SOS Portfolio Results

As noted in last Oct 2009, I have set up a hypothesis portfolio on inflationist and deflationist, after 14 months, portfolio inflationist performed much better than deflationist.

Inflationist gain 14% and Deflationist loss 17%.

So the Inflationist Camp is the winner for the last 14 months. It seems that since the portfolios were created, continuous QE was one of the reasons commodities prices has gone up, the only thing that slows is the housing. It appears that there is ASSET deflation but there is also a PRICE inflation in consumables (necessity not the luxury goods).

MyView

I believe both arguements have their merits, however, the actions by the mass is non rational, hence it is not easy to predict the directions. Consumer moods changes. For example, more people prefer to let the mortgage default and hence, use the extra money to purchase other items. I will continue to monitor and update every quarter.

SOS Real CPI discovered!

Look at those who keep their deposits in the bank, interest on deposits is near Zero. Bad for savers, especially those that above 50s.

The blue line indicates the REAL inflation, which is about 8% p.a. over the last 10 years, meaning, prices has doubled over the last 10 years.

SOS Want to Know Wall Stree Bonuses?

2009 has jumped over the $20 billion mark. What is installed for 2010? Perhaps that is the reason the financial sector contribute more than 30% of the GDP. So we should cut taxes for the rich to buy Gucci, Prada or Rolex?

SOS CPI truth unveiled!

What the USA CPI did not tell you!

Only an Ivy League academic could examine the following yearly price data and conclude, as Bernanke has, that inflation is well contained:

• Unleaded gas up 24%
• Heating Oil up 28%
• Corn up 50%
• Wheat up 48%
• Coffee up 56%
• Sugar up 27%
• Soybeans up 30%
• Beef up 26%
• Pork up 22%
• Cotton up 101%
• Copper up 33%
• Silver up 72%

What about education fee (State of Illionious increase its tuition fee by 42% as the state are facing problems), i.e. those subsidised by the state will be removed.

What about insurance?
What about medical?
What about electricity?
What about natural gas?
What about mortage rate?

It will be similar in a lot of other countries around the world. CPI is just not representative. CPI should be broken down to 3 categories according to age, between 18-32 (Gen Y), 35-45 (Gen X), 46-70 (Gen Z). It is also good to list down which item are "price controlled".

Each categories is effected by different consumption matrix. One group may be facing inflation, another group is facing mild deflation (those buying Property or luxury items)

So, how then to protect your hard earn income over the unannounced inflation?

SOS What is the QE effect?

What Next

• Interest near zero since crisis


• QE1 & QE2 - buy bond, indirect injection money into the market - go into speculation by banks - creating another bubble
  
• Crash of stock market may be deferred to mid 2011

Can market continue to rise? Based on statistic, 90% bullish and 10% bearish on US market.

I wonder what will happen when Euro drop significantly against US Dollar in the next few months?

I wonder what will happen if crude oil continue to go up to USD120 per barrel in the next few months?

The financial markets is simply a very big puzzle, comprising interest, currency, commodities, money supply & credits, GDP and last but not least, social mood. Hence, there is no expert is able to predict the market "accurately" over a long period of time. Mainly because, there is no definitive correlation between GDP, interest, commodities, currency nor credits AND stock market mainly because stock market behaviour cannot be determined "scientifically or logically". A word of cautious, actual DEMAND is lower than SUPPLY.

The rise in GOLD price is not due to FUNDAMENTAL, it relates more to social mood, which based on the perception of money printing craze.

But one factor is clear, when central banks print money via QEs, eventually the fiat currency will depreciate substantially against "real money", which is GOLD or SILVER. Perhaps one should allocate 10-20% of their portfolio in GOLD or SILVER for a long term investment, between 10 to 20 years, to finance one's child EDUCATION.

SOS what is the economic outlook in 2011

By Roubini

1. Global growth in 2011 looks marginally weaker than 2010, but the recovery continues and chances of a double dip in 2011 have significantly decreased.

2. The global economy emerged from the most severe recession and financial crisis of the post-war period but not without additional fiscal and monetary stimulus; plans to manage monetary exit strategies and fiscal sustainability remain uncertain at best.

3. Growth in the emerging world will cool from the above-potential rates of 2010. A large part of the advanced world continues to struggle with balance-sheet repair and debt crises.

SOS What effect CPI on fiat money

1992 the breakdown of spending was 15% food, 10% recreation, 25% housing, 5% apparel, 15% transportation, 10% medical care, 5% education and 15%

Let us analyse a little bit:

For Malaysia (for 2010)

Food prices - increases average 8-12%

Recreation - increases about 5%

Housing - 10-15%

Apparel - 0-2%

Transportation - 5-8%

Medical care - 10%

Education - 5%

Others

So technically speaking, we can conclude the average inflation in Malaysia is 8%-10% p.a.

As for USA it would be similar, other than the rest, the housing prices is dropping. Should we measure some major expenses of a family the following the the big ticket items:

1. House
2. Car
3. Education
4. Food
5. Entertainment & recreation
6. Insurance
7. Medical

Most will realise, once you have both car and house, your inflation profile change immediately, if you do not have a child, then your inflation is confine to FOOD, Entertainment, Medical and Insurance. You will then notice an increase, which is not really represented by the CPI.

MyView

Each individual or family have different set of INFLATION. Hence it is very much depends on lifestyle, his needs and necessities. Whatever the case may be, one will reaslise the unofficial INFLATION is always higher than the Official inflation which is reported. Hence, one will have to measure the inflation that applies, because, a guy who travels a lot, then his inflation is mainly, currency, food, travelling costs, air port tax, etc.

MEASURE IT TO YOUR OWN PROFILE. So, technically, Fiat Money is not a good store of money, especially when most central banks starts printing money. One should consider investment into perceived "REAL MONEY" which is precious metal (for long run like 10 - 30 years).

SOS CRB Index

CRB index is still 32% from its peak in 2008 of 475 points.
CRB index climbs from its low in March 2009 from 200 points to today Dec 17, 325 points, an increase of 62.5%.

So, the next important question, where is CRB index heading? UP or DOWN? Well, time will tell.

Perhaps we take a look of CRB index in Japanese Yen, at least we can see how well did Yen against CRB index since their stocks and property market tanked.

Well, perhaps next issue.

SOS Currency vs Gold

Most currency depreciated against gold since 2000. Does all these charts confirm that "fiat money" is not a good store of money. Is the best store of money be in "GOLD"?

What about CRB Index? Another Hard Asset to look at?

SOS Gold

As usual, the two school of thoughts:

Jim Rogers said:
I don’t know how you can call it a bubble. A bubble is when everyone and his mother owns gold. Today, most people still don’t own gold.

Warrent Buffett said:
Look, you could take all the gold that’s ever been mined, and it would fill a cube 67 feet in each direction. For what that’s worth at current gold prices, you could buy all — not some — all of the farmland in the United States. Plus, you could buy 10 Exxon Mobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?

MyView:

Fact: over the last 10 years, physical supply exceeds the demand of gold

Fact: over the past 10 years, transaction of gold is 70% physical:30% financial (paper gold)

Fact: today transaction of gold is 70% financial (paper gold): 30% physical

Fact: Gold, on its own have no economic value, unlike a farmland, a property, an energy company, BUT in human civilisation, gold is perceived as REAL money

Fact: 1971, Presiden Nixon lifted gold as a reserve, fiat money is created. USD disposable income had dropped more than 95%.

Fact: all the gold's worth on the earth at the moment (USD1400 per oz) is about USD5.5 trillion, world GDP is about USD60 trillion.

Fact: it will not be fruitful to try to reconcile why physical gold price price goes up when supply exceed demand, it is the paper gold that is traded that is conducted between willing buyer and willing seller, no logic required.

Argument for Buying GOLD - most countries is printing fiat money, over a long run the disposable income for the currency per gold oz will drop. This is the conventional way how human view GOLD and FIAT MONEY.

So, best way to do a research one can consider is how much yen per gold oz in 1989 (peak of property and stocks) and how much yen per gold TODAY to prove whether it is a good idea to buy gold and hold long term (10-20 years)

Let's look at Japan
1980 - 200,000 (yen per oz of gold)
1985 - 90,000
2000 - 28,000
2010 - 100,000

The lesson is: keep your money stable, and taxes low. When Japan was on the gold standard in the 1950s and 1960s, and reduced taxes steadily, it was the growth wonder of the world.

Lets see what happen in Japan

The Tokyo government, aware of unsustainable asset valuations, embarked on a draconian series of steps to depress property prices throughout the 1990s.

This not only blew away the froth of unsustainable valuations, it also demolished the real, fundamental value of property. They began with a series of tax measures on January 1, 1990 – the first day of the bear market – which eliminated certain preferential capital gains tax treatments for property.

In 1992, the tax rate on short-term capital gains (under 2 years) on property was raised to 90%. Long-term gains were taxed at 60%. Additionally, a 0.3% national property tax was introduced (this was several multiples greater than existing property taxes), plus a City Planning Tax of 0.3%.

Then there was a Registration and License Tax of 5% of the sale value of a property...a Real Estate Acquisition Tax of 4%...an Office Tax of 0.25%...a Land Ownership Tax of 1.4%...a even the regular property tax, the Fixed Assets Tax, was effectively raised by several multiples.

From 1990 to 1996, Japanese property values imploded by as much as 70%. However, the revenues from this tax rose by 46%. You can do the math.

All of this resulted in epic levels of bad debts at banks. For some reason, the banks managed to get the blame for this, as if they were responsible for the unprecedented monetary deflation during the decade, or the tax assault on property owners. Banks wrote off and liquidated loans continuously during the decade. However, the economy was unable to improve due primarily to the hideous monetary deflation, so more bad debts kept piling up as one borrower after another reached the end of their resources. This gave the appearance that the banks "weren't doing anything about their bad debts." As fast as they bailed out their boat, new water was coming in.

In 2000, the government, still convinced that banks "weren't doing anything about their bad debts," undertook an extensive audit of bank assets on a loan-by-loan basis. They wanted to determine if there were any "hidden bad debts," borrowers that had effectively gone bust but were being carried as performing loans. Then, having dug all the skeletons out of the closet to their satisfaction, they mandated that the banks resolve all these bad debts over the course of the next few years. Banks were required to state their progress under this plan in their financial statements.

Thus, we can see with great precision what banks were up to. As of September 30, 2000, Sumitomo Mitsui Financial Group had "bankrupt and quasi-bankrupt assets" of ¥653 billion. These were the real bad loans – those that had defaulted. There were another ¥2,594 billion of "doubtful assets".

SOS Derivatives in 2007

By DK Matai

2007 (source, Bank of International Settlement)

1. Listed credit derivatives stood at USD 548 trillion;

2. The Over-The-Counter (OTC) derivatives stood in notional or face value at USD 596 trillion and included:

a. Interest Rate Derivatives at about USD 393+ trillion;

b. Credit Default Swaps at about USD 58+ trillion;

c. Foreign Exchange Derivatives at about USD 56+ trillion;

d. Commodity Derivatives at about USD 9 trillion;

e. Equity Linked Derivatives at about USD 8.5 trillion; and

f. Unallocated Derivatives at about USD 71+ trillion.


Let us think about the invisible USD 1.144 quadrillion equation with black swan variables -- ie, 1,144 trillion dollars in terms of outstanding derivatives, global Gross Domestic Product (GDP), real estate, world stock and bond markets coupled with unknown unknowns or "Black Swans". What would be the relative positioning of USD 1.144 quadrillion for outstanding derivatives, ie, what is their scale:

1. The entire GDP of the US is about USD 14 trillion.

2. The entire US money supply is also about USD 15 trillion.

3. The GDP of the entire world is USD 50 trillion. USD 1,144 trillion is 22 times the GDP of the whole world.

4. The real estate of the entire world is valued at about USD 75 trillion.

5. The world stock and bond markets are valued at about USD 100 trillion.

6. The big banks alone own about USD 140 trillion in derivatives.

7. Bear Stearns had USD 13+ trillion in derivatives and went bankrupt in March. Freddie Mac, Fannie Mae, Lehman Brothers and AIG have all 'collapsed' because of complex securities and derivatives exposures in September.

8. The population of the whole planet is about 6 billion people. So the derivatives market alone represents about USD 190,000 per person on the planet.

SOS Wikileaks

USD12.3trillion leaks, Fed

As the Wikileaks cables revealed, General Kayani, head of the Pakistani military, threatened to depose the Pakistani government in a coup in March of 2009, and he discussed this in meetings with the U.S. Ambassador to Pakistan, Anne Patterson. The cables revealed that the Pakistani Army Chief disliked the civilian government, but that they disliked the opposition even more, which was rallying people in the streets.[31] This reveals the intimate nature the U.S. has with the Pakistani military, as it always has. The U.S. did not support this proposal, as it currently favours a weak civilian government, and therefore a strong military dictatorship is not in America’s (or India’s) interest. Thus, there was no coup. Hence, Wikileaks can be used to further inform and vindicate analysis of Pakistan. For those who have been speaking about the destabilization of Pakistan for years, and there have been many, Wikileaks provides more resources to a critical analysis, and suddenly more people around the world might be interested in new ideas and perspectives, as Wikileaks has challenged so many of their previously held beliefs.

The list of examples surfacing from the Wikileaks cables is endless in the amount of additional information it can add in the alternative media’s dissemination of information and analysis. These were but a few examples among many. Make no mistake, this is an opportunity for the spread of truth, not a distraction from it. Treat it accordingly.

SOS Debate on Deflationary vs Inflationary Depression

If you notice, there is no argument about whether there is a depression. The debate is more of a deflationary or inflationary depression.

Google Youtube and key in debate Peter Schiff vs Robert Prechter

Peter Schiff arguments:

• government will continue to print money when bank fails


• government will continue to stimulate the economy as long as they can


• in the long run, interest rate will shoot up the roof and gold price will explode


• economy will goes into inflationary depression (high unemployment) and US currency will become worthless in the long run

Robert Prechter arguments

• there is about USD55 trillion toxic assets (CDO, CLO, MBS, ABS, CDS) or bad IOUs in the banks


• bank credit grows since 1930s to 2008, and will contracts over many years down the road


• it will come to a stage due to debt implosion, the government is unable to bailout so many banks that it will let the banks fail and depositors money will end up in smoke


• government is unable to stop the huge credit implosion


• bad IOU holders money will go up in smoke, and interest will remain low


• economy will go into a deflationary depression, and due to the implosion of huge amount of debt, not only USA but the world, there will be shortage of US dollars in circulation couple with less new credit issued, hence US dollar will eventually appreciate (although majority is of the view that US will continue to do what they are doing (QE), and debase the currency)

MyView

• Is important to understand the mechanics of the world biggest economy, because, our wealth is determined by the policy maker of the world, principally the central banks.


• Do not forget, it is not only USA is printing the money, the entire world is also printing money for the past few decades, take a look at their own currency against GOLD, or against CRB index.


• Also remember, the economy does not function like physics, it does not goes in a linear way, i.e. we cannot predict the effects base on the cause, it is more "art" or influence by "social behavior" that is not normally measured by conventional key performance indicators.


• It may goes one way for a while, and another way for a while, but in the long run, everyones agree, ultimately, the holder of toxic debts will lose their pants (ie many banks will fail) but temporarily prolong from the reflation actions (QEs).


• There is no straight forward answers for these financial crisis, but the well known fact is many will suffer for it, be it the Main Street or the Wall Street.


• The few that got away is the legalized "Madoff" bankers with multi millions of bonuses at the expense of the mass taxpayers i.e. the incompetent is rewarded, the corrupt elites got away


• So, what is the long run view, say if you can predict JAPAN in the 1989? If that is the case, one should avoid PROPERTY, STOCKS, CRB, when the entire world is CONTRACTING.


• Can gold become the next currency? At the moment, there is about USD5 trillion worth of gold vs the world output of USD60 trillion. Can gold replace the current USD currency? It will need to be USD13,000 per oz.


• Say what we like, over the long run, the two biggest economies, i.e. USA and Europe will contract.

SOS Gary Shilling

Gary Shilling's new book, Age of Deleveraging

Quite similar to his 2010 predictions, for long term ( I believe he is talking about 5-15 years):

BUY

1. Treasurys (30 years) and other high quality bonds (NYSE: EDV)
   
2. Income-producing securities (PUI)
   
3. Food and other consumer staples (PSL)


4. Small luxuries (7-eleven) (RCD)
   
5. The US Dollar (UUP)
   
6. investment adviser and financial planners (PFI)
   
7. Factory-built housing and rental apartments (REZ)
   
8. Health care (FXH)
   
9. Productivity enhancers (SMH)
   
10. North American energy

For the buy items, I like 2,3,4 & 8

AVOID

1. Big ticket consumers purchases
   
2. credit card and other consumer lending
   
3. conventional home builders and suppliers


4. antiques, art, and other tangibles
   
5. bank and similar financial institutions
   
6. Junk securities


7. Low and old tech capital equipment
   
8. commercial real estate
   
9. commodities
   
10. Developing country stocks and bonds
    
11. Japan - a slow train wreck
    
12. Failing companies - In an era of slow growth and deflation, the combination of below-average revenue growth, high fixed income, and big debts can be deadly for a company. Avoid investing in flailing companies, since miraculous recovery is a less likely proposition.

SOS should we buy and hold stocks?

World GDP is about USD60 trillions

World derivatives is about USD600 trillions

Daily world trade is about USD4 trillions

Fiat money created over the last 10 years via derivatives is about USD500 trillions.

What will happen when 10% of the derivatives turns bad?

Some of the questions we need to ask ourselves.

1. Is the zero interest effective?
2. Is the first bailout effective?
3. Why the second bailout?
4. Any action to resolve the Derivatives problems?
5. Is the problem cause merely by sub prime? or is it Derivatives created via sub prime?
6. Why is the world stock market still so volatile?
7. Should one enter the market at this stage?

MyView

In a long run, it is not going to be pretty. One needs to protect our hard earned wealth. How? High cash flow stocks and high dividend stocks may be a good protection. A small portion in precious metal is not a bad idea. Shorting the markets is risky.