Revisiting Debt/GDP Ratios

Charles Hugh Smith put together this wonderful graphic below on the European Financial Crisis.

The dominoes of debt are toppling in Europe, and there is no way to stop the forces of financial gravity.

After 19 months of denial, propaganda and phony fixes, the political and finance leaders of the European Union are claiming a “comprehensive solution” will be presented by Wednesday, October 26– or maybe by the G20 meeting on November 3, or maybe on Christmas, when Santa Claus delivers the gift global markets are demanding: a “solution” that actually pencils out and that forces monumental writeoffs of debt and thus equally monumental losses on European banks and bondholders.

Typically, people speak of Debt/GDP ratios in terms of government debt. The graphic below from business week expands the definition to include the debt of private businesses as well as that of households.

And to China, it's just over a trillion

According to the below graph, the US owes China just over a trillion of the 14 trillion dollars we now have outstanding.

I wonder what percent of the “oil exporters” is comprised by Saudi Arabia, given that I wouldn’t think that other big oil exporters (Iraq, Iran, and Venezuela) would hold much. I suppose UAE and Kuwait might hold a bit.

China: When Will the Bubble Burst?

On the one hand, it’s amazing to watch a 15 story hotel being built in China in a mere 6 days…

On the other hand, Jim Chanos is one of the world’s smartest investors. He was the short who questioned Enron on their conference call and managed to aggravate Jeff Skilling to the point of swearing. Last month, Chanos spoke at the Grant’s Investment Conference in London and shared his thoughts around why the Chinese Bubble will burst. He calls it “Dubai times 1,000″. Notable: I found amusing his coining of the term CRAAP: Chinese Regularly Accepted Accounting Policy.
Grants China Presentation by Jim Chanos

The presentation is downloadable at:
www.grantspub.com/UserFiles/File/Grants_China_Presentation.pdf
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QE2: Comic Book Edition

The Story of Monetary Policy

Returns since QE2

Thompson Reuters posted this interactive graphic of the effect of quantitative easing on asset prices.

Quantitative Easing Explained

This type of video, developed by a company called XTRA NORMAL, is turning in to its own art form. So too, is this type of monetary policy.

Pimco's Commodity Fund

PIMCO’s Commodity Real Return Strategies fund manages $20 Billion. I can’t figure out why. It’s described on Yahoo Finance as:

The investment seeks maximum real return. The fund normally invests in commodity-linked derivative instruments backed by a portfolio of inflation-indexed securities and other fixed-income instruments. It seeks to gain exposure to the commodity markets primarily through investments in leveraged or unleveraged commodity index-linked notes. The fund may also invest up to 10% of total assets in preferred stocks. It is non-diversified.

Yet, when compared over ten years to gold, oil, and the S&P 500, the results look kinda lousy.

Investing Nuggets from RJM Capital

I don’t know Rajeev Munjal a fee only financial planner and principal of RJM Capital, but I enjoyed reading his “Investing Nuggets” and “Quotable Quotes” sections of his website.

INVESTING NUGGETS

* Achieve superior long-term results by systematically exploiting the judgmental biases and behavioral weaknesses that influence the decisions of many investors. These include tendency to extrapolate the past too far into the future, to wrongly equate a good company with a good investment irrespective of price, to ignore statistical evidence and to develop a “mindset” about a company.

* Seek companies with wide “moat” or sustainable competitive advantage. This means companies with special advantages that create barriers to competition: patents, trade secrets, relationships, market dominance, etc.

Continue reading Investing Nuggets from RJM Capital

New ways to communicate

Tonight, I came across Prezi, a company that makes a new kind of presentation software. In some ways it resembles Microsoft’s Powerpoint, as the major purpose of the software is for making presentations in an interesting way. However, it’s also interesting to note that their software is also useful as a way to organize ideas, in much the same way as various mind mapping tools.

Here’s an example about how

I played with the tool long enough to get a quick sense that going from organizing ideas to putting together one of these presentations is really not very hard.

So, great product.

The pricing model has three tiers. There’s a free service that allows you create presentations for public consumption, but if you don’t want your presentations immediately available you have to upgrade to the $59/year package. And if you want to be able to edit offline, that’s an upgrade to the $159 a year package. Perhaps their sales come mainly from corporate accounts, because these are steep prices for individuals. I can’t think of any other software that I would pay that much for on an ongoing basis.

Gold vs. S&P as an Investment

Yesterday, I attended the San Francsico CFA discussion of commodities as investments in an inflationary environment. Naturally, I had a bunch of questions about gold.

One of the presenters made the point that Gold has been a lousy investment. I gave him my card, and in a follow up note, he wrote the following:
“… I checked our databases and since the US came off the gold standard in 1975, I found these historical numbers:

    Gold in 1975: $140
    Gold in 2008: $865 (up 518%)

    Dow Jones in 1975: 852
    Dow Jones in 2008: 8776 (up 930% in spite of the financial crisis)
    US Dollar Index in 1975: 33.0
    US Dollar Index in 2008: 96.1 (up 191% which has had a positive impact on the gold price as it’s in US dollars)

It’s true that gold is much higher now but that underlies the point I made that gold is a great trade but has proved many times to be a poor investment – end point sensitivity is pretty much the only way you can ever make gold look like a good investment. If you take random periods that are 20 years apart, gold is likely to look poor – stocks won’t. Additionally, gold doesn’t deliver income and has no intrinsic value that isn’t connected to subjective views as opposed to something more objective like earnings.”

My response was that I thought it was important to start the analysis with the beginning of the current global monetary system, which is with the abandonment of the Bretton Woods system by Nixon in 1971.  I put these charts together based on some historical data that I found.  From them, it looks like:

    o The S&P has outperformed gold over the period, and by a significant margin thru most of the 1990s and 2000s.
    o In 1 year time frames, gold has outperformed the S&P in about half of the years since the US went off the gold standard, including 8 of the last 10
    o The correlation between gold prices and the S&P is low.

What I think is remarkable here is not that Gold outperformed the S&P, but simply that it was close. S&P returns are a function of business risk, credit risks, and leverage. By contrast, gold has none of those.

And yet, I’m not sure that comparing gold to the S&P is meaningful investment analysis. Gold is a store of value and a raw form of money, and its returns should be compared to those of other forms of money, such as currencies and certain other commodities. It is not an investment. Investing involves predicting future cashflows and assigning a probability to actually receiving them. A purchase of gold involves no such analysis. It’s simply a hedge against the debasement of currency.

The difference is that it’s easy to extract a yield from currencies by investing them, or from land, by farming it or renting it. But, for whatever reason, despite $4.5 trillion of mined gold in the world, there seem to be few avenues for borrowing and lending it. For centuries people have borrowed and lent gold as money, and yet today, earning interest on a gold balance is as difficult a concept as squeezing water from a stone, despite the high, uncorrelated, and unleveraged returns since 1971. I find this fact very odd.