Thursday, July 31, 2008

The Peter Lynch - Andy Warhol connection


I know I'm not the only one to have noticed a striking resemblance between famed Fidelity fund manager, Peter Lynch, and artist, Andy Warhol.

A quick Google search reveals this to be so; it seems quite a few people have commented on the similarity in their looks. So file this post in the "random observation" department, but there is something fun and interesting about this to me.

I guess I first noticed how much the two look alike about ten years ago, while reading Lynch's One Up On Wall Street and Andy Warhol and Pat Hackett's Andy Warhol Diaries in close succession.

There was another interesting similarity between Lynch and Warhol that occurred to me over time. Not only did they look alike, but both seemed to be very recognizable public figures and spokesmen for their respective professions.

While Andy Warhol was (and still is) one of the art world's most recognizable figures and an unflinching proponent of the view of art as a business, Peter Lynch was out there in print and on TV, selling his view of investing for the average person and providing Main Street with a connection to the world of stock and mutual fund investing during the 1980s and 1990s.

Both served as diplomats of a sort, bridging their spheres (stock investing and the art world/celebrity culture) with the public at large. I think it's safe to say that many of us were provided with at least a partial introduction to these worlds through Peter and Andy. At least, in my case, this is true.

Wednesday, July 30, 2008

Thomas Donlan on trade, SEC actions

Barron's editorial page editor Thomas G. Donlan has a few things to say about the SEC's latest move to protect financial firms from supposed rumor-mongering and naked short-selling in this week's Barron's editorial commentary.

In, "Swatting an Imaginary Fly", Donlan reminds SEC officials (and Barron's readers) that short-sellers are not to blame for the very real problems facing certain banks and financial companies.

"The SEC also denounced false rumors and undertook to fish through traders' e-mails and phone records in search of rumor-mongers. Its reasoning was simple:

"False rumors can lead to a loss of confidence in our markets. Such loss of confidence can lead to panic selling, which may be further exacerbated by "naked" short-selling. As a result, the prices of securities may artificially and unnecessarily decline well below the price level that would have resulted from the normal price-discovery process. If significant financial institutions are involved, this chain of events can threaten disruption of our markets."

The SEC cited the example of Bear Stearns: "During the week of March 10, 2008, rumors spread about liquidity problems at Bear Stearns, which eroded investor confidence in the firm. As Bear Stearns' stock price fell, its counterparties became concerned, and a crisis of confidence occurred late in the week. In particular, counterparties to Bear Stearns were unwilling to make secured funding available to Bear Stearns on customary terms."

Talk about putting the cart before the horse: The SEC has formally declared that false rumors drove Bear Stearns over the edge. In fact, as even the commission's version of the sorry tale makes clear, the rumors were true. The falsehoods were told by Bear Stearns spokesmen, who declared that everything was hunky-dory.

The new investigations and regulations aren't designed to protect investors, but to deceive them. The SEC decided to support the market reputations of 19 banks and other financial institutions in the face of well-warranted criticism.

Yelling "fire" in a crowded theater is a terrible thing to do -- unless there's a fire."

The SEC, in Donlan's view, is an agency that has resorted to regulating speech, an exercise it finds easier than identifying and prosecuting fraud.

Read on for a further view of why our capital markets are ill-served by such "protective" measures (and hear David Einhorn's take on the recent SEC actions while you're at it).

Added note: Thomas Donlan is also the author of a new book entitled, A World of Wealth: How Capitalism Turns Profits Into Progress.

His recent interview on the Financial Sense Newshour broadcast provided an overview of his new book, and an interesting discussion on why free markets and free enterprise are the best options for meeting society's needs and wants, while delivering increased prosperity for the greatest number of people over time.

Enjoy the interview and the discussion.

Monday, July 28, 2008

David Einhorn on FT.com

David Einhorn, founder of Greenlight Capital and author of "Fooling Some of the People All of the Time", speaks with "View from the markets", FT.com's weekly video interview series.

In this three part interview, David offers his view of the recent move by the SEC to curb alleged naked-shorting in a list of 19 financial shares (a move he calls "a rather peculiar action"), the scapegoating of short-sellers for the problems affecting financial companies, the role of ratings agencies and risk management in the financial industry, and investing in distressed debt and shares.

Interestingly, Einhorn refused to provide an update on the status of his past short position in Lehman Brothers. When asked, he did say that his views on the company were well known and that he had nothing new to add at this time.

Is this a sign that Greenlight has decided to cover some or all of its previous short position, or is Einhorn just keeping mum in light of the recent publicity directed towards short-sellers in the US?

Friday, July 25, 2008

Features of the week

Plenty of investment and world news to share this week, with a special focus on banks and derivatives. Let's dive right in to this Friday's, "Features of the week".

1. "Ich bin ein Berliner": Obama-mania grips Europe.

2. Foreclosure activity surges in US (especially in Nevada & California).

3. A look at the US Housing Bill (I guess "GSE bailout bill" didn't have the appropriate ring).

4. Crowd gathers for House Judiciary hearing on Bush "impeachment".

5. Is a UK house price crash in the offing?

6. US and EU expand sanctions against Mugabe government.

Note: Remember what we said on Monday; the Western governments are stepping up their response after Zimbabwe threatened to seize foreign firms supporting Western sanctions. This is about money.

7. India's Sensex drops 502 points after soaring earlier in the week.

8. Jean-Marie Eveillard sees investment opportunity in India and Asia.

9. A recent sharp reversal for the "buy oil, sell financials" trade.

10. Paulson & Co. plans fund to provide capital to banks.

11. Some hedge fund stars still hit home runs.

Note: John Paulson, Philip Falcone, Peter Thiel, and Daniel Arbess are highlighted for their funds' 2008 performance.

12. Global money supply - 2008 update.

13. Best performing ETFs: UltraShort funds dominate the list.

14. Property derivatives set to flourish under new US tax law.

15. Should water be traded as a commodity?

16. Markit and DTCC to launch OTC derivatives processing venture.

17. How to trade foreign stocks in a global clean-tech market.

18. Bear market psychology & the ten phases of a bear market.

19. "Bear market is only half over", says Nouriel Roubini: video interview with Tech Ticker.

20. Randy Pausch last lecture: Achieving Your Childhood Dreams.

Note: Thanks to The Financial Philosopher for highlighting this clip earlier in the year.

Thanks for checking in with Finance Trends Matter. Have a great weekend!

Thursday, July 24, 2008

John Adams & Thomas Jefferson at the Drive-Through

A bit of Thursday afternoon humor ahead of our Friday "Features" post: here's John Adams & Thomas Jefferson at the Drive-Through.

I found this clip back on July 4 and had to share it. Can't believe it hasn't been watched more on YouTube (only 2,000 views?!).

Enjoy, and grab me a Shamrock Shake while you're at it, will you?

Wednesday, July 23, 2008

Marc Faber on Bloomberg

Marc Faber speaks of weakness in the technology sector, a spreading global recession, and issues surrounding Fannie Mae and Freddie Mac in this latest Bloomberg TV interview.

Reiterating certain points made in an earlier interview with CNBC, Marc notes that while Fed governors may not recognize (or face up to) signs of recession, the average person on the street feels the impact of rising prices and weakening business conditions. This slowdown will be felt particularly in technology and industrial commodities.

He also feels that Fannie and Freddie should be split up into separate private enterprises, rather than be bailed out. Echoing points made by Jim Rogers in his recent Bloomberg appearance, Marc notes that a bailout of Fannie and Freddie would amount to a rescue of "people who have made bad investments" at the expense of taxpayers and common citizens.

One last point on the stock market and the overall economic picture. While Marc allows that the possibility for oversold bear market rallies exists, he feels the big bull market for financial (paper) assets is over, and has been for some time. Inflation will be the looming problem in our economic future, despite Ben Bernanke's academic focus on deflation, and interest rates will go higher over time as a result of market forces.

Lots more to see and hear in this interview clip. Enjoy the rest!

Monday, July 21, 2008

Monday's notes

Last week's wild ride in the financial markets and the political world gave us much to talk about. So as we stumble out of the haze of a Fannie & Freddie-dominated week, let's review what happened and see what's in store for the week ahead.

1. "Bizarre five days that few will forget" - Financial Times.

"It was one of the most remarkable weeks in the history of financial markets. The US banking sector lost a quarter of its stock market value, then registered a 33 per cent gain. Rising oil prices spooked investors, then fell more than 12 per cent. Short-sellers, branded as the villains by politicians, were squeezed as never before."

A concise wrap-up of last week's dizzying action.

2. "Trouble at Fannie Mae and Freddie Mac stirs concern abroad" - NY Times.

"For more than a decade, Fannie Mae and Freddie Mac, the housing giants that make the American mortgage market run, have attracted overseas investors with a simple pitch: the securities they issue are just as good as the United States government’s, and they usually pay better.

The marketing plan worked. About one-fifth of securities issued by Fannie, Freddie and a handful of much smaller quasi-governmental agencies, some $1.5 trillion worth, were held by foreign investors at the end of March. One out of 10 American mortgages is, in effect, in the hands of institutions and governments outside the United States.

Now that the two companies are at risk, how their rescue is handled will ultimately test the world’s faith in American markets. It could also influence the level of interest rates and weigh on the strength of the dollar for years to come, analysts say."

3. "Given a shovel, Americans dig deeper into debt" - NY Times.

Just following the government's lead, of course. Don't hold your breath waiting for a story that explains how we're ALL in debt, given our global reliance on (credit-based) fiat money.

4. "Charts and news for Monday" - Red-Hot Resources.

Sean Brodrick shares charts and outlook on oil, natural gas, and the US dollar, along with news on the economy and the banking sector.

5. "Rule changes could hit balance sheets" - Financial Times.

"US accounting changes that could force banks to take trillions of dollars back on to their balance sheets will seriously complicate their capital-raising efforts at a time when the money is most needed, standards setters have been warned.

More than $10,000bn of outstanding bonds backed by mortgages and other consumer and corporate debt could be affected by accounting changes, according to a letter from two leading debt market trade associations to the US Financial Accounting Standards Board."

6. "Mugabe threatens to seize foreign firms over sanctions" - Reuters.

"Zimbabwe will transfer ownership of all foreign-owned firms that support Western sanctions against President Robert Mugabe's government to locals and investors from "friendly" countries, a state newspaper reported on Sunday.

The southern African state is struggling with an economic crisis many blame on Mugabe's policies, which has left it with an inflation rate of over 2.2 million percent and chronic shortages of food and other basic needs."

Seems Mugabe and Co. blame foreign firms for creating and exacerbating goods shortages inside Zimbabwe. Could it be their own policies are to blame for the people's suffering?

In any event, this will likely be the last straw for foreign nations looking on at the situation in Zimbabwe. Now that money and property is at stake, "Western firms" and their governments are likely to get more involved.

We'll have more as the week unfolds. Stay tuned.

Friday, July 18, 2008

Features of the week

Kick back, relax, and enjoy our, "Features of the week".

1. Freddie Mac considers major stock sale in bid to avoid rescue plan.

2. Citi's $2.5 billion loss less than feared, while Merrill takes a $9.4 billion writedown.

3. It's an emergency! The SEC's endangered species list.

4. It's good to short. Short sellers have been doing well lately.

5. Jim Bunning's capitalism pitch is in strike zone: Caroline Baum.

6. Pakistani investors smash up Karachi Stock Exchange as stocks slide.

7. Diamonds attract funds as gem prices surge.

8. Super-rich are still spending, says Sotheby's CEO Bill Ruprecht.

9. Export boom fuels factory town's revival.

10. Welcome back US Manufacturing (?)

11. Solar's hot real estate market: a desert land boom.

12. US homeowners cruising Craigslist for cheap heating oil.

13. Andy Grove on "Our Electric Future" (Hat tip: Dow Theory Letters).

14. To hell with $4 gas, drive this: Tesla's wild ride.

15. Bountiful Barrels: a wealth-transfer to oil-exporting nations.

16. Barron's makes a case for buying Middle Eastern shares.

17. Soil under strain: worries over topsoil erosion.

18. Fannie, Freddie, the Drug War - it's all here. Thomas E. Woods and Mark Thornton discuss a multitude of topics on "Shock to the System", Woods' weekly radio podcast.

19. Lunch with the FT: Ronnie Wood.

If you've enjoyed this week's posts, you might wish to subscribe to our feed or bookmark this site for future visits and for sharing with friends.

Thanks for reading Finance Trends Matter. Enjoy your weekend!

Thursday, July 17, 2008

Popular sentiment in the blogosphere

One great thing about the blogosphere and the interactive web is that it exposes you to some interesting thoughts and comments from people responding to blog posts, articles, and media clips, all around the world.

All across America, and around the world, it seems people are starting to take more of an interest in where they are getting their information from, and in understanding the agendas driving media companies and news outlets.

Media ownership has become more concentrated and the remaining TV, radio, and print news outlets have become increasingly driven by commercial concerns and a commitment to the bottom-line.

While this focus on profits is to be expected from media-focused corporations (and lauded by their shareholders and directors, at least in the short-term), it tends to bring about an accompanying decline in the quality of news reporting and the variety of news stories offered.

As "hard news" stories and international coverage drop off, and reporting standards and quality declines, the reading and viewing public loses out.

This shift leaves more discriminating readers and viewers cold, and these once-dependable "news consumers" are voting with their feet, with many canceling their newspaper and cable TV subscriptions altogether. Many of these disillusioned news patrons are now opting to get a large part of their news and information from a variety of online news sources and opinion outlets, such as blogs, international news websites, and trusted financial websites and communities.

Here's one recent example of this shift, courtesy of the reader comments at Barry Ritholtz' blog, The Big Picture.

While reading through the comments responding to Barry's takedown of a recent Barron's cover story ("Why Barron's Housing Cover is So Terribly Wrong"), I noticed these revealing remarks from readers "Unsympathetic" and "bluestatedon":

"Mainstream media is gratuitous schlock, not worthy of consideration. Famed? Perhaps to baby boomers who are used to respecting public figures. I'm 30. Until proven otherwise, I believe everything I see on TV or in print.. is pure spin, and factually incorrect." - Unsympathetic.

The second commenter agrees with the above and elaborates:

"IMHO a big part of the problem is found in the gradual corporatization of the media, but I also have concluded it's also a product of crappy journalism programs at the collegiate level. And you can also include our rotting and decrepit public education system.

For obvious reasons, an adequately functioning democracy absolutely requires the voting public to be well-informed, and a crucial link in that process are people who work at furnishing the truth to the public. Today's class of journalists are, by and large, more suited to an authoritarian state than a democracy. The trouble is, I doubt that your average mainstream "journalist" would be able to write a coherent paragraph describing the functional and legal differences between the two systems. As long as they have a nice lunch and get to quit work at 5, it's all the same to them.

Which is why the dirty, filthy bloggers laboring amongst the internet tubes are so important. Yes, there's plenty of crap on the internet, but if you know where to look (this site, as an obvious example), the truth — and real, hard, information — is available." - bluestatedon.

What you see here is a complete lack of faith in the traditional mass media sources that have dominated the spectrum for the last hundred years.

We also seem to have reached a point where many in America are now expressing outrage and disbelief over the current state of the nation and the treachery of our supposed political leaders and a pliant media. These sentiments are not limited to certain financial blogs; you can find them in just about any online news site or blog that hosts reader comments.

Of course, there are still some excellent journalists and mainstream news sources out there. Regular readers of this blog know that I am fond of reading and quoting from the Financial Times and Bloomberg, to name two such examples.

In fact, I suspect news outlets that remain committed to maintaining high standards of quality in their reporting will buck the trend of mainstream media abandonment and acquire new readers and viewers in the long-run. Many of these converts will be those who jumped ship from other newspapers and media outlets where eroding standards and lack of reader/viewer accountability are evident.

But for now we seem to see, in the blogosphere and the interactive web, a growing distrust of politicians, appointed government officials, and the MSM (mainstream media) as a whole.

How does it look out there to you?

Tuesday, July 15, 2008

Fannie and Freddie: an overview

Today's print edition of the Financial Times carried some excellent coverage of the ongoing crisis surrounding Fannie Mae and Freddie Mac.

Since their analysis is far superior to anything I could offer on the subject, I thought we'd take a look at what the FT has to say on the history of the two GSEs, current market sentiment towards the mortgage giants' shares and debt, and the likely outcome of any government "backstop" or bailout plans.

First off, John Authers and Stephanie Kirchsgaessner provide a bit of historical overview on Fannie and Freddie in their piece entitled, "Moral hazard on the road to increasing profits".

Here are a few key excerpts from their article:

"Many US economists, on the right and the left, are today able to say: “I told you so.” Few developments in US financial policy over the past half century have been more controversial than the decision to allow Fannie Mae and Freddie Mac to develop to their great size as private shareholder-owned institutions.

Fannie Mae (originally the Federal National Mortgage Agency) had its roots in New Deal legislation of the 1930s. It was set up in 1938 as a government-owned development bank. Its purpose was to ensure that mortgage interest rates would stay at low levels that kept home ownership within the reach of the US middle class.

In 1968, the decision was made to re-charter the FNMA as a private entity, funded entirely by shareholders. As it continued to operate under an explicit mandate from the government, however, the belief took hold that Fannie Mae enjoyed an explicit guarantee from the government.

The complaint was that private sector institutions could not possibly compete against a company that in effect held a government guarantee. To address this complaint, Freddie Mac (the Federal Home Loan Mortgage Corporation) was chartered in 1970, with a similar mission to ensure stability, liquidity and affordability, and to compete with Fannie.

But this did not quiet the objections. First, the existence of the agencies was held to create “moral hazard” – the mere presence of such a guarantee, it was held, would create an incentive for excessive risks. As it was obvious the government could not allow the agencies to go bust, capitalism’s normal controls against risk-taking would not work. "

Be sure to read the whole thing, as the authors explain the "crowding out" effect that the two GSEs had on the private sector's involvement in the US mortgage market.

"A history of Freddie Mac and Fannie Mae" provides a brief timeline spanning Fannie Mae's and Freddie Mac's initial chartering, up to their present difficulties, along with an easy to understand graphic on "How the US mortgage markets work". Very handy for quick reference.

In, "Effort unlikely to improve lot of homeowners", Saskia Scholtes describes how, "the US government's efforts to quell the crisis -surrounding Fannie Mae and Freddie Mac will affect different constituencies.". Read on for a concise overview of how forthcoming plans will affect homebuyers, debt investors, equity investors, and foreign investors.

Henry Sender describes how the focus of Wall Street's "take under" trade has shifted from Fannie and Freddie to the rest of the financial sector, as traders look to short banks and financial institutions who seem to be at risk of going under.

And lastly, Neil Dennis provides an update on how investors are reacting to proposed rescue plans for Fannie and Freddie in, "Ailing sentiment hits dollar and global stocks".

We'll have more on Fannie and Freddie in our next post. Stay tuned.

Monday, July 14, 2008

Fannie plan a "disaster" says Rogers

Well, this is the video I had been waiting for.


Given all that has happened with Fannie Mae (FNM) and Freddie Mac (FRE) over the last week, along with the weekend announcement of a proposed government bailout plan for the two mortgage giants/GSEs, you had to figure that when Monday rolled around, we'd almost certainly get to hear Jim Rogers' view on the matter (as he has been short Fannie and Freddie for some time, and is one of the main go-to contrarian voices for the cable business channels).

Never one to disappoint, Rogers was happy to make his opinions on the Fannie/Freddie debacle known in this Monday morning interview with Bloomberg TV.

But first, a brief overview of the US government's latest plan (FT):

" Trading in Fannie Mae and Freddie Mac was volatile on Monday morning after the US government on Sunday night announced that it would seek unlimited authority from Congress to lend money to the troubled mortgage groups and invest in their equity.

The Federal Reserve said it would give Fannie and Freddie access to emergency funds on the same terms as banks, “should such lending prove necessary”.

It goes further than many market participants expected. In effect the government is seeking full discretion to inject both debt and equity into Fannie and Freddie, and take them over if necessary.

The Fed will act as a bridge by providing a backstop source of emergency finance in the interim while Congress passes the required legislation. "

And as Bloomberg notes, this latest and greatest "Paulson plan" will, "bring the U.S. closer to giving an explicit guarantee for the debt sold by the shareholder-owned, federally chartered companies."

"Paulson's proposal, which the Treasury anticipates will be incorporated into an existing congressional bill and approved this week, signals a shift toward an explicit guarantee of Fannie Mae and Freddie Mac debt. The shareholder-owned companies are government-sponsored enterprises, giving investors the indication of an implicit federal backing."

As noted above, investor Jim Rogers is less than thrilled with the plan, calling it "a disaster". Those of you who are US taxpayers, or holding dollars and dollar-denominated assets, might want to hear Jim's reasoning on this one.

" The U.S. Treasury Department's plan to shore up Fannie Mae and Freddie Mac is an ``unmitigated disaster'' and the largest U.S. mortgage lenders are ``basically insolvent,'' according to investor Jim Rogers.

Taxpayers will be saddled with debt if Congress approves U.S. Treasury Secretary Henry Paulson's request for the authority to buy unlimited stakes in and lend to Fannie Mae and Freddie Mac, Rogers said in a Bloomberg Television interview. Rogers is betting that Fannie Mae shares will keep tumbling.

``I don't know where these guys get the audacity to take our money, taxpayer money, and buy stock in Fannie Mae,'' Rogers, 65, said in an interview from Singapore. ``So we're going to bail out everybody else in the world. And it ruins the Federal Reserve's balance sheet and it makes the dollar more vulnerable and it increases inflation.''

Go straight to the source in the video above to hear more.

Friday, July 11, 2008

Features of the week

We bring you our, "Features of the week".

1. Are Fannie Mae and Freddie Mac insolvent?

2. Fannie and Freddie: The $5 trillion mess.

3. Ted Forstmann says we're in the second inning of the credit crisis.

4. Ron Paul: "Something big is going on".

5. US leads world in substance abuse, says WHO study.

6. Peter Schiff talks with Barron's about the US economy.

7. Fiat's $115,000 Maserati defies US slump, gas costs.

8. Media and tech stars mingle in Sun Valley.

9. Bankers use secret clinics to beat breakdown stigma.

10. US adopts capitalism light for housing bailout: Caroline Baum.

11. UK: Russia "backed Litvenenko murder".

12. US killed 47 Afghan civilians in Sunday airstrike.

13. Stratfor releases its third quarter 2008 global intelligence forecast.

14. Zimbabwe's central banker answers to Mugabe, Bible.

15. Frank Holmes lists top performing commodities of 1999-2007.

16. Consider the effects of inflation on your investments.

17. Brian Hunter speaks with Fortune magazine.

18. Sir John Templeton interview with Charlie Rose.

Thanks for reading Finance Trends Matter. Enjoy your weekend!

Wednesday, July 09, 2008

T. Boone Pickens on America's energy

There was a lot of discussion yesterday about the "Pickens Plan" for America's energy future, as noted energy investor T. Boone Pickens launched a media campaign to call attention to his energy plan.

That discussion is still going strong in today's news. So we're going to include some video highlights from Boone's July 8 appearance on CNBC, in which he outlined his plan to supply more of our country's energy needs through wind power, natural gas, and solar energy. To find more videos from that CNBC appearance, see this link.

Now there's another great video with Boone that I wanted to highlight, and it's one that we posted in our May 9 "Features" post.


Here's video of T. Boone Pickens speaking earlier this spring at the Milken Institute Global Conference.

This is a great hour-long Bloomberg video clip in which Boone talks with interviewer Brian Sullivan about his business failures and successes, and his thoughts on energy prices and energy policy. He also uses this appearance to sketch the outline for his now-public "Pickens Plan".

While I certainly don't agree with everything Pickens says, advocates, or does with regards to energy policy and his related business ventures, there are a few reasons why I'd point to this Milken Conference video as highly recommended viewing material.

You may not agree with his energy plan, but you'll probably learn a few things about energy, trading & investing, and business by watching this clip and learning from Boone's experience.

Check it out, and enjoy.

Tuesday, July 08, 2008

Excess speculation? Onions tell the tale

Are commodity speculators to blame for higher commodities prices and increased volatility in price movements? A study of the now defunct onion futures market may shed more light on this ongoing political debate.

This morning, both the Wall Street Journal and the Financial Times ran articles on the current political witch hunt against commodity speculators. Each paper used the story of the onion futures ban to illustrate how futures markets actually work, while addressing the recurring blame game centered on "evil" commodity speculators.

An excerpt from the WSJ editorial, "The Onion Ringer":

"In 1958, Congress officially banned all futures trading in the fresh onion market. Growers blamed "moneyed interests" at the Chicago Mercantile Exchange for major price movements, which could sink so low that the sack would be worth more than the onions inside, then drive back up during other seasons or even month to month. Championed by a rookie Republican Congressman named Gerald Ford, the Onion Futures Act was the first (and only) time that futures trading in a specific commodity was prohibited, and the law is still on the books.

But even after the nefarious middlemen had been curbed, cash onion prices remained highly volatile. In a classic 1963 paper, Stanford economics professor Roger Gray examined the historical behavior of onion prices before and after the ban and showed how the futures market had actually served to stabilize prices.

The fresh onion market is highly seasonal. This leads to natural and sometimes large adjustments in prices as the harvest draws near and existing inventories are updated. Speculators became the fall guys for these market forces. But in reality, the Chicago futures exchange made it possible to mitigate the effects of the harvest surplus and other shifts in supply and demand."

The editorial goes on to note that, "to this day, fresh onion prices still cycle through extreme peaks and troughs." So the overall stabilizing effect that the onion futures market might have had is now gone.

In fact, some are looking for a return to onion futures trading, as the benefits of such a market are now being seen by the sons of those who originally advocated the ban in onion futures trading.

Now, to be fair, we should mention that there was an attempt at manipulation in this market that prompted some outcry and support for the onion trading ban that came later (see the 1956 Time article cited in Marginal Revolution's post).

But were these manipulation attempts indicative of a problem with the onion futures market itself, or was this a sign of problems with the rules governing traders? Shouldn't the exchanges examine the possibilities for price manipulation and censure traders found guilty of such actions, rather than allowing for a ban on entire market?

It seems that anytime prices for a commodity are driven higher or lower than some people would care to see, the old attacks on speculators are renewed. In this light, it's not all that surprising to hear calls for a ban on futures trading in a given commodity, as public alarm over rising prices leads politicians and regulators to jump on the anti-speculation bandwagon.

The FT sums up the situation in, "The usual suspects...":

"The International Energy Agency, the western countries’ oil watchdog, recently accused politicians of looking for “an easy solution” that avoids taking the necessary steps to improve supply and curtail demand. Michael Lewis, head of commodities research at Deutsche Bank, says: “When regulators turn the lights on these ‘dark markets’, they will find no monsters in the room – rather underlying fundamentals driving prices higher.”

The Onion Futures Act is a perfect case study. When economists studied the market, they discovered that volatility and prices were higher in the period after the ban than they were before. Frédéric Lasserre, head of commodities research at Société Générale in Paris – who has studied the onion example – says today’s context is very similar. “The politicians are leading the debate pressured by the people,” Mr Lasserre says.

The onions market is not the only example. India last year banned financial trading in most agricultural commodities but prices continued to rise. “[Banning financial trading] is irrelevant,” says a senior Indian official. “When a commodity is scarce, its price rises, whether it is traded on an exchange or not.”"

Seems there's no getting around supply and demand in the end.

Monday, July 07, 2008

Monday's notes

Market news and items of interest to start off the week.

1. OPEC president blames ethanol, weak dollar for oil price rise.

So as far as I can tell, according to OPEC officials and US politicians, everything except supply and demand fundamentals is behind the rise in oil prices.

2. Oil's rapid rise stirs talk of $200 a barrel this year -WSJ.

Excerpt from the Wall St. Journal:

"U.S. benchmark crude prices leapt 3.6% last week, closing before the Independence Day holiday at a record $145.29 a barrel. Roughly halfway through the year, oil prices have soared 50% since Jan. 1 and have doubled since the same time last year. (See related article.)

Few oil watchers are now ready to bet that oil will hit $200 a barrel by New Year's Eve. But nearly all are wary of predicting how and when oil's upward stampede will be reversed."

3. Countdown to $200 oil: $140 oil and speculation - The Oil Drum.

A very good piece from The Oil Drum that breaks down the factors behind oil price increases. Highly recommended as an antidote to the usual nonsense put forth on this issue by much of the media.

4. TIPS flunk inflation test as fuel, food overtake CPI - Bloomberg.

So it seems professional investment managers are finally waking up to this one. When you have an "inflation protected security" that is tracking inflation as defined by the government's own measure of price increases, bet you're going to get short changed. It's the whole fox and the henhouse thing.

Here's more from Bloomberg:

"Treasury Inflation Protected Securities aren't living up to their name for bond investors who say they can't trust the way the U.S. government calculates the rising cost of consumer goods.

Morgan Stanley, the second-biggest securities firm, and FTN Financial, a unit of Tennessee's largest bank, are telling clients to pare holdings of TIPS, whose principal amount rises with the Labor Department's consumer price index. Morgan Stanley says derivatives tied to inflation expectations are a better bet, while FTN recommends corporate and agency bonds because the index doesn't reflect the actual rate of U.S. inflation."

Investment managers quoted in the article say the CPI is underestimating inflation and that TIPS have not paid off, despite rising inflation.

5. My $650,100 lunch with Warren Buffett - Guy Spier.

As Chinese investor Zhao Danyang ups the auction price of a lunch with Buffett to a new record of $2.1 million, last year's charity auction winners Mohnish Pabrai and Guy Spier (who paid the then astounding sum of $650,100 for their lunch date) recount their recent lunch date with Warren.

6. Bubble lessons for a deflated Beijing - FT.

Edward Chancellor draws on history to provide lessons for authorities in Beijing, who hope to quell local investors' fear and anger over the recent Shanghai stock market drop.

7. Lost scenes from Fritz Lang's Metropolis shown - BBC.

"Lost scenes from the classic sci-fi film Metropolis have been shown for the first time in decades. The long-lost original cut of Fritz Lang's 1927 silent film was discovered in the archives of the Museum of Cinema in Buenos Aires earlier this year.

The museum's Paula Felix-Didier said it was the only copy of the complete film. Metropolis depicts a 21st Century society divided between a class of underworld workers and the "thinkers" above who control them.

Soon after its initial release at the height of Germany's Weimar Republic, distributors cut Lang's three-and-a-half-hour masterpiece into the shorter version since viewed by millions worldwide. But a private collector carried an original print to Argentina in 1928, where it has stayed, Felix-Didier said."

An exciting find, for sure. Hope to see this version soon, I don't think I've ever watched the movie from start to finish (and that robot is amazing).

That's all for Monday. Be sure to join us tomorrow for more.

Friday, July 04, 2008

Independence Day cheer

Happy Independence Day to all.

As we in America celebrate the 4th of July, the date commemorating the approval of the Declaration of Independence by the Continental Congress on July 4th, 1776, I thought it would be instructive to take a look at the famed document itself, and the history behind it.

For those who would like to learn more about the signing of the Declaration of Independence, see the Wikipedia link above.

You may also want to read and compare the document's various drafts (first draft, reported draft, engrossed copy) which can all be viewed here at the Online Library of Liberty.

And lastly, some valuable thoughts on the Declaration and its principal writer, Thomas Jefferson. We should also mention Thomas Paine, whose pamphlet, Common Sense, became the widely read rallying cry for American independence from Great Britain.

For more on this, please see the following articles.

"Jefferson on American Liberty" - Gary Galles.

"Thomas Jefferson, Rebel!" - Frank Chodorov.

"The Sudden Emergence of Tom Paine" - Murray Rothbard.

"The Declaration of Independence" (Audio MP3) - Robert LeFevre.

Thursday, July 03, 2008

Inflation & the fate of paper money

Inflation was one of the key themes in our post on Marc Faber's recent CNBC appearance. I said then that we'd talk a bit more about inflation and money creation later in the week. So let's talk about it now.

Have you ever wondered how the fiat money we use comes into existence? We'll you're about to find out.

Last week, Bear Mountain Bull pointed us to a very revealing passage on central bank money creation from Richard Russell's daily remarks.

Here is an excerpt from those remarks; get ready for some truth.

"If the American people ever realized or understood how the Fed operates and how money is created in the US, there would probably be a ten million man and woman march on Washington and more specifically a march on the Federal Reserve Building. The Fed is a private banking monopoly that has "grabbed hold" of the money-creation of the United States. Who controls a nation's money, controls that nation.

The US needs money to pay for building roads, for buying war planes, for fighting wars, for paying Congressmen, for paying IRS and Post Office employees, for a thousand different items. For this the government turns to the tax payers or it turns to the Federal Reserve. The Fed is nothing more than a group of private banks that charge interest on money that never existed before.

How does the system of money creation work? A simplified but true explanation. The government needs ten billion dollars (aside from what it takes in income taxes or from what it borrows). So the government then prints ten billion dollars worth of interest-bearing US government bonds. Next, it takes the bonds to the Fed. The Fed accepts the bonds, and then places ten billion dollars in a checking account. The US government then writes checks to the tune of ten billion dollars against their checking account. But where was that ten billion dollars before the Fed issued the money? The money didn't exist. Can you believe it, the money was created by the Fed "out of thin air."

Now you know how the whole scam works. Kudos to Russell for that explanation, it happens to be one of the most easily understood summaries I've heard or read on the subject.

And by the way, if you ever want to know how inflation has affected the price levels here in the US over much of the 20th century, just ask Richard Russell. He'll tell you about growing up in New York City in the 1930s and '40s, back when subway rides were a nickel, fresh oysters were fifty cents for a dozen, and a New York townhouse could be had for several thousand dollars (for those few who actually had the money).

The big picture theme here is paper money's gradual loss of purchasing power. As he noted back in 2005, the dollar that the Air Force paid him in 1945 buys less than ten cents worth of goods today.

Russell, an "old timer", likes to remind his readers that the one thing you'll never hear a central banker talk about is the purchasing power of a fiat (paper) currency over time.

Why? Because paper money and central bank credit can be created at will; therefore it has no intrinsic value. As more "money" and credit is created over time, the purchasing power of any paper currency will erode, until it eventually becomes worthless.

Which leads me to exhibit B in our discussion of inflation and paper money. For a fascinating look at the average lifespan and history of the world's paper currencies, please see Mike Hewitt's article, "The Fate of Paper Money".

You'll probably want to save Mike's article for future reference, and I hope you'll find it as interesting as I did. Remember to share the knowledge and pass it along!

Wednesday, July 02, 2008

Global bear market continues

Leading share indices continue to drift downwards today as worries mount over inflation, the continuing credit crisis, weak corporate profits, and slowing business activity around the globe.

As we write this, the S&P 500 index is sitting at 1277.94, several points away from its March 10 low of 1273.37, the point at which the index's most recent rally began.

A successful test of the March low and a subsequent rally could help keep the benchmark index aloft for a time, though a breakdown through 1273.37 and a close below that level would likely spell trouble for the index and US stocks as a whole.

We see a similar picture in the chart of the MSCI World index. The MSCI World peaked out in November of '07 and, much like the S&P 500, has drifted downwards since in a pattern of lower highs and lower lows.

What's behind the poor performance, year to date, in global share markets? John Authers of the Financial Times shares his view in today's "Short View" column, "Hope springs eternal".

"The second half of 2008 made a terrible start on Tuesday after one of the worst six months for global stocks in memory. As measured by the MSCI World index, it was the worst first half in 26 years.

Such a fall suggests markets were taken by surprise. But problems for US subprime lenders were obvious at least once a rash of bankruptcies hit the sector in February of last year. The credit market was then at obviously untenable valuations. To foresee that this would damage global stock markets required only logic, not imagination or clairvoyance."

Authers goes on to detail the rationale behind each of the three preceeding "bear market rallies" to date, all of which petered out. He notes that any subsequent rallies will be pulled along by some new hopeful rationale, but that the period ahead is likely to be a rather messy one, as the world's banks attempt to "sort out their own mess".

More on this in Authers' July 1, "Short View" video clip, "A very bad first half of 2008".

Related articles & posts:

"Stock market overview" - Finance Trends Matter.

"Danger: Open Trench" - Frank Barbera via FSO.

"JGBs gain on signs of global economic slowdown" - Bloomberg.

"Record commodity gains mirror equities downturn" - FT.