Investment Ideas from Prison

I have a friend of mine doing hard time in the California State Prison system. Drugs and armed robbery were his crimes, but the real roots lay in his childhood. I told him as much, and urged him to take a look at his childhood upbringing in the hopes that he might exorcise some of his demons. Towards that end, I sent him the book One of a Kind: The Rise and Fall of Stuey ‘,The Kid’, Ungar, The World’s Greatest Poker Player.

I’m sure most of my readers will have no idea who Stu Ungar is, but, as the title of the book says, he was the greatest poker player the world has ever seen. He is estimated to have made over $30 million dollars over the course of his poker career, but he’d continually throw the money away on drugs or other gambling addictions. He went from broke to millionaire and back to broke four separate times over the course of his life. He died so penniless that this friends had to take a collection for his funeral.

I send my friend this story because I wanted him to understand that talent and ability are no replacement for a good understanding of yourself. That’s a lesson I hope he’ll come to learn before he gets out.

He wrote me this letter and I wanted to share it with my readers: Continue reading Investment Ideas from Prison

“Helicopter” Ben Starts Printing Up a Storm

Just a quick note to pat myself on the back. In a prior blog I wrote:

f Roger is right, and the banks are no longer able to function as the traditional engine of inflation, then I’m sure Ben is prepared to either go around them to offer credit to consumers directly. Such a scenario could take place in a variety of ways, with the most likely being that Fannie Mae and Freddie Mac start offering 4% 40 year mortgages and refinances straight to consumers. Since both of these lending institutions have now been nationalized, relatively few people would need to be involved in that decision. Fannie and Freddie create the money to give to consumers, and the Fed buys the notes. Voila, inflation.

Today, gold rallied strongly as Ben announced that the Fed:

will spend up to $300 billion over the next six months to buy long-term government bonds, a new step aimed at lifting the country out of recession by lowering rates on mortgages and other consumer debt.

At the same time, the Fed left a key short-term bank lending rate at a record low of between zero and 0.25 percent…

The Fed also said it will buy more mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac to help that battered market. The central bank will buy an additional $750 billion, bringing its total purchases of these securities to $1.25 trillion. It also will boost its purchase of Fannie and Freddie debt to $200 billion. Continue reading “Helicopter” Ben Starts Printing Up a Storm

Conspiracy Theories That Surround The Federal Reserve: Part III

In the first two parts of this series on the conspiracy theories that surround the Federal Reserve, we looked at the popular G Edward Griffin conspiracy which traced the formation of the Federal Reserve from the Jekyll Island meeting forward to present. As I laid out in both parts I and II, the Jekyll Island meeting was the culmination of the national banking power over US politics. It was literally a meeting of the nations power brokers (the “money trust”) in a smoke filled room where the future of the nation was discussed.

The Jekyll Island meeting is an easy target for conspiracy theorists. The problem lay in that they then make this rather credible event the lynch pin of a broader, all encompassing conspiracy. In Griffin’s case, the Jekyll Island meeting plays the frontman for a conspiracy of “Fabian Socialists” who were behind not only Woodrow Wilson, but everything else from the Soviet Union to the US Environmentalist movement. Griffin’s conspirators wait behind the power of the United Nations to strip away our power when we are weakest in the name of Socialism.

Griffin commits three logical fallacies: Continue reading Conspiracy Theories That Surround The Federal Reserve: Part III

Open Letter to Artie Lange

As my personal friends know, I’m a fan of the Howard Stern show. This week the Stern show had two separate moments that showed just how deep this recession has affected people. First, Howard Stern did a segment of the Mexican Delivery game. Howard typically does this when he has porn stars in. The two in question were Kagney Linn and Tory Lane.

The crux of the game is that Howard Stern orders something to be delivered by a Mexican; I have no idea how he arranges this. He has the delivery man make the delivery in-studio and then gets them on the microphone and offers them a hefty tip or the chance to see the girls naked. In times past, the man making the delivery has gone for the chance at flesh, but that’s not what happened this time around. According to HowardStern.com:

Howard then welcomed Raoul, the first Mexican delivery guy, to the studio and offered him a $50 tip – or the opportunity to see Tory and Kagney naked. Raoul chose the money, so Howard upped the offer to $50 or a naked hug from Tory (with bonus tit-squeeze).

Again Raoul went with the money. Howard asked Tory what went wrong, and she blamed the translator: “I don’t believe the translator’s telling him [the correct deal].”

The second delivery guy, Hector, said he hadn’t been laid in six months – so Howard had the girls strip down to get him started and offered Hector a $25 tip or the chance to hug, squeeze and slap the girls.

Hector chose the money. Howard was shocked: “The economy has really turned.” Tory got depressed: “Gimme that food.” Continue reading Open Letter to Artie Lange

Will the Real Market Bottom Please Stand Up?

As I mentioned last week, I expect the market to find a temporary bottom at some point this year and to stage a significant rally. However, I expect that this rally will prove to be a bear trap, as the market will then fall far more to find its true bottom a couple of years from now.

I don’t base this prediction on any sort of economic theory, but rather on history. Prior to the Federal Reserve Act of 1913, economic contractions were short and violent affairs. The Panic of 1907, for instance, was over and done with in a single year. The panic spelled the end of the Knickerbocker Trust Corporation, and many small regional banks failed and wiped out their depositors. This kind of “liquidation” of struggling companies was viewed as a necessary evil back then. No one likes liquidation, but it does its work quickly.

Things are different these days. John Maynard Keynes came along and theorized that all economic downturns were caused by “insufficient demand.” He argued that politicians needed to juice the economy with easy money to get consumers spending again. The fact that Keynes’s theory is nothing more than math piled on top of a foundation that’s part conjecture, and part shaky definitions, did not stop it from becoming popular. Similarly, the fact that Keynes’s prescription of juicing the economy with easy money does not seem to actually prevent recession — but, rather, prolong it, until it becomes far larger and more devastating — has not caused it to since fall from grace. Politicians get elected on promises to give money to their supporters and Keynes’s theory makes it their primary mission to do so.

This is why Keynesianism never goes out of style. Continue reading Will the Real Market Bottom Please Stand Up?

Worshiping at the Altar of the Inflationary God

“Bow down before the one you serve. You’re going to get what you deserve.”

– Trent Reznor

I listen to Peter Schiff’s weekly podcast “Wall Street Unspun.” He said something in a recent edition that stuck with me. He said that his father, Irwin Schiff (who was also a prominent opponent of the inflationary policies of the US Government) denounced the politicians and central bankers of the world in books such as The Biggest Con: How the Government Is Fleecing You. Peter said that his father described inflation as a “god that they worshiped.” These days it would seem there’s hardly any room left at the altar. 

The power of the ability to create money from nothing was marveled at when it was first discovered. Critics were sure that no one would accept Lincoln’s Greenbacks when they were first issued to help pay for the civil war. The notion that people would accept a paper money that had no backing just because the government told them to seemed rather dubious at the time, but the general public did accept them. The possibilities were not lost on the thinkers at the time.  If fiat money could be created with a printing press and accepted by the general public, then why not use the printing presses to make us all rich? Continue reading Worshiping at the Altar of the Inflationary God

A Market in Search of a Bottom

The Dow Jones Industrial Average is at 6625 as of this writing. The last time the Dow was trading in this range was 1997. Back then it was on it’s way up. The lowest level it ever reached in 1997 was on April 10 when it closed at 6391. If the Dow falls lower than that, then we’re going back 1996.  

Frequent readers of my blog know that I don’t follow the nominal value of the Dow Jones as much as it’s ratio compared to gold. The reason for this is that it the ratio of those two will automatically correct the Dow for inflation without referencing some wonky government statistic that has been worked over by “hedonistic price adjustments” until its lost its usefulness. In terms of the Dow-Gold ratio, the Dow looks far worse because $6625 would go a lot father in 1997 than it would today. The Comex Spot price of gold is in the neighborhood of $930; that would put the ratio of the DJIA to 7.1 ounces of gold. Last time we looked at the Dow-Gold ratio it was a 7.4. Last time it was that low it was the recession of 1991. The ratio is now trading belong its long term average, but it still has plenty of room to fall. People ask me when a good time to look at getting back in to the market is and I say when the Dow is trading at two to three ounces of gold. To paraphrase Dr. Seuss, “When we will get there, I can’t say, but I bet we’ll fall a long, long way.”

Continue reading A Market in Search of a Bottom

Exploring the Myths of the Consumer Driven Economy: Part III

In the previous blogs of this series, I have laid down some basic fundamental definitions for things such as assets and liabilities. In the second post in the series, we saw how the banks serve as the inflationary engines of society, but that their activity does not add to the fundamentals level of assets in a society. Instead, banks expand the monetary base by creating and loaning far more money into circulation that they could actually deliver were their depositors to demand it; banks thereby create situations whereby there are far more claims to the amount of real goods in society then there are actual goods which leads to inflation.

As banks create and loan out money the economy booms, but it is an unsustainable growth. It is caused because the market misinterprets the source of the amount of money flowing into their products and services as a genuine increase in demand as opposed to simply a credit induced event. This leads business to expand their operations in an effort to make more profit, but the problem is that they are responding to false/credit induced demand as opposed to genuine demand. Eventually things have to revert back to fundamentals, and that is when the bubble collapses. 

Now lets take these tools and bring them to bear on our current situation. Continue reading Exploring the Myths of the Consumer Driven Economy: Part III

Barrick Gold Down Heavily After Bernanke Comments

Helicopter Ben testified before both houses of Congress today and that the recession might end this year. It appears that these comments sent the stock market up over three percent. Citigroup, which has been circling the drain over fears that the bank would require nationalization that would wipe out share holder value gained over 21% because Ben said that the US Government would not need to take such action. Gold fell to around $950 an ounce and, most mystifying of all to me, Barrick Gold (ticker symbol=ABX) and fell over 11%.

Wow. That must have been some speech. It’s hard for me to imagine Barrick falling 11% because Ben said the recession “might” end in 2009. After all, even at $950, gold is still close to its all time high. I guess people were figuring that, if the recession ends, gold will no longer be in demand. Therefore, the price of gold should fall, and Barrick will not make as much money. 

Here’s the thing they are missing. Continue reading Barrick Gold Down Heavily After Bernanke Comments

Deflation? Only for the Stock Market

I have to take a moment to pat myself on the back.

Around the start of the new year, I said that deflation was not going to be the main concern, and instead, it would be inflation that was going to be making a comeback. As it turns out, the January numbers are in and CPI inflation is up, not down .  Gold closed at $993 an ounce today and is poised to soon break into new all-time highs. In this way, gold is serving its traditional purpose — as the canary in the coal mine warning all of us that things are not well and that danger, (in this case, inflation) is on the way.

Not everything is going up, however. Yesterday, the Dow Jones closed at a 6-year low. Today it went down even more — so now it’s flirting with its 10-year low. The Dow-Gold ratio, which I’ve talked about before, is rapidly reaching new lows. Dividing the Dow’s close of 7365 by gold’s close of $993 gives us a Dow-Gold ratio of 7.4, which is the lowest it’s been in roughly 20 years.

But it’s going to keep heading down even further than that. Soon, we should be seeing a Dow-Gold ratio of three or even two …

Imagine the Dow at 5000 and gold at $2500 an ounce and you get an idea of what the future holds. Continue reading Deflation? Only for the Stock Market