Books on Investing: Discussions, Reports &amp; Suggestions

Top 97. Nov 9, 2003 11:35 AM

» Normxxx - The Dollar Crisis: Causes, Consequences, Cures

Guest Commentary, by Richard Duncan

The Dollar Crisis: An interview with Richard Duncan

by the PRUDENTBEAR.COM

November 8, 2003

Richard Duncan is author of a new book called "The Dollar Crisis: Causes, Consequences, Cures." In it, he argues that the Japanese bubble, the Asian Crisis and the U.S. bubble are related. In Mr. Duncan’s view, problems have been building since the U.S. ditched the Bretton Woods system for what turned out to be a "dollar standard." As Richard will explain, the U.S. has benefited from the dollar standard because the U.S. is allowed to play by different rules. It appears, however, that we've overplayed our hand. But before we find out why Mr. Duncan thinks that a "dollar crisis" is inevitable, let's learn how we got here.

PRUDENTBEAR.COM: Before we find out where we are, can you help us find out where we've been by filling us in on Bretton Woods? For example, under Bretton Woods, what happens when a country imports more than it exports?

RICHARD DUNCAN: To see what has gone wrong with the global financial architecture, it’s first necessary to understand that the global economy functions very differently today than it did before the Bretton Woods System collapsed in the early 1970s. Today, the United States’ Current Account Deficit is 60 million Dollars…AN HOUR. A Million Dollars a minute, if you will. Or roughly 17 thousand Dollars a second. Let’s call it HALF A TRILLION DOLLARS A YEAR.

That’s the amount by which the United States is subsidizing the rest of the world’s economy each year. AND, that’s the amount by which the United States’ net debt to the rest of the world is increasing each year. It’s also the amount by which international reserves—and the Global Money Supply—are expanding each year since the increase in international reserves is more or less determined by the size of the annual US Current Account deficit.

Under the Gold Standard, or the quasi-gold standard Bretton Woods System, such an extraordinary surge in global liquidity would have been impossible.

There were automatic adjustment mechanisms inherent in the gold standard that made large, multi-year trade imbalances unsustainable. For instance, if England had a persistent trade deficit with France, England’s gold would have been shipped to France. The expanded Monetary Base in France would have allowed an expansion of credit creation that would have resulted in rapid economic growth and, eventually, inflation.

The opposite would have occurred in England. England would have lost gold. Therefore its Monetary Base would have contracted, necessitating a contraction of credit. Credit contraction would have caused a recession and, as a result, falling prices.

After a few years, with prices in France rising and prices in England falling, the French would have begun to buy more English goods, while the English bought fewer French good, until equilibrium on the balance of trade was restored.

From the beginning of the Nation State up until the early 1970s, that is how international trade worked. And, it was within that framework that all the classical economic theory of the 18th and 19th Centuries was formulated.

Once Bretton Woods broke down, however, the self-adjustment mechanisms inherent in the gold standard ceased to function and the global economy began to operate in a way that would have been entirely inconceivable to Adam Smith or David Ricardo.

International Trade no longer had to balance. Deficits merely had to be financed. Consequently, trade imbalances exploded and the greatest global financial bonanza in history got under way.

PRUDENTBEAR.COM: So it would be impossible for the U.S. to have today's trade deficit under Bretton Woods?

RICHARD DUNCAN: Under the Gold Standard or the quasi-gold standard Bretton Woods system, the United States could not have run very large current account deficits over many years because those deficits would have depleted its gold reserves, causing credit to contract, driving the economy into recession and pushing prices down until Americans could no longer afford to buy any more foreign-made goods.

For example, according to IMF statistics, the market value of the United States’ gold reserves is $83.3 billion. In 2001, the US trade deficit with China alone was $83 billion. Therefore, under a gold standard, the entire US gold reserves would have been depleted just to cover one year’s current account deficit with China, wiping out all the base money of the United States.

In the post Bretton Woods world, the United States does not have to pay for its deficits with gold. It can pay with paper money or debt instruments instead—and there are technically no limits as to the amount of such credit instruments that the United States can create.

What this means is that the self adjustment mechanism inherent in the Gold Standard that prevented large and persistent trade imbalances ceased to function when Bretton Woods collapsed. While the surplus nations did experience economic overheating and hyper inflation in asset prices just as they would have under the Gold Standard, the deficit country, the United States, did not deflate because it didn’t have to pay for its deficits out of a limited amount of gold reserves, but instead could finance those deficit by issuing more and more debt instruments…or simply by printing more Dollars. And that is exactly what it has been doing.

PRUDENTBEAR.COM: Okay, but with Bretton Woods now old school, let's talk about how the dollar standard works today. What's to stop us from importing all the goods we want?

RICHARD DUNCAN: In 1988, the US was still a net creditor nation. Now, its net debt to the rest of the world is roughly $3 trillion Dollars, give or take a couple hundred billion. That’s approximately 30% of US GDP or 10% of world GDP.

Since the United States’ current account deficit is now more than 5% of US GDP per annum, that means the United States’ net debt to the rest of the world will rise to 35% of GDP by the end of 2004, 40% by the end of ’05, 45% by the end of ’06, and so on. Of course, this rise in net indebtedness as a percentage of GDP will be affected by the rate of GDP growth. But, it must not be forgotten that the GDP can contract as well as expand; and given the imbalances in the US economy a very painful recession is a more probable scenario than most would like to admit.

The problem with the rapid increase in US indebtedness is that the United States must be able to service the interest on that debt. And, already, here things have begun to turn tricky.

Foreign investors now own more than 40% of the US government’s tradable debt, 26% of US corporate bonds, and 13% of US equities.

What’s next? Already US consumers are up to their eyeballs in debt. Overly indebted US corporations are going bankrupt in droves. Which sector of the economy will be able to issue (and service) an additional $500 to $600 billion worth of debt every year—year after year—so long as the present extraordinary trade imbalances persist?

If new US Dollar debt instruments of this magnitude are not forthcoming, the surplus nations will have no choice but to convert their Dollar surpluses into their own currencies, causing them to skyrocket and the Dollar to plunge, thereby killing the export goose that laid the golden egg.

Fortunately for the near term outlook for the Dollar, the US government has once again begun running massive budget deficits. And, there’s no doubt, that the US government can service the interest on its own debt. This year the US budget deficit is expected to exceed $500 billion. However, the Current Account deficit will be $600 or more. So even if the surplus nations buy all of the US government bond issues (which is unlikely for a number of reasons) that’s still not enough to absorb all of their Dollar export earnings. They would still have to buy more than one hundred billion of other Dollar denominated assets each year.

Nonetheless, the re-emergence of very large government bond sales will provide a safe home for a good part of the Dollar export earnings of the surplus nations. Consequently, it will relieve some of the pressure on the Dollar, since the United States’ trading partners will be able to park at least a significant portion of their Dollar earnings in US Treasuries, instead of being forced to choose between, one, investing them in over-indebted US corporations with questionable accounting standards or, two, throwing their economies into recession by converting their dollar earnings into their own currencies, and thereby causing them to appreciate sharply.

Still, this state of affairs cannot continue indefinitely. The United States cannot continue increasing its net indebtedness to the rest of the world at the rate of 5% of GDP per year. And, not even the US government can continue running $500 billion Dollar a year budget deficits forever.

PRUDENTBEAR.COM: What's wrong with a huge trade deficit? Haven't we been told that it's a sign that the U.S. offers the best investment opportunities in the world?

RICHARD DUNCAN: Some government officials and investment bankers frequently tell the public that the US Current Account deficit is caused by the eagerness of the Rest of the World to invest in the United States. They reason that the large US Financial Account surpluses resulting from foreign investment in the United States necessitates the large US Current Account deficits, given that the Financial Account and the Current Account must completely offset one another when added together.

It is hard to understand how such a ridiculous idea could be taken seriously. Americans buy more from the rest of the world than the rest of the world buys from the United States because the rest of the world uses very low cost labor to make goods at a much lower cost than American manufacturers can. This could not be more obvious. That is why the current account surpluses of Mexico, China, Thailand, and the rest of the Asia Crisis countries rose sharply following the devaluation of their currencies in the 1990s: their labor costs fell, making their products even more attractively priced to the US consumer. Is it conceivable that American consumers buy all the foreign made products in their homes and in their closets because other countries what to invest in the United States? Or is it because those imported products were 50% cheaper than similar goods made in the US? Wage rates in Chinese factories are $5 per day. Think about it.

In 2002, the United States ran a current account deficit of approximately $500 billion because the rest of the world can manufacture products more cheaply than the US can. Anyone who tries to persuade the public that the US Current Account deficit is caused by the desire of foreign investors to buy US assets should be laughed at if he actually believes that and ashamed of himself if he doesn’t. These deficits have resulted in tremendous disequilibrium in the global economy. The public should not be mislead about their origin.

PRUDENTBEAR.COM: You argue that the dollar standard has global implications. Maybe we can understand what you mean by reviewing your explanation of Japanese bubble. What does a lack of constraints under the dollar standard have to do with the Japanese bubble?

RICHARD DUNCAN: By the early 1980s, the United States began buying much more from the rest of the world than the rest of the world bought from the United States. Obviously, this did wonders for the economies of those countries with large surpluses with the US.

As a result of those surpluses, the international reserves held by the United States’ trading partners began to pile up. For example, Japan’s international reserve rose from $3 billion in 1968 to $84 billion in 1989. Thailand’s rose from $2 billion in 1984 to $38 billion in 1996.

In every instance, where international reserves expanded sharply, “Economic Miracles” occurred - for a while.

The economies of the surplus nations boomed for two reasons: The first and more obvious reason is that their exporters made terrific profits and employed large numbers of workers.

It is the second reason, however, that was the real spark that set off the economic boom, and it is this reason that is generally not understood.

It is as follows: when exporters brought their dollar earnings home, those dollars entered their domestic banking system and, being exogenous to the system, acted as high powered money.

The affect on the economy was just the same as if the central bank of that country had injected high powered money into the banking system: as those export earnings were deposited into commercial banks, they sparked off an explosion of credit creation. That is because when new deposits enter a banking system they are lent and relent multiple times given that commercial banks need only set aside a fraction of the credit extended as reserves.

Take Thailand as an example. Beginning in 1986, loan growth expanded by 25 to 30% a year for the next ten years. In a closed economy without foreign capital inflows, such rapid loan growth would have been impossible. The banks would have very quickly run out of deposits to lend, and the economy would have slowed down very much sooner.

In the event, however, with such large foreign capital inflows going into the banking system, the deposits never ran out, and the lending spree went on and on. By 1990 an asset bubble in property had developed. Every inch of Thailand had gone up in value from 4 to 10 times. Higher property prices provided more collateral backing for yet more loans.

A huge building boom began. A thousand high rise buildings were added to the skyline. All the building material industries quadrupled their capacity. Corporate profits surged and the stock market shot higher. Every industry had access to cheap credit; and every industry dramatically expanded capacity. The economy rocketed into double digit annual growth as everything turned to gold in an explosion of investment.

And, so it was in all the countries that rapidly built up large foreign exchange reserves: credit expansion surged, investment and economic growth accelerated at an extraordinary pace, and asset price bubbles began to form.

Think of Japan in the 1980s; Thailand and the other Asia Crisis Countries in the 1990s; and China today.

PRUDENTBEAR.COM: Why did the Asian miracle end?

RICHARD DUNCAN: The Asian miracle ended for the same reason the Japanese miracle of the 1980s ended and for the same reason that the current Chinese miracle will soon end. Those “miracle” were bubbles and bubbles always pop.

I lived in Thailand during the first half of the 1990s, so I can tell you from personal experience that economic bubbles are fun…until they pop.

Unfortunately, economic bubbles always do pop. And when they pop, they leave behind two serious problems.

First, they cause systemic banking crises that require governments to go deeply in debt to bailout the depositors of the failed banks. Economic bubbles always end in excess industrial capacity and/or unsustainably high asset prices. Banks fail because deflating asset prices and falling product prices make it impossible for over-stretched borrowers to repay their loans.

During the Bretton Woods era, systemic banking crises were practically unheard of. Since Bretton Woods broke down, however, they have occurred on a nearly pandemic scale. There have been at least 40 systemic banking crises around the world between 1980 and today.

The second problem economic bubbles leave behind when they pop is excess industrial capacity caused by the extraordinary expansion of credit during the boom years. The problem with excess capacity is that it causes Deflation.

Japan is suffering from Deflation. Hong Kong and Taiwan have deflation. Even China, where an economic bubble is still inflating, has been experiencing deflation off and on since 1998. The rest of the Asia Crisis Countries only avoided deflation by drastically devaluing their currencies and exporting deflation abroad. Think of the impact that the over expansion of Korea’s semiconductor industry has had on global chip prices.

This, therefore, is the point I want to stress: trade imbalances of the magnitude experienced over the last 25 years cause unsustainable economic bubbles in the surplus countries which subsequently implode, leaving behind wrecked banking systems, heavily indebted governments, excess capacity and deflation.

PRUDENTBEAR.COM: Next in line was the United States bubble. Does that mean we can blame foreigners for our bubble trouble?

RICHARD DUNCAN: First, I think we should be very careful about assigning “blame” to anyone. This is a global problem that evolved over decades. There are simply too many variables to untangle all the cause and effect relationships that produced the extraordinary economic imbalances we are discussing. Rather than pointing fingers, global policy makers need to work together to find a solution to prevent the occurrence of a world wide economic crisis when the US current account deficit inevitably unwinds.

Having said that, it is true that the surplus countries played a role in fueling the New Paradigm Bubble in the United States during the late 1990s. At that time, the US government temporarily enjoyed a budget surplus (leaving aside the issue of the unfunded Social Security program).

That budget surplus was due to all the bubble tax revenues, mostly from capital gains taxes on stocks. During those years, 1998 to 2000, the government stopped selling new Treasury Bonds.

Yet that was also the period, following the currency devaluations of the 1990s, that the current account surpluses of the United States’ trading partners expanded very sharply, hitting $400 billion by 2000. Since there were no new US treasury bonds for those countries to buy with their dollar surpluses, they bought agency debt (Fannie Mae and Freddie Mac) and corporate bonds instead. That sparked off the property boom in the US and also facilitated the incredible misallocation of corporate credit at that time. It is no coincidence that the peak of the US economic bubble occurred when there were no new treasury bonds being issued to absorb the growing dollar surpluses of the United States' trading partners. In large part, that bubble happened because the rapidly growing dollar stockpiles of the surplus countries had to be invested in other kinds of US dollar-denominated assets if they were to generate a positive return.

PRUDENTBEAR.COM: Now we have a dynamic where we buy goods from Asia and Asia takes those dollars and buys U.S. securities. Sounds good to me, what's the catch? What will make the next five years different from the last five?

RICHARD DUNCAN: This state of affairs cannot continue indefinitely. The United States cannot continue increasing its net indebtedness to the rest of the world at the rate of 5% of GDP per year. And, not even the US government can continue running $500 billion Dollar a year budget deficits forever.

That said, while this situation can’t last indefinitely, it could persist for a number of more years. Not without costs, however. As we have already seen, the US Current Account deficits are causing an explosion of the global money supply which, in turn, has been responsible for the rise of a series of bubble economies that leave systemic banking crises and deflation behind when they inevitably implode.

In other words, the United States’ Current Account deficit, by flooding the world with Dollar liquidity, is creating (in fact, has already created) a global credit bubble of enormous proportions. It is only a matter of time before something will have to give.

Either government finances will snap under the strain of bailing out failed banking systems, or deflationary pressure stemming from global excess capacity will undermine corporate profitability to such an extent that unemployment will soar, causing a backlash against free trade, or the rest of the world will eventually lose faith in the ability of the United States to finance its ever growing indebtedness and, in a panic, dump their US Dollar-denominated debt instruments, making it impossible to finance further deficits.

One way or the other, this global credit bubble will—like every credit bubble before it—come unwound, the Dollar will lose much of its value, and the US Current Account deficit will correct.

Unhappily, the correction of the US Current Account deficit will have extraordinarily damaging impact on the global economy. The world economy has grown dependent on exporting to the United States. At 500 billion Dollars, the US Current Account deficit is the equivalent of almost 2% of global GDP—and, that’s before any multiplier effect is taken into consideration.

The inability of the United States to indefinitely expand its indebtedness to the rest of the world at the current rate of a Million Dollars a minute means that Asia’s era of export led growth will soon be coming to a close.

If policy makers don’t come up with a new source of global aggregate demand to replace that presently created by the US Current Account deficit then the global economy will not be able to avoid a severe and protracted deflationary slump.

What’s more, the two principle economic policy tools of the 20th Century, Monetarism and Keynesian fiscal stimulus, are not up to the task at hand. This crisis has been caused by an explosion of the global money supply. It cannot be solved by simply printing more money—as many important and powerful people would have you believe. It might be possible to fight fire with fire, but no one has ever suggested that you can fight liquidity with liquidity.

Similarly, governments are already too heavily in debt, or soon will be, to provide the type of fiscal stimulus required to resolve this crisis. Since most governments have run large budget deficits through goods years and bad over the last several decades, they’re no longer in the position to provide the type of stimulus that Keynes had in mind when he published The General Theory in 1936, which, by the way, was the last time the world experienced this kind of liquidity trap.

I tell you without exaggeration that developing a new source of global aggregate demand sufficiently large to replace the stimulus that up until now has been provided by the US Current Account deficit is the greatest challenge facing economic policy makers today

-- posted by Normxxx

Top 98. Nov 10, 2003 6:59 AM

» Normxxx - When Genius Failed

When Genius Failed: The Rise and Fall of Long Term Capital Management by Roger Lowenstein

When the Market Made Fools of Wall Street's Wisest Men (Review From Robert Folsom's Market Watch)

A few weeks ago I mentioned that I was reading When Genius Failed, the book about Long-Term Capital Management. LTCM was the hedge fund run by the best minds on Wall Street, but it suffered such monumental losses that the Federal Reserve itself had to sponsor a bail out of the fund in September 1998.

In the brief space on this page, I cannot relate the immense arrogance and irony of this story -- to do it justice literally required a book. Here's a small taste:

The partners at LTCM knew how to hedge trades worth tens and hundreds of millions of dollars, but failed to hedge their own fortunes -- virtually all of their own wealth was in the fund when it collapsed.

They believed markets were efficient, with a depth of faith that rivaled religious fanaticism. Yet their trading models were programmed to identify and exploit the market's inefficiencies. Iheir trading models were also programmed to measure risk, based on experience and market history. Yet they didn't have or ignored data that showed many "extreme" price divergences in the markets, and were thus unprepared when Russia defaulted on its ruble debt in August 1998.

The firm's two most prominent intellects [had been] awarded the Nobel Prize for economics in October 1997, less than one year before the fund they helped to manage lost four billion dollars. LTCM was devoted to the dogma of "diversification," and held positions worth hundreds of millions in each of nine separate categories of trades -- only to suffer catastrophic losses in all of them at once.

The book is well written and doesn't over do the details. If a tale of titanic folly can be a "good" read, this one is.

Yet it's so much more. The mania of the late 1990s went beyond the foolishness of undereducated small investors buying overpriced NASDAQ stocks. LTCM's partners seemed to know all there was to know about finance, and about how prices should behave. Yet the market also made fools of Wall Street's wisest men, and did so when their arbitrage bets amounted to "more than $1 trillion worth of exposure." Yes, that's trillion with a "T."

[Editor's Note: This is why you must have "Circuit Breakers" for each asset class, and for your overall portfolio (sometimes "small" losses add up). ]

-- posted by Normxxx

Buy it from our Co-op Store

Top 99. Nov 15, 2003 7:18 PM

» Q_out - The Fourth Turning

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The Fourth Turning, An American Prophecy
What the Cycles of History Tell Us About America's Next Rendezvous with Destiny

By William Strauss and Neil Howe

This analysis of the roles of changing generations in America is so prescient that its hard to believe that it was written in 1997. Here's an excerpt that projects the conditions of the current decade.

An initial spark will trigger a chain reaction of unyielding responses and further emergencies. The core elements of these scenarios (debt, civic decay, global disorder) will matter more than the details, which the catalyst will juxtapose and connect in some unknowable way. If foreign societies are also entering a Fourth Turning, this could accelerate the chain reaction.
At home and abroad, these events will reflect the tearing of the civic fabric at points of extreme vulnerability -- problem areas where, during the Unraveling, America will have neglected, denied, or delayed needed action. Anger at "mistakes we made" will translate into calls for action, regardless of the heightened public risk. It is unlikely that the catalyst will worsen into a full fledged catastrophe, since the nation will probably find a way to avert the initial danger and stabilize the situation for a while. The local rebellions will probably be quelled, terrorists foiled, fiscal crisis averted, disease halted, or war fever cooled. Yet even if dire consequences are temporarily averted, America will have entered the Fourth Turning.

Strauss and Howe describe a four generation cycle that leads the nation from crisis to high to awakening to unraveling and back to crisis. Each crisis period redefines the nation. Past crisis periods were the Revolution, the Civil War, and the Depression, each about 70 years apart. Halfway between those crisis period comes a time of awakening, a sort of religious revival. In the 1960s and 70s the awakening was one of individual rights (civil, women's, privacy).

The authors predict a crisis period that will likely begin with an economic devaluation and lead eventually to war. They expect that the generation graduating from high school in the first two decades of the new millenium will be called to make great sacrifices and reap great honor for their country in ways similar to the GI generation that fought in World War II and is now passing away.

The current generation of citizen soldiers is typified by the Power Rangers, ordinary youths that when summoned by the elder, transform themselves into thunderbolting fighters of evil.

The Boomers, moving into retirement, will see their assets diminished by a secular bear market and see Social Security and Medicare benefits severely cut.

Strauss, cofounder and director of the Captial Steps, and Howe, senior advisor to the Concord Coalition, unfortunately write like history professors. While my wife made it through the entire book, with several renewals from the local library, I skipped most of the history stuff and started in earnest with Chapter 10. Even so, the generational views and their implications are profound.

<img src="/files/mysites/qout/bhoestarts.gif" width=53 height=34 align="left">
Q_out

-- posted by Q_out

Top 100. Nov 15, 2003 10:03 PM

» 2win - Book by Marc Faber

See Marc Faber's recent book, "Tomorrow's Gold: Asia's Age of Discovery." According to Faber, Asia's three billion-strong population will have a profound effect on the world. He cautions that today's richest cities and clusters of wealth are unlikely to retain their exalted positions in the future.

Change is the thread. As Faber points out, the world is experiencing a transformation as great as the late 15th Century's golden age of discovery and the industrial revolution of the 19th Century - events that altered the commercial face of the earth forever.

And from this dramatic landscape - a world in which economic, social and political conditions are morphing at an alarming rate - Faber identifies investment opportunities.

Written in an informal but authoritative style, it is easy to digest. Many charts illustrate the insights of this investment guru who knows Asia intimately, having lived there for years.

Click here to visit publisher's site.

Dave J.

-- posted by 2win

Top 101. Dec 18, 2003 2:14 PM

» Kirk - The Lazy Person's Guide to Investing

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Warner Books, a division of Time Warner, just sent me "uncorrected Page Proofs" (paperback book) for a book by Paul Farrell called "The Lazy Person's Guide to Investing." They asked me to write a review for the book and recommend it here which I think I will since my first skim of it was quite favorable.

<img align=left src=http://images.amazon.com/images/P/0446531685.01._PE30_PI_SCMZZZZZZZ_.jpg width=111 height=169>
The Lazy Person's Guide to Investing
A Book for Procrastinators, the Financially Challenged, and Everyone Who Worries About Dealing With Their Money
by Paul B. Farrell (Author)

Availability: This item has not yet been released. You may order it now and we will ship it to you when it arrives.
Edition: Hardcover
Price now $13.97

I really liked this book!

Dr. Farrell covers all sorts of the portfolios we talk about here at Suite101.com. Farrell starts out with our favorite portfolio in the first chapter titled "The Couch Potato Portfolio is Microwavable." Regular readers here know this is simply a two fund portfolio comprised of The Total Stock Market and Total Bond Market index funds.

In chapter two, Farrell expands to the "coffee house portfolio" which we talk about often here. It is a mixture of these Vanguard index funds

VFINX: Vanguard S&P500
VIVAX: Vanguard Large-Cap Value
NAESX: Vanguard Small-Cap
VISVX: Vanguard Small-Cap Value
VGTSX: Vanguard International
VGSIX: Vanguard REIT
VBMFX: Vanguard Total Bond

In chapter three he talks about Peter Bernstein's well known 4x25% "No Brainer Portfolio":

VFINX: 25% Vanguard S&P500
NAESX: 25% Vanguard Small-Cap
VEURX: 25% Vanguard European
VBMFX: 25% Vanguard Total Bond

The rest of the book adds a few versions of these well known portfolios then discusses their returns while contrasting them to managed results. My favorite is "Dilbert's Anti-weasel Portfolio" which is simply a 70:30 Couch Potato Portfolio. Dilbert also writes a full book on personal finance advice in less than a single page. The price of the book is well worth it just to get "Dilbert's Fab-u-lous 1-Page Personal Finance Book."

The very end of the book talks about having two brains where you let one brain manage 10% of your funds while you index the other 90% according to one of the techniques taught in the book. I know that even the best indexers are well known to have ten or twenty percent "mad money" in a self managed account.

I have heard many of the best indexers say they have "mad money" in a self managed account. I believe this can be up to 20% for those who are young and a good place to get ideas for what to buy is my newsletter. I started out with most of my money in diversified funds then slowly I started to buy stocks on my own with a small part of my money. I was either good or lucky for 20 years so my "mad money" is much larger than my indexed stuff. If I was still working, I'd still contribute new money 80:20 with 80% going to the diversified index type funds and 20% to "mad money" (more or less…). Why take a chance that the good luck/skills continue?

To all: Happy Christmas / Hanukkah / Eid / "pick-one not on list" and Merry New Year!!

Kirk's Newsletter performance vs. the S&P500



Year-to-date:
 
  Date       Kirk    S&P500   Delta
2003 YTD    +76.7%    27.5%    48.2%  as of 12/31/2003 
 

Total Return:
                                  Kirk   S&P500+  NASDAQ 
5 Yrs 12/31/98 through 12/31/03  171.0%  ( 3.0%)  ( 8.6%)
Annualized Annual Return          22.1%  ( 0.6%)  ( 1.8%) 
 
  
9/30/98 Inception Value:   $100,000
9/30/03 5 yrs later value: $345,395 up 245.4%
S&P500 between 9/30/98 and 9/30/03: up   4.6%
12/29/03   $424,249 - up 24.7% since 1/1/00!
With dividends reinvested. All Numbers unaudited. 
Click for a free issue of my newsletter 
Suitable for the aggressive growth part of your 
diversified investment portfolio.

-- posted by Kirk

<img align=left src=http://images.amazon.com/images/P/1556236832.01._PE30_PIdp-schmooS,TopRight,7,-26_SCMZZZZZZZ_.gif>
Stan Weinstein's Secrets For Profiting in Bull and Bear Markets

Top 102. Jan 5, 2004 6:37 AM

» Kirk - Stan Weinstein's Secrets For Profiting in Bull and Bear Markets

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Damon Vickers recommended this book:

2004 Forecast -
By: Damon Vickers
Full Text: http://www.damonvickers.com/news.asp?id=...

First off let me say... Happy New Year to you.
For those of us that remained bearish thru much of 2003, doing so did not generate much happiness... myself included.

My 2003 forecast was dead wrong. I started the year calling for lower stock prices across the board... -clearly that didn't happen.

In spite of the fact that I called the top in the beggining of 2000... that I forecast accurate successive cuts in interest rate ... stayed short for 2000/2001/2002... three great years! 2003 was not, - particularly because we were short.

Even tho I saw the bottom in the internets and the nasdaq, "talking about the divergent market"... we did not act on this observation. Had we done so... 2003 would have materialized very differently. The bottom was established for the nasdaq with stage one bottoms in YHOO and AMZN as well as the qqq's and others.

For many that have followed me ... these last eight months have been a particularly hard horse to ride... with unrelenting pain month after month and little to celebrate ... -unlike 2000/2001/2002 while we danced as wall street burned.

As the saying goes "you are only as good as your last race"...

I will never be right 100% of the time... no investor ever is. With the exception of my exit from the bond market, which was perfectly timed... my views of 2003 were mostly wrong.

Now let us look at 2004... a dow that seemingly appears overbought... a nasdaq that seemingly appears to have bottomed... There are stage 1's (a term for describing botoms or changes in trend typically formed by a cross over thru moving avgs... see Stan Weinstein "
Stan Weinstein's Secrets For Profiting in Bull and Bear Markets" -www.half.com/$12. hard cover -buy it!)

This chart is what I am talking about -

These Stage 1's are abundant in many tchnology companies and optical/telecom equipment companies as well as the qqq's and many lower price shares.

This is where we are focused...

In the final analysis... my desire to grow capital has outweighed my desire/need to be right. Other well known "bears" might do likewise... Perma Bull or Perma Bear... it's the same thing.

My guess is that stage 1 buys will tend to do well. That these are better applications of capital than trying to pick "the top".

We could get "juice" from the Dow as it sells off at some point and money is refocused "shifted" down into growth/tech...

Obviously we will see... 2003 has made me humbler... and that is probably a good thing. smile

My love to you and your sons and daughters... your husbands and wives... your grandparents and grandchildren... to those you work with and work for... may you all give love and kindness to one another in this New Year... full of possibilities only limited by our capacity to project .... love.

Book Description
Stan Weinstein's Secrets For Profiting in Bull and Bear Markets reveals his successful methods for timing investments to produce consistently profitable results.

Topics include:

Stan Weinstein's personal philosophy on investing

The ideal time to buy

Refining the buying process

Knowing when to sell

Selling Short

Using the best long-term indicators to spot Bull and Bear markets

-- posted by Kirk

Top 103. Jan 24, 2004 7:05 PM

» Normxxx - Fooled by Randomness: The Hidden Role of Chance in the Markets

Blowing Up
How Nassim Taleb turned the inevitability of disaster into an investment strategy

by Malcolm Gladwell full text

One day in 1996, a Wall Street trader named Nassim Nicholas Taleb went to see Victor Niederhoffer. Victor Niederhoffer was one of the most successful money managers in the country. He lived and worked out of a thirteen-acre compound in Fairfield County, Connecticut, and when Taleb drove up that day from his home in Larchmont he had to give his name at the gate, and then make his way down a long, curving driveway. Niederhoffer had a squash court and a tennis court and a swimming pool and a colossal, faux-alpine mansion in which virtually every square inch of space was covered with eighteenth- and nineteenth-century American folk art. In those days, he played tennis regularly with the billionaire financier George Soros. He had just written a best-selling book, "The Education of a Speculator," dedicated to his father, Artie Niederhoffer, a police officer from Coney Island. He had a huge and eclectic library and a seemingly insatiable desire for knowledge. When Niederhoffer went to Harvard as an undergraduate, he showed up for the very first squash practice and announced that he would someday be the best in that sport; and, sure enough, he soon beat the legendary Shariff Khan to win the U.S. Open squash championship. That was the kind of man Niederhoffer was. He had heard of Taleb's growing reputation in the esoteric field of options trading, and summoned him to Connecticut. Taleb was in awe.

"He didn't talk much, so I observed him," Taleb recalls. "I spent seven hours watching him trade. Everyone else in his office was in his twenties, and he was in his fifties, and he had the most energy of them all. Then, after the markets closed, he went out to hit a thousand backhands on the tennis court." Taleb is Greek-Orthodox Lebanese and his first language was French, and in his pronunciation the name Niederhoffer comes out as the slightly more exotic Nieder hoffer. "Here was a guy living in a mansion with thousands of books, and that was my dream as a child," Taleb went on. "He was part chevalier, part scholar. My respect for him was intense." There was just one problem, however, and it is the key to understanding the strange path that Nassim Taleb has chosen, and the position he now holds as Wall Street's principal dissident. Despite his envy and admiration, he did not want to be Victor Niederhoffer -- not then, not now, and not even for a moment in between. For when he looked around him, at the books and the tennis court and the folk art on the walls -- when he contemplated the countless millions that Niederhoffer had made over the years -- he could not escape the thought that it might all have been the result of sheer, dumb luck.

more. . .

[Normxxx Here: In a few short years later, Niederhoffer and his funds went spectacularly bust. ]

Nassim Taleb has written a book called
Fooled by Randomness Revision: The Hidden Role of Chance in the Markets and Life

-- posted by Normxxx

<img src=http://images.amazon.com/images/P/0446533173.01._PE30_PI_SCMZZZZZZZ_.jpg align=left>
The Oil Factor: How Oil Controls the Economy and Your Financial Future
by Stephen and Donna Leeb.

Top 104. Feb 8, 2004 8:19 AM

» Kirk - The Oil Factor: How Oil Controls the Economy and ...

.
It is not often I’ll read a book like this but the authors sure make a good case in the blurbs recommending the book. I hope someone else gets this book so we can discuss the conclusions in our Gas Prices and the Oil Industry forum. I am far from an expert in this field and I find it more difficult to make large investment gains in areas outside my expertise. One way to become “an expert” is through self education…. I’ve enjoyed reading what the “experts” have written there even though I don’t contribute much myself…

I am reading The Oil Factor: How Oil Controls the Economy and Your Financial Future by Stephen and Donna Leeb. (Warner Books asked me to review the book and write a book review if I like the book.) I am just getting started but their basic premise is oil prices are going to go up a great deal in the years ahead and the wise investor will take advantage of this.

I remember this sort of theme was prevalent in the years following the formation of OPEC when we had to wait in long gas lines. The Stock market went up and Oil Prices lost ground to inflation. It might be different this time. The interest by the GOP in Iraq has me looking beneath the WMD story to see if there is more to their “official story” so I can get ahead of the curve with my own investments.

The book does address alternative energy and cites the lack of investment in alternative energy the past 30 years is one reason we will suffer such a shock of higher energy prices and high inflation. Yes, they predict gold “may be on the verge of an historic bull run.”

From Publishers Weekly

Stephen Leeb, editor of the "Complete Investor" newsletter, believes the U.S. economy is headed for a significant fall because of a severe shortage of oil, which has been inextricably tied to the economy for the past 30 years. Leeb, author of several books including Getting In on the Ground Floor (also co-written with wife Donna), believes the country must become less dependent on oil imports over the long term. Meanwhile, though, Leeb advises individuals to choose investments based on the longstanding relationship between oil prices and the stock market. He has a number of solid observations based on an examination of the past 30 years of stock performance and oil prices: "Since 1973, the economy and stock market have danced to oil's tune. Sharp rises in oil prices have led to recession/stagflation and plummeting stocks, while declining prices or prices that are just mildly uptrended have led to good times." Leeb provides a great deal of historic context and analyzes industries, selected companies, and other investment choices such as bonds and Treasury notes. Leeb's thesis is well researched, and the book offers a solid, concise overview of the economy and stock trends. Still, given the uncertainty of the stock market-and the lack of job security-readers should consider Leeb's strategies carefully before overhauling their portfolios.

Book Description

Financial guru Stephen Leeb shows how following oil prices can lead investors to real financial security.A storm is coming--an inflationary "perfect storm" whipped up by skyrocketing oil prices that will lay waste to millions of portfolios if investors don't prepare. Renowned financial advisor Stephen Leeb asserts that in this perilous period, oil prices will drive all other economic indicators. But there is a way to diversify away from disaster, by dedicating a significant part of one's portfolio to real assets that keep their value relative to inflation. Here, Leeb helps readers pick the "energy-producer star performers," and reveals the "double payoff" to investing in metals like platinum and silver. He also explains why the stocks of "mega-insurers" are a safe bet, and shows how investing in real estate does not have to mean actually owning it. Filled with sound advice for an unstable marketplace, this is the book no one with a 401K can afford to miss.

-- posted by Kirk

http://www.amazon.com/exec/obidos/tg/det...

Top 105. Feb 22, 2004 6:31 PM

» radiodude - American Sucker --- David Denby

American Sucker --- David Denby

I have not read this book, but the reviews pretty much tell one what the book is about. Has anyone read it???

In short: This New Yorker wanted to be part of the inner circle of Millionaires, so in 1999, he took huge risks to become a NASDAQ Millionaire. Well, It didn't quite work out for him, and he lost his shirt. He followed CNBC and bought the hot stocks of the day, and he even rubbed elbows with some big wall street names like Samual Waksal of IMCLONE.

I guess he should have checked into Suite101 before placing his bets. Too bad he didn't check with Kurt, Bernardo or any of the other gurus here. In short, he was a gambler, not an investor --- which makes the story seem very ho-hum. Stories about gambling losses and lost love extend back before Babylonian times so what makes this guy special??

-- posted by radiodude