The Future Tense

How Capital Flows Impact Currency Movement

2013-05-19T19:44:00.001-04:00

We live in a bit of a bizarro world today that differs greatly from the investment landscape of the 1970's and 1980's. Today, an increase in central bank printing (supply) can be met with a large rise in the currency strength (see Europe's recent movement). A large supply of new government debt can also be met with open arms (see the U.S. dollar's recent movement). In the long term, real fundamentals have the advantage, but in the short term that is not always the case.

The currency of a country strengthens or weakens for one simple reason: there are more buyers of that currency than there are sellers. If more people are selling their yen in exchange for another form of currency such as the US dollar or the Euro (which has been occurring over the last 6 months) then you will see the value of the yen drop in the open market vs. the dollar.

This means that the dollar now buys more yen. It also means that the dollar now buys more goods that are manufactured in yen. Imagine that you make toy boats on the beaches of Japan. After you complete your toy boat you get on a real boat and travel across the sea to the United States to sell it to an American waiting to buy it on their shores.

If the Japanese yen is valued at par with the US dollar, meaning that 1 Japanese yen = 1 US dollar, then the boat costs $1 and the American can purchase 1 boat. What happens if the Japanese yen falls to 0.5 U.S. dollars in the currency exchange market? The person in America converts their 1 American dollar into Japanese yen and they find that they now have 2 Japanese yen. They can now afford to purchase two boats when the seller arrives at the port.

This simple walk through is the foundation for what is taking place around the world today called "currency wars." Countries are in the process, in some cases completely open about it (see Japan), in devaluing their currency to boost their exports.

What causes a currency to be devalued?

The first and most simple to understand is an increase of the total units of that currency in existence We know that if 10 people live on an island and there are 1,000 shells that they use as money and someone finds a secret location holding another 1,000 shells, the total value of each individual shell on the island will fall in value. Scarcity is a key component to value, not just in currencies, but in every good on the planet.

The second part is a bit more complex. When capital enters a country it needs to find a home. As money pours in it will likely end up in the form of real estate, stocks, or bonds (looking for a "return" on the money). The largest, liquid investment opportunity in a country is usually in government bonds. If an investor believes that the government is very likely to pay back the money they lend them and they are receiving a strong return (interest rate) then it becomes more attractive to buy bonds.

A Japanese citizen may take 100 yen and get back on a boat toward the shores of Australia. They arrive and go to the local Australian currency office to exchange their 100 yen for Australian dollars (the number of Australian dollars they receive is based on the exchange rate in the open market that day). They now take their Australian dollars and invest in Australian government bonds because they are a trust worthy government who provides a strong interest return.

This process lowers the value of the yen (yen is sold), raises the value of the Australian dollar (Aussie dollar is bought) and raises the price of Australian government bonds (bonds were bought).

This does not happen today with someone taking a boat to Australia. It occurs electronically, with trillions of dollars moving around the world at the speed of light.

So what would reverse this process? If sentiment toward Australian government bonds were to fall, which could occur because investors lost faith in the government's ability to return their money in full or they expected the underlying currency that they purchased the bonds in to fall in value.

Then the process just discussed would reverse. Aussie government bonds would be sold, Australian dollars would be sold, and the yen would be purchased (or some other currency).

This is only a fraction of what is involved when looking at why a currency should fundamentally move up or down in value but it is enough to provide a full discussion on how each currency's financial statement looks around the world.

Up Next: The Fundamentals Behind Currency Strength & Weakness

The Fundamentals Behind Currency Strength & Weakness

2013-05-19T19:31:00.002-04:00

The thought process that I move through when deciding when to purchase an asset is a relatively simple one. I spend time deciding on what I call a "shopping list" within a specific asset class that I feel is attractive. The second part of the process is easy: wait for an asset on the shopping list to go on sale and sentiment to become low, then accumulate.

For this discussion we are going to talk about currencies, or options for where/how to hold cash. There are three major components that I use to determine whether I believe a currency is a long term, fundamentally strong buy:

1. The current price and sentiment of the currency on the open exchange

2. The government debt to GDP within that country

3. Interest rates within that country

There are numerous other factors involved, but these three will provide us with a foundation for the scope of this discussion. Based on the insane nature of the currency wars taking place around the world, if you only use these three benchmarks to make your decision you will do better than almost all other investors in the long term.

We'll begin first with the currencies that are currently on my personal shopping list. I would suggest you do your own research to develop your own:

1. Canadian Dollar

2. Australian Dollar

3. New Zealand Dollar

4. South African Rand

5. Swedish Krona

6. Norwegian Krona

7. Malaysian Ringgit

8. Mexican Peso

After discussing the big three characteristics above for these 8 currencies, we will move on to the group of currencies I believe are fundamentally weak:

1. U.S. Dollar

2. Euro

3. British Pound

4. Japanese Yen

Over the next decade I believe money will be moving from developed (bankrupt) to developing (healthy balance sheet) countries. This will not occur in a straight line process, due to the fact that markets tend to act irrational for long periods then make major shifts to re-adjust.

I like the eight currencies discussed above. I also like others. Do I recommend that someone move 100% of their cash position into those currencies today? NO! As just discussed, this is my shopping list, not the only currencies I own. Many of this currencies have performed well since they bottomed in 2009. This makes them less attractive at the moment. Others have not, making them stronger buys. We'll discuss the price movements for all of them.

I think the majority of a cash position today should be held in "safe cash," or pre-crisis cash, which I have discussed numerous times over the past few years. This represents ultra-short U.S. treasury T-bills. Why? The U.S. dollar, for all its flaws, is still the world's reserve currency and if there is a liquidation moment in markets there will be a scramble for liquid U.S. dollars.

This is the moment you can trade in your fundamentally flawed U.S. dollars for the items on your shopping list that are (hopefully) selling at a discount.

I think we have one more "great" liquidation in front of us before you can feel comfortable moving 100% of your portfolio out of U.S. dollars. In the meantime the process is easy. You make your shopping list and raise safe cash. Then all you have to do is wait for the sale light to go on. We'll now review the markets discussed above and you can decide if they represent attractive assets for your personal list:

Up Next: The Canadian Dollar

The Canadian Dollar: Price, Government Debt, & Interest Rates

2013-05-19T19:20:00.003-04:00

The following charts come from the team at Trading Economics. Their site is an incredible resource for all sorts of charts and information.

The Canadian dollar fell to a low of 80 cents against the U.S. dollar during the panic of 2008 and has since rebounded to parity and has hovered at that level for years.

The 10 year government bond has fallen from the 6% range in 2000 in almost a straight line decline to the 2% range it is located today.

The Canadian debt to GDP has moved from 66.5% in 2008 up to 84.6% today.

Up Next: The Australian Dollar

The Australian Dollar: Price, Government Debt, & Interest Rates

2013-05-19T19:20:00.001-04:00

The following charts come from the team at Trading Economics.

The Australian dollar has risen from 0.50 U.S. dollars in 2002 up to over 1.0 U.S. dollars in recent months. The currency fell to as low as 60 cents during the financial crisis and hit 80 cents in mid 2010. It has the ability to plunge quickly then recover rapidly making it an excellent "shopping list" currency.

The Australian 10 year government bond hovered between 5% and 6% over the last 13 years before falling to the 3% level seen today.

The Australian government debt to GDP rose from 9.7% in 2008 to 22.9% in 2012.

Up Next: New Zealand Dollar

New Zealand Dollar: Price, Government Debt, & Interest Rates

2013-05-19T19:19:00.000-04:00

The following charts come from the team at Trading Economics.

The New Zealand Dollar rose from 0.39 U.S. dollars in 2000 to 0.83 U.S. dollars today.

The 10 year New Zealand government bond fell from a consistent 6% over the last 13 years to 3% after a recent sharp decline.

Governmetn debt to GDP rose from 17.4% in 2008 up to 37% in 2012.

Up Next: South African Rand

South African Rand: Price, Government Debt, & Interest Rates

2013-05-19T19:18:00.000-04:00

The following charts come from the team at Trading Economics.

The South African Rand fell to 0.09 U.S. dollar's during the financial crisis, then rose up to 0.15, and has now fallen back to .11.

South Africa's debt to GDP rose from 28.3% in 2008 to 38.8% in 2012.

South Africa's 10 year government bond has fallen in a steady decline from 14% in 2000 to 6% today.

Up Next: Swedish Krona

Jeffrey Gundlach Discussion On The Global Financial Markets

2013-05-17T07:47:00.002-04:00

The following is an excellent interview from Reuters with Jeffrey Gundlach of Doubleline, not only due to the quality of the questions but the clear responses from one of the best minds in finance today.

The interview covers asset classes around the world, both where they are today and where he sees them heading moving forward.

His fund, DoubleLine, currently has over $60 billion under management. He became a household name during the middle of last year when he was one of the very few (perhaps the only) voices who recommended shorting Apple stock just a few months before it peaked and collapsed.

Japan's Government Bond & Currency Markets Begin To Tremor

2013-05-15T07:19:00.001-04:00

The Japanese financial markets are beginning to get exciting. I have discussed many times over the last 18 months that the announcement of the ECB to do "whatever it takes" marked the entry into the second phase of the sovereign debt crisis.

During this phase of the crisis, you will see the perverse economic consequences for what has now become gospel for economic recovery: unlimited government spending combined with unlimited central bank printing. It is now widely believed that the only mistake policy makers can make is not doing enough of either one.

During these many discussions on this second phase of the sovereign debt crisis I mentioned that I believed Japan would be the first country to implode. It could just as easily begin in Europe, the United States, or the U.K. (and it will eventually arrive at all three), but for countless reasons discussed Japan is simply a powder keg waiting for a match.

The match was lit upon the announcement of their most recent quantitative easing program discussed in detail here: Japan Steps Into The Abyss: Begins The Largest Money Printing Experiment In History. Now it is just a question of how long the fuse will burn before it ignites.

Back in late 2012, when it became clear that the new leadership at the Bank of Japan (their version of the Federal Reserve) would do "whatever it takes" to take the lead in the currency war, meaning devalue their currency through money printing, the Japanese Yen has been in a straight line decline. It crossed below the 100 mark against the US dollar this past week.

The central bank has the ability to control the price of the Japanese government bonds, due to their ability to print enough money to purchase every bond in existence. However, if the markets chose to protect themselves against the promised currency devaluation it is impossible for them to simultaneously keep control of the value of the yen and protect the yields on bonds. At some point they are going to lose control of one.

It is likely that they will eventually lose control of both markets simultaneously as more and more investors in Japan and around the world begin to understand what is taking place. An interesting thing began to happen in the long term Japanese bond market 4 days ago, which people have said for years now would never occur.

Prices began to plunge.

The following chart shows the incredible move in 10 year government bond yields from the 60 basis point range to the 90 basis point range in only a few short days. Bond prices move down as yields move up.

The central bank is currently purchasing over 70 percent of all government bond issuance, which makes the current move even more incredible. If yields keep moving higher, they will be forced to buy more. They cannot allow yields to rise because the cost to finance the debt would instantly overwhelm the entire government annual tax receipts. Is this the moment that the central bank finally loses control?

Stay tuned.

For details on how the individual investor can participate in this trade see:

How To Short Japanese Yen & Government Bonds Through ETFs

h/t Sober Look

The New Bull Market In Stocks? Why This Time May Not Be Different

2013-05-14T08:00:00.004-04:00

The frothiness in the financial markets continues to bubble up almost any direction you turn. This past week high yield bonds, which is another term for junk bonds due to their likelihood to default, crossed below the 5% mark. This is a new historic low and the prices paid for these bonds continues to relentlessly surge higher as investors everywhere search for yield. The coming massacre in the junk bond market is almost indescribable for those unfortunate investors who have no idea what kind of toxic debt their "safe" bond portfolios contain.

The second location investors are finding yield is in American stocks through dividend payments. Analysts continue to say that dividend yields are extremely attractive relative to treasury bond yields, but if you remove the current bubble treasury yields from the graph and just look at historical dividend yields you have the chart below. Dividends traded in a 2% to 6% range for decades before diving lower and staying at or below the 2% range for almost 15 years running. Companies have found that investors are still willing to purchase stocks on the hope of the underlying stock appreciating, allowing companies to pocket what they formally paid out to investors in dividends to attract them to take on the risk of ownership. This will change in the future.

On Wall Street we now see that not only have traders moved "All In" to the market, but they are borrowing at record levels to purchase even more stocks. The chart below shows that the margin levels at the NYSE have now reached the 2007 peak where investors are 100% confident that nothing can go wrong which gives them not only the confidence to buy stocks, but the confidence to borrow to buy stocks. We know how this story ends, which can be seen during the last market bubble peaks in 2000 and 2008. As stocks turn, it creates a waterfall type decline because investors must meet margin calls during the liquidation. This is why stocks, and other markets with high leverage, rise very slowly over many years and then plunge rapidly during the panic liquidation.

Corporate profits relative to GDP have a tendency to mean revert over time as the economy moves through the natural business cycle. Companies trimmed their largest expense, employees, since the depression began in late 2007, and they have been bringing back this expense at a very slow clip. This has allowed their corporate profits relative to GDP to surge to new record levels. Although it appears counter intuitive, the time to buy stocks is when profits are low because stocks measure market participants future expectations. Investors today believe that gravity no longer applies and that profits will continue their straight line up forever, the exact opposite of what they believed during the March 2009 lows when they extrapolated forward that corporate profits would fall forever.

The Shiller Price to Earnings ratio, which measures the relative "cheapness" of stocks crossed above 24 last week. This puts it above the levels of previous secular peaks in the market. It can be argued that since stocks first entered the period of "Irrational Exuberance," as quoted by the then Federal Reserve Chairman Alan Greenspan in 1996, they have been overvalued. They only reached fair value during the March 2009 bottom. What does this mean? We have a long way to go before reaching a secular bottom in both sentiment and valuation. The ability for market participants to put this type of overvaluation on stocks based on what is actually occurring in the global economy is a true testament to the madness of crowds.

A benefit to the current stock market bubble is that it has created Ben Bernanke's desired "wealth effect," where consumers will feel wealthier based on the artificial reality that exists on their 401k statement every month and go out and spend. Or even better, go out and borrow to spend. The problem with this, as noted by David Rosenberg this week in the following chart, is that only 52% of Americans are now involved with this market. This number is still well above the range from the early 1980's when stocks were widely considered toxic by the average American. We will get to that sentiment level again when we reach the real lows of this secular bear market.

Based on historical data stocks are more overvalued and thus more dangerous to own today than almost any point in history. Does that mean that they will stop going up this morning?

Of course not.

When markets get this type of built in momentum, which is then fueled by leverage, the level that prices can rise to can stagger the mind of rational market participants.

On top of this artificial pricing you have the the fact that the market today is dominated by machines and algorithms that actively participate and then tend to "turn off" when things go bad creating flash crashes. It is possible that the next market clearing liquidation will occur over in a matter of minutes, not months as we have seen in the past.

In the meantime we can continue to celebrate new highs every day as a testament to the strength of the economic recovery.

h/t David Rosenberg, Sober Look, Zero Hedge

The Third & Final Bubble: Enjoy The World Around You Before It Pops

2013-05-10T08:23:00.001-04:00

After last week's performance on CNBC, this week we get another dose of reality from Peter Schiff on Fox News discussing the Fed induced bubble in stocks, bonds, and real estate.

If a small portion of the trillion+ of dollars currently printed every year should begin to enter back into the energy or agriculture market (it is already spiking the cost of rents), then you will have the trifecta that ends this charade: rising inflation in the goods people need to survive every month. When this occur the Fed must decide to either stop printing or ignore it and just hope for the best. Either scenario will lead to total disaster (for the real value of asset prices) and the world will once again see that the emperor has no clothes.

This process will most likely occur first in Japan and provide a blue print for what is coming for the U.S.

In the meantime, and I say this with all honestly, enjoy the world around you today where people are more happy in general because they think this is a real recovery. Most people have no understanding about what is currently happening and therefore have no understanding about the consequences today's actions will induce.

This bubble will be the last bubble because when it begins to collapse central banks and the governments will already both be "all in." There will be no bailout that comes from Mars or Jupiter. The bill will finally come due for the 70 year debt super cycle that has now bankrupted every layer of the economy.

For a complete discussion on the most likely first domino to fall during the next collapse see:

Japan Steps Into The Abyss: Begins Largest Money Printing Experiment In History

2013 Outlook: Japan's Government Debt Bomb Goes Off

The Economic Strength Behind The Housing Recovery

2013-05-08T11:13:00.002-04:00

The following should hopefully provide a very brief and updated recap (for those standing in line outside a Realtor's office waiting to cash in on the current mania), on the long term economic strength behind the current real estate "recovery."

We know that pockets of the United States are back in a residential real estate bubble, euphoria, mania, hysteria, or whatever you like to call it when people's decisions become almost solely based on emotion and greed. The fear of losing a dream home, or the thought process that someone will "miss out" on lower interest rates or these low prices has the country, in a few select markets, back in full madness mode.

A strong, healthy, real estate market would be composed mainly of growing middle class families (having kids - need more space). They have a job that is going great, they have low debt, and they have a high amount of savings which allows them to put down a large down payment on the American dream. We have the benefit of economic data statistics to see if this is what is actually occurring across the United States and driving these real estate prices higher.

We'll begin first with income growth. The chart below shows the US median income through the end of March. It collapsed after the current depression began in December 2007 and has not yet recovered.

How could I possibly and irrationally use the word......depression.....in a country with a stock market that not only goes up every day, but goes up every hour?

If you strip away the artificial government life support, and look at personal income excluding transfer payments, you get the very scary chart below showing a free fall back down to 2008 levels.

If Americans are not earning, at the very least we know that they are not piling on more unpayable debt, right? Didn't we finally learn that lesson back in 2008?

Nope. US consumer debt levels have now crossed back above previous record highs thanks in most part to the explosion in student loan debt (good luck for that generation getting a down payment on a home with hundreds of thousands in student loan debt and no job) and subprime auto lending.

If you are good at math you can probably guess how the final component of healthy growth will look, but we will review it anyway. With income collapsing and debt soaring that obviously leaves little room available to save. You can see the steady trend in America beginning in the early 1980's where the country moved from one of savings to one of borrowing. With no savings, it makes down payments on a home difficult. The chart below is a mirror image of the chart above. Savings were replaced with debt.

During the previous housing boom it was the average American pushing home prices higher, seen in the rising homeownership rate below. Housing prices bottomed in many areas in early 2012, but the homeownership rate has continued to fall, last month hitting a new post bubble low. This shows it is not the average middle class family working family that is buying homes and pushing prices higher.

Another tool we can use to see that the average working family has not been involved with this recovery is the number of mortgage applications. When a family goes to purchase a home they take out a loan. This is not occuring.

The actual cause of the recent price surge we have discussed in the past, but will review a piece of the story again briefly. The number of homes being foreclosed on collapsed in September 2010 after the robo-signing scandal. This inventory has been held off the market now for close to three years creating an artificial shortage.

I know some people planning on eventually moving to Florida that visited an enormous community called The Villages in 2010 which was completely flooded with foreclosures and vacant homes. The median home price in this area fell from a high of $248,000 down to about $175,000 (about 30 percent decline), and has trended up to about $200,000 and held steady over the past few years.

They are back visiting The Villages this week and it is a complete mania (see the recent surge in pricing on the chart above on the far right). A Realtor they spoke with told them that there is now only 1 foreclosure in the entire community (the residential area is the size of a small city). The Realtor said that home would probably be sold in minutes and that there are bidding wars on the limited supply of homes available. Where did this inventory go?

The red line on the graph below shows the collapse in foreclosures in Florida after the robo-signing scandal. These foreclosures never returned to the market.

I have no idea what the number of bank homes currently in default are that are being held off the market in this specific retirement community. It could very well be zero as these Realtors are telling people. A retirement community is also a different type of market than your typical single family neighborhood (there is currently strong demand from retiring baby boomers). I was in a conversation about this particular neighborhood earlier in the week, which is why I use it as an example. Every market is different.

The purpose of this disucssion is to think about the fundamental factors that would strengthen the real estate market as a whole and create a long term sustainable recovery against the actual factors taking place in the market today.

For a further discussion on who the new big buyer is in the real estate market (if it is not working families as just discussed) see:

Wall Street Becomes The Housing Market: Why This Is A Good Thing

For those that do not remember the Robo-Signing scandal or its recent conclusion, here is John Stewart with a nice summary:

The Daily Show with Jon Stewart
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Jeremy Grantham On Debt Fueled Growth & The Fed Killing The Donkey

2013-05-08T07:54:00.004-04:00

The following is just a small piece of an excellent conversation with legendary money manager Jeremy Grantham on Charlie Rose. The chart he discusses on the debt growth which began in the early 1980's is here:

For the complete interview click here.

Charlie Munger On Bankers & High Frequency Trading

2013-05-05T09:29:00.000-04:00

On high frequency trading: "It is legalized front running." Very simple, and correct. For an example of how they front run (your stock purchases) see:

Dark Pools: Understanding The World Of High Frequency Trading

Some of the greatest quotes from Warren Buffett over the years, list courtesy of Barry Ritholtz at The Big Picture.

“The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities ¾ that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future ¾ will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands.”

- Source: Letter to shareholders, 2000

“Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful.”

- Source: Letter to shareholders, 2004

“Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.”

- Source: Letters to shareholders, 2005

“After all, you only find out who is swimming naked when the tide goes out.”

- Source: Letter to shareholders, 2001

“SUPPOSE that an investor you admire and trust comes to you with an investment idea. “This is a good one,” he says enthusiastically. “I’m in it, and I think you should be, too.”
Would your reply possibly be this? “Well, it all depends on what my tax rate will be on the gain you’re saying we’re going to make. If the taxes are too high, I would rather leave the money in my savings account, earning a quarter of 1 percent.” Only in Grover Norquist’s imagination does such a response exist.”

- Source: New York Times

“You don’t need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ.”

- Source: Warren Buffet Speaks, via msnbc.msn

Buffett comments on some of Charlie's comments and discusses other market ideas from the weekend:

Wall Street Becomes The Housing Market: Why This Is A Good Thing

2013-05-05T09:09:00.002-04:00

It is no secret now that the major driving force behind the current floor or temporary recovery in the U.S. residential home market is the enormous money entering through the investment funds. These funds are entering cities and purchasing home after home after home for cash with the anticipation of renting them out.

Before we go on I find it fascinating that many writers feel that this is just another "evil banker move," saying that "we will all become serfs to these new landlords." I feel the exact opposite. This is exactly how a healthy free market heals itself, something I have been talking about for years now.

What will this do to the average cost of living for every American? It will lower it! That is how free market capitalism works. These buyers will continue to buy homes and rent them out, and rent prices will continue to fall as more supply enters the market. This is already happening. Economics 101. For more on this see:

Behind The Curtain Of The Artificial U.S. Residential Home Market

Unfortunately, this is only a portion of the story and if it were to end there it would have been a happy one. When looking at the complete residential housing picture you find that it is still quite unhealthy, creating a bottoming foundation made of sand.

On the other side of the demand dynamic you have supply. Banks continue to hold properties off the market and this I certainly do not believe is part of a healthy free market housing recovery. Accounting changes in early 2009, discussed relentlessly here since their inception, have allowed banks to hold assets as mark to myth. After the robo-signing scandal in late 2010 the number of foreclosures declined precipitously and that supply never returned. The banks found that if they artificially hold supply of the market they could create a short squeeze and increase the value of the assets they are holding on their books.

The red portion in the graph below shows the foreclosure filings in the state of Florida. You can see the cliff drop in foreclosure filings when the robo-signing scandal hit in October 2010. Then when a settlement was reached last year something strange happened; the inventory (foreclosure filings) did not pick back up.

You would believe that there would be a pent up level of homes building during the two year settlement period. By then the banks could see what was taking place. With that supply off the market it was already creating the artificial squeeze. Their hope is to trickle the supply back onto the market and keep the artificially low "supply" data in the brochures of every Realtor in the country. Why sell and take a loss if they can just hold homes at "full value" on their balance sheet?

This is creating an artificial rise in the price of homes and there is nothing healthy or free market about it. Buyers entering the market today that have little understanding of what is occurring enter a bidding war with Wall Street (cash buyers) over the limited supply available and they think there is some sort of new mania in the market which is causing them to get caught up in a frantic buying mind set. This of course is tremendous news for anyone looking to offload a property.

Las Vegas has become the perfect case study of this dynamic in place and I highly recommend you read the following article:

Special Report: Cheap Money Bankrolls Wall Street's Bet On Housing

The third part of the real estate analysis that I believe is both unhealthy and will slow the inevitable bottoming process is the artificial lowering of interest rates by the Federal Reserve which is allowing home buyers, in their new manic state, the ability to over pay for homes as the temporarily low interest rates bring down the monthly mortgage payments. For a complete discussion on mortgage rates impact on home prices see:

Residential Home Prices Have Not Bottomed

If banks were forced to put the real supply of homes on the market and mortgage interest rates were not artificially held down then the prices of homes would fall much further. This would allow investors and those capable of purchasing a home to do so at much lower levels. The monthly cost of living for everyone in the country would be significantly reduced allowing more money every month to be used for spending (boosting the economy) or saving/investing (boosting the economy). Real growth.

Instead we continue to lurch forward in this zombie housing market and people with little understanding of what is actually taking place and getting caught up in the short term frenzy of markets will be once again be hurt badly, just as they were the last time.

Peter Schiff Visits CNBC's DOW Celebration Studio

2013-05-05T08:17:00.002-04:00

The people on CNBC, and their guests, have once again completely lost their mind. The show has become a 24 hour a day live streaming celebration of new DOW highs, which at times feels more like a Saturday Night Live skit. Unfortunately, someone accidentally booked Peter Schiff to come speak with Maria for a few minutes on Friday afternoon, and the studio was hit with something they have not heard in a while and had no answer for: reality.

Maria, who appears to be literally drunk off the DOW highs, continues brushing off every real economic data point Schiff provides and counters with "there is no other option for stocks" and "the Fed has this market going higher." The other guest is even more laughable as he provides a real time look at what the network's market analysis has become.

For a helpful visual on the economic data Schiff is discussing you can see its strength below in the US Macro economic data (red line). The green line is the S&P 500. We now live in a world where what takes place in the actual economy has no relevance. Good economic data makes stocks go higher, and bad economic data makes stocks go much higher.

Why? Terrible economic news just means more Fed printing, which can then be re-invested by the banks back into the stock market in a perfectly healthy loop that is now the American economy. Pass the bubbly, and watch that ticker roar to 16,000 and beyond because when this madness ends as Schiff points out; it will make 2008 look like a Sunday picnic.

Fore more on the strength of Maria's main argument, "there is no other alternative," see:

Why Buy Stocks? There Is No Other Alternative

h/t Zero Hedge

Newton's Cradle: Visualizing Asset Prices Through Capital Movement

2013-05-04T18:07:00.000-04:00

This conversation is going to delve into more personal parts of my life than I have discussed in the past. I do this to provide a different point of view on the way markets and assets can be viewed around the world.

People like to put labels on people within the financial markets. Over the past few years I have said that I was “raising cash” and during large sell offs at times I was purchasing gold and silver. This one sentence would put a general label around me that I am something called a "bear." If I was currently interested in purchasing stocks or real estate I would be labeled a "bull." The mainstream financial media hosts segments during their daily telecasts called "Bull vs. Bear" based on someone's belief on where stocks are going tomorrow.

This is the complete opposite way that I look at the world.

I take in a tremendous amount of financial information on a day to day basis. This involves reading articles, books, and tracking markets. I don’t take in this information and then try to decide if “the world is ending” or if “the world is booming” in some black and white fashion. That’s not how it works.

When I close my eyes, I imagine capital moving all around the world. This incredible process has been taking place for centuries. When capital flows, as I have tried to discuss here over the last few years, it does not always move in a perfectly efficient manner as many text books teach (the efficient market theory). These books feel that markets are always efficient, therefore the best thing you can do is create a diversified portfolio that will appreciate over the long term. If you believe the markets are efficient then you can design algorithms that will profit as they revert back to their means or what these professionals tell the computer is a harmonious market.

I believe that due to the combination of human emotion and psychology, which is the fundamental engine that drives the movement of capital flows, every asset on the planet swings from under valuation to over valuation. Is simple terms, I believe that markets are not efficient. This can be described using many terms but I like to think of it as cycles. Long term secular cycles lasting 15 to 20 years, to cyclical cycles within those longer term trends. I could write an entire text book on the topic of cycles so I will save further discussion for another day.

For hundreds of years markets have moved from pessimism to skepticism to optimism to euphoria. This process has creates both large and small “bubbles” that then burst. Based on countless hours studying human psychology and the impact on markets, I do not see this process ever stopping.

Before I begin to describe real capital flows, the best visual I can provide of this process is through Newton's Cradle. As capital travels toward an investment or investment class, it moves from under valuation at one extreme and keeps pushing through until it reaches the maximum point of over valuation. It then reverses and moves back the other direction as there is no more force (capital) available or willing to push it higher. This is the continuous process, both long term and short term, that markets cycle through:

In this overly simplistic example we will describe the current capital flows moving around the world as "yield on" vs. "yield off."

Most of the assets I own today provide no yield. The reason for this is because these assets are currently out of favor. Sentiment is low. I like cash today because no one wants cash. People today want assets that yield something, not assets that yield nothing. Examples of these higher yielding assets are stocks, bonds, and real estate.

I believe that sentiment toward “yielding” assets is currently high, meaning a large amount of capital is flowing toward these sectors. When that happens, prices rise, and become overvalued.

Many of these assets can be purchased with leverage. That means that not only do investors want to buy them, but they are willing to go into debt to bet on prices going higher. In some ways this leverage and euphoria is now even more extreme than what occurred in 2006-2007.

Red line below shows the net margin debt (borrowing to buy stocks) at the NYSE:

In the fall of 2008 the movement of capital changed. Investors did not care about what the yield was on their assets, they cared about the return of their principle. This created a rush to cash. Yielding assets fell in price as capital flows moved away from these sectors, and these assets became under valued. Cash become over valued.

During late 2008 through early 2010 I was interested in selling cash to buy yielding assets. Now I am doing the exact opposite.

To take this a step further, you can begin to find assets within the realm of cash (no yield asset) or currency that move in and out of favor. For example, over the summer the Brazilian Real (currency) fell and I moved some of my cash into that currency. A few weeks ago I was purchasing the Canadian dollar. Today I am purchasing silver (I view precious metals as form of cash) and the South African Rand (currency) because they are both out of favor with investors.

Does this mean that I am bullish or bearish? No, I am thinking about global capital flows and making investment decisions based on fundamental under/overvaluation and sentiment.

At some point, I don’t know if it will be tomorrow, December, or 2017, yielding assets will reach a certain extreme level in price where investors will no longer be willing or able to pay, or more importantly in today's world have the ability to borrow to pay, to purchase more. Investors will begin to move back to the other side of the ship. I certainly do not care when that occurs, I just need to be cognizant that this change is taking place and adjust my capital position accordingly. It is not a complex mathematical science, it is just a common sense understanding of human nature and the ability to act rationally.

The DOW reaching 16,000, 17,000, or 20,000 has no impact on how I view stocks because I am not viewing them with emotion. If real estate prices explode higher, or bond yields fall lower, that does not make them a better investment. With common sense you can see that it makes them a far worse investment.

At some point the current “rush for yield” will reverse. There will be rush for cash. I will sell my cash and move into yielding investments.

I’ll take this a step further and get a little more personal into my own life. My view of global capital flows impacts decision I make beyond just my personal investment portfolio. It impacts how I spend the “business” hours of my day to day life.

Longer term readers of this site know that since this site originated in mid 2008 I felt capital would be moving away from residential real estate (specifically in the United States though it has been more extreme in other areas of the world). As capital moved away, real estate prices fell for close to four years in the residential market. As investors began their rush toward yield some large funds have moved into the residential real estate market and have begun to push prices higher in some areas.

This occurred back in 2010 for the apartment sector as investors looked at that market (and continue to look at that market) as a great location for a strong yield.

When investors move away from yielding assets at some point in the future I think the real estate market will be impacted in a negative way. During the coming transition out of "high yield" investments I want to be purchasing stocks and bonds when they go on sale but real estate has specific traits that makes it even more appealing: the amount of leverage available to purchase it, tax advantages, and the control you have over the asset.

The difference between real estate and paper assets (stocks/bonds) is that it takes a larger skill set in order to participate successfully in the market. You have to know how to finance properties, handle everything that is involved during the acquisition process, and manage the properties once they are acquired (this is far more important if you are interested in the commercial/multifamily sector).

I think the U.S. apartment market is one of the most overvalued sectors in the world right now. Why? Because capital has been, and continues to, rush toward that sector. At some point, and I have no idea when it will occur, this process will reverse. Capital will eventually move on to another asset class somewhere in the world when prices reach a certain extreme.

Knowing this, my goal in the present moment today is to be as ready as possible for when capital moves away form the asset class and it becomes undervalued.

I recently spent two years managing a 500 unit apartment community. I spent my days learning how to efficiently manage the daily operations, cut costs in a budget, and most importantly manage the team that works there. Rather than try to read it in a book, I felt the best way to learn would be to do it myself. I can drive in to a community today and “feel” how it is being run both inside the management office and walking through the property.

My business hours during the week now are spent in large part working at one of the largest commercial real estate finance companies in the country. I spend my days churning through and analyzing the financial statements of apartment communities all over the country that are being bought, sold, or refinanced. I am surrounded on the floor that I work by the most gifted minds in the country on commercial real estate finance, and I am doing everything possible to train myself to become machine at taking in and analyzing data on a property.

I have not spent years working and learning about the multifamily business because I think it has a great short term future. In fact, it is for the exact opposite reason.

I want to be as ready as humanly possible to purchase as much real estate as possible when capital moves away from the asset class at some point in the years ahead. The apartment market has tremendous long term fundamentals with the key demand demographic, those aged 25 to 34, set to grow steadily over the next two decades.

I don’t “like” cash as an investment. It is a terrible long term investment. I own cash today because capital is moving away from it. Capital is flooding, with full force, toward yield in any and every form.

I look forward to the day when this site can be focused on buying stocks, bonds, and real estate, which is far more exciting conversation. I can’t wait to sell the silver I bought back in 2005, or the Brazilian Reals I bought last summer for something that provides a yield. I have no control over when that day will be, and it really does not matter to me if it is 6 months from now or 6 years from now.

Like the ocean tides, the cycles will change, investors will continue to behave irrationally, and certain investment classes will become under and over-valued.

This process has nothing to do with “doom and gloom” or "positive projections" only understanding that the world changes and capital is moving at every second of every day. It is the ultimate sport, something you can spend your entire life trying to master.

Why Buy Stocks? "There Is No Other Alternative For Income"

2013-05-04T11:53:00.000-04:00

Imagine that you have inherited $1,000,000 from a relative who has unfortunately passed away. You are 65 years old, no longer working, and this money represents your entire retirement. What are you going to do?

You call a financial advisor and he tells you, "before you think about anything, before you pick up the remote to turn on the television, or before you even make your breakfast, you must find a return for that money. You need to get that money working for you. Today’s low growth and low interest rate environment has created only one option for you to get that return desired return: high dividend paying stocks. This morning I will safely put your portfolio in large cap, blue chip, safe stocks located in the DOW which has just crossed 15,000 and is rapidly approaching 16,000 and then of course, 20,000. Not only are dividends growing at 10% per year, the stocks themselves are appreciating even faster."

Before he hangs up to put in your order ticket he reminds you why are making this simple choice: “There is no other alternative to provide you a return on your money.”

With the understanding that there is no other alternative you decide to go ahead and get invested. The following morning you begin to collect a healthy 3% annual dividend return on your money. This works out to be $30,000 per year or about $24,000 after taxes giving you $2,000 per month.

Let's see how this outcome would play out in a "hypothetical black swan world" that could obviously never occur under either President Obama or Benjamin Bernanke's watchful eye.

Let’s say that instead of rising quickly to 20,000 over the next 24 months that the DOW moves from 15,000 to 10,000 in May of 2015. Does DOW 10,000 seem impossible? We were very close to it about 19 months ago.

That is a 33% reduction in your total retirement. You now have $667,000 in retirement savings. How long will it take you to recoup that loss with your 3% annual return? 11 years.

11 years to get back to where you started. You are spending all of your dividends to live on, so in real terms, it would take as long as it would take the DOW to get back to 15,000 (if the same companies remain in the DOW during that time).

There’s probably a reason why stocks fell 33%. It is most likely because the economy has slowed significantly, corporate profits are sinking, and companies are looking out at a different horizon than they were during the beautiful spring of 2013.

As humans we are forward looking and tend to believe the future will be a projection of the current trend line we are on (which is why everyone is fooled at major turns), so perhaps management gets a little nervous and feels the company needs to raise more cash. What is an option to bring more cash into the company?

Cut the dividend!

Your 3% dividend is now at 1.5%. So you are bringing in $1,000 per month after taxes, instead of $2,000.

This would be very difficult for anyone to live on in today’s world, but what if something else changed during the spring of 2015? Another "impossible in today's modern world black swan" occurred.

What if some of the trillions in printed money that the Fed has been pumping into the banking system every year since 2008 began to filter into consumer prices? What if inflation actually rose?

You have most likely heard that it is impossible for inflation to rise during a period of economic weakness. You only need to go back to the 1970’s in the United States to see this is not correct, or look through countless examples around the world over the last century. The term is called stagflation; high inflation and low growth. I assure you that not only is it possible, after what I believe will be a short term period of deflation ahead, you will see just this.

What if you had the opportunity to go back to May 2013 after you inherited that $1,000,000 and make another decision? Let’s say that instead of doing what your financial advisor said was the “only option for your money” you decided to put the money into safe cash. What does safe cash earn?

0.0% at today’s rates. Zippo. Nadda. Nothing.

Fast forward to the spring of 2015. Your sibling, who also collected $1,000,000 and invested it in stocks because it was the only option to receive a return, now has $60,000 collected in dividend payments over those two years.

Your total dividend payment is $0.0. Not only that but you had to eat into the $1,000,000 in order to stay alive over these two years. Let’s see how everyone stacks up at this point:

Sibling:

$667,000 + $0 (used $60,000 in dividend payments for living expenses) = $667,000.

You:

$1,000,000 - $60,000 (used $60,000 for living expenses) = $940,000.

Dividend rates are now cut to 1.5% and you decide to invest the money into the stock market.

You now receive $14,100 in annual income (before taxes). Your sibling still receives $900 more per year. The only difference? You have $237,000 in additional stock. It will take a 50% rise in stocks in order for your sibling to get back to even.

For everyone that tells you that “there is no other option” I hope I just provided an example of one and why that option could be better. If we are at the start of a new bull market and dividends continue to rise over the next decade this option will certainly be the wrong one.

I am in the minority today that a scenario such as the one above is even a possibility. Barron’s Big Money poll recently showed that 94% of money managers are bullish on the stock market over the next five years. 86% are bullish over the next 12 months. These percentages dwarf any bullish reading over the past 20 years, just as stocks are touching new all-time highs.

Even those that are not bullish on stocks will recommend you put the money into longer dated bonds to try and lock in a return, an investment that may carry just as much danger or more in principle losses in the years ahead

I am certainly not recommending an investment strategy, only providing a thought experiment against the most common phrase used today to push individuals into stocks: "there is no other alternative."

DOW 15,000 - S&P 16,000: Bring Out The Champagne

2013-05-03T11:03:00.002-04:00

Sorry for the lack of writing over the last week. I've been able to keep up with all the reading, but I haven't had the chance to get everything down on the site due to it being a busy week.

Lots to come this weekend on stocks, bonds, real estate, commodities, and economic data.

Stay tuned....

Jim Rickards On Gold

2013-05-03T05:35:00.003-04:00

Mark Cuban On High Frequency Trading & Shorting The Yen Through Debt

2013-04-30T15:13:00.001-04:00

Jim Chanos: China - The Edifice Complex

2013-04-27T08:28:00.001-04:00

Click the full screen button on the bottom right of the video to help view the presentation Chanos is discussing.

Or you can follow along with the presentation he is discussing here:

Chanos Wine Country Conference

The World's Largest & Most Dangerous Casino: A Machine Driven Stock Market

2013-04-25T07:21:00.001-04:00

Most of the day to day noise you hear around the financial markets is just that, noise. Some people spend their days trying to analyze which direction a stock is going to move based on chart patterns or earnings releases to try and "trade" the market correctly. I have repeated countless times that trying to "trade" against Wall Street's machines is like trying to beat IBM's Deep Blue in chess. A waste of time and money.

What happened on Tuesday with the mini Flash Crash, or the Hash Crash, was more than just noise. It perfectly symbolized exactly what the stock market has become and provides a crystal clear preview for what awaits in the future.

A hacker broke into the Twitter account of the Associated Press and posted that a bomb went off at the White House and the President had been hurt. What followed was fascinating.

The algorithmic machines, also known as high frequency trading machines, picked up on this headline and it triggered automatic sell orders. The market went into free fall, a flash crash, as the bids (buy orders) disappeared.

The following graphic from Nanex illustrates this moment beautifully. You can see the market trending along at a normal pace with the machines providing their normal level of liquidity. Then the tweet hits and you can see in the red oval that all bids disappeared. The machines put in their instant sell order (before a human would ever have a chance to react), and then they went into hiding.

This is exactly what took place during the May 6, 2010 Flash Crash, only it lasted much longer and the sell off was far larger. What has changed in the market since that terrifying afternoon when stocks entered free fall for close to 15 minutes? Nothing. There is nothing in place today to stop that from happening again. The only thing that has changed is that these machines now have a far greater control of the total volume.

Wall Street exchanges love them because they have become the main source of their revenue. I have discussed in the past how these high frequency machines loot the markets, and if you have not read the book Dark Pools, I highly recommend you do so.

When you get a firm understanding of how the stock market actually works today, you will see why I repeatedly say that someone trying to day trade the market has a far better chance of winning at the casino tables. This does not mean you should not buy stocks. The market still provides discounts to strong companies that should be bought for a long term cash flowing position, not something that you hope to flip 5, 10, or 15 minutes later.

As a quick example of how traders were crushed on Tuesday, think about those that had stop orders in place before the #Hash Crash. A stop order triggers an automatic sell order when the price of a stock falls to a certain level. When stocks plunged during the 3 minute span it was very likely a trader with a stop order had it triggered. The stocks then bounced back immediately when liquidity came back into the market (the machines saw it was all clear) and that trader was left holding a sell order ticket below where the stock is currently trading. This is just one simple example. I could provide countless others.

One day a crash bigger than what we experienced on May 6, 2010 will occur. The argument for high frequency traders is that they provide liquidity to the market. As just shown above, they provide liquidity to the market when it is not needed. When they are needed to step back in and create a functioning market, the algos sell and then turn off. What will be left after the "big one" is 401k's and many lifetimes of savings that will be destroyed.

More from Rick Santelli:

For much more on this topic see:

Dark Pools: Understanding The World Of High Frequency Trading

Mark Cuban On High Frequency Trading

Dark Pools: The New Dominance Of High Frequency Trading

Frontline: The Retirement Gamble

2013-04-25T05:25:00.000-04:00

Watch The Retirement Gamble on PBS. See more from FRONTLINE.

Using Common Sense Instead Of Economic Text Books

2013-04-24T07:58:00.002-04:00

Anti-austerity, pro Keynesian economic policy has now officially moved beyond the mainstream financial news and become the headline story on comedy central.

A paper was recently released showing that Reinhart & Rogoff made a mistake on their study of how debt to GDP ratios impacted growth because they left off 3 countries during the study.

Before we watch the video below, which is fun, and you begin reading or watching the mainstream news which all back Keynesian (increased government debt) growth, let's take a quick walk through the land of common sense.

I am in complete agreement that an increase in government debt in today's modern financial world will increase growth in the short term. It provides a boost to the economy the way a steroid shot boosts an athlete or a heroine shot boosts a junkie. When you live in a world where growth has been manufactured through an increase in credit levels it is simple math to understand what happens if you take that credit away.

The problem with today's modern debt markets is that there is no pricing mechanism to alarm participants when they are entering danger. This is because the central banks around the world are artificially holding interest rates down with their QE purchases. If they were to release that artificial push downward, no one has any idea where the free market rate levels would rise to.

Imagine you have taken a shot that numbs pain completely all over your body. You walk into the kitchen to cook dinner and your shirt catches on fire and begins to burn your arm badly, but you cannot feel it. The fire now has the ability to spread to the rest of your body, which you will not notice until you can actually see it, which at that point will probably be too late.

Modern economists would look a this situation and say, "don't worry, they can't feel the pain so there is no problem." A rational human being would say, "what happens when the numbing medication wears off?"

This is exactly what is taking place in the bond market today. The governments can hurt (burn) their balance sheets as much as they possibly want to. There is no mechanism in place to notify anyone of potential danger because central banks are masking it with their numbing medicine.

In today's modern world an increase in government spending backed by the numbing medicine of QE is the most perfect elixir for growth. An economy grows and grows, steadily and slowly for years, and then all the sudden it stops. Now, here is where it gets interesting. When the music stops it will not be a slow and steady fall downward. You will not have time to casually sell positions or make adjustments. It will be a complete collapse. It will be like looking down and seeing your entire shirt on fire.

Almost everyone I know and interact with on a daily basis would tell me that if their next door neighbor financed their lifestyle through credit cards and they paid those credit cards by printing money in their basement that their could be a potential danger to their way of life if either one of those tools for "growth" was taken away (credit cards or the printing press). Yet, many of those same people see little concern with the way our current government spending and printing economic model is structured today. What if one of the tools for "growth" was taken away? The first response would be that they would never need to be taken away. Really? Then why have we not been running trillion dollar deficits financed with trillion dollar QE programs for decades? Why do we not just run a $5 trillion deficit this year with $5 trillion in QE? Would that not just create more growth?

Every week you will read on this site about about how trillion dollar deficits combined with trillion dollar QE programs do not provide long term sustainable growth. Every week it will appear on the surface that this analysis is incorrect because the financial markets will show that they feel no pain, no burning. Many businesses or investments (see real estate) that depend on artificially low interest rates or an artificially strong currency will appear as if they feel no pain. Then one day we will wake up and those that have studied Austrian economics, or even better; those that can just look at a situation and use common sense, will understand why the world is a very different place. Many people woke up the day of the Lehman Brothers bankruptcy and understood exactly why the financial system collapsed. It had nothing to do with decisions made the night before, it had to do with the decisions made every day over the previous decade.

I do not look forward to this day, and I'm sure that those that understand economics do not either. I certainly do not look forward to the suffering that the people of Japan will soon experience, but what I want to happen makes little difference on what will happen in reality.

In the meantime we continue living in this strange purgatory, which Kyle Bass has perfectly described as a Potemkin Village, where those that see a problem with spending have gone from argued against to laughed at. For more on the Reinhart/Rogoff discussion, I would recommend reading John Mauldin's article here:

Austerity Is A Consequence, Not A Punishment

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Jim Rogers - Street Smarts: Adventures On The Road & In The Markets

2013-04-20T17:02:00.000-04:00

After what seemed like a never-ending run of mediocre business books, over the past few weeks I have discovered some phenomenal ones.

This morning I finished reading "Street Smarts: Adventures On The Road And In The Markets" by Jim Rogers. Rogers co-founded the Quantum fund with George Soros in the early 1970's and in that decade, which was a secular bear market and one of the worst in history for Wall Street, returned 3,700% while the market only experienced a 42% gain (and was ravaged by inflation making the real gains negative). Rogers discusses the major events of the decade through his eyes and provides the learning lessons for investors (extremely important for today as we are in another secular bear market in stocks).

At 37, he had acquired enough money to last many lifetimes and he did what most money managers do not do - he walked away. It was the equivalent of Michael Jordan walking away from basketball at the peak of his prime in the early 1990's.

Rogers decided to take a trip around the world on his motorcycle, setting the world record for distance traveled. He discusses what he learned being a part of almost every culture in the world and how his world travels (which he has continued) relate to the financial world we find ourselves today.

If you are a parent, he spends a lot of time on the importance of education and the future of his children. He recently moved to Singapore so they could learn Mandarin and grow up in their school system. He is extremely bullish on commodities, specifically agriculture.

A few excellent quotes:

"Harvard, Princeton, and Stanford, though they may not know it yet, may be heading toward bankruptcy. Museums, hospitals, and other institutions we love and know are heading for trouble, and we are going to see a lot of them vanish in the upheaval, be it financial or economic."

"If you were smart at the start of the nineteenth century, you made your way to London. If you were smart at the start of the twentieth, you packed up and moved to New York. If you are smart at the start of the twenty-first, you will find your way to Asia."

"Throughout history there have been periods where financiers were in charge, and there have been periods where the producers of real goods - farmers, miners, energy providers, lumberjacks - were in charge. In the '50s, '60s, and '70s, before the big bull market, Wall Street and the City of London were backwaters. They will be again."

"Today, the United States, alone, graduates over two hundred thousand MBAs a year, as opposed to five thousand annually in 1958. The rest of the world produces tens of thousands more (there were none abroad in 1958). Over the next few decades, those business degrees will be worthless, a waste of both time and money."

He sees the current booms of two of the BRICs (Brazil and Russia) as heavily tied to the commodity boom, and when it busts (as all booms do), it will take those economies down with it. India, for many reasons he discusses, is not ready to become as strong an economic power as many anticipate. While he sees many short term troubles ahead for China (just as the United States had in the early 1900's), it is the one true future area of growth in the world over the decades ahead.

From his understanding of economics, discussions on health care, litigation, and his ability to provide historical examples of financial crisis and resolution in countries around the world, I could go on forever with quotes and wisdom from the book. I highly recommend picking up a copy.