Tuesday, August 30, 2011
Faber: Gold is the safest bet in these financial crunch times- ...more- Balkans.com
Marc Faber, the publisher of “The Gloom Boom and Doom report” has said that paper money has lost its value and Gold is the safest bet in these financial crunch times. He also owns the Marc Faber Limited, which acts as an investment advisor.
Faber is known for advising his clients to liquidate stock positions one week before the 1987 October crash. He also predicted the rise of oil, precious metals, commodities and emerging markets in his book “Tomorrow's Gold: Asia's Age of Discovery”. In it he had specially predicted the rise of China. His prediction of the U.S. dollar slide since 2002 and the 5/06 and 2/07 mini-corrections also proved to be true.
“Financial conditions are today worse than they were prior to the crisis in 2008. The fiscal deficits have exploded and the political system [in both the U.S. and Europe] has become completely dysfunctional” he said, as reported by marketwatch.
He says that it is dangerous to only hold investments in cash since inflation would eat away its purchasing power since hyperinflation is the pattern to come.
He prefers stocks over cash and government bonds over the long term and personally owns dividend yielding Asian shares in his portfolio.
He views Gold as currency instead of an asset class and argues that since the US dollar fails in performing the function of money, why not hold money in gold and silver.
“Physical gold in a safe deposit box is the safest. Forget about huge capital gains. I would look at capital preservation. I want to preserve my capital”, he says.
Faber is known for advising his clients to liquidate stock positions one week before the 1987 October crash. He also predicted the rise of oil, precious metals, commodities and emerging markets in his book “Tomorrow's Gold: Asia's Age of Discovery”. In it he had specially predicted the rise of China. His prediction of the U.S. dollar slide since 2002 and the 5/06 and 2/07 mini-corrections also proved to be true.
“Financial conditions are today worse than they were prior to the crisis in 2008. The fiscal deficits have exploded and the political system [in both the U.S. and Europe] has become completely dysfunctional” he said, as reported by marketwatch.
He says that it is dangerous to only hold investments in cash since inflation would eat away its purchasing power since hyperinflation is the pattern to come.
He prefers stocks over cash and government bonds over the long term and personally owns dividend yielding Asian shares in his portfolio.
He views Gold as currency instead of an asset class and argues that since the US dollar fails in performing the function of money, why not hold money in gold and silver.
“Physical gold in a safe deposit box is the safest. Forget about huge capital gains. I would look at capital preservation. I want to preserve my capital”, he says.
Monday, August 29, 2011
Marc Faber Stock Market S&P Index Won't Surpass 2011 1370 High - TheMarket Oracle
Marc Faber, publisher of the Gloom, Boom & Doom report, appeared on Bloomberg Television’s “Street Smart” with Carol Massar and Matt Miller today.
Speaking from Sao Paolo, Brazil, Faber said that the S&P won’t surpass the 2011 high of 1,370 and that investors are “better off in equities than bonds.” Faber also said that keeping money in cash in 10-Years is a “disaster.”
Faber on whether this is the market rally he’s been expecting:
“We had rally from the low on the ninth of August at 1,101 on the S&P to almost 1,200. Then we came right down again. Basically we did not make new lows. And now I think we can rally again for a while.”
Faber on how long his view of the market is:
“I think a lot of people will say the markets formed a double low and we have some technical indicators that are going to turn positive, so we could rally around 1,250, but as I said before, for me, we reached a high on May 2, 2011. 1,370 on the S&P–that we will not go through. My view is you have a lot of people with strategies that are very bullish. They have a yearend target of around 1,400-1,450 on the S&P. Then you have the super bear. I think both camps will be disappointed.”
On why the markets won’t come back down again to the lows that were hit in 2009:
“On fundamentals one could make the case that we could go lower to around March 2009 lows at 666 on the S&P. But I think we have to be realistic that if the market dropped here another 10% or 15%, there would be for sure another quantitative easing move and other measures taken to support asset prices.”
On what we’ll hear from Bernanke on Friday and whether there will be a selloff of Treasures after that:
“I think what [Bernanke] will say is that they are monitoring the situation, and they will take ‘appropriate measures’ when they are required. To some extent we are in midst of QE3 already, because by announcing the Fed will keep zero interest rates until the middle of 2013, they basically encourage financial institutions to borrow short-term and to buy 10-year Treasuries.”
On how uncertainty on a global level is affecting the markets:
“What I see extremely well is the stock market has traced out a major high between November of last year and June of this year and then fell sharply with very strong momentum and conviction very rapidly by close to 20%. I think that is a very important signal that we should not overlook. I think new highs are practically out of the question for the next six months to one year. We will likely move lower, but as I said, I do not think we will have a complete collapse.”
On why he’s not more bearish:
“I agree with you. I am the greatest bear on earth, but if you compare Treasury bond yields and equities, equities look reasonably attractive. I think we will have zero and below zero interest rates for the next 10 years. In other words, inflation adjusted to keep money in cash. Finally, the mood is so negative right now as a contrarian, you do not take a huge short position when people are as bearish as they are right now and when insider buying has picked up as much. I am as bearish as the greatest bear is. It is just that I do not believe stocks will implode.”
On insider buying:
“The insider buying has picked up, but there is still a lot of insider selling. Compared to all the selling in the last six months the buying is relatively muted. The insiders in general are a group of people against whom I would not bet against necessarily. All I am saying is I am very bearish. I think we will have inflation. I think the Treasury market is a disaster waiting to happen. I think the economy will slow down. They’re going to print money and we will go to war at some stage somewhere. So, you are probably better off in equities than in bonds. My favorite investment remains gold. As it happens the gold price is coming down, and I hope it will drop $100 or $200. Not necessarily a prediction. I think we will go down in a correction because there has been too much enthusiasm recently.”
Faber commenting on Gary Schilling’s bet against copper:
“I have known Gary Schilling since 1970 when we worked together. He has been a frequent bear about commodities and about copper. I happen to think copper is likely to come down, but I would not bet too heavily on it, because it takes a long time to bring on additional copper mines. Unless the Chinese economy collapses, the demand for copper will stay relatively high. If the Chinese economy collapses and Jim Chanos is right, then you want to be short not only copper, but short everything.”
Faber where the 10-Year will go:
“I would like to remind you that the 10-year has made a new low. [Gluskin Sheff economist] David Rosenberg was right and I was wrong. The 30-Year has not made a new low. The low in December 2008 was 2.53%. Now we’re around 3.4%. Basically we have an artificial market. The Fed has said we guarantee next to zero interest rates for the next two years. Banks and financial institutions are pouring into the 10-year because of the low rates at the present time. ”
Tuesday, August 23, 2011
Marc Faber's Top 5 Suggestions For Investors - Barron's (blog)
Hong Kong-based investment manager Marc Faber, a member of Barron‘s Roundtable, just last weekend warned in the magazine that stocks would drift lower.
Gold is likely to correct, he added, something that’s looking more possible each passing day even though the popular SPDR Gold ETF (GLD) moved higher this week.
He’s also bullish on silver, which saw the iShares Silver ETF (SLV) stage a technical breakout on Friday.
Faber reiterated his recommendation to short Salesforce.com (CRM) as well.
The publisher of “The Gloom Boom & Doom Report” took time this week to talk to Jonathan Burton, MarketWatch’s money and investments editor. (See video above.)
Faber didn’t offer much that we haven’t heard before, but some of his top suggestions were put into a Top 5 list of things investors should focus on:
1.) Avoid Treasuries. “The dollar may rally somewhat, but clearly in the long run the dollar and other paper currencies — the euro is not much better — will have a depreciating tendency vis-a-vis honest money: gold and silver.”
2.) Cash is trash. “Paper money has lost its value. Hyperinflation is the pattern to come.”
3.) Stocks offer some safety. “My assumption is that March 2009 was a major low, and that we will not go back below that low.”
4.) Emerging markets will expand. “I can buy you a portfolio of high-dividend stocks in Asia that would have a yield of 5% to 7% … The banks in Asia are in a very solid position. All these are a play on the recovery in the stock market in Japan.”
5.) Gold is worth its weight. “Intelligent people, instead of holding cash in U.S. dollars with zero interest rates, why not hold money in gold and silver?”
Avoid cash, load up on gold, says Marc Faber - MarketWatch (blog)
Marc Faber is to financial-market optimists what the Grinch is to Christmas. The Hong Kong-based investment manager and publisher of “The Gloom Boom & Doom Report” doesn’t often like what he sees, and nowadays he finds even less to like about the world’s economic situation than he did in 2008 — as if that wasn’t bad enough.
In an interview with MarketWatch’s Jonathan Burton, Faber outlines five places where investors should put – and pull out – their money. Namely: avoid Treasurys and cash, selectively buy stocks, stick with emerging markets, and load up on gold.
Faber, also known as “Dr. Doom,” believes that Federal Reserve policy is stoking speculation over savings and debasing the U.S. dollar, hyperinflation is a real possibility, the stock market’s recovery since 2009 has favored the rich and powerful, cash is trash, and gold and land in the countryside are the only true safe havens.
“The Federal Reserve is a very evil institution,” Faber said with characteristic bluntness, “in the sense that they punish decent people who have saved all their lives. These are people who don’t understand about stocks and investments, and suddenly they are forced to speculate.” Read full story.
In an interview with MarketWatch’s Jonathan Burton, Faber outlines five places where investors should put – and pull out – their money. Namely: avoid Treasurys and cash, selectively buy stocks, stick with emerging markets, and load up on gold.
Faber, also known as “Dr. Doom,” believes that Federal Reserve policy is stoking speculation over savings and debasing the U.S. dollar, hyperinflation is a real possibility, the stock market’s recovery since 2009 has favored the rich and powerful, cash is trash, and gold and land in the countryside are the only true safe havens.
“The Federal Reserve is a very evil institution,” Faber said with characteristic bluntness, “in the sense that they punish decent people who have saved all their lives. These are people who don’t understand about stocks and investments, and suddenly they are forced to speculate.” Read full story.
Wednesday, August 17, 2011
Debunking Myths of a U.S. Monetary Collapse
Printing Money Does Not Create Wealth
Marc Faber, who needs doom in order to sell subscriptions to his Gloom, Boom and Doom report, likes to say, "If debt and money printing equaled prosperity, then Zimbabwe would be the richest country.”
Seems logical, does it not?
Maybe.
Let's pretend we start a useless government agency (not hard to pretend, I know) that hires 10,000 people to do nothing more than pick their ear and report on their experience. I agree, this in fact is useless and non-productive, a seeming waste of money. The government prints money to fund this agency and pays these useless workers.
Is that money wasted and gone forever, and wealth never to be created?
The example I like to give is that the Sovereign US Government can start this totally useless agency, yet the money will eventually flow to those who create wealth. Therefore, printing can eventually lead to wealth creation. Sounds absurd, I understand, but keep reading. Money is demanded by capitalists in the current monetary system because it allows them to stay out of jail for not paying their taxes in US Dollars, while at the same time providing a better lifestyle for their family.
How will the "wasted" money get into the hands of the wealth creators? If the new ear pickers go into their communities and spend it at local businesses, the printed money goes from useless employees, into the accounts of productive businesses (of course the producers get less after layers of tax bites). So the act of spending printed dollars itself will get those dollars into the hands of businesses who are able to create wealth.
By true wealth creators, I am talking about the modern day alchemists who turn something worthless like oil, into something valuable like gasoline.
I try to stay away from businesses who leech the system of wealth creation when I invest. Entertainment companies for example do nothing to create wealth in America. These businesses would not exist unless producers created wealth, which in turn allows that wealth to be spent on these types of businesses. I am a big believer of going through your portfolio and ridding yourself of the leeches. Spend money with the leeches, but don't invest in them. They do not create wealth, they take it.
So the answer is, yes, printed and worthless money eventually flows into the hands of those who create wealth, but, because of taxes and mis-allocation, it is not very efficient on the journey there. Is it fair? Absolutely not. Is it wrong to start an agency like this? Absolutely.
But to argue that government spending is all a waste and the money spent ends up being vaporized, is wrong. Government spending, even wasteful spending, is someone's income. Food stamps become the income of Safeway and Albertson's. Employees who work there get paychecks, and the shareholders get dividends. That money ends up being spent as well. Again, not fair to some who are productive, but also not a waste. If you run a productive business, chances are you too have received some of this "stimulus" money. If you are that against government spending, go to great lengths to make sure you don't let any of that money get into your hands, and then watch your business struggle.
Take a look at any defense contractor such as LMT, GD, NOC and LLL.
They are all cash cows, and most all of them get over 90% of their revenues from government spending.
They spend money on stuff that kills people and blows things up. Not very "productive".
Yet, those businesses are gushing cash. Other businesses and investors lent them money, which they use government spending to pay back. So that debt from investors is now those investors' income, which comes from government spending. Government spending = debt investors' income. These defense companies buy technology and metal from somewhere to make their weapons. Therefore, those that sell them technology and metal get paid from revenues that come from government spending.
There are 412,000 people who work for these 4 companies. Assuming they average $50,000 per year in income, that is about $20.6 billion in income. Where does that $20.6 billion go? Some goes to taxes, of which some gets wasted. But those taxes pay teachers, build roads in neighborhoods, pay for police etc. It also gets spent at the local grocery store, hardware store, invested in other companies (which produce and employ). Another $2.5 billion gets paid out in dividends. I know some of my clients get that money. Those dividends get spent somewhere in our local community.
How about the pay of the 2.3 million soldiers? That is "wasted" government spending. But it is income for those 2.3 million soldiers. That is roughly what, $100 billion? It seems like "spending", but is in fact income that gets spent at all the places mentioned above. So the spending gets into the hands of businesses.
So the hard answer, as much as I hate it, is yes, government spending does end up flowing throughout the economy.
I agree, we need to focus more on getting that money into the hands of the citizens, rather than Wall Street, who blow it. There are reforms that need to happen as well. If you read some of my past articles, I am VERY against POMO and the manipulation going on in our markets. I say use that $600 billion and give it to Main Street. Don't just prop up asset prices "higher than they otherwise would be" (Fed member quote).
The government should spend more - and tax less. Build roads with the money. Instead of paying 99 weeks of unemployment insurance for people to sit around and watch TV, pay unemployed workers to go to school so that they can keep their skills up and become productive for society again.
Find ways to manufacture things here, not China. A lot of what happens now is the government spends money here, and then that money flows to people who send it to China by buying Chinese stuff. Now China has the money to buy and build cities made for 1.7 million people in which no one lives.
Government spending is not always bad. Unfortunately, with the plutocracy we are heading towards, the spending gets filtered through the Wall Street crooks first, and not Main Street. Spending does not need to stop, per se, but what it gets spent on needs to change.
Businesses and Foreigners Will Stop Accepting US Dollars
For some reason it is just assumed that the marketplace will all of a sudden stop accepting paper US dollars. Gold bugs are storing up precious metals for the day when they will only be able to buy and barter with precious metals. If the US keeps printing, it does seem logical that this could actually happen.
Can it?
No. Not anytime soon.
There is this funny little thing that keeps us from being truly free men. Taxes. Grocery stores don't have the luxury of deciding to exist on barter as some would have you believe. It's not that they don't desire such situations, but the government mandates they continue to accept paper money by force. The US Government has determined that taxes are to be levied on owners of property and services, and those taxes will only become extinguished in the form of paper dollars. Failure to submit to this monster will require time in prison. So under the motivation to not spend time in jail, citizens work tirelessly, offering labor and goods in exchange for paper dollars so they can feed the tax monster. I am not saying I approve, but it is the system in which we currently live. Thus, individuals and businesses who can create wealth are forced to figure out ways to obtain paper dollars. Capitalism allows a small carrot of incentive in that the more dollars you can obtain by productivity, the better lifestyle you can live, even though taxes go up with the higher income.
Will foreigners stop accepting US Dollars? Not unless they plan on ceasing sales into the world's largest market. How then will the world stop using them?
America Will Soon Not Be Able to Afford the Interest on the National Debt
The statement in quotations above is based on doom and gloom from Larry Burkett in his book about the coming financial earthquake back in 1990! How similar to what we hear being sold today as fact.
He was wrong 20 years ago, and his new worry-wart cohorts will be wrong the next 20 as well.
Burkett prophesied that America, by the turn of the century, would have so much debt that they could not afford the interest on the debt. Since his book made this claim, the debt has doubled. Now the current doom and gloom crowd is saying, yet again, that we will not be able to afford the interest on the debt. They conclude impending collapse is right around the corner. We are warned foreign confidence in the US Dollar will cease, and they will sell Treasuries indiscriminately, causing an epic collapse in our bond market which leads to 'economy-choking' higher interest rates. High interest rates, of course, will supposedly mean the US Government can't afford the interest on the outstanding debt because it is so large.
As the saying goes, "The more things change, the more they stay the same."
Other versions of fear and doom might sound similar to these:
Oh me, oh my, the sky is falling! It must be time to hoard gold (GLD)!
My advice? Cancel your doom and gloom subscriptions. The US Government is not revenue constrained. For those who want to find out why, I highly encourage you to read: Understanding Modern Money
by L. Randall Wray. You will realize Dick Cheney got it right when he said "Deficits don't matter," (at least while there is a capacity utilization gap - once that gap is filled, then they will matter) and will rest well knowing the US will not default through non-payment, nor hyper-inflation. Worry about the deficits once factories are at capacity. At that point, the government will use their tools (taxes, rates) to slow down the economy.
Paper Dollars Are Worthless and Backed By Nothing
Dollars are just worthless pieces of paper. It has no value by itself and is today backed by nothing. I agree with this argument. Consider this though: Oil in and of itself is also worthless. It is just sticky goo that could ruin the environment if it ends up in the wrong place.
Only in the hands of a company that knows how to create wealth can oil have any actual value.
A company that takes resources which have been given freely to us by God, converting them into something useful and productive, is worth more than gold. Gold is a store of value, but it does not create wealth just as paper dollars do not create wealth. Oil, lumber and coal, by themselves, are worthless too. While oil is useless by itself, when a company like Exxon Mobil (XOM) or Chevron (CVX) figures out a way to take this free and useless commodity out of the ground and turn it into gasoline, they in turn have created wealth by making something that was useless, useful. Modern day alchemy at work. Investors reading this can feel confident investing in these types of companies, knowing that all money flows to them eventually. Any company that makes something out of nothing is a wealth creator. Your only job is to figure out what price you are willing to pay for the profits the company generates.
So like oil, dollars by themselves are worthless until an event takes place creating demand. The event that causes worthless oil to be in demand is when a company turns it into gasoline. The event that causes worthless paper dollars to be in demand is the prosecution process for failing to pay taxes.
Every Fiat Currency System Eventually Fails
I hear (and used to believe myself), that the fiat currency system is about to collapse because all fiat currency systems in history have collapsed. Here are a few examples of such claims:
dailyreckoning.com/fiat-currency/ www.thedailycrux.com/content/6653/Porter_Stansberry
Some of our own dear Seeking Alpha writers claim as much also:
Fiat Currency Is Doomed to Fail Is This Time Different for the Dollar and Precious Metals
The problem is, these proponents are comparing apples with oranges. Never in history has the entire world been on a coordinated, floating exchange-rate, fiat-currency, system. Therefore, do they really have anything with which to compare today's situation?
Fiat currencies have collapsed in the past because countries print money to pay debts which are denominated in foreign currencies. If the US Government owed trillions in Euro denominated debt, and then printed US Dollars to buy Euros in order to satisfy those debts, the value of the US Dollar would collapse, as we would be forced to flood the world with dollars and soak up Euros. Ellen Brown does a fantastic job in explaining why the US situation will not end like Zimbabwe or Germany.
Sorry to say gold bugs, but Zimbabwe we are not.
Printing Money Will Cause the US Dollar to Lose Reserve-Currency Status
These words are usually stated as a matter of fact, rather than conjecture. Well known newsletter writer Porter Stansberry warns almost daily, "The world has officially entered what we believe will be the final chapter of the U.S. Dollar's reign as the world's reserve currency. " (www.thedailycrux.com/content/4751/Porter_Stansberry)
It is assumed that the rest of the world will stop accepting payments in US Dollars overnight for business transactions, and only if we subscribe to their information service will we be able to protect ourselves and family using their timely advice.
Will the US Dollar lose the coveted reserve currency status from all the printing going on?
Not any time soon.
The US economy is still the biggest in the world by a large margin. The military, which we are not afraid to use, is the most powerful. Until another country holds title to either one of these claims, our reserve currency status will likely remain intact. While it feels as if China will surpass us soon as they maintain their rapid growth, they are still many trillions of dollars in GDP away. Think about this - if the US is the world's largest customer, and China has become richer by selling to us, is China really going to tell us which currency we can spend? Don't we dictate what currency we are willing to give them? Who is truly in charge? If China stops accepting dollars, could we not easily find a group of other nations to do business with? Would us dumping China as a business partner not cause other nations to line up to take China's place? Would any of these other nations refuse to do business with us in US Dollars?
Until China or another country surpasses us as the world's largest economy or strongest military, loss of our reserve currency status is not imminent, as sellers of fear would like you to believe.
Granted, China is growing at roughly 10% a year, and we are only growing at 3%. I get that. Let's do the math though and see if we should worry. If China is a $6 trillion economy, growing at 10%, they grow by $600 billion a year. If we are a $14 trillion economy growing at 3%, we grow by $420 billion a year. In this close to reality example, China is closing the gap at $180 billion a year. At this rate - it will take China 44 years to even match the US in GDP. Can they continue to grow at 10% a year, while their largest customer grows at 3% for 44 straight years? We are a far cry from no longer being the largest economy. The biggest economy in the world should be blessed with the reserve currency.
If Money Printing is Good, Then Just Print Enough To Give Everyone $1 Million
If printing is not a big deal, then why not just print away? The doom and gloomers jump to the conclusion that if I think printing won't cause the collapse of America, it must be a good thing. So why not seek more of that good thing? The answer is simple.
There is a limit to the productive capacity of the economy. If the government printed money to buy 40 million cars, and gave that new money to Americans under the auspice it only be spent on automobiles, Americans could do one of two things, buy cars or sit on the cash. If the capacity of the world's auto manufacturers is 20 million cars, and the government printed enough money to buy 40 million cars, the market's ability to produce only 20 million cars would be overwhelmed by car demand - thus creating a price surge. In a perfect environment, this price surge would bring demand in line with production. If the demand happened overnight, we could be certain that the price of a car should, at a minimum, double overnight. 20 million cars would be produced because that is the capacity of the market, but the price would double to soak up the new money that was printed to buy 40 million cars at yesterday's prices. Of course, new wealth could be created from all of this printed money if other firms decided to take free resources, like iron ore, and convert it into steel to make more cars to meet this demand.
So the answer to how much money printing we can handle is this: how much demand for goods will the printing create for the economy? If everyone received $1 million but took a vow to never spend it and instead put it under their mattress, I doubt prices would move much, because the demand is not there. If the economy gets to maximum production, then new money in the system via demand will cause the rise of prices across the board.
We are seeing some of this happen now with food prices in certain areas of the world. Capitalism will, over time, right this ship though. Farmers will see the ability to make more money selling beans and wheat, and will invest in planting more acres for these crops. They will purchase technology that will help reap more crop yield per acre. Right now there is an imbalance, but it won't last. The doom and gloom crowds will have you believe that this current "crisis" is permanent, causing the collapse of society as we know it. No need to fear, but in the meantime while the imbalance is in place, buy the businesses that turn the commodities into wealth. Don't buy oil itself, but Exxon or Chevron. Don't buy wheat or soybeans, buy fertilizer companies which allow farmers to produce more wheat and agriculture, companies like Potash (POT). But always make sure the current profitability of the company is worth investing in. If you invest with the idea that the crisis will be without end, you may end up overpaying for a stock.
7/6/11 Update to the above paragraph:
From Reuters:
(Looks to me like the proof a few months later is in the pudding. Farmers - seeing higher prices for corn - are planting much more corn, thus crushing the price of corn. So much for never ending higher corn prices for the rest of our lives.)
The US Dollar Has Lost 96% of its Purchasing Power - Thus Printing Makes Us PoorerThis argument only covers one side of the story. While each individual dollar buys less goods, the argument is incomplete. To bust this myth, we just need to look at how much time it requires to pay for those goods. Instead of looking at how many dollars it takes to buy a candy bar today compared to 30 years ago, I would challenge you to instead value the candy bar in hours of labor to obtain it. While it might take many more dollars to buy that candy bar, you get many more dollars for each 60 minutes of work. So even though the candy bar costs 1000% more, it may take you 30% less work now to buy it. Therefore, you are in fact richer, even though the value of your dollar does not go as far. The next time you are told you are poorer because the price of gas is higher, remember to ask yourself this:If I have to work 15 minutes to buy 1 gallon of gas at today's prices of $3.00 per gallon, compared to 10 years from now when I may have to pay $10.00 per gallon but only have to work 10 minutes to afford, does the price actually matter?
After asking that question, remember these quotes:
'The US will collapse because the US is printing money. As everyone knows, printing money does not produce wealth.'
Marc Faber, who needs doom in order to sell subscriptions to his Gloom, Boom and Doom report, likes to say, "If debt and money printing equaled prosperity, then Zimbabwe would be the richest country.”
Seems logical, does it not?
Maybe.
Let's pretend we start a useless government agency (not hard to pretend, I know) that hires 10,000 people to do nothing more than pick their ear and report on their experience. I agree, this in fact is useless and non-productive, a seeming waste of money. The government prints money to fund this agency and pays these useless workers.
Is that money wasted and gone forever, and wealth never to be created?
The example I like to give is that the Sovereign US Government can start this totally useless agency, yet the money will eventually flow to those who create wealth. Therefore, printing can eventually lead to wealth creation. Sounds absurd, I understand, but keep reading. Money is demanded by capitalists in the current monetary system because it allows them to stay out of jail for not paying their taxes in US Dollars, while at the same time providing a better lifestyle for their family.
How will the "wasted" money get into the hands of the wealth creators? If the new ear pickers go into their communities and spend it at local businesses, the printed money goes from useless employees, into the accounts of productive businesses (of course the producers get less after layers of tax bites). So the act of spending printed dollars itself will get those dollars into the hands of businesses who are able to create wealth.
By true wealth creators, I am talking about the modern day alchemists who turn something worthless like oil, into something valuable like gasoline.
I try to stay away from businesses who leech the system of wealth creation when I invest. Entertainment companies for example do nothing to create wealth in America. These businesses would not exist unless producers created wealth, which in turn allows that wealth to be spent on these types of businesses. I am a big believer of going through your portfolio and ridding yourself of the leeches. Spend money with the leeches, but don't invest in them. They do not create wealth, they take it.
So the answer is, yes, printed and worthless money eventually flows into the hands of those who create wealth, but, because of taxes and mis-allocation, it is not very efficient on the journey there. Is it fair? Absolutely not. Is it wrong to start an agency like this? Absolutely.
But to argue that government spending is all a waste and the money spent ends up being vaporized, is wrong. Government spending, even wasteful spending, is someone's income. Food stamps become the income of Safeway and Albertson's. Employees who work there get paychecks, and the shareholders get dividends. That money ends up being spent as well. Again, not fair to some who are productive, but also not a waste. If you run a productive business, chances are you too have received some of this "stimulus" money. If you are that against government spending, go to great lengths to make sure you don't let any of that money get into your hands, and then watch your business struggle.
Take a look at any defense contractor such as LMT, GD, NOC and LLL.
They are all cash cows, and most all of them get over 90% of their revenues from government spending.
They spend money on stuff that kills people and blows things up. Not very "productive".
Yet, those businesses are gushing cash. Other businesses and investors lent them money, which they use government spending to pay back. So that debt from investors is now those investors' income, which comes from government spending. Government spending = debt investors' income. These defense companies buy technology and metal from somewhere to make their weapons. Therefore, those that sell them technology and metal get paid from revenues that come from government spending.
There are 412,000 people who work for these 4 companies. Assuming they average $50,000 per year in income, that is about $20.6 billion in income. Where does that $20.6 billion go? Some goes to taxes, of which some gets wasted. But those taxes pay teachers, build roads in neighborhoods, pay for police etc. It also gets spent at the local grocery store, hardware store, invested in other companies (which produce and employ). Another $2.5 billion gets paid out in dividends. I know some of my clients get that money. Those dividends get spent somewhere in our local community.
How about the pay of the 2.3 million soldiers? That is "wasted" government spending. But it is income for those 2.3 million soldiers. That is roughly what, $100 billion? It seems like "spending", but is in fact income that gets spent at all the places mentioned above. So the spending gets into the hands of businesses.
So the hard answer, as much as I hate it, is yes, government spending does end up flowing throughout the economy.
I agree, we need to focus more on getting that money into the hands of the citizens, rather than Wall Street, who blow it. There are reforms that need to happen as well. If you read some of my past articles, I am VERY against POMO and the manipulation going on in our markets. I say use that $600 billion and give it to Main Street. Don't just prop up asset prices "higher than they otherwise would be" (Fed member quote).
The government should spend more - and tax less. Build roads with the money. Instead of paying 99 weeks of unemployment insurance for people to sit around and watch TV, pay unemployed workers to go to school so that they can keep their skills up and become productive for society again.
Find ways to manufacture things here, not China. A lot of what happens now is the government spends money here, and then that money flows to people who send it to China by buying Chinese stuff. Now China has the money to buy and build cities made for 1.7 million people in which no one lives.
Government spending is not always bad. Unfortunately, with the plutocracy we are heading towards, the spending gets filtered through the Wall Street crooks first, and not Main Street. Spending does not need to stop, per se, but what it gets spent on needs to change.
Businesses and Foreigners Will Stop Accepting US Dollars
For some reason it is just assumed that the marketplace will all of a sudden stop accepting paper US dollars. Gold bugs are storing up precious metals for the day when they will only be able to buy and barter with precious metals. If the US keeps printing, it does seem logical that this could actually happen.
Can it?
No. Not anytime soon.
There is this funny little thing that keeps us from being truly free men. Taxes. Grocery stores don't have the luxury of deciding to exist on barter as some would have you believe. It's not that they don't desire such situations, but the government mandates they continue to accept paper money by force. The US Government has determined that taxes are to be levied on owners of property and services, and those taxes will only become extinguished in the form of paper dollars. Failure to submit to this monster will require time in prison. So under the motivation to not spend time in jail, citizens work tirelessly, offering labor and goods in exchange for paper dollars so they can feed the tax monster. I am not saying I approve, but it is the system in which we currently live. Thus, individuals and businesses who can create wealth are forced to figure out ways to obtain paper dollars. Capitalism allows a small carrot of incentive in that the more dollars you can obtain by productivity, the better lifestyle you can live, even though taxes go up with the higher income.
Will foreigners stop accepting US Dollars? Not unless they plan on ceasing sales into the world's largest market. How then will the world stop using them?
America Will Soon Not Be Able to Afford the Interest on the National Debt
"A major depression is inevitable for America because decades of growing debt-financing by consumers, businesses, and state and (especially) federal governments have undermined the health of the economy, giving the appearance of wealth when in fact there is poverty. The enormous private and public debts bring the law of compound interest into play, and it takes no great mathematician or economist to figure out that those who live beyond their means for too long must finally reach the point at which they not only cannot pay off their debts, they can't even pay the interest on them—or find anyone willing to lend enough to cover the interest." (www.ecalvinbeisner.com/reviews/BurkettReview.pdf)
The statement in quotations above is based on doom and gloom from Larry Burkett in his book about the coming financial earthquake back in 1990! How similar to what we hear being sold today as fact.
He was wrong 20 years ago, and his new worry-wart cohorts will be wrong the next 20 as well.
Burkett prophesied that America, by the turn of the century, would have so much debt that they could not afford the interest on the debt. Since his book made this claim, the debt has doubled. Now the current doom and gloom crowd is saying, yet again, that we will not be able to afford the interest on the debt. They conclude impending collapse is right around the corner. We are warned foreign confidence in the US Dollar will cease, and they will sell Treasuries indiscriminately, causing an epic collapse in our bond market which leads to 'economy-choking' higher interest rates. High interest rates, of course, will supposedly mean the US Government can't afford the interest on the outstanding debt because it is so large.
As the saying goes, "The more things change, the more they stay the same."
Other versions of fear and doom might sound similar to these:
"In their ill fated attempt to get something for nothing the Fed is going to cause a currency crisis and a massive surge in global inflation. The price we will all pay when the house of cards comes crashing down again will be multiples more expensive than last time.
"The problem is debt. Hyperinflation is the result of a government debt spiral. At some point the debt becomes so large that a nation can't even service the interest on the debt. At that point there are only two options. Either default or inflate."
Oh me, oh my, the sky is falling! It must be time to hoard gold (GLD)!
My advice? Cancel your doom and gloom subscriptions. The US Government is not revenue constrained. For those who want to find out why, I highly encourage you to read: Understanding Modern Money
by L. Randall Wray. You will realize Dick Cheney got it right when he said "Deficits don't matter," (at least while there is a capacity utilization gap - once that gap is filled, then they will matter) and will rest well knowing the US will not default through non-payment, nor hyper-inflation. Worry about the deficits once factories are at capacity. At that point, the government will use their tools (taxes, rates) to slow down the economy.
Paper Dollars Are Worthless and Backed By Nothing
Dollars are just worthless pieces of paper. It has no value by itself and is today backed by nothing. I agree with this argument. Consider this though: Oil in and of itself is also worthless. It is just sticky goo that could ruin the environment if it ends up in the wrong place.
Only in the hands of a company that knows how to create wealth can oil have any actual value.
A company that takes resources which have been given freely to us by God, converting them into something useful and productive, is worth more than gold. Gold is a store of value, but it does not create wealth just as paper dollars do not create wealth. Oil, lumber and coal, by themselves, are worthless too. While oil is useless by itself, when a company like Exxon Mobil (XOM) or Chevron (CVX) figures out a way to take this free and useless commodity out of the ground and turn it into gasoline, they in turn have created wealth by making something that was useless, useful. Modern day alchemy at work. Investors reading this can feel confident investing in these types of companies, knowing that all money flows to them eventually. Any company that makes something out of nothing is a wealth creator. Your only job is to figure out what price you are willing to pay for the profits the company generates.
So like oil, dollars by themselves are worthless until an event takes place creating demand. The event that causes worthless oil to be in demand is when a company turns it into gasoline. The event that causes worthless paper dollars to be in demand is the prosecution process for failing to pay taxes.
Every Fiat Currency System Eventually Fails
I hear (and used to believe myself), that the fiat currency system is about to collapse because all fiat currency systems in history have collapsed. Here are a few examples of such claims:
dailyreckoning.com/fiat-currency/ www.thedailycrux.com/content/6653/Porter_Stansberry
Some of our own dear Seeking Alpha writers claim as much also:
Fiat Currency Is Doomed to Fail Is This Time Different for the Dollar and Precious Metals
The problem is, these proponents are comparing apples with oranges. Never in history has the entire world been on a coordinated, floating exchange-rate, fiat-currency, system. Therefore, do they really have anything with which to compare today's situation?
Fiat currencies have collapsed in the past because countries print money to pay debts which are denominated in foreign currencies. If the US Government owed trillions in Euro denominated debt, and then printed US Dollars to buy Euros in order to satisfy those debts, the value of the US Dollar would collapse, as we would be forced to flood the world with dollars and soak up Euros. Ellen Brown does a fantastic job in explaining why the US situation will not end like Zimbabwe or Germany.
Sorry to say gold bugs, but Zimbabwe we are not.
Printing Money Will Cause the US Dollar to Lose Reserve-Currency Status
These words are usually stated as a matter of fact, rather than conjecture. Well known newsletter writer Porter Stansberry warns almost daily, "The world has officially entered what we believe will be the final chapter of the U.S. Dollar's reign as the world's reserve currency. " (www.thedailycrux.com/content/4751/Porter_Stansberry)
It is assumed that the rest of the world will stop accepting payments in US Dollars overnight for business transactions, and only if we subscribe to their information service will we be able to protect ourselves and family using their timely advice.
Will the US Dollar lose the coveted reserve currency status from all the printing going on?
Not any time soon.
The US economy is still the biggest in the world by a large margin. The military, which we are not afraid to use, is the most powerful. Until another country holds title to either one of these claims, our reserve currency status will likely remain intact. While it feels as if China will surpass us soon as they maintain their rapid growth, they are still many trillions of dollars in GDP away. Think about this - if the US is the world's largest customer, and China has become richer by selling to us, is China really going to tell us which currency we can spend? Don't we dictate what currency we are willing to give them? Who is truly in charge? If China stops accepting dollars, could we not easily find a group of other nations to do business with? Would us dumping China as a business partner not cause other nations to line up to take China's place? Would any of these other nations refuse to do business with us in US Dollars?
Until China or another country surpasses us as the world's largest economy or strongest military, loss of our reserve currency status is not imminent, as sellers of fear would like you to believe.
Granted, China is growing at roughly 10% a year, and we are only growing at 3%. I get that. Let's do the math though and see if we should worry. If China is a $6 trillion economy, growing at 10%, they grow by $600 billion a year. If we are a $14 trillion economy growing at 3%, we grow by $420 billion a year. In this close to reality example, China is closing the gap at $180 billion a year. At this rate - it will take China 44 years to even match the US in GDP. Can they continue to grow at 10% a year, while their largest customer grows at 3% for 44 straight years? We are a far cry from no longer being the largest economy. The biggest economy in the world should be blessed with the reserve currency.
If Money Printing is Good, Then Just Print Enough To Give Everyone $1 Million
If printing is not a big deal, then why not just print away? The doom and gloomers jump to the conclusion that if I think printing won't cause the collapse of America, it must be a good thing. So why not seek more of that good thing? The answer is simple.
There is a limit to the productive capacity of the economy. If the government printed money to buy 40 million cars, and gave that new money to Americans under the auspice it only be spent on automobiles, Americans could do one of two things, buy cars or sit on the cash. If the capacity of the world's auto manufacturers is 20 million cars, and the government printed enough money to buy 40 million cars, the market's ability to produce only 20 million cars would be overwhelmed by car demand - thus creating a price surge. In a perfect environment, this price surge would bring demand in line with production. If the demand happened overnight, we could be certain that the price of a car should, at a minimum, double overnight. 20 million cars would be produced because that is the capacity of the market, but the price would double to soak up the new money that was printed to buy 40 million cars at yesterday's prices. Of course, new wealth could be created from all of this printed money if other firms decided to take free resources, like iron ore, and convert it into steel to make more cars to meet this demand.
So the answer to how much money printing we can handle is this: how much demand for goods will the printing create for the economy? If everyone received $1 million but took a vow to never spend it and instead put it under their mattress, I doubt prices would move much, because the demand is not there. If the economy gets to maximum production, then new money in the system via demand will cause the rise of prices across the board.
We are seeing some of this happen now with food prices in certain areas of the world. Capitalism will, over time, right this ship though. Farmers will see the ability to make more money selling beans and wheat, and will invest in planting more acres for these crops. They will purchase technology that will help reap more crop yield per acre. Right now there is an imbalance, but it won't last. The doom and gloom crowds will have you believe that this current "crisis" is permanent, causing the collapse of society as we know it. No need to fear, but in the meantime while the imbalance is in place, buy the businesses that turn the commodities into wealth. Don't buy oil itself, but Exxon or Chevron. Don't buy wheat or soybeans, buy fertilizer companies which allow farmers to produce more wheat and agriculture, companies like Potash (POT). But always make sure the current profitability of the company is worth investing in. If you invest with the idea that the crisis will be without end, you may end up overpaying for a stock.
7/6/11 Update to the above paragraph:
From Reuters:
Despite excessively wet conditions, a scramble to get corn seeded in key growing areas that was fueled by high prices has set the stage for a potentially record-large corn crop, and conversely a smaller soybean crop, according to the report issued Thursday by the U.S. Department of Agriculture.
"There are some big surprises in this report," said Karl Setzer, commodity Trading Advisor for MaxYield Cooperative in West Bend, Iowa. "All in all, what this shows us in the quarterly stocks report, we are not using grain at the pace we thought we were."
USDA said farmers planted 92.282 million acres with corn this spring, above an average trade estimate for 90.767 million acres and well above the USDA's June 10 forecast of 90.700 million acres.
The department estimated quarterly corn stocks as of June 1 at 3.670 billion bushels, above an average trade estimate for 3.302 billion and compared with 4.310 billion a year ago.
Traders said the fact that farmers were able to get so much corn in the ground despite flooding and heavy rainfall through the U.S. Midwest underscored how recent high prices pushed farmers to plant corn over soybeans despite the adverse conditions.
"Getting this much acreage planted is a surprise," said Shawn McCambridge, an analyst with Prudential Bache Commodities.
(Looks to me like the proof a few months later is in the pudding. Farmers - seeing higher prices for corn - are planting much more corn, thus crushing the price of corn. So much for never ending higher corn prices for the rest of our lives.)
The US Dollar Has Lost 96% of its Purchasing Power - Thus Printing Makes Us PoorerThis argument only covers one side of the story. While each individual dollar buys less goods, the argument is incomplete. To bust this myth, we just need to look at how much time it requires to pay for those goods. Instead of looking at how many dollars it takes to buy a candy bar today compared to 30 years ago, I would challenge you to instead value the candy bar in hours of labor to obtain it. While it might take many more dollars to buy that candy bar, you get many more dollars for each 60 minutes of work. So even though the candy bar costs 1000% more, it may take you 30% less work now to buy it. Therefore, you are in fact richer, even though the value of your dollar does not go as far. The next time you are told you are poorer because the price of gas is higher, remember to ask yourself this:If I have to work 15 minutes to buy 1 gallon of gas at today's prices of $3.00 per gallon, compared to 10 years from now when I may have to pay $10.00 per gallon but only have to work 10 minutes to afford, does the price actually matter?
After asking that question, remember these quotes:
"The real price of every thing, what every thing really costs to the man who wants to acquire it, is the toil and trouble of acquiring it... But though labour be the real measure of the exchangeable value of all commodities, it is not that by which their value is commonly estimated... Every commodity, besides, is more frequently exchanged for, and thereby compared with, other commodities than with labour."
- Adam Smith, The Wealth of Nations, 1776
"What is a cynic? A man who knows the price of everything and the value of nothing."
- Oscar Wilde, Lady Windermere's Fan, 1892
The Next Crash Will Be Much Worse Than 2008
Marc Faber: The Next Crash Will Be Much Worse Than 2008 ? Before Then Expect More Money Printing and More WarThe Daily Bell
On August 8th, 2011 Dr. Marc Faber was interviewed on CNBC about the future of the US dollar-debt crisis and what investor's can expect to take place in the markets.
During the interview, among several timey questions, Dr. Faber was asked, "What's the end game here? Is it the collapse of Western civilization as we know it? ... Where are we going here? How must It inevitably end in your opinion?"
To which Dr. Faber replied, "You have a computer and occaissionally the computer will crash and need to be rebooted. That will happen to the global economy. So basically, the central banks are willing to do that. By printing money the problems are not solved but they can be postponed and they become larger. … The next time we have a global economic crisis it will be much worse than 2008. Before this happens there will be money printing and war."
Marc Faber, Ph.D, publishes a widely read monthly investment newsletter, The Gloom Boom & Doom Report, which highlights unusual investment opportunities. Dr. Faber is the author of several books including Tomorrow's Gold – Asia's Age of Discovery, which was first published in 2002 and highlights future investment opportunities around the world.
Dr. Faber describes himself as a free-market economist, but also notes that he uses other disciplines in his analysis as well. As an adviser he is not strictly speaking a value investor but uses a variety of tools. His clients, he says, expect some sort of profit on their funds every year. Simply beating market averages is not enough.
Here at the Daily Bell we are regular followers of Dr. Faber's prescient work. In fact, Marc was interviewed at the DB recently. Here is a link to that interview: Marc Faber on 21st Century Investing, Why It's too Late for the Dollar and Why Emerging Markets Look Good.
On August 8th, 2011 Dr. Marc Faber was interviewed on CNBC about the future of the US dollar-debt crisis and what investor's can expect to take place in the markets.
During the interview, among several timey questions, Dr. Faber was asked, "What's the end game here? Is it the collapse of Western civilization as we know it? ... Where are we going here? How must It inevitably end in your opinion?"
To which Dr. Faber replied, "You have a computer and occaissionally the computer will crash and need to be rebooted. That will happen to the global economy. So basically, the central banks are willing to do that. By printing money the problems are not solved but they can be postponed and they become larger. … The next time we have a global economic crisis it will be much worse than 2008. Before this happens there will be money printing and war."
Marc Faber, Ph.D, publishes a widely read monthly investment newsletter, The Gloom Boom & Doom Report, which highlights unusual investment opportunities. Dr. Faber is the author of several books including Tomorrow's Gold – Asia's Age of Discovery, which was first published in 2002 and highlights future investment opportunities around the world.
Dr. Faber describes himself as a free-market economist, but also notes that he uses other disciplines in his analysis as well. As an adviser he is not strictly speaking a value investor but uses a variety of tools. His clients, he says, expect some sort of profit on their funds every year. Simply beating market averages is not enough.
Here at the Daily Bell we are regular followers of Dr. Faber's prescient work. In fact, Marc was interviewed at the DB recently. Here is a link to that interview: Marc Faber on 21st Century Investing, Why It's too Late for the Dollar and Why Emerging Markets Look Good.
Tuesday, August 16, 2011
Revolution Investing: How to position your portfolio for this market -MarketWatch (blog)
This is a special free reprint of the current Revolution Investing newsletter published here on Markewatch. You can also sign up for a free one-week trial of my independent trading diary with just your email address by signing up here.
The guys on TV say we’re supposed to be talking about the Standard & Poor’s downgrade of the U.S. debt. The newspapers say we’re supposed to be talking about Spain and Italy and whether or not the ECB, and the World Bank can redistribute enough wealth upward to the elite and bank shareholders and lenders that they “save” the E.U. Wall Street analyst reports tell us that the markets might or might not be pricing in a new global or U.S. recession.
And certainly, we do need to talk about these market crashes over the last week. But just how sure are we that these guys are focusing on the right things? That anybody’s even looking at the primary catalyst for this sell off?
I got this instant message last night at 1:00 am from a friend of mine in Iceland:
The youth in the country revolted and the markets and economy tanked for a couple quarters … and then the resurgence started. Turned out that when the country forced corrupt bankers and the government they owned out and allowed smarter, more ethical managers to take over that things improved. And fast. And now the Iceland government is already back borrowing from the global markets are low rates and the country’s economy is expanding once again.
This is a special free reprint of the current Revolution Investing newsletter published here on Markewatch. You can also sign up for a free one-week trial of my independent trading diary with just your email address by signing up here.
Contrast that to the approach that we took here in Ireland and Greece. Where they propped up the bank shareholders and lenders with welfare money, allowed the banks to continue fraudulent accounting practices by institutionalizing them, kept the corrupt bankers and traders and managers and regulators in place, and allowed them to pay out record bonuses with that welfare money while making drastic cuts to generations-old social services. You know, sort of like the Republican/Democrat regime did here in the U.S. And like they did in England. And in Norway and every other country that’s allowed the E.U. to pervert its mission of uniting the currencies and countries to one of simply looting for the elite and banks.
And people are angry. And now they’re taking to the streets and doing exactly to the establishment what the establishment has started explicitly doing to them — looting.
Likewise, the average American is also freaking out over the news that the same guys who took out bin Laden were themselves killed over the weekend. One of the guys had recently told New York magazine that they had been ordered to take Bin Laden out from the beginning, in contrast to what the Republican/Democrat regime leaders had originally told us.
People, even those like me who don’t consider themselves to be conspiracists or even-conspiracy-minded, wondered about the way Bin Laden was killed and disposed of, and now this? It rattles people to the core that our own soldiers are dying. When heroes/elite soldiers like the Green Beret guys who were taken out this week are killed en masse in one ugly attack like this, it’s horrific.
The upshot of all this is that whatever the reason for this current trashing of our stock markets, it’s the kind of ethereal, intangible catalyst that is truly the hardest kind to work through. It’s not going to be quick or easy because solutions to all of these issues are not going to be quick or easy.
But all that said, let’s also look past these issues. Unless you truly think that both the U.S. and E.U. economies and therefore societies are about to implode upon themselves and that we are headed into a Great Depression or something worse, then we’re likely already closer to pricing all off these problems into the markets already.
More likely, the reactions to these issues — U.S. debt downgrade, flash looting, mortgage title anarchy, E.U./euro debt crisis, threat of recession, etc — will be yet more corporate welfare, monetary easing, tax tricks for the biggest companies with the best lobbyists…in other words, more bubbles.
We added a short on Wells Fargo last week and the stock dropped 25% in the next few trading days, as the broader markets also tanked (though not quite that badly!). Our many smartphone/tablet/cloud stocks from Apple to Google and Marvell also took a big hit. That said, I’d also outlined repeatedly for subscribers to TradingWithCody.com that I’d been buying Cisco calls aggressively on weakness heading into their earnings report last week, catching a near-20% pop in the stock and doubling/tripling the value of the calls.
But our overall positioning of getting long for a new tech bubble while getting short for collapsing banks and other sectors that would be insolvent without ongoing welfare has helped us wildly outperform the markets since launch.
That continues to look like the right positioning.
This was a special free reprint of the current Revolution Investing newsletter published here on Markewatch. You can also sign up for a free one-week trial of my independent trading diary (where you get access to all my stock and option trades as I do them in real-time) with just your email address by signing up here.
Cody Willard writes Revolution Investing for Marketwatch and posts the trades from his personal account at TradingWithCody.com. At time of publication, Cody was net long Cisco, Marvell, Apple, Google and net short Wells Fargo.
The guys on TV say we’re supposed to be talking about the Standard & Poor’s downgrade of the U.S. debt. The newspapers say we’re supposed to be talking about Spain and Italy and whether or not the ECB, and the World Bank can redistribute enough wealth upward to the elite and bank shareholders and lenders that they “save” the E.U. Wall Street analyst reports tell us that the markets might or might not be pricing in a new global or U.S. recession.
And certainly, we do need to talk about these market crashes over the last week. But just how sure are we that these guys are focusing on the right things? That anybody’s even looking at the primary catalyst for this sell off?
I got this instant message last night at 1:00 am from a friend of mine in Iceland:
“These riots in london are scary … the youth is so self-centered and lacking of ethics and compassion. The same with the Norwegian terror attack in Oslo … Very scary and hitting home … You getting any news about this over in your end?”She’s in her mid 20s and was active in stopping the bank bailouts in her own country. Iceland, to review, had a bunch of corrupt bankers who created and invested and gambled on a bunch of lousy mortgage securities and needed a huge bailout and drastic austerity cuts to their social services to avoid bankruptcy and default.
The youth in the country revolted and the markets and economy tanked for a couple quarters … and then the resurgence started. Turned out that when the country forced corrupt bankers and the government they owned out and allowed smarter, more ethical managers to take over that things improved. And fast. And now the Iceland government is already back borrowing from the global markets are low rates and the country’s economy is expanding once again.
This is a special free reprint of the current Revolution Investing newsletter published here on Markewatch. You can also sign up for a free one-week trial of my independent trading diary with just your email address by signing up here.
Contrast that to the approach that we took here in Ireland and Greece. Where they propped up the bank shareholders and lenders with welfare money, allowed the banks to continue fraudulent accounting practices by institutionalizing them, kept the corrupt bankers and traders and managers and regulators in place, and allowed them to pay out record bonuses with that welfare money while making drastic cuts to generations-old social services. You know, sort of like the Republican/Democrat regime did here in the U.S. And like they did in England. And in Norway and every other country that’s allowed the E.U. to pervert its mission of uniting the currencies and countries to one of simply looting for the elite and banks.
And people are angry. And now they’re taking to the streets and doing exactly to the establishment what the establishment has started explicitly doing to them — looting.
Likewise, the average American is also freaking out over the news that the same guys who took out bin Laden were themselves killed over the weekend. One of the guys had recently told New York magazine that they had been ordered to take Bin Laden out from the beginning, in contrast to what the Republican/Democrat regime leaders had originally told us.
People, even those like me who don’t consider themselves to be conspiracists or even-conspiracy-minded, wondered about the way Bin Laden was killed and disposed of, and now this? It rattles people to the core that our own soldiers are dying. When heroes/elite soldiers like the Green Beret guys who were taken out this week are killed en masse in one ugly attack like this, it’s horrific.
The upshot of all this is that whatever the reason for this current trashing of our stock markets, it’s the kind of ethereal, intangible catalyst that is truly the hardest kind to work through. It’s not going to be quick or easy because solutions to all of these issues are not going to be quick or easy.
But all that said, let’s also look past these issues. Unless you truly think that both the U.S. and E.U. economies and therefore societies are about to implode upon themselves and that we are headed into a Great Depression or something worse, then we’re likely already closer to pricing all off these problems into the markets already.
More likely, the reactions to these issues — U.S. debt downgrade, flash looting, mortgage title anarchy, E.U./euro debt crisis, threat of recession, etc — will be yet more corporate welfare, monetary easing, tax tricks for the biggest companies with the best lobbyists…in other words, more bubbles.
We added a short on Wells Fargo last week and the stock dropped 25% in the next few trading days, as the broader markets also tanked (though not quite that badly!). Our many smartphone/tablet/cloud stocks from Apple to Google and Marvell also took a big hit. That said, I’d also outlined repeatedly for subscribers to TradingWithCody.com that I’d been buying Cisco calls aggressively on weakness heading into their earnings report last week, catching a near-20% pop in the stock and doubling/tripling the value of the calls.
But our overall positioning of getting long for a new tech bubble while getting short for collapsing banks and other sectors that would be insolvent without ongoing welfare has helped us wildly outperform the markets since launch.
That continues to look like the right positioning.
This was a special free reprint of the current Revolution Investing newsletter published here on Markewatch. You can also sign up for a free one-week trial of my independent trading diary (where you get access to all my stock and option trades as I do them in real-time) with just your email address by signing up here.
Cody Willard writes Revolution Investing for Marketwatch and posts the trades from his personal account at TradingWithCody.com. At time of publication, Cody was net long Cisco, Marvell, Apple, Google and net short Wells Fargo.
Friday, August 5, 2011
The bear market is starting: Marc Faber - Moneycontrol.com
The bear market is on its way back, economist and contrarian investor Marc Faber, the editor and publisher of The Gloom Boom and Doom Report
told CNBC Tuesday.
"The bear market is starting. When you compare equities to bonds and cash I don`t think equities are very positive," Faber said in an interview.
The SandP 500 has risen steadily since hitting its lowest point of the previous decade in March 2009.
Markets have been more turbulent in recent months as debt crises in both the US and the euro zone threatened to damage growth there.
"The Treasury market is telling you that the economy is in recession," said Faber. "So if the bond market is telling you that the economies of the Western world are weakening, but at the same time the stock market is still relatively high, I think the stock market is vulnerable."
He added his voice to those criticizing politicians in the US and elsewhere over the current problems.
"The politicians are all useless individuals. Nobody is reducing the problems in the US or Europe, just putting on a band aid and postponing the problems endlessly," he said.
"Some analysts think that there`s a chance economic data will surprise on the upside but I think, if anything, it will be on the downside," Faber added.
He believes that some companies will start to disappoint in the second half of this year.
China Bigger Risk
Second-quarter results so far have been a mixed bag, with major European banks such as BNP Paribas and Barclays announcing disappointing results on Tuesday, while earlier in the week Motorola and engineering giant EADS performed better than expected.
The most recent plan for US debt, which the Senate will vote on Tuesday afternoon, involves more than USD 1 trillion of spending cuts and a hard-won raising of the debt ceiling.
Faber argues that China disappointing "is a much bigger risk for the global economy than the US because the US is no longer a major commodities buyer".
He believes that the impact of a decline in Chinese growth on the oil price could be critical for major commodities producers like Canada, Australia and the Middle East.
"If commodity prices are falling, then commodity producers will buy fewer goods from China," he pointed out. "This is something that the world central bankers can`t deal with."
Food price inflation is more of a problem in emerging markets than in the developed world as food is typically a much bigger part of annual spend in poorer countries, Faber pointed out, arguing that this could lead to worse than expected growth in China.
Faber, who describes himself as "ultra-bearish", said that he thinks that precious metals are the best place to be at the moment.
Despite worries about major euro zone economies including Italy, he is relatively bullish on the survival of the euro.
"What surprises me more is actually the strength of the euro and that it has not collapsed yet," he said
He believes that peripheral economies which drag down the euro will eventually be "chucked out" of the single currency.
"I would have chucked out Greece three years ago, straight away, and it would have been much cheaper," Faber said.
Gold's position as a safe haven will continue to keep prices close to their recent historical highs, Faber believes. He said that he would buy gold if it falls below USD 150 per ounce again.
Copyright 2011 cnbc.com
Wednesday Look Ahead: Markets Twin Fears are Weak US Economy and Euro Crisis
China Rating Agency Downgrades US Debt
told CNBC Tuesday.
"The bear market is starting. When you compare equities to bonds and cash I don`t think equities are very positive," Faber said in an interview.
The SandP 500 has risen steadily since hitting its lowest point of the previous decade in March 2009.
Markets have been more turbulent in recent months as debt crises in both the US and the euro zone threatened to damage growth there.
"The Treasury market is telling you that the economy is in recession," said Faber. "So if the bond market is telling you that the economies of the Western world are weakening, but at the same time the stock market is still relatively high, I think the stock market is vulnerable."
He added his voice to those criticizing politicians in the US and elsewhere over the current problems.
"The politicians are all useless individuals. Nobody is reducing the problems in the US or Europe, just putting on a band aid and postponing the problems endlessly," he said.
"Some analysts think that there`s a chance economic data will surprise on the upside but I think, if anything, it will be on the downside," Faber added.
He believes that some companies will start to disappoint in the second half of this year.
China Bigger Risk
Second-quarter results so far have been a mixed bag, with major European banks such as BNP Paribas and Barclays announcing disappointing results on Tuesday, while earlier in the week Motorola and engineering giant EADS performed better than expected.
The most recent plan for US debt, which the Senate will vote on Tuesday afternoon, involves more than USD 1 trillion of spending cuts and a hard-won raising of the debt ceiling.
Faber argues that China disappointing "is a much bigger risk for the global economy than the US because the US is no longer a major commodities buyer".
He believes that the impact of a decline in Chinese growth on the oil price could be critical for major commodities producers like Canada, Australia and the Middle East.
"If commodity prices are falling, then commodity producers will buy fewer goods from China," he pointed out. "This is something that the world central bankers can`t deal with."
Food price inflation is more of a problem in emerging markets than in the developed world as food is typically a much bigger part of annual spend in poorer countries, Faber pointed out, arguing that this could lead to worse than expected growth in China.
Faber, who describes himself as "ultra-bearish", said that he thinks that precious metals are the best place to be at the moment.
Despite worries about major euro zone economies including Italy, he is relatively bullish on the survival of the euro.
"What surprises me more is actually the strength of the euro and that it has not collapsed yet," he said
He believes that peripheral economies which drag down the euro will eventually be "chucked out" of the single currency.
"I would have chucked out Greece three years ago, straight away, and it would have been much cheaper," Faber said.
Gold's position as a safe haven will continue to keep prices close to their recent historical highs, Faber believes. He said that he would buy gold if it falls below USD 150 per ounce again.
Copyright 2011 cnbc.com
Wednesday Look Ahead: Markets Twin Fears are Weak US Economy and Euro Crisis
China Rating Agency Downgrades US Debt
Thursday, August 4, 2011
The Faulty Logic Behind the Market Sell-off - TIME
With the debt deal concluded, you might have expected global markets to have rallied. Instead, the Dow Jones industrial average closed down 266 points yesterday, or 2.2 percent.
The reason? There is a growing consensus among the investing class that a double-dip recession is imminent and that, as a result, stocks are in for tough times — and may even be poised for a crash.
You can’t argue with the market. If stocks fall, they fall. But the current outlook on equities may be based on faulty logic, namely that corporate profits and hence stock prices will track global GDP. For the past few years, profits have been strong even as GDP in many places has been weak, and there is little reason – based on what companies are saying over the past weeks – to believe that trend is at an end.
The sell-off of the past week and a half, which has continued even as the debt deal solidified, makes a certain amount of sense on paper. It’s been fueled by a raft of less-than-stellar economic data, ranging from a poor GDP report last Friday to weak future orders and declining consumer spending. And that data comes on top of uncertainty about just how bad the European banking and credit crisis will become. The upshot is that the investing class has turned distinctly bearish on the economy and future stock earnings.
Some of the most negative prognostication I’ve seen has come from the investing newsletter circuit. Perpetual bears like Marc Faber (whose regular report is called “Gloom, Boom & Doom”) are, not surprisingly, predicting a multi-year down market. But even less pessimistic market sages, including the widely respected John Hussman, have read the tea leaves of global economic data and concluded that a new recession is likely. Hussman is especially concerned about Chinese growth, which he believes will continue long-term but falter near-term, causing ripple effects in Canada, Australia and Brazil, among other countries.
But as I’ve noted in the past, what’s strange about all this is that somehow, amid the gloom, company after company has reported both record earnings and strong revenue growth. In fact, if you exclude financial companies, which are struggling under the combined weight of bad loans, anemic trading revenues, and new capital requirements, S&P 500 companies that have reported earnings this quarter are averaging nearly 22% earnings growth and nearly 12% revenue growth. The revenue figure is especially powerful: Earnings can be massaged by astute accounting; but revenue reflects real demand.
Usually the market pays a premium for such growth, but stocks remain remarkably cheap. The average price-to-earnings ratio of S&P500 companies is about 12, well below historical averages and even cheaper when you look at the pathetically low yield on bonds.
None of that seems capable of swaying bearish sentiment, however, which holds that results to date are less important than results going forward — and that overall macroeconomic conditions globally won’t support the level of business we have seen.
You can’t prove the prevailing wisdom is wrong (given that it’s about the future), but it’s worth remembering that the most successful investors routinely bet against the crowd. And it is my sense that investors are falling into the same trap they have been falling into for years: Namely, they are assuming that business trends closely track economic trends when in fact they are increasingly diverging. Global GDP numbers are weakening, and traders will trade on the economic data in the short-term, but it has little bearing on the long-term strength of companies. This has been a problem for years, and it remains one.
So as the drumbeat of negativity gets louder, note what is happening in Corporateland. Sure, some are doing better than others there – all is not equal among companies any more than among individuals. But using weak economic data as an indicator of stocks or company profits is a mistake. It is one that is routinely made, and occasionally makes people money. But it will surely lead to missed opportunities and to a fundamental misreading of powerful trends propelling technology companies, industrial corporations and even many retailers relentlessly forward.
The reason? There is a growing consensus among the investing class that a double-dip recession is imminent and that, as a result, stocks are in for tough times — and may even be poised for a crash.
You can’t argue with the market. If stocks fall, they fall. But the current outlook on equities may be based on faulty logic, namely that corporate profits and hence stock prices will track global GDP. For the past few years, profits have been strong even as GDP in many places has been weak, and there is little reason – based on what companies are saying over the past weeks – to believe that trend is at an end.
The sell-off of the past week and a half, which has continued even as the debt deal solidified, makes a certain amount of sense on paper. It’s been fueled by a raft of less-than-stellar economic data, ranging from a poor GDP report last Friday to weak future orders and declining consumer spending. And that data comes on top of uncertainty about just how bad the European banking and credit crisis will become. The upshot is that the investing class has turned distinctly bearish on the economy and future stock earnings.
Some of the most negative prognostication I’ve seen has come from the investing newsletter circuit. Perpetual bears like Marc Faber (whose regular report is called “Gloom, Boom & Doom”) are, not surprisingly, predicting a multi-year down market. But even less pessimistic market sages, including the widely respected John Hussman, have read the tea leaves of global economic data and concluded that a new recession is likely. Hussman is especially concerned about Chinese growth, which he believes will continue long-term but falter near-term, causing ripple effects in Canada, Australia and Brazil, among other countries.
But as I’ve noted in the past, what’s strange about all this is that somehow, amid the gloom, company after company has reported both record earnings and strong revenue growth. In fact, if you exclude financial companies, which are struggling under the combined weight of bad loans, anemic trading revenues, and new capital requirements, S&P 500 companies that have reported earnings this quarter are averaging nearly 22% earnings growth and nearly 12% revenue growth. The revenue figure is especially powerful: Earnings can be massaged by astute accounting; but revenue reflects real demand.
Usually the market pays a premium for such growth, but stocks remain remarkably cheap. The average price-to-earnings ratio of S&P500 companies is about 12, well below historical averages and even cheaper when you look at the pathetically low yield on bonds.
None of that seems capable of swaying bearish sentiment, however, which holds that results to date are less important than results going forward — and that overall macroeconomic conditions globally won’t support the level of business we have seen.
You can’t prove the prevailing wisdom is wrong (given that it’s about the future), but it’s worth remembering that the most successful investors routinely bet against the crowd. And it is my sense that investors are falling into the same trap they have been falling into for years: Namely, they are assuming that business trends closely track economic trends when in fact they are increasingly diverging. Global GDP numbers are weakening, and traders will trade on the economic data in the short-term, but it has little bearing on the long-term strength of companies. This has been a problem for years, and it remains one.
So as the drumbeat of negativity gets louder, note what is happening in Corporateland. Sure, some are doing better than others there – all is not equal among companies any more than among individuals. But using weak economic data as an indicator of stocks or company profits is a mistake. It is one that is routinely made, and occasionally makes people money. But it will surely lead to missed opportunities and to a fundamental misreading of powerful trends propelling technology companies, industrial corporations and even many retailers relentlessly forward.
The bear market is starting: Marc Faber
The bear market is on its way back, economist and contrarian investor Marc Faber, the editor and publisher of The Gloom Boom & Doom Report told CNBC Tuesday.
The bear market is starting. When you compare equities to bonds and cash I don't think equities are very positive," Faber said in an interview.
The S&P 500 has risen steadily since hitting its lowest point of the previous decade in March 2009.
Markets have been more turbulent in recent months as debt crises in both the US and the euro zone threatened to damage growth there.
"The Treasury market is telling you that the economy is in recession," said Faber. "So if the bond market is telling you that the economies of the Western world are weakening, but at the same time the stock market is still relatively high, I think the stock market is vulnerable."
He added his voice to those criticizing politicians in the US and elsewhere over the current problems.
"The politicians are all useless individuals. Nobody is reducing the problems in the US or Europe, just putting on a band aid and postponing the problems endlessly," he said.
"Some analysts think that there's a chance economic data will surprise on the upside but I think, if anything, it will be on the downside," Faber added.
He believes that some companies will start to disappoint in the second half of this year.
China Bigger Risk
Second-quarter results so far have been a mixed bag, with major European banks such as BNP Paribas and Barclays announcing disappointing results on Tuesday, while earlier in the week Motorola and engineering giant EADS performed better than expected.
The most recent plan for US debt, which the Senate will vote on Tuesday afternoon, involves more than $1 trillion of spending cuts and a hard-won raising of the debt ceiling.
Faber argues that China disappointing "is a much bigger risk for the global economy than the US because the US is no longer a major commodities buyer".
He believes that the impact of a decline in Chinese growth on the oil price could be critical for major commodities producers like Canada, Australia and the Middle East.
"If commodity prices are falling, then commodity producers will buy fewer goods from China," he pointed out. "This is something that the world central bankers can't deal with."
Food price inflation is more of a problem in emerging markets than in the developed world as food is typically a much bigger part of annual spend in poorer countries, Faber pointed out, arguing that this could lead to worse than expected growth in China.
Faber, who describes himself as "ultra-bearish", said that he thinks that precious metals are the best place to be at the moment.
Despite worries about major euro zone economies including Italy, he is relatively bullish on the survival of the euro.
"What surprises me more is actually the strength of the euro and that it has not collapsed yet," he said
He believes that peripheral economies which drag down the euro will eventually be "chucked out" of the single currency.
"I would have chucked out Greece three years ago, straight away, and it would have been much cheaper," Faber said.
Gold's position as a safe haven will continue to keep prices close to their recent historical highs, Faber believes. He said that he would buy gold if it falls below $1500 per ounce again.
The bear market is starting. When you compare equities to bonds and cash I don't think equities are very positive," Faber said in an interview.
The S&P 500 has risen steadily since hitting its lowest point of the previous decade in March 2009.
Markets have been more turbulent in recent months as debt crises in both the US and the euro zone threatened to damage growth there.
"The Treasury market is telling you that the economy is in recession," said Faber. "So if the bond market is telling you that the economies of the Western world are weakening, but at the same time the stock market is still relatively high, I think the stock market is vulnerable."
He added his voice to those criticizing politicians in the US and elsewhere over the current problems.
"The politicians are all useless individuals. Nobody is reducing the problems in the US or Europe, just putting on a band aid and postponing the problems endlessly," he said.
"Some analysts think that there's a chance economic data will surprise on the upside but I think, if anything, it will be on the downside," Faber added.
He believes that some companies will start to disappoint in the second half of this year.
China Bigger Risk
Second-quarter results so far have been a mixed bag, with major European banks such as BNP Paribas and Barclays announcing disappointing results on Tuesday, while earlier in the week Motorola and engineering giant EADS performed better than expected.
The most recent plan for US debt, which the Senate will vote on Tuesday afternoon, involves more than $1 trillion of spending cuts and a hard-won raising of the debt ceiling.
Faber argues that China disappointing "is a much bigger risk for the global economy than the US because the US is no longer a major commodities buyer".
He believes that the impact of a decline in Chinese growth on the oil price could be critical for major commodities producers like Canada, Australia and the Middle East.
"If commodity prices are falling, then commodity producers will buy fewer goods from China," he pointed out. "This is something that the world central bankers can't deal with."
Food price inflation is more of a problem in emerging markets than in the developed world as food is typically a much bigger part of annual spend in poorer countries, Faber pointed out, arguing that this could lead to worse than expected growth in China.
Faber, who describes himself as "ultra-bearish", said that he thinks that precious metals are the best place to be at the moment.
Despite worries about major euro zone economies including Italy, he is relatively bullish on the survival of the euro.
"What surprises me more is actually the strength of the euro and that it has not collapsed yet," he said
He believes that peripheral economies which drag down the euro will eventually be "chucked out" of the single currency.
"I would have chucked out Greece three years ago, straight away, and it would have been much cheaper," Faber said.
Gold's position as a safe haven will continue to keep prices close to their recent historical highs, Faber believes. He said that he would buy gold if it falls below $1500 per ounce again.
Investing in Hedge Funds with ETFs - Investing Daily
According to the limited publicly available information on hedge fund performance, 2011 has been a less-than-stellar year for the industry. The Barclay Hedge Fund Index--which is maintained by a private company not affiliated with Barclays Bank--shows that hedge funds have returned just 2.3 percent this year and have significantly underperformed the broad market over the past three years.
Macro-strategy funds, in particular, have struggled amid a steady stream of political and economic crises that have erupted even in relatively stable parts of the world. This unpredictable turmoil has prompted a number of hedge fund managers, including the great George Soros, to exit the business.
Hedge funds that employ a quantitative investment strategy have also lagged. Many investors assume that these funds’ “black box” strategies would succeed in any market. But these strategies work best when the market exhibits well-defined trends, of which there has been precious little during the past several months.
Despite a middling performance, hedge funds have experienced strong asset inflows in 2011. With the exception of a scant outflow in July, hedge funds have taken in about $75 billion this year. The mystique of investing in a hedge fund may partially explain this ostensible contradiction. Some investors will always be drawn to the prestige of being an elite, “qualified investor.”
The real reason is probably more mundane: Hedge funds offer investors the benefit of portfolio diversification. Although fund-specific data is in short supply, industry watchers estimate that hedge funds exhibit a 0.7 percent correlation to the broader indexes.
This implies that a hedge fund will perform similarly to its benchmark 70 percent of the time. This correlation may be too close for comfort for some investors, but it does offer a measure of downside protection.
Nevertheless, many investors are eager to put their money to work in a hedge fund. In the past few years, the industry has sought to democratize hedge fund investing with the use of mutual funds and exchange-traded funds (ETF). Given the complexity of the strategies employed by many hedge funds and the rules that regulate trading within mutual funds and ETFs, this emerging trend has benefits and drawbacks.
Exchange-traded funds require high levels of transparency--an investor can see an ETF’s holdings at any time. This precludes the full implementation of hedge fund-like strategies because other market participants can engage in front running. Strangely enough, this drawback may actually benefit investors. Because these funds cannot run esoteric strategies, they must stick with tried and true strategies that dampen volatility and reduce their correlation to other asset classes. Meanwhile, a hedge-fund focused ETF is more transparent and liquid than a typical hedge fund. It’s also far cheaper; hedge-fund focused ETFs don’t charge the usual “2 and 20” fee--2 percent of assets under management and 20 percent of profits--that is common in the hedge fund industry.
I don’t recommend investors include hedge fund-like exchange-traded products in their portfolio. Even in the form of an ETF, these are complicated investment vehicles. But for those investors willing to take the risk, these two offering from Index IQ are a good place to start.
IQ Merger Arbitrage ETF (NYSE: MNA) runs a merger arbitrage strategy; the fund takes long positions in announced takeover targets and occasionally also takes short positions in the acquirer. Additionally, the fund uses short positions in stock index futures and currencies to hedge its broad market exposure. The fund’s portfolio is rebalanced on a monthly basis. I’ve recommended this ETF in the past because its strategy is sensible and easy to understand. Corporations have built up enormous cash hoards that they’re leery of deploying in a weak economy. Nevertheless, these enterprises remain under pressure to create value for shareholders. One of the easiest ways to achieve this goal is to acquire another company.
Global mergers and acquisitions (M&A) volume rose by about 23 percent last year to $2.4 trillion. This year M&A volume is expected to grow by another 35 percent to more than $3 trillion. A rising number of deals means significant opportunity for investors. This is not to suggest that soaring profits are a foregone conclusion for this ETF; M&A deals fall apart regularly. But the fund’s strategy generates an extremely low correlation to the S&P 500 with a low expense ratio of 0.75 percent.
Macro-strategy funds, in particular, have struggled amid a steady stream of political and economic crises that have erupted even in relatively stable parts of the world. This unpredictable turmoil has prompted a number of hedge fund managers, including the great George Soros, to exit the business.
Hedge funds that employ a quantitative investment strategy have also lagged. Many investors assume that these funds’ “black box” strategies would succeed in any market. But these strategies work best when the market exhibits well-defined trends, of which there has been precious little during the past several months.
Despite a middling performance, hedge funds have experienced strong asset inflows in 2011. With the exception of a scant outflow in July, hedge funds have taken in about $75 billion this year. The mystique of investing in a hedge fund may partially explain this ostensible contradiction. Some investors will always be drawn to the prestige of being an elite, “qualified investor.”
The real reason is probably more mundane: Hedge funds offer investors the benefit of portfolio diversification. Although fund-specific data is in short supply, industry watchers estimate that hedge funds exhibit a 0.7 percent correlation to the broader indexes.
This implies that a hedge fund will perform similarly to its benchmark 70 percent of the time. This correlation may be too close for comfort for some investors, but it does offer a measure of downside protection.
Nevertheless, many investors are eager to put their money to work in a hedge fund. In the past few years, the industry has sought to democratize hedge fund investing with the use of mutual funds and exchange-traded funds (ETF). Given the complexity of the strategies employed by many hedge funds and the rules that regulate trading within mutual funds and ETFs, this emerging trend has benefits and drawbacks.
Exchange-traded funds require high levels of transparency--an investor can see an ETF’s holdings at any time. This precludes the full implementation of hedge fund-like strategies because other market participants can engage in front running. Strangely enough, this drawback may actually benefit investors. Because these funds cannot run esoteric strategies, they must stick with tried and true strategies that dampen volatility and reduce their correlation to other asset classes. Meanwhile, a hedge-fund focused ETF is more transparent and liquid than a typical hedge fund. It’s also far cheaper; hedge-fund focused ETFs don’t charge the usual “2 and 20” fee--2 percent of assets under management and 20 percent of profits--that is common in the hedge fund industry.
I don’t recommend investors include hedge fund-like exchange-traded products in their portfolio. Even in the form of an ETF, these are complicated investment vehicles. But for those investors willing to take the risk, these two offering from Index IQ are a good place to start.
IQ Merger Arbitrage ETF (NYSE: MNA) runs a merger arbitrage strategy; the fund takes long positions in announced takeover targets and occasionally also takes short positions in the acquirer. Additionally, the fund uses short positions in stock index futures and currencies to hedge its broad market exposure. The fund’s portfolio is rebalanced on a monthly basis. I’ve recommended this ETF in the past because its strategy is sensible and easy to understand. Corporations have built up enormous cash hoards that they’re leery of deploying in a weak economy. Nevertheless, these enterprises remain under pressure to create value for shareholders. One of the easiest ways to achieve this goal is to acquire another company.
Global mergers and acquisitions (M&A) volume rose by about 23 percent last year to $2.4 trillion. This year M&A volume is expected to grow by another 35 percent to more than $3 trillion. A rising number of deals means significant opportunity for investors. This is not to suggest that soaring profits are a foregone conclusion for this ETF; M&A deals fall apart regularly. But the fund’s strategy generates an extremely low correlation to the S&P 500 with a low expense ratio of 0.75 percent.
China Bubble Poses Global Risk: Faber
"If Chinese growth really slows down or if they have a crash... it could trigger a vicious circle on the downside and I would say there is a fairly good chance that this could happen,"
Marc Faber, managing director, editor and publisher at The Gloom Boom & Doom Report told CNBC. "This would be really something the world's central bankers wouldn't be able to help with printing money," he added.
Marc Faber, managing director, editor and publisher at The Gloom Boom & Doom Report told CNBC. "This would be really something the world's central bankers wouldn't be able to help with printing money," he added.
Monday, August 1, 2011
Invest in Gold, Silver
Well I think investors are gradually realizing that it’s unusual, with all of the problems in Europe that the euro is actually relatively strong against the US dollar. They are realizing US holders don’t want to hold euros because they don’t trust the euro and the Europeans don’t want to hold dollars because they don’t trust the dollar.
Marc Faber is a famous contrarian investor and the publisher of the Gloom Boom & Doom Report newsletter.
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