Oct 31

Solutions for Everything, Answers to Nothing

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Could one day’s Financial Times be the best £2.50 humanity ever spends…?
 

WEDNESDAY we picked up an issue of the Financial Times, writes Bill Bonner in his Diary of a Rogue Economist – the so-called pink paper due to its distinctive color.
 
We wondered how many wrongheaded, stupid, counterproductive, delusional ideas one edition can have.
 
We were trying to understand how come the entire financial world (with the exception of Germany) seems to be singing from the same off-key, atonal and bizarre hymnbook. All want to cure a debt crisis with more debt.
 
The FT is part of the problem. It is the choirmaster to the economic elite, singing confidently and loudly the bogus chants that now guide public policy.
 
Look on practically any financial desk in any time zone anywhere in the world, and you are likely to find a copy. Walk over to the ministry of finance…or to an investment bank…or to a think tank – there’s the salmon-pink newspaper.
 
Yes, you might also find a copy of the Wall Street Journal or the local financial rag, but it is the FT that has become the true paper of record for the economic world.
 
Too bad…because it has more bad economic ideas per square inch than a Hillary Clinton speech. It is on the pages of the FT that Larry Summers is allowed to hold forth, with no warning of any sort to alert gullible readers. In the latest of his epistles, he put forth the preposterous claim that more government borrowing to pay for infrastructure would have a 6% return.
 
He says it would be a “free lunch” because it would not only put people to work and stimulate the economy, but also the return on investment, in terms of GDP growth, would make the project pay for itself…and yield a profit.
 
Yo, Larry, Earth calling…Have you ever been to New Jersey?
 
It is hard enough for a private investor, with his own money at stake, to get a 6% return. Imagine when bureaucrats are spending someone else’s money…when decisions must pass through multiple levels of committees and commissions made up of people with no business or investment experience – with no interest in controlling costs or making a profit…and no idea what they are doing.
 
Imagine, too, that these people are political appointees with strong, and usually hidden, connections to contractors and unions.
 
What kind of return do you think you would really get? We don’t know, but we’d put a minus sign in front of it.
 
But the fantasy of borrowing for “public investment” soaks the FT.
 
It is part of a mythology based on the crackpot Keynesian idea that when growth rates slow you need to stimulate “demand”.
 
How do you stimulate demand?
 
You try to get people to take on more debt – even though the slowdown was caused by too much debt.
 
On page 9 of Wednesday’s FT its chief economics commentator, Martin Wolf (a man who should be roped off with red-and-white tape, like a toxic spill), gives us the standard line on how to increase Europe’s growth rate:
“The question […] is how to achieve higher demand growth in the Euro zone and creditor countries. [T]he Euro zone lacks a credible strategy for reigniting demand [aka debt].”
It is not enough for people to decide when they want to buy something and when they have the money to pay for it. Governments…and their august advisers on the FT editorial page…need a “strategy”.
 
On its front page, the FT reports – with no sign of guffaw or irony – that the US is developing a “digital divide”.
 
Apparently, people in poor areas are less able to pay $19.99 a month for broadband Internet than people in rich areas. So the poor are less able to go online and check out the restaurant reviews or enjoy the free pornography.
 
This undermines President Obama’s campaign pledge of giving every American “affordable access to robust broadband.”
 
The FT hardly needed to mention it. But it believes the US should make a larger investment in broadband infrastructure – paid for with more debt, of course!
 
Maybe it’s in a part of the Constitution that we haven’t read: the right to broadband. Maybe it’s something they stuck in to replace the rights they took out – such as habeas corpus or privacy. 
 
We don’t know. We only bring it up because it shows how dopey the pink paper – and modern economics – can be.
 
Quantity can be measured. Quality cannot. Broadband subscriptions can be counted. The effect of access to the internet on poor families is unknown.
 
Would they be better off if they had another distraction in the house? Would they be happier? Would they be healthier? Would they be purer of heart or more settled in spirit?
 
Nobody knows. But a serious paper would at least ask.
 
It might also ask whether more “demand” or more GDP really makes people better off. It might consider how you can get real demand by handing out printing-press money. And it might pause to wonder why Zimbabwe is not now the richest country on earth.
 
But the FT does none of that.
 
Over on page 24, columnist John Plender calls corporations on the carpet for having too much money. You’d think corporations could do with their money whatever they damned well pleased.
 
But not in the central planning dreams of the FT. Corporations should use their resources in ways that the newspaper’s economists deem appropriate. And since the world suffers from a lack of demand, “corporate cash hoarding must end in order to drive recovery.”
 
But corporations aren’t the only ones at fault. Plender spares no one – except the economists most responsible for the crisis and slowdown.
“At root,” he says of Japan’s slump (which could apply almost anywhere these days), the problem “results from underconsumption.”
Aha! Consumers are not doing their part either.
 
Summers, Wolf, Plender and the “pink paper” have a solution for everything. Unfortunately, it’s always the same solution and it always doesn’t work.
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Oct 29

QE, War & Other Autopilot US Action

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Ready for a clean break with Fed money creation…?
 

AMONG the many things still to be discovered is the effect of QE and ZIRP on the markets and the economy, writes Bill Bonner in his Diary of a Rogue Economist.
 
We can’t wait to find out.
 
The Fed has bought nearly $4 trillion of bonds over the last five years. You’re bound to get some kind of reaction to that kind of money.
 
But what?
 
Higher stocks? More GDP growth? Higher incomes? More inflation?
 
Washington was hoping for a little more of everything. But all we see are higher stock and bond prices. And if QE helped prices to go up, they should go back down when QE ends this week.
 
Unless the Fed changes its mind…
 
If the Fed makes a clean break with QE, it risks getting blamed for a big crack-up in the stock market. On the other hand, if it announces more QE, it risks creating an even bigger bubble…and getting blamed for that.
 
Our guess is we’ll get a mealymouthed announcement that leaves investors reassured…but uncertain. The Fed won’t allow a bear market in stocks, but investors won’t know how and when it will intervene next.
 
Last week, we were thinking about the reaction to the murder in Ottawa of a Canadian soldier who was guarding a war memorial.
 
There were 598 murders in Canada in 2011 (the most recent year we could find). As far as we know, not one registered the slightest interest in the US. But come a killer with Islam on his mind, and hardly a newspaper or talk show host in the 50 states can avoid comment.
 
“War in the streets of the West,” was how the Wall Street Journal put it; the newspaper wants a more muscular approach to the Middle East.
 
Why?
 
After a quarter of a century…and trillions of Dollars spent…and hundreds of thousands of Dollars lost…America appears to have more enemies in the Muslim world than ever before. Why would anyone want to continue on this barren path? To find out, we follow the money.
 
Professor Michael Glennon of Tufts University asks the same question: Why such eagerness for war?
 
People think that our government policies are determined by elected officials who carry out the nation’s will, as expressed at the ballot box. That is not the way it works.
 
Instead, it doesn’t really matter much what voters want. They get some traction on the emotional and symbolic issues – gay marriage, minimum wage and so forth.
 
But these issues don’t really matter much to the elites. What policies do matter are those that they can use to shift wealth from the people who earned it to themselves.
 
Glennon, a former legal counsel to the Senate Foreign Relations Committee, has come to the same conclusion. He says he was curious as to why President Obama would end up with almost precisely the same foreign policies as President George W. Bush.
“It hasn’t been a conscious decision. […] Members of Congress are generalists and need to defer to experts within the national security realm, as elsewhere.
 
“They are particularly concerned about being caught out on a limb having made a wrong judgment about national security and tend, therefore, to defer to experts, who tend to exaggerate threats. The courts similarly tend to defer to the expertise of the network that defines national security policy.
 
“The presidency is not a top-down institution, as many people in the public believe, headed by a president who gives orders and causes the bureaucracy to click its heels and salute. National security policy actually bubbles up from within the bureaucracy.
 
“Many of the more controversial policies, from the mining of Nicaragua’s harbors to the NSA surveillance program, originated within the bureaucracy. John Kerry was not exaggerating when he said that some of those programs are ‘on autopilot’.
 
“These particular bureaucracies don’t set truck widths or determine railroad freight rates. They make nerve-center security decisions that in a democracy can be irreversible, that can close down the marketplace of ideas, and can result in some very dire consequences.
 
“I think the American people are deluded…They believe that when they vote for a president or member of Congress or succeed in bringing a case before the courts, that policy is going to change. Now, there are many counter-examples in which these branches do affect policy, as Bagehot predicted there would be. But the larger picture is still true – policy by and large in the national security realm is made by the concealed institutions.”
Calling the Ottawa killing “war” not only belittles the real thing; it misses the point. There is no war on the streets of North America. But there is plenty of fraud and cupidity.
 
Here is how it works: The US security industry – the Pentagon, its hangers-on, its financiers and its suppliers – stomps around the Middle East, causing death and havoc in the Muslim world.
 
“Terrorists” naturally want to strike back at what they believe is the source of their sufferings: the US. Sooner or later, one of them is bound to make a go of it.
 
The typical voter hasn’t got time to analyze and understand the complex motives and confusing storyline behind the event. He sees only the evil deed.
 
His blood runs hot for protection and retaliation. When the call goes up for more intervention and more security spending, he is behind it all the way.
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Oct 23

An End to QE? A Good Man in Congress?

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God knows what Ron Paul was ever doing in US politics…
 

OVER the weekend, we were down in Nashville at the Stansberry Conference Series event, along with Ron Paul, Porter Stansberry, Jim Rickards and others, writes Bill Bonner in his Diary of a Rogue Economist.
 
The question on the table: What’s ahead for the US?
 
Ron Paul took up the question from a geopolitical angle. He told the crowd that the military-security industry had Congress in its pocket.
 
As a result, we can expect more borrowing, more spending and more pointless and futile wars. They may be bad for the country and its citizens, says Paul, but they are good for the people who make fighter jets and combat fatigues.
 
“We’ve been at war in the Middle East for decades,” he said…
“We supported Osama bin Laden against the Soviets in Afghanistan…and the result of that was the creation of al-Qaeda.
 
“Then we supported Saddam Hussein against Iran. Saddam and bin Laden hated each other. But after 9/11 we attacked Saddam, using a bunch of lies to justify it. We sent over military equipment worth hundreds of billions of Dollars. This equipment is now in the hands of ISIS – another enemy we created…and a far more dangerous one.”
Ron Paul is such a pure-hearted soul. What was a man like him doing in Congress?
 
It must have been some sort of electoral accident. Good men rarely run for public office. And when they do, it is even rarer for them to win.
 
Poor Ron is retired from Congress now. And he spends his time trying to “get the word out.” He thinks that if people only realized what was happening they would vote for more responsible leaders and more sensible policies.
 
Alas, that’s not the way it works. The further the country goes in the wrong direction, the more people there are who have a financial interest in staying on the same road.
 
We visited Ron in his office on Capitol Hill. He held a breakfast meeting with a small group of congressmen, trying to convince them to vote his way; we don’t remember what was at issue.
 
It was an uphill battle. Only a few members of Congress attended. And those few worried that their districts would lose money…or that the labor unions wouldn’t like it if they voted no…or that they might not get a plum committee assignment if they bucked their own party leadership. Ron was alone.
 
Politics favors blowhards, hustlers and shallow opportunists, we concluded. Which makes us wonder how Ron Paul ever got elected to Congress in the first place.
 
But not only did he get elected…once in Washington, he never sold out. Neither to the right nor the left. He opposed zombies, malingerers and bullies wherever he found them.
 
Which brings us to the subject of our own presentation to the Nashville crowd. We were following the (QE) money. “St. Louis Fed president James Bullard let the cat out of the bag last week,” we explained.
 
As Bullard told Bloomberg TV last week:
“I also think that inflation expectations are dropping in the US. And that is something that a central bank cannot abide. We have to make sure that inflation and inflation expectations remain near our target.
 
“And for that reason I think a reasonable response of the Fed in this situation would be to invoke the clause on the taper that said that the taper was data dependent. And we could go on pause on the taper at this juncture and wait until we see how the data shakes out into December.
 
“So…continue with QE at a very low level as we have it right now. And then assess our options going forward.”
We didn’t think it would happen so fast. We thought the central bank would wait. We expected a little more hypocrisy…a bit more posturing…a little more phony resistance…a few denials…
 
…the Fed should have played it cool…coy…elusive…hard to pin down, making investors really sweat before coming to the rescue.
 
We knew where the Fed would end up…but we didn’t know it would go there so quickly and easily!
 
Bullard is admitting to a staggering act of vanity and hypocrisy. In the land of free minds and free markets, apparently only the Fed knows what prices equities should fetch.
 
Henceforth, it will approve all price movements on Wall Street.
 
To bring you fully into the picture, dear reader, the US central bank has the economy, and the markets, hooked on cheap credit and printing-press money. It has been supplying both on a grand scale for the last five years.
 
But it had promised to stay away from the playground, beginning this month. Now that the economy is recovering, goes the storyline, the Fed will back away from its emergency measures and allow things to return to normal.
 
QE ends this month. Higher interest rates are expected next year.
 
No bubble has ever been created that didn’t have a pin looking for it. And nobody likes it when the two meet up. Last week, it looked as though the Fed’s bubble and Mr. Market’s pin were coming closer. Then quick action by Bullard helped push them apart on Friday.
 
QE began in November 2008. And zero interest rates began a month later. This has perverted prices for stocks, bonds, houses…and just about every other asset price on the planet. Stocks are worth more than twice what they were at the bottom of the crisis. The average house is worth $60,000 more.
 
Now QE is ending. And that means a lot less money gushing into financial markets.
Instead of increasing at a 40% rate as it did in 2012, what Richard Duncan calls “excess liquidity” – the difference between what the Fed pumps out via QE and what the government absorbs via borrowing – will go up only 6% this year.
 
Next year, there will be even less.
 
With less new money coming from the Fed…and still no real recovery…something’s gotta give. No matter what Fed officials say. And since stocks periodically go down anyway, this seems like as good a time as any.
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Oct 15

Up-to-Date with the Big Sell-Off

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The trouble began in 1968 with Lyndon Johnson…
 

THIS is what we’re hoping for, writes Bill Bonner in his Diary of a Rogue Economist
 
A big selloff.
 
Not that we want to see people lose money. What do you take us for?
 
But we’ve been watching this show for many years now. We want to see how it turns out.
 
To bring you up to date, in 1968, the US switched from gold to the kind of money that grows on trees. That’s when President Johnson asked Congress to end the requirement that Dollars be backed by gold.
 
It allowed a huge increase in credit…and debt. Thirty-seven trillion Dollars in excess credit allowed Americans to live beyond their means for decades. They were spending money that nobody earned or saved.
 
Year after year – through Democrat and Republican administrations…through good times and bad – debt continued to build up.
 
And as time went by debt became more important. The US economy…US financial assets…US lifestyles…and the US federal government all came to depend on it. None could survive in its present form if it were forced to live on what was actually earned.
 
When the US stock market crashed in 1987 Alan Greenspan came to the rescue with more EZ money.
 
It was a daring and provocative move; never before had the nation’s chief central banker expressed such an interest in stock prices. Previously, Mr.Market was responsible for the stock market; Mr. Central Banker stayed out of his way.
 
And ever since, central bankers have taken upon themselves the grave and absurd task of guarding speculators’ backs. That’s why the Fed intervened so eagerly in the markets in 2001 and again in 2008.
 
The Fed may not be able to spot a bubble, but it has no such trouble when it comes to busts. And although it has no interest in pricking a bubble, it treats a bear market as though it were an Ebola epidemic. Whenever there is the slightest hint of an outbreak, it rushes in with hoses and disinfectant.
 
That’s why we are so interested to see what happens next.
 
Will the Fed come to its senses and let Mr.Market do his work? Will it allow investment mistakes to be corrected quickly and naturally? Or will it meddle once again…and make them worse?
 
Perhaps we will find out soon.
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Oct 13

FT’s Martin Wolf in "Not Wrong" Shocker

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Today’s debt bubble is a real problem, says a key cheerleader…
 

AS WE predicted, volatility is rising. Investors are beginning to squirm, writes Bill Bonner in his Diary of a Rogue Economist.
 
Why?
 
The Fed is ending QE. And it could hike short-term interest rates as soon as next year. The EZ money is getting scarce.
“We are trapped in a cycle of credit booms,” writes Martin Wolf in the Financial Times.
Wolf is wrong about most things. But he is not wrong about this.
“On the whole,” he writes, “there has been no aggregate deleveraging since 2008.”
Wolf does not mention his supporting role in this failure. When the financial world went into a tailspin, caused by too much debt, in 2008, he joined the panic – urging the authorities to take action!
 
As a faithful and long-suffering reader of the FT, we recall how Wolf howled against “austerity” in all its forms.
 
His solution to the debt crisis?
 
Bailouts! Stimulus! Deficits! In short, more debt!
 
Since then, only America’s household and financial sectors have deleveraged…and only slightly. Businesses and government have added to their debt.
 
Overall, the world has much more debt than it did six years ago – more than $100 trillion worth.
 
Wolf has come to realize where his own misguided policy suggestions lead.
 
As a recent paper by banking think tank the International Center for Monetary and Banking Studies put it, fighting a debt crisis with more debt leads to a “poisonous combination of higher and higher debt and slow and slowing real growth.”
 
That is the world we live in. Thanks a lot, Martin.
 
The future is a blank slate. It whacks us all – but differently, depending on how exposed we are. What can we do but try to protect our backs…and squint, peering through the glass darkly ahead.
“These credit booms did not come out of nowhere,” writes Wolf. “They are the outcome of previous policies adopted to sustain demand as previous bubbles collapsed.”
Why sustain unsustainable demand? Why not just let the bubble collapse?
 
Under oath in a New York courtroom, two former US secretaries of the Treasury have told us why.
 
Not bailing out AIG would have been “catastrophic,” said Hank Paulson on Monday. A failure of AIG would have led to “mass panic,” chimed in Timothy Geithner on Tuesday.
 
At least they had their story straight. But it is not hard to connect the dots. When a credit bubble pops, it causes fear and panic. The authorities take action to stop it.
 
What can they do?
 
Whatever it takes, is their answer.
 
What does it take to stop a deflating credit bubble?
 
More money! More credit! More debt!
“We need to escape this grim and apparently relentless cycle,” Wolf concludes.
Meanwhile, “IMF warns of third Euro-zone recession since financial crisis,” reports the FT elsewhere.
 
The IMF also downgraded its forecast for world GDP growth to 3.3%.
 
High debt. Slow growth. And another colossal crisis coming.
 
No wonder investors are nervous.
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Sep 28

The Bells, the Bells!

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From high art to Russia and US housing, the bells are ringing out…
 

TALK about ringing a bell! says Bill Bonner in his Diary of a Rogue Economist.
 
This ring-a-ding-ding comes from the New York Observer:
“Sales of contemporary art at public auctions surpassed $2 billion for the first time last year, the Paris-based arts-data organization Artprice said.
 
“The report tallied auction sales between July 2013 and July 2014, and it found that contemporary art sales grew 40% from the previous year. The number of big-ticket items that sold for over 10 million Euro ($12.8 million) more than doubled in the period.
 
“Those who follow the art market will remember the record-breaking Christie’s auction in November that saw buyers walk away with the most expensive publicly auctioned piece of art ever, Francis Bacon’s $142.4 million Three Studies of Lucian Freud (1969). That auction also minted Jeff Koons’ $58.4 million Balloon Dog (Orange) (1994-2000) as the most expensive piece by a living artist ever sold at auction…”
That’s another bad thing about being rich – you have to live with this stuff.
 
Even if you don’t own it, your new friends and neighbors will.
 
Unless you’re autistic – or a savant, like Warren Buffett – you’ll find it hard to avoid. Contemporary art and big, expensive houses are hugely popular among the wealthy elite. And most people are very susceptible to peer influence.
 
That is what creates investment opportunities, too. The lumpen investoriat – like the lumpen electorate – does not do much serious thinking.
 
Instead, it reacts emotionally and primitively.
 
It takes up positions that are too expensive. And then, in a panic, it stampedes away from them…leaving them too cheap. That’s when the bells start ringing.
 
Monday’s Financial Times, for example, chimed loudly.
 
It reported on page one that US private equity group Blackstone “calls it a day in Russia.”
 
This followed a withdrawal from Russia earlier this month by DMC Partners, a private equity group founded by former Goldman Sachs executives.
 
Further reporting revealed that the European Bank for Reconstruction and Development had “also suspended investments in the country.” And if that weren’t enough, “US group Carlyle has retreated from the market twice.”
 
Over on page 15, the FT continues to ring the bell, telling us that “Russia’s Gazprom could lose 18% of its revenues as a result of competition from US liquefied natural gas exports.”
 
On Tuesday, the bell ringing went on. A front page revealed that even the Rockefeller fortune was pulling out of fossil fuels.
“The effort to make oil, gas and coal investments as unpopular as tobacco stocks…gathered momentum…” the paper declared.
Geez, you’d have to be crazy to invest in Russian energy stocks now, right?
 
Yeah…crazy like a fox. Any time the newspapers give you nothing but reasons to sell, it’s time to buy. You can buy Gazprom for less than three times earnings…with a 5% dividend yield.
 
“And that’s post-theft,” says Rob Marstrand, chief investment strategist at our family wealth advisory, Bonner & Partners Family Office.
“You don’t have to worry about corruption…or politics…or sanctions,” he says. “It’s all in the price already.”
The news about Russian energy companies is all bad. It’s time to buy.
 
Meanwhile, what are people almost universally in favor of buying?
 
A house!
 
Poor people buy cheap houses. And when they get more money, they believe they should “trade up” to an expensive one.
 
Both rich and poor:
  • take advantage of mortgage deductions…
  • lock in low interest rates for the long term…
  • build equity…
  • improve their credit scores.
All by buying a house. But is it true? Is housing a good deal? Now? Ever?
 
A year ago, housing was one of our favorite investments. But our lead researcher at The Bill Bonner Letter, EB Tucker, thinks he hears the bell ringing for housing too.
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Sep 16

Russian Stocks: Betting on the Now

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Moral rules meet simple logic in the search for cheap assets…
 

OCTOBER is coming. Excess liquidity is disappearing. And with the S&P 500 on a trailing P/E of 19.7, the index is fast approaching “sell territory”, writes Bill Bonner in his Diary of a Rogue Economist
 
Watch out. 
 
Having finished with investment theory, now we turn to practical application. 
 
There are three parts to the investment world. The first part is Aristotelian, Cartesian, Pythagorean. It is a world of logic and calculations. He who calculates best wins. 
 
The second part is Socratic and Emersonian. The investment world, like the rest of the world, follows moral rules. When you do something “wrong” you will pay the consequences. 
 
For example, when you forget to pay a parking fine…you will probably regret it. Leave a rake lying in the yard, turned up the wrong way, and you will almost surely step on it. Buy an expensive “story stock”, recommended to you by a broker you’ve never met, calling from Boca Raton, and you will most likely lose money. 
 
That is true in a larger sense, too. An economy that goes too deeply into debt will have to bear the consequences. No amount of QE or negative real interest rates will make those consequences disappear. They can only distort and displace them. 
 
This is not to say that moral rules will play out the way you expect in every instance. It is wrong to kill. But had you snuffed a certain housepainter in Vienna at the turn of the last century, the world might not necessarily be a worse place. 
 
Likewise, not every foolish bet goes bad. Still, you’re probably better off believing it will. 
 
The third part of the investment world is completely unpredictable and unfathomable. Mr.Market gets up to mischief from time to time; he drives moralists mad and logicians to drink. 
 
The numbers we presented last week show that the average investor does not beat the indexes…not even close. 
 
According to data from Dalbar, he consistently lags just about every asset class there is. This leads the Efficient Market Hypothesis crowd to say: Just buy an index fund. You can’t beat the market. 
 
But our Simplified Trading System (STS) tells us there’s a good time to buy and a bad time. 
 
“Buy low and sell high,” is the basic rule. US stocks are now expensive. The trailing P/E for the S&P 500 is 19.7. The 10-year cyclically adjusted P/E ratio (Shiller P/E of CAPE) for the index is even higher – at 26.3. 
 
What do you do when when US stock valuations are so high? 
 
Well, you need to find markets that aren’t so pricey. Such as the Russian stock market! 
 
There, the trailing P/E is under 6.
 
You’re thinking: “Hmm…Russian stocks are treacherous. Everybody says so. And with the war in Ukraine and the sanctions regime, they could go much lower.” 
 
One of our own clever readers, Bradley P., warns:
“The downside on Russian stocks is still 100% from here. Mathematically that is the maximum loss one can have buying Russian stocks. 
 
“Once in the last hundred years that happened; when the Bolsheviks closed the stock market in 1917 […] 
 
“Since US stock markets have never lost 100%, while Russian ones have, by a historical perspective US stocks, even at 20 times earnings, are likely a better investment than Russian stocks (never mind whether they use an accounting system you can trust). 
 
“Just wait until Russia closes the market to foreign investors, issues capital controls and the ADRs and ETFs go to zero.”
Bradley may be right. But we don’t presume to know – neither what is really going on now…nor what it will mean for the future. Neither in Russia nor in the US. 
 
All we know is that our calculations (as primitive as they are) tell us you get more value per Dollar in Russia. 
 
And our “moral” rule tells us that you don’t make money speculating on the future. You make money by buying wisely in the present. 
 
Our guess is that Mr.Market aims to make fools of as many investors as possible. And right now, there are far more investors who are short or out of Russian equities than there are those who are long.
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Sep 12

Stock Investing: A Loser’s Game

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Why EMH is wrong, and right, and how that points to a simple winning strategy…
 

THERE are so many unanswered questions, writes Bill Bonner in his Diary of a Rogue Economist.
  • Should you put your money in a company just because you like the product?
  • Should you buy companies with rising earnings?
  • Should you trade in and out of stocks?
  • What should you do if the market is “too high”?
  • Should you be trying to beat the market at all? Is it not better to content yourself with whatever the market returns?
The answer to these questions will be far more important than any stock pick you ever make.
 
This is one of the reasons my son Will and I set up our new publishing venture, Bonner & Partners. We wanted to publish research not just aboutwhat to invest in and when to invest in it…but how you should be investing in the first place.
 
First, consider this from Forbes:
“According to the latest 2014 release of Dalbar’s Quantitative Analysis of Investor Behavior (QAIB), the average investor in a blend of equities and fixed-income mutual funds has garnered only a 2.6% net annualized rate of return for the 10-year time period ending Dec. 31, 2013.
 
“The same average investor hasn’t fared any better over longer time frames. The 20-year annualized return comes in at 2.5%, while the 30-year annualized rate is just 1.9%. Wow!
 
“The average investor exclusively investing in just fixed-income funds has had an even worse experience. The annualized return is 0.6% over 10 years, 0.7% over 20 years, and 0.7% over 30 years.
 
“Investors may only have themselves to blame. According to Dalbar’s QAIB, investors make poor investment choices that hurt their investment returns. These decisions, including when to buy and sell, are often driven by emotion.”
By contrast, almost any investment sector or category did better. Over the last 10 years, the S&P 500 rose 7.4%. International stocks rose 6.9%. Bonds went up 4.6%. Only commodities underperformed, with a negative 0.8% annual return.
 
Academics and financial theoreticians have confronted these facts in the context of the Efficient Market Hypothesis (EMH).
 
The evidence, say EMH advocates, supports the hypothesis: There is no point in trying to beat the market. You won’t win.
 
“Nothing of the sort,” reply EMH critics, among them Warren Buffett. There’s plenty of evidence that:
  1. irrational investors frequently misprice stocks in an exploitable way; and
  2. investors using old-fashioned Graham-and-Dodd value investing techniques consistently beat the market in a way that is not attributable to luck.
More evidence on this point came yesterday. Our old friend and colleague Chris Mayer – and another disciple of Graham and Dodd – had the track record of his value-investing newsletter Capital & Crisis verified by outside auditors. Chris writes:
“The report is not perfect. They exclude dividends, which is ridiculous. But even so, from September 2004 through July 31, 2014, the annualized return for Capital & Crisis were 16% over the last decade versus 4.8% for the S&P 500.
 
“I count dividends, so my figures are a touch higher – 17% for Capital & Crisis. But pretty close.”
So you see, you can “beat the market”. But both EMH advocates and detractors exaggerate.
 
It may be true that prices are never “perfect”…in the sense that they perfectly reflect the real value of the underlying investment. But it is also true that investors can never be sure they have discovered a more perfect price than the market has set.
 
In other words, Mr.Market is never wrong; he just changes his mind.
 
For us, the EMH is better regarded as a moral rule. It is not exactly true. But it is not exactly false, either.
 
A savant such as Warren Buffett would be a much poorer man today had he believed it. But most investors are probably better off taking it as gospel…just as they are better off believing they will go to hell if they disobey the Ten Commandments.
 
For most investors, riding along with the market will be far more rewarding than trading in and out trying to beat it. There may be $100 bills lying around from time to time, but most investors probably won’t find them before Buffett and other pros like him do.
 
This is the approach we take at our family wealth advisory, Bonner & Partners Family Office – where the main focus is on asset allocation, not stock picking.
 
The core message of EMH is that the market is very hard to beat in a consistent way. It tells us to be humble…and realistic about what we can expect from stocks.
 
For most people, investing is not a good way to make a fortune. It is just a good way to keep…and maybe grow…a fortune.
 
You make your real money by providing real goods and services to others. It is not realistic to think you can make much money, while you sleep, from the hard work and enterprise of others. That is revealed in the figures above cited by Forbes.
 
Another way to look at this is to think of investing as a “losers’ game”. A successful amateur investor realizes he is not likely to beat the pros. He doesn’t try for home runs or grand slams. He just wants to get on base.
 
He assumes the market is fairly efficient…and that he’s not likely to beat it. He avoids buying expensive stocks. (How does he know they’ll continue to go up?) He avoids investment themes he doesn’t understand. (How does he know they make sense?)
 
He aims only to not lose, by sticking with the very, very basics.
 
That is the point of our Simplified Trading System (STS). And it’s what we spend most of our time doing in our new newsletter, The Bill Bonner Letter. We’re not trying to find things that will work. (How do we know?) We’re just trying to identify those that probably won’t.
 
Here’s our investment philosophy:
  1. Think a lot. Do a little.
  2. Always buy low. And for safe measure, buy very low.
  3. Never believe anything a salesman says about an investment. There’s a good chance that he is ignorant, dishonest or stupid. Or all three.
  4. Be reasonable. But take a swing at a grand slam pitch from time to time. Heck, it’s not just about the money; it should be fun, too.
  5. Remember, the investment world is like the rest of life. Patience, modesty and hard work pay off.
Vanity, weakness and cupidity do not.
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Sep 05

$10 Billion for Snapchat?!

Gold Price Comments Off on $10 Billion for Snapchat?!
Insider secret of how Wall Street works to part you from your money…
 

WE ARE sitting in the lobby of the China World Hotel in Beijing, writes Bill Bonner in his Diary of a Rogue Economist.
 
It is a very large space and very unlike most hotels. 
 
Monday, we stopped into the lobby of the Marriott Opera Ambassador Hotel on Boulevard Haussmann in Paris. Like most lobbies, it was quiet, with just a few people having coffee. 
 
Here, there are hundreds of people – almost all young. I am the oldest person, a fossil from another continent and another time. The young people are dressed casually but well. They sit in groups talking…as though planning their next marketing campaign. 
 
There is scarcely anyone over the age of 40. We have started a small publishing business in China. It, too, is staffed by people in their twenties. 
 
What happened to the old people? Maybe they have not been able to keep up with the breathtaking changes in China. This is no country for old men…
“Everyone has great confidence in the future,” says a Chinese colleague. “Things have gotten so much better over the last 20 years. And we expect that to continue. 
 
“Our new president, Xi Jinping, is serious about trying to get rid of corruption, even at the highest levels. He is trying to deregulate whole industries. Regulations and licenses were just a way for officials to demand bribes and payoffs. So, Xi wants to get rid of a lot of this so we can do business more freely.” 
Whether he will succeed or not, we can’t say. But at least it sounds promising. 
 
The truth is we never know what will work. And here we take up an important subject: how you can invest intelligently in a world of ignorance.
 
It is so important and so weighty, it needs a real-world introduction. And it can be so tedious that we must offer you a reward for paying attention. 
 
Yes, dear reader, you will be the first to know about our new trading system. It’s guaranteed – almost – to beat the market. But first, let us turn to the “Wolf of Wall Street” – financial commentator Wolf Richter, that is:
“It was leaked on Tuesday [of last week] by ‘people with knowledge of that matter,’ according to the Wall Street Journal, that VC firm Kleiner Perkins Caufield & Byers had decided in May to plow up to $20 million into message-app maker Snapchat, for a tiny portion of ownership. An undisclosed investor also committed some funds. The deal, which apparently hasn’t closed yet, would give Snapchat a valuation of $10 billion.
 
“That’s a big step up from November last year, when the valuation was $2 billion. At the time, the company had raised $130 million in three rounds of funding. By now that would be closer to $160 million, after it was also leaked that Russian investment firm DST Global had put some money into it earlier this year, boosting its valuation to $7 billion at the time, once again, “according to two people familiar with the matter.”
 
“At a valuation of $10 billion, it joins the top of the heap: app makers Uber ($18.2 billion) and Airbnb ($10 billion), cloud storage outfit Dropbox ($10 billion), and Palantir, the Intelligence Community’s darling ($9.3 billion).”
What makes photo-messaging app Snapchat stand out is that it has no business model…no revenue…and no profits. 
 
It has, as near as we can tell, a lot of young users who send photos to one another…often explicit in nature. These photos – known as “Snaps” – then disappear after a number of seconds. 
 
How can Snapchat monetize that? Who knows? 
 
Perhaps a better question: Why would a bunch of rich, rational money-grubbers at KPCB want to invest good money in Snapchat? 
 
We don’t know. Maybe they know something we don’t. Maybe they have a lot of this kind of inventory in stock? And maybe they believe that pumping up the whole sector will be good for business. 
 
What’s their business? 
 
It is simple: Smart guys sell things to guys who aren’t so smart. The pros unload onto the amateurs. Wall Street touts IPOs to mom-and-pop investors. 
 
Putting a little VC money into Snapchat…giving it a nutty valuation…is like bidding up odd paintings by contemporary artists. Quirky works of art suddenly become valuable simply because someone paid a lot of money for them. 
 
With no earnings to guide prices, valuations can go to the moon. KPCB – with a lot more Snapchats where this one came from – is along for the ride. 
 
But do you, dear investor, want to be taken for a ride too?
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Sep 02

About That GDP Revision

Gold Price Comments Off on About That GDP Revision
Strong GDP data hide the failure of QE and zero rates to juice the real economy…
 

The FIRST REVISION of the GDP numbers for the second quarter wasn’t what we expected, says Bill Bonner in his Diary of a Rogue Economist.
 
We expected the data to show substantial weakness. Instead, they show what looks like strength. The US economy expanded at a 4.2% rate in the second quarter, adjusted for inflation.
 
The economy may be growing. Stocks may be near a record high. But the typical American owns no stocks and his prospects are depressing. Here is a report from the New York Times:
“For five years, the United States economy has been expanding at a steady clip, the stock market soaring, the headlines filled with talk of recovery. Yet public opinion polling shows most Americans still think the economy is pretty miserable.
 
“What might account for the paradox? New data from a research firm offers a simple, frustrating answer: Middle-class American families’ income is lower now, when adjusted for inflation, than when the recovery began half a decade ago.”
This is hardly news to us. We’ve been following the real economy – as best we could – for the last 15 years. Dear readers already know household income, hourly wages and household wealth were all down – for most people.
 
The averages are distorted by the few at the very top, but the typical American suffered a big plunge in wealth in 2008-09…and has never recovered. In fact, he is worse off today than he was at the bottom of the hole in 2009.
 
In June of that year, according to Sentier Research, the median family earned $55,589. Today, that figure is $53,891, adjusted for inflation. That “median” family is right at the middle of all US households. So, half of the people you see on the streets or in the shopping malls have suffered even bigger income losses.
 
But it wasn’t just the damage done by the crisis of 2008-09 that has lowered incomes. The problem is bigger, deeper. It’s the core defect in the debt-fueled growth model.
 
As we explore in our new book, Hormegeddon, a little bit of debt may be a good thing. But add more, and it depresses growth. Keep adding debt, and the whole shebang blows up.
 
Sentier’s numbers show the deterioration in household income began at least 14 years ago. Today, the typical middle-income family earns less than it did when the 21st century began – despite the biggest wash of cheap credit the world has ever seen.
 
In other words, policymakers’ efforts to increase real demand have failed miserably. Go figure.
 
But our guess is the feds will not spend much time figuring out why their “stimulus” model doesn’t work. It’s the only tune they know. As it fails, they will merely keep singing, louder.
 
How?
 
Bypassing the banks, they will put their newly digitized money directly into the hands of the people whose votes they need to buy. This kind of flagrant money creation is becoming intellectually respectable, as a kind of final solution to the problem of insufficient demand.
 
Martin Wolf, the influential chief economics commentator at the Financial Times, has already suggested it publicly. Now, here comes an article in Foreign Affairs magazine titled: “Print Less and Transfer More: Why Central Banks Should Give Money directly to the People.”
 
Recognizing that QE and ZIRP are not making it to the top of the charts, the establishment is getting behind more direct inflationary measures. The article explains:
“It’s well past time, then, for US policymakers – as well as their counterparts in other developed countries – to consider a version of Friedman’s helicopter drops. […]
 
“Many in the private sector don’t want to take out any more loans; they believe their debt levels are already too high. That’s especially bad news for central bankers: when households and businesses refuse to rapidly increase their borrowing, monetary policy can’t do much to increase their spending. […]
 
“Governments must do better. Rather than trying to spur private-sector spending through asset purchases or interest-rate changes, central banks, such as the Fed, should hand consumers cash directly.”
Are you still holding government bonds, dear reader? Make sure you get rid of them before the music stops.
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