“The value of most currencies, including ours, is going to decline in purchasing power. I still believe, over a 10-year period, I would much rather own stocks than cash.” Warren Buffett

From Richard Russell:

Clearly. Buffet is expecting inflation in the years ahead. I just received the latest “Insight” report from my brilliant friend, A. Gary Shilling. The report is entitled, “Investment Strategies In An Era of Slow Growth and Deflation.” Gary is convinced that the trend ahead is deflation. Buffett or Shilling, who are we to believe?

Ed Note: Russell follows the market. Its why he has been buying Gold for 10 years. Its also why he’s gone bullish the stock market in recent days, a position that would support Buffet’s point of view.

Here’s an analysis more similar to Gary Shillings take. Garu Shilling is renowned for spotting bubbles.   It is an interesting read.

Chance of a Depression Now 5 Percent

For 2-1/4 years now I have been saying that there is no chance of a repeat of the Great Depression or anything like it — that we know what to do and how to do it and will do it if things turn south.

I don’t think I can say that anymore. In my estimation the chances of another big downward shock to the U.S. economy — a shock that would carry us from the 1/3-of-a-Great-Depression we have now to 2/3 or more — are about 5%. And it now looks very much as if if such a shock hits the U.S. government will be unable to do a d—– thing about it.

We could cushion the impact of another big downward shock by a lot more deficit spending — unemployment, after all, goes down whenever anybody spends more (even though sometimes falling unemployment comes at too-high a price in rising inflation), and the government’s money is as good as anybody else’s. But the centrist Democratic legislative caucus has now dug in its heels behind the position that we cannot undertake more deficit spending right now because we have a dire structural health-care financing proble afrer 2030. The Republican legislative causes has now dug in its heels behind the position that the fact that unemployment is 10% shows not that policy earlier this year was too cautious but rather that it was ineffective. And the Obama administration has not been able or has not tried to move either of those groups out of their current entrenchments.

We could cushion the impact of another big downward shock by recapitalizing the banks again. But the failure of the Fed and the Treasury in the aftermath of Lehman to grab a share of the upside from its capital injection and purchase operations for the public in the form of warrants means that there is no coalition anywhere for a repeat or anything like a repeat of propping-up the banking system: the right thinks it is an unwarranted intervention in the free market, the left thinks that it is a giveaway to the undeserving and feckless superrich, and the center is bewildered because it is an enormous and poorly-structured intervention in the market, it is a giveaway to the undeserving and feckless superrich, and the optics are terrible.

So if another big bad shock hits the U.S. economy, what could the Obama administration possibly do?

Hugh Son of Bloomberg:

Fed ‘Severely Limited’ Savings on AIG, Watchdog Says: n American International Group Inc.’s rescue by refusing to compel banks to take concessions, said a Treasury Department watchdog. The Fed didn’t use its “considerable leverage” as regulator of several of AIG’s counterparties to force them to accept so-called haircuts on credit-default swaps, Neil Barofsky, special inspector for the Troubled Asset Relief Program, said today in a report. The regulator gave up efforts to negotiate discounts from the banks after two days and opted to pay them in full for $62.1 billion in swaps, Barofsky said. “These policy decisions came with a cost — they led directly to a negotiating strategy with the counterparties that even then-New York Fed President Geithner acknowledged had little likelihood of success,” Barofsky said.

overlooks the central lesson learned from the unprecedented steps taken to support AIG. The federal government needs better tools to deal with the impending failure of a large institution in extraordinary circumstances like those facing us last fall,” Williams said. “It is for these reasons that the Obama administration has proposed a regulatory reform agenda that includes giving the government the emergency authority to resolve a significant, interconnected financial institution…

J. Bradford DeLong is a professor of economics at the University of California at Berkeley, chair of its political economy major, a research associate of the National Bureau of Economic Research, a visiting scholar at the Federal Reserve Bank of San Francisco, and was in the Clinton administration a deputy assistant secretary of the U.S. Treasury. You can learn more about his website (http://delong.typepad.com/sdj/about_this_website.html/), visit his home page (http://delong.typepad.com/main/), visit his principal weblog (http://delong.typepad.com/sdj).

The 10 Rules for Successful Investing

With all the financial woes in the global economy, the worst thing an investor can do is to “freeze up.” With all the ups and downs in the market, it’s all too easy for investors to allow their emotions to take control. That’s when the smallest mistakes turn into the biggest mistakes.

There’s one antidote for this problem…remembering a few basic rules. Just embrace the 10 ideas that follow and you’ll be in line to make some serious money in the months ahead.

Rule Number 1: Invest on the Right Side of Major Economic Trends

That old investing adage “Don’t fight the Fed” serves as a good example here. Rising interest-rate environments make meaningful gains difficult to sustain — unless you know what to look for. Far too many investors got it wrong in the 2000-2003 and 2008-2009 periods by betting on growth stocks in a recessionary economy, and they’re still getting it wrong. Those investors are likely to get burned again should the economy slow even more, despite the government-bailout and federal-stimulus efforts. Make sure to analyze all of the other major global trends, as well — and ride the ones that are truly unstoppable. You’ll know them when you see them, because they’ll have trillions of dollars in new capital flowing directly at them — investment plays in such areas as infrastructure, inflation, energy, food, and water (both supply and purity) are great examples

Rule Number 2: Sell Your Winners

This may seem counterintuitive, but — if you want to succeed — you must sell your winners. Rule Number 6 — thinking like a plumber to prevent losses — is only part of the success equation. To be really effective, you have to take profits, too. That way, you get more capital that you can put to work. Think of it this way — Safeway Inc. (NYSE: SWY) regularly replenishes the inventory in its Produce Department to keep it fresh. You should do the same with the “inventory” in your portfolio because, if you let your stocks sit on the shelf too long, they’ll eventually go bad — just like fruit that’s past its expiration date.

Rule Number 3: Always Sit in an Exit Row

This rule goes hand in hand with Rule Number 2. One of the most common problems investors have is not knowing when to sell. Sometimes, they’ll let a big loss get out of control (which violates Rule Number 6) — or, worse, they’ll notch a big gain and then sit on the investment so long that it sneakily turns into a loss. The bottom line is that, up or down, you should always have planned exit points when you initiate a position — and enforce them with “protective stops,” adjusting them as prices move in your favor (but never when they go against you).

Rule Number 4: Your Broker is a Salesman

So unless you know you want to buy what he has, don’t go shopping today! Wall Street is not a service business. Brokers exist for one reason and one reason only — to sell you stuff and make money . . . from your money. And the more of your money you give to them, the less you have to make more for yourself. So buy only what you want and what fits your goals and objectives — not the “stock of the day ” the broker is pushing to meet his weekly quota.

Rule Number 5: Invest for High Yields

Contrary to popular belief, rather than investing for capital gains, you should aim for the highest possible yields and the most certainty you can find. The real secret to wealth-building is compounding small gains over long periods of time. In fact, studies show that compound returns can outperform so-called “growth stocks” by as much as 22-to-1. Furthermore, dividends account for a huge percentage of total returns — varying studies have claimed anywhere from 60% to as much as 97% over time. So, don’t ignore them!

Rule Number 6: Think Like a Plumber

Big losses — like six inches of water in your living room — are expensive and can set you back years. Professional traders — and I’m not including the risk-junkie cowboys who drove the derivatives mess to heck in a hand basket — understand this. And because they do, they focus the majority of their efforts on avoiding losses, instead of on capturing gains. It’s counter-intuitive, but it really makes a difference. Besides, if you keep those portfolio pipes from bursting, you won’t have to worry about your assets leaking away, drip by drip.

Rule Number 7: Buy Value

Buying when the underlying value is “right” can mean the difference between pathetic single-digit gain and truly market-beating returns. It’s hard to make money when valuations — as reflected by Price/Earnings (P/E) ratios are greater than 20. More normal valuations sit in the 12 to 14 range. However, to really make money, you need to buy when valuations have been beaten down into the single digits — assuming, of course, that the company’s underlying value is real. Doing so puts the odds strongly in your favor and can dramatically boost returns.

Rule Number 8: Retirement is a Lifestyle Issue, Not a Monetary One

When most people think about retirement, they think about safety. Big mistake. The single biggest problem facing us today is running out of money before we run out of life. If you’ve followed Rule Number 9, this shouldn’t be a problem. However, if you’ve thought about safety and have not invested enough, what you’re really doing is crippling your ability to earn future income — income you’re going to need in order to eat, keep a roof over your head, and provide lifelong life health care. Oh yeah, and have some fun.

Rule Number 9: Start Early and Leave Your Money Alone For as Long as Possible

This is not the same thing as “buy-and-hold” investing. Buy-and-hold is not an investing strategy, it’s a marketing gimmick — and, these days, it’s more like “hope-and-pray” investing, anyway. The world’s most successful investors — think Jim Rogers, Warren Buffett and the late Sir John Templeton, to name a few — don’t buy and hold. And I don’t believe you should, either. These experts buy and “manage,” confining themselves to stocks and strategies that meet their specific objectives. Given that one of our critical objectives is to have our money working hard for us rather than us working hard for it, the point is that you want to start as early in your life as possible and never miss an opportunity to invest. The longer you have your money in play, the better you will be paid when you’re ready to cash out!

Rule Number 10: All Investments Contain Risks — But Not All Investments Contain the Same Risks

Despite all my talk about avoiding losses, the simple truth is this: If you want to grow your wealth, you have to take on risk. It’s unavoidable. Every investment involves risk — the only questions are how much and under what circumstances. Remember, success is not about how much money you can make, but about how much money you keep. As such, the true secret of wealth-building is taking risk properly.

Indeed, the late legendary U.S. Army Gen. George S. Patton Jr., once said: “There is nothing wrong with taking risks.” But he also cautioned: “That’s quite different from being rash.” I completely agree. What’s more, I think that Patton would have agreed with my belief that if you want to be successful in anything, you have to take a certain amount of risk every day. It’s just a fact of life.

Yet, most folks are unwilling to do so — or they spread themselves too thin, and over-diversify, all with the goal of “protecting” themselves. Unfortunately, by doing so, these investors actually set themselves up for failure — not because they take too much risk, but because they don’t concentrate the risks they do take in the right places!

What are those “right” spots? They’re the investments that can provide the potential rewards to justify the risks the investor has taken.

Regards,
Keith Fitz-Gerald
Money Morning

Editor’s Endnote: Keith’s new book, Fiscal Hangover: How to Profit from the New Global Economy, was just released yesterday, and it’s already getting some glowing reviews. Right now, you can pick up your copy AND save more than $10 off the cover price. Just click HERE right now…

Today’s Outside the Box comes to us from England. My European partner Niels Jensen from time to time sends me some of the best letters he reads from the hedge fund world. He is an excellent filter for me, and this week’s Outside the Box offering is no exception. Below is the November commentary from Eclectica fund manager Hugh Hendry. He challenges the current preoccupation with the falling dollar and China, and posits what would happen if that thinking is wrong? It offers some very thought-provoking ideas. You can contact them for more information at info@eclectica-am.com or visit their website: http://www.eclectica-am.com

John Mauldin, Editor
Outside the Box

Eclectica November Commentary

by Hugh Hendry – Eclectica Fund Manager

“The power to become habituated to his surroundings is a marked characteristic of mankind.” – John Maynard Keynes The Economic Consequences of the Peace, 1921

This month I will attempt to answer the entrance examination for the Chinese civil service. That is to say, I will attempt to tell you everything that I know. In doing so, I will argue that this year’s rally in inflationary assets, from emerging stock markets to industrial commodities to the fall in the US dollar, could be a FAKE. Let me explain why.

But first, I am indebted to Scott Sumner, professor of economics at the University of Bentley, and his essay on the economic lessons that can be drawn from timelessness in art (see http://blogsandwikis.bentley.edu/themoneyillusion/?p=2542). It is a theme that I will constantly revisit in my arguments below.

Sumner is able to take us from the Flemish forger, Van Meegeren, and his horrendous reproductions of the Dutch painter, Vermeer, to the notion that every recession seems unique and special to its protagonists. So just how did Van Meegeren fool the Nazis with paintings that today look so awful, so un-Vermeer? Jonathan Lopez, the noted art historian, argues that a FAKE succeeds owing to its power to sway the contemporary mind. Or in other words, the best forgeries tend to pay homage to the tastes and prejudices of their time. The present is so seductive.

However, forget the art world. Controlling the psyche of this generation of investor is the indelible mark of the falling dollar and the associated fear of inflation. Monetary inflation has been the distinguishing feature of the last ten years, and it is now firmly embedded in the contemporary mind. I am sure I need not remind you that gold, along with just about every other commodity, has at least quadrupled in price since 1999. You already know my explanation for why this has happened.

The spectacular rise in the Chinese trade surplus, predominantly with America, to $320bn per annum at its peak in 2007, and the mercantilist desire to prevent currency appreciation drove the Asians and the sheiks to buy Treasuries and print their own currencies. The ability of fractional reserve banking to leverage this liquidity many times over provided the monetary mo-jo to instigate ever higher commodity prices. In other words, quantitative easing, masquerading as a cheap but fixed currency regime, has succeeded where Japan’s orthodox version has failed. The QE succeeded because, amongst other features, it raised the velocity of monetary circulation.

However, it was not always like this. As an example, ten years ago it was unthinkable that the dollar would prove so fragile. Recall that back then, when the euro was first launched in 1999, it promptly lost 31% of its value against the greenback. The subsequent reconstruction of modern China, though, intervened. In order to finance the emergence of a new economic superpower, an abundance of dollars was needed. Have no doubt that had we not had the dollar as a reserve currency, the rise of China would not have been as swift nor as decisive.

The Yellow Brick Road

Consider another economy needing to be rebuilt: that of the United States in 1865, the post Civil War era. The rebirth of the American economy was funded from the monetary rectitude of the gold standard, not from the generosity of a foreign and infinitely expandable paper currency. However, all of this occurred before the discovery of cyanide for heap-leaching and the opening up of the huge South African gold fields. In other words, hard money was in tight supply and the recovery was neither swift nor decisive. Indeed, 30 years later, during the presidential election campaign of 1896, Williams Jennings Bryan was still hotly contesting its merits. He railed against the persistent price deflation and argued that the economy was burdened by a “cross of gold” (see The Eclectica Fund Report, December 2005).

Perhaps I Should Stick to the Twenty-First Century?

My previous investment letter attempted to explain the subtleties of the Triffen dilemma and the dollar’s pre-eminent role in regenerating modern day economies. Let me repeat once more: lots of dollars were required, and duly delivered, to build modern China. They did not have to wait on the vagaries of a gold discovery to promote and sustain their economic engine. Instead, they required the willingness of their trade partners to run trade deficits. The US delivered and, partly as a consequence, the Fed’s broader trade weighted dollar index has now fallen 20% since its peak in 2002 (the narrower DXY index compiled by the Intercontinental Exchange has fallen more, but excludes the renminbi and overstates the role of the euro). In return, the world has a new $4trn trading partner: China.

Heady stuff, but not without precedent: recall the Marshall Plan, a watershed American aid program that assisted the reconstruction of the Western European economy during the 1950s and 60s. This was further augmented by America’s willingness to run trade deficits, the modern day equivalent to a gold discovery, which became necessary to sustain the emergence of the new economic trading bloc. This resulted in the dollar’s huge devaluation versus gold in the 1970s. However, back then, the broad trade weighted index kept rising. This time it has fallen sharply.

…..read more HERE (scroll down to the title below)

What an Ungrateful Lot we Are?

The dollar’s role as the world’s sole reserve currency has both assisted and accelerated the development of world trade……

New crisis ahead? 5 things to watch

Thanks to confusion, shortsightedness and anger, global markets are on course to be wiped out by a third — if we’re lucky, renowned bear Bob Janjuah says. If not, expect markets to fall by half.

Bob Janjuah is back, and dude, he’s not happy about what you’ve done to the stock market.
Then again, Janjuah is never really very happy. But now the great bear of the United Kingdom — the chief market strategist at the Royal Bank of Scotland (RBS, news, msgs), to be exact — is quite sure that stocks’ bender over the past eight months is about to come to a terrible, concussive, tragic end. He’s like a cop who wants to slap a DUI on your portfolio.

Should we care? Well, most bears aren’t worth the kibble that’s slipped into their cages at night. But give him credit: Janjuah is a little different. He made a sell-everything call on the global financial fiasco two years ago with impressive accuracy, and he hadn’t been all Chicken Little about it for years before either.
His view now is almost as negative as it was back then on everything but gold. Here’s why he believes the end is near, the markets could get cut in half and lumps of yellow metal will trump stocks and bonds.

Who and what matters now

Janjuah believes that only five things matter now: three players and two forces. The players are the private sector (that is, individuals), the policymakers (government officials and central bankers) and the financial sector (brokerages and big institutions). The forces are balance-sheet repair and growth, which can also be viewed as final demand.
The way these forces and players interact will determine how the next act plays out. Let’s take them one at a time.

Player 1: The private sector

First, Janjuah believes that individuals get it. He says they know they borrowed too much and are reacting by borrowing and spending less, and saving more. This is expected to be a multiyear trend in the face of employment and wage fears, volatility in the economy and confusing messages from policymakers (e.g., “We have a major debt problem, so go out and borrow more!”).

He believes ordinary Americans are fed up with being taken for chumps and have lost faith in a system that is bound to tax them to restore losses at banks. All they see is that the policymakers and financial sector have looked after each other at the expense of the private sector. Indeed, they see no trickle-down to their lives from all the efforts taken so far, since they’re not much invested in stocks, yet they sense there will be a big bill to pay anyway. As a result, Janjuah believes the private sector has changed its behavior, swinging toward prudence and precautionary savings, and away from the sort of spending that would juice earnings growth for retailers and manufacturers.

Naturally, some people — notably 20- and 30-somethings — will consume irrespective of their anger. So Janjuah will essentially be right only if people 40 and older make these behavioral shifts.

Player 2: Policymakers

The strategist observes that policymakers were “totally wrong” through all of 2006 and 2007, and most of 2008, then finally got it once Lehman Brothers collapsed. They then did a great job of averting a total global financial meltdown but are now reverting to type by persisting with a “systemic war footing” policy even though the war is over. Although they understand, deep down, that printing money will create a huge risk of another debt-fueled asset price bubble, they heartlessly believe that it’s OK to ignore it for now.

“Central bankers . . . are relying on the old failed policy of more and bigger asset bubbles on the hope that it equates to real and sustained growth for the private sector,” Janjuah says wearily. “This reckless policy is creating the mother of all bad balance sheets — that of governments.”

Janjuah believes there are two choices: the current path of more debt and more bubbles, which is the “worst possible outcome,” as it will cause individuals to become even more cynical and thus withdraw more from spending — or the path of austerity.

Video: How investors have adapted

As you might imagine, he believes the latter will come, whether we get the former or not, and “the more we resist . . . the worse the endgame.” He adds, “Everyone should hope that the great debasement experiment will be exited voluntarily and not forcibly” due to a citizen revolt or a dollar crisis. “Forcible exit is the path to another recession before the first one has been addressed, and it will be hugely difficult to emerge from.”

…..read page 2 of 3 HERE.