If you have not watched “The Crash Course” by
Chris Martenson, I highly recommend it and that you pass it on to your
friends. It is a reasonably concise presentation and very well done. It
explains quite clearly how we have gotten into this mess. It will
provide you with lots of information that, I am pretty sure, is new and
disturbing. It is apolitical and economically non-ideological. It is
more of a detached presentation of facts and the mathematical
impossibilities inherent in where we are.
Tuesday, March 13, 2012
Extend strategy will not work
The FDIC is broke (although not without additional Fed/Congress credit
access) so is not closing banks that should be closed. Bank closures are
occurring when they collapse under their own weight rather than FDIC
guidelines. Thus, losses are bigger and taxpayers pay more as this game
of pretend and extend goes on. I believe we are in much worse shape than
we are being told and that it is a bigger problem than the government
can handle. I also think the government knows this and that facing up to
it would destroy the dollar and/or country). Hence the pretend game.
Unfortunately the extend strategy will not work because underlying asset
collateral continues to decline and will probably do so for the next
several years. The pretend cannot go on for that long.
The banking system is insolvent, period! Using honest accounting would reveal that condition and expose the house-of-cards economy created via credit over the past 2 or 3 decades. The problem is probably still economically solvable but politically intractable so the government hopes to paper it over. Enron-type accounting is allowed to enable banks to keep exposure on non-consolidated subsidiary books. Banks are allowed to value assets at whatever they deem them to be worth rather than accounting standards that have been in place for centuries. Condoning this fraud may defer the political problem. It cannot solve the economic problem and likely makes it unsolvable at some point. Market forces will eventually overwhelm the charade, and put our entire economic system at risk of implosion. The following article from David Reilly at discusses the issue.
David Reilly
Banks Need to End $1 Trillion Kick the Can Game: David Reilly
Share | Email | Print | A A A
Commentary by David Reilly
Sept. 3 (Bloomberg) — Banks have known for a while that they would eventually have to face up to some of the assets they had stashed in off-balance-sheet vehicles. Now that day is looming, and regulators are concerned that lenders might need even more time to deal with such items.
Enough already. It’s time for banks, and their regulators, to stop playing kick the can. Either banks have — or can get — the capital they need to support assets on their books, or government watchdogs should take action.
Instead, regulators last week raised the prospect of giving banks a one-year, phase-in period to fully recognize for capital purposes what may be about $1 trillion in assets coming back onto balance sheets next year. This breathing room may ostensibly help some banks avoid having to quickly beef up regulatory capital, the buffer that helps them absorb losses.
Such a delay is unwarranted. Banks have had almost two years to prepare for accounting-rule changes adopted this spring that will place greater restrictions on the use of off-balance- sheet vehicles.
And it was just such hemming and hawing that helped get the banking system into its current mess. After the implosion of Enron Corp., accounting-rule makers tried to shut down off- balance-sheet games.
Bank Fight Back
Banks fought back, and the Financial Accounting Standards Board watered down the restrictions. That helped fuel both the rise of off-balance-sheet lending vehicles during the credit- bubble years as well as the so-called shadow-banking system.
These vehicles allowed banks to shuffle assets off their books — everything from mortgages to credit-card debts to auto loans — even though they often still bore some risks from them. By seemingly shedding these assets, banks were able to hold less capital. That helped boost returns and profit. It also allowed risks to build up out of the sight of investors, regulators and in some cases the banks themselves.
As Federal Deposit Insurance Corp. Chairman Sheila Bairsaid in an op-ed article in the New York Times this week, “the principal enablers of our current difficulties were institutions that took on enormous risk by exploiting regulatory gaps between banks and the non-bank shadow financial system.”
Those gaps were exposed when the financial crisis hit, and many banks were saddled with assets, and losses, from those previously out-of-sight, off-balance-sheet vehicles. The best- known case involved Citigroup Inc., which suddenly had to absorb about $25 billion in collateralized debt obligations.
Strained Balance Sheets
Even smaller banks such as Zions Bancorporation had to help off-balance-sheet vehicles, straining already-stretched balance sheets.
This spring, the FASB tightened the rules. In light of that, bank regulators — the FDIC, Office of the Comptroller of the Currency, the Federal Reserve and the Office of Thrift Supervision — have to decide how these returning assets will be treated for capital purposes.
Regulators allow banks to hold different amounts of capital against different kinds of assets, which is why regulatory capital can differ from a bank’s stated shareholder equity, or net worth. Those deliberations gave rise to the possibility of the year-long phase-in period.
A year may not seem like a long time; it is certainly less than the three-year grace period sought by some banks.
Don’t Dilly-Dally
Yet regulators, including the FDIC’s Bair, acknowledge that the new accounting rules are needed. More than that, in a television interview last week, Bair said if banks had faced stricter treatment for off-balance-sheet vehicles “a few years ago, I think there would have been more capital in the system.”
If these rules would have helped to prevent the current crisis, that is all the more reason not to dilly-dally.
Bair and other regulators haven’t said whether they would support a phasing-in of capital requirements. Bair has said, though, the 2010 start date for the new rules “is a little troublesome.”
Big banks in particular should have to face up to reality from the get-go since the government’s stress tests of 19 large institutions acted as if about $700 billion in off-balance-sheet assets had already returned.
The big four banks — Citigroup, JPMorgan Chase & Co.,Bank of America Corp. and Wells Fargo & Co. — are expected to see about $550 billion in assets return to their books under the accounting-rule changes, Barclays Capital analyst Jason Goldberg estimated in a recent report.
Besides having had time to prepare for the changes, there is another reason to avoid delay. Any postponement opens the possibility that banks will use the phase-in period to argue for further forbearance.
That is a time-honored tradition in Washington — if you can’t kill something outright, just delay it into oblivion.
Bank lobbyists shouldn’t be given that chance. Banks need to take their off-balance-sheet medicine now, without delay.
The banking system is insolvent, period! Using honest accounting would reveal that condition and expose the house-of-cards economy created via credit over the past 2 or 3 decades. The problem is probably still economically solvable but politically intractable so the government hopes to paper it over. Enron-type accounting is allowed to enable banks to keep exposure on non-consolidated subsidiary books. Banks are allowed to value assets at whatever they deem them to be worth rather than accounting standards that have been in place for centuries. Condoning this fraud may defer the political problem. It cannot solve the economic problem and likely makes it unsolvable at some point. Market forces will eventually overwhelm the charade, and put our entire economic system at risk of implosion. The following article from David Reilly at discusses the issue.
David Reilly
Banks Need to End $1 Trillion Kick the Can Game: David Reilly
Share | Email | Print | A A A
Commentary by David Reilly
Sept. 3 (Bloomberg) — Banks have known for a while that they would eventually have to face up to some of the assets they had stashed in off-balance-sheet vehicles. Now that day is looming, and regulators are concerned that lenders might need even more time to deal with such items.
Enough already. It’s time for banks, and their regulators, to stop playing kick the can. Either banks have — or can get — the capital they need to support assets on their books, or government watchdogs should take action.
Instead, regulators last week raised the prospect of giving banks a one-year, phase-in period to fully recognize for capital purposes what may be about $1 trillion in assets coming back onto balance sheets next year. This breathing room may ostensibly help some banks avoid having to quickly beef up regulatory capital, the buffer that helps them absorb losses.
Such a delay is unwarranted. Banks have had almost two years to prepare for accounting-rule changes adopted this spring that will place greater restrictions on the use of off-balance- sheet vehicles.
And it was just such hemming and hawing that helped get the banking system into its current mess. After the implosion of Enron Corp., accounting-rule makers tried to shut down off- balance-sheet games.
Bank Fight Back
Banks fought back, and the Financial Accounting Standards Board watered down the restrictions. That helped fuel both the rise of off-balance-sheet lending vehicles during the credit- bubble years as well as the so-called shadow-banking system.
These vehicles allowed banks to shuffle assets off their books — everything from mortgages to credit-card debts to auto loans — even though they often still bore some risks from them. By seemingly shedding these assets, banks were able to hold less capital. That helped boost returns and profit. It also allowed risks to build up out of the sight of investors, regulators and in some cases the banks themselves.
As Federal Deposit Insurance Corp. Chairman Sheila Bairsaid in an op-ed article in the New York Times this week, “the principal enablers of our current difficulties were institutions that took on enormous risk by exploiting regulatory gaps between banks and the non-bank shadow financial system.”
Those gaps were exposed when the financial crisis hit, and many banks were saddled with assets, and losses, from those previously out-of-sight, off-balance-sheet vehicles. The best- known case involved Citigroup Inc., which suddenly had to absorb about $25 billion in collateralized debt obligations.
Strained Balance Sheets
Even smaller banks such as Zions Bancorporation had to help off-balance-sheet vehicles, straining already-stretched balance sheets.
This spring, the FASB tightened the rules. In light of that, bank regulators — the FDIC, Office of the Comptroller of the Currency, the Federal Reserve and the Office of Thrift Supervision — have to decide how these returning assets will be treated for capital purposes.
Regulators allow banks to hold different amounts of capital against different kinds of assets, which is why regulatory capital can differ from a bank’s stated shareholder equity, or net worth. Those deliberations gave rise to the possibility of the year-long phase-in period.
A year may not seem like a long time; it is certainly less than the three-year grace period sought by some banks.
Don’t Dilly-Dally
Yet regulators, including the FDIC’s Bair, acknowledge that the new accounting rules are needed. More than that, in a television interview last week, Bair said if banks had faced stricter treatment for off-balance-sheet vehicles “a few years ago, I think there would have been more capital in the system.”
If these rules would have helped to prevent the current crisis, that is all the more reason not to dilly-dally.
Bair and other regulators haven’t said whether they would support a phasing-in of capital requirements. Bair has said, though, the 2010 start date for the new rules “is a little troublesome.”
Big banks in particular should have to face up to reality from the get-go since the government’s stress tests of 19 large institutions acted as if about $700 billion in off-balance-sheet assets had already returned.
The big four banks — Citigroup, JPMorgan Chase & Co.,Bank of America Corp. and Wells Fargo & Co. — are expected to see about $550 billion in assets return to their books under the accounting-rule changes, Barclays Capital analyst Jason Goldberg estimated in a recent report.
Besides having had time to prepare for the changes, there is another reason to avoid delay. Any postponement opens the possibility that banks will use the phase-in period to argue for further forbearance.
That is a time-honored tradition in Washington — if you can’t kill something outright, just delay it into oblivion.
Bank lobbyists shouldn’t be given that chance. Banks need to take their off-balance-sheet medicine now, without delay.
Overstaying bad investments
This is the first article in the Investing series.
It is introductory and provides a range of observations. Sophisticated
investors may want to skip it as it is basic and aimed at novice
investors. It does, however, contain some elements that will recur in
subsequent articles.
Mr. Lorie, in his inimitable fashion, described the market in light of these conclusions as “a game worth winning, but not worth playing.”
Much controversy has arisen regarding the validity of the EMH. Some of this criticism is misguided in that it attributes claims never made by proponents. For our purposes, I would like to differentiate between short and long-run, without precisely defining these periods. In the long-run, markets can clearly become over or undervalued. However, even those who make such claims usually do so after the fact rather than during the bubble or distortion. As examples: In 1999 who predicted an imminent dot com collapse or in 2005 predicted the housing collapse? Some did, but they were dismissed as “wingnuts.”
I believe that EMH holds in the short-term but less so in the long-term. Thus, whether markets in general are priced correctly or over or undervalued, individual stocks within markets are “correct” in the sense that it is difficult to find stocks that are over or undervalued. That is, stock picking cannot produce excess returns on any sustained basis.
More will be said about short-run and long-run differences later in this series.
The fact that we are “average” should not be discouraging. It is consistent with the findings of the Efficient Market Hypothesis. It does not mean that we cannot make money investing, merely that we cannot obtain superior (outperform the benchmarks) returns on a consistent basis. Don’t feel bad, highly paid “experts” running mutual funds overwhelmingly fail to equal their market benchmarks.
Recognition that we are “average” is important to investing success. It should prevent us from getting overextended in positions and overstaying bad investments.
That is easy to do, even for small investors. Simply buy an index fund that mirrors the average you want to match. There are mutual funds that reproduce the performance of the Dow, S&P 500, Wilshire, Nasdaq, etc. You can buy one of these and forget everything else. You will virtually equal the market as you have defined it. Exchange-traded funds (ETFs) are also available that provide the same benefit.
Fully diversified portfolios will approximate market returns. Index funds and some ETFs provide that diversification for you.
Investors with such expectations would likely reduce their positions in stocks. The strength of your expectations and the costs of being wrong are two factors that influence your portfolio allocations.
Two other ways are to reduce your exposure to stocks and/or shift your weightings.
Reducing your exposure to stocks involves taking money out of play. You might move some funds out of equities into bonds, thus reducing your exposure to equities. On the other hand, you might leave all your funds in equities but shift the allocations. Of course both strategies can be used – reduce exposure and shift weightings.
One of the simplest ways to change weightings is via the use of sector funds. Sector funds specialize in various sectors of the economy. If you believe retailers or manufacturing might outperform the general market, you might want to overweight these sectors. Doing so, puts you in position to either over or underperform the general market, depending upon what develops.
For investors who prefer to approximate the market, an index fund or an ETF is efficient. Taking some money out of this index fund and placing it into one or two sectors is an effective way to retain some diversification while weighting a bit more heavily toward those sectors you perceive as having value.
If you believe the general stock market will not do well, your favorite stock or sector will be heavily influenced. If your expectations are particularly negative, you might want to deploy your assets to alternative investments.
Even so-called low beta investments are not immune to market waves as witnessed by the sell-off of precious metals when the markets turned down in 2008.
The past is useful information only to the extent that it enables you to make better judgments regarding the future. It has no relevance to current prices.
To be a superior investor, you must be able to anticipate the future both earlier and more accurately than others. James Lorie recognized this exception to the efficiency of markets. Despite all of the mathematical testing, he asserted that some people were capable of beating markets. Their methods were suspected to be the ability to see the future better than the rest of us. Evidence for this, according to Mr. Lorie, is the people on their yachts at St. Tropez who do not reveal talk about their methods.
Being correct and too early generally results in double disappointment. The first is when you take your initial position and underperform because you are ahead of market expectations. The second arrives after you have given up the position, believing your analysis to be incorrect. Then the market finally catches up to your “wisdom” and the investment moves up. By this time, you are out of your position.
Thus, what you are really trying to do is to forecast what market expectations will be in advance of their changing. You can be right regarding reality and still lose money if you are too early. John Maynard Keynes colorfully expressed this anomaly thusly: “The market can remain irrational longer than you can remain solvent.”
I have personal trading records vividly demonstrating the “too early” problem. For quite a while I was convinced that the banks and especially Fannie and Freddie would collapse. I shorted (via the use of puts) these entities. I entered and exited these trades many times without making any money (actually losing money). Finally, out of frustration, I threw in the towel only to see my expectations fulfilled but not my net worth. I was correct but too early.
Subsequent articles will deal with personal objectives. Three different set of objectives will be established for generic investors. The first will deal with a retiree or near-retiree. The second will deal with a middle-aged worker and the final one with someone just beginning their working career.
For each of the three generic investors, expectations of the future and personal objectives will be used to develop an investing strategy. Markets beyond the stock and bond markets will be included in the discussions.
Market Efficiency
The late James Lorie, from the University of Chicago, was one of the early investigators of what is known as the Efficient Market Hypothesis (EMH). Early research begun in the 1960s concluded that stock markets were efficient in the sense that one could not design trading rules (technical analysis) that would consistently outperform markets. It was also determined that fundamental analysis (the Graham-Dodd value approach) was no better.Mr. Lorie, in his inimitable fashion, described the market in light of these conclusions as “a game worth winning, but not worth playing.”
Much controversy has arisen regarding the validity of the EMH. Some of this criticism is misguided in that it attributes claims never made by proponents. For our purposes, I would like to differentiate between short and long-run, without precisely defining these periods. In the long-run, markets can clearly become over or undervalued. However, even those who make such claims usually do so after the fact rather than during the bubble or distortion. As examples: In 1999 who predicted an imminent dot com collapse or in 2005 predicted the housing collapse? Some did, but they were dismissed as “wingnuts.”
I believe that EMH holds in the short-term but less so in the long-term. Thus, whether markets in general are priced correctly or over or undervalued, individual stocks within markets are “correct” in the sense that it is difficult to find stocks that are over or undervalued. That is, stock picking cannot produce excess returns on any sustained basis.
More will be said about short-run and long-run differences later in this series.
We are Average
Most of us have the “Lake Wobegon” disease and believe we are above average and can generate superior returns. With respect to investing, I would almost guarantee that is not true for anyone reading this post (including the writer). We are all “average” investors and we should never forget that. Hubris is often responsible for our biggest blunders.The fact that we are “average” should not be discouraging. It is consistent with the findings of the Efficient Market Hypothesis. It does not mean that we cannot make money investing, merely that we cannot obtain superior (outperform the benchmarks) returns on a consistent basis. Don’t feel bad, highly paid “experts” running mutual funds overwhelmingly fail to equal their market benchmarks.
Recognition that we are “average” is important to investing success. It should prevent us from getting overextended in positions and overstaying bad investments.
Average Investors Can Earn Market Returns
In the section above you were insulted by being referred to as average. Because you are average, it means you can achieve market returns. Actually, even below-average investors can achieve this result. All you have to do is diversify your portfolio to approximate the market and you will approximate market returns.That is easy to do, even for small investors. Simply buy an index fund that mirrors the average you want to match. There are mutual funds that reproduce the performance of the Dow, S&P 500, Wilshire, Nasdaq, etc. You can buy one of these and forget everything else. You will virtually equal the market as you have defined it. Exchange-traded funds (ETFs) are also available that provide the same benefit.
Fully diversified portfolios will approximate market returns. Index funds and some ETFs provide that diversification for you.
What Happens If You Expect the Market to Underperform?
If you expect that the stock market is going to go down say 20%, why would you feel comfortable investing with an expected return of negative 20%? It is little consolation to be able to say that you did as well as the market if the market loses money. Of course neither you nor anyone else would be happy unless you were required by law or charter (as some mutual funds are) to remain in the market.Investors with such expectations would likely reduce their positions in stocks. The strength of your expectations and the costs of being wrong are two factors that influence your portfolio allocations.
How Average Investors Might “Beat the Market” or “Underperform the Market”
In periods when you expect market returns to be unsatisfactory, you might reasonably decide to detach your performance from the stock market. The simplest strategy is to get out completely. That is usually not a wise strategy because there is no guarantee that your expectation of the future will be fulfilled.Two other ways are to reduce your exposure to stocks and/or shift your weightings.
Reducing your exposure to stocks involves taking money out of play. You might move some funds out of equities into bonds, thus reducing your exposure to equities. On the other hand, you might leave all your funds in equities but shift the allocations. Of course both strategies can be used – reduce exposure and shift weightings.
One of the simplest ways to change weightings is via the use of sector funds. Sector funds specialize in various sectors of the economy. If you believe retailers or manufacturing might outperform the general market, you might want to overweight these sectors. Doing so, puts you in position to either over or underperform the general market, depending upon what develops.
For investors who prefer to approximate the market, an index fund or an ETF is efficient. Taking some money out of this index fund and placing it into one or two sectors is an effective way to retain some diversification while weighting a bit more heavily toward those sectors you perceive as having value.
Wave Effects
Stocks tend to move together. Studies show that about 50% of an individual stock’s performance can be attributed to the general market. The other 50% is unique to the company. Market statisticians refer to this correlation as “beta.” Other than mentioning the concept, there is no reason for delving further into the intricacies of how beta is calculated. In my opinion, it is virtually a useless concept.If you believe the general stock market will not do well, your favorite stock or sector will be heavily influenced. If your expectations are particularly negative, you might want to deploy your assets to alternative investments.
Even so-called low beta investments are not immune to market waves as witnessed by the sell-off of precious metals when the markets turned down in 2008.
Expectations
Investing first and foremost depends upon expectations. Current prices are determined by expected future performance, not by past performance. Unsophisticated investors frequently reveal themselves when a company’s earnings report comes out and they say: “Earnings went up but my stock went down?”The past is useful information only to the extent that it enables you to make better judgments regarding the future. It has no relevance to current prices.
To be a superior investor, you must be able to anticipate the future both earlier and more accurately than others. James Lorie recognized this exception to the efficiency of markets. Despite all of the mathematical testing, he asserted that some people were capable of beating markets. Their methods were suspected to be the ability to see the future better than the rest of us. Evidence for this, according to Mr. Lorie, is the people on their yachts at St. Tropez who do not reveal talk about their methods.
Your Expectations may be Correct but Your Investments can be Wrong
Having accurate expectations of the future is the only way to obtain superior returns, but it is no guarantee. Often you are right in your prognostications but too early.Being correct and too early generally results in double disappointment. The first is when you take your initial position and underperform because you are ahead of market expectations. The second arrives after you have given up the position, believing your analysis to be incorrect. Then the market finally catches up to your “wisdom” and the investment moves up. By this time, you are out of your position.
Thus, what you are really trying to do is to forecast what market expectations will be in advance of their changing. You can be right regarding reality and still lose money if you are too early. John Maynard Keynes colorfully expressed this anomaly thusly: “The market can remain irrational longer than you can remain solvent.”
I have personal trading records vividly demonstrating the “too early” problem. For quite a while I was convinced that the banks and especially Fannie and Freddie would collapse. I shorted (via the use of puts) these entities. I entered and exited these trades many times without making any money (actually losing money). Finally, out of frustration, I threw in the towel only to see my expectations fulfilled but not my net worth. I was correct but too early.
Investing is Not Easy
Given the above discussion regarding expectations, it is easy to see why markets seem so confusing. The early basis for the Efficient Market Hypothesis likened stock prices to a random walk process. There is no easy way to “make a killing in the market,” at least legally. But this is the reality that we must deal with. In the words of Frank Knight, a great economist from the University of Chicago, long retired before the EMH studies:We have to adapt and overcome, that’s all we can do.His advice was not directed at the stock market but at life in general. It is advice we all should heed as this economy continues to deteriorate.
Where Do We Go Next?
The next article in this series will lay out a set of expectations regarding the future.Subsequent articles will deal with personal objectives. Three different set of objectives will be established for generic investors. The first will deal with a retiree or near-retiree. The second will deal with a middle-aged worker and the final one with someone just beginning their working career.
For each of the three generic investors, expectations of the future and personal objectives will be used to develop an investing strategy. Markets beyond the stock and bond markets will be included in the discussions.
Monday, March 12, 2012
Forget about restraining
we beginning to see the end of the bubble for long-term Treasury Bonds? This article, Friday Showed More Signs Of A Revolution In The Bond Market, seems to believe we might be:
Why the stinky price action when we get a big miss on NFP number? QE and the talk of stimulus done it. The numbers were so bad that by 9:30 talking heads and pundits concluded that the tax cuts were coming and we might just get a break on Social Security payroll deductions any day. Forget about restraining QE-2; the talk went straight into high gear with the only question; “How big might QE-3 be?”
Saturday, March 10, 2012
Most investments and investment strategies
For those investors looking for ideas, here is an interesting post from ZeroHedge.
It represents a portfolio designed for rising inflation. However, note Tyler Durden’s preliminary comments regarding controlled inflation versus hyperinflation. To me, that is the critical issue and the one that I am trying to protect against. After all, it is the one that can wipe out most investments and investment strategies if it occurs.
It represents a portfolio designed for rising inflation. However, note Tyler Durden’s preliminary comments regarding controlled inflation versus hyperinflation. To me, that is the critical issue and the one that I am trying to protect against. After all, it is the one that can wipe out most investments and investment strategies if it occurs.
Harley Bassman’s Model Portfolio For 2011, And Why “It Is Just A Matter Of Time” Before The Fed Creates Inflation
8) And of course, CMM vs CMS for 6 months, now offered at 59 3/4bpsSubmitted by Tyler Durden on 01/05/2011 20:08 -0500
Harley Bassman, who used to head Merrill’s RateLab, and who was one of the most erudite sellside voices on rate matters, and doubly so on mortgage issues, and subsequently moved to Merrill’s prop side, has kept a low profile recently. Which is why we are happy to present his model portfolio for 2011. Bassman is a firm believer in inflation (synthetic or real), and we for one would pay good money to see the redux of the Rosenberg vs Grant debate in 2011 be Rosenberg vs Bassman. Bassman’s conclusion, even though obtained in a circuitous way to our own, is comparable to the Zero Hedge thesis that the Fed will have no choice but to eventually create inflation. “In a nutshell, the FED (with the help of the Govt), is going to engineer some type of Inflation to reduce the value of both our Private and Public Debt. Since Inflation is the only solution, it will happen; it is just a matter of time. Since the entire G-7 is in the same boat, trading in Euro or Yen is purely a short-term speculation since all these currencies will be heading south.” Where Zero Hedge and Bassman, however, differ, is that we are certain that the Fed will be unable to contain said inflation once it has finally been unleashed, resulting in a complete wipeout of all assets that are directly or indirectly a rate derivative (ref: a very notable reparation paying, post-WW1 central European state), which means all fiat derivatives, leaving only hard assets in the wake.
Bassman’s Model Portfolio for 2011
1a) Long “Big Oil” + “Big Pharm” + “Big Tobacco” + etc equities. I am precluded from making naming names, but you know what I like. Mega Cap international stocks with patent and pricing power. P/Es of 13ish (an earnings yield of 7 1/2%) and Dividend of 2 1/2% to 4 1/2%. FED will encourage Retail to reverse out of Bonds and into Stocks.
1b) For “non-stock pickers”: Buy the S&P five years Forward at a discount to Spot. Sell Ultra long dated (five to ten year expiry) calls.
2) Buy Brazilian Local Currency Bonds. Yes the “Real” at 1.67 is rich, but the 10 1/2% yield for three to six years will more than offset the Govt’s efforts to weaken the Currency. Unlike China or India, Brazil is a “hard asset” country.
3) Buy Russian // Mongolian // Southern Caucus Equities. I want “hard assets”, not cheap labor. Yeah, this region is sort of lawless and it is unclear if your legal claim will be upheld. But at some point Russia, etc, will need to bring in Capital and reform is likely. Most importantly, this region is a “negative beta” to the G-7 race to the bottom.
4a) A diverse portfolio of Long-dated Municipal Bonds. You can find a selection of AA bonds in the 10 to 20 year sector that yield 5% or more. Since rates can only rise if the FED is successful in reflating the economy, a higher rate world would tighten Muni ratios. Also, I do not see taxes declining anytime soon. Muni’s have a massive negative spread correlation to Treasury rates. Long Muni bonds will simply not sink below 4% on the downside and will start to compress at 5% to 6% on the upside. These “retail” bonds are super sticky at these coupon levels.
4b) Buy Closed-End 35% leveraged Muni Bond funds. Either National or Single State. They trade at a 5% to 8% discount to NAV and sport yields near 6.0%
5) It goes without saying I hate Treasuries, especially 3yrs to 7yrs.
6a) Buy 10yr into 10yr 6.0% swaption payers (puts) at 435bps. This trade is analytically “Positive Carry” for the first three years as 9yr, 8yr and 7Yr payers also struck at 6.0% costs 450bpb, 465bps, and 475bps respectively.
6b) A variation of above: Sell 3y-10y 5.35% payer vs Buy 10y-10y 6.00% pyr for zero cost. This trade is long a 10% delta, so there can be some severe mark-to-market risk. Nonetheless, this trade is a carry monster. Moreover, I do not think we can break T10yr above 4.05% as long as the FED is on hold, which should be sometime into 2012. Pure “roll down” on this package is 175bps for the year and the net delta decays from 10% to 3%.
7) I hate to say it, but I kinda like owning some GOLD. I would execute via either a costless collar trade (buy OTM call vs sell OTM put) or via our famous “Quiet Bull” structure (long call spread funded by short an otm put).
SUMMARY: In a nutshell, the FED (with the help of the Govt), is going to engineer some type of Inflation to reduce the value of both our Private and Public Debt. Since Inflation is the only solution, it will happen; it is just a matter of time. Since the entire G-7 is in the same boat, trading in Euro or Yen is purely a short-term speculation since all these currencies will be heading south. The question is: “When will the non-Western USD/EUR/Yen buyers take actions that will defend their longer-term Purchasing Power ?
If you are reading this note, congrats on having survived the Great Wall Street meltdown. As I have noted, this period is nearly identical the last great Financial Meltdown from 1989 to 1994….and I can assure you, it will end in a similar manner: FED steepens Curve to allow banks to re-cap via carry.
Reaching hyperinflation
I am long overdue with this installment of the promised investment series. The holidays obviously got in the way.
In Part 3, I detailed what I was anticipating with respect to the economy. Most of you know there is no guarantee with respect to the future, so these musings refer to what I intend to prepare for, rather than what may actually occur.
My best guess is an environment bordering or reaching hyperinflation. That is also the judgment of Matterhorn Asset Management:
Despite what is obvious to clear-thinkers, the world mostly seems oblivious to what is about to happen. According to Matterhorn, there are several reasons for that:
In the next part of this analysis, we will expand on other investments in addition to gold. Two important points will be stressed:
In Part 3, I detailed what I was anticipating with respect to the economy. Most of you know there is no guarantee with respect to the future, so these musings refer to what I intend to prepare for, rather than what may actually occur.
My best guess is an environment bordering or reaching hyperinflation. That is also the judgment of Matterhorn Asset Management:
We now live in a world where governments print worthless pieces of paper to buy other worthless pieces of paper that combined with worthless derivatives, finance assets whose values are totally dependent on all these worthless debt instruments. Thus most of these assets are also worth-less.The world has reached the end of a multi-decade bacchanalian credit romp made possible only because of fiat money and irresponsible governments (dare I suggest that this last phrase is redundant?). Around the world, governments are applying the same medicine that created the mess as a cure. It is all they know, and we are past the point of a solution. In typical fashion, “doing something” is perceived as better than doing nothing, even if the “something” creates more harm.
So the world financial system is a house of cards where each instrument’s false value is artificially supported by another instrument’s false value. The fuse of the world financial market time bomb has been lit. There is no longer a question of IF it will happen but only WHEN and HOW. The world lives in blissful ignorance of this.
Despite what is obvious to clear-thinkers, the world mostly seems oblivious to what is about to happen. According to Matterhorn, there are several reasons for that:
- Firstly, because this is what totally clueless governments are telling everyone and this is what investors want to hear.
- Secondly, whether governments apply austerity like in parts of Europe or money printing as in the US, investors want to believe that any action by government is good, however inept.
- Thirdly, market participants are in a state of false security due to shortsightedness and limited understanding of history.
- Fourthly, as long as they can benefit from inflated and false asset values, the market participants will continue to manipulate markets.
- Fifthly, there has been a very skilful campaign by the US to divert the attention from their bankrupt economy and banks `to small European countries like Greece, Ireland or Portugal. These nations, albeit in real trouble, have problems which are miniscule compared to the combined difficulties of the US Federal Government, states, cities and municipalities.
Commodity prices have increased 26% in the last 12 months and 77% in the last 24 months based on the Continuous Commodity Index (CCI). So whilst most economies publish inflation rates of 1-3%, the real cost of food and energy is surging. The US government, which doesn’t eat or use energy, recently published the adjusted 12 months’ Consumer Price Index (ex food and energy) of 0.8% per annum. Whilst most people are struggling with a massive increase in their cost of living, the US government is continuously adjusting and manipulating the published figures. There are lies damn lies and US government statistics. Who are they fooling!I encourage you to read the fine Matterhorn report. It provides detailed information to support their belief that hyperinflation is coming. It also provides a strong case for owning gold.
In the next part of this analysis, we will expand on other investments in addition to gold. Two important points will be stressed:
- Keeping Score – Because the numeraire (the dollar) is becoming worthless, nominal valuations measured in dollars (or other fiat money for that matter) are becoming meaningless. We could very well be entering a period where your investments produce a 100% return in nominal dollars, yet lose purchasing power. The new way to keep score will be in purchasing power, not nominal fiat currency.
- If the dollar is going to lose value, then dollar-denominated contracts are going to be diminished to the extent of loss of purchasing power. This fact has serious implications for pensions, fixed income investments, social security, debt, etc.
Crisis is far more dangerous than it appears
As
usual, this report is provided only for information purposes. Consult
your investment advisor should you want to alter your portfolio.
Executive Summary: How to Protect Your Portfolio from the Economic InsanityBy Nick Barisheff
Investors should be gravely concerned about the future of their portfolios, according to a newly released report from Bullion Management Group Inc (BMG). The reason? Because today’s fiscal and monetary policies have set the stage for a wrenching period of currency devaluation, portfolio destruction and potentially devastating inflation.
“How to Protect Your Portfolio from the Economic Insanity” notes that today’s financial policymakers are displaying a dangerous absence of common sense. The report, authored by noted bullion expert Nick Barisheff, seeks to educate mainstream investors about the powerful but often unnoticed riptides affecting the global economy and, by extension, the health of their portfolios.
Beginning with an explanation as to why we are experiencing one financial crisis after another, this report offers investors a carefully researched but easy to understand look at the inner workings of our deeply flawed economy. In doing so, it manages to shed new light on three of the most pressing issues affecting investors today.
Three pressing issues explained
- Why the global debt crisis is far more dangerous than it appears;
- Why monetary policies are driving the global economy to the brink;
- How investors can protect their portfolios from the inflationary storm.
The protection of wealth
Today, wealth protection is the primary goal. According to the report, precious metals bullion is the one asset class every astute investor must own today. Why? Because it maintains its value under virtually all economic conditions. Most investors confuse money and currency. Gold is money, currency is not. Gold is money because it is a store of value. Currency, whether US or Canadian dollars or euros or rubles or yuan or yen, is losing its value – fast. Currencies are being depreciated at an unprecedented rate because they are being created out of thin air by desperate, deeply indebted governments.A shift in mindset?
The report emphasizes that in today’s economic environment, it is crucial that investors take a new approach. They need to make the shift away from a “currency mindset” to a “gold mindset.” The switch to a gold mindset does not mean investors need to become gold fanatics and convert all their possessions into gold. It means allocating the proper percentage of one’s portfolio to gold and precious metals. And that means understanding the importance of intrinsic (monetary) value versus currency-based value.Value: in the eye of the beholder
The report demonstrates that with gold at US$1,400 per ounce, the bullion market remains miniscule compared to the financial assets markets. In fact, as the table below shows, privately held gold bullion is valued at but a fraction of total global financial assets. And the total amount of all the gold ever mined, including central bank reserves, industrial applications and jewellery is less than 4 percent of the total value of global stocks and bonds.
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