Finance Trends Letter

"I'm forever blowing bubbles, Pretty bubbles in the air They fly so high, nearly reach the sky Then like my dreams they fade and die." I'm Forever Blowing Bubbles - Jaan Kenbrovin & John William Kellette 1919. W ith all the talk about financial bubbles these days, we might start to get comtemplative and ask ourselves a couple of basic questions. First, what is a bubble? And second, have the conditions that define a bubble been shown to exist in one or more areas of the economy? Are we in fact living in a "bubble economy" , or is the term being indiscriminately applied to any phenomenon where rapid growth and speculation have been observed? Let's begin by defining our terms. A financial bubble is properly defined as a situation in which the market for an asset or valued object has been taken over by rampant speculation, with increasing disregard for the underlying economic fundamentals. In Manias, Panics, and Crashes: A History of Financial Crises , ...

Professor Harry Kat of London's Cass Business School says investors can earn greater returns at a fraction of the cost by replicating hedge fund performance. In, "Hedge-Fund Returns Can Be Matched Without Fees" , Bloomberg gives us the low down on Kat's findings. Synthetic funds would have outperformed 82 percent of the 2,000 hedge funds and 500 funds of hedge funds studied by Kat, a former head of equity derivatives at Bank of America Corp. Most of the gains generated by hedge funds were eaten up by fees, typically 2 percent of a portfolio and 20 percent of profits, he found after studying 15 years of monthly fund results. ``In most cases, managers aren't good enough to make up for the massive fees that they charge,'' said Kat, a professor of risk management at Cass, part of London's City University, in an interview. ``The combination of excessive fees and minimal opportunity in the market makes alternative investments really doubtful in terms of thei...

A recent trip to China is the inspiration behind this recent article by Bruce Feirstein in the New York Observer. An excerpt from "Bargaining in Beijing" : The last time I was here, two years ago, the thing that struck me was the number of cars and trucks on the streets of Beijing, and the realization that we (as Americans) were going to be in competition for oil. But this time, I was struck by something else: a sense of Chinese invincibility. In the English-language news, there’s almost no mention of the war in Iraq, the mid-term elections or North Korean nukes; it’s as if they’re side issues (think of Americans covering Britain’s Boer War in 1880) and tangential to the future. It’s the Chinese century. And however an important trade partner we may be, we represent the past. Have a look. It's a short piece, and an interesting account of one traveler's experiences and observations.

This is just a heads up for anyone who hasn't heard the latest Financial Sense Newshour broadcast. This week, Jim Puplava interviews Matthew Simmons , Chairman of Simmons & Company International. The topic: a critique of the recent CERA report , which claims oil supplies are plentiful and that a peak in production with ensuing decline curve will resemble an "undulating plateau". Check it out.

Interview with Dr. Marc Faber from Howestreet.com, entitled, "World Fiscal Reality Check" . Enjoy the video for the insights expressed by Dr. Faber and for the refreshing break from financial fantasy land.

From the Big Picture blog, Barry Ritholtz on "The Return of M3" : Last year, we lamented the passing of M3 reporting . This broadest of money supply measures had shown a discomforting increase in liquidity, far greater than what M2 was revealing. At the time of the M3 announcement, we suspected the Fed was attempting to cover their tracks, disguising an ongoing increase in money supply and an unstated "easing" in Fed bias. Since that time, we have learned: the Treasury Department was also adding liquidity -- a duty they have assumed, in part, in addition to the same performed by the Fed. Indeed, based on the credit growth data Doug Noland published last month ( October Credit Review ), it appears that the Fed has – despite increasing interest rates – actually eased over the last two years. Barry also mentions the websites where M3 figures are being reconstructed from publicly available data. One such source is the excellent Nowandfutures.com (see "Key Stats (...

Are credit and ample liquidity (aka cheap money) the driving factors behind the recent spate of merger and buyout deals? We asked this question back in March in a post entitled "Mergers and global liquidity" . All the usual reasons for doing deals still applied (savings, "synergies", empire building, etc.), but it seemed that the recent upsurge in M&A and buyout deals has been fueled by something else: in a word, credit. Well now comes news that the most recent deal binge has, in fact, been financed through easy and cheap debt. In yesterday's Financial Times (November 21, 2006 print edition), John Authers looked at the deals done in the previous 24 hour period and asked, "where did yesterday's rash of deals come from? The answer is the credit market". Authers went on to say that because of low borrowing costs, it is now cheaper for companies to finance themselves more cheaply through debt, rather than equity. This, being opposite from the usua...