings. Last year GE recorded a $1.74 billion pension credit. That was 9% of the company's pretax earnings. And it was 2 1/2 times the appliance division's profit of $684 million. A $1.74 billion credit is simply a lot of money. Reduce that pension assumption enough and you wipe out most of the credit. GE's pension credit, and that of many another corporation, owes its existence to a rule of the Financial Accounting Standards Board that went into effect in 1987. From that point on, companies equipped with the right assumptions and getting the fund performance they needed could start crediting pension income to their income statements. Last year, according to Goldman Sachs, 35 companies in the S&P 500 got more than 10% of their earnings from pension credits, even as, in many cases, the value of their pension investments shrank. Unfortunately, the subject of pension assumptions, critically important though it is, almost never comes up in corporate board meetings. (I myself have been on 19 boards, and I've never heard a serious discussion of this subject.) And now, of course, the need for discussion is paramount because these assumptions that are being made, with all eyes looking backward at the glories of the 1990s, are so extreme. I invite you to ask the CFO of a company having a large defined-benefit pension fund what adjustment would need to be made to the company's earnings if its pension assumption was lowered to 6.5%. And then, if you want to be mean, ask what the company's assumptions were back in 1975 when both stocks and bonds had far higher prospective returns than they do now. With 2001 annual reports soon to arrive, it will be interesting to see whether companies have reduced their assumptions about future pension returns. Considering how poor returns have been recently and the reprises that probably lie ahead, I think that anyone choosing not to lower assumptions - CEOs, auditors, and actuaries all - is risking litigation for misleading investors. And directors who don't question the optimism thus displayed simply won't be doing their job. The tour we've taken through the last century proves that market irrationality of an extreme kind periodically erupts - and compellingly suggests that investors wanting to do well had better learn how to deal with the next outbreak. What's needed is an antidote, and in my opinion that's quantification. If you quantify, you won't necessarily rise to brilliance, but neither will you sink into craziness. On a macro basis, quantification doesn't have to be complicated at all. Below is a chart, starting almost 80 years ago and really quite fundamental in what it says. The chart shows the market value of all publicly traded securities as a percentage of the country's business - that is, as a percentage of GNP. The ratio has certain limitations in telling you what you need to know. Still, it is probably the best single measure of where valuations stand at any given moment. And as you can see, nearly two years ago the ratio rose to an unprecedented level. That should have been a very strong warning signal. For investors to gain wealth at a rate that exceeds the growth of U.S. business, the percentage relationship line on the chart must keep going up and up. If GNP is going to grow 5% a year and you want market values to go up 10%, then you need to have the line go straight off the top of the chart. That won't happen. For me, the message of that chart is this: If the percentage relationship falls to the 70% or 80% area, buying stocks is likely to work very well for you. If the ratio approaches 200% - as it did in 1999 and a part of 2000 - you are playing with fire. As you can see, the ratio was recently 133%. Even so, that is a good-sized drop from when I was talking about the market in 1999. I ventured then that the American public should expect equity returns over the next decade or two (with dividends included and 2% inflation assumed) of perhaps 7%. That was a gross figure, not counting frictional costs, such as commissions and fees. Net, I thought returns might be 6%. Today stock market 'hamburgers,' so to speak, are cheaper. The country's economy has grown and stocks are lower, which means that investors are getting more for their money. I would expect now to see long-term returns run somewhat higher, in the neighborhood of 7% after costs. Not bad at all - that is, unless you're still deriving your expectations from the 1990s." - Warren Buffett
Highly successful share investor, Chairman of Berkshire Hathaway and one of the richest men in the world. Published in 'Fortune' magazine, December 10, 2001. [It was adapted from a speech he gave in July, 2001 at the investment bank, Allen & Co.'s invitation-only annual Sun Valley conference for world business leaders and corporate executives.
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[Quote No.31156] Need Area: Money > Invest
"[One of the best ways to gauge world economic growth, apart from International Monetary Fund forecasts for global Gross National Product growth, the cost of money - for example the London Inter-Bank Overnight [interest] Rate [LIBOR] and the trends in oil and copper prices, is through the cost of shipping dry materials. The following article goes into this in a bit more detail.] Commodity Shipping Index Advances the Most Since at Least 1985: The Baltic Dry Index, a measure of shipping costs for commodities, rose the most since at least 1985 in London as the number of idled capesizes fell to almost zero, indicating strengthening demand for iron ore. Capesize rates have risen more than ninefold from a record low of $2,316 a day on Dec. 2 [2008]. Steelmakers may be replenishing stocks in China after they fell 22 percent by mid-January [2009] from a record in September [2008]. Producers abroad, faced with an oversupply of iron ore, may also be shipping ore to China for storage. 'This has been the first day of the year when the buzz has been back,' Michael Gaylard, strategic director at Freight Investor Services Ltd., a shipping-derivatives broker, said by phone from London. 'There’s no doubt that enquiry for physical tonnage is consistent and strong.' Shipping rates collapsed last year as demand slumped for steelmaking raw materials and Japan, the U.S. and Europe grappled with their first simultaneous recessions since World War II. The steel industry accounts for almost half of all dry-bulk cargo at sea, according to shipping line Golden Ocean Ltd. The Baltic Dry Index advanced 168 points, or 15 percent, to 1,316 points. The gauge’s 70 percent gain in 2009 is its best start to the year since at least 1986. It fell as low as 663 points on Dec. 5, the lowest since 1986, and rose to a record 11,793 points on May 20. Daily rates for capesizes rose 17 percent to $21,810 a day, the highest since October. Smaller panamax ships, the largest to fit through the locks of the Panama Canal, increased 14 percent to $8,005 a day. Daily operating costs are $6,500 for capesizes and $5,000 for panamaxes, according to Erik Nikolai Stavseth, an analyst with shipbroker Lorentzen & Stemoco in Oslo. Both ships compete to haul coal and iron ore. Idled Capesizes: There are almost no idled capesizes, Oslo-based Fearnley Fonds ASA analyst Rikard Vabo said. As much as a quarter of the world capesize fleet of about 800 ships was probably idled by owners two months ago in response to plunging rates. BHP Billiton Ltd., the world’s third-largest producer of iron ore, said Chinese steelmakers are returning to the iron ore market after inventories were used up. 'You are starting to see the underlying demand of the Chinese economy,' Chief Executive Officer Marius Kloppers told journalists today. 'We have seen in the steel business in China that the de-stocking cycle is almost complete and that means people are coming back into the market and buying.' China announced in November a 4-trillion yuan ($586 billion) economic stimulus package running through 2010. That may boost infrastructure projects and steel demand. Capesize forward freight agreements, derivatives used by traders to bet on future shipping rates, rose 14 percent to $30,375 a day for the second quarter. Panamax futures jumped 12 percent to $16,375 for the same period. The data are from Oslo-based broker Imarex NOS ASA. Steel stocks gained, with all nine members of the Bloomberg Europe Steel Index trading higher, led by ArcelorMittal. The 13 members of the Bloomberg Metal and Mining Index also advanced, led by Kazakhmys Plc." - Alistair Holloway and Alaric Nightingale
Financial journalists. Published on Bloomberg.com, February 4th, 2009.
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[Quote No.31158] Need Area: Money > Invest
"[The Economist magazine suggested in December, 2008 that the difference between a recession and a depression is: a recession is two quarters of falling GDP (gross domestic profit); while a depression is] ...a decline in 'real' GDP [Real GDP accounts for inflation] that exceeds 10 percent; or one that lasts more than three years. [The Great Depression in the United States qualified on both counts, with GDP falling 13 percent during 1937 and 1938, and GDP plummeting by around 30 percent between 1929 and 1933.]" - The Economist magazine
December, 2008.
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[Quote No.31184] Need Area: Money > Invest
"History has shown that complexity, leverage and too much optimism is a recipe for eventual disaster for real estate and share markets. In such times a cautious reduction in the exposure to debt and risk assets, in an investor's portfolio, is prudent and rational, even if it then underperforms other's returns for a short time." - Seymour@imagi-natives.com

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[Quote No.31186] Need Area: Money > Invest
"Gold is money." - J.P. Morgan
Famous American Wall Street banker during the first half of the Twentieth Century.
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[Quote No.31233] Need Area: Money > Invest
"All intelligent investing is value investing." - Charlie Munger
Lawyer, investor and Warren Buffett's longtime business partner.
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[Quote No.31245] Need Area: Money > Invest
"The only cure for a depression is time, not the abrogation of the free market...All attempts by the government to mollify the depression tend to exacerbate the situation by force-feeding more debt when it is least capable of being serviced. [This is contrary to the politically popular Keynesian economic theory that government spending should increase in a recession to compensate for falling consumer spending and business investment. This is founded on the now disproved belief that a dollar of government spending will have a significant multiplier effect in the economy. The only way to avoid an economic bust is to not allow the markets to become significantly overpriced by countercyclical bank capital adequacy ratios and monetary policy that raises interest rates as markets boom - thereby taking away the alcoholic punch bowl of cheap interest rates before the market gets too drunk to realistically judge long-term market values.]" - Michael Pento
Delta Global Advisors
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[Quote No.31266] Need Area: Money > Invest
"Here are some key terms to understand when investing in dividend-paying stocks: ---Declaration Date - The date on which the board of directors of a company announces the amount of the next stock dividend and its ex-dividend date, record date, and payment date. ---Ex-Dividend Date - The date on which the stock trades without a dividend. So if you buy the stock on or after the ex-dividend date, you will not receive the next dividend. If you sell the stock before the ex-dividend date, the buyer - not you - will receive the dividend. If you sell after the ex-dividend date, you - not the buyer - will receive the dividend. ---Record Date - The date on which the company determines the list of shareholders who qualify for the stock dividend. To be a shareholder of record, you must own the stock at least one day before the ex-dividend date. ---Payment Date - The date on which the stock dividend is paid to shareholders of record in the form of a dividend check or a credit to their account." - Alex Green
Investment Director of The Oxford Club and Chairman of Investment U - a free source of impartial, no-nonsense advice on how to build long-lasting wealth.
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[Quote No.31272] Need Area: Money > Invest
"Beware of one who [advises you on investments who] has nothing to lose." - Italian Proverb

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[Quote No.31280] Need Area: Money > Invest
"You can't have a good stock market without a good economy." - Jim Rogers
Famed billionaire investor who co-founded the Quantum Fund with George Soros.
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[Quote No.31285] Need Area: Money > Invest
"Great fortunes can be made in times of recession. It's not easy, but everything is half the price... So if you can, if you've got a bit of money, there's a fortune to be made." - Sir Richard Branson
Founder of the Virgin Group of companies.
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[Quote No.31286] Need Area: Money > Invest
"In the early 60's Edward Altman, using Multiple Discriminant Analysis combined a set of 5 financial ratios to come up with the Altman Z-Score [which is very useful for monitoring 'financial fitness' of any companies you own or are considering buying]. This score uses statistical techniques to predict a company's probability of failure using... 8 variables from a company's financial statements." - creditguru.com

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[Quote No.31288] Need Area: Money > Invest
"Do not take yearly results too seriously. Instead, focus on four- or five-year averages." - Warren Buffett
Highly successful value investor and one of the richest men in the world.
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[Quote No.31296] Need Area: Money > Invest
"You know, the stock market is sort of like a tracking poll in politics. It bobs up and down day to day, and if you spend all your time worrying about that, then you’re probably going to get the long-term strategy wrong." - Barack Obama
U.S. President
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[Quote No.31298] Need Area: Money > Invest
"...on average, earnings have declined by 25 per cent over 20 months in typical Australian earnings recessions." - Citigroup Global Markets
Quoted from a research report by Citigroup Global Markets, in an article published March 07, 2009 in 'The Australian' newspaper.
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[Quote No.31317] Need Area: Money > Invest
"Excessive boardroom pay, particularly when combined with low management shareholdings, is another obvious sign that management is feathering its own nest at the expense of shareholders. Large option packages can be particularly worrying because, depending on their terms, they can encourage risk-taking; a steady performance might lead to moderate remuneration, while a risky strategy might lead to moderate remuneration in the case of failure, or a bonanza if the risk pays off." - James Carlisle
Editor of the 'Intelligent Investor', an Australian value orientated investment newsletter.
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