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  Quotations - Invest  
[Quote No.35726] Need Area: Money > Invest
"Bubbles have quite a few things in common ... and that is every one of them is considered unique and different [and permanent but they never are]. " - Jeremy Grantham
The chief strategist of GMO, a US investment group managing more than $100 billion in 2011.
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[Quote No.35727] Need Area: Money > Invest
"Shortages [demand exceeding supply] create higher relative prices which, in turn, help to discourage consumption and improve efficiency and substitutes." - Don Stammer
Chairman of Praemium Limited and the advisory council of FIIG Securities, and is an adviser to the Third Link Growth Fund.
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[Quote No.35731] Need Area: Money > Invest
"One of the most controversial topics in investing is the price of gold. Twelve years ago, gold dropped as low as $252 per ounce. Since then, the yellow metal has risen more than six-fold, easily outpacing the major stock market indexes—and it seems to move higher every day. Some goldbugs say this is only the beginning and that gold will soon break $2,000, then $5,000 and then $10,000 per ounce. But the question is, 'How can anyone reasonably calculate what the price of gold is?' For stocks, we have all sorts of ratios. Sure, those ratios can be off... but at least they’re something. With gold, we have nothing. After all, gold is just a rock (ok ok, an element). How the heck can we even begin to analyze gold’s value? There’s an old joke that the price of gold is understood by exactly two people in the entire world. They both work for the Bank of England and they disagree. In this article, I want to put forth a possible model for evaluating the price of gold. In doing so, we can look at the underlying factors that drive gold. Let me caution that as with any model, this model has its flaws, but that doesn’t mean it isn’t useful. The key to understanding the gold market is to understand that it’s not really about gold at all. Instead, it’s about currencies, and in our case that means the dollar. Gold is really the anti-currency. It serves a valuable purpose in that it keeps all the other currencies honest (or exposes their dishonesty). This may sound odd but every currency has an interest rate tied to it. In essence, that interest rate is what the currency is all about. All those dollar bills in your wallet have an interest rate tied to them. The euro, the pound and the yen also all have interest rates tied to them. Before I get to my model, I want to take a step back for a moment and discuss a strange paradox in economics known as Gibson’s Paradox. This is one the most puzzling topics in economics. Gibson’s Paradox is the observation that interest rates tend to follow the general price level and not the rate of inflation. That’s very strange because it seems obvious that as inflation rises, interest rates ought to keep up. And as inflation falls back, rates should move back as well. But historically, that wasn’t the case. Instead, interest rates rose as prices rose, and rates only fell when there was deflation. This paradox has totally baffled economists for years. Yet it really does exist. John Maynard Keynes called it 'one of the most completely established empirical facts in the whole field of quantitative economics.' Milton Friedman and Anna Schwartz said that 'the Gibsonian Paradox remains an empirical phenomenon without a theoretical explanation.' Even many of today’s prominent economists have tried to tackle Gibson’s Paradox. In 1977, Robert Shiller and Jeremy Siegel wrote a paper on the topic. In 1988 Robert Barsky and none other than Larry Summers took on the paradox in their paper 'Gibson’s Paradox and the Gold Standard,' and it’s this paper that I want to focus on. (By the way, in this paper the authors thank future econobloggers Greg Mankiw and Brad DeLong.) Summers and Barsky explain that the Gibson Paradox does indeed exist. They also say that it’s not connected with nominal interest rates but with real (meaning after-inflation) interest rates. The catch is that the paradox only works under a gold standard. Once the gold standard is gone, the Gibson Paradox fades away. It’s my hypothesis that Summers and Barsky are on to something and that we can use their insight to build a model for the price of gold. The key is that gold is tied to real interest rates. Where I differ from them is that I use real short-term interest rates whereas they focused on long-term rates. Here’s how it works. I’ve done some back-testing and found that the magic number is 2% (I’m dumbing this down for ease of explanation). Whenever the dollar’s real short-term interest rate is below 2%, gold rallies. Whenever the real short-term rate is above 2%, the price of gold falls. Gold holds steady at the equilibrium rate of 2%. It’s my contention that this was what the Gibson Paradox was all about since the price of gold was tied to the general price level. Now here’s the kicker: there’s a lot of volatility in this relationship. According to my backtest, for every one percentage point real rates differ from 2%, gold moves by eight times that amount per year. So if the real rates are at 1%, gold will move up at an 8% annualized rate. If real rates are at 0%, then gold will move up at a 16% rate (that’s been about the story for the past decade). Conversely, if the real rate jumps to 3%, then gold will drop at an 8% rate. I want to thank Jake at EconomPicData for running some numbers and you can see how well the model has performed over the years. The relationship isn’t perfect but it’s held up fairly well over the past few decades. In effect, gold acts like a highly-leveraged short position in U.S. Treasury bills and the breakeven point is 2% (or more precisely, a short on short-term TIPs). Let me make this clear that this is just a model and I’m not trying to explain 100% of gold’s movement. Gold is subject to a high degree of volatility and speculation. Geopolitical events, for example, can impact the price of gold. I would also imagine that at some point, gold could break a replacement price where it became so expensive that another commodity would replace its function in industry, and the price would suffer. Instead of explaining all of gold, my aim is to pinpoint the underlying factors that are strongly correlated with gold. The number and ratios I used (2% break-even and 8-to-1 ratio) seem to have the strongest correlation for recent history. How did I arrive at them? Simple trial and error. The true numbers may be off and I’ll leave the fine-tuning for someone else. In my view, there are a few key takeaways. The first and perhaps the most significant is that gold isn’t tied to inflation. It’s tied to low real rates which are often the by-product of inflation. Right now we have rising gold and low inflation. This isn’t a contradiction. (John Hempton wrote about this recently.) The second point is that when real rates are low, the price of gold can rise very, very rapidly. The third is that when real rates are high, gold can fall very, very quickly. Fourth, there’s no reason for there to be a relationship between equity prices and gold (like the Dow-to-gold ratio). Fifth, the TIPs yield curve indicates that low real rates may last for a few more years. If the historical relationship holds up, gold will continue to soar." - Eddy Elfenbein
Named by CNN/Money as the best buy-and-hold blogger, Eddy Elfenbein is the editor of Crossing Wall Street.com. His free Buy List has beaten the S&P 500 for the last four years in a row from 2007-2011. www.seekingalpha.com May 14, 2011.
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[Quote No.35732] Need Area: Money > Invest
"[One of the important economic indicators of future performance for investors is the yield curve:] Global demand for US long term financial assets such as government bonds slowed in March as investors shortened up their maturities and China trimmed their portfolio of US Treasuries. The total TIC flows were up at $116 billion in March vs. $95.6 billion the month before. But the makeup of these purchases is what is concerning. Foreigners decreased their net long term TIC flows from an adjusted $27.2 billion February to $24 billion in March. This figure is a good gauge on international confidence in the US economy and foreigners seem to be getting more concerned over the inflation prospects in the US, and perhaps worry about our ability to pay down our long term debt. Investors typically shift to the shorter end of the curve when they are concerned about inflation, or in volatile times when they just want to 'hide' from market volatility. Both combined to push investors away from the longer dated maturities and into the short term US Treasury bills. The problem this creates for the US is two-fold. First, with less buyers of the longer dated maturities interest rates on these securities will be forced up. Right now the Treasury has been able to hold longer term rates down with the bond buying of QE II [quantitative easing = money printing], but what happens when that program is scheduled to end [at the end of June, 2011]? The lack of buying interest in our longer term securities could push interest rates dramatically higher after QEII, and help force another round of quantitative easing (this is the vicious circle which Chuck has been warning readers about). The second problem with the shortening of maturities is the US will have to roll that debt in the coming months and years, and with global interest rates on an increasing path, our debt will get less and less attractive to these foreign investors. In order to attract these buyers, rates will have to go higher. These higher rates will increase the already sky rocketing debt burden on the US, as interest payments will be forced up along with the rates offered to foreign investors. More and more of our budget will be used to pay these foreign bond holders, and our debt hole will continue to get deeper. China is the biggest foreign owner of US Treasuries (our own Federal Reserve is now the largest holder of our debt!!) and they have been trimming their holdings. Figures released yesterday show China now owns $1.145 trillion of the debt, which is down $9 billion from their holdings as of February. The holdings had reached a record of $1.175 trillion in October of last year. China has been vocal about their concerns regarding the growing debt burden of the US, and the amount of new debt the Treasury department continues to add. According to many with knowledge of China's central bank, the amount of US Treasuries in China's investment portfolio will be gradually cut and the funds diversified into other currencies and fixed income securities. This is not good news for the US dollar or debt situation. " - Chris Gaffney
CFA, Vice President, EverBank World Markets. Published in the currency fx newsletter, 'A Pfennig For Your Thoughts', Tuesday, May 17, 2011.
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[Quote No.35733] Need Area: Money > Invest
"The 'core inflation' method of forecasting inflation begets booms and busts [by allowing central banks to keep interest rates too low for too long by saying rising food and fuel prices are not important until their effects are seen in the core inflation figures, rather than the headline inflation figures. Their rationale is that these items are too volatile to show a trend but this is often not the case as ex-Federal Reserve Chairman, Alan Greenspan has said.]" - Lakshman Achuthan
Economist with Economic Cycle Research Institute [ECRI], April 15, 2011.
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[Quote No.35734] Need Area: Money > Invest
"The general assumption about measures of core inflation is that food and energy fluctuate, but have no trend. That is incorrect. [Rising incomes have shifted diets toward more protein, requiring more wheat crops while at the same time we are running out of arable land. This will create a long-term uptrend in food prices. Concerns over the security of oil supplies will also put oil prices on an upward trend. Over the counter derivatives (futures) have encouraged more storage of oil above ground in developed nations, providing a buffer. Otherwise, oil would be even higher right now.]" - Alan Greenspan
Former Chairman of the US Federal Reserve Bank. Quoted March 5, 2011.
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[Quote No.35737] Need Area: Money > Invest
"Over time, [US] houses have sold for about 15 times rental income [called the capitalisation rate]. But that’s in the post–World War II years when owners of rental properties expected inflation to enhance their 6.7% return—before the costs of income tax–deductible maintenance and property taxes. When we were young and house price appreciation was not expected in the aftermath of the 1930s, the norm for rentals was 10% of the house’s value. If we’re right about our outlook for slow economic growth and falling house prices, houses and apartments may sell for closer to 10 times rentals than 15 times, much less the 20 times rental income in the housing boom days." - A. Gary Shilling
Economist and financial advice newsletter writer. Excerpted from the May 2011 edition of A. Gary Shilling's INSIGHT
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[Quote No.35741] Need Area: Money > Invest
"A crisis presents as much opportunity as danger - if you're prepared for it." - Doug Casey

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[Quote No.35742] Need Area: Money > Invest
"The yield curve gives you a very good indication of how attractive a market is for equities. The Indian yield curve is flat and almost inverted and a negative yield curve is very bad for equities." - Michael Penn
Global equity strategist at Bank of America/Merrill Lynch. Quoted 18th May, 2011.
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[Quote No.35744] Need Area: Money > Invest
"[When you consider debt in a country - debt-to-GDP - dont just consider government debt but also business and household debt:] Hey, big spenders, it’s time to worry about all that foreign debt. Tick, tick, tick, tick, tick. The sound of a time bomb, or Australia racking up a little more foreign debt? This week, after Wayne Swan [the Australian Treasurer] delivered the budget, the thorny subject of our national debt hit the headlines. The Opposition Leader, Tony Abbott, and his finance man, Joe Hockey, jumped all over it. And with good reason. It is an easy mark for an opposition attack, certain to stir unrest and indignation within the electorate. Unfortunately, they are picking on the wrong target. There is no doubt Australia is one of the most heavily indebted countries. A list compiled by the American Central Intelligence Agency puts us at No. 14 on the foreign debt scale with about $1.2 trillion owing to offshore lenders. When you consider our relatively small population [of about 21 million], and our strong but comparatively tiny economy, that means we are punching well above our weight in the spendthrift stakes. In fact, total foreign debt easily outstrips national income. The CIA reckons we owe the rest of the world 132 per cent of our annual gross domestic product. That’s not too far behind Greece which, at 165 per cent, finally appears to have tipped the balance and is heading towards bankruptcy (more politely expressed these days as a debt refinancing). But hang on, I hear you say. Didn’t the Treasurer boast the other night that we are one of the least indebted nations in the developed world? Indeed he did. Australia’s net foreign debt would peak at just 7.2 per cent of GDP in the coming financial year, he claimed. That’s a long way shy of the figure calculated by the CIA, and far too big a gap to be explained by rounding or the rubbery calculations involved between net and gross debt. So who is telling the truth? The simple explanation to this conundrum is that the Treasurer was only talking about government debt, the loot he’s responsible for borrowing. At about $120 billion, it’s certainly a lot bigger than the $38 billion debt in the first year of the Rudd government. But despite the theatrics from Tony and Joe, government debt is negligible compared to the size of our economy and barely makes an impression when calculating who owes what to the rest of the world. The real culprits in the foreign debt splurge are you and me. Between us, with our mortgages, the renovations, our investment properties, our margin loans, the new car, the credit cards and that interest-free loan on the new fridge, we account for the vast bulk of that $1.2 trillion foreign debt. Big companies are in for a hefty slice as well, but nowhere near as much as ordinary folk like us. Again, I hear you scratching your heads. How could that possibly be the case? Haven’t we all been complaining about the dominance of the big four Australian banks, and how they have a stranglehold on the market? Who on earth is borrowing all this money offshore? I’ll tell you who. The Commonwealth Bank of Australia, Westpac Banking Corporation, ANZ Banking Group and National Australia Bank. For years now, they’ve been running around the world, raising vast amounts of cash, and then bringing it back home to lend to us. Depending on the bank, up to a half the money they lend us comes from offshore markets. The other banks were all into it as well before they were rudely interrupted by the financial crisis three years ago. Ever since financial deregulation, which began here in the 1980s, the impediments to capital flows between countries have been chipped away. Before that, our banks essentially only lent out money they gathered from deposits or from local investors. Foreign investors and financiers played a role in big rural, resource and industrial projects but when it came to household lending, Australia was a closed shop. Deregulation has delivered wondrous benefits to the Australian economy and all who sail with her. Living standards have risen, jobs have been created and we have become a far more open and sophisticated society... You see it all the time in finance and economics. What seems a terrific idea at the time often has unforeseen and unintended consequences years down the track. Nowhere is that more apparent than in the Australian housing market. Ridding the nation of those regulations about foreign money inflows delivered bucket loads of cheap and easy finance to Australian households. Mostly, we invested it in bricks and mortar. And because we had more money to splash around for housing stock that was growing at a much slower pace, real estate prices rose. From the mid-1980s, residential housing maintained a furious pace, delivering spectacular tax free capital gains to homeowners. It now has reached the point where most community leaders complain our housing is 'unaffordable'... Incredibly, the biggest beneficiaries of this credit-fuelled real estate boom have been the very organisations doling out the credit. Rising house prices meant bigger mortgages. The expanding mortgages meant larger bank profits. It has been a virtuous circle for our banks, the financial equivalent of a perpetual motion machine... [but it has created what other countries are calling a real estate bubble. Bubbles are nearly always the result of mispricing the cost of money or in other words central banks setting interest rates too low, for too long. When rates revert higher then the bubble bursts and much if not all the paper profits and a lot of the owner equity disappears.] " - 'The Age'
The Australian newspaper, 'The Age', 14 May 2011
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[Quote No.35745] Need Area: Money > Invest
"Bottom-up value investors would not wish to bet the ranch on a macroeconomic view, but neither would they be wise to ignore the macroeconomy altogether." - Seth Klarman
Very famous and successful value share investor
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[Quote No.35746] Need Area: Money > Invest
"[Currency effects can be very important to a country's economy. Therefore different countries can take efforts to effect their currencies in what has been termed 'currency wars'.] China is slowing the recovery in the U.S. and U.K. Nouriel Roubini, one of the few economists who predicted the new depression and understands it, argues that China's exchange rate policy is keeping the U.S., U.K., and some other advanced economies from recovering their economies through net export growth (i.e., reduction of their trade deficits). During a Bloomberg interview with Tom Keene at the Milikin Conference at the beginning of this month, Roubini said, 'In this fundamental exchange rate game, the currencies that should be appreciating are those that are undervalued with large current account surpluses [i.e., trade surpluses]. While the ones that should be depreciating are U.S., U.K. and other countries that had their bubble, then bust, and now need net export growth, given that domestic demand is anemic with balance sheet retrenchment. The problem is that China is resisting its currency from appreciation, [that] is doing it very, very gradually. China is shadowing the U.S. dollar and that every other emerging market in the world, not just in Asia but those in Latin America, they say, 'If China resists appreciation of its currency, I don't want to lose market shares to China in third markets, and I don't want a flood of cheap Chinese goods destroying my own import-competing sectors.' So all of these countries are shadowing China. So the adjustment of exchange rates that should occur, yuan currency appreciating, advanced economies weakening relative to the yuan, so that we have global rebalancing, that is not occurring. Apparently, [US] Federal Reserve Chairman Ben Bernanke has the same understanding. He has been trying to address this problem by creating massive amounts of money and using it to buy U.S. Treasuries (a strategy known as 'QE2' 'quantitative easing' = money printing). This strategy gives currency manipulating countries a choice between inflation [due to US denominated commodities like food and oil becoming more expensive within their own countries] and [continued] currency manipulation. Since September [2010], when QE2 began to take effect, it has helped U.S. trade [making US exports more competitve in countries with floating exchange rates], but not enough. The U.S. trade deficit with China is still going up, not down [in 2011]... But QE2 is not sustainable. Bernanke's massive money creation has been causing inflation in the United States to grow at a rapid half percent per month pace since January [2011 as the cost of net oil imports - denominated in US dollars - along with the price at the petrol pump have risen dramatically]... Bernanke has already announced that the Federal Reserve will end QE2 in June [2011]. As a result, the dollar has already been bouncing back [risen] against the euro. With the inflation threat in the emerging market countries lessening [with the rise in US dollar and therefore cheaper food and fuel], they will resume their currency manipulations in order to better compete with China. After that, the rising U.S. trade deficits can be expected to choke off the U.S. economic recovery. There has always and will always be a solution to this problem which would balance trade and get the U.S. economy moving. WTO rules do not require that countries permit trade deficits. The Obama administration or Congress could easily restore U.S. prosperity by imposing a WTO [World Trade Organisation]-legal scaled tariff to balance trade. Such a tariff would boost U.S. exports and reduce U.S. imports at the same time." - Howard Richman
www.idealtaxes.com 18th May 2011.
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[Quote No.35747] Need Area: Money > Invest
"Why Beijing must end inflation – or else. There’s one extreme method of dealing with inflation. That is to ban it. This month, Unilever agreed to pay a fine of $300,000 after China’s National Development and Reform Commission accused the Anglo-Dutch company of creating panic by announcing its intention to increase detergent and soap prices. Such reckless behaviour was described as an 'ugly habit' that 'seriously distorted market order'. But even in a planned economy, such 'ugliness' is hard to airbrush out. Inflation stayed stubbornly high in April in spite of the state’s best efforts. In April, the consumer price index rose 5.3 per cent from a year earlier, a tiny improvement on the 5.4 per cent of the previous month, but still higher than expected. Even if they can’t put prices up overtly, many companies have ways of getting around price controls. Manufacturers of soft drinks, crisps, milk and yoghurt have resorted to the old ruse of shrinking the packet size but keeping the price the same. Inflation is causing anxiety at the very top of the Communist party. Wen Jiabao, the Chinese premier, who likes to portray himself as a man of the people, says he checks the price of basics such as pork, rice and flour every day. If you ever spot him scouring the supermarket shelves, that is probably what he is doing. Mr Wen has declared the battle against inflation this year’s top priority. The government was even prepared to allow the renminbi to appreciate to this end, he said. It is only natural the party should worry about inflation. After all, it was concerns about spiralling prices that first stirred protests in the run-up to the 1989 occupation of Tiananmen Square. The price of food, which accounts for one-third of the disposable income of the average Chinese household, is again rising much faster than headline CPI. Food prices are galloping along at about 11.5 per cent annually. That could quickly make millions of families feel poorer in a country where the state’s implicit contract with its people is to raise living standards each year. The government has tried to blame external factors. It railed against the Federal Reserve’s second wave of quantitative easing [QE2], launched in November [2010], for pushing up prices around the world [for those things denominated in US dollars like metals, food and oil]. It also blamed high commodity prices, although these are partly a function of Chinese demand. The more likely causes, however, lie closer to home. The first is Beijing’s new emphasis – explicitly laid out in the latest five-year plan – of allowing wages to outpace growth. In the past year, wages for factory workers have risen by 20, 30 or even 40 per cent, with the government’s implicit blessing. The thrust of that policy is correct. The share of national income going to wages has fallen progressively for many years, undermining the stated aim of rebalancing growth towards household consumption [a bigger domestic market rather than an export dominated economy]. But higher wages without higher productivity inevitably causes prices to rise [as businesses try to keep their margins the same as their employment expenses rise]. An even bigger likely cause of inflation is the massive increase in credit since the Lehman shock [so more money demand chasing the same goods supply], when Beijing sought to substitute domestic investment for dwindling exports. The authorities have encouraged banks massively to increase their lending. Even when they have sought to rein this in, banks have been adept at finding off-balance sheet ways of extending credit. The upshot, says the International Monetary Fund, is that M2, a measure of money in circulation plus bank deposits, is up a whopping 52 per cent in the past two years [2009-11]. With so much money sloshing around, no wonder prices have been rising. Nouriel Roubini, co-founder and chairman of Roubini Global Economics, says the problem lies in the Chinese government’s attempt to keep the economy going through a huge increase in fixed investment [in infrastructure, etc]. 'No country can be productive enough to reinvest 50 per cent of gross domestic product in new capital stock without eventually facing immense overcapacity and a staggering non-performing loan problem,' he wrote recently. Mr Roubini predicts a short-term rise in inflation, followed by deflationary pressure as too much capacity comes on stream. That, in turn, would be followed by a hard landing in 2013, he predicts. He argues that the only way out is to shift more income to households, for example by changing tax and interest-rate incentives. The US Obama administration has been suggesting China allow its currency to rise to reduce the inflationary effects of a higher cost of US denominated commodities, food and oil imported into the country due to quantitative easing and their weak dollar policy - which some have called a 'currency war' - but China has been resisting due to concerns about this reducing exports in its export dominated economy and the effect on the value of its huge over one trillion of US denominated bonds.] People have lost a lot of money betting against China’s planners. But, at the very least, they face a classic dilemma of having to choose between growth and inflation. Indeed, the Communist party has said it is willing to see growth fall in return for greater stability. Since October, it has raised interest rates on four occasions and tightened up rules for bank reserves eight times. In response, industrial growth has fallen and retail spending has slowed to its weakest level in six years. But the results of the war on inflation are not always predictable. GaveKal, an economic consultancy, says electricity price controls have led to energy shortages. Producers have cut output because tariffs have not kept pace with the rising cost of coal [as well as a drought effecting hydro-electricity output]. Incentives to increase vegetable supplies have worked – too well. Farmers have been unable to unload extra cabbages, which have rotted in the field. The state’s concerns about inflation are rational. However the consequences of its actions are not always so. Just ask Unilever." - David Pilling
Published in 'The Financial Times' May 18 2011 http://www.ft.com/cms/s/0/1bf6dc04-817c-11e0-9c83-00144feabdc0.html#ixzz1Mp0F6Pgx
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[Quote No.35748] Need Area: Money > Invest
"The Silver Market’s Stroll Down Memory Lane - Mark Twain once said: 'History does not repeat itself, but it does rhyme.' Today, silver investors can learn a lesson or two from that observation. In recent months, that market took a swift ride to highs near US$50 an ounce, a level unseen since the early 1980s. But then it took a largely orchestrated and stomach-churning drop. Rumors ran rampant that the only 'real' reason silver rose was because some mysterious figure was accumulating a large position. Specific blame fell on everyone from Russian billionaires to a secret silver-buying program by the People’s Bank of China. But the truth may be a lot simpler than that. This situation is very reminiscent of the late 1970s and early 1980s when the Hunt brothers tried to corner the silver market. The characters have changed since then, but history holds more than a few clues about the future all the same. The Hunt Brothers’ Silver Thursday - In late 1973 and early 1974, the Hunt brothers bought about 55 million ounces of silver. The commodity cost around US$3 to US$4 an ounce at the time. The two next physically moved that haul to Switzerland on fears of Uncle Sam. They thought the government would seize silver much like it did gold in the 1930s. The brothers continued buying over the years. And in 1979, they partnered up with some Saudi sheiks to set up Investment Company Ltd., a Bermuda-based business. That business then bought 90 million ounces of silver, again taking physical delivery of it. The next few months saw silver spike from US$8 an ounce to US$16 as fears intensified over silver supplies – or the lack therefore – at the Comex, which is part of the CME Group (Nasdaq: CME ) today. Unfortunately though, the odds didn’t favor the Hunt brothers in the end... A number of people on the board of directors of the commodities exchanges came from big Wall Street banks. And those financials were anything but happy with the Hunts’ actions, especially since they were short 38 million ounces of silver. Regulators Step In And On the Hunt Brothers - The Chicago Board of Trade (CBOT) started out by raising the margin requirement. And then it limited silver traders to three million ounces of futures contracts; anyone with more than that would have to divest their holdings by February 1980. The price of silver really took off after that, hitting US$34.45 at the end of 1979. In effect, the exchange had confirmed that there was a shortage and investors reacted accordingly. On January 7, 1980, the rules changed again. CBOT announced new limits for all silver futures contracts of 10 million ounces. But silver continued to skyrocket – all the way to US$50! – and the Hunts kept buying. The axe finally fell on them two weeks later when the Comex limited silver trading to liquidations only. That meant no one could open new positions at all. The very next day, silver fell off a cliff, plunging from US$44 to US$34. And prices kept falling until the Hunts couldn’t even cover the margin for the futures they had bought. They had to liquidate everything and their fortunes soon disappeared as a result. In short, they lost the big game, while the house won... like it always eventually does. By 1988, the more famous of the brothers, Nelson Bunker Hunt, declared bankruptcy. Today’s Silver Investor - Fast forward to 2011, when silver recently neared US$50 an ounce again. And once again, it looks like some big Wall Street banks were caught short on the white metal. Not surprisingly, a similar pattern is beginning to emerge. The exchanges already raised the margin requirement on silver and, in turn, it plunged by 27% in a short period of time. If silver recovers back towards US$50, look for further rule changes from the exchanges. It’s what Mark Twain would expect. Silver investors should stay safe and do the same." - Tony D’Altorio
http://www.investmentu.com/2011/May/silver-market-memory-lane.html
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[Quote No.35765] Need Area: Money > Invest
"[Gold often rises in times of inflation or fear, and therefore can be a good way to hedge risk in an investor's portfolio. Trying to value gold as cheap so buy or expensive so sell is difficult. One common way is to measure and chart the dow/gold ratio. The following quote just touches the surface of this interesting topic.] Long used (together with silver) as a means of exchange and unit of account, gold had already lost those functions by the time it ceased backing the world's currency system forty years ago [1971] this coming August [2011]... But gold retains the third function of money – as a store of value – now beating, now lagging the unbacked fiat money (i.e. created at will) which replaced it. Since 1971, gold's value has also varied more widely against other, competing stores of wealth – just as it has against cash – amplifying the swings in its relative worth against equities, housing, raw industrial resources, and government debt [i.e. dow/gold [10/1oz], house/gold, commodities/gold, bond/gold - also dow/silver, and gold/silver [15/1oz] ratios]. No doubt you've seen ...[a dow/gold] chart before, for instance. Simply dividing the Dow Jones Industrial Average by the [US] Dollar-price of gold per ounce, the Dow/Gold Ratio might sound an arbitrary yard stick. But it tracks the relative worth of US equities against an increasingly popular, if still minority store of wealth, Gold Bullion. Dividends are excluded, leaving just the market-price – rather than income or earnings potential – of business assets in the world's largest economy, measured by a lump of dumb metal. To what end? Unlike corporate equity, gold doesn't do much. It can't even rust, much less grow (or shrink) its return-on-capital-employed. And from the recent low (7.2 ounces per Dow unit, hit in Feb.2009), US stocks have gained 20% vs. gold. (Priced in nominal dollars, they've risen 73% in the last two years.) The historic low stands beneath two ounces of gold, the all-time high above forty. Today, the Dow/Gold Ratio sits just shy of nine – a little beneath its 12-decade average of ten [10]. Note those two lows in the Dow (or rather, peaks for gold if you prefer), hit in the mid-1930s and early '80s." - Adrian Ash
He runs the research desk at BullionVault, 10 Feb, 2011. http://goldnews.bullionvault.com/gold_bonds_dow_020920112
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[Quote No.35766] Need Area: Money > Invest
"Be humble about your investing and trading abilities, for if you do not markets will eventually make you so. " - old investor
More than 45 yrs of investing experience.
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[Quote No.35771] Need Area: Money > Invest
"In 1969, Warren Buffett was running out of things to buy. He knew that in every bull market Mr. Market gradually becomes used to paying more and more for a business -- and eventually the prices get so high that there just is no smart choice but to stay in cash and wait for the unavoidable crash. The year 1969 was four years past the 1965 peak of the bull market that started in 1942, but the market was still overpriced, so Buffett stayed mainly in cash -- and his investors were getting restless. Some were voicing their disappointment that Mr. Buffett had been sitting mostly in cash for a long time and, as a result, they were not making the wonderful 20% plus returns of the past decade. They wanted him to invest. Now what? Should he pay more for a good business or fold the partnership? Would the market do what it had always done and crash, or somehow continue to defy 'financial gravity?' Buffett has always maintained that the only way to invest successfully is to buy wonderful businesses at attractive prices -- and if you can't, don't invest. Therefore, in 1969, he closed the partnership rather than violate the basic valuation principle of investing that had given him so much success. [Eventually the markets crashed in 1972 and 1974 at which time Buffett loaded up with good companies at good prices through his Berkshire Hathaway holding company and the rest is legendary investment history, eventually making Warren Buffett the second wealthiest individual in the world.]" - Dr Brian Zen
Fund manager
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[Quote No.35772] Need Area: Money > Invest
"[William J. Ruane (1925-2005), founder and former Chairman of Ruane, Cunniff & Co. Inc. which ran value share investing funds.] Ruane’s Four Rules of Smart Investing:- During a class he taught at Columbia University, Ruane laid out the four rules that guided his investment career: -- 1. Buy good businesses. The single most important indicator of a good business is its return on capital. In almost every case in which a company earns a superior return on capital over a long period of time it is because it enjoys a unique proprietary position in its industry and/or has outstanding management. The ability to earn a high return on capital means that the earnings which are not paid out as dividends but rather retained in the business are likely to be re-invested at a high rate of return to provide for good future earnings and equity growth with low capital requirement. -- 2. Buy businesses with pricing flexibility. Another indication of a proprietary business position is pricing flexibility with little competition. In addition, pricing flexibility can provide an important hedge against capital erosion during inflationary periods. -- 3. Buy net cash generators. It is important to distinguish between reported earnings and cash earnings. Many companies must use a substantial portion of earnings for forced reinvestment in the business merely to maintain plant and equipment and present earning power. Because of such economic under-depreciation, the reported earnings of many companies may vastly overstate their true cash earnings. This is particularly true during inflationary periods. Cash earnings are those earnings which are truly available for investment in additional earning assets, or for payment to stockholders. It pays to emphasize companies which have the ability to generate a large portion of their earnings in cash. Ruane had no taste for tech stocks. He stressed the importance of understanding what a company’s problems might be. There are two kinds of depreciation: 1. Things wear out. 2. Things change (obsolescence). -- 4. Buy stock at modest prices. While price risk cannot be eliminated altogether, it can be lessened materially by avoiding high-multiple stocks whose price-earnings ratios are subject to enormous pressure if anticipated earnings growth does not materialize. While it is easy to identify outstanding businesses it is more difficult to select those which can be bought at significant discounts from their true underlying value. Price is the key. Value and growth are joined at the hip. Companies that could reinvest at 12% consistently [Return on capital with low debt] with interest rate at 6% deserve a premium [especially if can buy at a forward PE below 13]." - Brian Zen
He has PhD and CFA qualifications and is the founder of Zenway Group, a New York-based investment advisory firm.
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[Quote No.35773] Need Area: Money > Invest
"Sorting terminal stocks from turnarounds: How can you tell the difference between a company getting into trouble, and one getting out of it? It’s an important question for investors who try to buy shares on the cheap, when the price is low relative to the value of the company’s assets or earning power [or low price to book ratio]. Typically, these companies are financially distressed. Profitability may be falling or negative and they may have to raise money just to keep going. They might not sound like good investments, but turnarounds can earn investors extreme returns when previously investors had written them off. Buy while business is still deteriorating, though, and at best you’ll have to wait before you make any money. At worst the company goes bust, and you loose everything. Why not reduce the waiting, and the risk? I’ve been thinking about this question more actively since I lost money on SCS Upholstery, a turnaround that didn’t. Checking a company’s level of debt didn’t save me from SCS’ fall. It had none. Perhaps a more complete description of a company’s financial health would be a better test. The F-Score, invented by an academic, Joseph Piotroski, distinguishes between financially weak and financially strong companies. By selecting only the strongest companies from a pool of cheap stocks as measured by the price to book ratio, Piotroski increased average annual returns by 7.5%. Companies with low F-Scores are also five times more likely to go bust than companies with high scores. Intuitively, I like the F-Score because it combines common sense measures of financial health; profitability, debt, and productivity. The information needed to calculate it is all in a company’s financial statements, and the calculation involves basic addition. Most of all, I like it because it promises to resolve one of the psychological hurdles facing value investors and pundits alike. Although value investing produces market-beating returns, Piotroski showed that they depend on the strong performance of a minority of stocks. In other words, typical value investors are wrong more often than they are right, but when they are right the returns more than compensate them for their many wrongs. By picking companies with high F-Scores, value investors can be right about half the time! As an investor it’s tough being wrong most of the time, as a pundit it’s even harder, which, explains Piotroski, is one reason analysts prefer to recommend expensive momentum stocks to value stocks. It also explains why I’m checking the F_Scores of the stocks with the lowest Naked PEs. I’m hoping to identify companies that are already turning themselves around, and thereby improve my ratio of winners to losers. Calculating the F-Score:- Each variable scores one or zero to give a total score out of nine. Stocks that score two or less are the weakest, and best avoided. Stocks that score eight are nine are financially strong and consequently they’re: -1.More likely to recover, and... -2.Go on to make the highest returns. Which is another way of saying they’re low risk, and high reward. In the descriptions of the variables that follow, I’ve attempted to simplify and change some of the terminology Piotroski used to British equivalents and included his terms in brackets afterwards. Piotroski chose these variables because they’re stalwarts of financial analysis, not because they’re an optimal blend. Potentially the F-Score could be improved by tinkering – at your own peril! Profitability: A recovering company should be profitable, profitability should be increasing, and cash profit should cover accounting profit. (1) Return on assets Shareholders’ profit (net income) before extraordinary items divided by total assets at the beginning of the year. Score 1 if positive, 0 if negative (2) Cash flow return on assets Net cash flow from operating activities (operating cash flow) divided by total assets at the beginning of the year. Score 1 if positive, 0 if negative (3) Change in return on assets Compare this year’s return on assets (1) to last year’s return on assets. Score 1 if it’s higher, 0 if it’s lower (4) Quality of earnings (accrual) Compare Cash flow return on assets (2) to return on assets (1) Score 1 if CFROA is greater than ROA, 0 if CFROA is less than ROA. Funding: A recovering company should be able to fund itself without borrowing more, or selling more shares. (5) Change in gearing (leverage): Compare this year’s gearing (long-term debt divided by average total assets) to last year’s gearing. Score 1 if gearing is lower, 0 if it’s higher. (6) Change in working capital (liquidity): compare this year’s current ratio (current assets divided by current liabilities) to last year’s current ratio. Score 1 if this year’s current ratio is higher, 0 if it’s lower (7) Change in shares in issue Compare the number of shares in issue this year, to the number in issue last year. Score 1 if there are the same number of shares in issue this year, or fewer. Score 0 if there are more shares in issue. Efficiency A recovering company should be reducing costs, increasing prices or both, and selling more (relative to the assets it uses). (8) Change in gross margin Compare this year’s gross margin (gross profit divided by sales) to last year’s. Score 1 if this year’s gross margin is higher, 0 if it’s lower (9) Change in asset turnover Compare this year’s asset turnover (total sales divided by total assets at the beginning of the year) to last year’s asset turnover ratio. Score 1 if this year’s asset turnover ratio is higher, 0 if it’s lower Does the F-Score still work? Piotroski tested the F-Score on US stocks between 1976 and 1996. In its 2007 newsletter (PDF), Validea – a commercial stock-screening company, reported annual returns of 39.9%, 9%, 17.9% and -4.9% for its implementation of the F-Score, demonstrating once again that last year was a bad one for value investors. Why does it work? Piotroski found that the smaller the company the better the returns. He also found that the majority of companies not covered by analysts in the previous year did better than the minority that were. Because there is so little information about small, thinly traded companies, investors aren’t expecting them to recover. That may explain why share prices fall so low, and bounce back so strongly when the companies do. [Another helpful rating system is the Z-Score which measures the likelihood of the company going bankrupt in the next year.] " - Richard Beddard
Sep 17, 2008 - http://blog.iii.co.uk/piotroski/
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[Quote No.35774] Need Area: Money > Invest
"The Altman Z-Score is a measure of a company’s health and likelihood of bankruptcy. It was developed by Edward Altman in 1968 when he was a finance professor at NYU. This is a mathematical formula which uses financial data from company’s income statement and balance sheet. It generates a number which tells you the likelihood of bankruptcy or financial embarrassment. It has a reported 72% accuracy in predicting bankruptcies two years in advance. Z-Score Formula for Public Companies: T1 = Working Capital / Total Assets T2 = Retained Earnings / Total Assets T3 = Earnings Before Interest and Taxes / Total Assets T4 = Market Value of Equity / Total Liabilities T5 = Sales/ Total Assets Z-Score Bankruptcy Model: Z = 1.2T1 + 1.4T2 + 3.3T3 + 0.6T4 + .999T5 Zones of Discrimination: Z > 2.99 -“Safe” Zone 1.8< Z< 2.99 -“Grey” Zone Z< 1.80 -“Distress” Zone Z-Score Formula for Private Firms: T1 = (Current Assets-Current Liabilities) / Total Assets T2 = Retained Earnings / Total Assets T3 = Earnings Before Interest and Taxes / Total Assets T4 = Book Value of Equity / Total Liabilities T5 = Sales/ Total Assets Z' Score Bankruptcy Model: Z' = 0.717T1 + 0.847T2 + 3.107T3 + 0.420T4 + 0.998T5 Zones of Discrimination: Z' > 2.9 -“Safe” Zone 1.23< Z'< 2. 9 -“Grey” Zone Z'< 1.23 -“Distress” Zone Z-Score for Non Manufacturer Industrials and Emerging Market Credits: T1 = (Current Assets-Current Liabilities) / Total Assets T2 = Retained Earnings / Total Assets T3 = Earnings Before Interest and Taxes / Total Assets T4 = Book Value of Equity / Total Liabilities Z-Score Bankruptcy Model: Z = 6.56T1 + 3.26T2 + 6.72T3 + 1.05T4 Zones of Discrimination: Z > 2.6 -“Safe” Zone 1.1< Z< 2. 6 -“Grey” Zone Z< 1.1 -“Distress” Zone " - sudhanshujain
http://www.gurufocus.com/ic/space.php?uid=82201
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[Quote No.35789] Need Area: Money > Invest
"Policy makers watch [inflation] expectations because they can fuel actual inflation. Businesses may raise prices in anticipation of higher production costs, while consumers can demand higher wages to keep up with the price of goods. Unless restrained by central banks, the two processes together can accelerate inflation... Inflation expectations, especially long-run projections, 'are an important force in inflation dynamics,' according to a 2008 research paper from the Federal Reserve Bank of Kansas City by Todd E. Clark, who’s now a vice president at the Cleveland Fed, and Troy Davig, now a senior economist at Barclays Capital in New York. 'Even small movements in long-run expectations can represent a persistent source of pressure on inflation,' they wrote... [US] Inflation, including all items, has averaged 2.1 percent a year over the past 10 years [2001-11], and the same rate over the prior decade. It was 4.8 percent during the 1980s and 6.7 percent in the 70s, based on the Commerce Department’s personal consumption expenditures price index. St. Louis Fed President James Bullard said May 18 that central bankers are 'determined' to avoid a repeat of the 1970s inflation. Paul Volcker, who took over as chairman in 1979, kept the federal funds rate on overnight loans among banks above 8 percent for more than five years, pushing it as high as 20 percent... During that decade, 'forecasters consistently underpredicted the future level of inflation, seeing considerably more disinflation from a particular policy stance than in fact occurred,' former Fed Vice Chairman Donald Kohn said in a 2007 speech. Fed staff economists and bond investors both made such mistakes, Kohn said. 'I lived through that whole thing, and it was awful,' said Broaddus, who joined the Richmond Fed in 1970 and ran it from 1993 to 2004. Even though there hasn’t been an incident of similar magnitude since then, policy makers 'know that can happen,' he said. It’s 'always out there as the lesson of what can happen if the Fed begins to lose focus on its main job of focusing on price stability.' Now Fed officials often speak of the credibility they regained from Volcker’s inflation victory and how careful they must be not to let it slip away... 'This is the point in the business cycle when the risk of losing a bit of credibility and risk of losing ground on inflation is highest,' Jeffrey Lacker, the current president of the Richmond Fed, told reporters May 10. The market-based measure of inflation five to 10 years out [i.e. The TIPS market represents a fair assessment of inflationary pressures. Breakeven rates are the yield difference between TIPS and comparable maturity Treasuries and are a measure of the outlook for consumer prices over the life of the securities.] 'is a proxy on their credibility completely,' Davig said. 'Any kind of financial market movement that would indicate the market’s lack of belief in the Fed’s ability to execute a smooth exit strategy -- the Fed’s completely fearful of that.' " - Caroline Salas and Scott Lanman
Bloomberg.com - May 23, 2011
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[Quote No.35790] Need Area: Money > Invest
"By S&P’s definitions:, a pullback represents a 5-10% fall, a correction a 10-20% drop and a bear market around a 20% or greater decline." - Standard and Poor’s

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[Quote No.35791] Need Area: Money > Invest
"To control inflation you reduce demand in the economy by raising interest rates. " - Seymour@imagi-natives.com

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[Quote No.35792] Need Area: Money > Invest
"On Investing: The many hats of great investors: Graduation season is upon us. From the next generation of Warren Buffett wannabes, I occasionally hear questions such as 'What should I learn to become a great investor?' Contrary to popular belief, investing isn’t a traditional academic discipline. Money management is hardly a typical major. There are, of course, plenty of 'Business Administration' undergrads, but their focus tends to be on running companies, rather than investing in them. We churn out MBAs like made-in-China widgets, yet few ever become outstanding investors. And don’t even ask about economists — the profession that missed the housing boom and bust, the Great Recession, the credit crisis and the market collapse. Great investors are savvy generalists. I can think of five fields that are hugely helpful to asset management. If you were to study these disciplines, your understanding of how markets work would greatly improve. And you would be a better investor. How? You will generate better risk-adjusted returns; meaning, you will get the most bang for the bucks you are putting at risk. You will suffer less from volatility — the stomach-churning ups and downs in the markets that are one part risk, one part opportunity. And you will avoid the typical mistakes that most investors make. The five disciplines that can help: -1- Historian: Knowing what has happened in the past (and how often) is an enormous advantage when it comes to investing. It informs you of the range of possibilities, allows you to conceptualize possible outcomes to various scenarios and provides a framework for thinking about market cycles. Heading into the market bottom in 2003, some market historians warned about a secular bear market. These are the decade-plus long periods of huge rallies and great collapses. Some warned that investors should not be surprised if after a decade, the markets were essentially unchanged, which is exactly what happened. Think back to the market lows in March 2009. After about a 20 percent bounce off the bottom, quite a few commentators expressed fears that the markets had gone 'too far, too fast.' Market historians knew that the median bounce after a drop of 50 percent or more was 75 percent. With that information, you might not have been scared away from equities just before they gained 80 percent in value over 18 months. -2- Psychiatrist: Speaking of scared: Have you ever sold anything in a panic — then regretted it over the ensuing months? What about the opposite — greedily buying stocks that were screaming higher because everyone else was? Many investors fall prey to these errors. Fear and greed are the most enduring investor emotions. They lead to destructive behaviors. Carl Richards, a financial planner, sums it up thusly: 'Buy greed at tops; Sell fear at bottoms; repeat until broke.' Not understanding your own psychology is the downfall of many an investor. The best financial plan becomes worthless if you are unprepared for the emotional turmoil that accompanies the ups and downs of markets. The crowd becomes an unthinking mob at tops and bottoms. Being able to read the emotional state of the market, as well as keeping your own emotions in check, are hallmarks of great investors. -3- Trial lawyer: Good litigators are always skeptical, but not negative. Is that witness telling the truth? What is motivating him? Is the opposing counsel’s argument logical? Being able to answer these questions makes for a good lawyer – and a good investor. All CEOs want you to buy their company’s stock; every analyst wants you to follow his equity calls; every fund manager wants to run your money. When it comes to investing, everyone is trying to separate you from your money. Good investing requires good judgment. Being able to recognize valuable intel versus the usual blather is a huge advantage. Like a good litigator, you must question data, consider alternative explanations, argue against the obvious. You cannot blindly accept everything you hear as truth, nor can you reject everything out of hand. Being able to discern between information that is valuable and that which is not, is crucial. -4- Mathematician/statistician: Investing is filled with math: compound interest-rates, dividend yields, long-term gains, price-to-earnings ratio, risk-adjusted returns, percentage draw downs, annualized rate of returns. Don’t worry if you suffer from math anxiety: If you can operate the simplest calculator — even the free one that came with your computer — you have the requisite math skills needed. If you follow the professional literature there is a plethora of advanced mathematical formulas of dubious utility. Value-at-risk is a complex mathematical formula that was supposed to tell Wall Street banks how much risk they could safely assume. It failed to prevent them from blowing themselves up during the credit crisis. The Sharpe ratio measures the excess return — the 'risk premium' — an investment strategy has. Even William Sharpe, its creator, has said it’s been misapplied by Wall Street’s wizards. Investors can ignore these sorts of mathematical esoterics. But understanding basic math is key. -5- Accountant: When you buy a stock, you are buying an interest in a company’s future revenue and profit. How much you pay for that future cash flow determines whether you are over or under paying. That means understanding the basics of a company’s books is a key to recognizing value. An understanding of basic accounting is essential to grasping the fundamental health of a company or business model. It is how you determine whether an existing company is profitable, or when a young firm might become profitable. But it also can help you determine when a formerly profitable company is heading down the wrong path. You don’t have to be a forensic accountant. These are sleuths in green visors poring over pages and pages of quarterly filings and footnotes, looking for evidence of fraud or accounting shenanigans. Forensic accountants are the guys who discovered the frauds at Enron and Worldcom, and they warned about AIG and Lehman Brothers. Amazingly, even after these frauds were revealed, many investors refused to believe them. Having a basic knowledge about accounting can help you understand and heed the work of forensic accountants. You don’t need to have an MBA or doctorate in economics to be a good investor. Indeed, as the spectacular blow up at Long-Term Capital Management has taught us, these can be impediments to good investing. Instead, you need to develop more general skills. [1] Learn market history, [2] understand crowd psychology, [3] how to think critically, [4] be able to do simple math and [5] understand basic accounting. Do this, and you are on the path to becoming a much better investor." - Barry Ritholtz
Chief executive of FusionIQ, a quantitative research firm. He also runs a finance blog, The Big Picture. Published in 'The Washington Post', May 22, 2011.
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[Quote No.35809] Need Area: Money > Invest
"Japan's economic demons dog China: The recent triple disasters of the tsunami, earthquake, and Fukushima nuclear plant meltdown means that the Japanese economy has put Japan back into recession. The 0.9 per cent contraction from January-March is larger than almost all analysts expected. Natural disasters are unpredictable. But no one can blame bad luck for Japan’s two lost decades of economic growth that began from the 1990s onwards. Predictions in the 1980s that Japan was about to rule the world ignored evidence that the Japanese miracle from the 1960s to 1980s was too good to be true. Bad economic practices, political paralysis, bad demographics, and a failure to adapt and innovate still plagues the country. It is why the bubble burst and a large part of the reason why Japan is where it is today. When President Bill Clinton first entered the White House in 1992, the Japanese economy made up about 18 per cent of global GDP, up from 7 per cent in 1970 and 10 per cent in 1980. The fact that it now constitutes only 8 per cent of global GDP means that, in relative terms, it is back to where it started when the country’s spectacular growth began 40 years ago. China’s spectacular rise has obviously eaten into Japan’s relative share of global GDP. But the United States has managed to maintain its relative standing at around 21 per cent of GDP growth over many decades. Which begs the question: Why Japan could not? First, the recent history of Japan’s demise... Before ‘Made in China’ became omnipresent, there was ‘Made in Japan’. Built on the back of an undervalued Japanese yen and an abundance of cheap labour, the so-called East Asian model of export-driven development (combined with ever increasing levels of fixed-investment based on a high national savings rate) was seemingly perfected by Japan in the 1970s and 80s. In a story that sounds eerily familiar to the US-China one today, the American Congress became increasingly agitated that the undervalued yen was destroying the country’s terms of trade and taking away jobs from Americans. After persistent pressure from Washington, the result was the 1985 Plaza Accord. Over the next two years, the US dollar fell from 240 yen to 160 yen. The Japanese export sector suffered, and with it economic growth, which fell from 4.4 per cent in 1985 to 2.9 per cent in 1986. In response, the government drastically eased monetary policy and cut the discount interest rate from 5 per cent in January 1986 to 2.5 per cent in February 1987. With the flood of virtually free money came the real estate and stock market bubbles. Tokyo responded by tightening monetary policy and raised rates five times until they reached 6 per cent in 1989. After these increases, the asset markets collapsed. The Nikkei stock market fell more than 60 per cent – from a high above 40,000 in 1989 to under 15,000 by 1992. It is currently under 10,000. Real estate prices also fell by 80 per cent from 1991 to 1998. This explains how Japan got into trouble. But it doesn’t explain why it has not been able to emerge out of the malaise. To understand why this is the case, we need to identify the political economy’s enduring flaws that was always behind Japan’s rise, and which are still apparent more than two decades after its fall. In basic economic terms, we achieve GDP growth in three ways: 1. Increased capital inputs; 2. Increased labour inputs; or 3. Increased Total Factor Productivity, which is the growth not accounted for by increased factor inputs. The problem of Japan’s ageing demographics is well known. This explains the inability to simply throw more workers at the problem – Japan doesn’t have them. In 1975, 7.9 per cent of the population was over the age of 65 years. In 2000, the figure was 17.2 per cent. In 2025, it will be almost 30 per cent. Neither could employers force workers to work any longer. The Japanese were already famed for being the hardest workers in the world. What about increasing capital inputs? Unfortunately, this is part of the problem. In the 1960s and 1970s, fixed investment as a proportion of GDP was around 25-30 per cent. Japan grew very rapidly due to high rates of (inefficient) investment. When the asset bubbles burst, the government tried to do more of the same. From 1992-1995, Japan tried six spending programs amounting to 65.5 trillion yen. In 1998, another fiscal stimulus package worth 24 trillion yen was announced, with a further 18 trillion yen package in 1999, and an 11 trillion yen package in 2000. In the 1990s, Tokyo put forward 10 stimulus packages worth over 100 trillion yen. At least half the money went into big infrastructure and fixed investment projects. Unfortunately, there was little impact when it came to encouraging economic growth. The problem with throwing money at the problem was twofold. First, Japanese household savings rates were rapidly declining. The net household saving rate (savings as a percentage of net disposable income) fell from 16.5 per cent in 1985 to 11.9 per cent in 1995, to 2.4 per cent in 2005. Private households were losing the capacity to simply throw more capital into the economy. This meant that the increased reliance on public funds to make up any perceived investment shortfall simply increased government debt. Second, there was always plenty of evidence that capital was misallocated – both before the stimulus packages of the 1990s and after. The rise of hugely successful and innovative companies such as Toyota and Sony hides the fact Japanese companies have long operated in protected environments and have little incentive to innovate and adapt. Because of rigid corporate structures and culture, promotion is based on seniority rather than merit or achievement. Japanese subordinates do not question their superiors even when decisions are clearly wrong, corrupt or irrational. In terms of the government stimuli from the 1990s onwards, much of it was directed towards construction and infrastructure companies with close links to the government and ruling Liberal Democratic Party, which had been in power almost continuously from 1955-2009. By throwing more and more money at the problem, Tokyo is inadvertently preventing the process of creative destruction from taking place. More generally, the sources of Japanese growth were always inefficient and remain so, relying on increasing labour and capital inputs rather than improvements in Total Factor Productivity (TFP). Even before the economy began stagnating, Japanese TFP was only 60 per cent that of America’s in the 1970s and two-thirds that of America’s in the 1980s. Since 1990 it has remained at 75 per cent of American TFP. With an economic miracle based on ‘putting more and more in’ rather than ‘getting more and more out’, the good times were always going to end. With ‘Japan hype’ on the rise and GDP still growing rapidly, almost everyone dismissed obvious ‘structural’ problems in the political-economy. They argued that the Japanese people were clearly ‘smart’ enough to work through the structural problems and ‘transition’ towards a more efficient economy. After all, Japan was unique and criticisms of its political-economy were not ‘nuanced’. In contrast to America, its autocratic social structures, and stoic, unquestioning people, were a virtue. While innovation and creativity in the west also meant chaos, Japan’s more rigid society brought economic, social and political discipline. Unlike squabbling Western politicians, Japanese leaders were known to take the ‘long-term’ view and were excellent technocrats. When Japan began its decline, the myth that state-led political-economies based on an ancient East Asian wisdom could defy the laws of economics fell with it. Now we are resurrecting such an article of faith about its Chinese neighbour. Let’s hope that we are not being fooled a second time and that Japan’s predicament is not to be China’s future. [Japan also stagnated for 20 years because it failed to eliminate bad debts from the commercial banks during the 1990 financial crisis. " - Dr John Lee
Research fellow at the Centre for Independent Studies in Sydney and the Hudson Institute in Washington DC. He is author of Will China Fail? Published in BusinessSpectator.com - 25 May 2011.
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[Quote No.35810] Need Area: Money > Invest
"What happens when Greece defaults? It is when, not if. Financial markets merely aren’t sure whether it’ll be tomorrow, a month’s time, a year’s time, or two years’ time (it won’t be longer than that). Given that the ECB has played the 'final card' it employed to force a bailout upon the Irish – threatening to bankrupt the country’s banking sector – presumably we will now see either another Greek bailout or default within days. What happens when Greece defaults. Here are a few things: - Every bank in Greece will instantly go insolvent. - The Greek government will nationalise every bank in Greece. - The Greek government will forbid withdrawals from Greek banks. - To prevent Greek depositors from rioting on the streets, Argentina-2002-style (when the Argentinian president had to flee by helicopter from the roof of the presidential palace to evade a mob of such depositors), the Greek government will declare a curfew, perhaps even general martial law. - Greece will redenominate all its debts into 'New Drachmas' or whatever it calls the new currency (this is a classic ploy of countries defaulting). - The New Drachma will devalue by some 30-70 per cent (probably around 50 per cent, though perhaps more), effectively defaulting 0n 50 per cent or more of all Greek euro-denominated debts. - The Irish will, within a few days, walk away from the debts of its banking system. - The Portuguese government will wait to see whether there is chaos in Greece before deciding whether to default in turn. - A number of French and German banks will make sufficient losses that they no longer meet regulatory capital adequacy requirements. - The European Central Bank will become insolvent, given its very high exposure to Greek government debt, and to Greek banking sector and Irish banking sector debt. - The French and German governments will meet to decide whether (a) to recapitalise the ECB, or (b) to allow the ECB to print money to restore its solvency. (Because the ECB has relatively little foreign currency-denominated exposure, it could in principle print its way out, but this is forbidden by its founding charter. On the other hand, the EU Treaty explicitly, and in terms, forbids the form of bailouts used for Greece, Portugal and Ireland, but a little thing like their being blatantly illegal hasn’t prevented that from happening, so it’s not intrinsically obvious that its being illegal for the ECB to print its way out will prove much of a hurdle.) - They will recapitalise, and recapitalise their own banks, but declare an end to all bailouts. - There will be carnage in the market for Spanish banking sector bonds, as bondholders anticipate imposed debt-equity swaps. - This assumption will prove justified, as the Spaniards choose to over-ride the structure of current bond contracts in the Spanish banking sector, recapitalising a number of banks via debt-equity swaps. - Bondholders will take the Spanish Banking Sector to the European Court of Human Rights (and probably other courts, also), claiming violations of property rights. These cases won’t be heard for years. By the time they are finally heard, no-one will care. - Attention will turn to the British banks. Then we shall see... [as the extremegovernment debt-to-GDP dominoes fall in order of their unsustainable debt load.] " - Andrew Lilico
Andrew Lilico is an economist with Europe Economics, and a member of the Shadow Monetary Policy Committee. He was formerly the Chief Economist of Policy Exchange. Published in the English newspaper 'The Telegraph', May 20th, 2011.
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[Quote No.35811] Need Area: Money > Invest
"Gold is measured in Troy ounces. 1 Troy ounce equals 1.0971428571 ounces. 1 metric tonne = 32,150.746 Troy ounces. 1 long ton of 2240 lb (UK) = 32,666.667 Troy ounces. 1 short ton of 2000lb (US) = 29,166.667 Troy ounces. 1 kg of gold is equal to 35.2739 oz of gold. 1 troy oz = 31.1 grams. [1 ounce (oz) of any material is 28.34952 grams.] Gold is typically sold by the troy ounce, which equals 1.097143 (standard ounces). Note that there are 12 troy ounces in a troy pound, while there are 16 standard ounces in a 'regular' pound." - Anon

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[Quote No.35812] Need Area: Money > Invest
"Silver is called 'the poor man's gold' because it is cheaper per ounce." - Seymour@imagi-natives.com

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[Quote No.35815] Need Area: Money > Invest
"In all the more advanced communities the great majority of things are worse done by intervention of government, than the individuals most interested in the matter would do them, or cause them to be done, if left to themselves. [Therefore the doctrine of leaving it to market competition to determine - laissez-faire (French: 'allow to do') - but this does not mean no rules at all. The government would still need to ensure the citizen's inalienable rights to liberty - free choice, and private property by guarding against fraud, force, coercion and corruption and anti-market-competitive cartels and monopolies.] " - John Stuart Mill
(1806–1873),'Principles of Political Economy'.
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[Quote No.35816] Need Area: Money > Invest
"[In a market bust, the central bank, for example, the US Federal Reserve]...the lender of last resort stands ready to halt a run out of real and illiquid financial assets into money, by making more money available... How much? To whom? On what terms? When? These constitute some of the dilemmas of the lender of last resort, after it is determined, first, whether there should be one, and second, who it should be. All these issues derive from the basic dilemma that if the market knows it is to be supported by a lender of last resort, it will feel less [little? no?] responsibility for the effective functioning [assessment of risk and therefore the risk premium] of money and capital markets during the next boom [creating a moral hazard, where risk of bankruptcy will be reduced believing the central bank will save them as it has done before by lowering interest rates to very low levels - in the 1990's actually called 'a Greenspan (Chairman of the Fed) put']. The public good of the lender of last resort weakens the private responsibility of ‘sound’ banking... ‘Too little, and too late’ is one of the saddest phrases in the lexicon not only of central banking but of all activity. ‘Too much, too early’ is not an evident improvement. Enough at the right moment is better than either. But how much is enough? When is the right time? ...If, then, one admits the necessity for a lender of last resort after a speculative boom, and believes that it is impossible for restrictive measures to slow down the boom at the optimal rate without precipitating collapse, the lender of last resort faces dilemmas of amount and timing ... As for timing, it is an art. That says nothing — and everything. [Namely sometimes the efforts of lenders of last resort make the recovery quicker and less painful. Sometimes they make the recovery longer and more painful.]" - Professor Charles Kindleberger
Economics professor and author. Quote from his book, 'Manias, Panics, and Crashes', Basic Books, 1978.
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[Quote No.35817] Need Area: Money > Invest
"...if the world had had no central banks over the last 20 years and monetary growth had been kept constant at, say, 3% per annum, it is likely that the wild swings we have experienced in the global economy since 1990 would have been avoided. Without central banks, market forces would have contained the speculative booms and the colossal busts that followed them far better than the central bankers have managed to do." - Marc Faber
Economic historian, investment advisor and author. Quote from his newsletter, 'The Gloom, Boom and Doom Report', Nov 23, 2001.
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[Quote No.35818] Need Area: Money > Invest
"[Overindebtedness is brought about by] new opportunities to invest at a big profit ... such as through new inventions, new industries, development of new resources, opening of new lands or new markets. Easy money is the greatest cause of over-borrowing. [Over-borrowing can be encouraged by both great opportunities that excite people's imagination and greed and/or too cheap money - that is when interest rates are too low for the long-term risk and monetary policy is too loose. The resulting over-borrowing can then cause a crash in asset and financial prices when rates rise or there is an economic shock that rattles people's confidence as there was in the Great Depression in 1929-39 and the Great Financial Crisis 2007-9.]" - Irving Fisher
Respected early 20th century economist. Quote from his very good book, 'The Debt Deflation Theory of the Great Depression,' London, 1933.
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[Quote No.35819] Need Area: Money > Invest
"In the course of the year, I meet numerous very well informed hedge fund and traditional fund managers, strategists, and economists. Naturally, most of these people have a business self-interest. They only reluctantly have their clients withdraw funds, even if market conditions or poor performance warrant such action. Moreover, no matter how large these financial institutions have become, they continually look for new clients in order to enlarge their assets under management [for which they get paid a percentage of so the more the better from their financial perspective]. So, what these financial people are saying publicly is often somewhat different from what they themselves really believe. In private, most of the fund managers and investment advisers I talk to express the view that the current imbalances in the global economy — and, in particular, the external imbalances of the United States — are not sustainable forever. With the exception of the incorrigible optimists, most financial observers know that at some point the excessive credit creation in the US will backfire and lead to some sort of a crisis. But that is where our knowledge stops. We don’t know what might be the catalyst for the crisis, when it might happen and in what form it will manifest itself. [Marc Faber wrote this in 2005. In 2007 the crash came as securitised sub-prime loans became worthless creating a chain of deflation so great it halved share markets around the world in a year and was described as second only to the Great Depression in financial damage.]" - Marc Faber
Financial historian, advisor and author. Quote from his newsletter, 'The Gloom, Boom and Doom Report', April 20, 2005.
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[Quote No.35820] Need Area: Money > Invest
"ARE CONTINUOUSLY RISING US ASSET PRICES SUSTAINABLE? ...on first sight, it would seem that easy money and credit can sustain asset inflation for a very long time, or at the very least prevent a serious asset deflation. A closer analysis, however, reveals that in the same way that corporate profits cannot grow in excess of nominal GDP in the long run, asset markets cannot appreciate at a higher rate than nominal GDP for very long. Let me explain. Money supply growth in excess of real economic growth leads to inflation, which may manifest itself in rising wages or in rising consumer prices, commodities, equities, or real estate. The beauty — or the viciousness — of inflation is that it doesn’t occur in all asset markets and in the prices for goods, services, and commodities at the same time. Very broadly speaking, we could argue that rising consumer good prices are bad for asset markets, whereas a declining rate of increase in consumer prices (disinflation, such as we had since 1981) or an absolute decline in consumer prices (deflation) tend to be favourable for asset markets. The reason for this diverging performance of inflation in consumer prices and asset prices is that declining commodity and consumer prices allow for interest rates to decline, which boosts the value of assets such as stocks, bonds, and real estate. Rising commodity and consumer prices, on the other hand, lead to rising interest rates [E/P expansion], which then depress asset markets (P/E contraction). Moreover, rising consumer rices lead to rising wages. It should be easy to understand that if consumer prices increase by 10% per annum, wages cannot increase for long by, say, only 3% per annum, since negative real wage gains would lead to a loss of purchasing power, diminished spending, and a recession [This would show up as reducing home affordability as measured by house price to income ratios rising above the historical norm and people out of the housing market complaining]. Similarly, wage increases in excess of productivity gains will lead to some inflation in the system (rising consumer prices, or rising asset prices)[as the profit margins of companies are squeezed until they pass on these costs by raising product and service prices]. This is the easy part to understand about inflation. Where inflation becomes tricky and vicious is at turning points. Obviously, consumer prices and wages cannot rise forever without at some point bringing some asset inflation into the equation. This is so, even if monetary conditions never become tight, as was the case under Fed chairman Volcker in the early 1980s, when tight money brought about disinflation for consumer prices after 1981. Similarly, asset prices cannot increase forever without consumer price inflation manifesting itself in some form or another, leading then also to rising wage inflation. Accelerating consumer price and wage inflation will inevitably lead to asset inflation, when people lose faith in paper money as a store of value. They will then switch from bonds and cash into hard assets such as real estate, precious metals, or equities, which benefit from rising prices (oil and mining companies in the 1970s). Similarly, it is inconceivable that asset prices could appreciate forever in excess of consumer prices, wages, and interest rates. Why? If asset prices rise for very long at a much faster clip than interest rates, people will, as in the case of accelerating consumer price inflation, lose faith in cash and bonds as a store of value. They will then, as in the case of consumer price inflation, shift their cash into real estate and commodities and all sorts of collectibles. As asset prices rise, more and more people will be drawn into the asset appreciation game. Jobs will migrate from productive industries such as manufacturing to jobs related to the asset appreciation game, where the annual capital gains far exceed the returns that can be achieved from the manufacturing of goods and the provision of productive services. Rising asset prices and the neglect of manufacturing will then lead to a loss of international competitiveness, which will be reflected in rising trade and current account deficits. Initially, these rising trade and current account deficits will not be perceived as negative by the investment community. Some smart economist will write an article for the Wall Street Journal in which he explains that the rising trade and current account deficits are a sign of economic strength and the appreciating asset values are some sort of savings. Eventually, however, the market will become concerned about the total loss of international competitiveness as a result of the inflated price level and reflected in ballooning trade and current account deficits. The currency of the country with the high asset inflation will then weaken. Commodities will increase in price [noticed in the PPI -Producer Price Inflation figures] — expressed in the depreciating currency of the country with high asset inflation — and put upward pressure on consumer prices [as producers pass on the additional costs in order to preserve their margins and return on assets/equity]. In countries with a stable currency, commodity prices will remain stable or rise far less than in the country with high asset inflation and the depreciating currency. Should the country with the high asset inflation happen to be a large net importer of commodities [for example industrial metals, food or oil], this situation of weak currency and rising commodity prices is likely to exacerbate the trade and current account deficits and lead to additional weakness in the exchange rate. And once the currency of the asset-inflating country falls in earnest, import prices will begin to increase rapidly and lead to consumer price inflation and rising interest rates [if the central bank's monetary policy is serious about meeting its mandatory inflation target over the cycle and doesn't have a dual mandate of maximising employment which can contradict the necessary tightening required to ensure stable prices and low inflation]. At this point, the asset inflation is gradually replaced by commodity, consumer and wage inflation, for two principal reasons. Rising interest rates affect the inflated value of equities, bonds, and real estate negatively, since a huge credit expansion was responsible for the asset inflation in the first place. Therefore, some leveraged players faced with rising interest rates default and the supply of assets increases [This additional supply reduces demand and therefore prices]. But probably more importantly, while the public is brainwashed into believing that the asset inflation is based on sound economic fundamentals, the smart money notices that the asset inflation in local currency does not offset the depreciation of the currency. The result is that the smart money, which became immensely rich as a result of the asset inflation, bails out of local assets and shifts its funds overseas into assets that are relatively inexpensive compared to the inflated domestic assets. The result is additional currency weakness [as the domestic currency is sold and the foreign currency bought] and consumer price increases brought about by rising import prices [due to the lower currency], which begin to exceed the rate of increase of the appreciating assets. The leveraged consumer faced with rising interest rates, and wages that initially will lag behind the consumer price inflation because of international competition, is squeezed, and the accelerating consumer price inflation is likely to be accompanied by a very nasty recession. Because of rising interest rates, asset price inflation, which may still continue but at a lower rate than consumer price increases, will no longer support increasing consumption, which the asset inflation did for as long as it was higher than consumer price increases. At the same time, negative real wage growth will bring about a decline in aggregate demand. So far, I have tried to explain that there is only one type of inflation, and that this is an increase in the quantity of money in excess of real economic growth, but that this inflation can manifest itself in one of two ways: rising consumer prices or rising asset prices. Of the two types of inflation, rising consumer prices is far less dangerous. When consumer prices increase rapidly, the public at large will support the monetary authorities’ attempt to bring down the rate of price increases through tight monetary measures since the majority of the population, notably the housewives, will suffer from rising consumer prices [and reduce spending on discretionaries to continue to meet non-discretionary spending needs]. In asset inflation, however, the illusion of wealth keeps the public happy [and spending the paper profits -wealth effect spending especially on discretionary items - conspicuous consumption] for quite some time. How much more enjoyable is it to see one’s stock portfolio or home equity appreciate by between $50,000 and $100,000 — or, for the rich, by millions of dollars — every year, than to work hard in a manufacturing plant or in one’s own business? So, for a very long time the public — and especially the smart money, which benefits the most from the asset inflation — will support accommodating monetary policies by the central bank. THE FOUR PHASES OF ASSET INFLATION [The Business Cycle]: The first of the four phases of asset inflation is the soundest one. Once the monetary authorities move to curtail the accelerating commodity, wage, and consumer price inflation with tight monetary and credit policies (high real interest rates), commodity prices begin to decline and consumer price inflation to decelerate disinflation). Usually, a recession will accompany the tight monetary policies. Once recovery gets under way, asset values — in particular, bonds and equities, which became very depressed as a result of the earlier high consumer price inflation, which was followed by tight monetary policies and a recession — begin to rally sharply as interest rates begin to decline and corporate profits to expand, thanks to the ongoing disinflation. In the United States, I would put the beginning of this phase in 1981/1982. We can say that in the first asset inflation phase, financial assets recover from very depressed levels in celebration of the economic policymakers’ victory over consumer price inflation. It is not unusual to have heavy foreign participation in this phase [with the currency rising due to foreign demand for it to use it to buy assets especially rising equities], since, at its onset, assets were extremely depressed — especially in foreign currency terms, since the exchange rate obviously collapsed during the preceding phase of high consumer price inflation. In the first phase of the asset inflation, policymakers, investors, and economists still worry about consumer price inflation — not understanding that inflation has shifted from commodities, wages, and consumer prices to assets. Towards the end of phase one, excessive speculation becomes evident, some inflationary pressures develop, and the monetary authorities overreact and tighten money excessively, which then leads to a big setback for asset markets (in the US, real estate after 1986, and equities in 1987). Since the setback in asset markets threatens to bring about another recession, monetary conditions are quickly loosened again and asset markets begin to recover in phase two of the asset inflation cycle. In the early part of phase two, foreigners are largely absent since they were burned badly when phase one of the asset inflation experienced a serious setback. The additional liquidity injection that gets phase two in motion then brings about additional asset inflation and, through the illusion of wealth, strong consumer confidence and general financial contentment, complacency, and happiness. Phase two of asset inflation is facilitated by still-declining commodity prices [as more supply comes to market from the increase to capacity started when commodity profits were high during the previous inflationary period] and diminishing consumer price inflation [as reduced commodity prices and interest rates as well as increased productivity - output to hours - improves business margins which can then be held or lowered to try to improve volume and market share as the market recovers], and increasingly begins to be perceived as resting on sound economic fundamentals. In this phase of the asset inflation, the loss of international competitiveness [of exporters due to rising currency] begins to show up in rising trade and current account deficits. However, asset markets continue to perform well because foreigners are drawn to the asset inflation party and become active participants once again (in the US, in the late 1990s). Forgotten are the pains from the losses incurred at the end of phase one; and, having missed out on the early stage of phase two, when assets recovered from the losses incurred earlier at the end of phase one, foreigners rush into the inflating asset markets in order to reap some 'quick gains'. In this phase the incoming liquidity from foreign investors will even strengthen the currency and lead to declining import prices. This condition provides additional confidence to the monetary authorities and the public, who come to believe that their economy and their monetary policy are fundamentally sound. Otherwise, why would foreigners shift their assets into a country with high asset inflation? Phase two of asset inflation usually ends in a wild orgy of stock market and often also real estate speculation [as people pile in after watching friends early into the market make 'easy' money and 'greed for gain and fear of missing out' becomes the theme]. Prices become grossly overvalued, and when investors’ expectations are disappointed the markets collapse. Before the collapse, the financial markets, which expanded at a much faster clip than GDP in phase two of the asset inflation cycle, become disproportionately large in terms of their size relative to GDP [i.e. as a rough rule of thumb, total market capitalisation of the share market exceeds the annual GDP]. The collapse of financial assets worries the monetary authorities who, up to now, have feared a recurrence of consumer price inflation. Suddenly they change their mindset and begin to believe that declining financial asset prices could seriously damage the economy, and that deflation could become a problem (the US after 2001). Through a massive injection of liquidity and, frequently, direct purchases of equities, [or government bonds in 2009-11 called quantitative easing - money printing keeping bond prices high and therefore interest rates low] the policymakers support the market. This leads to phase three of asset inflation, the most unhealthy phase. In the early part of this phase, consumer price inflation remains low despite negative real interest rates, because the system suffers from excess capacities that came about from a capital spending boom at the end of phase two [and also now there may be more unemployed]. However, the smart money begins to realise that asset inflation erodes the purchasing power of money in the same way that consumer price inflation does. Since excessive liquidity injection prevents financial asset prices from becoming truly inexpensive, money begins to shift into hard assets, such as real estate, commodities, and foreign currencies. The public, who just lost a ton of money when the equity markets broke down and who are desperate to make up for their losses, then follow and boost the hard asset markets to lofty levels. For a while, all assets become grossly inflated. There is simply too much money chasing too few assets. Speculation becomes rampant in all asset classes. In the meantime, the productive economy doesn’t perform particularly well and, due to the artificially inflated price level brought about by negative real interest rates, becomes totally uncompetitive. But the public, brainwashed by the media and the monetary authorities, believe that asset prices are rising due to sound economic fundamentals and a solidly recovering economy. At some point in this third phase of asset inflation, consumer prices begin to rise more than was expected. At this point, the most crucial time in the whole asset inflation cycle occurs. If the monetary authorities are alert — which is an unrealistic assumption — they would tighten monetary conditions resolutely. But their response will be to do so only reluctantly and timidly. Having gone from fearing consumer price inflation for as long as it wasn’t a problem (in the case of the US, for 20 years or more right up to the year 2000), to fearing deflation [and unemployment], the monetary authorities (who are usually several miles behind market events) will argue that the rise in commodity and consumer prices is only temporary. Nevertheless, the market will perceive the modest tightening as a measure to contain inflationary pressures, and the asset markets will begin to stall or decline moderately while the foreign exchange rate improves temporarily. However, when consumer price inflation does accelerate, which is inevitable in an environment of negative real interest rates, rising commodity and basic material prices, and renewed serious foreign exchange weakness, the market will push up interest rates through a bond market collapse [where central banks from around world reduce buying and bond vigilantes sell bonds, including short selling, that increases supply and reduces demand lowering prices and raising effective yields]. It is important to understand that, in phase three of the asset inflation cycle, there is an inflection point that leads to asset deflation. This is brought about either by tight monetary policies or by consumer prices beginning to increase at a faster pace than asset prices, which is exacerbated by a collapse in the foreign exchange rate as the smart money and foreigners — even central bankers with a huge time lag — lose faith in the currency of the asset inflating country. How ugly phase four of the asset inflation cycle becomes will largely depend on how high the asset markets were pushed by the easy money policies [too low interest rates] of the central bank during phases one to three and how the downturn is brought about. If asset prices became grossly inflated in phase three (the US in 1929, Latin America in 1980, Japan in 1989), the downturn in asset markets can be severe and long lasting. Moreover, if the downturn is brought about by monetary tightening measures by the central bank, the result is likely to be a severe deflationary asset market decline in local currency. Conversely, if during phase three the central bank failed to increase interest rates in an attempt to curtail the emerging inflationary pressures in consumer prices — for fear of popping the asset bubble it itself created — the deflationary process is more likely to be through the exchange rate mechanism. In this instance, the asset markets may only decline moderately in local currency terms (down only by 30–50%) but collapse against strong currencies. If at this juncture no strong paper currencies exist, the asset deflation occurs against gold and silver [which rise as currencies fall or are debased and fear prevails]! The important point to remember is that there is a continuous process in economic development that leads to alternating phases of consumer price inflation and asset price inflation. At times, asset prices rise more strongly than consumer prices; at other times, consumer prices rise much faster than asset prices. I admit that my analysis of the alternating consumer and asset price inflation cycles is an oversimplification of economic conditions. If consumer prices rise strongly, not all asset markets suffer to the same extent. For example, in the 1970s bonds performed miserably, while real estate had its fair share of a collapse in 1974 but then recovered strongly. Similarly, in periods of asset inflation, not all consumer price increases decelerate. High asset inflation will increase the wealth of rich people more than that of poor people; therefore, prices of certain luxury goods (caviar, very high end luxury cars, prestigious premium wines, etc.) continue to rise strongly. But these imperfections don’t alter the fact that the best time for asset markets is in the Kondratieff downward wave [Kondratieff cycles also called Commodity cycles, tend to last between 45 and 60 years from peak to peak - some commodity downward waves were between 1814–1845, 1864–1895, and 1921–1942], during which commodity prices and interest rates decline. (All the major financial manias in the last 200 years coincided with declining commodity prices.) Conversely, during the Kondratieff upward wave, during which commodity prices and interest rates rise, asset markets don’t perform spectacularly well. Again, I concede that there are exceptions to this general rule. If at the onset of the consumer price and interest rate upswing (the early stage of the Kondratieff upward wave) asset markets were terribly depressed as a result of a massive debt liquidation, such as was the case in the US in the 1940s, then asset markets can perform superbly in an environment of rising consumer price inflation and rising interest rates... fully understand that, whereas in the 1940s and early 1950s the asset markets were low (as was, at that time, total debt) as a percentage of GDP, today the asset markets are as badly inflated as total outstanding credit market debt. David Malpass should perhaps consider that the rise in household net worth in recent years may have had something to do with the rapid credit growth we have recently experienced. (Total credit is up by approximately US$10 trillion in the last four years.) IN WHAT PHASE OF THE [GLOBAL] INFLATION CYCLE ARE WE NOW [in 2005]? In economics it is always difficult to know precisely what stage of a price, business, or speculation cycle one finds oneself to be in. However, we know that consumer price increases have been moderating since 1980 and that interest rates have been declining since 1981. At the same time, asset markets have been rising since 1982, although equities experienced a serious downturn after 2000. Therefore, it is easy to determine that we are not at the beginning of consumer price disinflation and an asset inflation cycle. Rather, we are likely to be in either phase two of the asset inflation cycle or, even more likely, in the third phase where the inflection point from asset inflation to consumer price inflation is reached. Why do I think so? Unless a business downturn occurs, interest rates in the US cannot decline any further. A business downturn, however, would not be good for asset markets, as affordability of the inflated assets would become a serious issue. If, however, the economy continues to expand, inflation to accelerate, and interest rates to rise, then it would seem to me that even modest interest rate increases brought about by the Fed, or by the market if the Fed doesn’t take any action, would cool, or more likely depress, various highly leveraged investment or asset markets..." - Dr. Marc Faber
Economic historian, investment advisor and author. Quoted from his financial newsletter, 'The Gloom, Boom and Doom Report', April 20, 2005.
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[Quote No.35825] Need Area: Money > Invest
"Yale Professor Robert Shiller is widely celebrated for his Cyclically Adjusted Price Earnings (CAPE) ratio, made popular in his best selling book, 'Irrational Exuberance'. The method uses ten years worth of trailing earnings adjusted for inflation to account for the business cycle. This allows you to use it to determine roughly whether the share market is over or under valued. Other methods include the Tobin Q ratio for business asset replacement, the Fed Model, and the share market's total capitalisation to GDP ratio." - Seymour@imagi-natives.com

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[Quote No.35833] Need Area: Money > Invest
"[A useful leading economic indicator for the economy and the business cycle is the share market and within the share market there is a leading indicator for the way it will go that we can chart:] It’s the relative performance of the S&P consumer discretionary sector (the XLY) versus the S&P consumer staples sector (the XLP). At least since 2007, this relative price performance ratio has led the direction of the broader stock market. It has also been a leading indicator for the direction of US GDP as a whole. After all, what better describes the character of the US economy at any point in time than the character of consumption? At the equity market highs of 2007 [before the crash], the relative performance of the consumer discretionary sector compared to the consumer staples stocks put in a 'lower high' in price relative to the 'higher high' seen in the S&P 500. Clear in hindsight, the discretionary stocks were warning of a slowing in consumption. As is so often the case in the financial markets, 'divergences' are extremely important. In almost mirror image divergence in late 2008 and early 2009 [just before the recovery], the relationship of the discretionary equity sector to the consumer staples sector put in a 'higher low', while the S&P 500 put in a 'lower low' in price. Once again the retail sector discretionary versus staples relationship was a leading indicator for both the financial markets and the economy, in essence 'telling us' conditions would improve ahead. So looking forward this is one of many indicators regarding the character of US consumption hopefully helpful in decision making. As of the end of last week, we see yet another very short term divergence between [consumer] discretionary versus [consumer] staples stocks set against the broad market characterized by the S&P. In the current cycle, the discretionary versus staples relative performance ratio has been important not only for documenting and benchmarking the character of consumption, but also because the discretionary stocks have traditionally been considered a high beta (investment risk) sector. In the risk on versus risk off investment environment of the current cycle clearly engendered by the Fed’s extravagant monetary policy experimentation [using quantitative easing = money printing], the discretionary sector singularly takes on importance in terms of staying in harmony with the risk on versus risk off ebb and flow character of the financial market for now. One last retail observation we likewise hope is an important anecdote. A few brief preemptory comments. We all know it is clear that since late summer of last year, the Fed has directly targeted US stock prices for reflation. And reflate they have. Very generically, we know as does the Fed that the top roughly 20% wealth demographic in the US accounts for approximately 60% of personal consumption expenditures. Quite simply, the top 20% can out spend their US wealth demographic peers. The Fed also knows that it’s this top 20% wealth demographic that is the most leveraged to higher stock prices vis-à-vis the concentration of equity ownership in the US . So, the Fed clearly inferred that if they could reflate stock prices, they could theoretically reflate aggregate personal consumption spending by this top 20% that would positively impact headline consumption numbers. This is indeed exactly what has happened. Is there yet something else we can watch that might give us an insight or two as to how the higher end of the consumption food chain in the US feels about life? We’ll see how it all works out ahead, but one observation that has indeed been helpful in both of the prior two financial market and real economic cycles has been to keep an eye on very high end retail such as Sotheby’s that you see below. Sotheby’s [Holdings Inc ticker symbol: BID on the NYSE] has literally put in spike price highs very near the top of each prior market cycle and directly before the onset of both of the last two recessions. Directionally it has been joined at the hip with the broad equity market [Loose money always gushes into Picassos and van Goghs during booms. A chart of Sotheby's common stock going back to mid-1988, just before the final run-up of the Japanese stock market, would show the stock price for the auction house peaked as the Nikkei was peaking. It ran to higher highs as the Internet bubble was cresting. Sotheby's ran to all-time highs with US house prices in 2006/7 and has run up again since the '08 crash with the China boom and the Federal Reserve's QE1 and 2, and currently is trading near the high of $58 a share set in October 2007]. Again, just another tool in the analytical tool box we hope can help in completing the ongoing paint by number story that is the financial market. Hopefully by watching the XLY versus XLP ratio in conjunction with high end retail such as Sotheby’s will allow us to get a sense for the total high and low end of the consumer market. A market crucial to the character of the US economy and a market that has very much been supporting by Government sponsored tailwinds that are set to die down as we move directly ahead." - Brian Pretti
Managing Editor at ContraryInvestor.com - Quote from website in the free Monthly Market Observations section for May 2011. http://contraryinvestor.com/mo.htm
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[Quote No.35839] Need Area: Money > Invest
"No warning can save people determined to grow suddenly rich." - Lord Overstone

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[Quote No.35840] Need Area: Money > Invest
"The farther backward you look, the farther forward you can see. [While history doesn't repeat, it does rhyme. So history has lessons for the present and future for those that look.]" - Winston Churchill

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[Quote No.35842] Need Area: Money > Invest
"A stock operator [trader] has to fight a lot of expensive enemies within himself." - Jesse Livermore
Famously successful share trader at the beginning of the 20th century.
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[Quote No.35843] Need Area: Money > Invest
"Especially in an ambiguous situation, the tendency for everyone to be looking to see what everyone else [the crowd] is doing can lead to a fascinating phenomenon called 'pluralistic ignorance' [sometimes called 'group-think' and 'herd mentality'. And as the old saying goes - When everyone thinks alike, there isn't much thinking going on]." - Robert Cialdini

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[Quote No.35844] Need Area: Money > Invest
"When considering inflation and therefore monetary policy and central bank set interest rates to keep inflation within the mandatory band over the cycle, it is best to watch year over year increases/decreases in the CPI Consumer Price Index, both core [excluding food and fuel] and non-core, PPI Producer Price Index, Wage Inflation, Commodity Inflation and Import prices. " - Seymour@imagi-natives.com

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[Quote No.35931] Need Area: Money > Invest
"The only source from which an [investor-]entrepreneur's profits stem is his ability to anticipate better than other people the future demand of the consumers." - Ludwig von Mises
[1881 – 1973], an Austrian-American economist, historian, philosopher, author, and classical liberal who had a significant influence on the modern free-market libertarian movement and the Austrian School of economics.
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[Quote No.35936] Need Area: Money > Invest
"The share market, like its participants, is often not rational. Daniel Kahneman won a Nobel Prize in 2002 for his work related to this and his contribution to the economic discipline, Behavioural Economics, which studies this. It includes the study of heuristics and cognitive biases. Heuristics is the study of mental shortcuts that allow people to solve problems and make judgments quickly and efficiently. Cognitive bias is a general term that is used to describe many observer effects in the human mind, some of which can lead to perceptual distortion, inaccurate judgment, or illogical interpretation. It is a phenomenon studied in cognitive science and social psychology. Tversky and Kahneman went on to develop prospect theory as a more realistic alternative to rational choice theory. For those interested Wikipedia.org has some introductory information and even a list of some common cognitive biases. It is not hard to see how they can effect investors. The highly successful investor George Soros has a theory of investing called reflexivity which seems to incorporate a knowledge of some of these cognitive biases as they relate to investing in free markets, especially share markets." - Seymour@imagi-natives.com

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[Quote No.35942] Need Area: Money > Invest
"INTEREST RATE CYCLES AND FIXED INCOME MARKETS: During an interest rate cycle, prices of fixed income securities behave differently based on various factors, but longer-maturity securities are typically considered to be relatively more sensitive to interest rate risk. Generally, assuming other factors are the same, the price of a 10-year security will move down more compared with a one-year security during monetary tightening. Liquidity can also have an impact on rates - in the last year or so, tight liquidity conditions have added to the pressure created by repo rate hikes. This can be gauged by the performance of different types of fixed income securities during the earlier monetary tightening phase (March 31, 2004 to August 29, 2008). During this period, long-term gilts represented by I-Sec LiBEX and long-bond funds as represented by CRISIL Composite Bond Fund index gave a return of 2.68% and 3.31%, respectively. On the other hand, CRISIL Short Bond Fund Index moved up by 5.27%. Also, when the interest rates start moving down, long-dated bonds start doing well, helped by capital gains. STRATEGIES: Experience over the previous interest rate cycles in India and across the globe indicates that during a rising interest rate environment one should focus on shorter maturities, corporate bonds and accruals. Historically, corporate bonds have performed well during monetary tightening phases. Typically, interest rates are hiked to rein in inflation due to strong economic growth - in other words, companies will be benefiting from the increased demand. Despite the macro headwinds, corporate India has turned in a largely good earnings performance. Corporate credit ratings witnessed more upgrades than downgrades in the second half of FY11 on the back of strong demand trends and easy funding environment. Consequently , the CRISIL MCR (modified credit ratio ) increased to 1.10 from 0.93 in FY10. Also, one needs to focus on accruals - securities offering relatively high yields (not necessarily of lower credit quality) will provide a boost to portfolio performance . For instance, if we have two bonds A (6% pa) and B (9% pa), a 50 bps rate hike will impact the former more. While floating rate instruments are ideal in a rising rate environment, we don't have adequate issuances of such securities in India. In a portfolio, we look to replicate the floating rate strategy by entering into fixed-floating rate swap arrangements or maintaining very short average maturity such that assets can be re-invested at higher rates. Investors also need to keep in mind liquidity and taxes in mind while investing in a rising interest rate scenario. Unlike FMPs or FDs where one is locked in at a particular yield, open-end income funds with a low duration can take advantage of rising rates by re-investing at higher yields. Investors with a short investment horizon can look at liquid funds (up to one month) and low duration funds (three months), while those with a longer investment horizon can look at short bond funds (9-18 months). Strategies focused on high yield bonds, capital accruals and any trading opportunities in bond spread movements are likely to do well in the current environment . Once the interest rate cycle turns, funds focusing on high accrual will benefit from coupon payments as well as capital gains. Timing the interest rate cycle is a guessing game and, hence, one needs to focus on diversification within the fixed income segment by building exposure to long bond funds, short bond funds and money market funds." - Harshendu Bindal
President, Franklin Templeton Investments ,India. Quoted from the Indian newspaper, 'The Economic Times', 31st May, 2011.
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[Quote No.35943] Need Area: Money > Invest
"Platinum, like gold and silver, enjoys a certain demand solely as a means of storing wealth. It is one of the precious metals, but the biggest use of platinum is in catalytic converters, which are the major emission-control component on modern automobiles." - Anon

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[Quote No.35944] Need Area: Money > Invest
"The reason for the historical relationship between the slope of the yield curve and the economy's performance is that the long-term rate is, in effect, a prediction of future short-term rates. If investors expect the economy to contract, they also expect the Fed to cut rates, which tends to make the yield curve negatively sloped. If they expect the economy to expand, they expect the Fed to raise rates, making the yield curve positively sloped." - Paul Krugman
American economist. Quoted May, 2011.
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[Quote No.35945] Need Area: Money > Invest
"The sensitivity of the value of fixed-income investments to changes in interest rates is known as ‘duration’. Fund managers like taking on duration when they think rates are going to fall in the future, since the value of their bonds will rise. The flip-side of this coin also applies: people seek to avoid long-term fixed-rate bonds when they think rates are heading up. Duration can thus be an important diversifier depending on your views on the economy. " - Christopher Joye
joint managing director of Rismark International
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[Quote No.35948] Need Area: Money > Invest
"The valuation of a monetary unit depends not on the wealth of a country, but rather on the relationship between the quantity of, and demand for, money. Thus, even the richest country can have a bad currency and the poorest a good one." - Ludwig von Mises
[1881 – 1973], an Austrian-American economist, historian, philosopher, author, and classical liberal who had a significant influence on the modern free-market libertarian movement and the Austrian School of economics.
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[Quote No.35949] Need Area: Money > Invest
"There is neither constancy nor continuity in the valuations and in the formation of exchange ratios between various commodities. Every new datum brings about a reshuffling of the whole price structure." - Ludwig von Mises
[1881 – 1973], an Austrian-American economist, historian, philosopher, author, and classical liberal who had a significant influence on the modern free-market libertarian movement and the Austrian School of economics.
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[Quote No.35962] Need Area: Money > Invest
"Nickel is used primarily for the alloys it forms. It is used for making stainless steel and many other corrosion resistant alloys. Copper-nickel alloy tubing is used in desalination plants. Nickel is used in coinage and for armor plating. When added to glass, nickel gives a green color. Nickel plating is applied to other metals to provide a protective coating. Finely divided nickel is used as a catalyst for hydrogenating vegetable oils. Nickel is also used in ceramics, magnets, and batteries." - chemistry.about.com

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