Monday, May 31, 2010

Testing Microsoft's Bing

I often go to MSN Money to look at the top stories. They've really been pushing their bing service lately.

How is Bing: Investing in copper a top news story? It's just search results from a search engine. Nothing more.

That said, I'm not going to heckle something unless I've actually tested it first. So here goes.

Bing: Does Bing Suck?

Here are Bing's top two search results.

Bing Sucks

Why Bing Sucks. Top 5 Reasons.

I'm now caught in a liar paradox.

On the one hand, Bing found the answer to my question. That must mean that Bing does not suck.

On the other hand, Bing tells me that Bing sucks. That must mean that Bing does suck.

Lowering Our Expectations

April 16, 2010
Time: Why Young People Should Buy Stocks on Margin

We have just survived the worst debt-fueled binge since the Roaring '20s. Now two professors at Yale University are suggesting we introduce leverage into a new realm of our lives — our retirement portfolios.

The worst debt-fueled binge since the Roaring '20s was caused by excessive leverage. So what's the advice? More leverage of course. That just figures.

Running the numbers on more than 130 years of stock data...

130 years of stock data is certainly impressive. While we stare into the rear view mirror looking for insight from an era when none of us were even alive, here's something else we might see.

Or how about this one from 2007? I made every attempt to give the horrific chart an H.P. Lovecraft theme in order to properly do it justice.

Men of learning suspect it little, and ignore it mostly. - H.P. Lovecraft

Let's face it. Lowering our expectations about the future can be painful. There's no denying it. Better to realize the pain up front than have it blind side us though.

Haven't I seen you before? Yes.
Did you get many margin calls? Yes.
Then why are you back? I don't know.
Are you looking to risk your savings? It's possibly.
You do know that this is a risky service? [Silence]
Would you like a growth stock? Okay.
You would have said the same thing about value stocks, wouldn't you? Yes.
Would you like to invest in rabbits? Yes.
Would you like to buy this lint from my pocket? Okay.

Sunday, May 30, 2010

The Sarcasm Report v.49

China Keeping Thumbs Up

We always read about that china is now running an economy based on bubble and that bubble burst might disrupt the economic growth of the world economy.

I've been reading about Chinese bubbles since 2007. Okay, sure, maybe some of them popped. That's not important right now though. We need to keep in mind that the Internet is full of wacky conspiracy theories and even crazy people can be right sometimes.

China is looking into the core areas of economic growth and not building an artificial economic growth based on reckless lending and speculative dreams.

Absolutely. There's not one bit of reckless lending and speculative dreaming in China. It's all just calm rational thinking planned out meticulously by the world's smartest central bankers. Just because their stock market trades at less than half of its all time high means nothing. That was a planned Olympic event choreographed with utmost precision.

Don't believe me? Just look at real estate. Where else in the world can you invest in housing and not even rent it out? It can appreciate there even without any actual tenants. That's just pure genius.

China Real Estate Bubble Bursts in Bond Market: Credit Markets

China property developers paid coupons as high as 14 percent to issue dollar debt this year, compared with an average 9.2 percent for other companies in Asia and 6.2 percent for U.S. property companies. On average, Chinese property companies are paying a 10.875 percent coupon.

They borrow money at 14%? I know reckless lending when I see it and that's not it. This is definitely China's time to shine.

Screw 'em! This is your time! Now go out there and take it.

Spending Power (Version 2)

First, some definitions.

Deposits include foreign deposits, checkable deposits, currency, time and savings deposits, and money market fund shares.

Credit Market Instruments' Assets include open market paper, treasury securities, Agency- and GSE- backed securities, municipal securities, corporate and foreign bonds, other loans and advances, and mortgages.

Credit Market Instruments' Liabilities include home mortgages, consumer credit, municipal securities, bank loans n.e.c., other loans and advances, and commercial mortgages.

Tangible assets such as real estate and durable goods are not included, nor are stocks, mutual funds, life insurance, or pensions. Some of that could easily be cashed out for extra spending power, but as seen in recent years, it gets a bit dicey if everyone wishes to do the same. Further, the point of this post is to actually show that tangible assets, stocks, and mutual funds are at risk. I have little doubt that they will eventually be sold at some point to provide at least some future spending power.

I can spend money by withdrawing deposits I have at the bank, by selling the credit market assets that I own (savings bonds), or by simply taking on more credit market liabilities in the form of a loan (payday loan). That is my combined spending power at any moment in time.

This type of spending power is not sustainable though. Every dollar I borrow to fuel my current spending is one less dollar I'll have to fuel my spending at some point in the future.

This charts shows spending power as the money we have in savings plus the amount of money we are owed minus the amount of money we owe. That is just about the nastiest chart I could possibly put on my blog. Sorry.

It gets worse though. See that recovery in recent years? Our government borrowed that for us. Technically speaking, at least in my world, it isn't real spending power. It's just more illusionary spending power intended to help prop things up.

There's $5 trillion in new public debt since I turned bearish in 2004. It's long-term spending power that we've permanently lost. If we continue down this path then I can say with 100% certainty that we will reach a point when we cannot borrow any more. We will have simply postponed The Great Depression.

From where I sit, it will not be a black swan event. It will simply be destiny catching up to us, much like it has for Greece. The goods news is, if you can even call it good news, is that I think the entire world is in the same boat. At least we won't be alone.

See Also:
Pure Spending Power! Rarr!
Trend Line Disclaimer

Source Data:
FRB: Flow of Funds

Saturday, May 29, 2010

Pure Spending Power! Rarr!

Let's start with the ballpark idea that our spending power is a combination of money we have in the bank as seen in M2 plus the money we borrow as seen in the total consumer credit outstanding plus the money we borrow as seen in the real estate loans at all commercial banks. It isn't perfect, but it might illustrate a point or two.

It's kind of scary how we fell off the exponential trend line back in 1989, but let's conveniently ignore that for a while. Trust me. You won't even be thinking about it at all by the time you've read the rest of what I have to say.

Let's now factor in the rise of modern mining equipment to meet our spending power needs.

This shows what the aluminum price might be if it all of the world's aluminum was still in existence, we owned it all, and it fully backed our M2, consumer debt, and real estate loans. I've also shown the actual price of aluminum.

And lastly, let's see how stable the system might look under such a scenario. I'll divide the prices as seen in the black line by the actual price as seen in the red line to come up with a ballpark stability proxy. The more stable that ratio is the more stable the system should be, at least in theory.

Let me summarize this a bit for those not quite following along. I know it is complicated. I'm basically suggesting that the growth in the money supply and debt compared to the actual production of aluminum should be enough to actually guess the price of aluminum. That's pretty much what the chart shows from the 1970s to 2008. It just hovers around 7, give or take.

Now for the bad news.

I started with the assumption that our spending power is a combination of the money we have plus the debt we are willing to take on. That's pretend spending power in my world. It's an illusion. I'm retired. I can't spend money like that. My real long-term spending power is the money I have in the bank MINUS the amount I owe.

Cash and credit are not the same things to me. In fact, they are the exact opposites. The more I have now the more I can spend in the future. However, the more I owe now the less I can spend in the future.

Therefore, let's try again looking at cash and credit in a different way. We'll update those three previous charts using a new economic model based somewhat on common sense. We won't think of our spending power as the amount of money we have plus the amount we can borrow. Instead, we'll think of our spending power as the money we have in the bank minus the amount we have borrowed.



Oh my. What a difference a few minus signs make. What are we going to do with all that extra aluminum if this trend continues?

This may seem very complicated, and it is. These are arguably the most complex charts I've done yet. I had to break it into two groups of three to even have a hope of explaining what I am thinking to others, or even myself for that matter.

Unfortunately, these charts are way too simplistic to do our economy justice. This analysis is just a flea on the back of an elephant. It does, however, suggest why I might be more deflationary than most though. A vacuum exists where growth once was, but aluminum production continues on almost as if nothing had happened.

Aluminum is a new hope for the U.S.

In brief: Aluminum production in the U.S. begins to grow at a steady pace because of rising demand for the metal in the manufacturing sector.

A new hope? I saw that movie. The empire's death star blew up in a "one in a million" black swan type event.

China Becomes Net Aluminum Exporter for First Time Since 2008

China’s aluminum production capacity will expand 20 percent this year, Neil Buxton, managing director at London-based researcher GFMS Metals Consulting, said May 21. Stockpiles monitored by the Shanghai Futures Exchange have climbed almost 65 percent this year to a record 489,495 tons.

I'm not quite done yet. Here's the worst news of all. I've made the bearish case without even mentioning our national, state, and local government debts. Technically, I should be subtracting that from my long-term spending power too. That's assuming I don't get the unborn grandchildren of others to pay for it of course. Sigh.

I really don't think now would be the best time to be swinging for the fences using leveraged high risk bets. Just an opinion!

See Also:
The Quantity Theory of Aluminum
Trend Line Disclaimer

Source Data:
St. Louis Fed: M2 Money Stock
St. Louis Fed: Total Consumer Credit Outstanding
St. Louis Fed: Real Estate Loans at All Commercial Banks
USGS: Historical Mineral Statistics

One Cubic Foot

You are presented with two boxes that are filled with one cubic foot of a mystery substance. Each box has a note on it.

Box A’s note says the contents have superior electrical conductivity, thermal conductivity, malleability, and resistance to corrosion. The contents have extraordinarily high reflective powers. The contents are used in the spacecraft industry.

Box B’s note says the contents can be very strong, ductile, and malleable. The contents are an excellent conductor of heat and electricity. The contents are known for their ability to resist corrosion. If polished, the contents have the highest reflectivity of any material, including even mirror glass. The contents are used in the spacecraft industry.

It is Monty Hall time. Which box would you prefer? I should probably warn you that this is not a game show and that I am not your game show host. Nothing is free here. Should you wish to purchase a box you may therefore wish to look at the price tags.

Box A's price is $21 million.

Box B's price is $151.

Still deciding? Okay, okay. Look inside the boxes then.

Box A is filled with 1,728 cubic inches of gold. The box weighs 1,206 pounds. At today's prices, it costs $21 million.

Box B is filled with 1,728 cubic inches of aluminum. The box weighs 169 pounds. At today's prices, it costs just $151.

Some of you are going to point out an obvious fact that is missing in my analysis. The world has been in love with gold for 5,000+ years. Why hasn't there been a similar love of aluminum? I would respond with a shoulder shrug and an often overlooked bit of information as seen in one of the links below.

1. Aluminum was was not "discovered" until 1808. It would therefore have been impossible for the world to have been in love with aluminum for 5,000+ years.

2. The world has not been in love with computers for 5,000+ years either, and yet here we are relying on them to debate the price of gold's true value.

3. The world does love aluminum. Big time. We just don't seem to realize it these days. We'll drink a can of Coca Cola and/or Pepsi and just toss the empty can right into the recycling bin, and for some out a car window or straight into the garbage. Not a thought is given of its true value to us.

It's just an opinion of course, but at $21 million per cubic foot, I think gold has become very expensive relative to the other things I could be filling that box with if I was looking to lock in a current standard of living long-term. At just $0.06 per troy ounce, I could fill it with things I need and use every day: canned goods, aluminum, and/or toilet paper.

See Also:
Gold to Aluminum Price Ratio

Source Data:
Densities of Materials
Kitco: Gold
Kitco: Aluminum
NWTM: Gold Uses
Aluminum - An Essential Metal
Wikipedia: Aluminum

Friday, May 28, 2010

I Can See Clearly Now (Musical Tribute)

The year was 1973. What a year.

Click to enlarge.

Signs of Deflation You Might Not be Able to See Clearly

The Fed and the government quite effectively advertise their efforts to inflate the supply of money and credit. But deflationary forces, to most eyes, are invisible. I thought I would point some of them out.

Stock-market roller coaster is hard on the economy's stomach

Most worrisome is that the market mayhem is bringing back memories of fall 2008, when stocks plummeted as bank lending froze after the collapse of brokerage Lehman Bros.

Dollar's monthly string of gains longest in a decade

Dollar index makes biggest monthly gain since October 2008

I turned bearish in the summer of 2004. I remember walking my dog around a local lake. The sun is a powerful force. It had me questioning my bearishness. I had to remind myself that the sun was also out during The Great Depression though. It may not seem like it when we look back at the grainy black and white footage of that era, but it really was.

This post inspired by G.H. who referred to the first song in the comments. I really do wish I could see clearly now. Unfortunately, the future still looks cloudy to me. I just don't think we can borrow our way back to prosperity. I hope I am wrong.

Memorial Day Weekend Humility

It is very easy to think that we know more than we do.

That said, this is what I do know.

I am thankful to live in America. I can freely type my thoughts in public thanks to those who came before me.

Thursday, May 27, 2010

How to Hire the Best Financial Advisor

How to hire the best financial adviser

To choose the right steward of your money, do your homework, cast a wide net, check references and avoid these 7 big mistakes.

Not one mention of using a mirror? Interesting. I bring this up because I doubt the person in your mirror could manage risk any worse than the trained professionals at Citigroup and AIG did. They were the cream of the crop.

Citigroup Chart
AIG Chart

Or how about the two Nobel prize winning economists over at Long-Term Capital Management?

Long-Term Capital Management

LTCM was founded in 1994 by John Meriwether, the former vice-chairman and head of bond trading at Salomon Brothers. Board of directors members included Myron Scholes and Robert C. Merton, who shared the 1997 Nobel Memorial Prize in Economic Sciences.[2] Initially enormously successful with annualized returns of over 40% (after fees) in its first years, in 1998 it lost $4.6 billion in less than four months following the Russian financial crisis and became a prominent example of the risk potential in the hedge fund industry.

The mirror is so easy even a child can do it. It doesn't even require a management fee. Give it a shot. You've got nothing to lose that the very best of the best couldn't lose on your behalf.

Compare and contrast her speech to this one.

December 19, 2001
GE SEES BRIGHT FUTURE Chief Immelt declares big bucks are coming

"We're built to work in every environment," Immelt told investors. "The point I want to make about GE is who we are. We give investors a chance to sleep at night knowing that you're going to get consistency and visibility."

Look, I can be a CEO. Now, my whole company is great. I can do anything good. I like anything. I like my stock. I like my money. I like my growth. I like my...

"He wants growth and he's going to use the financial firepower of GE to get it," said Dick Henderson, an analyst with Pershing. It is a strategy that has worked very well for GE in the past, he said.

The world was his for the taking.

GE's Stock Price

In my opinion, the only person you can truly trust to be a proper steward of your prosperity is you. There are just too many others looking to make your prosperity their prosperity.

The Worst Possible Way to Save

This Is the Wrong Way to Save

Moreover, Betterment has a different way of charging for its services than most brokers. Rather than charging commissions, Betterment simply takes a 0.9% annual management fee from your assets.

Betterment simply takes. What more is there to say? You know I'm not going to end here though. I'm just getting started.

Invest once. After 30 years, that 0.9% annual management fee would have taken 24% of your assets. Here's the math.

0.991 ^ 30 = 0.76

On the bond side, the service offers a single investment: iShares Barclays TIPS Bond (NYSE: TIP). That's also a useful fund, although it's unfortunate that the service doesn't offer at least one ETF with traditional rather than inflation-indexed bonds in its portfolio.

Oh oh. I feel the need to offer some profanity here. I apologize in advance because here it comes.


Here are your choices.

1. You can buy TIPS directly from the government for free. There are no fees to purchase. There are no annual fees to maintain your account.

2. You can buy TIPS through Betterment. They will serve as your primary middleman. They will take 0.9% for themselves per year. They'll take that money and invest it in the TIP bond fund. The bond fund will serve as your secondary middleman. TIP will take 0.2% for themselves per year. The TIP bond fund will then buy TIPS on your behalf.

Which plan do you really think is the "better" way to save?

The Rise (and Fall?) of the Mung Bean Empire

Latest investment tip in China: Mung beans

Mung beans are three times more expensive than in January; garlic is up 20 fold as speculators and wholesalers corner the market.

Zhang Wuben's TV lectures on the healthful properties of mung bean water have become enormously popular nationwide in the past three months. His claims to be a qualified nutritionist have been debunked by investigative journalists, but thousands of Chinese are believed to be following his advice to boil three pounds of mung beans a day and drink the resulting broth instead of water in order to ward off everything from lung cancer to high blood pressure.


Stocks jump after China shows confidence in Europe

China's show of confidence in Europe let the market resume a rally that stalled late Wednesday following a report that the Chinese government was considering cutting its European debt holdings. If that were true, such a move would have signaled that China didn't think Europe would be able to contain the crisis. The agency that manages China's $2.5 trillion in foreign reserves denied the report.

Europe and Mung Beans. Mung Beans and Europe. They go together like two peas in a pod. Confidence games for the win.

Just 97 More Points (Musical Tribute)

The S&P 500 hit 1103.06 today. That's a 3.3% gain in just one day. Very impressive!

Just 97 more points and we'll cross the
S&P 500's Rubicon for the 24th time.

He was going down a grade making 90 miles an hour
When a whistle broke into a scream
He was found in the wreck with his hand on the throttle
Scalded to death by the steam

Wreck of the Old 97

The route between Monroe and Spencer was rolling terrain and there were numerous danger points due to the combination of grades and tight radius curves. Signs were posted to warn engineers to watch their speed.

The Southern Railway placed blame for the wreck on engineer Broadey, disavowing that he had been ordered run as fast as possible to maintain the schedule.


This blog is currently being barraged by SPAM.

I have therefore temporarily turned on comment moderation. This is a first for me so let's hope I can figure out how this works. Let's also hope I can turn it back off once the spammer realizes he/she is not welcome here.

Feel free to post whatever you like about anything you like and as long as it doesn't contain umpteen references to watch and/or handbag products then chances are I will approve it as soon as I read it.

Consider it a grand experiment to see just how often I am on my computer. Hahaha!

Any SPAM related jokes would be especially amusing right now for those with a sense of humor about this.

I'm sorry for any inconvenience.

Wednesday, May 26, 2010

Immigration Math Is Not What You Would Think

The Economics of Immigration Are Not What You Think

With my colleague Jiwon Vellucci, we found, to start, that more than one-third of recent immigrants come from Europe and Asia, while less than 57 percent have come from Mexico and other Latin American nations.

That is such an interesting way to word it. I think it pretty much sums up any potential biases within the article.

Let's say Mr. Shapiro and I won the lottery together. Can't you just picture him saying...

Let's split the winnings fairly. I'll take less than 57% for myself. That will leave you with more than one-third!

Hey, just a thought.

The evidence regarding the impact of immigration on wages also turns up some surprising results. First, there’s simply no evidence that the recent waves of immigration have slowed the wage progress of average, native-born American workers.

Rumor has it that obscenely highly paid CEOs are making the "average" native-born American workers seem better off than they really are. Has that been factored into the analysis?

Critics blast Boy Scouts for CEO's $1 million compensation

"This is crazy. This is just crazy. First class tickets. Country clubs, Admirals Club? This is ridiculous,” said Ken Berger, president and CEO of Charity Navigator, which provides independent analysis of non-profit organizations.

How about "average" native-born American teenagers? Has that been factored in?

Are immigrants to blame for teen unemployment?

"The decline in teenage employment is very worrisome because a large body of research shows that those who do not work as teenagers often fail to develop the work habits necessary to function in the labor market later in life," said Steven Camarota, the director of research at the Center for Immigration Studies who co-authored a study about the issue.

Overall immigration – both legal and illegal – is a major factor in the steady decline in U.S.-born teenage participation in the summer workforce, according to a report issued Wednesday by Camarota's organization, an anti-illegal immigration think tank that believes in restricting legal immigration.

"A Drought of Summer Jobs, Immigration and the Long-term Decline in Employment among U.S. Born Teenagers" shows charts comparing various occupations and states. Before the current recession, the summer labor force participation of U.S.-born teens was decreasing, the report says.

Black Swans Are NOT Everywhere

Black Swans Everywhere

Karen Gibbs, editor of the Gibbs Perspective, recently told attendees of The MoneyShow Las Vegas that Black Swan events aren’t as rare as they once were.

In 2007, Nassim Nicholas Taleb wrote The Black Swan: The Impact of the Highly Improbable. In it, he argues that most of the really big events in our world are rare and unpredictable.

Taleb lists three criteria for such an event: It must be a surprise to the observer; it must have a major impact, and [will be] eventually rationalized by hindsight as predictable.

By definition, black swans cannot be everywhere.

For example, several weeks ago I was watching TV and the screen froze. This surprised me. It had a major impact on my television viewing experience. I later rationalized it in hindsight as being predictable. I do use Comcast after all, lol.

That met Taleb's definition of a black swan event.

When my Internet and phone failed to respond last night and it was roughly the third time this month that service was out, it really did not surprise me much.

Once something becomes predictable, then it no longer qualifies as a black swan event.

The Greek economic crisis is yet another Black Swan event, although those studying the situation saw legal accounting sleight of hand mask the country’s profligate spending, cheap money and few, if any, financial controls.

No, it isn't. If those studying the situation could see it coming then it definitely was not a black swan event. They did not need to rationalize it later as being predictable. They were predicting it.

As long as governments engage in fiscal irresponsibility, [however,] the global economy will be buffeted by fear. To paraphrase Mr. Taleb, until governments can refute rumors, expect more black swans.

If fiscal irresponsibility leads to fear, then it should come as no great surprise to us that more fiscal irresponsibility will simply lead to more fear. How could this surprise us? We'd be predicting it.

About the only way our current situation could lead to a true black swan event would be if all this fiscal irresponsibility did not lead to more crises. What if it led us on a path to true prosperity and world peace instead? What if the "extend and pretend" policies really did work?

It would match all three of Taleb's conditions.

1. It would very much surprise all of us.
2. It would have a very positive impact on all of us and our well being.
3. It would no doubt be rationalized in hindsight as predictable.

I doubt very much we will get that black swan, but you never know. Perhaps Mr. Fusion is invented soon and it leads to a bright future world of unlimited cheap energy? It could happen. I'm just not betting on it, especially in the short-term.

If history is a guide, we can expect nuclear fusion to power our homes 40 years from now though. Why 40 years? It was 40 years away in the 1970s and it still probably is!

Editorial: Nuclear fusion must be worth the gamble

The old joke, that practical fusion is 40 years away and always will be, is no longer funny.

Party pooper! I still think it is funny.


Watchtower has pointed out in the comments that what we are seeing might be black crows, and not black swans. That makes a lot more sense to me, especially since they can be seen in great numbers.

As seen at
Wikipedia, "Crows, and especially ravens, often feature in European legends or mythology as portents or harbingers of doom or death, because of their dark plumage, unnerving calls, and tendency to eat carrion (including those of humans)."

World Debt Crisis

World debt crisis: eight reasons you should care

1. Because it will impact your neighborhood tool-and-die maker.

2. Because it could affect things at the bank window – again.

3. because your portfolio will rise and fall like the bay of fundy.

4. Because it could affect how the world deals with that mercurial North Koreanfellow, Kim Jong-Il.

5. Because if it happens to them, it can happen to us.

6. Because no easy solutions to the crisis exist that won't affect jobs and possibly mortgage rates.

7. Because the U.S. approach to the problem may increase your tax bill and lower your Social Security check.

8. Because you'll be able to say 'i told you so.'

The entire article is well worth the read.

Bay of Fundy

In July 2009, the Bay of Fundy was named as a finalist for the New 7 Wonders of Nature.

Hopewell Rocks

The large volume of water flowing in to and out of the Bay of Fundy modifies the landscape surrounding it.

Meanwhile, advancing and retreating tides and the associated waves have eroded the base of the rocks at a faster rate than the tops, resulting in their unusual shapes.

Here's what Hopewell Rocks look like up close. Marketing

Poll Update

Poll: Who Is Smarter?

The crow is up 10 votes to 1 over Dennis Kneale. I'm going to attempt to even the odds here, or at the very least provide more information to the voters still on the fence.

On the one hand, almost everyone loves an underdog. Let's hear it for Dennis Kneale! Hurray!

On the other hand, the DJIA has dropped below 10,000 again. That can't be helping Dennis "permabull" Kneale's popularity. It's also possible that the mean-spirited bloggers will continue to jeer his optimism from the dark and cozy safety of our mothers' basements. Who really knows for sure?

Dennis Kneale Freaks Out At "Dickweed" Blogger Critics In Epic Rant (VIDEO)

Kneale is offended that these "mean-spirited bloggers" would be "jeering" at his optimism from the "dark and cozy safety of their mothers' basements," and invites them to come on and hash it out with him.

And lastly, this isn't all about Dennis Kneale. The world does not necessarily revolve around him. The crow also deserves some airtime.

Notice how the crows and ravens choose not to fight when they know they can't win. They are smart that way.

Tuesday, May 25, 2010

The Chinese "Sure Things"

The Stock Market

May 23, 2010
China’s Stock Market Has Become a Poor Man’s Casino: Andy Xie

May 24 (Bloomberg) -- A bartender at my neighborhood pub recently asked me how the Shanghai stock market was performing. I said it was at about 2,600 points. He jumped and said, “No! The Communist Party wouldn’t let that happen.”

He spent the next 10 minutes trying to convince me that the Communist Party would make the market rise to 8,000 in the next three to five years.

Real Estate

May 13, 2010
Bubble, Bubble, China's in Trouble

Ms. Wang, the wife of a successful Beijing businessman who gave only her surname, has purchased four homes in recent years. There's the apartment she and her husband live in, and three others they hold as investments. All three are vacant; she's making no attempt to rent them out. No property taxes are assessed in China, and so there's no financial penalty for simply buying and holding. The rental market in Beijing, in comparison to the red-hot real estate market, is fairly weak, and besides, renting out those apartments -- putting them to use and risking some wear and tear -- could diminish their value. So they remain pristine and empty.


May 17, 2010

Canny investors in China sense a storm is coming and they are taking shelter in gold. There is a sense of urgency in the crowds packed...

Canny investors? Packed crowds? Where have I heard that before? Stocks, real estate, gold... it's all good... until it isn't.

November 6, 2007
Savvy Chinese Know Exactly When Bubble Will Burst!

Zhu Qiuxia, for one, is not worried about a bubble. The power grid worker has put all her savings into shares, and is planning to keep them there until the Olympic Games next year, when she plans to put her original principal back in the bank and continue to speculate with the profit she's made.


The Freudian Housing Slip of the Century

Home prices drop 0.5 pct. from February to March

"When you loot at recent trends, there are signs of renewed weakening in home prices," he said in a statement.

This is discouraging for American homeowners who have seen the value of their largest asset deteriorate significantly over the last three years. If the home prices dip again, consumers may curb their spending and threaten the nascent economic recovery.

Looting can indeed be discouraging for American homeowners. No doubt about that.

Forehead. Desk. Whack. Whack. Whack.

Monday, May 24, 2010

Historical Dow Revisited

I created the following chart shortly after I turned bearish in 2004. It was the first economics chart that I posted publicly. It could be seen in my Yahoo profile. I also posted this chart on the first day that I started this blog.

August 31, 2007
Historical Dow

It's on a log chart. Constant growth rates therefore show up as a straight line.

In the spirit of what ifs, what could cause the stock market to head back down to the green line? Where do I start?

1. Near record low unemployment. Bulls love it. I wonder what would happen if it reverts to the mean.
2. Near record profit margins. Bulls love it. I wonder what would happen if it reverts to the mean.
3. Credit crisis. Don't think many people love that, myself included.
4. Housing crisis. Let's see. Rising inventory, falling sales, falling prices, rising foreclosures, rising inventory, falling sales, um, I think I just fell into a feedback loop. Sorry about that.
5. Banks. Need I say more? Just how many do we really need?
6. Payday Loan Centers. Didn't I just cover this one as #5? Just how many do we really need? 20,000+? Seriously?
7. China. Just how many more paper dollars can we ship them in exchange for cheap goods? Let the grand experiment continue!

Would could go wrong, did go wrong.

Here's an updated chart that I created today.

First the good news. We're back to the long-term growth trend line. The market may be fairly valued now. I say may be.

Now the bad news. The market was on the long-term growth trend line in 1969. We put a man on the moon that year. As seen in the chart, it did not stop us from having 15 straight years of lousy stock market performance though.

I'm not done with the bad news yet. Unlike 1969, about the only thing we're shooting up into space this year is our national debt. It is not sustainable.

I'm still not done. In order to justify being on the long-term exponential growth line that's been in place for 80+ years, then you must continue to believe in the long-term exponential growth story and a return to business as normal. I must admit I'm not all that much of a believer these days. At best, I think growth will slow. At worst, well, watch out below.

See Also:

Trend Line Disclaimer

Source Data:
Yahoo: Historical Prices for the DJIA

Stimulus Physics Update #3

This is and was always intended to be a joke. It would seem that the joke is on us though. Go figure.

So what will the future have in store? My crystal ball is foggy. It's just too close to call.

Uh, Tower, US Air 2998, ‘til we figure out what’s going on down there, we’re just going to stay clear of all runways.

I'm with US Air 2998 on this one.

See Also:
Stimulus Physics
Stimulus Physics Update #1
Stimulus Physics Update #2
Trend Line Disclaimer

Source Data:
Yahoo: Historical Prices for Dow Jones Industrial Average

Sunday, May 23, 2010

What the World Needs Now (Musical Tribute) love sweet love.

Or alternatively, the world may need the largest-ever graduating class of crane operator apprentices coming out of Manitoba. Your call.

Largest Graduating Class of Building Crane Apprentice Operators Signals Province's Strong Economy: Selinger

Manitoba needs more people to help put up skyscrapers...

There is nothing better than a good lie.

Is Canada's Property Market Due For A Downturn?

Canada might be America's neighbor to the north, but it has a bubbly real estate market, even as the U.S. market continues to limp along. Consider these eye-raising facts: Canada's real estate prices have increased on average 40% in the last year while incomes have dropped.

The Sarcasm Report v.48

New financial rules might not prevent next crisis

WASHINGTON (AP) -- The most sweeping changes to financial rules since the Great Depression might not prevent another crisis.

Apparently 200,000 years of crisis data isn't enough to come up with a workable crisis prevention plan. Shocking.

Gold to Aluminum Price Ratio

Gold trades at $1,180.60 per troy ounce. Aluminum trades at $0.9068 per pound. There are 14.5833333 troy ounces in a pound. The current gold to aluminum price ratio is therefore 18,987 to 1.

747 Fun Facts

A 747-400 consists of 147,000 pounds (66,150 kg) of high-strength aluminum.

Selling just 7.75 pounds of gold will now allow you to buy all the aluminum needed to make a 747-400.

Although I did ride gold and silver from 2004 to 2006, I have no interest in owning either gold or silver at these prices.

I will repeat what I said in my Silver to Aluminum Price Ratio post (see link below).

I've mentioned in the past that if I was running my portfolio like a hedge fund then I would buy toilet paper and aluminum foil and sell precious metals.

Here's what 1970s stagflation looks like.

That is not what we are seeing though. This is.

February 16, 2010
Technical Announcement: U.S. Minerals Sector Declined in 2009

Gold was one notable exception to the downward trend in metal prices, reaching an all time high of $1,215.21 per troy ounce in early December 2009. Iron ore was among the largest to decline and decreased by nearly 50 percent in production quantity and value over the last year.

I remain deflationary.

See Also:
Silver to Aluminum Price Ratio

Source Data:
USGS: Historical Statistics
Kitco: Gold
Kitco: Aluminum

Saturday, May 22, 2010

China's Foul Assets

Andy Xie: China's Foul Assets, Fouler Yet

China's policies have travelled the path of least immediate resistance - monetary expansion and asset inflation. The main purpose behind asset inflation is that the government can tax it. It provides a place for people to chase their get-rich-quick dreams and is popular as long as the market goes up. It also offers insiders who have disproportionate influence to play the game at the expense of little people. It is no coincidence that China's policies have been so pro-asset-inflation in the past few years.

What more is there to say? Oops. There is more to say.

Beijing can still cope with the consequences of the bubble bursting, given its enormous assets. But it may be harder to handle if the bubble continues for two more years. To rein it in, Beijing must raise interest rates quickly. Some worry that raising rates would increase the pressure for currency appreciation, but this is probably not true. The yuan is not undervalued. When the subsidy to manufacturing for asset inflation is removed, it could be equivalent to a 20 percent appreciation in the exchange rate.

What? All those investors who piled into Wisdom Tree's CYB back on 5/14/2008 aren't going to make a killing someday? Andy Xie, tell me it isn't so!

CYB: WisdomTree Dreyfus Chinese Yuan

The investment seeks to achieve total returns reflective of both money market rates in China available to foreign investors and changes in value of the Chinese Yuan relative to the U.S. dollar. The fund normally invests in a combination of U.S. money market securities with forward currency contracts and currency swaps which is designed to create a position economically similar to a money market security denominated in Chinese Yuan. The average portfolio maturity is 90 days or less. It does not purchase any money market securities with a remaining maturity of more than 397 calendar days. The fund is non diversified.

It's got the safety and return of U.S. money market securities (minus 0.45% annual fund expenses) with the potential risks and rewards of forward currency contracts and currency swaps. What's not to like? I don't know about you, but I can't seem to get enough forward currency contracts and swaps into my retirement nest egg. *sarcasm*

Perhaps the typical CYB investor knows exactly what he or she is doing though.

Most Amusing Yahoo Question:

3-5% increase over 1 year...

If the Chinese gov. only allows for this amount of currency increase, what type of annualized return do you think we will get?

Most Amusing Yahoo Answer:

Re: 3-5% increase over 1 year...

I'm going to take a wild guess...of 3-5%

Most Tragic Yahoo Answer:

Re: 3-5% increase over 1 year...

My goal is to settle in china maybe permanently. So I may have to convert half my money. I will buy only because I think I will not be able to retire in USA, very high cost of healthcare and having no job is making me think about moving to china; maybe become citizen of china if I start to like it there.

Please just shoot me if I ever think of moving to China. I have absolutely nothing against the Chinese people but I would not want to be a citizen. What if the government discovered my blog?

China Human Rights

Amnesty International has documented widespread human rights violations in China. An estimated 500,000 people are currently enduring punitive detention without charge or trial, and millions are unable to access the legal system to seek redress for their grievances. Harassment, surveillance, house arrest, and imprisonment of human rights defenders are on the rise, and censorship of the Internet and other media has grown.

You Should Be More Worried Than Ever

Why? This man is.

Legendary Investor Is More Worried Than Ever

"We didn't get the value out of this crisis that we should have," Mr. Klarman told the audience. "For our parents or grandparents, it was awful to have had a Great Depression. But it was in some ways helpful to carry a Depression mentality throughout their later lives, because it meant they were thrifty with their money and prudent in their investment decisions." He added: "All we got out of this crisis was a Really Bad Couple of Weeks mentality."


You could have heard a pin drop as Mr. Klarman proclaimed, "I am more worried about the world, more broadly, than I ever have been in my career." That's because you can make good investing decisions and still end up with bad results if you reap your profits in currencies that do not hold their purchasing power, he explained.

I have and will continue to urge caution even in inflation protected Treasuries and I-Bonds. I buy and hold them until maturity. I know what I will be getting more than likely and it isn't much. I will even lose money after taxes if inflation does pick up, due to the taxation.

"All the obvious hedges"—commodities and foreign currencies, for example—"are already extremely expensive," he warned.

Especially gold. "Near its all-time high, it's a very hard moment to recommend gold," said Mr. Klarman.

I believe that. I have stated here that $1000 gold was expensive. I've been wrong so far in the eyes of the market but I do continue to believe it. "Obvious" is just another word for "sure thing". I do not believe in sure things.

Markets are constantly in a state of uncertainty and flux and money is make by discounting the obvious and betting on the unexpected. - George Soros

The obvious almost never works in the long-term, because by the time it has become that obvious it is too late to invest.

Stock market bubbles don't grow out of thin air. They have a solid basis in reality, but reality as distorted by a misconception. - George Soros

That's true of all bubbles in my opinion.

China's Aluminum Change

Aluminum Producers in China ‘Losing Money,’ May Reduce Output

“At these prices all aluminum producers in China are losing money,” said Jia Zheng, a trader at Soochow Futures Co. “So far we haven’t heard of any output cuts yet. Producers will try to maintain output for a long as they can because it is costly and time-consuming to restart idled capacity.”

We've been in this business a long time. With our experience, we're going to have ideas for change combinations that probably haven't occurred to you.

A lot of people don't realize that change is a two-way street.

How do you make money doing this? The answer is simple. Volume.

See Also:
Silver to Aluminum Price Ratio
The Quantity Theory of Aluminum
More Deflationary Thoughts
World Production Euphoria
Monetary Printing Press vs. Mining Equipment
Hot Commodities vs. Commodity Glut?

How "It" Can Happen Here

The Cast of Characters

Mr. Consumer
Mr. Producer
Mr. Investor
Mr. Banker
Mr. Central Banker

The Props

$10 in cash
10 pounds of widgets

Act I

The curtains open. Mr. Consumer buys 10 pounds of widgets from Mr. Producer for $10. Mr. Producer gives the $10 to Mr. Investor. Mr. Investor deposits $10 in Mr. Banker's bank. Mr. Central Banker smiles. The curtains close.

Act II

The curtains open. Mr. Producer goes to Mr. Banker. He says, "Look at those widget prices. $1 a pound! If you loan me $20 then I can produce 20 more pounds and we can both be happy." Mr. Banker looks at the numbers and likes what he sees. Loan approved! Thanks to fractional reserve banking, Mr. Banker loans $20 out even though he only has $10 in deposits. Mr. Producer produces 20 pounds of widgets. Mr. Central Banker smiles. The curtains close.


The curtains open. Mr. Consumer goes to Mr. Banker. He says, "I'd like to buy 10 pounds of widgets, but I don't have any money. If you loan me $10 then I can buy 10 pounds of widgets and pay you back later." Mr. Banker looks at the numbers and likes what he sees. Loan approved. Thanks to fractional reserve banking, Mr. Banker loans another $10 out even though he only has $10 in deposits. That's $30 in loans to $10 in deposits. Mr. Central banker smiles. The curtains close.

Act IV

The curtains open. Mr. Consumer pays Mr. Producer $10 for 10 pounds of widgets. Mr. Producer deposits $10 in Mr. Banker's bank. Mr. Central Banker smiles. The curtains close.

Act V

The curtains open. Mr. Banker calls Mr. Consumer. Mr. Banker says, "You haven't paid me the $10 you owe me." Mr. Consumer says, "I have no money. I could give you 10 pounds of widgets though." Mr. Banker hangs up and calls Mr. Producer. Mr. Banker says, "You still owe me $10. Have you got it?" Mr. Producer says, "Um, well, there's a bit of a problem. Mr. Consumer only bought 10 pounds of widgets. I could give you the extra 10 pounds of widgets I still have though." Mr. Banker panics. He thinks to himself, "What the @#$% am I going to do with 20 pounds of widgets? I need the @#$%ing $20 back!!" He calls Mr. Central Banker. Mr. Central Banker frowns as he prints $20 in new money and bails out Mr. Banker. Crisis averted. The curtains close.


The curtains open. There is now $30 sitting in cold hard cash sitting on the table. There are 30 pounds of widgets sitting on the table. There's a sign above it that says, "Even with the bailout causing $20 of freshly printed money to suddenly exist, widgets are still worth $1 per pound. Deflation averted. Hyperinflation averted." Mr. Central Banker smiles. The curtains close.

You will note that the printing of the $20 did not create inflation in this example. That $20 was already thought to exist. The initial creation of the credit is what propped up widget prices. Otherwise, 30 pounds of widgets with just $10 of actual money in circulation would imply widgets should be 67% cheaper.

So how can deflation happen in our world? There's a key sentence back there that needs more thought.

"Mr. Central Banker frowns as he prints $20 in new money and bails out Mr. Banker."

What if our Mr. Central Banker doesn't actually print all $20? Or what if he instead simply loans money to the Mr. Bankers? Or what if he tells Mr. Bankers to pretend the losses never actually happened? Or what if it is all of the above?

$20 billion hole in FDIC Insurance Fund

Reggie Middleton is an investor and analyst who owns He was one of the earliest to warn of the impending downfall of Lehman Brothers and Bear Stearns. Middleton told me, “If the FDIC had more money and manpower, it would be closing a lot more banks.” Middleton also said, “Many of America’s 8,000 banks are insolvent or close to it because of mark to market accounting.” Because of accounting rule changes, banks are allowed to value toxic assets for whatever they think they are worth, not what they actually are worth. Some call this “mark to fantasy accounting.” Middleton warns, “There is more risk now (in the banking system) than during the Lehman crisis because the pool of banks is smaller.”

Friday, May 21, 2010

Whiplash or Bounce?

Whiplash rally boosts Dow 125

Stocks finished sharply higher Friday in a whiplash rally that saw an early swoon, a big morning upswing that faded completely and then late buying that appeared seemingly out of nowhere.

Seeing as how the DJIA closed at 10,620.16 last Friday and closed today at just 10,193.39, there may indeed be an alternate description for today's rally. It's probably too early to say for sure though.

No cats were harmed during the making of this video.

Would I Buy Stocks Again?

I was asked this question by a reader in an email and it is one I think about quite often. Rather than just answer it in private I thought I'd do it here.

I just don't know how to value stocks these days. There seems to be two things driving them and I'm not a fan of either.

1. I'm not a believer in debt based stock markets. It reminds me too much of the Great Depression. We're pumping so much new unsustainable government debt into the system as an attempt to simply prop things up. That does not comfort me.

2. I'm not a believer in commodity based stock markets. It reminds me too much of the 1970s. I was tempted to buy stocks when the prices were lower, but I was even more tempted to buy things like oil and palladium. In hindsight, as impressive as the stock market rally was from the bottom, the rally in oil and palladium was even greater. That does not comfort me.

In my opinion, we're combining the deflationary Great Depression and the inflationary 1970s to form a relatively tame inflationary enviornment. Unfortunately, two wrongs are not going to make a right. Both eras were known for their high unemployment and that's exactly what we've been getting.

If you could show me a relatively sustainable US debt path and relatively stable commodity markets then I do think I could own stocks again. We seem to be further away from that environment now than when I turned bearish in 2004 though.

Here are two things we know for sure.

1. The rate of recovery from this current recession has been anemic at best. At the pace we are currently on, it could be many years before we fully recover.

2. If we slip into another recession before we've fully recovered from this one, things are going to get really ugly.

The DJIA was roughly 10,150 when I exited in 2004. It sits at roughly that level now. It's been 6 years of nothing. We could easily get 10 more years of nothing. I'm not saying we will. I'm simply saying that we could.

Krugman: Lost Decade Looming?

Despite a chorus of voices claiming otherwise, we aren’t Greece. We are, however, looking more and more like Japan.

I will end this on one of my favorite quotes. I use it often.

It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong. - George Soros

If I buy stocks and I am right to do it then I will be better off in the future than I am now. I don't really need to be better off though. I live a modest lifestyle and I have no great material wants. Having twice as much money will not double my happiness.

If I buy stocks and I am wrong to do it then I will probably need to go back to work at some point. Further, if I am wrong to buy stocks now then unemployment could be even higher in the future than it is now. That would not be an ideal environment for me to find a job that I may desperately need.

All things considered, owning stocks is just not worth the risk to me.

Thursday, May 20, 2010

"Bucking" the Trend

Dollar Tree rose 3.37% today even as the stock market crashed.

Dollar Tree, Inc. (DLTR)

Dollar Tree, Inc. operates discount variety stores in the United States. Its stores offer merchandise at the fixed price of $1.00.

Our new economy does seem very dollar friendly.

The same cannot be said for Sears (SHLD). It closed Monday at $108.90. It now sits at $88.70. That's a 19% loss.

May 20, 2010

Sears stumbles again

What gives? Sears has a good brand name historically for some items, such as appliances and tools, and has been known for low prices. It's got some good locations. But sometimes it seems like the company isn't even trying. Sears has been struggling for years and behaves as if it's not sure if it wants to be a retailer, or if it prefers to be an investment vehicle for hedge-fund investor Eddie Lampert.

May 8, 2008
Our Pillars of Retail Strength

What's a CEO to do these days if he can't report financial information and he can't hide financial information? That's sure some conundrum!

I refer you to the comments though. That's where the fireworks took place. Here's a sample.

I can't believe the previous comments are supposed to be taken seriously. First off, Eddie Lampert was recognized as a whiz a decade before buying Kmart. Second of Lampert is still a whiz his return on Kmart and on Sears even with the recent decline beats the market hand over fist.

Either you guys are joking or you like to buy high and sell low. Not my style. Lampert and Sears will prove to be fantastic investments over the next 10 years. Over the next 10 minutes? who knows and who cares?

SHLD closed that day at $93.45. It now sits at $88.70. The future continues to look bleak.

In hindsight, it would seem that mab's comments and my comments were actually intended to be taken seriously, we weren't joking, neither of us were looking to buy high and sell low, and the time span of the heckling was intended to last longer than 10 minutes. It has, after all, been two years so far.

A toast to you mab! Thanks for believing in the Illusion of Prosperity. We both bucked Eddie Lampert's long-term "sure thing" trend using nothing more than sarcasm and common sense. Who could have guessed?

But hey, as watchtower recently pointed out, Sears now offers cash-for-gold services. That's *sure* to revive their business model, because nothing says satisfied customer more than selling one's wedding ring to pay the rent. When times turn hard, count on the harder side of Sears!

The Beatings Will Continue Until Morale Improves (Musical Tribute)

I feel the need to offer yet another stock market tribute. It got ugly out there today.

How ugly? Real ugly.

Watch at your own risk. It may permanently damage your musical taste buds.

Wednesday, May 19, 2010

If "Ifs" and "Buts" Were...

Create Your Own Social Security Fund

With a monthly deposit of $206 per month, you'd have $194,625 at retirement. If you continued to earn 5% interest on your money, you could withdraw $810 per month without touching your principal.

Welcome to the magical and mythical world of 5% interest rates, no inflation, and the ability to withdraw 4x your initial deposits per month until eternity. It truly does give the Social Security Trust Fund a run for the money.

If your money grew at an 8% interest rate, you could nearly equal your retirement principal from the 10.6% rate at the 5.3% rate.

If "ifs" and "buts" were candy and nuts we'd all have a Merry Christmas!

Here's an alternate scenario.

Let's say that the money you save exactly keeps up with inflation after taxes. It might not be easy in this low rate environment (especially if inflation picks up and/or taxes rise someday), but let's assume that you can actually pull it off. Who said I couldn't be optimistic?

We'll call it a Benjamin Franklin approach to saving.

A penny saved is a penny earned. - Benjamin Franklin

This makes the math so much easier and so much safer. Saving one penny and expecting it to spit out 4 pennies in the future is just asking for trouble in my opinion.

So let's do the math.

If you save $206 per month in today's dollars and do it for 32 years, then you will have $79,104 ($206 x 12 x 32) in today's dollars when you retire. That's it. Consider yourself lucky if you have more than that.

If you withdraw $810 per month in today's dollars, then it will last you roughly 8 years. You'd then be broke.

You can safely withdraw $0 of it per month if you don't want to touch the principal though. So have at it. Feel free to withdraw $0 as many times as you like.

We here at the Illusion of Prosperity blog don't believe in having your cake and eating it too. I think I can speak for the majority of the readers on this. If we save a slice of cake for the future, then we only count on having one slice of cake in the future.

That's if we are lucky. Governments of the world have been notoriously crafty at extracting cake wealth in times of economic peril. The currently pathetic 0.2% I-Bond rate is proof alone of that. Once expected inflation is factored in, it seems to come up a bit short of the 5% initial interest rate assumption.

Of course, we could simply take on more risk to fund our retirements. Although it hasn't worked out so well for the last decade, it might work again someday. Maybe. Who really knows?