Archives of “inflation” tag

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Alpha & Beta: Two Competing Investment Philosophies

  
  Education
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“Where’s the Dow going to be in a year?”

That’s often asked of financial TV guests. From their responses, you’ll detect two distinct investment philosophies emerge. Which answer resonates with you most strongly probably determines the sort of investor you are. It also affects the odds of how well your portfolio is likely to do.

Imagine it is a random Wednesday, and despite my past warnings about noise, you have a television tuned to a financial news station. That very question is posed to two television guests; let’s call them “Alpha” and “Beta.” Their answers — which are quite different — reflect their competing investment schools of thought.

Guest Alpha’s response is very specific. Yet it incorporates so many factors, it’s hard to keep up with. Rather than fill this in with the news of the moment — Fed raising rates! China devaluation! Greek bailouts! Gold collapse! — I have left the details blank so this remains “evergreen.” This not only shows how many variables are involved, but it avoids the emotional response you may have to any of these specific issues.

So Alpha is asked where the Dow will be in a year, and he responds:

“Our view is that the economy in the U.S. continues to _______, and we foresee _______ problems overseas ______. China is _______, and that has ramifications for the Pacific Rim’s ______. Greece is ______ in Europe. The commodity complex is causing _____ for emerging markets. But many sectors of the U.S. economy remain _______, and some sectors overseas are still _______. The valuation issue continues to be _____, and that means _____ for investors. That has ramifications for corporate profits that will be ______. We think the economy is going to do ______, and you know that means inflation will be _____, which will force interest rates to ______. Under these conditions, the sectors most likely to benefit from this are ______, ______ and ______. The companies best positioned to take advantage of this are ____, ____ and ____. Based on all that, we especially recommend an overweight allocation to ____, ____ and ____. Thus, we believe the Dow will be at ______ next year.”

You can turn on FinTV any day of the week and hear some variation of that discussion. (more…)

Great Expectations

  
  Education
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The best things in life are unexpected – because there were no expectations – ELI KHAMAROV 

Great_expectations

 Legendary trader Roy Longstreet was once asked by Intermarket Magazine, “Why have you succeeded in trading to such a degree and why do most traders fail?”  Roy answered “Many major problems people have in trading are caused by their expectations – of where the market is headed, how much money will they make from this trade, etc. One thing I learned that has helped me: it is wrong for a person to enter any market with any preconceived expectations.” 

He went on to say, “I know that there’s always the possibility that what I don’t want to happen, will happen. The market will not act in accord with my expectations. You have to ask yourself the question, how must you function to survive? The answer is to be able to accept a loss. Not having expectations makes it a little easier to accept a loss. You must realize that losing is part of soul growth, so to speak. It’s necessary. It’s hard to accept, but necessary.” 

This problem of attaching ourselves to an outcome is not exclusive to trading, but is a problem in investing in general. Expectations of higher and higher returns have become commonplace in an environment of lower opportunity to do so. Few people consider the fact that when they invest today, the riskless marketplace pays close to zero.  For example, the one month Treasury Bill pays $40 for a $100,000 investment, and inflation is running around -1.3%, based on the Consumer Price Index.  (more…)

How to Spot a Market Top

  
Analysis, Education
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This is via an article in the Wall Street Journal title: How to Spot a Market Top

It begins generically enough with the sort of stuff you hear all the time:
  • A da Vinci sells for $450 million
  • one bitcoin is worth $7,700
  • 99-year-old Austria issues a 100-year bond at an interest rate of 2.1%
  • Clearly there is too much money in the world. That isn’t new, but how long can it last?
  • With central banks scaling back stimulus, investments that appear attractive when interest rates are near, or below, zero suddenly look silly.
Then, some, errr … wisdom:
  • The end may come soon, or the current investing nirvana could go on.
K, thanks.
But, then it gets better:…  walks through the risks and likely scenarios for markets in the coming months. It is ungated (I think), co check it out while we await Europe/UK action:

Bad NEWS Continues For BRAZIL

  
Analysis, Education
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BRAZIL2Brazil’s economic growth continues to disappoint.

After data in December showed Brazil’s economy shrank in the third quarter of last year for the first time since 2009, the central bank’s IBC-Br index, a monthly proxy for gross domestic product, showed economic activity fell 0.3 per cent in November from a month earlier.

The market had been expecting an increase of 0.1 per cent for November.

The surprise contraction comes just two days after the central bank voted unanimously to raise its benchmark Selic rates by a larger-than-expected 50 basis points to 10.5 per cent.

The aggressive move is aimed at tackling the country’s high inflation, which hit 5.91 per cent last year. (more…)

Abu Dhabi Lecture: Short Summary

  
Economy, Education
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He began by explaining why extreme deflation scenarios are extremely unlikely under the Bernanke Fed, comparing the Fed chairman’s commitment to an anti-deflation strategy to Hitler’s Mein Kampf, a book that also clearly stated a policy program in advance but was not widely believed until it was too late.

Likewise Dr Faber believes Mr. Bernanke is committed to printing money and will in any case have very little choice because of entitlements and the US constitution. Thus he could see the S&P 500 dropping back from current levels to say 950 in this autumn but by then Fed monetary policy would be strongly inflationary and bring the market back up.

Dr Faber pointed out that with the US so deep in debt the Fed thinks it cannot allow asset prices to drop below a certain point because that would devastate the balance sheets of the banks with debt deflation. But he thinks in the long run this is just rolling up another crisis for the future that will destroy the US dollar and cause an even bigger financial crisis.

Declaring himself the ‘most pessimistic of forecasters, nobody is more pessimistic than me’ Dr Faber outlined a scenario in which the dollar has to be replaced by another unit after a future inflation, and holders of cash and bonds lose virtually everything in the process.

Ten Key Principles in Economics

  
Analysis, Education
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ASR-10Everything has a cost. There is no free lunch. There is always a trade-off.Cost is what you give up to get something. In particular, opportunity cost is cost of the tradeoff.

 

One More. Rational people make decisions on the basis of the cost of one more unit (of consumption, of investment, of labor hour, etc.).

iNcentives work. People respond to incentives.

Open for trade. Trade can make all parties better off.

Markets Rock! Usually, markets are the best way to allocate scarce resources between producers and consumers.

Intervention in free markets is sometimes needed. (But watch out for the law of unintended effects!)

Concentrate on productivity. A country’s standard of living depends on how productive its economy is.

Sloshing in money leads to higher prices. Inflation is caused by excessive money supply.

10 Worst Cases -Hyperinflation

  
Analysis, Economy, Education
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Inflation is hot property today, hyperinflation is even hotter! We think we are modern, contemporary, smart and ready to deal with anything. We’ve got that seen-it-all-before, been-there-done-it attitude. But, we are not a patch on what some countries have been through in the worst cases of hyperinflation in history. Here’s the top 10 list of worst cases in history. We’ll start with the worst first…let’s think positive!

Hungary 1946

Inflation at its peak reached a staggering figure of 13.6 quadrillion % per month! That’s 13, 600, 000, 000, 000, 000%. The largest denomination bill was a 100 Quintillion note. Prices ended up doubling every 15 hours at the time.

Zimbabwe 2008

Prices doubled here every 24.7 hours in November 2008 and inflation reached levels of 79 billion-odd %. They eventually stopped using the official currency and switched to the South African Rand or the $US. A loaf of bread ended up costing $35 million. This is the most recent case. It was Mugabe’s land-redistribution program that caused this.

Yugoslavia 1994 (more…)

Best Disclaimer Language Ever

  
Education, Humour
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I like a legal department that has a sense of humor. This is the standard disclaimer that Contango Oil & Gas Company (MCF) includes with their quarterly earnings reports:

Lawyer Stuff
The future is unknowable. We have good intentions but all of our projections and estimates will be wrong, and could be materially wrong. Wildcat exploration is expensive, speculative and potentially dangerous. An offshore spill or explosion would be enormously expensive. We have insurance but it may not be enough. You could lose your entire investment. Don’t be lazy – read our 10-Q’s, 10-K’s and press releases, and if you lose money – please no tears.
“Don’t forget about risk-free T-bills in your portfolio…After inflation and taxes you’ll likely only lose 5-10% of your investment.”
– Contango V.P. Investor Relations

Trading Books -Every Trader Should Read

  
  Education
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The Market Wizards Series – Jack Schwager:  Chances are you will find these books on the shelf of any serious trader.  They are without a doubt the most comprehensive collection of interviews with superstar traders ever published.  However, their dirty little secret is that although they capture perfectly a moment in time, they are extremely dated and will give you almost no insight into today’s markets or how to trade them. Their value now is in showing how even the greatest traders initially struggled and often blew up (repeatedly) before becoming successful.

Stan Weinstein’s Secrets For Profiting in Bull and Bear Markets – Stan Weinstein: This book was the first to quantify one of the most important concepts in trading; the four stages in which stocks move, which are the basing, advancing, topping, and declining stages.  Despite the fact that the cover of this book has not been updated since it was published in 1988, stage analysis is still relevant today.

How to Make Money In Stocks – O’Neil:  As an unnamed trader friend of mine recently said, all you need to do is review the charts in the first 150 pages of this book and you will be good to go.    These charts along with O’Neil’s annotations, give you a great foundation to understand the patterns stocks form before they go on massive runs.

Reminiscences of a Stock Operator – Edwin Lefevre:  Tough call on this book, only because I don’t think it is the Rosetta Stone of trading books like it is often described as.  The language is dated and colloquial, which though strange, is actually part of its charm. There are definitely some foundational lessons for trading in this book, but you as the reader have to do the historical conversion in your head from venue’s like “bucket shops,” to today’s market. (more…)

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