Wednesday, April 30, 2008

Thomas E. Woods: the 33 Questions

Thomas E. Woods talks with the Mises Institute's Jeffrey Tucker about some of the topics and themes in his book, "33 Questions About American History You're Not Supposed to Ask".

I've been meaning to put this clip up for some time, and having watched it again yesterday, I am reminded again of why I so enjoyed this discussion.

There's a little bit of everything here, from discussion of states' rights, the policies that came out of Progressive era, the founding of the Federal Reserve, the Great Depression, deification of certain American historical figures, and more.

I hope you enjoy this clip, and that it opens up some curiousity and interest in some of the topics that are covered here.

Ron Paul on CNN

Ron Paul talks to CNN about his Presidential campaign, the importance of sound money, finding free-market solutions to our national problems, adherence to Constitutional values, and the wisdom of the Founding Fathers in this American Morning interview segment.

Paul's comments on the Fed's control over interest rates and monetary policy are especially relevant and timely, as traders and market-watchers await the Fed's decision on interest rates due later today.

Thanks to Colleen for sending this clip!

Monday, April 28, 2008

Items of interest

Nassim Taleb, Kevin Phillips, Warren Buffett, and Jeremy Grantham. These are just some of the subjects (and authors) of today's wrap-up of recent news, articles, and interview features.

There's a lot of great stuff here that I couldn't fit into last Friday's "Features" post, and some very recent posts and news items found in the last 24 hours (including news of the Berkshire Hathaway-financed Mars-Wrigley deal). We'll provide a quick summary of each item; the rest is up to you!

1. Mars, Buffett to buy Wrigley for $23 billion. Berkshire Hathaway will help finance Mars' buyout of Wm. Wrigley Jr. Co. at $80 per Wrigley share. Excerpt from the MarketWatch piece:

"Wrigley will become a stand-alone, separate Mars subsidiary, in which Buffett's Berkshire Hathaway (BRKA) (BRKB) will make a minority investment, Mars said.Specifically, Berkshire Hathaway will make a $2.1 billion equity purchase in Wrigley. It will be bought at a discount to the share price being paid to the company's shareholders."

Note that Forbes' coverage of the deal highlights Wrigley's limited exposure to increased costs from higher agricultural commodity prices. A key selling point for Buffett and friends?

2. Warren Buffett chats with CNBC about the Mars-Wrigley deal and the "Main Street recession".

3. Fear of a Black Swan. Nassim Taleb talks to Fortune about why Wall Street fails to anticipate disaster. Interview excerpt:

"I worked on Wall Street for close to two decades in trading and risk management of derivatives. I noticed that while portfolio models got worse and worse in tracking reality, their use kept increasing as if nothing was happening. Why? Because in the past 15 years business schools accelerated their teaching of portfolio theory as a replacement for our experiences. It looks like science, and they have been brainwashing more than 100,000 students a year."

Very interesting. Check this one out.

4. Details on Jeremy Grantham's latest quarterly GMO commentary, "Immoral Hazard", from The Big Picture. The entire GMO letter is available here in PDF format.

5. Another great thing that Barry (Big Picture) tracked down was the full online version of Kevin Phillips' recent article, "Why the Economy is Worse than We Know", in the May 2008 issue of Harper's Magazine.

You may recall our earlier post on the Phillips piece, and the related Financial Sense Newshour interview with John Williams of Shadow Statistics. Be sure to check out both.

6. Investor David Dreman gives a nice, concise explanation of the ongoing financial crisis in this Forbes piece, entitled, "Looking Beyond the Bailout". Just be careful of possible value traps in some of those financial shares!

You're up to date! Have a great start to your week.

Friday, April 25, 2008

Features of the week

Welcome to this Friday's edition of, "Features of the week". Enjoy!

1. US consumer confidence falls to a 26-year low.

2. The SEC fines a trader for spreading false Blackstone deal rumors.

Funny how some individuals are targeted and fined for spreading false rumors, while media outlets seem to get a free pass (and a possible ratings-boost to boot)!

For added perspective, here are some past comments on moving the markets with rumors, and companies blaming short sellers for their demise, from Gary Kaltbaum (via BMB).

Plus, this post on the SEC targetting short-sellers in the Bear Stearns bust, and one blogger's take on bear raids.

3. The Shanghai Composite Index has fallen 50 percent from its peak.

4. Star subprime trader Josh Birnbaum has left Goldman Sachs to start a $1 billion hedge fund.

5. Superstar hedge fund trader Greg Coffey will leave GLG Partners, and forgo $250 million in compensation, to start his own fund.

6. UBS to start freight futures index.

7. Base metals are bucking the slowdown.

8. What would happen if commodity prices fell?

9. Could a Brazilian oil find end reliance on the Middle East?

10. The Bakken formation: how much will it help?

11. Emerging market oil use exceeds US as prices rise.

12. It's time for a rethink on recession-proof, says Michael Panzner.

13. Seeking knowledge? Physicist John Wheeler said, "In any field, find the strangest thing and then explore it".

14. Trading tactics from Gerald M. Loeb, author of one of my favorite books, "The Battle for Investment Survival".

15. Eight hundred years of financial folly. A long term view of capital flows and debt default cycles.

16. The rise of the Gulf. Economist cover story.

17. US News on the return of Big Government. Did it ever go away?

18. Nomads at last. Wireless communications change the way people live and work.

Is there an interesting story out there that we might have missed? Your suggestions are always welcome. Drop us an email or share your thoughts in our comments section.

Thanks for reading Finance Trends Matter. Enjoy your weekend.

Wednesday, April 23, 2008

Wave of bank failures expected

The Financial Times has a front page article today (4/23) entitled, "Regulator fears wave of bank failures".

The regulator in question is US Comptroller of the Currency John Dugan, whose office overseas 1,700 national banks and nearly two-thirds of the assets in the nation's commercial banking system.

In an interview with the FT, Mr. Dugan said that bank failures could rise above "historical norms" after a four-year period in which no financial institution under his watch had failed.

""We're going to have some more bank failures that will come back more to historical norms and may go above that with time," he said. "That is a natural consequence of the economy going from historically exceptionally benign credit conditions to something that is more normal to something you would get in a downturn."

Mr Dugan's comments come as US banks report big spikes in reserves for expected losses on consumer and small business loans, reflecting the spread of the credit crisis from Wall Street to the broader economy.

Yesterday, Atlanta-based SunTrust (NYSE:STI) said profit fell by nearly half to $283.6m as provisions rose 10-fold to $560m. Ohio's Fifth Third (NASDAQ:FITB) bank said profits fell 19 per cent to $292m as provisions rose to $544m from $84m last year.

The largest US banks, including Citigroup (NYSE:C) and Bank of America (NYSE:BAC) , have also seen loan losses increase as more consumers fall behind on home equity, credit card, automotive and other consumer loans. The banks have been rushing to raise capital to offset loan losses and writedowns on mortgage-related securities."

I included the last three paragraphs from FT's article because it serves up a nice, quick summary of the recent bank troubles and the spread of last year's subprime problems into a "credit crisis" affecting the broader economy.

Here's another useful excerpt which covers the expected problems at smaller regional banks, a subject we talked about (with insights from Wilbur Ross) in Monday's post:

"Mr Dugan's Office of the Comptroller of the Currency is particularly worried about lending by smaller banks to commercial real estate developers for condominiums and other projects. More than a third of smaller community banks have made commercial property loans that exceed 300 per cent of their capital, the OCC says. By comparison, in 1987, when hundreds of banks failed amid a commercial property collapse, such banks had commercial property loans equal to 175 per cent of their capital.

Mr Dugan said he did not expect failures to rise as high as during the late 1980s and early 1990s - when 534 banks failed in 1989 alone - because banks are better capitalised, have better underwriting standards and did less speculative lending.

"Banks are better capitalised going into this...but the flip side is they are more concentrated," he said. "Part of it depends on the depth of the downturn and duration of the downturn.""

Everything there seems to make sense to me, except for that last paragraph.

I'm not at all knowledgeable about banking, but if community banks are even more exposed to commercial property loans in the current cycle (with loans that exceed 300 percent of capital) than they were in the late 1980s (when loans exceeded 175 percent of capital), wouldn't you expect problems and failures to occur on a similar or greater scale this time around?

Mr. Dugan makes the case that the banks are better capitalised than they were in the last bust cycle, but given the ongoing cascade of (widely unanticipated) problems banks and financial institutions are currently suffering through, I think we'll have to wait and see on that one.

Incidentally, I should note that a quick search on Comptroller Dugan turned up this late 2006 RGE Monitor post on, "The Concerns of Comptroller of the Currency About the Excesses in the Mortgage Market." So there's past evidence of one financial regulator who was not totally "asleep at the wheel", as Nouriel Roubini notes.

Related articles and posts:

"Bad day for banks" - Finance Trends Matter.

"Wilbur Ross seeks $4 billion to purchase US banks" - Bloomberg.

"Wilbur Ross interview on credit losses, regional banks" - Bloomberg.

"Concerns of Comptroller..." - RGE Monitor.

Tuesday, April 22, 2008

Government meddling on food prices

In last week's post on rising food prices, we tried to briefly outline some of the factors behind higher commodity prices and growing food shortages.

While I mentioned things like water shortages, loss of arable land, dwindling global stockpiles of grain, and monetary inflation, I seem to have overlooked a major force affecting prices of agricultural commodities: government intervention.

Government Intervention At Work

Now, while I'm no seasoned observer of the farming and agriculture industries, I have learned enough in recent years to know better. If you've ever heard or read about crop subsidies, food import and export tariffs/restrictions, and ethanol mandates, you know that farming is rife with government intervention worldwide.

So, when I read a clutch of articles on this topic (under the World News heading of "Global Food Crisis") in yesterday's (4/21) print edition of the Financial Times, it was no real surprise to see the theme of government intervention present in each and every article.

Here's one such example, with excerpts from FT's article, "Ethiopian exchange bans trade in futures".

"Ethiopia will open Africa's newest exchange for agricultural commodities this week but, as politicians across the world express concern that speculation is exacerbating food price inflation, it will not permit futures trading.

The state-owned exchange (ECX) was conceived three years ago as a way to alleviate food shortages and promote agricultural development by improving the liquidity, transparency and security of the market for farm commodities...

Politicians in several countries where the poor are struggling to avoid hunger have blamed speculators for stoking inflation, a concern that led the Indian government last year to close futures trading in wheat, rice and pulses.

The article goes on to note that India banned trading in two pulses (dry beans and other leguminous crops), rice, and wheat in January of 2007. Did this ban on commodities trading help matters at all, or quell future price rises? No.

"Prices for the commodities have continued to rise in the country in spite of the bans, suggesting that factors such as demand and supply and not financial speculation are responsible, according to analysts.

B.C. Khatua, chief regulator of India's commodities markets, recently said the bans were a mistake. "In a way the futures market is more a messenger; there is no point in shooting the messenger because the message is not likeable."

India found out the hard way that attempts to abolish futures trading and pin blame for price rises on speculators are foolish, harmful, and counterproductive acts.

The Role of Speculators

Speculators in the commodities markets (or any market) help to ensure liquidity and, through their buying and selling, prices that reflect the market's view of supply and demand fundamentals.

Tampering with these markets will only hurt buyers and market participants, including farmers and commercial users/hedgers, in the long run.

But there are many who still do not seem to understand the role that trading markets play, and the benefits they provide. We see our fair share of this anti-speculation viewpoint here in North America as well, even from those who directly benefit from the process.

For example, take this opening section from the Globeandmail.com article, "Farmers battered by price distortions".

"Ian Wishart grows beans, corn and canola on his farm near Portage la Prairie, Man., and watches commodity markets closely to see what he'll get for his crops. But he's finding it harder to follow the markets these days because the prices don't always make sense.

"Nowadays it's not sending the same market signals that it used to," Mr. Wishart said. He blames investment funds for distorting prices. "The commodity market was designed to provide a forward pricing tool to protect farmers, not to provide an opportunity for someone else to make profits." "

So in Mr. Wishart's view, commodity markets are designed to provide a hedging function for farmers and producers, but "not to provide an opportunity for someone else to make profits".

It is astounding to hear such a remark coming from someone who looks to the futures market to provide price signals. Does Mr. Wishart think that the speculators who show up every day to trade these markets do so out of the goodness of their heart, just so he can be magically provided with his prices?

Speculators, like anyone else in business, demand a profit incentive to reward their efforts. While the prospect of gain exists for traders, so does the risk of capital loss. To expect any one to show up to the marketplace and trade purely as a "public service" to farmers, or anyone else, is ludicrous and reveals a total ignorance of how free markets work.

Are Speculators Behind Higher Prices?

But a misunderstanding of the role played by speculators and futures markets hasn't stopped a large number of people from blaming speculators for higher food prices. As a result of this public concern over "speculative premiums" in commodity prices, the CFTC today held a public roundtable discussion on recent trends in the agricultural commodities markets.

There has also been some increased concern in recent months over the increased volatility in the futures markets and the role that investment funds and commodity index funds have had in the relatively small commodity markets.

"Many farmers say the price problems stem from a surge in investment fund activity. Investment funds have been in commodities for decades but a key rule change by the CFTC a couple of years ago helped open the floodgates. The commission gave index funds an exemption to limits on commodity trading that applied to market speculators. The change meant the funds were treated like farmers and food processors, who are also exempt.

Experts say that boosted trading volumes in some wheat contracts fivefold. In January, the CFTC said investment funds accounted for 40 per cent of the wheat trading.

The CFTC and CME argue investment funds provide needed liquidity. But others say they do much more.

"The hedge funds swing up and down with the technical signals in the markets, and our markets aren't deep enough to absorb that," said Roy Huckabay, director of market research for commodities at the Linn Group in Chicago. "So we're seeing weekly trading ranges as big as we used to see in a whole year."

What seems unclear is if the problem lies with increased trading and activity from speculative and index funds, or with the classification of these funds as hedgers (rather than speculators) and a policy of enforcing position limits on some market participants, and not on others.

Markets Hampered by Protectionism

Still, in all this discussion over higher prices, little mention is made of the fact that farming and agriculture are industries in which prices and supplies are increasingly influenced by systems of government subsidies, import and export controls, and price supports worldwide.

How can anyone expect farmers to anticipate market conditions when governments and lobby groups create artificial price supports or ceilings and incentives to plant certain crops in favor of others? Can farmers really be expected to supply domestic and international markets with a steady supply of food when governments suddenly move to shut out export markets and the rules of the game are constantly being changed?

To illustrate this point, let's take one last look at the recent Indian experience with these food-related problems.

"Joshi said the measures like imports at high prices, putting restrictions on exports and police raids on stocks are meant to insulate Indian domestic market from global trends,which have not only resulted in indebtedness of farmers, but also given them negative subsidy.

"Any proposal to insulate commodity market from the global market is necessarily anti-farmers," he said. He said if the policy of insulation on agricultural commodity takes place, the question would arise whether agriculture inputs market should also be insulated. "Farmers can't pay input prices according to global market, and get prices according to the domestic market... that is not logical," he said."

Expecting increased food production in an environment of protectionism and decreasing incentives for producers is not logical. So how could any thinking person expect this kind of system to work?

See also:

"Farmers battered by price distortions" - Globeandmail.com.

"Farmers doomed to pay price for export restrictions" - FT.

"Ray Bradbury's chilling message for today's farmers" - FT.

"How the Feds took over farming" - FFF.

"Speculators perform no useful social function" - Mises Blog.

"CFTC webcast: Agricultural Forum April 22, 2008" - CFTC.

Monday, April 21, 2008

Bad day for banks

What timing. Hot on the heels of Wilbur Ross' recent comments on expected difficulties for regional banks, came Monday's news of further trouble for US banking sector.

Bank of America and National City figured prominently in Monday's news, as losses from bad loans hurt BoA's first-quarter earnings, and National City sought funds from private equity investors after reporting a first-quarter net loss of $171 million.

More from Bloomberg:

"U.S. stocks fell for the first time in five days after worsening credit losses at Bank of America Corp. and National City Corp. undermined confidence that banks are overcoming the subprime mortgage market's collapse.

Bank of America, the second-largest U.S. bank by assets, retreated after bad loans caused first-quarter profit to trail analysts' estimates. National City tumbled to a 17-year low as Ohio's biggest lender was forced to cut its dividend and sell stock at a 40 percent discount to last week's closing price..."

As we reported in last Friday's "Features" post, opinions on the credit crisis seem to be split between two camps: those who feel the worst is over, and those who see more bad news to come.

Bloomberg's story also highlights this divergence of opinion:

"...The profit reports from Bank of America and National City increased concern that Wall Street executives may be too optimistic about credit-market conditions. JPMorgan Chief Executive Officer Jamie Dimon, Goldman Sachs Group Inc. CEO Lloyd Blankfein, Lehman Brothers Holdings Inc.'s Richard Fuld and Morgan Stanley CEO John Mack all said this month that the worst of the credit crisis may have passed.

``Every quarter they predict the worst is behind us, we've taken the writeoffs, it's all rosy from here,'' Whitney Tilson, founder of New York-based hedge fund manager T2 Partners LLC, which oversees about $100 million, said in a Bloomberg Television interview. ``Every quarter they've been wrong. I think they are again here.'' "

National City shares have taken a sizable hit in Monday's trading, and Bloomberg notes other regional banks declined in sympathy.

"Regional Banks Fall

National City fell $2.15, or 26 percent, to $6.18 for the biggest drop in the S&P 500. The lender said a group of investors led by Corsair Capital LLC will buy shares for $5 each, about 40 percent less than the closing price on April 18. National City plans to slash its dividend to 1 cent a share from 21 cents, the second cut this year. The company posted a first-quarter net loss of 27 cents a share.

Other regional banks also declined. First Horizon National Corp., based in Memphis, Tennessee, lost 95 cents to $12.11. Cleveland-based KeyCorp dropped $1.13 to $23.55. Sovereign Bancorp Inc., based in Philadelphia, retreated 68 cents to $8.61."

Meanwhile, FT.com is discussing National City's plan to sell up to an $8 billion stake in the company to an investor group led by private-equity firm, Corsair Capital. But the deal to recapitalize this regional lender will differ from the deals that bigger private equity firms have done in the past.

"The Corsair-led group clinched the deal involving the ailing bank after many of the largest private equity firms, including Blackstone Group and Kohlberg Kravis Roberts, dropped out early in the process.

The winning group has little of the safeguards and governance rights that private equity firms usually require.

It is buying common stock, has the right to put only one director on the board and has no control, these people add.

"These are investment trades, not control trades," says the co-founder of one leading private equity firm that looked briefly at the deal very early in the process. "And because they don't have control, they don't have to pay a premium."

The National City deal comes weeks after TPG led a $7bn capital infusion into Washington Mutual, the largest savings and loan association in the US and shortly after Wachovia announced plans to raise $7bn from existing shareholders. Once TPG developed a template, it became easier for other deals to be done and bankers expect that more arrangements will follow. Other Ohio banks may be in that group."

So it seems that Wilbur Ross was right to expect continuing troubles for the regional banks. Can we expect more National City-type deals to follow?

Friday, April 18, 2008

Features of the week

Credit crisis (a dwindling or growing problem?), banks vs. trading exchanges, Uranium, a commodities bubble or lack thereof, the future of capitalism, plus interviews with Jim Rogers and Henry Kaufman.

All this and more in this Friday's edition of, "Features of the week".

1. Barron's profiles the top 75 hedge funds and their winning strategies.

2. Sell capitalism. Support for free market economies declined in 10 of 18 countries polled by Globespan.

3. Has capitalism failed? As Ron Paul notes, first we must properly define our terms.

4. Bond investors turn bearish amid commodity inflation.

5. 40 years of inflation, 80 years of Dow/Gold. Adrian Ash.

6. The next unsustainable asset bubble: brought to you by the Fed.

7. Rice traders hit by panic as prices surge.

8. Sugar seems to be a currently overlooked commodity.

9. Show me the commodity bubble! Parts one and two. Chris Puplava.

10. Frank Barbera looks at the Uranium sector. Parts one and two.

11. Barron's catches up with Jim Rogers in Singapore .

12. Templeton's Mobius has been buying Taiwanese stocks.

You may recall that Jim Rogers has also been investing in Taiwan.

13. Mark Mobius thinks the credit crisis is near its end; investor Wilbur Ross feels it is far from over, and is waiting to invest in distressed US regional banks.

14. Alternative trading platforms and MTFs take aim at exchanges.

15. General Georges Doriot: the father of modern venture capital?

16. The Financial Philosopher describes the holdings in his blog portfolio (thanks for the mention, Kent!).

17. Legendary Wall St. economist Henry Kaufman joins FT "View from the Markets" to talk about the credit crisis, financial regulation, inflation, and the US dollar.

Thanks for reading Finance Trends Matter. Enjoy your weekend!

Wednesday, April 16, 2008

Waking up to economic reality

John Rubino has posted an insightful new article called, "America, Ex-Distortion", to the DollarCollapse website.

In a nutshell, this piece describes how America is slowly waking up to economic reality, as mainstream observers start to uncover the truth of how government statistics distort the true picture of the nation's economic health.

To illustrate this point, Rubino highlights a recent article adressing this topic by Kevin Phillips in Harper's Magazine. Here's an excerpt from Kevin Phillips' article.

"...since the 1960s, Washington has been forced to gull its citizens and creditors by debasing official statistics: the vital instruments with which the vigor and muscle of the American economy are measured.

The effect, over the past twenty-five years, has been to create a false sense of economic achievement and rectitude, allowing us to maintain artificially low interest rates, massive government borrowing, and a dangerous reliance on mortgage and financial debt even as real economic growth has been slower than claimed."

That's just a piece of Phillips' opening. If you'd like to see the whole passage, and a brief look at how inflation, economic growth, national debt, and unemployment numbers would look if properly reported, see Rubino's article.

And if you'd like to hear more about John Williams' work at Shadow Government Statistics (cited as a main source for Phillips' article), you can check out his very recent interview with the Financial Sense Newshour.

Thanks to Bear Mountain Bull for his earlier post on both of these points.

Monday, April 14, 2008

On rising food prices

You've probably noticed the recent spate of articles and news stories documenting the rise in global food prices.

If you've been out shopping for food items, or live in a country facing unrest due to these problems, then you've experienced this trend firsthand.

Today we're going to review some previous posts and include a few new items that address this topic. But first, let's look at the trend towards increased news coverage of this topic.

Increased Attention to Rising Food Prices

As you can see from the Google Trends graph, search volume for the query, "food prices", has been appeared pretty stable over the past several years, with a recent rising trend from 2007 into 2008.

What's very notable in this chart is the surge in news reference volume; since the start of 2007, the pattern of occasional upsurges in news on food prices has been replaced with a steadily rising trend in news coverage and reference volume. Note the surge in news items going into this most recent period of 2008.

We can verify this with a simple Google News keyword search. Type in "food prices" (with the phrase in quotes) for the period March 1, 2007 through March 31, 2007, and you'll see Google return 513 results.

The same search for March 1, 2008 through March 31, 2008 yields 1,980 news results. I'd say that a more than threefold increase in news stories (year-over-year) addressing the same topic is a noteworthy trend.

Crisis = Coverage

What's behind the surge in news coverage? The answer is a rise in global food prices and agricultural commodities that seems to have taken much of the world by surprise.

But now that we're in crisis mode, we hear the "world leaders" calling for action.

"THE World Bank has issued an urgent call to rich nations to help stem rising food prices, warning that social unrest in poor countries is spreading and that 100 million people are at risk of being plunged deeper into poverty.

"We have to put our money where our mouth is now, so that we can put food into hungry mouths. It is as stark as that," said World Bank president Robert Zoellick, as he called for more contributions to the $500 million World Food Program.

The plea, issued after a meeting of aid officials in Washington, follows a dramatic surge in world prices for staple foods — rice, for example, has shot up by 75% in just two months — and resulting food-related riots in Haiti, Indonesia, the Philippines and Cameroon in the past week."

Now let me to pose a simple question to these so-called world leaders. What did you expect?

Without getting too bogged down in the details of why agricultural commodity prices are shooting up, let's consider the following trends.

Factors Driving Higher Prices

You have increased consumption of food and grains (and grain-fed animals) in huge developing countries like China and India, and across the globe. That's right, global leaders: increased supply and demand.

We also see rising energy prices in an age of energy-intensive farming. Water shortages, land shortages; think about the land shortages for a second.

You have governments and international agencies promoting hydro dam projects that, as I understand it, flood existing villages and acres of farmland.

There is the relentless urbanization of the Chinese landscape, which is taking over much of that country's arable land. In America, we've seen suburban sprawl and commercial development take over much of our rural landscape, paving over many former ranches and farms.

Next, factor in government subsidies and mandates for ethanol produced from crops, disastrous policies which have misallocated resources and shifted incentives towards the production of crops for biofuel, rather than food.

Biofuels production, combined with notable crop failures, have led to dwindling stockpiles of grain worldwide. This, in turn, has led to growing social unrest for countries facing food shortages, and an upsurge in food riots across the globe.

Finally, add several years of rampant increases in money supply (inflation) worldwide, and you are bound to see higher prices for almost any tangible asset, especially much needed commodities and food items in short supply.

Summing Up

As you can see, there have been many forces at work driving this trend towards higher food prices, despite earlier protests to the contrary from lobbyists, certain members of the media, and governments.

I'm sure readers with a better understanding of agriculture and farming could provide a more detailed explanation (or rebuttal) of these points, but the main idea is clear. Rising demand for food has been met with a shrinking supply of arable land and falling global stockpiles of crops, and the result is higher prices.

For more, please see:

"Why costs are climbing" - Globe and Mail.

"On agricultural commodity prices" - Finance Trends Matter.

"Agflation is the new buzzword" - Finance Trends Matter.

Sunday, April 13, 2008


Willkommen in der jukebox. Leave your requests...

1. OMD - Enola Gay.

2. The Cure - High.

3. Suede - The Wild Ones.

4. Stone Roses - Waterfall.

5. Duffy with Bernard Butler - Rockferry.

6. Primal Scream - Damaged.

Friday, April 11, 2008

Features of the week

The week in review, and the shape of things to come. It's all right here in our, "Features of the week".

1. The smartest men in the room. Whiskey & Gunpowder celebrates the traders who caught the short side of the subprime trade.

2. Subprime losses to total $1 Trillion. Nouriel Roubini called it.

3. Asian inflation begins to sting US shoppers.

4. Ivy League asset allocation excites Wall Street.

5. Follow the money: vast amounts of cash sitting on the sidelines.

6. Tim Wood looks at the stock market from a Dow Theory perspective.

7. Ten questions for Irwin Yamamoto. Kirk Report Q&A.

8. Rice riots signal a top in the rice futures market.

9. Commodities: "Show me the bubble!", writes Chris Puplava.

10. Oil producers struggle with the costs of developing new oil fields.

11. Saudi oil minister Al-Naimi claims there is a current lack of demand for oil, and that Saudi oil supplies are readily available should demand increase.

But even as demand forecasts are reduced, crude oil supplies remain incredibly tight in relation to global demand, as Matt Simmons and the Oil & Gas Journal point out.

12. What's driving the oil price? Informative overview by Wilf Gobert.

13. Robert Rodriguez: the best fund manager of our time.

14. How stereotyping yourself contributes to your success (or failure).

Thanks for reading Finance Trends Matter. Have a great weekend!

Thursday, April 10, 2008

Jesse Livermore: How to Trade in Stocks (1940 Ed. E-book)

If you've been around markets for any length of time, you've probably heard of 20th century supertrader, Jesse Livermore. Today we're highlighting his rare 1940 work, How to Trade in Stocks (ebook, pdf).

But first, a brief overview of Livermore's life and trading career (bio from Jesse Livermore's Wikipedia entry).

Jesse Livermore stock trader"During his lifetime, Livermore gained and lost several multi-million dollar fortunes. Most notably, he was worth $3 million and $100 million after the 1907 and 1929 market crashes, respectively. He subsequently lost both fortunes. Apart from his success as a securities speculator, Livermore left traders a working philosophy for trading securities that emphasizes increasing the size of one's position as it goes in the right direction and cutting losses quickly.
Ironically, Livermore sometimes did not follow his rules strictly. He claimed that lack of adherence to his own rules was the main reason for his losses after making his 1907 and 1929 fortunes.

The popular book Reminiscences of a Stock Operator, by Edwin Lefevre, reflects many of those lessons. Livermore himself wrote a less widely read book, "How to trade in stocks; the Livermore formula for combining time element and price". It was published in 1940, the same year he committed suicide"

Livermore started writing How to Trade in Stocks in 1939, at the urging of his son, Jesse Jr. For Jesse, the project provided some respite from a decade filled with personal depression and financial difficulties. Sadly, Livermore took his own life in late 1940, eight months after the book was published.

I first heard about Livermore's last book while browsing through some related trading books at Amazon.com. It seems author Richard Smitten used Livermore's 1940 work as the basis for a reworked and updated 2001 edition that left some readers cold.

Thankfully, some of the reviewers at Amazon pointed out that the hard-to-find original 1940 edition of How to Trade in Stocks was available online in PDF format. Click the title link to download this valuable scan of Livermore's book and read at your pleasure.

Jesse Livermore trading book How to Trade in Stocks 1940 pdf ebook

I'm excited to read through these pages and study Livermore's thoughts and trading wisdom. I hope you enjoy this rare look at what some consider to be a nearly-forgotten trading classic.

Related posts:

Why do traders still quote Jesse Livermore?  

Jesse Livermore on trading (Quotes)

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Wednesday, April 09, 2008

John Paulson: $3 billion man

In an update to Trader Monthly's recent rundown of Wall Street's top earners in 2007, the Financial Times ran an article focused on the man at the head of that list: hedge fund manager, John Paulson.

Paulson, head of the New York investment fund Paulson & Co., topped the list with an estimated $3 billion in personal earnings during 2007.

This unprecedented level of annual pay was reached at a time when Paulson & Co.'s subprime-shorting strategy led outsized returns in several of its funds, most notably the Paulson Credit Opportunities Fund.

Here's an excerpt from FT's article, "Top hedge fund manager earns $3 billion":

"The 10 best-paid hedge fund managers took home more last year than the combined GDP of Afghanistan and Mongolia as those predicting the global financial meltdown made record profits. Between them, the top 10 individuals earned up to $14bn, according to estimates by the magazine Trader Monthly, John Paulson in New York making $3bn, equal to the GDP of Kyrgyzstan or Rwanda...

...Mr Paulson and Phil Falcone, of New York's Harbinger Capital, who was estimated to have made $1.5bn-$2bn, were both hugely successful last year with bets against US subprime mortgage securities."

For more on Paulson's subprime strategy, see, "Trader made billions on subprime" - Wall St. Journal.

Be sure to join us tomorrow when we look at a famous trader of yesteryear, and the long out-of-print book which served as a sort of operations manual for his personal trading methods.

See you then.

Interview w/ Bill Fleckenstein

Financial Sense Newshour recently interviewed William Fleckenstein, investment manager, financial columnist, and author of the new book, Greenspan's Bubbles.

I posted this interview link in our last Features post, but for those who missed it,here it is again. I thought this would be especially useful since, as Tim Iacono and Barry Ritholtz point out, former Fed Chairman Alan Greenspan is currently engaged in a full court press to convince the media and the public that the housing bubble and its aftermath were, "not my fault!".

You'll find plenty of criticism of the Greenspan Fed's policies in Fleckenstein's book, but what I really wanted to key in on was a much bigger point made at the start of Fleckenstein's FSN intervew.

Jumping right in from the intro, FSN host Jim Puplava introduces a little recognized theme for discussion: the Fed as central planner.

"Bill, I want to start out with the concept of central banks that many may not recognize, and that is in reality, they're central planners..."

Intrigued? Hear Fleckenstein's thoughts on this issue and more in this FSN interview.

Monday, April 07, 2008

The Founding of the Federal Reserve

Last week we spent a lot of time talking about the Federal Reserve, specifically the recent US Treasury-sponsored blueprint that would expand the Fed's regulatory powers and grant the central bank an official mandate to "stabilize markets".

In all the discussion over this recently-proposed framework, I hear very little mention of the fact that a privately-owned, or quasi-public, central bank (the Federal Reserve) is now being cast as a US regulatory agency.

With last week's proposal to reshape the Fed's role with increased oversight of the financial markets, the Federal Reserve is now seen as a lender of last resort to non-bank financial institutions, a regulator of financial markets, and a market stabilizing agent.

Just how did this amazing transformation take place?

To answer that question, I think we first need to look at how and why the Federal Reserve system came about in the first place.

To shed some more light on this topic, here is a video clip of Austrian economist Murray Rothbard giving a 1984 presentation entitled, "The Founding of the Federal Reserve".

There is much to hear in this presentation clip, but one of Rothbard's early main points is that our current central banking system was born out of a desire to cartelize the banking industry and allow for the creation of an ever-expanding (or, "elastic") money supply.

Now, most people would tell you that this is a good thing, as this is the message that most of us absorbed through the media, or were taught in school.

But, as with nearly everything learned in schools (or absorbed through the cloud of "conventional wisdom"), there is another, often overlooked, side of the debate.

I'll let Rothbard do the rest of the talking. I hope you'll find this material interesting and informative, and share it with others who might find it useful as well.

Friday, April 04, 2008

Features of the week

It's been a week for wondering about the future of markets, speaking both in terms of future price direction and the very structure of our "free" capital markets in an age of increased bailouts and government intervention.

Let's review this week just ending and have a look at what may come in the weeks ahead. Please make yourself comfortable and enjoy our, "Features of the week".

1. Those curiously strong Transports. Setting up a coming buy signal?

2. Still trying to make sense of the Paulson plan? More thoughts on Fed oversight.

3. Should the Federal Reserve take on an increased role in our capital markets? Mish on the Fed Uncertainty Principle. Hat tip to Bear Mountain Bull.

4. "The Assault on Free Markets" - Peter Schiff.

5. Why the Fed can't do what it wants to do.

6. As cities revive, America's poor are forced to the periphery.

7. Mobile phones are "more harmful than smoking".

8. Housing slump comes to the Hamptons.

9. Gulf states should abandon dollar pegs, says Marc Faber.

And until they do, all other, "Gulf inflation plans 'doomed to fail'".

10. Hedge funds are making loans to small companies in Asia.

11. George Soros joins FT for its "View from the Markets" video series.

12. Food prices ring alarm for Asian nations.

13. Reserve Bank of Zimbabwe issues a Z$50 million note to deal with supposed "cash shortages" (see history of the Weimar Hyperinflation for parallels).

Meanwhile, Zimbabwe rulers announce an election runoff, as Mugabe looks to stay in power.

14. Thomas E. Woods has high praise for Ron Paul's new book.

15. Ron Paul on, "Money, Inflation and Government".

16. The current financial and political mess is a, "Multi-Party Affair".

17. Bill Fleckenstein joins Financial Sense Newshour to talk about his new book, "Greenspan's Bubbles".

Thanks for reading Finance Trends Matter. Enjoy your weekend!

Thursday, April 03, 2008

More thoughts on Fed oversight

On Monday we talked about the government's recently proposed plan to further Federal Reserve oversight of the financial markets and create a regulatory superagency to oversee "both investor protection and market stability" (LA Times quote).

I thought we'd follow up on this with some facts, and a bit of commentary from both sides. You'll hear the bright side, and get a view of the downside to this recent proposal. Shall we begin?

We'll start with an overview that lays out the nuts and bolts. Here's the Economist's recent take on the "Paulson plan" to revamp the US system of financial regulation.

"The Treasury plan envisages several phases of reform. Short-term goals include the expansion of the President's Working Group (PWG), now a club for only select large regulators, and the creation of a federal Mortgage Origination Commission.

This would consolidate oversight of a process that has wreaked havoc on balance sheets. It is also seen as a partial solution to the problem of dodgy securitisation, as the commission would grade the underwriting of loans going into pools. Critics point out, however, that it would create another layer of bureaucracy, since regulation of mortgage brokers and many lenders would stay with the states.

In the long run, say between two to eight years, Mr Paulson hopes to see a new regulatory architecture, with today's hotch-potch folded into three “objectives-based” agencies that some see as similar to the Australian system. That means a remodelled Federal Reserve with an eye on overall market stability; a prudential regulator for banks and thrifts, which would mean the demise of the Office of Thrift Supervision (OTS); and a business-conduct agency, taking in much of the SEC's oversight of disclosure and the like."

Now, the Economist piece notes that the rationale behind this unifying plan is to correct the present set-up which is "Balkanized and inefficient". But then, this sounds like the same line that you hear whenever people are arguing in favor of a new regulatory scheme or a roll-up and enlargement of an existing framework.

Indeed, this is the view offered by writer, Ian Welsh, over at the Huffington Post. I don't usually bother to read this site, but I was caught by his article title, which had a certain ring of truth to it. Here's an excerpt from, "The Paulson Plan: Doing What He Wanted to Do Anyway":

"So Paulson has come out with a plan. It's primarily a reorganization plan, pushing the Thrift regulator into the SEC, creating a federal mortgage regulator, giving the Fed the right to inspect the new firms that now have access to its liquidity. There's some talk about objectives based It's almost always a bad sign when the primary "reform" is to create new agencies or merge old ones and Krugman is right to ridicule it as The Dilbert Strategy."

Welsh goes on to outline his view of the proposed regulation scheme and its shortcomings, but does not question the idea of Fed regulation itself. He seems more concerned from a pragmatic view, that the plan will not make the needed corrections, and criticizes the plan as a meaningless "shock therapy" mandate designed to push through long-desired legisition.

So I went looking for upsides to the plan, and checked out a recent Bloomberg article on the Fed's new market authority. It turns out almost everyone there was down on it too.

Some excerpts:

``It would be Congress and the president essentially giving a blank check to a regulator over which they have very little power,'' said Michael Greenberger, a professor at the University of Maryland in Baltimore and a former CFTC official. Paulson's proposal will ``allow Wall Street to do whatever they want until a crisis occurs, at which point the Fed would intervene.''

"Treasury's proposal would ``create a more coherent supervisory scheme'' by ending ``some of the inconsistencies arising from today's patchwork system,'' Lou Crandall, chief economist at Wrightson ICAP LLC, a Jersey City, New Jersey-based research firm, said in a report.

Still, expanding the Fed's role to stabilize markets would exacerbate the ``moral hazard problems'' stemming from the central bank's decision to lend money to investment banks after the near collapse of Bear Stearns, said Crandall, who used to work at the New York Fed."

But don't worry, I found a quote in favor of the plan to merge regulatory agencies...from SEC Chairman Christopher Cox.

"Just as systemic risk cannot be neatly parceled along outdated regulatory lines, the overarching objective of investor protection can't be fully achieved if it fails to encompass derivatives, insurance, and new instruments that straddle today's regulatory divides,'' Cox said in a statement on March 29."

Here's more debate on the plan in a recent Bloomberg video collecting soundbites from various commenters. You'll hear comments from John Snow, Arthur Levitt, Harvey Kauffman, Michael Oxley, Marshall Front, Jeremy Siegel, and others.

Most of the government guys and former regulators seem to favor the proposal (or parts of it), while Marshall Front likens the plan to common after-the-fact regulatory proposals which end up having adverse unintended consequences for business and the economy.

So far, I'm having a hard time finding anyone (besides the regulators and the investment banks) who's in favor of the Paulson plan for increased Fed oversight of the financial markets. It turns out even the Fed is giving this plan the thumbs down.

So in the interest of lending an ear to some added voices, let me link to some additional commentary from writers and bloggers who have been looking at this issue. You may find some positive outlook in the blog search link I'll include, but you may have to sift for it.

"Paulson's Injustice to the Trial and Error Economy" - Seeking Alpha.

"Don't discount Paulson" - LA Times.

"Giving the Fed more (less?) regulatory power" - Marginal Revolution.

"Stemming the Tide" - BMB and Minyanville's Andrew Jeffrey.

"Market Manipulation Under Veil of Secrecy?" - Mr. Practical.

"Paulson's Civic Robbery to Finance Hyperinflation" - John Browne.

Various blogger posts on the Paulson plan - Google blog search.