Tuesday, August 24, 2010

The Perils Of Unmitigated Positive Thinking

By Michael J. Kosares: Private citizen, Alan Greenspan, could afford to be blunt. "Our choices right now," he said in early August 2010, "are not between good and better; they're between bad and worse. The problem we now face is the most extraordinary financial crisis that I have ever seen or read about." These comments echo a growing sentiment that Americans are up against something far different from the average downturn. Thus far, according to the Pew Economic Policy Group, the financial crisis has cost the American people $3.4 trillion in lost real estate wealth; $7.4 trillion in lost stock wealth; and 5.5 million jobs. Pimco's Bill Gross calls this change in the national psyche the "new normal" -- an economic environment marked by reduced expectations, slow growth. falling incomes and low returns on investment.

The New York Times' Nelson Schwartz recently lamented: "The new normal challenges the optimism that's been at the root of American success for decades, if not centuries." In turn the new normal has spawned a quantum change in the way Americans view the economy, their future prospects, and how they should employ their capital. The real question facing Americans -- public policy makers and citizens/investors alike -- is not what constitutes a positive attitude, but what constitutes a healthy attitude, one capable of guiding investors through the next, and perhaps even more dangerous, chapter of the financial crisis.

When the financial crisis began to take its toll on the United Kingdom in 2008, Queen Elizabeth at a meeting with financial analysts asked the logical question: "Why didn't anyone see this coming?" Though directed at the London financial community, it could have just as easily been put to the mainstream media, academia, the politicians or the regulatory apparatus of the government. The answer she received would soon become standard fare: "No one saw this coming." The implication, of course, was that if no one saw it coming, then no one reasonably could be held accountable.

For countless private investors on both sides of the Atlantic Ocean, Queen Elizabeth's question prompted a more personalized assessment: "Why," they asked their financial advisors, "wasn't I advised that this might be coming?" For those completely honest with themselves, the question reduced to "Why didn't I see this coming?" After all is said and done, each of us is responsible for the stewardship of our own portfolios, and to blame anyone else is pretty much an exercise in both futility and passing the buck.....read on

Bullion As An Alternative To Shorting (Part II)

By Jeff Nielson: In Part I, I discussed the world's largest and most obvious asset-bubble (excluding the derivatives market): the U.S. Treasuries market. While I pointed out that this market was an obvious target for "shorting", I also explained to readers why there were simply too many risks associated with shorting this opaque, and highly-manipulated market.

I explained that investing in bullion ("long") was a good "proxy" for shorting U.S. Treasuries, and concluded that this proxy was a safer, superior substitute for that short-position. In this instalment, I will apply that analysis to other U.S. asset-classes: the financial sector, and the U.S. dollar, itself.

When Wall Street's multi-trillion dollar Ponzi-schemes imploded (based upon the U.S. housing-bubble, which they also created), it was common knowledge that the entire U.S. financial sector was leveraged by an average of 30:1. It is a matter of simple arithmetic to observe that with such extreme leverage, it only takes a loss of a little over 3% on the underlying assets to take all "bets" at 30:1 leverage to zero.

Given that most of Wall Street's leverage was based upon the U.S. housing market, and given that the U.S. housing market plunged by roughly 30% (in its first collapse), you don't have to be a "mathematician" to figure out that this was ten times the decline necessary to take the entire, U.S. financial sector to zero....read on