Economic crisis. GIMP. Earbuds. National Freedom Day. Money & Inflation. IFA Investment Principle #5. Arguments against indexing? CEF vs. GTU. Mark Faber. Perils of UltraShorts. Mint.com feedback. Calculate your portfolio’s Standard Deviation?
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2008 was financial crisis. 2009 will be economic crisis.
Using GIMP for images now. Listen to EconTalk discuss open source software.
My Z.buds were crap. Bought Radius earbuds and they are OK. Use coupon code "buymeaniphone" to save $5. Would have liked the tangle-free cords of the Z.buds, but the wires inside broke. Al so, their L-R balance seemed off.
GURU: Marc Faber of GloomBoomDoom.com. "We are at the beginning of the worst economic contraction since the Great Depression ." Recovery in 2, 5 or even 10 years time. The market may go even lower from here. 2009 is going to be a catastrophe, economically speaking. Monetary policy led to the excesses and leverage and debt growth. Rate of inflation will accelerate. Interest rates will increase. Markets will drift lower because they are not compelling on P/E, or dividends, or book values. Commodity prices now, after the huge setback, are relatively low. Also Asian markets are low and stocks are probably OK but could go down more. Investing in gold, gold miners in particular, oil, oil companies. Says US Government is a bigger Ponzi scheme than Madoff. S&P may go up, but we have to look at the underlying currency relatively speaking.
Perils of Ultrashorts : FXI (China index ETF) was down 46.7% in 2008 but FXP, the UltraShort of FXI, was down 57.2%. "Furthermore, the purveyors simply highlight that these seek to replicate (plus or minus 1 time or 2 times) the daily returns, and that they "do not seek to achieve their stated investment objective over a period of time greater than one day" … despite presumably knowing full well people do not view mutual funds as one-day holds. Indeed, investors are sent a prospectus when they execute a trade, meaning that there is at least three days’ price risk before they even get the prospectus, and that alone is enough to cause damage."
Mint.com feedback
How to calculate your portfolio’s Standard Deviation or Sharpe Ratio
Subscribe in iTunes to "Index Funds Advisors " podcast to hear me do the Quote of the Week!
Let’s say we suddenly start doing everything right according to the Austrian economics playbook. We go on the gold standard and abolish the Federal Reserve. We drastically cut back federal government spending, including all bailouts. We pull back from all overseas engagements. Would it work? Meaning, would we end up more prosperous in the long term than if we stay the current course?
First, can you imagine the immediate shock the the economy? Could anyone really process all of these changes at once, including all of the second-order effects and how they would impact your particular situation? Shocking if done instantaneously. Even shocking if done over the span of one year. But big deal. Get over it. We can be shocked and still survive, right?
Yeah, if the USA were a closed system I think we would be just fine. We would trade our gold for the farmer’s corn. Farmers would trade gold for tractors. Tractor builders would trade gold for houses. On and on. We would employ all the former government workers as road builders. New banks would arise in cities eager to lend us some gold for capital projects. We would do just fine here in the USA.
It is the fact that the USA is not a closed system that complicates the issue. See, in this process we trade dollars for gold. Each dollar is worth 1/900 oz of gold (let’s say). Bring in your pieces of paper, your Federal Reserve Notes, to the bank and they will give you gold coins or a receipt for 100%-reserve gold coin storage.
So now we all have gold in our pockets. And we want to buy a giant LCD TV. With what exactly and from where? Dollars? Ha, they’re gone now. A TV made in the USA? Yeah, right. You gotta give up some gold to some other country. So we load up our Wal-Marts, our Dollar Trees, and our shopping malls with stuff that we trade away our gold for. That represents an outflow of gold from USA. To keep the system in balance, don’t we need a corresponding inflow of gold? Otherwise someday we completely run out of gold, right? Can’t just print more gold can we?
It is the same scenario with any government that is left over. How are they going to pay out Social Security in gold? How are they going to send thousands of troops overseas and build billion-dollar airplanes and pay people to read newspapers in fancy offices? Since they don’t have a gold mine to readily tap into, they either have to take away your gold, or have to borrow gold from China, or they have to stop spending gold. The first option quickly reaches either a point of diminishing returns or reaches a point of torches and pitchforks. The third option is their option of last resort. Which leaves us with the USA borrowing gold from China. Which is kind of making my head spin trying to think of how we are going to come up with the gold to not only pay that back but also to pay the interest.
But maybe that is the point. We would have to figure out some way of getting gold from other countries. We would have to actually make or do things that they want. For example, we could trade our tractors and our corn for their gold. We could build houses for them. We could even help build their roads. Either that or we build our own LCD TVs and stock our Wal-Marts and Dollar Trees ourselves. Shocking isn’t it? Economics does work.
As I ponder this scenario, I realize just how fortunate and prosperous we in the USA have been these past few decades. Being able to "manufacture gold out of thin air," that is, print dollars to trade to foreigners. We are so lucky that they want our fiat dollars. Because that guy reading the newspaper really isn’t a very good road builder.
Read an article by Michael S. Rozeff today in which he describes his approach to investing. The article was called "The Opportunistic Investor ." He says that a year ago he published two articles on buying a diversified portfolio and holding it. That portfolio is down 34 percent. Better than most. He says he actually did not invest according to his advice in that column. Instead, he was in cash.
He goes on to say that buy and hold is not the right approach. And I think the reason might have to do with the notion of "Austrian Investing," though he does not use those words. Here is what he does say about buy and hold:
The problem with that approach was and is government. Government alters currency values, and this alters the value of different kinds of investments. Government creates booms and busts, and that alters investment values. The presence of government forces us to speculate.
Then he goes on to talk about how we need to find value and buy it, be it stocks, real estate, or even timber.
I am on the hunt for more information about Austrian Investing. They’ve been right about the economy, maybe they would be right about investing too.
Check out IFA Quote of the Week Issue #44 where they speculate that Hollywood may remake How the Grinch Stole Christmas with Bernie Madoff in the lead role: (Click bottom right corner to watch in HD)
Mon, January 26 2009 » Blog, Fun, Video » Comments Off on Grinch Movie Remake Again?
With the stock market down some 40% last year, many people are asking, "Where did the money go?" Sure there are some stock market losers. But remember the winners, those who sold their stocks in October 2007? They got their money. Remember also that for every share of stock sold, there was a share of that stock bought. But Fannie Mae used to trade for $80 a share and is now just pennies a share. Is the money just totally gone? Where did that market capitalization go? Furthermore, we need to push deeper, past the issues of money and valuations and ask, "Have we really lost wealth?" The answer may surprise. We will get to that last question in a moment. But first, let’s follow the money.
Where did the money go?
The USA Today ran a story that read, "$2 trillion wiped out of retirement funds " so far in 2008. Really? Two trillion dollars is wiped out? Lost? This is a fascinating notion. You wake up one day and wealth is suddenly gone. Vanished. Like some ice cube that has melted on a hot street. Here one moment and gone the next. As we shall see, the ice cube metaphor may be even better than it first appears. Stocks have melted.
The NPR Planet Money podcast a few weeks ago sought to answer the question "What is money?" and recently asked "Where did the money go?" To help us visualize the "loss" of money, they acted out a little skit with three market participants. At the start of the skit it was noted that among them the sum total of money was $400. Russ had $200, Alex had $200, and Lois had a house. (It was a little green Monopoly game piece house.) Russ Roberts (of EconTalk fame) decided he wanted a house. So he offered Lois $200 for hers and she accepted. Russ has the house, Lois has $200. Some time passed and then Russ wanted to sell his house. Alex was the only one who made an offer and it was for $100. Russ took the offer but was obviously unhappy about "losing" $100. At the end of the skit, Alex owned the house and $100, Lois had $200, and Russ had $100. The sum total of money was $400. Therefore, the net amount of money remained unchanged although some of the market participants had varying emotions about their transactions.
Lois was happy to receive the $200 for her house because she said she had originally purchased the house for $100. But she said that she still had to live somewhere and would now have to go and buy another house. Russ was obviously unhappy because he has $100 less than when he started. And still no house. Alex was probably the happiest because he has a nice house and still has $100 of his original $200 remaining. But with the net amount of money remaining the same, they didn’t really ask the question, "Why did the house only get an offer of $100?" Why not a $300 offer? Don’t house prices continuously rise and never fall? It was a fun exercise to walk through, but it still left me unsatisfied. What’s behind the rise and fall of prices? Let’s try to figure that out. But instead of houses, let’s switch over and talk about gold for a moment.
Gold and the Market
Gold is different than houses. We can’t live in gold. Instead, gold is money. Ancient money. Gold would still be money today if the governments would stop prohibiting it from being money. Consider these characteristics of money: money must be marketable, easily transportable, relatively scarce, relatively imperishable, easy to store, easily divisible, and uniform in quality. Gold meets all of these characteristics and has been used as money by default through the ages. Ironically the dollar, the world’s reserve currency, doesn’t meet all of these characteristics. It misses the scarcity test.
So let’s trade two things: dollars and gold. It used to be that a dollar represented a fixed amount of gold, but today we can trade one for the other at different amounts. If you have dollars and I have a one ounce gold coin, you can make me an offer to trade some of your dollars for my coin. I can accept or refuse. If you offer me $200, I will refuse. If you offer me $2000 I will accept. Somewhere in between these two ranges we may reach an agreement (or we may not). The more people there are around to offer bids and ask for bids, the greater the chance that someone can reach an agreement on a fair trade. As an example, say your bid for my gold coin is $600 but Troy bids $800. You may consider increasing your bid to $850 in light of his bid. But before you do, Bill next to me accepts Troy’s $800 bid for his coin. You witness that and decide to limit your bid to me to $800 also. Why pay more, right? Or if you are really trying to game me, you may hold your bid at $600 thinking that no one else is around now that will bid something higher.
This is the workings of the market. Bidding and asking is how we reach agreed-upon prices. This is why stock prices are what they are: dynamic. It is a continuous mixture of people wanting to sell at the highest asking price and people wanting to buy at the lowest bid price. But they know they are competing with other sellers and buyers for those same shares.
Motivated Sellers
Competition is the heart of the market. It is the heart of the gold market and the heart of the real estate market and the heart of the stock market and even the heart of the currency market.
In the NPR skit, Alex was able to buy the house from Russ for only $100 because there were no other offers higher and Russ really wanted to sell. A motivated seller they say. Perhaps he needed to move because of a job relocation. There are motivated sellers in all markets just as there are motivated buyers. Are there more motivated sellers than motivated buyers? Prices will fall as bids dry up. Prices will fall as the number of offers rise and the amount asked for sinks. Are there more motivated buyers? Prices will rise as bidders compete. Prices will rise as owners hold tight.
Presently in our global stock markets our global real estate markets and our global commodity markets we have not just a boatload of motivated sellers but a whole fleet of cruise ships full of motivated sellers. We have banks, brokers, hedge funds rushing for the exits at the same time, needing to sell just to get the dollars to pay off debts and client redemptions. We even have investors motivated to sell simply because they see so many other motivated sellers selling.
As naturally happens when motivated sellers outnumber motivated buyers, prices drop. We might call this an asking war , the opposite of a bidding war. Sellers lowering their asking prices in the face of other low asking prices. Asking prices for stocks go lower. Asking prices for houses go lower. Asking prices for copper goes lower. But motivation in a particular market is only part of the story. We need to also consider motivation across markets. I may want to sell my house not because of physical reasons but because of economic reasons. Perhaps I want to trade house wealth for stock wealth. I may prefer at present to rent and hold 10,000 shares of an index fund rather than owning a house. I probably will not find the exact trade I’m looking for; that is, someone to offer to trade me their 10,000 shares for my house. Instead, I’ll have to trade through money. I sell the house for dollars and then sell the dollars for the index funds.
But the net amount of money in the system doesn’t change as a result of motivations. The buyer gets to keep the net amount that the seller loses out on. Alex has the $100 instead of Russ. When prices kept going up, did anyone ask, "Where did that money come from?" Not likely. We don’t care how we got it. Yet we darn sure want to know how we lost it. But both answers are the same. The net amount of money remains constant among the total pool of buyers and sellers.
[Note that I am for purposes of this discussion ignoring the effect of fractional reserve banking and the creation of money when lent and the destruction of money when a loan is paid back. This effect is indeed serious and makes an enormous impact to the economy as a whole.]
Lost Wealth?
Now we know where the money went. It is still there. Not a satisfying answer to owners of stock mutual funds in their 401K plans who say, "Oh great, more motivated sellers means any bids I seek for my shares will be lower if I were to try to sell today." Penny’s 401K plan may have a cost basis of $100,000. And last year when she checked the bids on her portfolio it may have fetched nearly $300,000. But based upon recent offers, it may only receive bids for $150,000. That seems like lost wealth to Penny. Is it?
It depends. It might not be lost wealth to Penny. We need to look at what Penny would have wished to trade her shares of stock for? A house? If so, Penny is in luck because houses she liked that used to fetch $300,000 bids are now asking only $150,000. So Penny’s 401K plan would buy the same amount of house even though its dollar value has fallen in half. Similarly, Penny may have wished to use her 401K to travel or to eat or to pay her gas bill. Dollar values for each of these things may have fallen, but their values may have stayed relatively close to the value of her stocks over that time.
We are living in a world where bids for practically every asset are lower in comparison to bids for dollars. Many motivated sellers of stuff, many motivated buyers of dollars.
So the problem is the thing we are using as money, which itself is becoming more "valuable." The banks, brokerages, and hedge funds that need to get dollars are not just motivated sellers of stocks and commodities, but they are also motivated buyers of dollars. There are lots of motivated dollar buyers. Prices of dollars rise. Everything else seems more expensive compared to dollars as a result.
But we the investing public with 401K plans are typically not motivated buyers of dollars. We are more typically motivated buyers of the things that dollars buy. Food, travel, cars, shelter, heat, etc. When we trade one of these for the other, we might expect roughly the same item-for-item transaction this year as we did last year. The thing in the middle is what has changed: the money. The demand for the dollar by banks, brokers, and hedge funds has skewed the monetary valuations of both the things that we need to sell and the things that we want to buy. But in the end, it might possibly be that our wealth remains somewhat unchanged just like the amount of money remains unchanged among buyers and sellers.
Which brings us back to the ice cube metaphor. With melting stock prices, melting real estate prices, and melting copper prices, just like a melting block of ice the water still exists — only in a different form. The wealth once stored in stocks is now stored in dollars. Ice melts to water. Stocks melt to dollars. There is one more thing. Something I really don’t want to think about in this analogy. What happens when the water evaporates?
I used Apple’s Keynote presentation software from their iWork package to create a video that goes along with the IFA Quote of the Week Issue #44. The episode talks about the rise and fall of fund manager Bill Miller. Have a look and give me suggestions for improvement. Get these videos delivered to your iPod or iPhone automatically by subscribing through iTunes.
I loved the most recent EconTalk podcast with Russ Roberts interviewing Eric Raymond about Open Source software. Eric explains why it works and why it works better than closed source.
I think we need to take the discussion to the next step and talk about open source Government. One of the keys of open source software is the idea of “forking” the code. If someone wants to go a different way, they can make a copy and do their own thing with it. I suppose the idea of “state’s rights” is like forking the code on a governmental level.
One thing they talked about regarding open source development is that it works best (especially graphical user interface development) when there is a “dictator” who approves the changes. We’ve come to think of dictators in government as being a bad thing. Maybe it is a matter of scale. If the dictator role is moved down the the smallest level of government, maybe the the analogy could work. But certainly not at a national leve.
Logic Pro. Gingerbread Man Geocache travel bug. Backing up your computer. Mint.com? Live CashBack worked. Non-systematic risk. Rick says Mish is full of mush. P/E not as good at P=E/i. Lazy Portfolios are not idiotic. Great risk, need long time. Tool: table of returns.
I ENCOURAGE you to Download this show thru iTunes! But, if you just cannot deal with that then go ahead and Play the new show right now
Show produced in Logic Pro on my MacBook. I think I had the expander turned up a little too high because after each pause in speech, I hear some buzzing sound that dies down in about one second.
A glitch on show 142 had the first few hundred people downloading the show through iTunes to get the Harry Browne radio show. Why does WordPress combined with PodPress automatically put an .mp3 file into my feed when all I simply do is put in a hyperlink to the .mp3 file. Just another problem to chase.
Please bring me the Gingerbread Man geocache travel bug! Looks like it is in College Station Texas today .
Backups: Recommendations for Mozy.com and SuperDuper, but I am waiting for GDrive, the long-promised online backup from Google. (And why not, they have all my other data.)
GrandCentral, new accounts? Looks like they say they are STILL in Beta. I don’t know how to send out invitations.
Caller wants to know what I think of Mint.com . First thing I say is that it sure looks pretty. But I am REALLY HESITANT to give ANY third party access to my financial data. Anyone think it is safe and OK to use?
Microsoft Live CashBack program did indeed come through and pay me the 25% cash back on my purchases from eBay. But it looks like they’ve shut me down. Does anyone else still have access to it? Do links to eBay still show up in the search results?
Risk that is specific to ONE COMPANY is called non-systematic risk. Systematic risk is that of the entire market. Who cares?
Feedback from Rick says Mish is full of mush. P/E ratio is not a way to measure a stock’s price. Instead, Rick says that the lower the discount rate, the higher the price of the stock. P = E/i. Since the drop in i is steeper than the drop in E, prices should be higher.
Lazy Portfolios are not idiotic. One bad year does not a dumb strategy make. The active managers never show their long-term performance and especially never show the amount of risk they took. By risk, we mean the standard deviation of the portfolio’s value. And know that the Lazy Portfolios mostly focus on the equities. Yet the majority of investors will temper their portfolios with some fixed income and bonds.
What is the best way to own gold? Buy gold coins? Seems like you’d pay too much commission. How about the GLD exchange traded fund? Or how about the CEF? I’ll try to report to you the differences between these and advantages/disadvantages of each.
Jim Rogers says commodities will be the first asset class to rise after the end of the recession because they still have good solid fundamentals.
Wow, people were really excited today. I must admit, I was getting caught up in the euphoria somewhat myself. I was mostly watching CNN but I also caught the streaming tweets at http://tweetgrid.com/inaug09. As you know, even though I have a Twitter account , I haven’t made much use of it yet. But lots of other people sure have. And when in their Twitter postings they type in a special tag "#inaug09" it helps other people find their tweets. That’s what tweetgrid does. You kinda sit there and watch people posting tweets in real time. Sometimes their links are pretty helpful. Several people post photos in real time. Others post links to major media stories. It was the first place I found out that whitehouse.gov got updated, for example.
But the thing that I got caught up in was the emotion, the joy, people were experiencing at the change of our Chief. They really believe things are going to be different and are going to be better. So far, I have to say they are right. The inauguration itself was indeed a spectacle. Good thing inaugurations aren’t held in June or there would have probably been ten million people trying to get down there. I don’t think I’ve ever seen so many JumboTrons. The media is just fawing over him. He is the rock star’s rock star. He is the Tiger Woods of presidents. BHO is the new JFK.
I believe that joy can be contagious. Like yawning. Like laughter. And with better than one half of our country experiencing sheer joy, maybe the other half can set aside their bitterness, sourness, or skepticism or whatever for a while and give this new executive branch a chance. Let’s see if Obama and his team push the pendulum toward liberty or toward tyranny. Let’s see if it is going to be Austrianism or Keynesianism that gets the upper hand. Let’s see if government does indeed get better.
That’s one of the things I remember from his address. Don’t focus on whether government gets bigger or smaller. Focus on whether it gets better. He will evaluate the effectiveness of each org, and the ones that don’t cut the mustard get dropped. (That could turn out to be a whole lot of orgs!)
So my question is this: After the white tablecloths get balled up and sent to the laundry tonight, will there still be joy tomorrow? Will John Stewart get nasty every night toward this Chief? Or will there be some spirit of civility? Will BHO really bring out the best of the politicians so that they work for us and not themselves? Or is this all just some audacity of hope?
Tue, January 20 2009 » Blog, Reviews » Comments Off on Excitement Tomorrow?
But, if you just cannot deal with that then go ahead and Play the new show right now
Topics in this week’s show include:
5. Passively invest, diversify to the maximum, maintain a small and value tilt and keep turnover, costs and taxes to a minimum. 
With the stock market down some 40% last year, many people are asking, "Where did the money go?" Sure there are some stock market losers. But remember the winners, those who sold their stocks in October 2007? They got their money. Remember also that for every share of stock sold, there was a share of that stock bought. But Fannie Mae used to trade for $80 a share and is now just pennies a share. Is the money just totally gone? Where did that market capitalization go? Furthermore, we need to push deeper, past the issues of money and valuations and ask, "Have we really lost wealth?" The answer may surprise. We will get to that last question in a moment. But first, let’s follow the money.
Topics in this week’s show include:
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