View Full Version : The Face of Inflation: Does the U.S. Have a "Peso Problem" revisited
http://www.itulip.com/images/20000MexsPesos1988_50.gifThe U.S. dollar had a "Peso Problem" and the markets are now correcting it.
April 9, 2006 in Face of Inflation: Does the U.S. Have a "Peso Problem" (http://www.itulip.com/faceofinflation.htm) we laid out a worst case scenario for the U.S. economy and dollar when the markets are finally allowed to devalue dollar. It explained that the U.S. may have what has been termed by economists a "Peso Problem.""No one knows the precise origin of the term peso problem, but it is often attributed to Nobel laureate Milton Friedman in comments he made about the Mexican peso market of the early 1970s. At that time, the exchange rate between the U.S. dollar and Mexican peso was fixed, as it had been since 1954. At the same time, the interest rate on Mexican bank deposits exceeded the interest rate on comparable U.S. bank deposits. This situation might seem like a flaw in the financial markets, since investors could borrow at the low interest rate in the United States, convert dollars into pesos, deposit the money in Mexico and earn a higher interest rate, then convert the proceeds back into dollars at the same exchange rate and pay off their borrowings, making a tidy profit.
Friedman noted that the interest rate differential between Mexico and the United States must have reflected financial market concerns that the peso would be devalued. Otherwise, the interest-rate differential would soon disappear as investors increasingly took advantage of it. In August 1976, those concerns were justified when the peso was allowed to float against the dollar and its value fell 46 percent."
- FEDERAL RESERVE BANK OF PHILADELPHIA BUSINESS REVIEW SEPTEMBER/OCTOBER 2000: Understanding Asset Values: Stock Prices, Exchange Rates, And the "Peso Problem" (PDF) (http://www.phil.frb.org/files/br/brso00ks.pdf)
The article proposed that the relationship that existed between the Mexican peso and the U.S. dollar in the early 1970s had developed between the U.S. dollar and the currencies of several of its trade partners. The exchange rate between the U.S. dollar has been effectively fixed by China and oil producing countries, although not fixed with respect to the British pound, euro, or Canadian dollar. As a result, the dollar has been steadily losing ground to those currencies while the exchange rate remains relatively level with respect to the currencies of trade partners that manage currency exchange rate values via a currency peg or, as in the case of China, a virtual peg. The interest rate differential between the U.S. and its trade partners, especially Japan and China, likely reflects financial market concerns that the dollar will be devalued.
With this week's emergency .5% rate cut by the Fed, the US$'s "Peso Problem" has been pushed to a crisis, starting with the announcement today by the Saudi central bank (http://www.itulip.com/forums/showthread.php?p=16333#post16333) that it will not lower interest rates to import more U.S. inflation in order to help bail out the U.S. economy as it heads into a post housing bubble recession. Soon the dollar may float against the currencies of all oil producers, yuan, and others.
How far might the dollar fall and what kind of the economic impact can we expect? Unfortunately, the worst case scenario that we formulated to shock our readers into action April last year is beginning to play out.Although the U.S. economy maintained its rapid growth during most of the 1990s and 2000s, it was progressively undermined by fiscal mismanagement and a resulting sharp deterioration of the investment climate. The GDP grew about 4 percent annually during the administrations of President Bill Clinton (1993-2001) and during that of his successor, President George W. Bush (2001-2009), except for a brief recession following the collapse of the stock market bubble in 2000. But asset prices fluctuated wildly during the decade, with booms and busts in the stock, bond and real estate markets.
Fiscal profligacy combined with the 2008 oil shock exacerbated inflation and upset the balance of payments. The balance of payments disequilibrium became unmanageable as capital flight intensified, forcing the government in 2008 to devalue the dollar by 30 percent.
Although a bubble in bond and real estate prices from 2001 to 2006 allowed a temporary recovery, the windfall from sales of financial assets to foreign central banks also allowed continuation of the Bush administration's destructive fiscal policies. In the mid-1980s, the U.S. went from being a net exporter of goods and to a significant importer. Sales of financial assets became the economy's most dynamic growth sector. Net foreign purchases of U.S. financial assets grew from 50% of issuance in 1996 to nearly 80% in 2005. Rising foreign borrowing allowed the government to continue its expansionary fiscal policy. Between 2001 and 2006, the economy grew more than 4 percent annually, as the government spent heavily on the military and the real estate and financial sectors provided more than 50% of private sector employment.
This renewed growth rested on shaky foundations. The United States' external indebtedness mounted, and the dollar became increasingly overvalued, hurting exports in the late 2000s and forcing a second dollar devaluation in 2010. The action effectively ended the U.S. dollar's status as a reserve currency. The portion of import categories subject to controls rose from 10 percent of the total in 2008 to 24 percent in 2010. The government raised tariffs concurrently to shield domestic producers from foreign competition, further hampering the modernization and competitiveness of U.S. industry. As unemployment rose to more than 20%, government policies to limit immigration fueled further increases in wage rates and inflation.
The macroeconomic policies of the 2000s left the U.S. economy highly vulnerable to external conditions. These turned sharply against the U.S. in the late 2000s, and caused the worst recession since the 1930s. By mid-2010, the U.S. was beset by rising oil prices, higher world interest rates, rising inflation, a chronically overvalued dollar, and a deteriorating balance of payments that spurred massive capital flight. This disequilibrium, along with the virtual disappearance of the U.S. international reserves--by the end of 2010 they were insufficient to cover three weeks' imports--forced the government to devalue the dollar three times during 2012. The devaluation further fueled inflation and prevented short-term recovery. The devaluations depressed real wages and increased the private sector's burden in servicing its dollar-denominated debt. Interest payments on long-term debt alone were equal to 28 percent of export revenue. Cut off from additional credit, the government declared an involuntary moratorium on debt payments in August 2013, and the following month it announced the nationalization of the U.S. private banking system.
The entire projection is speculation based on our understanding of historical determinism from the starting point we chose in mid-2006. It is meant to give a sense of how these kinds of imbalances tend to play out, although the likelihood is very low that events will unfold precisely in this way.
Even with a year of hindsight, our only major revision is to note that the process is happening sooner than we expected, and rather than being triggered by an oil shock in 2008 was triggered by a crisis in U.S. credit markets in mid 2007. In any case, we believe it's safe to say that indeed the dollar did have a "Peso Problem" and the markets are now correcting it.
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Ishmael
09-20-07, 01:50 PM
Eric:
Bernacke and Paulson will be known as the people who made the dollar not worth a continental.
It took what 6 years for the dollar index to go from 120 to 80 (33%) but 2 weeks to go from 80 to 78.5 (1.5%). This is a trend line that is decreasing at a decreasing rate. Always dangerous!
Nice article.
stumann
09-20-07, 03:11 PM
except that the AUS$ is soaring against the US$ even though debt levels down here are even HIGHER than in the US. by your logic, Australia has more of a "Peso Problem" than the US, but events do not bear your logic out.
then again, one might argue Australia is "rich" in resources, so a high AUS$ represents investor's longterm faith the Australian people can honor their indebtedness - yet the same thing could've been said about Mexico in the 1970s. Mexico had plenty of proven gas reserves & a young population when the Peso began falling. they didn't do much
the Wiemar Germany hyperinflation is a good example of why currencies go bust - in a word, capital flight by the wealthy. yet the modern definition of wealthy is far different now than what it was back in the Old World - the one ripped apart by the two WALL ST. FINANCED World Wars!!! (recalling that Bush's grandfather conspired to bring Nazism to the US; how funny that his grandson was "voted" in and is now doing basically the same thing, but legally...)
today "wealthy" no longer includes individuals, and probably no longer even includes corporations - today, "capital flight of the wealthy" describes ones and zeros temporarily created in the cyberspace - so that the "wealthy" now abondoning the US$ are not Saudis or Japanese bankers - but leverage itself.
unleashing this leviathon of unregulated international leverage was Greenspan's biggest gift/curse to humankind, and reminds me of the old Yiddish tale about the Golem - a monster created by a rabbi (Greenspan) to serve and protect the people of the ghetto (Wall St) from attacks by the Gentiles (social democracies??). the Golem eventually comes back to ravage the ghetto.
the decline in the US$ is A BUBBLE no different than the topping bubble in commodities, most obviously gold, both of which will soon fall alongside housing and world stocks. there will be no place to hide when the monster comes looking to do what it was created to do
Gold rises vs. all major currencies as confidence flees central banks
<!-- begin content --> Spot Gold Prices (http://www.bullionvault.com/gold-price-chart.do) leapt higher in London on Thursday, touching new 27-year highs at $738 per ounce and also breaking against the other four major world currencies.
Because even as the Dollar sank on the broader markets down to a new low versus the Euro and crude oil Thursday's move in the Spot Gold Price (http://www.bullionvault.com/gold-price-chart.do) didn't simply mark fresh weakness in the US currency.
Gold on Thursday hit a 16-month high against the Euro, finally moving above 523 per ounce after lagging the gains in Sterling- and Dollar-gold prices since the start of September.
In London and with all confidence in Mervyn King at the Bank of England shot by a series of policy U-turns and an "unconvincing performance" before a parliamentary committee today gold jumped to £366.85 per ounce, taking its gains for the month above 10% for British investors.
Japanese investors wanting to Buy Gold Now (http://www.bullionvault.com/) will now find it above ₯84,050 per ounce, very nearly the highest price since Nov. 1984. Gold has very nearly tripled against the Yen since the Bank of Japan slashed its lending rate below 0.5% in 2001 in a failed attempt to end the debt-deflation caused by the Tokyo banking sector's reckless lending during Japan's late 1980s property bubble.
The Canadian and Aussie Dollars both helding around six-month lows against bullion today. But while these commodity currencies continue to lag the wider bull market in gold, this global re-allocation to gold bullion is very different from the short-term spike seen in May 2006.
Back then, gold moved higher together with stocks and long-dated bonds. Now those paper assets are slipping back while gold attracts a genuine safe-haven bid from private investors and more crucially from savers.
So it's no surprise to learn that "Standard Bank eyes more physical gold trade in Japan," as Reuters reports today, adding that "Barclays is to offer more commodities ETFs" in Japan, too. "Lehman Brothers launches commodity fund," says Investment Week.
Gold's new 27-year against the Dollar is likely to make headlines in Friday's press, too. A rash of new price targets broke out today, with TheStreet.com confessing that "chart watchers say it's difficult to predict where technical resistance may kick in next and stall the current surge."
But whereas people jumped in to gold last May, they're now jumping out of everything else. Private individuals from Britain, the United States and Europe are all making a strong allocation of their savings and wealth to Buy Gold (http://www.bullionvault.com/) and they're looking to park it there for as long as their confidence in central bankers and official currencies remains dented.
What's the cheapest, simplest, safest and most direct route to Buying Gold Today (http://www.bullionvault.com/)? To claim a free gram of gold today valued at US$23.57 vaulted on your behalf in Zurich, Switzerland click through and learn more about BullionVault now... (http://www.bullionvault.com/from/itulip)
Ishmael
09-20-07, 04:30 PM
stumann:
There are several components of the value of a currency. One of the things I look at is level of natural resources per capita and also government. Oz as well as Canada and Norway have high per natural resources per capita. In addition, all three have western democratic governments even though in most cases on more of a socialist democrate style (I have lived and worked in all three -- that is not meant as a negative). A third factor is a highly educated population.
I believe this is one thing that differentiates these currencies from Mexico which had a low resources per capita, basically a one party political system and a low educated population.
metalman
09-20-07, 04:40 PM
stumann:
There are several components of the value of a currency. One of the things I look at is level of natural resources per capita and also government. Oz as well as Canada and Norway have high per natural resources per capita. In addition, all three have western democratic governments even though in most cases on more of a socialist democrate style (I have lived and worked in all three -- that is not meant as a negative). A third factor is a highly educated population.
I believe this is one thing that differentiates these currencies from Mexico which had a low resources per capita, basically a one party political system and a low educated population.
know you weren't talking to me but comparing usa to mexico:
- low resources per capita - check
- basically a one party political system - check
- low educated population - check
uh, oh.
rabot10
09-20-07, 04:48 PM
Gold rises vs. all major currencies as confidence flees central banks
<!-- begin content --> Spot Gold Prices (http://www.bullionvault.com/gold-price-chart.do) leapt higher in London on Thursday, touching new 27-year highs at $738 per ounce and also breaking against the other four major world currencies.
Because even as the Dollar sank on the broader markets down to a new low versus the Euro and crude oil Thursday's move in the Spot Gold Price (http://www.bullionvault.com/gold-price-chart.do) didn't simply mark fresh weakness in the US currency.
Gold on Thursday hit a 16-month high against the Euro, finally moving above 523 per ounce after lagging the gains in Sterling- and Dollar-gold prices since the start of September.
In London and with all confidence in Mervyn King at the Bank of England shot by a series of policy U-turns and an "unconvincing performance" before a parliamentary committee today gold jumped to £366.85 per ounce, taking its gains for the month above 10% for British investors.
Japanese investors wanting to Buy Gold Now (http://www.bullionvault.com/) will now find it above ₯84,050 per ounce, very nearly the highest price since Nov. 1984. Gold has very nearly tripled against the Yen since the Bank of Japan slashed its lending rate below 0.5% in 2001 in a failed attempt to end the debt-deflation caused by the Tokyo banking sector's reckless lending during Japan's late 1980s property bubble.
The Canadian and Aussie Dollars both helding around six-month lows against bullion today. But while these commodity currencies continue to lag the wider bull market in gold, this global re-allocation to gold bullion is very different from the short-term spike seen in May 2006.
Back then, gold moved higher together with stocks and long-dated bonds. Now those paper assets are slipping back while gold attracts a genuine safe-haven bid from private investors and more crucially from savers.
So it's no surprise to learn that "Standard Bank eyes more physical gold trade in Japan," as Reuters reports today, adding that "Barclays is to offer more commodities ETFs" in Japan, too. "Lehman Brothers launches commodity fund," says Investment Week.
Gold's new 27-year against the Dollar is likely to make headlines in Friday's press, too. A rash of new price targets broke out today, with TheStreet.com confessing that "chart watchers say it's difficult to predict where technical resistance may kick in next and stall the current surge."
But whereas people jumped in to gold last May, they're now jumping out of everything else. Private individuals from Britain, the United States and Europe are all making a strong allocation of their savings and wealth to Buy Gold (http://www.bullionvault.com/) and they're looking to park it there for as long as their confidence in central bankers and official currencies remains dented.
What's the cheapest, simplest, safest and most direct route to Buying Gold Today (http://www.bullionvault.com/)? To claim a free gram of gold today valued at US$23.57 vaulted on your behalf in Zurich, Switzerland click through and learn more about BullionVault now... (http://www.bullionvault.com/from/itulip)
Fred i like GoldMoney a little better, if anyone want's to know why i will give them my thoughts
Fred i like GoldMoney a little better, if anyone want's to know why i will give them my thoughts
Feel free to ignore the ad at the end. Posted so we can post the article, which I thought was well written and of interest to readers.
Especially: But whereas people jumped in to gold last May, they're now jumping out of everything else. Private individuals from Britain, the United States and Europe are all making a strong allocation of their savings and wealth to Buy Gold and they're looking to park it there for as long as their confidence in central bankers and official currencies remains dented.
Eric:
Bernacke and Paulson will be known as the people who made the dollar not worth a continental.
It took what 6 years for the dollar index to go from 120 to 80 (33%) but 2 weeks to go from 80 to 78.5 (1.5%). This is a trend line that is decreasing at a decreasing rate. Always dangerous!
The last thing we need is more cheap money fromt the Fed and destructive economy of financial manipulaton!
The Fed's rate cut on 9/18 has further pressured the exchange rate of the dollar to a new all-time low, pushing up gold prices to a 27 year high at $746.30 an ounce and oil topped $83 a barrel. The weakening dollar combined with faster growing economies in emerging markets make U.S. and companies that have dollar revenue an unattractive investment to foreign investors, and further weaken the U.S. domestic market, induces inflationary pressures, for sure!
Ishmael
09-20-07, 07:48 PM
Metalman:
That is basically my point. The US is very similar to Mexico while on the other hand Australia does have some points to differentiate it from the US. Not just high natural resources but high natural resources per capita.
The US has gone from 200 million to 300 million people in about 40 years. No one seemed to notice at the same time natural resources were being depleted.
This is why China and India will have such problems. Low resources per capita.
think the fed will continue to lower intrest rates and allow the credit cycle to continue to expand because there is no other option in their minds.
cost of living expenses will increase (food especially IMO) as well as other goods and "toys"
social security reform may get people to put large amount's of their social security pensions into the stock market to drive up a bit of a boom and then when the social security pensions are transferred to the market the market will then finally crash and the credit cycle will end (along with civilized, orderly society) but the gov't will have wiped social security benefits off it's list of debts, as the balance of power shifts (from retiring baby boomers) and an aging "unproductive" population.
gold is a great store of wealth, but how long will you allow your wealth to be stored there. say in a year gold peaks at 900 or so, then starts trending down, as the stock market bubble's higher , creating a better rate of return, while the cost of living goes up, and bond's are not outpacing inflation. will you let greed take hold of you, (thinking you will get out before the crash (and what a magnificent crash it will be)
i am an amateur but i think my questions are valid
This disequilibrium, along with the virtual disappearance of the U.S. international reserves--by the end of 2010 they were insufficient to cover three weeks' imports--forced the government to devalue the dollar three times during 2012.
Could someone explain to me what happens to savings when a currency is devalued?
For example . . . let's say I am retired (which I am) and I want to live off my savings that I have stashed away in Treasury securities. If there were a devaluation of the dollar, would I wake up some morning to find that I had lost 20% of what I was counting on for retirement, and will I then experience a 20% decline in lifestyle? Or, does everything become cheaper, so I will not really feel a difference?
I realize that this answer depends on what happens in other countries, since imported products from countries whose currencies remain strong must go up in price relative to the dollar. But what about U.S. products and services?
Fred i like GoldMoney a little better, if anyone want's to know why i will give them my thoughts
Rick: I am quite interested in your views on this, and think others may be also. I use GBS (the London equivalent of the GLD ETF) as I have not figured out how one can due diligence assess BullionVault or RealMoney. One wants to avoid purchasing the precious metal equivalent of...say...an illiquid CDO. Thanks.
GR.
except that the AUS$ is soaring against the US$ even though debt levels down here are even HIGHER than in the US. by your logic, Australia has more of a "Peso Problem" than the US, but events do not bear your logic out...
...the decline in the US$ is A BUBBLE no different than the topping bubble in commodities, most obviously gold, both of which will soon fall alongside housing and world stocks. there will be no place to hide when the monster comes looking to do what it was created to do
Ahhh, but look at the interest rate the RBA has to impose in order to keep attracting enough of Bernanke's "global savings glut" to balance the national accounts each month...events may eventually catch up with the RBA too.
If indeed there becomes "no place to hide" does that not mean there is simply a national, or international (?), resetting of the entire price level? In which case aren't we all more or less in the same relative wealth position as we were before (e.g. If everyone's real estate doubles in value, or gets cut in half, is anyone really better or worse off)?
Perhaps some of this is already happening as we see the price of things we need (food, energy, education, health care) rise relative to things we want (iPhones). In other words what is the future retained value of the baubles the wealthy have been accumulating compared to, say, a farm? (will we see used yachts and executive jets also go "no bid"?).
Could someone explain to me what happens to savings when a currency is devalued?
For example . . . let's say I am retired (which I am) and I want to live off my savings that I have stashed away in Treasury securities. If there were a devaluation of the dollar, would I wake up some morning to find that I had lost 20% of what I was counting on for retirement, and will I then experience a 20% decline in lifestyle? Or, does everything become cheaper, so I will not really feel a difference?
I realize that this answer depends on what happens in other countries, since imported products from countries whose currencies remain strong must go up in price relative to the dollar. But what about U.S. products and services?
you lose 20% of your wealth simply because everything else becomes 20% more expensive, not cheaper. this is inflation. the price rise is an effect from the excess supply of currency which is the cause.
so, as i understand it, savers basically get screwed.
in one sense, it might make sense to go take out a mortgage or some other type of loan. in which you pay back in future with less valuable dollars. but use the loan for what? surely not a house. and if you use the loan and buy gold, then youre doubling your bet on inflation, which exposes you to greater risk..
in other words i have no clue what to do
anyone else have any insight?
Yes, I too would like to here Rick Bishop's comparison of BullionVault and GoldMoney.
I guess what they have going for them over GBS and GLD is the greater faith one may have that the gold you own is actually there - the ETF are just IOUs for gold right?
Casting an eye over BullionVault the only problem might be liquidity - finding enough people within the BV clientele to buy your gold.
There are 84,000 "users" (don't know how many buyers) but I would imagine that the self-selecting population of BullionVault might be of a type (gold bugs) and hence prone to herd behaviour.
Theoretically you can take delivery, but I assume only of 400oz bars.
An other disadvantage, of course, is that you can't short gold in BullionVault like you can with an ETF But, er, moving on swiftly ...
What about GoldMoney?
dbarberic
09-21-07, 07:35 AM
Fred i like GoldMoney a little better, if anyone want's to know why i will give them my thoughts
I've held a GoldMoney account for about 3 years now and participate in their monthly gold accumulation program, where you dollar cost average into gold each month. So far I like GoldMoney and they have very low fees, but there is a little part inside of me that is concerned not being able to access the account and turn the gold back into cash when I need it. Every reference I have seen made about James Turk indicates that his a reputuable and honorable person, but I'm still a little nervous. I think part of my plan is to use GoldMoney to accumlate gold and once I hit certain break points in ounces, purchase physical and convert the GoldMoney into cash to pay for the physical.
Rick, I would like to get your thoughts on your opinion of GoldMoney.
dbarberic
09-21-07, 07:41 AM
Casting an eye over BullionVault the only problem might be liquidity - finding enough people within the BV clientele to buy your gold.
There are 84,000 "users" (don't know how many buyers) but I would imagine that the self-selecting population of BullionVault might be of a type (gold bugs) and hence prone to herd behaviour.
I'm not sure how BullionVault works, but in GoldMoney you can swap between holding gold and cashing out to currency when ever you like. If you have your bank account linked to GoldMoney, you can sell and the cash will be deposited to your bank account within a day or so. There is no need to find another buyer of the metal that is another member of GoldMoney. GoldMoney is not a "market maker" within the GoldMoney system, it just a bullon bank holding your physical for you with a minor monthly storage fee.
Could someone explain to me what happens to savings when a currency is devalued?
Raja,
Mikew has the explanation already there - I'll just add this: devaluation of a currency is precisely an inflation by fiat.
However, there are some exceptions: Those things that are producely internally based on the internal currency are not changed.
However, everything dependent on outside currencies is immediately inflated by the inverse of the devaluation.
Given that the US makes very little these days - especially for daily consumption - it is pretty much guaranteed that a devaluation would pass straight through into your wallet.
Thus if you were 100% self sufficient in necessities - a devaluation would just make external products more expensive.
If you are only 50% self sufficient, then you'll be paying more for that 50% and thus your accumulated cash will have that proportion less of purchasing power.
The other thing to keep in mind is that when inflation ramps up - interest rates never can keep up.
Thus in the leading edge of an inflationary curve - savings are eroded disproportionately.
As I've talked about many times - in this situation you don't have many choices to protect your savings:
1) Move money out of the currency in question. Check - I'm doing that
Note you likely need to move the money out of the country as well - historically devaluations and currency controls go hand in hand. Bank failures and nationalization are also present. Thus having a US account with yen in it is still dangerous for several reasons.
2) Buy into businesses low in the hierarchy of needs: Food, water, shelter (maybe not this one this time ;))
These will be the businesses most able to pass on inflation to customers. High end hair salons? Restaurants? Concerts? Sporting events? Car dealers? I think not.
3) Buy into inflation hedge commodities like gold
This can work, but gold is problematic because it produces zero income. You are basically thus becoming a gold trader - and not everyone can be successful trading.
I shouldn't say this because I DO trade, and trading is a zero sum game.
However, here is the good news:
If you can preserve your savings better than most people, even if not ideally, you will be far better off both in the immediate and more distant future.
The best investors survive the catastrophes and invest again. The average get killed and don't.
hayfield
09-21-07, 09:26 PM
in other words i have no clue what to do
anyone else have any insight?
No one does... But I think c1ue has the right idea (it's what I've been doing)
1) Move money out of the currency in question.
2) Buy into businesses low in the hierarchy of needs: Food, water, shelter (maybe not this one this time )
3) Buy into inflation hedge commodities like gold
But how to move money out of the country without actually traveling to the destination? I have been buying US$ denominated foreign currencies, PowerShares, MERKX, BEBGX, or the like.
The other idea commonly kicked around in this community and others is to invest in commodities. Of this, I am less certain, but I find it hard to argue with the logic that energy/commodities will be the next bubble
Could someone explain to me what happens to savings when a currency is devalued?
For example . . . let's say I am retired (which I am) and I want to live off my savings that I have stashed away in Treasury securities. If there were a devaluation of the dollar, would I wake up some morning to find that I had lost 20% of what I was counting on for retirement, and will I then experience a 20% decline in lifestyle? Or, does everything become cheaper, so I will not really feel a difference?
I realize that this answer depends on what happens in other countries, since imported products from countries whose currencies remain strong must go up in price relative to the dollar. But what about U.S. products and services?
Raja: You are getting some good answers from others who have responded to your post. As a supplement what others have said, one of my preferences is to listen carefully to the grizzled old market veterans -they've seen much more than the average 36 year old hedge fund manager. All of these folks are concerned about inflation, lots of inflation and here's how they think you should protect yourself:
- 83 year old Richard Russell (Dow Theory Letters) advocates holding some gold, some gold mining shares, a bit of oil, and recently has turned cautiously bullish on the large cap DJIA;
- Jim Rogers (of Quantum Fund fame) has been a strong advocate of commodities since 1999, and currently suggests agricultural sector particularly cotton and sugar (hard for us small investors to buy although there are some ETFs in London), Yen and Swiss Franc. He expects a significant correction in the US stock markets at some point. Also he prefers owning the commodities outright rather than the extraction (mining) companies (of course he trades the futures). Rogers recently sold his Manhattan home and moved his family to Asia - he has been an Asia bull for quite some time, especially China. On gold, Rogers thinks it will rise (and holds some), but believes it's better to own commodities that people need and use;
- Marc Faber also expects a US stock market correction, but thinks it may not fall very much in nominal terms due to the massive reflation now underway (the iTulip thesis applies this same logic to expected nominal house price changes in the US). Faber thinks everyone should have some gold.
Three people, three views. Hope that is of some help. Below are links to a couple of extended Bloomberg interviews with Rogers and Faber last Tuesday just before the FOMC decision was released.
Cheers, GR. ;)
Rogers Interview:
http://www.bloomberg.com/avp/avp.htm?clipSRC=mms://media2.bloomberg.com/cache/vjUSJ.lwS8e0.asf
Faber Interview:
http://www.bloomberg.com/avp/avp.asxx?clip=mms://media2.bloomberg.com/cache/vCoNtU.D0pcE.asf
you lose 20% of your wealth simply because everything else becomes 20% more expensive, not cheaper. this is inflation. the price rise is an effect from the excess supply of currency which is the cause.
so, as i understand it, savers basically get screwed.
in one sense, it might make sense to go take out a mortgage or some other type of loan. in which you pay back in future with less valuable dollars. but use the loan for what? surely not a house. and if you use the loan and buy gold, then youre doubling your bet on inflation, which exposes you to greater risk..
in other words i have no clue what to do
anyone else have any insight?
mikew: You are absolutely correct that during inflationary times it is better to be a borrower instead of a lender. During the latest reflation (2001-2006) this paid off in spades as those who borrowed and speculated the most were the biggest winners ("Give me leverage or give me death").
But then came the day the music died, and it was bye bye miss American pie for every overlevered hedge fund and condo speculator, as power transferred instantly back to the creditors. They are now claiming what is left of the assets. After Tuesday last we all know the Fed is warming up the printing presses (hedge fund manager Bill Fleckenstein has started calling them Bennie and the Inkjets).
Seems to me that the global credit system is still contracting, and therefore better to hold ones inflation hedges outright with no margin - so you really own them. If the Fed and the other Central Banks reflate successfully then the use of leverage will once again be a good strategy. But if the reflation doesn't work (a monetary policy "accident" scenario), one probably won't want to have any debt at all.
Would like to hear others views on this suggestion...
Raja: You are getting some good answers from others who have responded to your post. As a supplement what others have said, one of my preferences is to listen carefully to the grizzled old market veterans -they've seen much more than the average 36 year old hedge fund manager. All of these folks are concerned about inflation, lots of inflation and here's how they think you should protect yourself:
- 83 year old Richard Russell (Dow Theory Letters) advocates holding some gold, some gold mining shares, a bit of oil, and recently has turned cautiously bullish on the large cap DJIA;
- Jim Rogers (of Quantum Fund fame) has been a strong advocate of commodities since 1999, and currently suggests agricultural sector particularly cotton and sugar (hard for us small investors to buy although there are some ETFs in London), Yen and Swiss Franc. He expects a significant correction in the US stock markets at some point. Also he prefers owning the commodities outright rather than the extraction (mining) companies (of course he trades the futures). Rogers recently sold his Manhattan home and moved his family to Asia - he has been an Asia bull for quite some time, especially China. On gold, Rogers thinks it will rise (and holds some), but believes it's better to own commodities that people need and use;
- Marc Faber also expects a US stock market correction, but thinks it may not fall very much in nominal terms due to the massive reflation now underway (the iTulip thesis applies this same logic to expected nominal house price changes in the US). Faber thinks everyone should have some gold.
Three people, three views. Hope that is of some help. Below are links to a couple of extended Bloomberg interviews with Rogers and Faber last Tuesday just before the FOMC decision was released.
Cheers, GR. ;)
Rogers Interview:
http://www.bloomberg.com/avp/avp.htm?clipSRC=mms://media2.bloomberg.com/cache/vjUSJ.lwS8e0.asf
Faber Interview:
http://www.bloomberg.com/avp/avp.asxx?clip=mms://media2.bloomberg.com/cache/vCoNtU.D0pcE.asf
You can add iTulip to the inflated DOW list. See Real DOW (http://www.itulip.com/realdow.htm).
in one sense, it might make sense to go take out a mortgage or some other type of loan. in which you pay back in future with less valuable dollars.
GRG55, MikeW,
I didn't specifically respond to this because I thought it was pretty obvious.
However, it appears not so.
1) The strategy of borrowing money in the face of inflation only works if your savings are not similarly exposed.
Unless you are in the financial industry and using OPM (other people's money), I challenge you to get a loan today without putting a significant part of your own capital up. This capital is thus equally subject to the negative effects of inflation - unless you believe you will 'gain' more when the larger debt devalues as swiftly as your down payment/collateral? Note I am assuming you are able to hide all your other assets...itself a non-trivial exercise.
2) If you borrow to buy an asset, you are also assuming the asset worth growth equals or outpaces inflation.
This has not automatically true.
If there is a combination of BOTH inflation and price reductions to cause housing to revert to historical mean, you could wind up with both a lot of debt AND a lower worth house.
For example - if use the 100% increase as the recent housing market bubble, it is just as possible that inflation will rise 70% in the next 5 years while housing prices overall drop 30%. In this case you would have 'gained' in the sense that your debt was inflated away faster than the worth of the house. But you still owe more money than the house is worth.:mad:
The other example is a 50% inflation with a 50% house price drop. I think you can see this is even worse than above.
Note I haven't even talked about paying interest on the loan yet.
Of course you can buy assets other than a house with debt - my caution to you is just that you had better understand that you are making a double-leverage bet on the asset with several degrees of movement and furthermore are investing in a world of still inflated values due to the global liquidity glut.
If you are that good at predicting these complicated outcomes, I suggest you borrow money and start your own hedge fund instead :D
If you are that good at predicting these complicated outcomes, I suggest you borrow money and start your own hedge fund instead :D
Isn't there a petition doing the rounds to include hedge funds on the endangered species list...
rabot10
09-22-07, 05:57 PM
I've held a GoldMoney account for about 3 years now and participate in their monthly gold accumulation program, where you dollar cost average into gold each month. So far I like GoldMoney and they have very low fees, but there is a little part inside of me that is concerned not being able to access the account and turn the gold back into cash when I need it. Every reference I have seen made about James Turk indicates that his a reputuable and honorable person, but I'm still a little nervous. I think part of my plan is to use GoldMoney to accumlate gold and once I hit certain break points in ounces, purchase physical and convert the GoldMoney into cash to pay for the physical.
Rick, I would like to get your thoughts on your opinion of GoldMoney.
I live in the US and things are going to get more than weird on this side of the pond. Don't know when for sure but U can put money on it that it's going to happen. GoldMoney will send me (I hope) my money back to me to any bank account that is in the same name as the sending account. I have many accounts in a few different places so this is a big thing for me and my family. Check out what the others will do regarding getting your money back.
yea clue that makes sense. thats what i was trying to articulate in my post but you did it much better
mikew, c1ue, hayfield and GRG55,
Thanks for your responses to my question on the effects of currency devaluation on savings.
If I may follow up . . . .
I've been thinking for some time now about what commodities would be good investments in recessionary times.
I see two opposing factors determining the value of commodities:
-- inflationary effects due to a devaluing dollar, which would boost the price of commodities
-- economic slowdown with reduced spending and less demand, which would lower the price of commodities
Oil: Seems to me there might be a lot less driving if people reduce their shopping, lose jobs, cut back on vacations, etc. If demand for retail products is reduced, there will be a lot less of those Walmart trucks lugging stuff around and burning up gas. It's true that a certain amount of oil is used for home heating (I have no idea what percent), and people will still have to heat their homes. But they also might turn down their thermostats to save money.
On the other hand, the price of oil would be boosted by the loss of dollar value and/or political instability.
Natural Gas: Don't know much about this, but I assume it's used a lot for cooking, home heating and industry. However, unlike oil, there seems to be far less discretionary use, so perhaps this is a good bet.
Uranium: Used primarily for electricity generation, and there's a large discretionary use component there. IIRC, if we didn't have instant-on appliances -- like TVs that are constantly on so they respond to a remote -- we'd save up to 3% of electricity costs. So people becoming conscious of saving electricity during hard times might have a significant impact on electricity consumption, thus reducing the demand for uranium.
Coal might have a similar outlook as uranium, since I assume its primary use is for electricity generation.
Food: This looks to me like the safest bet. It's hard to believe that people would eat much less of basic foodstuffs in hard times. Sure, restaurants will suffer, but the food people ate in the restaurants they will now consume at home.
As I understand it, agriculture requires a lot of oil for pesticide and fertilizer manufacture, transportation, and running farm machinery, so betting on food is partly betting on oil.
I have a question about the timing of investing in commodities: Will commodity ETFs be taken down with other stocks when/if the market fails? Isn't there a tendency for all stocks to tumble in a crash?
Many commodity prices seem high right now. I'm wondering if I should buy now, or wait for some huge stock drop, and invest in commodities at that time?
I'd appreciate any opinions or feedback . . . .
it might make sense to go take out a mortgage or some other type of loan. in which you pay back in future with less valuable dollars.I had this idea a few weeks ago, but haven't acted on it yet . . . .
Last time I checked, I was able to get an equity mortgage on my house (which is paid for) for $100,000 at 6.7% fixed with no costs.
I take the $100,000 and invest in T-bills at whatever the going rate is now . . . let's say 4.5%. So at this rate I'm losing 2.2% on my money.
But inflation (hopefully) begins to climb, and I keep reinvesting the money in T-bills at ever higher rates. When T-bonds hit 15%, 20% or higher in 3 or 4 years (or whenever), I invest the money in 30-year T-bonds at say 20%.
So for 25 years or so I'm making 20% on the $100,000, and paying the bank back at 6.7%, which is a profit of 13% per year . . . all using the bank's money -- my own little personal carry trade.
The only risk I see is that T-bill interest will not rise, in which case I pay back the bank loan and experience a small loss. No risk, no gain.
Ohhh . . . forgot to mention that I'm deducting the mortgage interest paid to the bank from my taxes. I can get interest-only payments for the first 5 years, so when this is calculated in I take little or no loss for the first few years until interest rates rise.
I also should mention that the government only allows interest deductions for the first $100,000 on equity loans. But if my idea works, it would be a good deal even without any interest deductions . . . .
mikew, c1ue, hayfield and GRG55,
Thanks for your responses to my question on the effects of currency devaluation on savings.
If I may follow up . . . .
I've been thinking for some time now about what commodities would be good investments in recessionary times.
I see two opposing factors determining the value of commodities:
-- inflationary effects due to a devaluing dollar, which would boost the price of commodities
-- economic slowdown with reduced spending and less demand, which would lower the price of commodities
Oil: Seems to me there might be a lot less driving if people reduce their shopping, lose jobs, cut back on vacations, etc. If demand for retail products is reduced, there will be a lot less of those Walmart trucks lugging stuff around and burning up gas. It's true that a certain amount of oil is used for home heating (I have no idea what percent), and people will still have to heat their homes. But they also might turn down their thermostats to save money.
On the other hand, the price of oil would be boosted by the loss of dollar value and/or political instability.
Natural Gas: Don't know much about this, but I assume it's used a lot for cooking, home heating and industry. However, unlike oil, there seems to be far less discretionary use, so perhaps this is a good bet.
Uranium: Used primarily for electricity generation, and there's a large discretionary use component there. IIRC, if we didn't have instant-on appliances -- like TVs that are constantly on so they respond to a remote -- we'd save up to 3% of electricity costs. So people becoming conscious of saving electricity during hard times might have a significant impact on electricity consumption, thus reducing the demand for uranium.
Coal might have a similar outlook as uranium, since I assume its primary use is for electricity generation.
Food: This looks to me like the safest bet. It's hard to believe that people would eat much less of basic foodstuffs in hard times. Sure, restaurants will suffer, but the food people ate in the restaurants they will now consume at home.
As I understand it, agriculture requires a lot of oil for pesticide and fertilizer manufacture, transportation, and running farm machinery, so betting on food is partly betting on oil.
I have a question about the timing of investing in commodities: Will commodity ETFs be taken down with other stocks when/if the market fails? Isn't there a tendency for all stocks to tumble in a crash?
Many commodity prices seem high right now. I'm wondering if I should buy now, or wait for some huge stock drop, and invest in commodities at that time?
I'd appreciate any opinions or feedback . . . .
Raja, C1ue, et. al:
I think we can all agree that if credit is contracting then, in general, having debt can be hazardous to your (investing) health (individual situations will vary of course).
I am of the view that we are in just the early stages of what may be a major contraction following the biggest credit bubble in human history. The authorities have signaled unequivocally that they intend to reflate. Therefore at some point in the future, when credit is again cheap and plentiful, it might make sense for some people to take on prudent levels of debt. I get the impression you may have misunderstood a previous post C1ue; to be absolutely clear, my opinion is that the prudent level of debt for most people today, in the face of shrinking credit availability and rising cost of credit, is ZERO - but that's just an opinion folks.
Raja: I will comment on the two commodities with which I am most familiar - oil and gas - and I am keen to hear the views of others on your questions above on all commodities, especially agriculture. This is NOT investment advice but instead some things you may wish to investigate or factor into your own investment analysis. I will try to hit on a few things that you won't generally hear about on Bubblevision:
- for the first time ever the marginal demand for crude oil is coming from the developing economies. In the past crude oil demand was dependent on the economic cycles in the OECD countries - when the OECD was recovering from its most recent recession, crude demand increased and prices eventually responded. That is NOT what is happening this time so, unlike Bubblevision, you may want to put less emphasis on US (& European) demand patterns. If greater Asia continues to grow at even a moderate pace, energy consumption is probably going to rise regardless of what happens in the USA. If you expect an economic set-back in Asia you probably want to avoid, or short, crude.
- The cost of finding and developing oil has skyrocketed in recent years. Saudi Arabia expects to spend $30 Billion to add the next 1 million bbls/day of new incremental production. Wasn't this supposed to be the "cheap oil"? Saudi exports fell more than 3% full year 2006 compared to 2005. There are no places left to add cheap barrels of reserves or deliverability because the NOCs (National Oil Companies) are subject to the same escalating cost and manpower pressures as Exxon, BP. et. al.
- OPEC no longer controls the market. I know there are many that will dispute that statement - and persist in believing the price is manipulated by OPEC, or Big Oil, or the Carlyle Group (or maybe even the Easter Bunny :D). Some of those people reside in the fairyland known as the US Congress. I wouldn't recommend basing your investment decisions on that cohort's pronouncements. Note that oil blew through $80 on the day OPEC announced a production increase this month. I can see one scenario whereby OPEC regains control in the future, but for now they are price takers, not price setters.
- Do not underestimate the importance of political risk. If you are investing in a company that finds and produces oil or gas it matters not where it is headquartered or which stock exchange it trades on. What matters is where are their reserves located.
- Unlike crude oil which is global, gas markets are continental. This will change as blue water LNG volumes increase and that sector of the industry matures - but that's a few years away.
- North American natural gas markets are much more "just-in-time" than other energy sources. The drilling and subsequent supply response is very quick to adjust to price changes. At this moment nat gas prices in Canada have collapsed. So has drilling. If you believe in the old adage that the best time to invest is when there is "blood in the streets" you may want to check out what is happening in Alberta gas right now (take a first aid kit with you). By the way, one of the Arabian Gulf sovereign wealth funds run by an acquaintance of mine has recently purchased two Alberta-based natural gas producers, effectively taking them private.
- Finally, I have a personal bias against resource companies that try to price hedge future production. These so called "risk management" groups within many resource companies are nothing more than an expensive fashion accessory, and have collectively cost industry shareholders tens of billions of dollars in lost opportunity over the past decade - in falling and rising price environments. In my mind it is internally inconsistent for a company to bet against the commodity it extracts and then merrily go ahead and continue spending its shareholders money to find and produce more of it. :mad:
Hope this helps. Good hunting.
Quick postscript raja: Blood in the streets often means some of the patients die. You don't want to stuff your portfolio with "attractively priced" cremation candidates!
What would be the inflation index from 1980 to 2006 as per Shadowstats, compared to the inflation index using official CPI? -- The figure using official CPI is 2.443 using the CPI calculator (http://www.ez-calculators.com/consumer-price-index-inflation-calculator.htm) This figure may help crystallize my thinking.
My cursory reading of the CPI inflation graph (http://www.shadowstats.com/cgi-bin/sgs/data) below gives me a figure of 7.4 but that can be deceiving when eyeballing and estimating an exponential series from percentage changes.
http://www.shadowstats.com/imgs/sgs-cpi.gif
What would be the inflation index from 1980 to 2006 as per Shadowstats, compared to the inflation index using official CPI? -- The figure using official CPI is 2.443 using the CPI calculator (http://www.ez-calculators.com/consumer-price-index-inflation-calculator.htm) This figure may help crystallize my thinking.
My cursory reading of the CPI inflation graph (http://www.shadowstats.com/cgi-bin/sgs/data) below gives me a figure of 7.4 but that can be deceiving when eyeballing and estimating an exponential series from percentage changes.
http://www.shadowstats.com/imgs/sgs-cpi.gif
Elsewhere I've read that the US MZM has increased about 9 times since 1980, and that collectively, first-world countries money supply has increased about 6 times. So 7.4 sounds reasonable to me.
Last time I checked, I was able to get an equity mortgage on my house (which is paid for) for $100,000 at 6.7% fixed with no costs.
I take the $100,000 and invest in T-bills at whatever the going rate is now . . . let's say 4.5%. So at this rate I'm losing 2.2% on my money.
But inflation (hopefully) begins to climb, and I keep reinvesting the money in T-bills at ever higher rates. When T-bonds hit 15%, 20% or higher in 3 or 4 years (or whenever), I invest the money in 30-year T-bonds at say 20%.
So for 25 years or so I'm making 20% on the $100,000, and paying the bank back at 6.7%, which is a profit of 13% per year . . . all using the bank's money -- my own little personal carry trade.
The only risk I see is that T-bill interest will not rise, in which case I pay back the bank loan and experience a small loss. No risk, no gain.
Raja,
You are giving everyone on iTulip a great example of failure to recognize risk.
Instead of focusing on the 'carry trade' you mention, I suggest you think in terms of what the equivalent interest rate swap would cost you - because that is what you are doing.
The difference between what you are paying (2.2%) and what the swap would cost is what the market considers risk - and the market for risk is STILL quite low by historical standards. This means the swap will cost more in the future should risk-aversion set in.
As for specific considerations:
1) You are assuming interest rates are higher than inflation. Historically the interest rates lag. As I've mentioned before - the problem then is your money gets inflated before it earns equivalent interest. It is like the dealer's advantage in Blackjack - busting last = equal for house.
2) Will you be able to time the market? It is not a trivial exercise to lock in the 30 year T-bill at the peak; if you are 10% wrong then you're going to have a long long miserable time of it.
3) You're borrowing money to invest. Never a good idea. This is very similar to buying a house you can't afford with an Alt-A loan - believing all will be made right by one thing: house price appreciation.
4) You're taking on debt - when the economy is getting worse, it is generally though unwise to count on present cash flows continuing to grow or even keeping steady. This of course very much depends on the personal situation.
I get the impression you may have misunderstood a previous post C1ue
GRG,
I may have missed the satirical angle. I get easily distracted when the collapse of Western civilization is at hand ;)
I got the answer from John Williams at Shadowstat - it is 5.94 from 1980 - 2006 Now 1979/80 being a cusp year for high inflation I was off a bit -- But including 2007 it should end up about 6.53
I will start a new thread on how income taxes have been shifting the tax burden from the rich to the poor over the last century by not indexing personal tax exemptions and tax brackets to the inflation rate -- very similar to not indexing the minimum wage to inflation.
c1ue,
Thank you for your response . . . but I am confused by several things you said:
You said:
I suggest you think in terms of what the equivalent interest rate swap would cost you - because that is what you are doing.Am I not doing that when I said, "I take the $100,000 and invest in T-bills at whatever the going rate is now . . . let's say 4.5%. So at this rate I'm losing 2.2% on my money."
Of course, I am wagering that this loss will soon change to a profit after a few years.
You said:
This means the swap will cost more in the future should risk-aversion set in.But when risk aversion sets in, won't inflation climb. It seems to me that more risk-aversion is exactly what will make my investment a winner, not less.
You said:
You are assuming interest rates are higher than inflation. Historically the interest rates lag. As I've mentioned before - the problem then is your money gets inflated before it earns equivalent interest.I studied the interest rate/inflation relationship in the process of coming up with this idea, and I agree with your assertion about the lag. But what difference does it make? I'll be losing money the first few years anyway, but I'll still be locking in 25 years at 20% ?
You said:
Will you be able to time the market?http://upload.wikimedia.org/wikipedia/commons/e/e2/Federal_Funds_Rate_%28effective%29.png
Judging from this chart, there seem to have been several months during the early-80s interest rate spike during which one could have locked in 14% rates, and I'm expecting rates to go higher and last longer this time around. But even if I only got 14%, that's still 7 1/2% yearly profit for 25 years using the bank's money.
You said:
You're borrowing money to invest. Never a good idea. People have made millions on the carry trade . . . and as long as they get out in time, it seems like a good idea to me. Now if you had said, "Sometimes it's not a good idea" . . . .
You said:
This is very similar to buying a house you can't afford with an Alt-A loan - believing all will be made right by one thing: house price appreciation.There are many significant differences between buying a house vs. investing in Treasury bills. For one, T-bills are completely liquid, so one can bail out in a second if things trend badly. Second, you never lose your principle with T-bills, unlike a house which can lose value dramatically as we are now seeing. Third, if T-bill interest rates suddenly plunge over a 6-month period, I simple stop reinvesting them and pay off the bank with no penalty.
You said:
it is generally thought unwise to count on present cash flows continuing to grow or even keeping steady. This of course very much depends on the personal situation.I don't see what "personal" has to do with it. I'm counting on the government to supply the cash flow, and other than government default -- which is possible but doesn't seem likely, because they can print money -- this seems like a reliable source.
The gamble here is that interest rates will not rise, and I have acknowledged that could happen. There is a risk, but a very minor one, with a huge pay-off if interest rates rise.
c1ue, I've been reading your posts over several months, and I have been impressed by your worldly experience and wisdom in financial matters. However, everything you said in your post to me seems incorrect. So as an admitted financial neophyte, I must conclude that it is I who am incorrect, and I ask that you please help me understand what I am missing here . . . .
Lukester
09-23-07, 02:41 PM
GRG55 -
I'm posting this to the end of this thread because nested sub-topics make a thread really hard to read sequentially. So with Rajiv's gracious permission I will post a "non-sequitur" to his last comment on this thread.
______________
GRG55 -
Thank you for putting a very substantive issue squarely before the readers of this website, as described by yourself, as an oilman living and working in the Gulf. I doubt many here will pay the most fleeting attention to the serious issue unfortunately. I remark with astonishment instead that there seems a willingness among some here to buy often and easily into theories of contemporary events which incorporate subterfuge and plots - and this is very popular and engaged in all to easily.
Witness the box spread "Bin Laden Trade" which it was conjectured on this website was ostensibly betting on manufactured (i.e. terrorist) catastrophe causing a vast collapse in the markets - and yet a small footnote on the Seeking Alpha website quietly noted this weekend that this position had indeed expired worthless on Sept. 21st?
Yet here, this insight into the nature of probabilities (when something looks implausible it probably is) goes completely unremarked. Instead glamorous theses such as the "Bin Laden Trade"and many other collusive plots by "powers that be" are breathlessly discussed.
In the same breathless vein, theories are put forth without challenge as to collusive strategies by the Carlisle Group, the Bilderbergers, "Big Oil", and right on up to entire nation states who cunningly start wars to "manipulate the price of oil" merely to astutely and stealthily line their pockets with "oil profits" ( !!!?? ).
This sort of stuff occasionally gets bandied about on this website with little challenge, and it's detrimental precisely because it's mixed in among a lot of otherwise really high quality discussion thereby throwing up a dense fog around what the really big story is that's brewing in the global energy markets.
So I wish to note here that amid all the agonizing on what asset classes are "safe harbors" in the increasingly rocky markets, which is also a topic that gets endless reams of web page space as people try to indentify "promising investment classes" - the points you are making actually lead squarely to energy, as being an asset class that is so robustly underpinned by screamingly bullish secular fundamentals that it leaves one marveling at the stubborn skepticism of some readers here on iTulip.
These same readers worry about "where the G8 is now in it's growth cycle" and even more, fretting "is the USA going into recession and should I therefore buy consumer staples?". This community has had extensive articles posted to it's attention in past months, authored by the likes of Henry Groppe, and Charley Maxwell, not to speak of Matt Simmons who as an investment banker to the oil industry for 30 years is curiously dismissed as a lightweight - Henry Groppe and Charley Maxwell, with literally 100 years of energy markets analysis between the two of them, and superb, unimpeachable reputations.
These two are just two sample commentators among dozens describing the same large changes occurring in the petroleum sector. These are the kind of reputations, and individuals for whose advice international corporations pay lavishly, and these corporations will then proceed to take that industry insider intelligence straight to the bank as their preferred investment advice.
These corporations do so, after intelligently understanding the seniority and sobriety of those sources, and the unimpeachability of those sources. They take that intelligence to the bank without question because the verdict among the smart industry insiders is in, and it's agreed - on the truly precarious fundamentals for reliable energy supply to meet the world's growing needs in the NEXT DECADE.
Yet in this community, there persists among some a complacent skepticism, such that people find nothing unreasonable in the expectation that the price of oil is a "bubble" which will collapse to $40 a barrel as the global economy compliantly collapses along with the presumed imminent collapse of North American oil consumption.
I would ask readers here again, to reexamine their stubborn skepticism of the reality of a whole new paradigm in the energy markets, and to take a square look at the secular chart below, and ask themselves "what part, of a discernible and hugely significant trend in "no new major oil discoveries in 25 years" do they not yet understand???
Instead skeptics seem to trust their own astuteness in distinguishing substantive issues from flimsy ones, by speculating in avid discussion on the dark potential for a "Bin Laden trade" in the equities markets, or "geopolitical machinations" expressly intended to manipulate the price of petroleum. I would suggest instead, that their selective "suspension of disbelief" is being employed in the wrong places?
There is a story afoot in the critical resource markets, so much bigger even than the real Bin Laden, that it will leave his actions as a mere footnote in history - and these readers are missing it entirely.
_____________________
GRG55 wrote -
<< - for the first time ever the marginal demand for crude oil is coming from the developing economies. In the past crude oil demand was dependent on the economic cycles in the OECD countries - when the OECD was recovering from its most recent recession, crude demand increased and prices eventually responded.
That is NOT what is happening this time so, unlike Bubblevision, you may want to put less emphasis on US (& European) demand patterns. If greater Asia continues to grow at even a moderate pace, energy consumption is probably going to rise regardless of what happens in the USA. If you expect an economic set-back in Asia you probably want to avoid, or short, crude.
- The cost of finding and developing oil has skyrocketed in recent years. Saudi Arabia expects to spend $30 Billion to add the next 1 million bbls/day of new incremental production. Wasn't this supposed to be the "cheap oil"? Saudi exports fell more than 3% full year 2006 compared to 2005.
There are no places left to add cheap barrels of reserves or deliverability because the NOCs (National Oil Companies) are subject to the same escalating cost and manpower pressures as Exxon, BP. et. al.
- OPEC no longer controls the market. I know there are many that will dispute that statement - and persist in believing the price is manipulated by OPEC, or Big Oil, or the Carlyle Group (or maybe even the Easter Bunny :D). Some of those people reside in the fairyland known as the US Congress. I wouldn't recommend basing your investment decisions on that cohort's pronouncements.
Note that oil blew through $80 on the day OPEC announced a production increase this month. I can see one scenario whereby OPEC regains control in the future, but for now they are price takers, not price setters. >>
_____________________
http://www.eurotrib.com/files/3/050831_oil_discovery_vs_production.jpg
_____________________
COMMENT ON THIS CHART:
Only around 50 super-giant oilfields have ever been found, and the most recent, in 2000, was the first in 25 years: the problematically acidic 9-12 billion barrel Kashagan field in Kazakhstan.
Let us reduce our scale of scrutiny from the super-giant to the merely giant. Half the world's oil lies in its 100 largest fields, and all of these hold 2 billion barrels or more, and almost all of them were discovered more than a quarter of a century ago.
Consider the recent record of discoveries of giant oil- and gas-fields of over 500 million barrels of oil or oil equivalent. Half a billion barrels - the definition of a "giant" field - sounds a lot. But since the world is eating up more than 80 million barrels of oil a day at the moment, it is in fact less than a week's global supply.
In 2000 there were 16 discoveries of 500 million barrels of oil equivalent or bigger. In 2001 there were nine. In 2002 there were just two. In 2003 there were none.
Nice post Lukester -- Peak Oil very nicely presented!
Lukester
09-23-07, 04:24 PM
Thank you Rajiv.
Another quote: << Exxon Mobil and Royal Dutch Shell have each gone on record (statements were by both of their CEO's) this past summer that wind and solar power would supply only about 1 PER CENT of global energy demand by 2030 >>
Even if these two CEO's estimate were off by 1000%, are the broad implications of this stat meaningful to anyone here? Alt-energy will not even remotely replace hydrocarbons - even looking out to mid-century.
_______________________
One more illustration of why "technology" and "innovation" are in fact mythical as an alternative to hydrocarbons.
The innovation fallacy ------- by John Michael Greer
http://www.itulip.com/forums/showthread.php?t=2050
I use a rather broad definition for "alternate" energy, including gas-to-liquids, coal-to-liquids, nuclear, etc. Collectively all this stuff will make a difference over time. Some alt energy ideas will gain material market share, and some will prove to be technology or economic dead-ends. People seem to have forgotten that some of the most advanced early work on wind turbines was done in Mojave, California, not in Germany or Denmark as smug Eurocrats would have one believe. There's some interesting work going on in Mojave now using solar trough collectors for commercial scale power generation (in collaboration with an Israeli company).
California is an amazing incubator of new technologies of all sorts. That's why I found it ironic that, speaking recently with some friends that live near LA, they told me SoCal was experiencing rotating black-outs. Seemed sort of...um...third-world. Reminded me of living in Lagos.
The US seems to prefer energy policy that tries to preserve life as is (home grown SUV fuel for example) but this is bound to give way to energy technologies that prompt gradual change in patterns of living. Despite all the global criticism the US approach is attracting, I think it will ultimately prove vastly more effective at driving and commercializing innovative solutions than the restrictive, rule-based "we-know-what's-best-for-society" attitudes in Brussels, and promoted by the priesthood of the "new global order" that flock to Davos each year.
Am I not doing that when I said, "I take the $100,000 and invest in T-bills at whatever the going rate is now . . . let's say 4.5%. So at this rate I'm losing 2.2% on my money."
Of course, I am wagering that this loss will soon change to a profit after a few years.
Raja,
First let me be clear - I'm not picking on you specifically!
I am, however, hopefully using you as an excuse to hopefully wound some bad ideas floating around due to breathless financial media machinations.
Having said that: Have you actually bought a full T-bill before? As opposed to a T-bill fund or some derivative?
The interest rate on the T-bill is not an actual amount of money paid to you. It is a result of the amount paid for the T-bill at a given time as a ratio to the amount of money that WILL be paid back at the time of maturity.
Thus for a given $value of T-bill and x% interest, you pay $value divided by (1+x)exp(time to maturity).
Thus unless the interest rates change in between when you've sold a T-bill and you've bought another (higher yielding) one, your previous Tbill will have lost value. Again, if you are that good then you should get OPM and start a hedge fund.
To review:
Case 1: You wait for maturity: you're losing relative interest every day.
Case 2: You sell before maturity: your Tbill value will be lower - possibly lower than when you bought it depending on time delta and interest rate change. Why buy a lower interest Tbill than a higher interest longer duration one? (your old one will have had some time run by)
If you buy through funds - the result is the same except you also get management and transaction fees tacked on top.
But when risk aversion sets in, won't inflation climb. It seems to me that more risk-aversion is exactly what will make my investment a winner, not less.
Actually, no. Because you're getting into the interest rate swap now, and you are a seller not a buyer. By entering into an arrangement as you've specified, the counter party either effectively or literally enters into an interest rate swap which you've given him/her. Thus YOU are the one taking on the risk.
If you had bought the swap - you'd be the counter-party. Note that the counter-party is not necessarily one person but is what the market will behave as.
I studied the interest rate/inflation relationship in the process of coming up with this idea, and I agree with your assertion about the lag. But what difference does it make? I'll be losing money the first few years anyway, but I'll still be locking in 25 years at 20% ?
You are assuming 20% for 25 years is good. There are numbers of examples where this is not true:
1) in 1981 - had you bought T-bills at the highest interest rate point, while you made money you would have made more money investing in stocks from 1981 to 2001.
2) default - USA hasn't done this in a long while, but there are many examples of countries who did. And the ones who did generally did it to their internal investors first.
3) dollar commitment: Tbill by definition are dollar securities. In addition to picking the right interest rate peak, you would be fully subject to any dollar based devaluation.
Certainly 20% is a historical record - actually I think 30 year treasuries only hit a tad above 14% at the worst part of the previous cycle.
But then again even today we are seeing interest rates over 20% in several parts of the world.
Judging from this chart, there seem to have been several months during the early-80s interest rate spike during which one could have locked in 14% rates, and I'm expecting rates to go higher and last longer this time around. But even if I only got 14%, that's still 7 1/2% yearly profit for 25 years using the bank's money.
My point was that you are taking on debt to invest - it is not the bank's money but your debt. Thus you are taking on added risk (marketing timing, currency, etc) compared to the bank (your solvency). Now if the bank GAVE you money...
People have made millions on the carry trade . . . and as long as they get out in time, it seems like a good idea to me. Now if you had said, "Sometimes it's not a good idea" . . . .
True, but they were using OPM. You will be using your own. Losing OPM means a public black eye but cushioned by the lovely 2% fees. Losing your own money means many steps back in the walk of life.
Its the secret to Donald Trump's success.
There are many significant differences between buying a house vs. investing in Treasury bills. For one, T-bills are completely liquid, so one can bail out in a second if things trend badly. Second, you never lose your principle with T-bills, unlike a house which can lose value dramatically as we are now seeing. Third, if T-bill interest rates suddenly plunge over a 6-month period, I simple stop reinvesting them and pay off the bank with no penalty.
Several of these same arguments have been used for numerous other securities in the past: Internet stocks being a prime example.
As for never losing principle - if the dollar is devaluing and you are in a fixed input investment, you are very much losing principal. You're just assuming the interest rate you lock in will be greater than the devaluation and/or inflation.
Lastly if things go into the pot, not all financial assumptions are going to pan out. The holders of MBS' are finding this out the hard way.
If the rest of the world decides the US is no longer a good place to invest due to poor economic policies and a US govt. decision to inflate its way out of debt - can you guarantee that the T-bill market is still going to be liquid?
Already there is a lot of talk about China, the Middle East, etc no longer buying Treasuries.
I don't see what "personal" has to do with it. I'm counting on the government to supply the cash flow, and other than government default -- which is possible but doesn't seem likely, because they can print money -- this seems like a reliable source.
Raja,
If you are still working - then your daily expenses are still being paid by a job. Jobs are (in general) dependent on the overall economy.
Putting a significant chunk of your money into a 25 or 30 year investment means you REALLY won't need to use it for a LONG time.
In this way a long term Treasury is the same as a house - you get nothing until you sell it. Although you don't have to pay much upkeep on a Treasury...
I'm not telling you what to do - just pointing out some items which I personally would be concerned about when considering such an investment strategy.
Spartacus
09-24-07, 12:37 PM
the same relative wealth position as we were before (e.g. If everyone's real estate doubles in value, or gets cut in half, is anyone really better or worse off)?
there are specific losers.
Those who paid taxes on the higher values - retirees who could not afford higher taxes and are forced out of their homes, ferinstance.
Those who paid highly inflated brokerage fees (and on the opposite side are the "winners", the real estate pumpers^H^H^H^ agents)
Those who live in countries that don't give a tax holiday on principal residence sales.
c1ue,
Responding to your last post . . . .
I'm not telling you what to do - just pointing out some items which I personally would be concerned about when considering such an investment strategy.I appreciate your feedback . . . but after carefully reading everything you said, I still don't get your objections . . . any of them.
From my admittedly neophyte perspective, I don't think you have accomplished your goal of "wound(ing) some bad ideas floating around due to breathless financial media machinations." On the contrary, I think you are warding off people from a brilliant investment idea that could earn them a great profit . . . if they have a similar financial situation as I have.
Then, again, I may be wrong . . . .
The interest rate on the T-bill is not an actual amount of money paid to you. It is a result of the amount paid for the T-bill at a given time as a ratio to the amount of money that WILL be paid back at the time of maturity . . . Thus unless the interest rates change in between when you've sold a T-bill and you've bought another (higher yielding) one, your previous Tbill will have lost value.
When you buy a $100,000 T-bill @ 4.5%, your are actually paying $96,500. Six months later you get $100,000 back, i.e., $96,500 plus 4.5% interest.
If you have choosen auto reinvestment, your $100,000 is immediately reinvested. If the rate is 4.5%, you are investing $96,500 again, and $4,500 appears in your bank account the same day, which you can invest anywhere you choose.
What's the problem with this?
You say, "You wait for maturity: you're losing relative interest every day."
I'm not sure what you mean by this, but if I'm losing anything, it isn't much. It still looks to me like I'm making 4.5% on my investment.
But even if I am loosing something, aren't you looking at this from a microscopic perspective?
If there are minor losses from reinvesting T-bills for a few years, they pale in comparison to the 14% or more spread I'm hopefully going to earn for 25 years.
Therefore, in my opinion, this point you bring up, while possibly valid, in no way detracts from the overall soundness of my plan.
Because you're getting into the interest rate swap now, and you are a seller not a buyer. By entering into an arrangement as you've specified, the counter party either effectively or literally enters into an interest rate swap which you've given him/her. Thus YOU are the one taking on the risk.Ahhhh, I see now that you were talking about MY risk.
Since all investment is inherently risky, which everyone knows, I had assumed you must be talking about the atmosphere of risk present in the financial environment.
So to reanswer your original point, of course I'm taking risk. But why do you feel the need to point that out as a downside? Perhaps you can recommend some profitable investments that do not have risk? ;-)
You are assuming 20% for 25 years is good. There are numbers of examples where this is not true: in 1981 - had you bought T-bills at the highest interest rate point, while you made money you would have made more money investing in stocks from 1981 to 2001.I'm not saying that 20% for 25 year is the best investment in the world. But you're not really criticizing and investment that earns 20%, are you? If so, you are the one that should start a hedge fund . . . you are a quite a bit more ambitious than I . . . .
default - USA hasn't done this in a long while, but there are many examples of countries who did. And the ones who did generally did it to their internal investors first.Yes, default by the US goverment is a possibility. I'd give it about the same chance as the Pope hooking up with Britney Spears.
Seriously, though . . . I can see the government printing its way out of difficulty, or extending bond maturities, but never outright default.
But if you know more about the potential of default, please share it.
dollar commitment: Tbill by definition are dollar securities. In addition to picking the right interest rate peak, you would be fully subject to any dollar based devaluation.True. But you seem to forget that this is money that I otherwise wouldn't have to invest, so whatever I earn in the spread, it's all profit.
Certainly 20% is a historical record - actually I think 30 year treasuries only hit a tad above 14% at the worst part of the previous cycle.What I said above . . . .
My point was that you are taking on debt to invest - it is not the bank's money but your debt. Thus you are taking on added risk (marketing timing, currency, etc) compared to the bank (your solvency). Now if the bank GAVE you money...From an accounting perspective, I agree with you. But look at it this way . . . .
I've got this house, which I'm living in. After the bank gives me the money, I'm still living in the house, but now I've got $100,000 to play with.
I invest it in such a way that I earn a profit (assuming my bet is good) at almost zero risk to principal, from which I can bail out at any time with a small loss.
At the end of thirty years, I've still got the house, but I'm considerably richer.
You may call it debt, but I call it using the bank's money to make a profit.
I wrote: "People have made millions on the carry trade . . . and as long as they get out in time, it seems like a good idea to me."
True, but they were using OPM. You will be using your own. Losing OPM means a public black eye but cushioned by the lovely 2% fees. Losing your own money means many steps back in the walk of life.From what I have read, huge numbers of ordinary Japanese have been using their own money in the carry trade, so your statement is only partially true. My statement was 100% true.
As for never losing principle - if the dollar is devaluing and you are in a fixed input investment, you are very much losing principal. You're just assuming the interest rate you lock in will be greater than the devaluation and/or inflation.No, you're missing the point. I'm paying the bank back with devalued money. Any profit I make on the spread will still be profit, whether it's devalued or not. It's profit that I wouldn't otherwise have, had I not been using the bank's money.
Lastly if things go into the pot, not all financial assumptions are going to pan out. The holders of MBS' are finding this out the hard way.
My only assumptions are that the government won't default, and that during the first few years I may have to bail out at a small loss if interest rates don't rise. The only thing that will be hard is if I miss this opportunity and regret it later.
But, if you have some alternative ideas of where to invest that are as risk free as Treasury bonds and earn 20%, I'm all ears.
If the rest of the world decides the US is no longer a good place to invest due to poor economic policies and a US govt. decision to inflate its way out of debt - can you guarantee that the T-bill market is still going to be liquid?
Are you really saying that a time will come when it's not possible to sell a 6-month T-bill? That's hard to envision.
Still, even if that were the case, I might miss the top by a bit, but I could just let my T-bill go to maturity, then buy the 30-year bond. A more negative scenario might be that I only catch it at the halfway point on the downside, so I only make 7% pure profit for 25 years using the bank's money. Worse case scenario is that it drops somewhere below the loan rate, in which case I would pay off the bank and lose a relatively small amount.
But as I say, I don't foresee a time when a 6-month T-bill could not be sold. What scenario would you see that could create such an event?
1. If you are still working - then your daily expenses are still being paid by a job. Jobs are (in general) dependent on the overall economy.
2. Putting a significant chunk of your money into a 25 or 30 year investment means you REALLY won't need to use it for a LONG time.
3. In this way a long term Treasury is the same as a house - you get nothing until you sell it. Although you don't have to pay much upkeep on a Treasury...
1. I'm not still working. But this $100,000 would be paid by Treasury bond interest, not by a job.
2. This is money the bank is providing me, so I wouldn't have it to use anyway if I didn't make the loan.
3. Wrong. Unlike a house, I will be earning the spread in payments every six months -- about $13,000 a year if I caught a 20% bond. Not bad.
c1ue, I have responded to all your points, and feel these responses have been resonable. However, I've been wrong before. So if you still feel I'm not understanding something, I welcome your further insights . . . .
Raja,
Let me put this another way: if interest rates hit 20% - something which hasn'nt occured ever in the United States as far as I know, do you really think nothing will have happened to justify this?
Certainly the USA is not Zimbabwe, but then again it is equally foolish to think that the USA is somehow immune to reaping the rewards of its actions.
As for your reaping interest - you don't get to both renew and lock in a rate. You can do 1 year Tbills, or you can lock in a rate with a long bond, but you cannot do both at once.
As for the other points - what I am suggesting is to look to existing financial instruments based on the actions you are proposing to understand what risk you are taking on.
Ultimately it is your money, do with it what you will :)
As for what I recommend - I've talked about that already. The implementation is up to every individual and individual's temperament/skill set.
In the early 1980s you could buy a 30 yr treasury bond in the low teens. Get this: it wasn't callable! They won't make that mistake again.
if interest rates hit 20% - something which hasn'nt occured ever in the United States as far as I know, do you really think nothing will have happened to justify this?Being a financial neophyte, I derive a large part of my thinking from a mix of sources. EJ predicts a discount rate above 20% for about a year period.http://www.itulip.com/images/KaPoom2006Q.gif
So, to answer your question about what will happen . . . what he said.
But I don't see what you're getting at with this question. Can you please say what you think will happen and why it will scuttle my plan?
Certainly the USA is not Zimbabwe, but then again it is equally foolish to think that the USA is somehow immune to reaping the rewards of its actions.
It is precisely the reaping that will enable me to make a profit. If there is no reaping, my plan won't work.
In other words, high inflation, high interest rates, big spread, big profit.
As for your reaping interest - you don't get to both renew and lock in a rate. You can do 1 year Tbills, or you can lock in a rate with a long bond, but you cannot do both at once.Perhaps I need to explain again . . . .
I buy short term T-bills (either 3- or 6-month), which are then continuously reinvested. When interest rates reach a high level, I either sell the T-bills or let them mature. Then, I take the money and purchase a 30-year bond locking in a a high rate.
At what point am I doing "both at once"?
what I am suggesting is to look to existing financial instruments based on the actions you are proposing to understand what risk you are taking on.
The two financial instruments involved in my proposal are the equity loan and Treasury securities, both of which I have examined and have some familiarity with. Since I found no great risk in what I am proposing, I was hoping someone with more experience would be able to point out something I had missed.
Ultimately it is your money, do with it what you will :)
That's a relief. I thought I had to do what EJ said :D
In the early 1980s you could buy a 30 yr treasury bond in the low teens. Get this: it wasn't callable! They won't make that mistake again.Dang it, Fred. You found a chink in my plan.:eek:
For it to at least break even, my plan requires that I collect high interest rates for at least long enough to recoup my initial loses. And even calling the bond in some years later would still spoil my wonderful dream of clearing 15% for 25 years.
I checked the Fed website, and all bonds now are not callable. You are suggesting they will change that policy in the future.
How might that work?
They would issue 30-year bonds at high rates, and then after interest rates fall back to lower levels, they would say here's your principal back, good bye?
Is there a history of this?
Is there any way to get some idea about how long they will wait before calling in the bonds?
Seems like it would piss off a lot of people if they called in high-paying bonds after only a few years . . . .
I checked the Fed website, and all bonds now are not callable. You are suggesting they will change that policy in the future.
. . .
Is there a history of this?
Is there any way to get some idea about how long they will wait before calling in the bonds?
Seems like it would piss off a lot of people if they called in high-paying bonds after only a few years . . . .
Trying to piece this together from the treasury website....
For certain bonds issued before 1985, the U.S. Treasury reserves the right to stop paying interest before the bonds mature. When the Treasury "calls" a bond, it stops paying interest on the date of the call, before the maturity date.
View a list of bonds called (http://www.treasurydirect.gov/indiv/research/indepth/tbonds/res_tbond_call.htm#2000topresent) from 2000 to the present.
Searched for a couple of the bond ID numbers listed, and got this:
January 14, 2000 The Treasury today announced the call for redemption at par on May 15, 2000, of the 8-1/4% Treasury Bonds of 2000-05, issued May 15, 1975, due May 15, 2005 (CUSIP No. 912810BU1). There are $4,224 million of these bonds outstanding, of which $2,047 million* are held by private investors. Securities not redeemed on May 15, 2000, will cease to earn interest.
January 14, 2005
The Treasury today announced the call for redemption at par on May 15, 2005, of the 10% Treasury Bonds of 2005-10, originally issued May 15, 1980, due May 15, 2010 (CUSIP No. 912810CP1). There are $2,987 million of these bonds outstanding, of which $1,811 million are held by private investors. Securities not redeemed on May 15, 2005 will stop earning interest.
Only two examples is not enough to make a definitive case, but both of these were called after 25 years.
zoog,
Thanks for doing some research on this.
I guess Fred was wrong . . . these bonds were callable.
Some nice interest rates:
<table class="indepth"><tbody><tr><td>November 15, 2007</td><td>30 years</td><td>912810DB1</td><td align="right">10.375%</td></tr> <tr><td>November 15, 2006</td><td>30 years</td><td>912810CY2</td><td align="right">14.000%</td></tr> <tr><td>May 15, 2006</td><td>30 years</td><td>912810CV8</td><td align="right">13.875%</td></tr> <tr><td>November 15, 2005</td><td>30 years</td><td>912810CS5</td><td align="right">12.750%</td></tr> <tr><td>May 15, 2005</td><td>30 years</td><td>912810CP1</td><td align="right">10.000%</td></tr> <tr><td>February 15, 2005</td><td>30 years</td><td>912810CM8</td><td align="right">11.750%</td></tr> <tr><td>November 15, 2004</td><td>30 years</td><td>912810CK2</td><td align="right">10.375%</td></tr></tbody></table>
25 year maturity is not as good as 30 years, but it's not bad, either. Early maturity is not a dealbreaker by any means for my plan, but I'll have to add the threat of callability to my risk analysis. Who know what the government will do if they're paying out 25% interest . . . .
Lukester
09-25-07, 08:28 PM
Raja -
Here's an alternative idea - why not take that $100K you are looking at extracting from your property, and invest it 25% in each of these four 800 pound gorilla stocks instead:
1) BHP Billiton - largest natural resources company in the world - it's so diversified it's like a global juggernaut. As 1/3 of the world industrializes in the next decade (biggest global trend in 40 years), this stock alone will probably return you 500% - 1000%.
They have the largest Uranium mine in the world, and as of two or three days ago that same Olympic Dam mine is apparently now also the largest gold mine in Australia. This is by far the safest gold mining stock in the world, because they are in every other commodity concievable! They have operations in about 30+ countries, and mine every last commodity you can dream of.
2) Schlumberger - largest global oil services company in the world - another juggernaut. This one will even outperform BHP Billiton. As the energy markets tighten globally in the next decade, this stock will be the single most senior stock for global energy exploration. They have the very best exploration technology - at the cutting edge, and they have a superb history as a company consistently in the leadership of energy services. With a tightening energy market set to be the main story for the next twenty years, this is a mega-cap, globally diversified, and a very safe play on the entire energy theme.
3) Alcatel Alstom - France's flagship global leader in nuclear technology - covers every aspect of nuclear plant building with a huge list of global customers. James Dines predicts China will not need to build hundreds of nuclear power plants in the next twenty years - he claims they will wake up in the next few years to the need to build thousands. This man has been correct far more than he's ever been incorrect. The estimation of nuclear plants required by just about every industrialized country in the world is due to have a very harsh wake-up call soon. This company will be soaring with work contracted out a decade in advance.
4) Siemens - German engineering juggernaut with easily as broad a global network of markets as Alstom. They will be everywhere, as one of the truly global engineering firms winning contracts the world over as the global build out of the industrialising world gathers momentum.
Just these four stocks alone would probably turn your 100K into 500K in a decade. In severe market washouts these stocks are so big and diversified they offer incomparable safety, yet have powerful growth ahead of them. Each one of these companies is a global leader in materials, mining, oil exploration, large scale engineering, and nuclear technology.
I look at your plan to constantly roll over short term US treasury debt, and wonder why you are being so defensive, and why are you making a play within the world's most compromised currency? There is an entrenched recollection from a previous era (now ending!) that treasuries offer safety and fabulous returns - and that very savvy moves were made by those timing the purchase of the long bond perfectly.
But bonds are possibly one of the most fraught investments for the next decade, which will be a highly inflationary decade - if for no other reason than that energy will put a gigantic squeeze on the world. How can long term debt thrive in a world where energy shortages are exerting a constant and increasing squeeze? That is the big, big cue from here out to 2020. With energy squeezing global markets, everything energy related will have a considerable wind at it's back, while everything dependent on long term debt plays will be faced with treacherous and shifting currents.
The global energy crunch presents you with a vast opportunity - and the maxim that offense is the best form of defence carries a great deal of relevance in this particular case as we look out to 2020. I think you could make a half million dollars with this strategy. Of course the dollar will evaporate, but the global energy crisis that is coming is unstoppable - do some wide reading around, find the most senior and reputable sources you can refer to for hard intel on what's going to happen to energy, and you'll agree - these investments will far outrun your defensive bond strategy.
Just my two cents.
EDIT: Breaking News - BHP raises Olympic Dam estimate for Copper, Uranium and Gold by 75%!
http://www.bloomberg.com/apps/news?pid=20601087&sid=adJKPN7MtRrQ&refer=home
friendly_jacek
09-26-07, 06:09 AM
As I've talked about many times - in this situation you don't have many choices to protect your savings:
1) Move money out of the currency in question. Check - I'm doing that
Note you likely need to move the money out of the country as well - historically devaluations and currency controls go hand in hand. Bank failures and nationalization are also present. Thus having a US account with yen in it is still dangerous for several reasons.
This is what I did several months ago and liquidated all few remaining US equities and mutual funds I had. However, when I track the new global mutual fund (highly rated, vanguard one) I have in my 401k and compare to the previous large stock US equity I used to own, now the global under performs slightly, even though dolar slid several percent since. The global fund doesn't hedge currency as far as I know.
I suspect that US equity valuations will adjust them self up by market mechanisms as the value of of USD go down. I conclude that you don't necessarily have to own international stocks to protect from sliding USD. Bonds are another issue.
Thanks RickB - Is retrieval of funds to non-US bank accounts the only issue?
It seems that BullionVault will SWIFT wire your proceeds or cash balance from their account to one of yours. So if you have a bank account in, say London, they will do that for you.
One point in favor of BullionVault is that you can chose NY, London or Zurich, whereas GoldMoney is (just outside) London.
I think that diversification out of London is useful.
Are there any other key differences between the two that you see?
I think the main thing is the quality of the auditing, the way the legal title to the gold is held (including the quality and security of their online databases - no paper certicates to prove you have the gold remember*), and the security of the vault.
(* From my experience of database backup procedures in the investment industry, I'd say the integrity and resilience of their database would be my prime concern)
Lukester,
I really appreciate your reply and suggestions . . . .
Let me break my response into two parts: one dealing with commodities in general, and the second referring to my investment scheme. I'll deal with the former here:
In addition to my other investments, I would like to invest in some commodities, but I'm a little hesitant about energy. My fear stems from a perhaps simplistic idea that the world could be heading for some global slowdown, and the demand for commodities will slacken if that occurs.
I am relatively new to investing, and part of my impetus to become involved was my reading about the Asian crisis in 1987. Many experts way more knowledgeable than me talked about narrowly avoiding a "global financial meltdown".
If there was a "global financial meltdown", it seems likely that demand for energy would decline. Of course, if the meltdown was only in the US, that wouldn't be the case, because Asia and Europe might still be chugging along.
Thus, I am hesitant to take your energy stock suggestions . . . but open to hear counter reasoning to what I've said.
However, one thing that does seem likely is that, whatever happens, people will continue to eat. That's why I'm thinking that agricultural ETFs would be a good investment. I mention ETFs, because I have this perhaps-mistaken impression that other forms of trading in commodities -- futures and options -- are somehow too difficult and risky for amateurs like me.
So here is what I'm wondering . . . .
Commodities right now are high. There is an looming stock market crash predicted by many. Is this the time to buy any commodity?
Will commodities go down with the crash (if there is one)? Or will some go down, and others not? Or will commodities rise when stocks plummet?
I am hoping that those with more experience and knowledge than I can chime in and share their wisdom about the likelihood of different scenarios . . . . .
Lukester
09-26-07, 11:18 AM
Raja -
You will need to start doing your own reading and research of these investment themes, to gain a personal conviction of those trends which have the most solid prospects to last for a decade.
I can only tell you that one or two of the themes I described above are not only very real, but also very large.
Making bets that depend upon what happens within the USD, and particularly bets on fixed income vehicles in USD, are bets which introduce a lot of uncertainty to your investment.
As mentioned somewhere previously, "inflation will be the Jehova's Witness' pit bull, which you incautiously opened your front door to, and which is now in the house, and gnawing at your ankle". Rolling over short term treasuries in the hopes of defending yourself from the pit bull via a rising coupon is not IMHO reliable.
Allowing the uncertainty of the US dollar (and fixed income within that USD is even less good!) investments to compromise your portfolio's ability to fight back is not the only option available to you, and so it should be avoided if possible.
Lukester,
Here is the second part of my reply, dealing with my equity-loan/T-bill plan . . . .
I understand your point about inflation and how it might affect debt. Also, I agree that commodities can escape inflationary effects, because they are things and not fiat.
However, what you may be missing in our discussion is the distinction between short- and longterm debt.
There's no question that the value of long-term bonds will suffer during inflationary times. But during a period of high inflation, one can buy a new longterm bond near the top, and lock in a high interest rate for a number years. This is my plan -- to borrow money, rollover it over in short term T-bills until the interest rates are high, then lock in a 30-year bond.
The ultimate question is whether my plan of locking in a high-interest long-term bond is more or less profitable than yours of buying energy stocks. Let's look at that . . . .
Just these four stocks alone would probably turn your 100K into 500K in a decade. If we accept your estimate of stock price appreciation, you plan would be probably somewhat better than mine . . . but not necessarily.
Using EJ's prediction of where interest rates could go, it's possible that I could lock in a T-bond at 24%, giving me a spread of 17.5% over the cost of the loan. This would mean turning $100,000 into $500,000 in a decade . . . just as much profit as your stocks . . . at far lower risk.
(I agree that the differential tax treatment of the two plans would lower this profit somewhat, but for sake of discussion let's not get too detailed.)
Now, the risk in my plan is that I might not be able to lock in at the top, and would have to accept a lower profit. How low depends on how close to the top I get.
On the other hand, with energy stocks, there might be a global economic crisis, and I could lose half my investment as the demand for commodities falls.
Under different scenarios, each of our plans could best the other . . . but in your plan there is the possibility of catastrophic loss . . . .
In severe market washouts these stocks are so big and diversified they offer incomparable safety, yet have powerful growth ahead of them. Each one of these companies is a global leader in materials, mining, oil exploration, large scale engineering, and nuclear technology.I don't have the information to evaluate this. Do you happen to know how these stocks did in previous stock crashes?
With stocks, one can lose large amounts of value . . . whereas with Treasuries one can suffer lower interest earnings, but never (nominal) principal. (Both stocks and bonds can lose real principal.)
Jim Nickerson
09-26-07, 01:12 PM
Lukester,
Here is the second part of my reply, dealing with my equity-loan/T-bill plan . . . .
I understand your point about inflation and how it might affect debt. Also, I agree that commodities can escape inflationary effects, because they are things and not fiat.
However, what you may be missing in our discussion is the distinction between short- and longterm debt.
There's no question that the value of long-term bonds will suffer during inflationary times. But during a period of high inflation, one can buy a new longterm bond near the top, and lock in a high interest rate for a number years. This is my plan -- to borrow money, rollover it over in short term T-bills until the interest rates are high, then lock in a 30-year bond.
The ultimate question is whether my plan of locking in a high-interest long-term bond is more or less profitable than yours of buying energy stocks. Let's look at that . . . .
If we accept your estimate of stock price appreciation, you plan would be probably somewhat better than mine . . . but not necessarily.
Using EJ's prediction of where interest rates could go, it's possible that I could lock in a T-bond at 24%, giving me a spread of 17.5% over the cost of the loan. This would mean turning $100,000 into $500,000 in a decade . . . just as much profit as your stocks . . . at far lower risk.
(I agree that the differential tax treatment of the two plans would lower this profit somewhat, but for sake of discussion let's not get too detailed.)
Now, the risk in my plan is that I might not be able to lock in at the top, and would have to accept a lower profit. How low depends on how close to the top I get.
On the other hand, with energy stocks, there might be a global economic crisis, and I could lose half my investment as the demand for commodities falls.
Under different scenarios, each of our plans could best the other . . . but in your plan there is the possibility of catastrophic loss . . . .
I don't have the information to evaluate this. Do you happen to know how these stocks did in previous stock crashes?
With stocks, one can lose large amounts of value . . . whereas with Treasuries one can suffer lower interest earnings, but never (nominal) principal. (Both stocks and bonds can lose real principal.)
Raja,
I think there is a fatal flaw in bold above, in that how does anyone know what is "near the top." If one can determine that, I presume one can just as well determine what prices are near the bottoms. With that sort of skill, the notion "buy low, sell high" becomes a piece of cake, so to speak.
how does anyone know what is "near the top." If one can determine that, I presume one can just as well determine what prices are near the bottoms. With that sort of skill, the notion "buy low, sell high" becomes a piece of cake, so to speak.All investment requires some bet on whether value is appreciating or depreciating . . . .
Granted, there are degrees . . . .
With some investments, we can count on a gradual upswing over time, and don't have to worry about precipitous upswings and downturns . . . like stocks, bonds, gold and currencies. Oh wait, that's in the other universe! :eek:
In my mind, there is no difference between investing and gambling . . . it's all a casino.
There important question is level of risk.
Now . . . are you telling me that Lukester's proposal is less risky than mine?
If so, then I must disagree with you.
With stocks, the value of one's investment can drop precipitously . . . and many people are predicting that very thing in the near future.
With T-bills, principal is never lost, and rising rates in step with inflation mellow the effects of inflation.
What you say is true, that hitting the top is not a piece of cake.
One never knows how high something will go, or when a downturn is not just a temporary move, but the beginning of the fall.
However, isn't this true of most investments?
Have you got gold (or other investments that you think may rise and later decline)?
Are you planning to sell near the top?
If so, would you say this is a fatal flaw? How is that different from what I'm doing?
The reality is that we do the best we can to predict the future.
It's not a piece of cake, but I've heard that it is possible to make money with investing. :D
Paying attention and not being too greedy help.
Yes, I hope to buy the bond near the top. If I miss by 10% either way, I'll still consider it a damn good investment.
Lukester's suggestion may be a good investment, but it's a little too risky for me, until I get more information on how these stocks might fare in a crash.
Lukester
09-26-07, 10:13 PM
Raja -
It's easy to check how these mega cap stocks might fare in a crash. Just look them up!
America Movil (monopoly on central and south american cellular owned by Carlos Slim)
Alstom (global leader nuclear technology)
Range Resources (quite small midcap - mistake on this list - delete)
BHP Billiton (global leader in mining)
Schlumberger (global leader in oil services)
Areva (French national nuclear technology co. may merge with Alstom to become the 2000 pound gorilla of nuclear industry)
Bunge (global leader in grains and fertilizer)
Siemens (global leader in engineering)
Then Read Jim Rogers on the commodity bull market to last a decade more.
If you tend to believe his thesis - read a lot more about it, and about the inflection point being crossed just in this past five years, in the development of the countries that are driving Roger's commodity boom.
The above set of stocks are about as distributed a risk as you can obtain within the interested sectors Rogers discusseswhile at the same time packing a far greater punch than a hodgepodge of mutual funds.
If you bought five mutual funds in these general spaces your returns would considerably underperform this set of mega-cap stocks, without significantly increased diversification safety. These stocks are already well diversified within each of their markets. You can further distribute risk by entering into a tightly controlled dollar cost averaging into all of these, spaced over 18 months, but given the sheer size, diversification and prospects of these mega stocks that may be caution bordering excessive.
If you cannot stomach the risk such a basket of stocks entail, then you should not be in stocks. No use yearning after their returns if you reject the risk.
Before you go putting your extracted equity into short term inflation indexed US treasuries, make sure you've read through John Williams' SHADOWSTATS to get a full sense of the extent your inflation indexing will be increasingly under-reported by our glorious government.
Also worth checking out any number of other (better than treasury!) options, such as Everbank MARKETSAFE CD's indexed to diversified baskets of foreign currencies (which will also hugely devalue relative to gold BTW) but which will at least not be totally at the mercy of US Gov. CPI lies governing their interest rate yield!
Yet another option are Everbanks MARKETSAFE instruments indexed to the price of Gold and Silver! You buy them, they go up in lockstep to the rise in the metal, and if the metal goes down, your original principal is guaranteed.
There may be a lot more research you could do here? One of those MARKETSAFE gold indexed CD's may return you 200% in the next five years, while securing your principal, and you are looking only at buying short term US treasuries? Why?
Why not start looking into everything else you can do!?
...In my mind, there is no difference between investing and gambling . . . it's all a casino...
My father had the same view. He spent his life accumulating land, mostly farmland. Now we all wish he hadn't sold it all when he retired. ;)
Dang it, Fred. You found a chink in my plan.:eek:
For it to at least break even, my plan requires that I collect high interest rates for at least long enough to recoup my initial loses. And even calling the bond in some years later would still spoil my wonderful dream of clearing 15% for 25 years.
I checked the Fed website, and all bonds now are not callable. You are suggesting they will change that policy in the future.
How might that work?
They would issue 30-year bonds at high rates, and then after interest rates fall back to lower levels, they would say here's your principal back, good bye?
Is there a history of this?
Is there any way to get some idea about how long they will wait before calling in the bonds?
Seems like it would piss off a lot of people if they called in high-paying bonds after only a few years . . . .
Treasury notes and bonds are callable:
<table border="0" cellpadding="0" cellspacing="0" width="358"><tbody><tr><td class="Header" colspan="3">U.S. Treasury Bills (http://personal.fidelity.com/products/fixedincome/potreasuries.shtml)</td> </tr> <tr> <td class="bullet" height="12" valign="top"></td> <td height="12" width="8"> </td> <td class="Text" height="12" width="342">Treasury bills (T-Bills) are auctioned weekly with three month (90 days) and six month (180 days) maturities. Bills with one year (360 days) maturities are auctioned quarterly. The Treasury dictates the number of issues to auction under ceiling limits set by Congress.</td> </tr> <tr> <td class="bullet" height="12" valign="top"></td> <td height="12" valign="top" width="8"> </td> <td class="Text" height="12" width="342">Interest payment calculations - Interest on T-Bills is calculated using an actual/360 formula. Interest is paid at maturity and accrues as if the year has 360 days and the month has 30 day.</td> </tr> <tr> <td class="bullet" height="12" valign="top"></td> <td height="12" valign="top" width="8"> </td> <td class="Text" height="12" width="342">Call provisions - Because of their short term nature, T-Bills are not callable.</td></tr></tbody></table>
<table border="0" cellpadding="0" cellspacing="0" width="358"><tbody><tr><td class="Header" colspan="3">U.S. Treasury Notes and Bonds</td> </tr> <tr> <td class="bullet" height="12" valign="top"></td> <td height="12" width="8"> </td> <td class="Text" height="12" width="342">U.S. Treasury notes (T-Notes) and bonds (T-Bonds) are securities with coupons which pay interest semiannually and return principal at maturity. Typically the maturity for notes is between two and ten years, while the maturities for bonds are more than ten years.</td> </tr> <tr> <td class="bullet" height="12" valign="top"></td> <td height="12" valign="top" width="8"> </td> <td class="Text" height="12" width="342">The Treasury is required to announce its intent to call four months before a potential call date.</td></tr></tbody></table>
So some day you may get a note like this:
To: Joe Sixpack
Subject: Calling 10 Year Treasury Bonds issued by the Treasury 2010 @ 15%
Date: Jul 21, 2015
This is to notify you that your 10 year treasury bond issued in 2010 yielding 15% will be called in four months. You may reinvest in a new 10 year bond at the current market rate. Thanks for playing.
Of course, the "market" rate will be less than 15%.
No, the bondholders will not be happy. But then when gold confiscation was no picnic, either.
Milton Kuo
09-28-07, 12:05 AM
...
If you cannot stomach the risk such a basket of stocks entail, then you should not be in stocks. No use yearning after their returns if you reject the risk.
Also worth checking out any number of other (better than treasury!) options, such as Everbank MARKETSAFE CD's indexed to diversified baskets of foreign currencies (which will also hugely devalue relative to gold BTW) but which will at least not be totally at the mercy of US Gov. CPI lies governing their interest rate yield!
Yet another option are Everbanks MARKETSAFE instruments indexed to the price of Gold and Silver! You buy them, they go up in lockstep to the rise in the metal, and if the metal goes down, your original principal is guaranteed.
There may be a lot more research you could do here? One of those MARKETSAFE gold indexed CD's may return you 200% in the next five years, while securing your principal, and you are looking only at buying short term US treasuries? Why?
Why not start looking into everything else you can do!?
I think the goal behind Raja's idea is to put equity that would otherwise do nothing to work in a practically risk-free investment: government paper. As he has stated, the worst he can do, compared to not withdrawing the equity, is pay the spread between the cost of borrowing and the interest earned. I don't believe the original intent was to borrow money and put it into potentially high-yield (a euphemism for junk) investments.
If all goes right, he buys government bonds at a point where the spread is large enough that he actually earns more in interest than he pays. Ideally, inflation is eventually brought under control and the spread then becomes a source of guaranteed, free income. It has been noted, though, that government bonds are callable so this scenario will probably never be fully successful.
If inflation continues to stay high, he can still buy government bonds that yield more than what he pays in interest. True, the profit made is being eroded by inflation but it's profit that would not have otherwise existed had he not taken the HELOC and played a carry trade.
The key, however, is that the borrowed money is put into something highly liquid with practically no probability of loss-of-principal. Blue-chip stocks don't fit that bill and those Everbank MARKETSAFE instruments tied to gold and silver almost sound too good to be true :eek:. The returns on the yield-spread strategy may be improved by investing the profits into stocks or other higher-yielding investments.
Finally, the beauty of the above carry trade is that once the long-term bonds are bought, all the investor has to do is sit back and let the profits roll in for the next decade or so. There is no need to worry about lost principal or the hassle of reinvestment. However, this is all moot due to the callability of the bonds. :(
Lukester
09-28-07, 12:20 AM
Milton -
Is anyone looking carefully at the gap between the coupon offered on the short term treasuries Raja would be rolling over and the real inflation rate?
This together wth the exquisite timing required to obtain a decent buy window on the long term bond at a "top" seem to me like swiss cheese in this strategy. I.E. - Full of holes.
With all respect to Raja's conservatism, and I mean that as a compliment, as conservatism is indeed still quite rare while a lot of people are still taking flyers. But Jim Rogers commodity index fund has a good deal less "risk" than you suppose if you are plugged in solidly to what's changing inexorably in the world.
When you have sat on a beach for twenty years and are familiar with the tides - are you willing to place a bet to a newcomer that the next morning the tide will come back in? The newcomer will doubt you, but you will know exactly what low risk you undertake of being wrong!
Bottom line, if you are a total agnostic - that is you say "I can't hope to "know" anything well enough to be fairly sure I'm right", then of course by default you have to employ strategies that seek to tie themselves to the supposedly 'zero risk" categories.
You wrote << practically risk-free investment: government paper. >>
Personally, I think this is a questionable assumption in our US environment going forward. Declared coupons will be disneyland numbers compared to what the coupon rate should really be. The coupon offered on Govt treasuries will be chasing the real inflation all the way up! Try climbing that ladder up to a nice juicy 20% long bond opportunity, and you may find someone put slippery vaseline all over the ladder rungs - and it's a long climb.
Milton,
Thanks for your response regards my "carry-trade" plan . . . .
It was good to see that at least one person sees it the way I do, although I appreciated c1ue's and Lukester's feedback.
the beauty of the above carry trade is that once the long-term bonds are bought, all the investor has to do is sit back and let the profits roll in for the next decade or so. There is no need to worry about lost principal or the hassle of reinvestment. However, this is all moot due to the callability of the bonds.I liked everything you said . . . until the last line.
Saying it's "moot" suggests that it's not worth doing at all. Why would this be so?
From the info I've been able to gather on the web, T-bonds in the past have been callable only after 25 years, and when the bond is issued, the earliest possible call date is stated. (Otherwise, I would imagine it would be much harder to sell the bonds.)
So, if one collects 15% profit using OPM for 25 years instead of 30 years, that's not so bad, eh? :D
You did say in another part of your post that , "the scenario will probably never be fully successful", but that's far different from it being "moot".
Then again, perhaps I misunderstood what you meant, or I'm missing something about the scenario itself . . . .
Andreuccio
10-03-07, 02:23 PM
Milton,
Thanks for your response regards my "carry-trade" plan . . . .
It was good to see that at least one person sees it the way I do, although I appreciated c1ue's and Lukester's feedback.
I like the idea of a carry trade, too. I've been doing one for the last year that's worked out well. I borrowed about $100,000 on credit cards at 0% and put it into MM accounts at 5%. It's irrelevant what inflation is. I get 5k, about 3.5k after taxes. Even if inflation eats 10%, that's still 3.15k of found money with no risk. I might have done a lot better in equities, but it's money I couldn't afford to lose: I needed to repay it within the year, so why take the risk? The only real downside was maxing out those cards has played havoc with my FICO score, but that will sort itself out once I pay them off.
As to your idea, I would look at a few issues. First, depending on the rate you get on the loan and the short term investments, you'll have some carrying costs and some losses up until the point you lock in long-term. Can you absorb these costs? Do you have sufficient cash flow? What if long term rates don't go up to where you expect, or they don't go up for a while? Is it possible you could lose money overall because of that? Your's isn't a risk free bet. You're essentially speculating that interest rates will go up enough long term to make up for your short term losses.
Next, you'll have to make payments on the HELOC or whatever other loan you take out once you lock in long term, so you have to look at cash flow after you lock in, too. Will interest payouts on your long term investment be enough to make the HELOC payments? If the payouts are every 6 months, can you cover the payments easily while waiting for your first interest payment?
Finally, taking out $100k loan will have some impact on your ability to borrow additional money and might tie your hands. As I stated above, for example, my credit rating went down considerably due to my loans. Since it was only for a year, though, and I didn't expect to be buying any houses this year, I didn't really mind.
But you're talking about 25 years. I don't know if a HELOC would hurt or help your credit rating, but there might be other consequences. What if you need to sell the house, for example? There are lots of scenarios where it won't matter, but there are also some where it will. Could you get trapped because you have to pay off the HELOC? Any chance you might need the credit for something else? Also, obviously, you wouldn't want to get a HELOC for a shorter term than your bond.
Good luck.
Lukester
10-03-07, 10:46 PM
Andreuccio -
Can't quite believe your investment project. You halved your credit rating and played investment games with a very large chunk of credit card debt to net $3,500 USD? Why not take a small consulting job or a very minor part time work on the side for the same annual result, without the trashed credit rating you'll have to rebuild?
If you stand back from the lure of zero interest rate carrots dangled before you by otherwise thoroughly rapacious credit card companies, and consider all these lengths gone to, you could have made $20,000 USD with a fair bit of safety with that $100k just by finding conviction in the major commodity themes - that these sector trends don't merely peter out in mid trajectory.
Compare secular trend spotting worth 20% annual returns in an average year a' la' Jim Rogers - with committing $100K on a highly "unorthodox" strategy of borrowing from big CC companies (!!?) for a tiny return?. I might conceivably contemplate the idea if I could get a 20% annual return from it, but I'd still not be enthused about playing around with CC funds.
Or you could have made the same 20% by merely fastening firmly onto an entirely rational belief in the fundamentals coercing global governments to goose liquidity and thereby drive gold bullion up by at least that much in a year, or 18 months at the latest. You read about this inevitable liquidity abuse all over these pages and we all assume it's entirely true - Where then is the conviction sufficient to put serious money behind sound investment initiatives in that direction?
I am sorry, but I cannot imagine playing either home equity or credit card money to venture into the investments you and Raja are endorsing. They are hare brained methods to me. It also implies a lack of vision regarding some phenomenal five year investments strewn all around you!
Look at Charles Mackay, who coolly sold his primary residence in Washington State in the year 2000, or I forget if it was 2001, and watched the housing market soar away upwards from his exit. But he had done his very wide angle view homework, made highly rational macro conclusions, and knew his bet would come out on top.
This is the most serious kind of investing, but it involves at least some belief in one's own reasoning of macro themes - it involves acting as unilaterally and emphatically as Charles Mackay did when he not only sold his home when everyone was clamoring to buy more homes, put then putting a big chunk of his own un-levered cash from his home sale right into gold and then calmly let it all ride.
That has vision, and also is action that trusts totally in it's own rationality to grasp, and bet on the macro themes. I don't certainly match up to what Charles Mackay did, but I aspire to it, and I admire it.
Andreuccio
10-04-07, 12:34 AM
Andreuccio -
Can't quite believe your investment project. You halved your credit rating and played investment games with a very large chunk of credit card debt to net $3,500 USD? Why not take a small consulting job or a very minor part time work on the side for the same annual result, without the trashed credit rating you'll have to rebuild?
If you stand back from the lure of zero interest rate carrots dangled before you by otherwise thoroughly rapacious credit card companies, and consider all these lengths gone to, you could have made $20,000 USD with a fair bit of safety with that $100k just by finding conviction in the major commodity themes - that these sector trends don't merely peter out in mid trajectory.
Compare secular trend spotting worth 20% annual returns in an average year a' la' Jim Rogers - with committing $100K on a highly "unorthodox" strategy of borrowing from big CC companies (!!?) for a tiny return?. I might conceivably contemplate the idea if I could get a 20% annual return from it, but I'd still not be enthused about playing around with CC funds.
Or you could have made the same 20% by merely fastening firmly onto an entirely rational belief in the fundamentals coercing global governments to goose liquidity and thereby drive gold bullion up by at least that much in a year, or 18 months at the latest. You read about this inevitable liquidity abuse all over these pages and we all assume it's entirely true - Where then is the conviction sufficient to put serious money behind sound investment initiatives in that direction?
I am sorry, but I cannot imagine playing either home equity or credit card money to venture into the investments you and Raja are endorsing. They are hare brained methods to me. It also implies a lack of vision regarding some phenomenal five year investments strewn all around you!
Look at Charles Mackay, who coolly sold his primary residence in Washington State in the year 2000, or I forget if it was 2001, and watched the housing market soar away upwards from his exit. But he had done his very wide angle view homework, made highly rational macro conclusions, and knew his bet would come out on top.
This is the most serious kind of investing, but it involves at least some belief in one's own reasoning of macro themes - it involves acting as unilaterally and emphatically as Charles Mackay did when he not only sold his home when everyone was clamoring to buy more homes, put then putting a big chunk of his own un-levered cash from his home sale right into gold and then calmly let it all ride.
That has vision, and also is action that trusts totally in it's own rationality to grasp, and bet on the macro themes. I don't certainly match up to what Charles Mackay did, but I aspire to it, and I admire it.
Lukester,
Where to start?
First, regarding the credit rating, the trashing is real, (although not half - I dropped about 70 points), but very temporary. As you know, different things go into your credit rating. A major component is late payments, and if I had made any of these, the trashing would have been long term. Those stay on your rating for years.
Another component, though, is ratio of unsecured debt to total credit line. This is where I got trashed. But since the money was in an account that I could access within the few days it takes for an electronic funds transfer to complete, I was able to pay off the balance at any time within about a week. After that it takes about a month for the cards to report the new balance, and voila, credit score back up. So my only real risk was that I might not be able to make that impulse buy on a vacation home.
Once I pay off the balances, my credit score should be back up within a month.
Regarding investments with 20% returns, "vision", and following ones convictions, up until recently I've been very aggressive with my investments, and I've done just fine. But I made those investments with money that was already mine to invest. Not borrowed funds. 20%+ returns come with at least some degree of risk. I'm willing to take risk with my own money, but not with money I need to pay back, particularly in a short period of time. My carry trade netted me 5k pre-tax virtually risk free.
If it's "unorthodox", so what? I don't see what's wrong with borrowing from CC companies: they loan me the money for a year for free, I loan it back to them (Capital One was on both sides of at least part of the trade) at 5%. It's not like I'm spending it on vacations, or, God forbid, keeping it past the teaser rate period.
Finally, there's the issue of time, which you don't really consider. You compare my play with Charles Mackay's, but they have nothing to do with each other. His play was brilliant, and it probably netted him quite a bit of money. But I'll bet he spent a fair amount of time developing and researching his theory. Selling his house and moving was probably also time intensive. (And he had to have a house to sell in the first place.)
My play took me less than 10 hours total. I don't know what you make, but any time I can make $500 an hour, I'm a happy camper. And I made it with somebody elses money, again, risk free. For the same reason, it doesn't compare to a part time job. Nobody I know is willing to pay me $500/hour for part time work. (As an aside, if any of you iTulip member CEO's are
willing to pay me $500/hour, please contact me. :rolleyes:)
Lukester,
Normally I'm the wet blanket, but in this case I actually agree with Andreucchio - just not for the same reasons.
One consequence of the present unfolding events is that credit scores as we have experienced them are going to be relegated where they belong: in the trash bin.
The credit scores were an easy way for the ratings companies to quickly and easily determine a relative risk for loaning money to an individual.
It is now quite clear given the present stress test that any such system is worthless because it is too easy to game.
While the ratings agencies will modify their criteria, the 'credit score gamers' will also continue the arms race. It won't take much for lenders to realize that this type of system is no longer workable - both in the fact that borrowers can see (thus manage) their score and that the ratings agencies ultimately don't care if the ratings work or not (except in the most generic long term sense).
It is this feedback loop which has comprised one of the major legs of this present real estate bubble.
Thus trashing a worthless score is not a big deal!
Andreuccio
10-04-07, 02:26 PM
Lukester,
Normally I'm the wet blanket, but in this case I actually agree with Andreucchio - just not for the same reasons.
I hate being right for the wrong reasons.
C1ue, are you saying I'm wrong, or just irrelevant?:rolleyes:
BTW, there's something I've been meaning to bring to your attention: there is no "H" in Andreuccio. :)
Lukester
10-04-07, 05:18 PM
C1ue -
Ecco, a me pare che Andreuccio ha ragione. Per quanto ho capito, tu hai famiglia che hanno origine nella Russia, no? Allora dovresti come minimo tener presente qualche dettaglio della cultura Renaissance Italiana!
Andreuccio da Perugia. Gran avventuriero dell'Umbria!
Andreuccio va scritto "Andreuccio", non "Andreucchio". OK?
Pare che il gran infallibile BOT C1ue ha compiuto un primo errore d'intelligenza. La libreria del US CONGRESS che tiene fra le orecchie (ears) ha malfunzionato (malfunctioned)! :) :confused:
Milton Kuo
10-04-07, 11:11 PM
Andreuccio -
Can't quite believe your investment project. You halved your credit rating and played investment games with a very large chunk of credit card debt to net $3,500 USD? Why not take a small consulting job or a very minor part time work on the side for the same annual result, without the trashed credit rating you'll have to rebuild?
The carry-trade Andreuccio mentions with the credit cards uses the best and surest technique to get rich in a FIRE economy: always use other people's money. At a 0% rate and assuming no initial transaction fee, any interest earned in a CD is pure, sweet profit.
The only ways one can lose money on this strategy and the mitigating factors are:
You fail to pay the bank on time. 5% of OPM is a lot of money--you're going to have to earn it. :)
The bank where you bought the CD becomes insolvent. Always make sure your money is government insured; you don't get any extra yield on the uninsured amounts.As for the hit to one's credit rating, what does it matter? For the relatively well-heeled speculator, credit is a mere convenience and not a necessity.
If you stand back from the lure of zero interest rate carrots dangled before you by otherwise thoroughly rapacious credit card companies, and consider all these lengths gone to, you could have made $20,000 USD with a fair bit of safety with that $100k just by finding conviction in the major commodity themes - that these sector trends don't merely peter out in mid trajectory.
The key words here are "fair bit of safety," which is entirely different from the nigh-100% safety of a federal government insured CD. I don't think anyone is good enough to invest money in stocks and get a guaranteed profit. Investing in stocks means you're going from a play that, barring Armageddon, guarantees a nominal profit to one where you're at the mercy of the markets. A lot of hedge funds promise 20% annual returns with practially no risk yet very few are ever able to fulfill such a promise.
...
I am sorry, but I cannot imagine playing either home equity or credit card money to venture into the investments you and Raja are endorsing. They are hare brained methods to me. It also implies a lack of vision regarding some phenomenal five year investments strewn all around you!
The idea behind the carry trades mentioned here is not to maximize one's gains. Rather, they are vehicles designed to throw off free money with truly limited (in the case of Raja's HELOC carry) or no (Andreuccio's credit card carry) risk. Furthermore, both strategies involve principal that is otherwise idle or OPM. The ideas sound hare-brained because they rely on side effects of the FIRE economy. Being that a FIRE economy is just a con game, it is really all that surprising that some really stupid ideas actually can make money? :D
Finally, it's one thing to chase yield with discretionary funds where you can afford to lose some of the principal. However, we are essentially investing on margin with these two strategies. There's no point in making things any more exciting than they already are.
Lukester
10-05-07, 12:15 AM
Milton -
With all respect to Andreuccio, who's avatar is I think really cool, (I grew up maybe fifty miles away from where his chosen avatar character lived his life in central Italy - so Andreuccio please accept my comments in a sporting way).
Sophisticated risk savvy arguments abvout the merits of riskless carry trades don't convince me.
These are very elegant, FIRE-economy-savvy scamlets (rhymes with omelettes :D ) to beat the system. The only problem is, you need to employ large amounts of OPM committed capital for chump change returns. Or in Raja's case, large amounts of your own money for almost zero returns.
If you wanted to employ these gambits to make real money you'd have to scale these carry trades up by a factor of ten, and then unforseen risks really do creep in. Try borrowing 2 million on your personal credit to earn 3.5%, and doing this little caper and see how comfortable you'd feel with the whole creaky leverage thingy.
How are you going to trump the FIRE economy by figuring out how to wring $3500 USD from one hundred grand of borrowed money, while taking a year to accomplish it? Inflation alone risks making this merely an academic exercise.
This kind of play is like getting dazzled by one's own smooth methodology, by an elegant concept for squeezing profit from ultra low risk gambit, and yet after a full year of your life goes by you've only gained some very small pocket change?.
The thing that will in the end stump you in this approach is that while it employs a flawless planning and execution, so you feel you've pulled off some smart riskless coup, you've really only gotten distracted from your serious investments because it returns little to nothing!
I keep comparing this to what Charles Mackay did. It's almost painfully simple. No outsmarting of any FIRE economy system, no carry trade, no sophisticated and agile footed plans for a small short term result. Just one, very big shift and allocation - giving up the warmth and coziness and beguiling emotional security of one's own home (imagine that Raja!), to allocate a really significant part of all one's total worth to un-leveraged gold, right when everyone else is going absolutely GAGA about leverage and carry.
That's only the first part of this play. Then you have to have the conviction to sit like a Buddha (and no banality or disrespect is intended to this wonderful and inspiring diety) and the calm and detachment to let this simple bet against massively abused leverage worldwide accrue all of it's power - across an entire decade.
You put this one simple hand of cards on the table, and that's your only play, for a decade.
This is to my mind the real sophistication. We've seen "carry this" and "carry that" and "leverage this and that" for years now, until the system is creaking at the seams from it's overuse.
Wouldn't it be an eye opener, a real "kick in the head" as Dean Martin used to say, to see after ten or fifteen years with 20 / 20 clarity, that the single, simple trade Charles Mackay described (sell one's much-cherished home, buy a boatload of gold early and dirt cheap, and hang onto it) outstripped all the other carefully thought out and far more frenetic hedge, carry, option, stock, bond carries, short, long and straddle option trades - all of this stuff cycled through two or three dozen times over ten years while chasing small profits - endlessly agonizing back and forth with great expenditure of overwrought brain power, trying to out-contrarian the contrarians?
Could all that stuff concievably end up being be left in the dust by the returns of this "keeping it real simple" approach?
You know what? I'm guessing that is exactly what's going to happen.
Milton Kuo
10-05-07, 12:32 AM
Milton,
Thanks for your response regards my "carry-trade" plan . . . .
It was good to see that at least one person sees it the way I do, although I appreciated c1ue's and Lukester's feedback.
I liked everything you said . . . until the last line.
Saying it's "moot" suggests that it's not worth doing at all. Why would this be so?
From the info I've been able to gather on the web, T-bonds in the past have been callable only after 25 years, and when the bond is issued, the earliest possible call date is stated. (Otherwise, I would imagine it would be much harder to sell the bonds.)
So, if one collects 15% profit using OPM for 25 years instead of 30 years, that's not so bad, eh? :D
You did say in another part of your post that , "the scenario will probably never be fully successful", but that's far different from it being "moot".
Then again, perhaps I misunderstood what you meant, or I'm missing something about the scenario itself . . . .
I'm tempted to say something cryptic and then disappear :) but the truth is I don't know what the heck I'm talking about. For some odd reason, I thought that federal government bonds were callable after five years. At 25 years before being callable, though, the prospect of free money makes the strategy worth considering.
However, I do wonder if this carry trade will ever work as it did in the past. If bond rates go into double-digit range, it's entirely possible that the government will further shorten the non-callable period. Such an implicit option on the bonds may make them less palatable to investors but I question if it will truly make them more difficult to sell. My understanding is that the U.S. bond market is the biggest and most liquid of the world's bond markets. Assuming the United States isn't on the fast track to zero, I don't see any other bond markets (yet) that can scale to handle all the money from the world's pension funds.
http://www.itulip.com/images/20000MexsPesos1988_50.gifThe U.S. dollar had a "Peso Problem" and the markets are now correcting it.
April 9, 2006 in Face of Inflation: Does the U.S. Have a "Peso Problem" (http://www.itulip.com/faceofinflation.htm) we laid out a worst case scenario for the U.S. economy and dollar when the markets are finally allowed to devalue dollar. It explained that the U.S. may have what has been termed by economists a "Peso Problem.""No one knows the precise origin of the term peso problem, but it is often attributed to Nobel laureate Milton Friedman in comments he made about the Mexican peso market of the early 1970s. At that time, the exchange rate between the U.S. dollar and Mexican peso was fixed, as it had been since 1954. At the same time, the interest rate on Mexican bank deposits exceeded the interest rate on comparable U.S. bank deposits. This situation might seem like a flaw in the financial markets, since investors could borrow at the low interest rate in the United States, convert dollars into pesos, deposit the money in Mexico and earn a higher interest rate, then convert the proceeds back into dollars at the same exchange rate and pay off their borrowings, making a tidy profit. Friedman noted that the interest rate differential between Mexico and the United States must have reflected financial market concerns that the peso would be devalued. Otherwise, the interest-rate differential would soon disappear as investors increasingly took advantage of it. In August 1976, those concerns were justified when the peso was allowed to float against the dollar and its value fell 46 percent." - FEDERAL RESERVE BANK OF PHILADELPHIA BUSINESS REVIEW SEPTEMBER/OCTOBER 2000: Understanding Asset Values: Stock Prices, Exchange Rates, And the "Peso Problem" (PDF) (http://www.phil.frb.org/files/br/brso00ks.pdf)The article proposed that the relationship that existed between the Mexican peso and the U.S. dollar in the early 1970s had developed between the U.S. dollar and the currencies of several of its trade partners. The exchange rate between the U.S. dollar has been effectively fixed by China and oil producing countries, although not fixed with respect to the British pound, euro, or Canadian dollar. As a result, the dollar has been steadily losing ground to those currencies while the exchange rate remains relatively level with respect to the currencies of trade partners that manage currency exchange rate values via a currency peg or, as in the case of China, a virtual peg. The interest rate differential between the U.S. and its trade partners, especially Japan and China, likely reflects financial market concerns that the dollar will be devalued.
With this week's emergency .5% rate cut by the Fed, the US$'s "Peso Problem" has been pushed to a crisis, starting with the announcement today by the Saudi central bank (http://www.itulip.com/forums/showthread.php?p=16333#post16333) that it will not lower interest rates to import more U.S. inflation in order to help bail out the U.S. economy as it heads into a post housing bubble recession. Soon the dollar may float against the currencies of all oil producers, yuan, and others.
How far might the dollar fall and what kind of the economic impact can we expect? Unfortunately, the worst case scenario that we formulated to shock our readers into action April last year is beginning to play out.Although the U.S. economy maintained its rapid growth during most of the 1990s and 2000s, it was progressively undermined by fiscal mismanagement and a resulting sharp deterioration of the investment climate. The GDP grew about 4 percent annually during the administrations of President Bill Clinton (1993-2001) and during that of his successor, President George W. Bush (2001-2009), except for a brief recession following the collapse of the stock market bubble in 2000. But asset prices fluctuated wildly during the decade, with booms and busts in the stock, bond and real estate markets.Fiscal profligacy combined with the 2008 oil shock exacerbated inflation and upset the balance of payments. The balance of payments disequilibrium became unmanageable as capital flight intensified, forcing the government in 2008 to devalue the dollar by 30 percent. Although a bubble in bond and real estate prices from 2001 to 2006 allowed a temporary recovery, the windfall from sales of financial assets to foreign central banks also allowed continuation of the Bush administration's destructive fiscal policies. In the mid-1980s, the U.S. went from being a net exporter of goods and to a significant importer. Sales of financial assets became the economy's most dynamic growth sector. Net foreign purchases of U.S. financial assets grew from 50% of issuance in 1996 to nearly 80% in 2005. Rising foreign borrowing allowed the government to continue its expansionary fiscal policy. Between 2001 and 2006, the economy grew more than 4 percent annually, as the government spent heavily on the military and the real estate and financial sectors provided more than 50% of private sector employment. This renewed growth rested on shaky foundations. The United States' external indebtedness mounted, and the dollar became increasingly overvalued, hurting exports in the late 2000s and forcing a second dollar devaluation in 2010. The action effectively ended the U.S. dollar's status as a reserve currency. The portion of import categories subject to controls rose from 10 percent of the total in 2008 to 24 percent in 2010. The government raised tariffs concurrently to shield domestic producers from foreign competition, further hampering the modernization and competitiveness of U.S. industry. As unemployment rose to more than 20%, government policies to limit immigration fueled further increases in wage rates and inflation.The macroeconomic policies of the 2000s left the U.S. economy highly vulnerable to external conditions. These turned sharply against the U.S. in the late 2000s, and caused the worst recession since the 1930s. By mid-2010, the U.S. was beset by rising oil prices, higher world interest rates, rising inflation, a chronically overvalued dollar, and a deteriorating balance of payments that spurred massive capital flight. This disequilibrium, along with the virtual disappearance of the U.S. international reserves--by the end of 2010 they were insufficient to cover three weeks' imports--forced the government to devalue the dollar three times during 2012. The devaluation further fueled inflation and prevented short-term recovery. The devaluations depressed real wages and increased the private sector's burden in servicing its dollar-denominated debt. Interest payments on long-term debt alone were equal to 28 percent of export revenue. Cut off from additional credit, the government declared an involuntary moratorium on debt payments in August 2013, and the following month it announced the nationalization of the U.S. private banking system.The entire projection is speculation based on our understanding of historical determinism from the starting point we chose in mid-2006. It is meant to give a sense of how these kinds of imbalances tend to play out, although the likelihood is very low that events will unfold precisely in this way.
Even with a year of hindsight, our only major revision is to note that the process is happening sooner than we expected, and rather than being triggered by an oil shock in 2008 was triggered by a crisis in U.S. credit markets in mid 2007. In any case, we believe it's safe to say that indeed the dollar did have a "Peso Problem" and the markets are now correcting it.
iTulip Select (http://www.itulip.com/forums/showthread.php?t=1032): The Investment Thesis for the Next Cycle™
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Here's some related commentary from Brad Setser's Blog over on the RGEMonitor site:
Central banks came close to financing the entire US current account deficit over the past four quarters
Brad Setser | Oct 02, 2007
I have been reserve-obsessed for quite some time now. The uphill flow of funds from the emerging economies to advanced economies strikes me as the defining feature of today's global economy. That flow is entirely a central bank and sovereign wealth fund flow.
Indeed, the IMF's data (http://www.imf.org/external/np/sta/cofer/eng/index.htm) makes clear that it is still mostly a central bank flow despite all the recent attention granted to sovereign wealth funds. The central banks of the world's emerging economies accounted for $320 of the world's $340b in (valuation-adjusted) reserve growth in the second quarter, and $283 of the $303b (valuation-adjusted) increase in the first quarter. Sovereign wealth funds are comparatively small, at least in flow terms. They receive something like $30b in new inflows every quarter, or about 10% of the recent increase in central bank assets. Obviously, a big shift in the way China manages its foreign assets could change this.
One of the concluding paragraphs:
I should note that the high-frequency US data doesn’t show quite as large official flows as the IMF data on dollar reserve growth (with a couple of key gaps filled in by assumption) implies. But the high-frequency US data (the TIC data, and the BEA data that is derived from the TIC data) clearly fails to pick up a large share of Chinese, Russian and Gulf inflows. The annual survey is a bit better, especially for China and Russia. And when the US BEA data was revised after the last survey around, it – when combined with the BIS data on central bank dollar deposits in the global banking system (adjusted to avoid double counting the deposits in the US data) showed dollar reserve growth that topped my estimate of dollar reserve growth derived from the COFER
data.
Andreuccio
10-05-07, 01:37 PM
With all respect to Andreuccio, who's avatar is I think really cool, (I grew up maybe fifty miles away from where his chosen avatar character lived his life in central Italy - so Andreuccio please accept my comments in a sporting way).
Excellent. We'll have to talk sometime. :) I'd have answered your other post in Italian but I'm so out of practice...it's been a while. :(
If you wanted to employ these gambits to make real money you'd have to scale these carry trades up by a factor of ten, and then unforseen risks really do creep in. Try borrowing 2 million on your personal credit to earn 3.5%, and doing this little caper and see how comfortable you'd feel with the whole creaky leverage thingy.
If you, or anybody else, wants to loan me 2 million on the same terms the CC companies gave me, I'm in.
How are you going to trump the FIRE economy by figuring out how to wring $3500 USD from one hundred grand of borrowed money, while taking a year to accomplish it? Inflation alone risks making this merely an academic exercise.
Inflation only decreases the return. It's still guaranteed, only diminished slightly. My pay at work has diminished by the same amount over the year due to inflation, yet I keep showing up for my job. And, given that I only put in a few hours total to do this, I still made way more per hour that I would have made working.
This kind of play is like getting dazzled by one's own smooth methodology, by an elegant concept for squeezing profit from ultra low risk gambit, and yet after a full year of your life goes by you've only gained some very small pocket change?.
I didn't spend the whole year working on this. I set it up, then put the payments on automatic bill pay. I've probably spent more time explaining it to you than it took aggregate to complete the whole transaction. And while $5000 isn't going to make or break me, if somebody handed you 5k for doing essentially nothing, would you refuse it.
The thing that will in the end stump you in this approach is that while it employs a flawless planning and execution, so you feel you've pulled off some smart riskless coup, you've really only gotten distracted from your serious investments because it returns little to nothing!
It didn't distract me at all. It was just a little bonus for a few hours, if that, of work. You might as well say I shouldn't show up for my job because the pittance I make isn't worth the time and the distraction from my serious investments. (Actually, that might be a valid arguement. I think I'll take a few days off. :) )
I keep comparing this to what Charles Mackay did. It's almost painfully simple. No outsmarting of any FIRE economy system, no carry trade, no sophisticated and agile footed plans for a small short term result. Just one, very big shift and allocation - giving up the warmth and coziness and beguiling emotional security of one's own home (imagine that Raja!), to allocate a really significant part of all one's total worth to un-leveraged gold, right when everyone else is going absolutely GAGA about leverage and carry.
That's only the first part of this play. Then you have to have the conviction to sit like a Buddha (and no banality or disrespect is intended to this wonderful and inspiring diety) and the calm and detachment to let this simple bet against massively abused leverage worldwide accrue all of it's power - across an entire decade.
You put this one simple hand of cards on the table, and that's your only play, for a decade.
Apples and oranges. Charles Mackay made a huge, brilliant bet, with his house and money. I worked a small angle I found that gave a guaranteed payout with OPM, no risk and little time invested. There's no reason I, or he, couldn't do both. (Except I don't really want to sell my house.) They are in no way mutually exclusive.
Anyway, I didn't design the FIRE economy, I just live in it, and I've got a couple of little mouths to feed. Gotta' make a buck somehow. :cool:
Andreuccio
10-05-07, 05:40 PM
The carry-trade Andreuccio mentions with the credit cards uses the best and surest technique to get rich in a FIRE economy: always use other people's money.
A kindred spirit.:)
At a 0% rate and assuming no initial transaction fee, any interest earned in a CD is pure, sweet profit.
There was a small transaction fee. 3%, but capped at $75. In the year since I set that up, I find the cap disappearing in offerings I receive. Banks are now charging 3% with no cap, making this particular carry trade much less attractive.
The only ways one can lose money on this strategy and the mitigating factors are:
You fail to pay the bank on time. 5% of OPM is a lot of money--you're going to have to earn it. :)
The bank where you bought the CD becomes insolvent. Always make sure your money is government insured; you don't get any extra yield on the uninsured amounts.
Precisely. I set it up on automatic bill-payments with my bank. I could draw down the CD if I needed to to cover the monthlies. I've been unwinding it the last couple of days, and this is the trickiest part. Screw up, click the wrong button, and try to pay it off out of the wrong account or something and all of a sudden I've got a bounced check and a months worth of interest due at 9%/year. :eek:
If I were actually over $100k, I would have split the deposits into two FDIC insured accounts.
As for the hit to one's credit rating, what does it matter? For the relatively well-heeled speculator, credit is a mere convenience and not a necessity.
Um, "relatively" is the operative word here. But it's not like AMEX is going to cancel my card because I drop from the 700's to the 600's. I've already got a house and a car. What do I care?:rolleyes:
The ideas sound hare-brained because they rely on side effects of the FIRE economy. Being that a FIRE economy is just a con game, it is really all that surprising that some really stupid ideas actually can make money? :D
Hey, who you callin' stoopid?:mad: :D
Thanks for clearly stating the arguements. :)
As to your idea, I would look at a few issues. First, depending on the rate you get on the loan and the short term investments, you'll have some carrying costs and some losses up until the point you lock in long-term. Can you absorb these costs? Do you have sufficient cash flow? What if long term rates don't go up to where you expect, or they don't go up for a while? Is it possible you could lose money overall because of that? Your's isn't a risk free bet. You're essentially speculating that interest rates will go up enough long term to make up for your short term losses.
Next, you'll have to make payments on the HELOC or whatever other loan you take out once you lock in long term, so you have to look at cash flow after you lock in, too. Will interest payouts on your long term investment be enough to make the HELOC payments? If the payouts are every 6 months, can you cover the payments easily while waiting for your first interest payment?
Finally, taking out $100k loan will have some impact on your ability to borrow additional money and might tie your hands. As I stated above, for example, my credit rating went down considerably due to my loans. Since it was only for a year, though, and I didn't expect to be buying any houses this year, I didn't really mind.
But you're talking about 25 years. I don't know if a HELOC would hurt or help your credit rating, but there might be other consequences. What if you need to sell the house, for example? There are lots of scenarios where it won't matter, but there are also some where it will. Could you get trapped because you have to pay off the HELOC? Any chance you might need the credit for something else? Also, obviously, you wouldn't want to get a HELOC for a shorter term than your bond.Thanks for your warnings, Andreuccio.
You have brought up many good points -- all things to be careful about.
During the conceptualization of this plan, I had thought about all the issues you mentioned, except one . . . .
You said that having the loan may affect my credit rating and my ability to borrow more money. I'm not very familiar with this subject, and I wonder why this would be the case? Doesn't one's credit rating only go down if there is a default of some sort? Wouldn't the ability to borrow money largely depend on available collateral or income, not on the fact that one has other loans outstanding?
If you or anyone could elaborate on this, I would appreciate it . . . .
.
I do wonder if this carry trade will ever work as it did in the past. If bond rates go into double-digit range, it's entirely possible that the government will further shorten the non-callable period. Such an implicit option on the bonds may make them less palatable to investors but I question if it will truly make them more difficult to sell. My understanding is that the U.S. bond market is the biggest and most liquid of the world's bond markets. Assuming the United States isn't on the fast track to zero, I don't see any other bond markets (yet) that can scale to handle all the money from the world's pension funds.Milton,
I'm glad you didn't disappear :D
There are all sorts of unpalatable actions that a stressed government could take -- shorten call times, extend maturity dates to delay payment, declare an emergency then default in all or part, etc. I am aware of these risks, but give them a low probability.
Regards callability, even though the U.S. is the biggest, most liquid bond market, it still has to make the bonds attractive in the marketplace. That's the motivating factor behind the rise and fall of rates. If pension funds had no other choice but to buy T-bonds, then it seems the rates would always remain low . . . .
Making a 30-year bond callable in 5, 10 or 15 years seems strange to me. Why offer a bond for 30 years if the government feels it might need to call the bond after only a short time? It would certainly reduce the value of the bond, and therefore reduce the price someone would be willing to pay for it.
Even so, I'd probably more than break even after 5 years, so there is no risk of loss from callability that I can see . . . I just wouldn't earn as much as I'd hoped.
Andreuccio
10-05-07, 11:50 PM
Thanks for your warnings, Andreuccio.
You have brought up many good points -- all things to be careful about.
During the conceptualization of this plan, I had thought about all the issues you mentioned, except one . . . .
You said that having the loan may affect my credit rating and my ability to borrow more money. I'm not very familiar with this subject, and I wonder why this would be the case? Doesn't one's credit rating only go down if there is a default of some sort? Wouldn't the ability to borrow money largely depend on available collateral or income, not on the fact that one has other loans outstanding?
If you or anyone could elaborate on this, I would appreciate it . . . .
.
Credit ratings are based on a number of things. The most obvious is the one you mentioned: defaults, late payments, etc. But there are other things included as well. The one that specifically affected me is they look at the ratio of unsecured debt to available credit, and downgrade you as it goes up. I'm not sure of the specifics, but I think if you pass something like 75% of the available on any one credit card, that counts as a ding against you. I know this is true for unsecured credit, like CC's. I'm not sure it's applicable to a secured loan, like a HELOC. I've heard that the opposite might actually be true for secured debt: once you've made a few on-time payments, it actually improves your score. For more specific details, try either poking around on a site like http://money.cnn.com/ or try googling "FICO score".
The other way it might affect your ability to borrow you alluded to: available income. It's been a few years since I bought a house, and credit standards have loosened and then tightened since then, but the way it used to work was as follows: They would make two ratios, overall monthly debt payments to income, and mortgage payment to income for the house you were buying. I don't remember the specific numbers, and I think they loosened as time went on, but it was something like overall debt to income couldn't exceed .45, while mortgage debt was capped somewhere around .3. Thus, your carry would need to earn you $100 for every $45 of payment on your HELOC to have no impact. Earn more, you can borrow more. Earn less, you can't borrow as much.
Hope that helps.
Edit: One afterthought - Another way it might limit your ability to borrow, which you''ve probably already considered, depends on how liquid your bonds are. During the first part of my carry I put some of the money in a CD, but later on I decided the minimal extra interest wasn't worth the lack of liquidity. Is there any chance you could need to use the HELOC equity for something else, but be trapped because you can't liquidate the bonds?
ocelotl
03-19-08, 12:16 PM
know you weren't talking to me but comparing usa to mexico:
- low resources per capita - check
- basically a one party political system - check
- low educated population - check
uh, oh.
There is a fourth factor that plays also and that was present in Mexico between 1970 and 1982: Explosive federal indebtedness due to misunderstood overspending. The aftermath was that between 1982 and 1988 almost no one wanted to loan money to Mexico.
* Edition, March 31st 2008 *
It is rare around here to see this, but here it goes:
Mexico's Peso Rises to 19-Month High as Yields Lure Investors
By Valerie Rota
March 31 (Bloomberg) -- Mexico's peso rose to its strongest in 19 months, sending it toward a second straight quarterly gain, as a widening differential between Mexican and U.S. interest rates lures investors to the nation's fixed-income securities.
The Mexican currency has risen 4.5 percent since the Federal Reserve carried out in September the first of six cuts that have trimmed the benchmark U.S. rate to 2.25 percent from 5.25 percent. The peso may further strengthen if President Felipe Calderon (http://search.bloomberg.com/search?q=Felipe+Calderon&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1) gets legislators to end a ban on private and foreign investment in the nation's oil industry.
Continue... (http://www.bloomberg.com/apps/news?pid=20601083&sid=aVto4WwxBJdM&refer=currency)
As of the tables I've checked, it's not a "19 month strongest level", is a "24 month strongest", since the last time the USS/MXN rate was below 10.64 was at march 16th 2006 according to the "Fix" rate published every business day by Banxico (http://www.banxico.org.mx/sitioingles/indicadores/fix.html). This means that so far into the year (Q1 2008) we have gone from 10.8972 (Jan 2nd) to today's 10.6482 (Mar 31st), based on the Fix rate, for a win of 2.34% measured in bonars.
I have a mixed feeling about this, first since it is not common to see something similar, second, since usually on US recessions the opposite has happened, third, because personally I don't think we have an economy so strong that it can stand this for long, given some groups of Mexican population prone to go into over expenses in US stores...
An opportunity as this only tells me that I have to use it to improve my options, given an uncertain prospective. I have to study more about what's really going on.
Since this is playing along with a second drop in Gold and Silver (little trade into the big trade), I'm going to take it easy this time, to see how it all develops. Things I'm going to watch apart of the US data of this week are:
- INPC of March 2008 (Mexican CPI inflation, Apr 7th)
- Bank of Mexico Announcement about monetary policy (Apr 18th)
And, talking about options, somehow I got to a 2 year old Carolin Baker article. "Killing Hope, Enlivening Options (http://www.fromthewilderness.com/free/ww3/032006_killing_hope.shtml)" and I think I can say something about her opinion about us.
Americans have grown to rely on their government, to trust their authority figures, and that's fine when they tend to stand to those expectations.
For centuries, Mexican people have seen series after series of authority figures that were not part of their community, most of the time they were either imposed by somebody else or were doctrinized by somebody else. The end has been the same, to use the authority to their own benefit in a larger or lesser degree, with notable exceptions (Lucas Alaman, Ignacio Comonfort, Benito Juarez, Sebastian Lerdo de Tejada, Francisco I. Madero, Eulalio Gutierrez, Adolfo Ruiz Cortνnez and Adolfo Lσpez Mateos). This lack of reciprocity by authorities to the support of people, has diluted expectations for things in general to improve, not an erasing of hope per se.
Hope dies last, or so a popular saying in Spanish speaking countries say. But hope is not to be dilapidated in things that don't respond to it. One can put hope in his own working abilities, on the nuclear family well being or in the immediate community, but is growingly difficult to put hope in an authority figure that for most of the last generation, hasn't been up to the task. A practical case for this was the action of people after the September 19th 1985 earthquake. It was the people that took the initiative and organized for the rescue. The government took too long to give an answer.
Another saying resuming this attitude is "No se preocupe, ocϊpese" (Don't worry, occupy) indicating that the best way to overcome a dire and difficult situation is to face it. We have to thrive with government, without government or in spit of the government.
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