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October 2010

Recs

15

Siriusly optimystic

October 30, 2010 – Comments (13) | RELATED TICKERS: SIRI

No, my spell checker hasn't gone on holiday.  Siriusly optimystic is a phrase just coined by my Slovak friend, Mr Kruptcy, and when you see why, you'll want to throw him out of the building.  [more]

Recs

8

Capital gains tax rate could spark rush for exit

October 25, 2010 – Comments (8)

This year, the highest US Federal long-term capital gains tax rate is 15%.  Next year, that peak rate goes to 20%.  So, at the end of 2010, in addition to the usual tax loss selling, there may well be some tax gains selling, on the idea that this would be a good time to step up some bases before it becomes incrementally more costly to do so.  [more]

Recs

7

Warren's 1977 take on inflation

October 21, 2010 – Comments (4)


CAPS user brizzlekizzle posted a link to a Warren Buffett article from 1977, "How Inflation Swindles the Equity Investor:" http://www.valueinvesting.de/en/inflation-equity-investor-by-warren-buffett.htm My response to the article got way too long for a blog comment so I am posting it here instead, where I expect to receive a chorus of tl;dr in response.-- I don't agree that the fundamentals apply to what is going on now.  Warren's analysis,which takes the unusual form of the 'equity coupon' - you have to have run a few businesses to look at it that way, I think - is still fundamentally valid, but he is looking at different fundamentals.  The fed funds rate hit 19% a few years after this article was published, for instance, which it is unlikely to do again in our lifetimes.
The idea behind that was to spur capital investment by offering investors a return that could outstrip even the high rates of inflation now prevailing.  The result, of course, was a massive recession as corporations found it far too expensive to access capital; in an inflationary environment such as this, a vicious cycle of decreased aggregate demand, increasing unemployment, and increasing inflation occurs.  Now we know that we don't have to try it again.  Warren obviously saw it coming.
Although they do not come out and say so, our Fed now uses inflation targets, to prevent exactly the consequences that, as Warren explains, are so horrible.  They appear to have gotten that down pat.  Unfortunately, the Fed now also has a political mandate: keep people in their homes, keep unemployment low, keep the market from tanking.  This has led to rates being placed "extraordinarily low for an extended duration."
The result of this was, through 2005, artificially easy credit spiking an asset bubble via expansion of the money supply and money velocity, most of this occurring in mortgage backed securities, off-balance-sheet bank assets such as credit derivative swaps, and the like.  All this fictional money evaporated when Bernanke raised the rates from 1% to 5.5% over a period of 18 months and the assets declined in nominal value.  
 These so-called 'assets' declined in nominal value so much, as better yields became available with lower risk, that some banks found they were sitting on billions or trillions in so-called 'assets' that could not find a buyer at any price - which meant that they were valueless.
Having $50 trillion in 'notional value' - not my language, this is how the banker-economists are talking about it now - leave the money supply over an 18 month period is a deflationary influence.  Deflation slows growth because it makes it attractive to hold cash, not to lend it out; and because it suggests/produces a shrinking economy that is losing jobs. The Fed, trying to combat this by dropping rates to zero and by purchasing worthless assets from banks for money ("quantitative easing" is what this is called; I wish I could get in on it) is trying to expand the money supply and money velocity to counteract this deflationary force.  They have certainly succeeded in producing some retail price inflation but they are not getting very far in terms of improving credit velocity as far as anyone can tell.
Quantitative easing becomes less effective the more that inflation takes hold, because more has to be injected to achieve the same result.  Timing is key and now that there is some earnings growth occurring, I think QE2 may have missed the sweet spot.  I also suspect that QE2 may be a case of "don't look behind the curtain," some intentional misdirection.  QE2 may not actually exist; the Fed may be promulgating the thought of it to buy time for the economy to grow for another year, but come a year and look back at the Fed books and it may turn out not to be doing anything.  
For someone who understands the macro trends this well, Buffett's track record of ignoring them is equally spectacular.  His investing thesis - at least in 1977 - was to buy companies that will have high future growth, at exceptionally low prices; and then let them have that growth.  He is arguably better, at knowing which companies those are, than anyone else has ever been.  This letter was not an investment thesis: it was a warning to policymakers and economists, who, as he gently pointed out, were at the time on entirely the wrong track.   [more]

Recs

4

Cash position

October 19, 2010 – Comments (2)

As of last Friday's close, I was 20% in cash, the highest cash allocation I've had in my portfolio since Sep 08 when I was 45% in cash.

It's right around time for end of year tax loss selling.  I will be keeping my powder dry for bargains, just like Steve Jobs.  Anyone have a ticker and a pricelevel to suggest?  I'm all ears. 

Recs

3

CAPS Scoring glitch?

October 19, 2010 – Comments (10)

Oddly, I notice that today my CAPS score is reported as going up 579 points - from just under a thousand to what it is now, fifteen hundred and change - and meanwhile, my accuracy jumped from 72% to 77%.  [more]

Recs

5

Can you hear the lowing?

October 11, 2010 – Comments (9)

I just bought a new house.  Lo and behold, we were retired to bed in our new bedroom with the window open, when I heard a faint sound.  It almost sounded like a haunt or a spectre, but it was somehow soothing rather than the reverse.  Turns out it was the lowing of a herd of cattle, which are pastured about a half mile away.  [more]

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