# Interested in valuation?



## drillinto (19 April 2007)

This link contains pertinent information:

http://pages.stern.nyu.edu/~adamodar/

Click VALUATION on the blue left side column


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## drillinto (9 May 2007)

I trust many of you will find this blog interesting

http://bespokeinvest.typepad.com/

Part of Bespoke's presentation method is to display complex data and multiple variables in a way that allows investors to easily interpret the information


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## drillinto (7 June 2007)

BESPOKE crunches the numbers on country p/e ratios

Top Dog => Belgium: 11.37
Australia: 17.24

http://bespokeinvest.typepad.com/bespoke/2007/06/country_price_t.html


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## drillinto (19 June 2007)

The twenty-five best financial blogs

http://www.247wallst.com/2007/06/the_247_wall_st.html


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## reece55 (19 June 2007)

drillinto said:


> BESPOKE crunches the numbers on country p/e ratios
> 
> Top Dog => Belgium: 11.37
> Australia: 17.24
> ...




Even with this info, I would have a few questions:

i.e. Is this forward or current p/e's.

I would also point out that p/e's, in my opinion, are a pretty poor gauge of relative value. Company's/Regions that are in a high level growth phase will look expensive to say a region that is experiencing slower growth. But, depending on the acceleration of the growth, the Company/Region with the higher p/e may actually be better relative value.

DCF, whilst subjective, is the best valuation method. And the key ingredient in the equation is how rapidly the cash flow increases....

Cheers


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## stoxclimber (19 June 2007)

reece55 said:


> Even with this info, I would have a few questions:
> 
> i.e. Is this forward or current p/e's.
> 
> ...




reece
I agree, however P/E of course has its place provided that the user understands what affects P/E & why e.g. as you say country X may differ to country Y (or even company A v company B on the same market). Would like to see more consideration of EV/EBITDA (/EBIT) multiples..shrug..


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## drillinto (21 June 2007)

drillinto said:


> The twenty-five best financial blogs
> 
> http://www.247wallst.com/2007/06/the_247_wall_st.html




One of my current top picks is not in this list ==> http://bigpicture.typepad.com/


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## drillinto (24 June 2007)

NYSE short interest keeps climbing

http://bespokeinvest.typepad.com/bespoke/2007/06/nyse-short-inte.html


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## drillinto (25 June 2007)

drillinto said:


> One of my current top picks is not in this list ==> http://bigpicture.typepad.com/




Barry Ritholtz, an investment manager and commentator on financial TV network CNBC, operates the base camp for new explorers of investing blogs, the Big Picture. Accessible and unintimidating, the Big Picture tackles both the economy and the financial markets with a conversational style and ample references to pop culture.

Blog etiquette calls for linking generously to other writers, and Ritholtz's links are among the choicest.

A recent post linked to an article in Portfolio, Conde Nast's new magazine on investing, which eviscerates technical analysis, the vaunted art of studying stock charts to anticipate the market's next move. The piece pokes fun at the craft's jargon, such as the J. Lo, a term for a stock turning upward as it rounds off a bottom.

Ritholtz's blogroll -- a list of recommended blogs -- casts a wide net and is a good starting point for eager investors. Below, a sampler from four categories of investing blogs: trader blogs, economics blogs, market analysis blogs and industry-insider blogs.

___


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## drillinto (28 June 2007)

According to Brian Wesbury, the durable goods orders decline in May 2007 is no big deal. He is confident that the US economic expansion will continue.


Durable Goods Orders decline 2.8% in May 
Comment by Brian Wesbury, Chief Economist, First Trust Advisors - USA
Date: 6/27/2007 


New orders for durable goods declined 2.8% in May, a larger drop than the consensus expected. New orders excluding transportation declined 1.0% versus a consensus expected gain of 0.2%.

The weakness in new orders was concentrated in civilian aircraft, which accounted for two-thirds of the decline. However, orders also fell for primary metals, machinery, and electrical equipment and appliances. Areas of strength included communications equipment (part of computers and electronics) and motor vehicles and parts.     

When calculating business investment for the GDP accounts, the Commerce Department uses non-defense capital goods shipments excluding aircraft.  That indicator fell only 0.2% in May, although the figure for April was revised down slightly to a 0.9% gain from a previous estimate of 1.0%.

Unfilled orders rose 0.8% in May and are up 20.0% versus a year ago, larger than any year-to-year increase from 1980 to 2005. Unfilled orders for non-defense capital goods ex-aircraft increased for the 31st straight month and are up 16.8% versus a year ago.   

Implications:  Given the strength in new orders and shipments in March and April, the traditional month-to-month volatility in capital goods data, and the concentration of May’s weakness in civilian aircraft orders, we do not read much into today’s data. In fact, unlike most analysts, we had forecast the report would be a bit weaker than it actually was. Even with the data for May, in the past three months orders for non-defense capital goods ex-aircraft are up at a healthy 15.9% annual rate. Meanwhile, shipments of these goods are up at a 9.5% annual rate. These figures are consistent with our forecast that business investment will contribute about one percentage point to real GDP growth in the second quarter. Our view remains that businesses, flush with substantial profit growth the last few years, will expand capacity in the year ahead, confident the economic expansion will continue.

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## drillinto (28 June 2007)

CXO looks at the value of the most admired companies

http://www.cxoadvisory.com/blog/external/blog6-26-07/


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## drillinto (29 June 2007)

Brian Wesbury(top US inflation hawk) says: The Fed Gets Bullish

http://www.ftportfolios.com/Common/CommentaryContent/MarketCommentary-514.pdf


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## drillinto (2 July 2007)

Good piece on the threats to liquidity

http://www.ft.com/cms/s/73c48d7a-244a-11dc-8ee2-000b5df10621.html


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## drillinto (3 July 2007)

The average investor now has between 5-10% of their portfolio in Asian stocks, excluding Japan

http://www.ft.com/cms/s/fbacb038-20...age=d89d6328-51da-11da-9ca0-0000779e2340.html


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## drillinto (14 July 2007)

Rio has raised the valuation ante for mining companies by 33 per cent

http://www.smh.com.au/news/business/rio-bets-on-prices-holding/2007/07/13/1183833769360.html


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## drillinto (27 July 2007)

Countries GDP as US States

http://bigpicture.typepad.com/comments/2007/01/countries_gdp_a.html

[Australia = Ohio]


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## drillinto (2 August 2007)

July 2007 Equity Market Returns: OZ Top Ten

http://bespokeinvest.typepad.com/bespoke/2007/08/july-2007-equit.html


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## drillinto (15 August 2007)

Leonhardt on Stock Market Valuations
:::::::::::::::::::::::::::

August 15, 2007

Economic Scene
Remembering a Classic Investing Theory 
By DAVID LEONHARDT / New York Times

More than 70 years ago, two Columbia professors named Benjamin Graham and David L. Dodd came up with a simple investing idea that remains more influential than perhaps any other. In the wake of the stock market crash in 1929, they urged investors to focus on hard facts ”” like a company’s past earnings and the value of its assets ”” rather than trying to guess what the future would bring. A company with strong profits and a relatively low stock price was probably undervalued, they said.

Their classic 1934 textbook, “Security Analysis,” became the bible for what is now known as value investing. Warren E. Buffett took Mr. Graham’s course at Columbia Business School in the 1950s and, after working briefly for Mr. Graham’s investment firm, set out on his own to put the theories into practice. Mr. Buffett’s billions are just one part of the professors’ giant legacy.

Yet somehow, one of their big ideas about how to analyze stock prices has been almost entirely forgotten. The idea essentially reminds investors to focus on long-term trends and not to get caught up in the moment. Unfortunately, when you apply it to today’s stock market, you get even more nervous about what’s going on. 

Most Wall Street analysts, of course, say there is nothing to be worried about, at least not beyond the mortgage market. In an effort to calm investors after the recent volatility, analysts have been arguing that stocks are not very expensive right now. The basis for this argument is the standard measure of the market: the price-to-earnings ratio.

It sounds like just the sort of thing the professors would have loved. In its most common form, the ratio is equal to a company’s stock price divided by its earnings per share over the last 12 months. You can skip the math, though, and simply remember that a P/E ratio tells you how much a stock costs relative to a company’s performance. The higher the ratio, the more expensive the stock is ”” and the stronger the argument that it won’t do very well going forward.

Right now, the stocks in the Standard & Poor’s 500-stock index have an average P/E ratio of about 16.5, which by historical standards is quite normal. Since World War II, the average P/E ratio has been 16.1. During the bubbles of the 1920s and the 1990s, on the other hand, the ratio shot above 40. The core of Wall Street’s reassuring message, then, is that even if the mortgage mess leads to a full-blown credit squeeze, the damage will not last long because stocks don’t have far to fall.

To Mr. Graham and Mr. Dodd, the P/E ratio was indeed a crucial measure, but they would have had a problem with the way that the number is calculated today. Besides advising investors to focus on the past, the two men also cautioned against putting too much emphasis on the recent past. They realized that a few months, or even a year, of financial information could be deeply misleading. It could say more about what the economy happened to be doing at any one moment than about a company’s long-term prospects.

So they argued that P/E ratios should not be based on only one year’s worth of earnings. It is much better, they wrote in “Security Analysis,” to look at profits for “not less than five years, preferably seven or ten years.”

This advice has been largely lost to history. For one thing, collecting a decade’s worth of earnings data can be time consuming. It also seems a little strange to look so far into the past when your goal is to predict future returns.

But at least two economists have remembered the advice. For years, John Y. Campbell and Robert J. Shiller have been calculating long-term P/E ratios. When they were invited to a make a presentation to Alan Greenspan in 1996, they used the statistic to argue that stocks were badly overvalued. A few days later, Mr. Greenspan touched off a brief worldwide sell-off by wondering aloud whether “irrational exuberance” was infecting the markets. In 2000, not long before the market began its real swoon, Mr. Shiller published a book that used Mr. Greenspan’s phrase as its title.

Today, the Graham-Dodd approach produces a very different picture from the one that Wall Street has been offering. Based on average profits over the last 10 years, the P/E ratio has been hovering around 27 recently. That’s higher than it has been at any other point over the last 130 years, save the great bubbles of the 1920s and the 1990s. The stock run-up of the 1990s was so big, in other words, that the market may still not have fully worked it off.

Now, this one statistic does not mean that a bear market is inevitable. But it does offer a good framework for thinking about stocks. 

Over the last few years, corporate profits have soared. Economies around the world have been growing, new technologies have made companies more efficient and for a variety of reasons ”” globalization and automation chief among them ”” workers have not been able to demand big pay increases. In just three years, from 2003 to 2006, inflation-adjusted corporate profits jumped more than 30 percent, according to the Commerce Department. This profit boom has allowed standard, one-year P/E ratios to remain fairly low. 

Going forward, one possibility is that the boom will continue. In this case, the Graham-Dodd P/E ratio doesn’t really matter. It is capturing a reality that no longer exists, and stocks could do well over the next few years.

The other possibility is that the boom will prove fleeting. Perhaps the recent productivity gains will peter out (as some measures suggest is already happening). Or perhaps the world’s major economies will slump in the next few years. If something along these lines happens, stocks may suddenly start to look very expensive.

In the long term, the stock market will almost certainly continue to be a good investment. But the next few years do seem to depend on a more rickety foundation than Wall Street’s soothing words suggest. Many investors are banking on the idea that the economy has entered a new era of rapid profit growth, and investments that depend on the words “ew era” don’t usually do so well.

That makes for one more risk in a market that is relearning the meaning of the word.


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## drillinto (18 August 2007)

So is US the market now on the way back up? 

One day of buying doesn’t end a correction, of course, and investors are going to be looking for more to conclude that a bottom has indeed been reached. It’s particularly true when considering investors can look over the earnings situation (decent), economic outlook (still reasonably solid) and the valuation of stocks (most have reasonable price-to-earnings ratios), and yet still be afraid to dip back into the markets. “There’s still quite a bit of uncertainty out there as regards the extent of this bad paper and where it’s hidden,” says Jeff Lancaster, principal at Bingham, Osborn & Scarborough, which manages $2 billion in assets. “You see all these big companies trading at 15, 16, 17x earnings in an environment of low inflation and low interest rates, but the question is what lies beneath ”” the short answer is no one really knows.” 

Source: David Gaffen, WSJ, August 17


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## drillinto (23 August 2007)

Warren Buffett

A century ago, John Pierpont Morgan bought a modest amount of stock in the midst of a market panic. And the knowledge that wise investors were willing to buy into the market reversed sentiment. Could this be happening again? The idea that Warren Buffett could put a $50 billion cash pile to work buying companies like Countrywide Financial or TXU has titillated investors. But they shouldn't get carried away believing in a Buffett put. The billionaire head of Berkshire Hathaway won't strike until he can negotiate sweet deals. That only happens when real distress rears its head.

Judging by some of the market's most troubled companies, distress hasn't hit just yet. Take Countrywide, the mortgage lender at the heart of the Buffett speculation. Last week it received an $11.5 billion cash infusion from banks. That should shore it up for now, but it's hardly out of the water. It can't sell its riskier loans, and skyrocketing delinquencies could undermine its book value. So while Mr. Buffett might be circling some of the more desirable assets, such as the mortgage-servicing unit, he would probably wait until Countrywide's problems worsen before scooping up pieces. Even then it's not clear Countrywide has the like-minded management and protected market position that Mr. Buffett favors.

Mr. Buffett has had a few experiences that could teach him to be a bit more patient. He invested $700 million in a series of cumulative convertible preferred stock in Salomon one month before the 1987 crash. Four years later, he had to step into a temporary role as chairman after his predecessor resigned amid a scandal. Had he invested in Treasury bills instead, he would have made about the same return with far less risk.

That's not to say the recent credit troubles and falling stock prices don't make a famed value investor like Mr. Buffett perk up. But while he is willing to spend billions on the right assets, even buying a big listed company would be a value-based decision on its merits, not a vote of confidence in stocks in general. Investors looking for him to signal a market bottom might be disappointed.

Source: BreakingViews.com 
August 22, 2007


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## drillinto (25 August 2007)

Stock Markets' Fear of Falling
By Robert J. Shiller
August 2007

The sharp drop in the world’s stock markets on August 9, after BNP Paribas announced that it would freeze three of its funds, is just one more example of the markets’ recent downward instability or asymmetry. That is, the markets have been more vulnerable to sudden large drops than they have been to sudden large increases. Daily stock price changes for the 100-business-day period ending August 3 were unusually negatively skewed in Argentina, Australia, Brazil, Canada, China, France, Germany, India, Japan, Korea, Mexico, the United States and the United Kingdom. 

In the US, for example, the Standard and Poor’s 500 index in July recorded six days of declines and only three days of increases amounting to more than 1%. In June, the index dropped more than 1% on four days, and gained more than 1% on two days. Going back further, there was a gigantic one-day drop on February 27, 2007, of 3.5%, and no sharp rebound. 

The February 27 decline began with an 8.8% one-day drop in the Shanghai Composite, following news that the Chinese government might tax capital gains more aggressively. This news should have been relevant only to China, but the drop there fueled declines worldwide. For example, the Bovespa in Brazil fell 6.6% on February 27, and the BSE 30 in India fell 4% the next day. The subsequent recovery was slow and incremental. 

In the US, the skew has been so negative only three other times since 1960: at the time of the 6.7% drop on May 28, 1962, the record-shattering 20.5% plummet on October 19, 1987, and the 6.1% decline on October 13, 1989. 

Stock markets’ unusually negative skew is not inconsistent with booming price growth in recent years. The markets have broken all-time records, come close to doing so, or at least done very well since 2003 ( the case in Japan) by making up for the big drops incrementally, in a succession of smaller increases. 

Nor is the negative skew inconsistent with the fact that world stock markets have been relatively quiet for most of this year. With the conspicuous exception of China and the less conspicuous exception of Australia, all have had low standard deviations of daily returns for the 100-business-day period ending August 3 when compared with the norm for the country. 

The February 27 drop in US stock prices was only the 31st biggest one-day drop since 1950. But all of the other 30 drops occurred at times when stock prices were much more volatile. Thus, the February 27th drop really stands out, as do other recent one-day drops. 

Indeed, one of the big puzzles of the US stock market recently has been low price volatility since around 2004, amid the most volatile earnings growth ever seen. Five-year real earnings growth on the S&P 500 set an all-time record in the period ending in the first quarter of 2007, at 192%. Before that, between the third quarter of 2000 and the first quarter of 2002, real S&P 500 earnings fell 55% – the biggest-ever decline since the index was created in 1957. 

One would think that market prices should be volatile as investors try to absorb what this earnings volatility means. But we have learned time and again that stock markets are driven more by psychology than by reasoning about fundamentals. 

Is psychology somehow behind the pervasive negative skew in recent months? Maybe we should ask why the skew is so negative. Should we regard it as just chance, or, when combined with record-high prices, as a symptom of some instability? 

The adage in the bull market of the 1920’s was “one step down, two steps up, again and again.” The updated adage for the recent bull market is “one big step down, then three little steps up, again and again,” so far at least. No one is looking for a sudden surge, and volatility is reduced by the absence of sharp up-movements. 

But big negative returns have an unfortunate psychological impact on markets. People still talk about October 28, 1929, or October 19, 1987. Big drops get their attention, and this primes some people to be attentive for them in the future, and to be ready to sell if another one comes. 

In fact, willingness to support the market after a sudden drop may be declining. The “buy-on-dips stock market confidence index” that we compile at the Yale School of Management has been falling gradually since 2001, and has fallen especially far lately. The index is the share of people who answered “increase” to the question, “If the Dow dropped 3% tomorrow, I would guess that the day after tomorrow the Dow would: Increase? Decrease? Stay the Same?” In 2001, 72% of institutional investors and 74% of individual investors chose “increase.” By May 2007, only 48% of institutional investors and 59% of individual investors chose “increase.” 

Perhaps the buy-on-dips confidence index has slipped lately because of negative news concerning credit markets, notably the US sub-prime mortgage market, which has increased anxiety about the fundamental soundness of the economy. 

But something more may be at work. Everyone knows that markets have been booming, and everyone knows that other people know that a correction is always a possibility. So there may be an underlying sensitivity to price drops, which could fuel a succession of downward price changes, amplifying public concerns about problems in the economy and heralding a profound change in investor sentiment. 

Robert J. Shiller is Professor of Economics at Yale University, Chief Economist at MacroMarkets LLC, which he co-founded (see macromarkets.com), and author of Irrational Exuberance and The New Financial Order: Risk in the 21st Century. 


Source: www.project-syndicate.org


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## drillinto (2 September 2007)

James Grant, Editor of "Grant's Interest Rate Observer"
"Market Monitor" - PBS / USA; Friday, August 31, 2007 

PAUL KANGAS: My guest "market monitor" this week is James Grant, editor of the popular publication, "Grant's Interest Rate Observer." Welcome back to NIGHTLY BUSINESS REPORT, Jim. 

JAMES GRANT, EDITOR, "GRANT'S INTEREST RATE OBSERVER": Thank you, Paul. 

KANGAS: What kind of marks do you give Federal Reserve chief Bernanke on his speak today?

GRANT: I give him an "A." I thought he was terrific. He said that the Federal government would think long and hard before resuming its sadly accustomed role as first responder to the scene of a financial accident. That is, the Fed was not reflexively going to cut its funds rate just because somebody on Wall Street demanded it. As you know, in the old days, under Chairman Greenspan, the Fed was all too typically prone to cut its rate because of some financial crack-up. And knowledge that it would do that of course egged on people to take greater and greater risks with more and more debt. So I think Mr. Bernanke did a great service to the Fed and mostly to the country. 

KANGAS: On a scale of one to 10 with 10 the best, what is your grade on his overall performance so far, other than the speech?

GRANT: He is OK. 

KANGAS: You know this wouldn't last. 

GRANT: He is in the price fixing business and he has not objected to that, as I hoped a keen intellectual would object to it. What he is doing is fixing an interest rate as if the Federal government had special knowledge to invent (ph) most effectively. The world over, markets are active and the discovery of prices and of course the sun never sets on open outcry markets. And yet the Fed persists in this business of setting its funds rate as if it knew. Well it doesn't know. I fully expect that the funds rate is going to be coming down because I think these debt troubles are much worse than the Fed is acknowledging. 

KANGAS: It'll be cut, the Fed funds will be cut on the September 18th meeting?

GRANT: I believe it will. I believe it is going the way after (ph) that for what it's worth. 

KANGAS: Really, several cuts before the year is over is what you're saying?

GRANT: I think so, yes. 

KANGAS: Is that because the economy is in that bad a shape?

GRANT: I think the economy is weakening -- the growth in the economy is weakening. I think these debt troubles are not really a disturbance of Wall Street. They have to do with lending and borrowing in all departments, the credit (ph) markets and indeed, all over the world. This country's economy moves on debt just as the proverbial army does on its stomach. 

KANGAS: Right. 

GRANT: And it needs a lot of cheap debt to keep growing in its accustomed rate and its accustomed way and it is not going to get that debt at that price. 

KANGAS: What investment strategy do you favor in the current volatile investment environment?

GRANT: Buying dollar bills at $0.50.

KANGAS: It would be nice.

GRANT: That works in most environments. Seriously, that is the very heart and soul of the so-called value approach, (INAUDIBLE) is to look for securities that trade at less than they're readily ascertainable net asset value and the search is more difficult the stronger the stock market, but there's always something to do. 

KANGAS: During your last visit with us in late July of 2006, far too long ago, but you did have three buy recommendations. Let's see how they've done since then. We've seen the very conservative, the ishares, the Treasury ETF (SHY) actually up 1.7 percent. All the time you were collecting about 4.7 percent interest, then Sadia (SDA), the Brazilian chicken producer, up 70.6 percent. That is fantastic and then another chicken producer, Gold Kist (GKIS) was taken over by Pilgrim's Pride with a 51 percent gain. Those are not chicken gains, I'll tell you. They laid the golden egg. Those were wonderful. 

GRANT: I thank my colleague, Ian McCulley (ph) at Grants, who was responsible for the two chicken longs. There were three chicken longs (INAUDIBLE). 

KANGAS: Right. We just have a minute left, Jim, but do have any new recommendations?

GRANT: I do. I would like to suggest people take a look at three open-end mutual funds. These are not traded on the New York Stock Exchange, rather are accessible through a broker like Schwab. The first is a Wintergreen fund (Forum Wintergreen, (WGRNX) which is a global value fund run by a very fine value investor. 

KANGAS: It's had a good run up. 

GRANT: Yeah, it has, but I think that it will keep doing well. By the way, as full disclosure, I own a bit of that and a bit of the two others to come. The second name Paul is the Tocqueville Gold Fund (TGLDX) and this is an investment in the near certainty that money trading will continue fast and furious the world over. And the third is another esteemed value investor named Martin Whitman (ph) and Marty has a fund called Third Avenue value fund (TAVFX) which he has been running for years and years. And he, too, buys dollar bills for $0.50. 

KANGAS: We can see all those symbols up in the right-hand corner (TAVFX) in this case in this one and you can just go to your broker with those symbols and find out what the fund is doing. Do you personally own any of these securities, Jim?

GRANT: Yes, I do, all of them. 

KANGAS: All right, wonderful. It's always a pleasure to have you with us. 

GRANT: Thank you, Paul, nice to be here. 

KANGAS: My guest, Jim Grant of Grant's Interest Rate Observer."


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## drillinto (10 September 2007)

Lex(Financial Times) looks at global bank valuations

http://ftalphaville.ft.com/blog/2007/09/06/7072/lex-looks-at-global-bank-valuations/


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## drillinto (12 October 2007)

The Bullion Puzzle
James Grant 
Forbes.com | October 2007

John Hathaway and I go back a long way. I believe that I was the first journalist to misspell the name of his gold fund. It is "Tocqueville," with a "c." That was in 1998, and the fund--which invests in mining stocks and bullion--was shiny new. Gold was then a footnote to an afterthought in the levitating stock market. Then, as now, the ancient monetary metal yielded nothing. It just sat there looking good, like some people you may know.

Two years later I interviewed Hathaway for this column (Dec. 25, 2000). He was confident about the future but discouraged about the present. "It's a bad business, magnified by the lousy pricing environment," he said of the industry on which he was bullish. For all his trouble, the Tocqueville Gold Fund (TGLDX) had accumulated just $20 million in assets. The price of the metal he loved was $275 a troy ounce.

But Hathaway had, after all, drawn a bead on the future. Just as he predicted, the gold price zigged when the stock market zagged. The collapse of the Nasdaq was a blessing for his fund and for his investors (I among them). So were the weakening dollar exchange rate and the strengthening global economy. By November 2003 gold changed hands at $398, and the Tocqueville fund had accumulated $500 million in assets. Last April, with gold at $677, assets passed $1 billion.

Yet, curiously, Hathaway is grinding his teeth. It was frustrating to watch gold loitering below its post-1980 high price of $725, which it set in May 2006. And it was frustrating to watch the Tocqueville Gold Fund trail a tomato can of a benchmark like the Philadelphia Gold & Silver Index (ticker: XAU). In the year to date Tocqueville has a total return (price appreciation plus dividends) of 6.2%, the XAU 16.6%. It's been a very different story over the long pull, however. Since its inception in July 1998 the Tocqueville fund has produced an average annual return of 22.3%, versus 9.2% for the XAU.

Another source of Hathaway's irritation is unrelated to the frustrations of 2007. It is the chronic mismanagement of gold-mining companies. They drive him crazy, he says. Never mind maximizing return on the stockholders' equity. The miners are forever issuing stock in the cause of producing more ounces of metal.

As a long-term bull on gold, I ask him: "Why not just invest in GLD, the gold ETF, rather than in the mining companies in which you do invest?" Hathaway says that investing in this exchange-traded fund, StreetTracks Gold Trust, which tracks gold prices, not mining company stocks, might have made sense a couple of years ago. But it's not necessarily the most enlightened course of action today. So miserable are mining company returns on equity, so marginal are the overall economics of the business, he says, that a change in the price of gold should translate into a much larger change in the profits of a miner. "Let's just hope that the industry does a better job in managing their prosperity than they did before," he says.

Just before Labor Day Hathaway composed a sermon to his shareholder choir on the case for a much higher gold price. The general breakdown in lending and borrowing is very serious business, Hathaway led off, and exactly the circumstance that ought to favor gold in its original monetary capacity. If the Nasdaq disaster was good for gold, the credit crisis should be even better. The drop in tech stocks was a circumscribed problem. The seizing up of the mortgage market is a universal problem. "The extent of the damage in 2000 was readily apparent," Hathaway noted. It won't be so quick and easy to repair the damage done to complex credit, off-balance-sheet structures, the Fed's big rate cut notwithstanding.

"The page has been turned for gold," Hathaway's sermon continued. "In the previous chapter, the metal was just another hard asset and a laggard at that. It was outperformed by base metals, energy and all manner of tangible assets. It was an also-ran and an afterthought in the commodities derby driven by the expectation of unstoppable growth in the emerging sectors of the global economy. In the current chapter I expect gold to outdistance its tangible brethren as its unique monetary traits become more widely understood. Unlike dollars, euros or yen, it cannot be printed. In comparison with those suspect contenders for safety-seeking capital, it is scarce and difficult to produce."

Just how hard gold is to find and to produce is seen in the meager results of the companies in the Tocqueville portfolio. But a much higher gold price would cure many things, including--suddenly and dramatically--the miners' lackluster profits.

James Grant is the editor of Grant's Interest Rate Observer.


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## drillinto (19 October 2007)

I trust this lengthy interview with Charles Kirk, a must-read blogger, will interest many ASF members.

http://www.traders.com/Reprints/PDF_reprints/KR_KIRK.PDF


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## drillinto (16 November 2007)

Gavekal’s four scenarios for what lies ahead
by Gwen Robinson, Financial Times, 15 Nov 2007

The markets right now are facing an unusually high level of uncertainty, whether it be about future growth, the nature of banks’ balance sheets, the ultimate impact of the housing slowdown, the ability of banks to extend future loans…and, of course, how the new Fed chairman will react to all of this.

In their client newsletter, the pundits at Gavekal, the Hong Kong-based independent research and investment house, have neatly outlined four possible scenarios for the financial environment ahead. 

Scenario 1: The Fed sticks to its assertion that the risks for inflation and growth are now in balance, does not cut rates any further and the US economy grows past its credit crunch. If this happens, it would be massively bullish for the dollar, massively bearish for gold and potentially bearish for HK and Chinese equities (which are now anticipating more rate cuts). It would also be very bearish for US Treasuries and government bonds around the world. Additionally, we would most likely see a rotation within the stock markets away from commodity producers and deep cyclicals (which have been leading the market higher for years) towards the more traditional “growth” sectors, such as technology, health care, consumer goods, and maybe even Japanese equities. 

Scenario 2: The Fed sticks to its guns, does not cut rates, and the US economy really tanks under the weight of the credit crunch. In essence, the US would move into a Japanese-style “deflationary bust”. In this scenario, equities around the world, commodities, and the dollar would collapse, while government bonds would go through the roof. 

Scenario 3: The Fed ultimately cut rates, but this fails to rejuvenate the system and get growth going again. This would likely mean stagflation. As such, gold and other commodities would do well, while stocks and the US$ would struggle. Excluding bonds, this is increasingly what the market is pricing in today. 

Scenario 4: The Fed ultimately cuts rates, and succeeds in reining in the economy. This would be good news for equity markets, commodity markets, and the dollar, but of course, terrible news for bonds. 

The market is still adamantly betting on Scenario 3, and thus one has to be concerned that the Fed’s hand could once again be forced by the market to cut. However, having learned from past experience, Bernanke should now work harder to rein in expectations, particularly as the data continues to point toward a resilient US economy.
And with the weak dollar and continued growth around the world, rising exports should help counter any slack in domestic consumption (which has not yet fallen off a cliff) and the US housing slowdown (which should have a fairly limited impact on the overall economy).
Additionally, the steepening yield curve should begin to help banks rebuild their balance sheets, and thus the Fed may actually feel that it has already done its part in resolving this crisis. Given the above, Gavekal concludes that it is quite likely the market will be surprised to see Scenario 1 unfold.


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## drillinto (18 January 2008)

January 17, 2008

2008 Precious Metals Investment Outlook
By Nick Barisheff of Bullion Management Group
==> www.minesite.com


In January 2005, I wrote an article that began: “It's January, the beginning of a new year, and the time when economists, analysts and even astrologers like to prognosticate about what lies in store for the next 12 months. With respect to gold, opinions on the price vary from US$400 to US$500 dollars per ounce for 2005. These opinions presume that current conditions will remain relatively stable, and if they do the range is reasonable.”
And ended: “In 2005, whether the price of gold will be  US$400 or US$500 does not really matter. Would it have mattered whether you bought the NASDAQ at 400 or 500 in the mid-1980s? It is only important that you did not buy at 5,000.”

Today, price forecasts for gold in 2008 range from US$725 to US$1,100 per ounce, but it still does not really matter. Over the long term, prices of precious metals – gold, silver and platinum – will rise to much higher levels, in all currencies. This is because the underlying factors causing the increases will not only continue, but will likely accelerate.

Although precious metals and all other commodities are currently priced in US dollars, it is important to note that since the summer of 2005 gold has increased in every major currency. It has climbed by 101 per cent in US dollars, 93 per cent in British pounds, 82 per cent in euros, 93 per cent in Swiss francs, 111 per cent in Japanese yen and 78 per cent in Russian roubles. Canadian dollar price increases have been a more modest 65 per cent, because the Canadian dollar has increased in value from US$0.82 to approximately US$0.99.

Even though a bullish case for precious metals can be made based on simple supply-demand fundamentals (falling mine production, mining companies de-hedging, demand rising), the price rise is not due to simple commodity fundamentals. To understand fully the rise in gold prices, it is essential to understand gold’s monetary role.

Gold and silver have been used as money for over 3,000 years, and platinum for several hundred years. Today, they are still used by the world’s richest families as a store of wealth and an inflation hedge. Most central banks hold gold as part of their currency reserves. Although there is considerable controversy over central banks’ leasing of gold, they report current gold holdings of about 928 million ounces, down just 160 million ounces from the 1980 peak of 1,080 million ounces. While western central banks have reduced their holdings and may have leased substantial quantities of their bullion holdings, developing countries have been adding to their reserves. 

Today, a number of central banks have openly discussed diversifying out of US dollars and increasing their gold holdings. The fact that most banks and brokerages trade gold at their currency desks rather than their commodities desks also attests to gold’s monetary role. The net daily turnover of about  US$15 billion in physical bullion by members of the London Bullion Marketing Association also confirms gold’s current monetary role.

Although the daily volume is unpublished, it is estimated at US$100 billion to  US$150 billion per day. Clearly, this is not a result of jewellery demand, but a result of gold trading as a currency.  If we understand gold’s monetary role, what does its rising price indicate?

Analysis of economic statistics can lead to a variety of conclusions. Some economists say the global economy is headed for a recession, while others believe the worst is over and 2008 will be a good year for financial assets. However, a rising gold price is essentially a vote of non-confidence in paper currencies and a leading indicator of future inflation.

Many global investors are concerned about counterparty risk problems, and what may turn out to be the worst financial crisis the credit markets have ever seen. In addition, the explosive growth in derivatives, new highs in the oil price, unsustainable US consumer debt, and a possible unwinding of the yen carry trade provide plenty to be concerned about.

While investors are concerned about these vulnerabilities in the midst of the worst financial crisis the credit markets have ever seen, the major cause of gold’s price increases can be attributed to unprecedented increases in global money supply and the inflationary implications. Contrary to the common belief that inflation is an increase in the Consumer Price Index (CPI), the classical definition of inflation is an increase in the money supply, which results in price increases.

Gold’s role in predicting inflation has been documented by several sources. Recent studies by Ibbotson Associates and Wainwright Economics confirm that gold does provide a hedge against inflation over the long term, and that price increases are leading indicators of future inflation. Most recently, the Bank of Canada published a paper entitled “Gold Prices and Inflation”, which concluded that gold prices contain significant information about future inflation.

Wainwright Economics has conducted studies that show gold, silver and platinum are the best leading indicators of inflation over all other commodities, with platinum taking top honours. Given that gold increased by 26 per cent in 2007 and that platinum increased by 32 per cent (and has now surpassed its 1980 all-time high by nearly 43 per cent), the future outlook for real inflation indicates dramatic increases.

It’s not only precious metals, however, that are pointing to much higher inflation rates. Financial media generally use the Core Consumer Price Index (CCPI) as a measure of inflation, although it is only useful for people that don’t eat, or use energy. The full CPI has been relatively benign until lately, rising from an annualized rate of 2.5 per cent early in 2007 to 4.3 per cent in November. Even with this recent increase, the CPI understates and lags real inflation.

In establishing asset allocations for the coming years, a realistic view of inflation is crucial. Real wealth management must take into account real inflation. If real inflation is already at 8 per cent, then long-term bonds are not really a safe investment, but rather a guaranteed loss of purchasing power. And while the equity indexes may make new highs in nominal terms, they will likely experience losses in real terms.

A clearer picture unfolds if investment performance is measured in gold ounces. The Dow:gold ratio is an accurate long-term trend indicator. It peaked at 43:1 in 2000, and had fallen to 24:1 in 2005. It now stands at 16:1. This means that if you purchased a unit of the Dow with 24 ounces of gold in 2005, you would now get back only 16 ounces – a loss of 36 per cent, even though the Dow made new nominal highs in 2007.

As we begin 2008, one thing is undeniable: the gold price has been steadily rising in all currencies since the summer of 2005, and that rise is now accelerating. Since climbing precious metals prices are an accurate indicator of future inflation and other economic vulnerabilities, investors would be prudent to structure their portfolios to minimize the effects of rising real inflation, and protect their wealth from systemic financial risks.

According to studies by Ibbotson Associates, precious metals are the most positively correlated asset class to inflation. From a strategic point of view, Ibbotson determined that portfolios could reduce risks and improve returns with a 7-15 per cent allocation to precious metals bullion, without any consideration to rising inflation or the impact of any financial vulnerabilities or imbalances.

Wainwright Economics determined that, in the current rising inflationary environment, bond portfolios need an 18 per cent allocation to precious metals bullion and equity portfolios need 47 per cent just to immunize them against inflation. In order to profit from current market conditions, portfolios should have much higher allocations. While we can debate appropriate percentage allocations, the fact remains that even though precious metals have posted impressive increases since mid-2005, most investment portfolios have no allocation to precious metals whatsoever. As a result, they are not protected from inflation or other systemic vulnerabilities, and are neither balanced nor diversified.

While mining stocks and precious metals proxies and derivatives may provide some exposure and trading opportunities, long-term wealth preservation requires fully allocated, segregated and insured bullion. As we have recently seen, the counterparties to Collateralized Debt Obligations (CDOs) and mortgages may default. The counterparty risk in many derivatives, which Warren Buffett calls “financial weapons of mass destruction”, is unknown. Since bullion is not dependent on anyone’s promise, representation or ability to perform, and is not someone else’s liability, only it can provide protection against both systemic events and inflation while incurring low levels of risk.As the prices of gold, silver and platinum continue to rise, mainstream investors and institutions alike will begin to reallocate a portion of their resources, which exceed US$187 trillion, to precious metals.

Since above ground supplies of precious metals represent less than  US$4 trillion in total, and only  US$600 billion in privately held gold bullion, substantially higher price are indicated. If global investors decide to allocate even a modest 10 per cent of their assets to gold,  US$18 trillion in financial assets will attempt to move into this tiny  US$4 trillion market and higher prices will be the inevitable result.

When that reallocation begins, gold at  US$1,100 per ounce will look like a bargain.


[Note: the article was shortened]


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## drillinto (13 January 2009)

Some cautionary observations from Marc Faber

http://www.nakedcapitalism.com/2009/01/some-cautionary-observations-from-marc.html


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## drillinto (5 February 2009)

>>>  www.profitcents.com

This free service provides analysis on any US company's financial situation.


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## drillinto (5 February 2009)

I have tried the free service for a couple of OZ companies listed at the NYSE.

Below is the analysis for BHP.

https://www.profitcents.com/USEN/ru...spx?GUID=9218105e-c33c-4714-acbb-0b521993df71


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## drillinto (8 February 2009)

Ray Dalio(USA) sees a long and painful depression

http://online.barrons.com/article/SB123396545910358867.html?mod=djemWR&page=sp


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## drillinto (17 February 2009)

US Stock Market: A cyclical look at P/E ratios

http://www.ritholtz.com/blog/2009/02/a-cyclical-look-at-pe-ratios/


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## drillinto (11 August 2009)

Doctor Doom
Are There Bright Spots Amid the Global Recession?
Nouriel Roubini
http://www.forbes.com/2009/08/05/re...pinions-columnists-nouriel-roubini_print.html

This week, I take a look at which countries have best weathered the global recession and credit crunch. All economies have been affected by the crisis, but a combination of policy responses and strong fundamentals has given some countries, especially some emerging market economies, a relative edge. These same strengths could lead the countries I highlight below to perform better as the global recovery begins, even if their growth rates remain well below 2003-07 trends.

What do these countries have in common? One major theme is that they tended to have lower financial vulnerabilities due to more restrictive regulation and less developed financial markets, as well as larger and stronger domestic markets that sustained domestic demand. Moreover, they had the resources to engage in countercyclical fiscal and monetary policies, actions that were not possible in past crises. In contrast, countries that borrowed heavily to finance domestic consumption in the days of easy money are now facing sharp economic contractions. Despite the relative strength of these countries, however, their ability to return to sustained growth will depend on structural reforms that support consumption.

Latin America

A couple of countries in Latin America have thus far been able to weather this crisis better than their neighbors. Brazil and Peru stand out for their relatively healthy fundamentals and financial systems. Both countries have benefited from being relatively closed economies and from having diversified export markets and products. They also took advantage of the boom years (2003-08), reducing external vulnerabilities and increasing savings (fiscal and international reserves). By the time these the crisis hit, both countries had well regulated financial systems that saved them from being contaminated by toxic assets. The fact that their domestic credit markets are at an early developmental stage, so consumption is not very dependent on credit, helped them shelter internal demand. Finally, these countries enjoyed strong policy credibility.

Brazil

The Brazilian economy is definitely showing signs of resilience, given the massive adjustments among the developed economies. As early as Q1 of 2009, GDP data showed signs of resilient consumption despite the contraction in investments and the collapse of the industrial sector. Throughout the second quarter, manufacturing continued to show very weak performance vis-Ã -vis 2008 levels, although the sector has shown some tentative signs of improvement on a monthly basis. In the meantime, the retail sector continues slowly to adjust to a much less favorable environment than in 2008, and sales growth keeps on moderating, due to slower real income growth and a challenging credit atmosphere. Yet consumer confidence, which has now almost returned to precrisis levels, could support consumption, despite the labor market losses to come. The central bank's own assessment of the state of the economy suggests that the monetary and fiscal stimuli will remain in place to help the recovery process. The fiscal packages for infrastructure and the housing sector, as well as the tax breaks to the auto industry and capital goods sales, should in part support the labor markets and the expansion of domestic production.

Peru

Peru's economic performance has been relatively strong compared to its global and regional peers despite slowing sharply. In fact, Peru's economy continued to grow in Q1 2009, with domestic confidence holding up and real lending to the private sector keeping growth at high levels. Construction projects continued, and the currency did not experience sharp fluctuations. Although Peru's economy might contract mildly in Q2 and Q3 2009 due to tardy monetary policy actions and slow implementation of fiscal stimulus (an infrastructure development program), these programs are likely to take hold and prompt the economy to bounce back by the end of the year. A high level of international reserves also helped the central bank avoid destabilizing currency movements and properly provide liquidity to the financial system. Moreover, previous liability management operations helped Peru to reduce risks associated with maturity and currency mismatches, and to reduce external debt.

Asia-Pacific

Australia

Australia narrowly escaped a technical recession by force of luck and policy. Despite a slowdown in global manufacturing activity, China and other emerging markets continued to tap Australia's abundant natural resources, boosting Australia's net exports in 2009. Meanwhile, a leap in fiscal spending and a reduction in policy interest rates prevented a sharp falloff in consumer spending and housing prices. Thanks to resilience in Australia's twin pillars of growth, exports and domestic demand, expenditure GDP growth turned positive in Q1 2009. Production and income measures of GDP nevertheless indicate Australia is effectively in recession, but the good news is that the bottoming of production around the world suggests Australia will avoid technical recession this year and that its effective recession will be brief.

China

China's aggressive fiscal and monetary stimulus helped reaccelerate growth in the first half of 2009 from a near stall at the end of 2008. Manufacturing is expanding, new orders are up and the property market correction has been clipped. Yet it remains uncertain whether the government's response merely bought time. China's stimulus adds its own risks, including those of asset bubbles, overcapacity and nonperforming loans. Yet there are some signs that, supported by government incentives, domestic demand has been stronger than anticipated. A sustained increase in consumption, which has lagged overall growth in recent years, would require a reallocation of funds domestically, likely through patching holes in the Chinese social safety net. The Chinese stimulus has been dominated by infrastructure projects, which could boost productive capacity but would do little about structural factors that keep national savings rates high. However, there could be space to implement some such countercyclical policies in H2 2009 and 2010. If so, the Chinese recovery could have greater legs and could provide more support to other countries. If these efforts fail or are delayed, however, Chinese and global growth could be much more sluggish.

India

Despite slowing from highs of 8% to 9% growth, India's economy will grow close to 6% in 2009. Amid domestic and global liquidity crunch, large domestic savings and corporate retained earnings are financing investment. Sluggish labor market and wealth effects have hit urban consumption. But low export dependence, a large consumption base and the high share of employment (two-thirds) and income (one-half) coming from rural areas has helped sustain consumption. Pre-election spending, especially in rural areas, and high government expenditure, are also pluses. Timely monetary and credit measures have played a key role in improving private demand, liquidity and short-term rates and reducing the risk of loan losses. Credit is largely channeled by domestic banks, especially state-controlled ones, which have low loan-to-deposit ratios and little exposure to toxic assets. IT exports have held up despite repercussions on jobs and consumer spending. The oil price correction cushioned India's trade deficit and large foreign exchange reserves helped the country withstand capital outflows in 2008. High returns in real estate and infrastructure and planned liberalization also helped boost capital inflows and asset markets when global risk appetite revived recently.


Nouriel Roubini, a professor at the Stern Business School at New York University and chairman of Roubini Global Economics, is a weekly columnist for Forbes.

[ Note: I had to shorten the article due to space limitations. The link has the full article  >>  http://www.forbes.com/2009/08/05/re...pinions-columnists-nouriel-roubini_print.html ]


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## drillinto (11 August 2009)

Kennas: Do you agree with Roubini's opinion on Peru ?

http://www.forbes.com/2009/08/05/re...pinions-columnists-nouriel-roubini_print.html


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## drillinto (5 December 2009)

Pockets of rot
by Martin Hutchinson (USA)  
30 November 2009

The collapse of Dubai World is pretty unsurprising; when examined closely, the Dubai real estate market was always likely to prove a gigantic bubble. It does, however, raise the question: how many other pockets of rot are around globally, left over from the cheap money boom of 2003-07 and likely to plunge the world's markets into gloom by their collapse?

Even at the peak of its fashion allure in 2007-8, Dubai was clearly a market that had got ahead of itself. Residential mortgages were available at a cost of 7% below the local inflation rate, and were eagerly snapped up by ignorant expatriates in a sure sign that the local construction industry was running way ahead of genuine demand. 

Bizarre relocation decisions were being taken worldwide. It may have made sense for Halliburton, the giant oilfield services company, to relocate its CEO and headquarters staff to Dubai in March 2007 (though Texas, its original home, produces a lot more oil). However, it made no sense whatever for the International Cricket Council (ICC) to move to Dubai in 2005 – a country in which cricket is played very little, and which, however much it spends on fancy cricket grounds, lacks the essential of a successful cricket match – spectators cheering on the local team. The move was undertaken for unsavory tax reasons; its result however has been that the ICC is now completely removed from the bedrock support of the game, either in Britain, Australia, India or anywhere else, and so is prone to making increasingly eccentric and damaging decisions which it imposes on the world's cricketers.

Thus the collapse of the Dubai real estate market is little if any loss to the global economy, although it causes one to raise further eyebrows at the amounts of money the world's banks committed to the bubble. HSBC shareholders, in particular, should ask some tough questions of the bank's management, while British taxpayers can groan once more in the knowledge that RBS management was as capable of running into gigantic losses in real estate lending abroad as at home.

Dubai's problem, and that of several other hidden pockets of rot in the world economy, was the 14 years and counting of excessively loose monetary policy, initially in the United States and from 2000 worldwide. This stimulated investment in fixed assets far beyond the level required by the world economy. It also prolonged the life of many uneconomic operations that could be propped up with easily available money from compliant banks. It allowed the less productive areas of the investment banking/brokerage business to grow to immense size, to the enormous profit of their senior employees, largely at the expense of everybody else. Finally, it allowed the establishment of innumerable entrepreneurial ventures, initially in dot-coms but more recently in clean-tech, that lacked a solid economic basis and attracted capital purely because of their fashionable sector and capital's infinite availability.

These artificial constructs won't last forever. An unneeded building constructed with cheap money never attracts sufficient tenants and so is permanently a drain on its owners. An uneconomic business kept open with cheap money does not generally recover, but becomes more uneconomic, multiplying the losses when it eventually fails. A trading operation built with cheap money flourishes fine while money remains cheap, but is forced into enormous losses and rapid disappearance (like the subprime mortgage securitization business in 2007) once the cheap money dries up. An entrepreneurial business that is founded primarily with cheap money does not grow into a self-sustaining, employment-providing venture, but instead limps along sucking in more resources, always one deal away from viability.

Beyond Dubai, therefore, there are a number of other areas that on closer inspection appear to be patches of rot that will eventually collapse, causing immense losses to those involved in them.

One such pocket of rot is undoubtedly China. People have been writing this for at least a decade, and have lost credibility because collapse never happens. Nevertheless, China, while big enough and opaque enough to hide problems, is NOT immune to the normal laws of economics. It now bears every sign of a gigantic jerry-built economic edifice waiting to crumble. China has had money supply growth in the past year at 28.7%, with the government now doing 50-year bond issues at 4.4%, far less than the rate of inflation – both signs of a market in extreme bubble mode. It also has a mass of uneconomic state industries that have been propped up by the banking system, a gigantic portfolio of real estate investment financed by cheap loans that has been built far ahead of demand, casinos in its stock exchanges that are supporting immensely lucrative but fragile trading operations, and innumerable entrepreneurial ventures in all sectors of the economy, at least a substantial percentage of which have to be non-viable. 

Having all four types of bubble-created rot (albeit in different degrees), China must eventually undergo the collapse that is necessary to remove the rot and restore its long-term growth prospects. That's not to say China isn't the great growth economy of the 21st century – it probably is – but it has to go through a truly gigantic financial crash first, before resuming its growth on a healthier basis, probably at least 5-10 years later.

A second "pocket of rot," quite localized but nevertheless involving a lot of capital, is the London housing market. U.S. house prices have declined from their overvalued state in 2006 by about 25% to somewhere near their long-term average in terms of national earnings (but still have further to go before finally bottoming, as interest rates rise to a more normal level and subsidies are removed). However, the British housing market, which was far more overvalued, with the average dwelling price being about 6 times average earnings at the peak compared to about 4.5 times in the United States, has declined by only about 10% from the peak and has recently rebounded. There is thus no question that London housing in particular is still far into bubble mode. At some point, the rot will make itself evident, prices will collapse by close to 50% and huge losses will result for foolish lenders and speculators, as well as for many unfortunate over-extended homeowners.

A third "pocket of rot" is Wall Street and the other global trading operations. These were created partly by misguided financial theories, but more especially by the ready availability of cheap money for over a decade.  Had they been allowed to collapse in 2008, the world would have been the better for it. As it was, they were bailed out by unfortunate taxpayers, and have proceeded to make even more money in 2009, as finance has become even cheaper and more available – at least for rent-seeking trading. Their collapse will probably have to await the rise in interest rates and withdrawal of liquidity that is the inevitable denouement of the current commodities bubble. 

At that point, the Wall Street houses will demand yet another bailout, claiming that their tangle of mutual obligations makes them systemically essential and that they play a vital role in the U.S. and global economies. The answer this time should be NO; their role has for the last decade been a negative one, and the parts of it that are genuinely essential can quickly be replicated by boutique operations staffed by those of their ex-employees that aren't under indictment.

Finally, there is undoubtedly rot in the green-tech bubble of the past few years. Quite apart from the question of whether the entire global warming extravaganza was a gigantic hoax, as now seems possible (probably not entirely, but its over-inflation certainly was), the companies set up using readily available pools of over-excited venture capital don't look like ordinary youthful tech ventures. Instead of their "footprint" expanding inexorably like Google's until it seems about to take over the world, it has remained stubbornly modest, with their margins remaining slender and their revenues heavily dependent on new research grants from various government "stimuli" and other non-market sources. That suggests that the oxygen of genuine and explosively expanding demand for their products and services simply is not there; they will limp along at marginal profitability as long as the money lasts, but will then collapse altogether leaving no permanent results other than investor losses and the wrecked career prospects of their unfortunate ex-employees.

As was the case in 2001-02, the recession of 2008-09, painful though it was, has been prevented by artificial means from cleansing the rot in the global economic system. New healthy growth will be very limited indeed until the cleansing happens, because the rot, being powerful and well-connected, will tend to suck up the great majority of available capital and other resources. Its eventual decay and collapse will thus be immensely painful, but is wholly necessary before healthy economic growth can resume.

Source: http://www.prudentbear.com/index.php/thebearslairview?art_id=10317


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