Monthly Archives: October 2014

Jim Rogers: more banks should have failed




As the one-year anniversary of Lehman Brothers’ collapse arrives, some in the mainstream press (who neither anticipated the financial bust or understood its true causes when it actually transpired) have taken it upon themselves to educate their audience on the “lessons of the Lehman Brothers collapse”.

The problem, of course, is that these “lessons” tend to (predictably) advance all sorts of blatantly wrong ideas through their misreading of history (eg, Andrew Mellon and his cohorts triggered the collapse of the 1930s), faulty conclusions drawn in advance (the bailouts worked, saving us from a second Great Depression!), and plain ignorance of sound economic principles.

So what are the real lessons to have learned from last year’s financial crisis and the collapse of Lehman Brothers? Jim Rogers joins CNBC to offer his consistently-held view: not only should Lehman have failed, more banks should have failed with it. Watch the clip for more.

Jeff Saut on “Permanent Investments”

Checking out this article from Raymond James strategist, Jeff Saut, on the “Intrigue of Permanent Investments” (hat tip: Derek Hernquist).

There are some very interesting comments here on gold, farmland, and the “intriguing concept” of a permanent investment portfolio – if such a thing can ever really exist.

Rather than spoil the surprise (or front-run the excellent Bernard Baruch story), we’ll let you read it for yourself. Enjoy the article!

Related articles and posts:

1. Tangible Investments – Financial Sense Online.

2. Unloved, Undervalued, & Underowned – Jim Puplava at FSO.

Elon Musk and Peter Thiel on entrepreneurship + creativity

Elon Musk (PayPal, Tesla Motors, SpaceX) and Peter Thiel (PayPal, Facebook, Palantir) discuss entrepreneurship, capitalism, creativity, the educational system, and their own experiences building innovative companies in these PandoMonthly interviews.  

Bruce Berkowitz ‘Wealthtrack’ interview

Value investor and Fairholme Fund founder, Bruce Berkowitz sits down for an interview with Consuelo Mack on ‘Wealthtrack’.

Thanks to Prieur at Investment Postcards for highlighting this interview, which offers a nice glimpse into Berkowitz’ value investing style.

Check out the clip to hear Bruce’s rules on investing, his thoughts on Berkshire Hathaway, and why Warren Buffett may be making a “brilliant” investment with his Burlington Northern acquisition.

When you’re done with that, you can peruse our related posts for much more with Bruce and the aforementioned Berkshire Hathaway value investing greats. Enjoy!

Related articles and posts:

1. Bruce Berkowitz talks with Steve Forbes – Forbes.

2. Lessons from Warren Buffett – Finance Trends.

3. Lessons from Charlie Munger – Finance Trends.

Dow 10,000, we meet again

Being plugged into the market chatter on Twitter and Stocktwits, it was hard to avoid yesterday’s talk (often dismissive) of a return to Dow 10,000.

So now we’re back to the vaunted high number mark that serves to remind us of the glory days of the dot.com era & the possibility for an even higher 5 digit readout in the not-too-distant future. But what does Dow 10,000 really mean, if anything at all?

Noting the fact that inflation over the past decade has reduced our purchasing power by at least 20-30 percent, we should remind ourselves that a trip back to a nominal high in a widely followed market average does not automatically translate to money in our pockets.

Reflecting on these thoughts yesterday, I went off to dig up my old copy of the Wall Street Journal from March 30, 1999, the first time the Dow Jones Industrial Average crossed 10,000. I could not find that old paper, but I did find this interesting article instead.

Excerpt from, “Dow 10,000 and the Lost Decade”:

I have made it a habit to save the print edition of the Wall Street Journal on certain key dates including March 30, 1999, the day after the Dow Jones Industrial Average (DJIA) first crossed 10,000.

Although the DJIA is a flawed benchmark, no other index has captured the imagination of the public to the same degree. As we again approach the 10,000 level, there appears to be no shortage of commentators ready to discuss what this means for the overall market. It comes as no surprise that value investors attach no particular significant to round numbers for individual stock quotations or for market indices.

However, it is hard to avoid recognizing the obvious fact that the past decade has seen very disappointing returns for index investors given that stocks started the ten year period at very high valuations. This is true of many individual DJIA components as well…

Read on for a very interesting look at the market’s performance over the past decade, along with some worthwhile notes on the changes we’ve seen in media, business, and the debt and commodity markets over that time frame.

Related articles and posts:

1. The great “bear market rally” post – Finance Trends.

2. The Invisible Crash: book review – Financial Sense.

CEOs won’t invest in America, why should you?

Remember what we said in our last post about the dangers of corporatism and crony capitalism taking hold in America? Frederick Sheehan, writing for Credit Writedowns, has a few things to say on that point.

From, “Corporate CEOs won’t invest in America, why should you?”:

American CEOs are voting with their feet. Since they aren’t investing in the United States, does it make sense for the individual stockholder or bondholder to do so?

One armchair columnist told his readers to ignore corporate whiners. Those overpaid stuffed shirts will always gripe, goes his argument. The columnist may have a point, but also an inconsistency. The columnist, who is also an economist, has skewered CEOs in the past for cashing out their stock options as quickly as possible. There is much truth to that.

But, it is not in a CEO’s interest to publicly denounce the Obama administration, which still has over two years to hand out and withhold favors. It is the favoritism that the CEOs are denouncing, either directly or by implication.

Corporate managers lived through the last episode of blatant favoritism, during the final months of the Bush administration. In the fall of 2008, when credit was scarce, the Treasury Department and Federal Reserve decided which companies would receive loans and government guarantees. Those that fell under the umbrella paid around 5% interest on their debt. Those not so blessed paid 15%, or went broke...”

As Sheehan explains in his post, many American CEOs and investors are looking for options outside the US when it comes to making new capital investments. Large manufacturers are looking to Asia as a place to move their business, as mounting regulations and ever-increasing costs of doing business make the USA an unattractive place to do business.

Read on to learn why those whose businesses are more rooted locationally are left to stay and fight for a less intrusive business climate, and why even formerly willing corporatists (like GE’s Jeff Skilling) are chafing at the new environment of over-regulation in the US.

Worthwhile Tips

Everyone knows that people ought to keep it. However, merely a couple of people escape. Why? Because you will find a lot of competing focal points your money can buy within our lives. However, it can save you much more of their purchases for any situation which will surely come, the college of the children, retirement home and also you. You don’t think you are able to afford. It may seem your salary to salary, there is nothing left after meeting their expenses. You may think that you ought to have more money compared to what they are able to afford in order to save.

It is a fact the economy isn’t a few mathematics. It’s an emotional. Whenever you save important, then and just then helps you to save money. Before determining to pay for yourself first, you won’t be saved. When you achieve the finish won’t be enough money for you personally. Here are a few quick tips about how to cut costs.

 Tip Number One – Know where your hard earned money goes

 Keep an eye on that which you spend the following month. Write lower every purchase, or delivery of the request. But in the finish from the month, your work would be to take into account every cent.

 Tip Two – Get charge of your financial troubles

 Personal debt and charge card financial loans is really a vehicle two biggest personal finance channels. Adopt the attitude when you have to pay money for this, don’t. Stop making use of your charge card and pay high rates of interest on stuff that you most likely don’t need anyway. Stop purchasing a brand new vehicle on credit, it’ll lose its value when lots of driving. Make use of the snowball method to get away from debt after which stay out!

 Tip Three – Are you currently a collector?

 Lots of people spend some money and merchandise. You may collect records, books, antiques, coins, dolls … view your collection. Have they got a genuine value (for any small group of popular), which are among the 1000’s who’ve no real resale value? Possess a duplicate? Are you currently purchasing most enjoy?

 Tip Number 4 – Take a look at budget to provide a present

 Or buy costly gifts lengthy listing of buddies and family? That you can do anything, no more prone to mean the one who receives the prize? Sometimes, for consumption, home gift for somebody whose house would be a mess which includes the record would be the best gift they receive.

They’ll just change the rules

Inflation or deflation ahead?

Why, after the bursting of a massive credit bubble, do losses from defaulted debt go unrecognized? How is that we simply continue to hum right along?

Chris Martenson explains in, “Don’t worry, they’ll just change the rules”:

Suppose, for the sake of argument, that there is a world in which banks are allowed by their regulators to pretend their default losses simply do not exist. And, even more outlandishly, some of these banks are allowed to sell heavily damaged loans to their central bank at nearly their full original price.

What does “deflation” mean in such a world? Not much, as it turns out. At least from a monetary perspective, because money is not being destroyed at nearly the rate that would be expected or predicted by the size and rate of the defaults.

This is the world in which we currently live. Trillions in probable and provable losses quietly exist, out of sight, on the balance sheets of the Federal Reserve and other financial institutions. If they ever come out of hiding and onto the books, I think the deflationists will be proven correct beyond all doubt...”

Which brings Martenson to his next point: the “extend and pretend” game which favors the “too big to fail” (TBTF) banks is part and parcel of the trend towards changing the rules of the game at will. In this framework, what should happen may not transpire at all, or at least not for some time.

“…The theme here is simple enough: If and whenever the circumstances justify a major response, existing rules will be changed, altered, bent, or broken.

Because of this, I routinely argue that what should happen won’t happen, at least not right away, and that there’s really no such thing as investing anymore, only speculating — unless you are a big bank, favored by the Fed, with advance information…

Check out the full piece to hear why the rules of the game are constantly changing, and why we’re all speculators (as opposed to investors) now.

Michael Burry: Betting the Blind Side

Michael Lewis has a new book coming out called, The Big Short. It’s supposed to be an account of the financial crisis and how the “US economy was driven off a cliff”, thanks to the drive for cheap housing and the toxic investments Wall Street packaged around this goal.

Vanity Fair has published an excerpt from Lewis’ book called, “Betting on the Blind Side”, which highlights the subprime-housing short trade of California hedge fund manager, Dr. Michael Burry.

In early 2004 a 32-year-old stock-market investor and hedge-fund manager, Michael Burry, immersed himself for the first time in the bond market. He learned all he could about how money got borrowed and lent in America. He didn’t talk to anyone about what became his new obsession; he just sat alone in his office, in San Jose, California, and read books and articles and financial filings.

He wanted to know, especially, how subprime-mortgage bonds worked. A giant number of individual loans got piled up into a tower. The top floors got their money back first and so got the highest ratings from Moody’s and S&P, and the lowest interest rate. The low floors got their money back last, suffered the first losses, and got the lowest ratings from Moody’s and S&P.

Because they were taking on more risk, the investors in the bottom floors received a higher rate of interest than investors in the top floors. Investors who bought mortgage bonds had to decide in which floor of the tower they wanted to invest, but Michael Burry wasn’t thinking about buying mortgage bonds. He was wondering how he might short, or bet against, subprime-mortgage bonds.

We mentioned Burry in yesterday’s post, highlighting a passage from Greg Zuckerman’s book, The Greatest Trade Ever, which pinpoints the moment that Michael Burry and John Paulson’s subprime short aspirations were realized in the creation of credit-default swaps (CDS) tied to mortgage bonds.

I’m halfway through Greatest Trade Ever now, and Lewis’ account of Burry’s subprime trade should prove to be an engrossing companion piece to Zuckerman’s book. You may even want to print the VF article out, as it’s a lengthy excerpt from Lewis’ book.

Chart of the day: commodities vs. shares

Chart of the day: Dow Jones – AIG commodity index (^DJC) versus the S&P 500 (^GSPC) and the Dow Jones Industrial Average (^DJI), on a two year timeframe.

As you can see from the enlarged version of the chart (click chart to expand), all three indices are down by 30-40 percent over the two year period (April 2007 – April 2009).

You’ll note that while US shares entered their bear market at the end of 2007, commodities to continued to outperform stocks (by a wide margin) up until the summer of 2008, when commodities joined the “liquidation party” which hit most major asset markets worldwide. Both stocks and commodities have taken their fair share of abuse on the downside since.

The three indices have staged a bit of a rally off of their early March lows, with ^DJC and ^DJI leading the way in relative performance (now down the least in percentage terms) on this two-year chart.

However, if you flip to a one-year timeframe, the stock indices, ^DJI and ^GSPC, are shown to be outpacing the commodities, ^DJC, in terms of relative performance (with commodities showing a – 45% return over the period).

Some of the long/index commodity ETFs such as DBC, DJP, and DYY seem to have been forming a base and showing strength lately (Disclosure: no position in any of these at time of writing).

Will the leading commodity indexes begin to outperform shares, or do the major US stock averages still have some juice to the upside?