Follow The Bottom Violation
-
Futures, options, commodities, Treasuries, short-selling, interest rates, supply-side theory, swaps…
Man, do I ever remember how overwhelmed I was when I started learning about markets, finance, and economics! And now, here I am, cavalierly tossing about terms and phrases that would inspire nausea from even for the most battle-hardened lexicographer.
I guess I have some explaining to do…
How did you decide to call your site The Bottom Violation?
How do you define inflation and deflation?
What is the “velocity of money?”
What is “fractional reserve banking” and the multiplier effect
What would happen if we went back to the gold standard tomorrow?
Can you define “Austrian Economics?”
How does Austrian Economics compare to Keynesian Economics?
What is “recession-proof” investing?
Considering your stance on the economy, are you still a value investor?
TECHNICAL QUESTIONS AND ISSUES:
How do I subscribe to your blog’s RSS feed?
How did you decide to call your site The Bottom Violation?
How do you define inflation and deflation?
Most people incorrectly define inflation as rising prices (and deflation as falling prices). But while it might seem convenient and obvious on the surface, the definitions are incorrect. Inflation is always defined as the expansion of the money supply and the easing of credit. Likewise, deflation is always defined as the reduction of the money supply and the constriction of credit.
Why is this important? Let’s take our current economic environment as an example: most people say we’re currently experiencing deflation; they say this because asset-classes are, in general, falling. But, in fact, global governments are printing money and easing credit at levels never seen in history. This means that we’re actually in an unprecedented inflationary environment, but common wisdom has us reacting to “deflation.”
The implications? Almost every decision of economic and financial consequence — from the boardrooms of the largest corporations and government branches, to the backrooms of the smallest business — is being made with the anticipation of lower prices. In reality, the actions global economic powers have taken in recent years are going to cause massive price increases never before seen. This is a systematic miscalculation on a global basis, and the repercussions, I believe, are going to be extreme and dramatic.
Hyperinflation is a misnomer used to describe extreme price increases, driven by massive credit expansion and credit-easing. It’s a misnomer, because — as I’ve said before — inflation is defined as printing currency and easing credit. The ensuing price increases are not “inflation,” per se, but rather the effects of it. As such, hyperinflation — which is used to describe runaway price growth — is actually the result of excessive printing and easing (inflation), rather than the result, itself.
Quantitative easing is a fancy term that basically describes a government’s Keynesian reaction to extreme economic downturns. In these situations, as assets are being sold off, the government reacts by trying to offset the collapse in certain asset-classes by printing money in huge quantities, while at the same time lowering interest rates dramatically. Until 2008, quantitative easing had never been tried on a global scale, and nobody is really certain what the exit strategy will (or should) be. The only the we Austrians know is that it’s not going to be pretty.
What is the “velocity of money?”
Simply put, it’s the speed at which money moves from creation to arrival in the general economy. If money is printed and it gets to consumers and businesses quickly, the velocity of money is said to be high. If money is printed and just sits in banks (as it’s doing now), its velocity is said to be low.
WARNING TO CLOWNS RUNNING THE FED: You think you can control velocity? We’ll see.
M0: the money circulating, defined as the amount of bills and coins held by the population, in addition to cash in bank boxes, and currency held by the central bank.
M1: M0 + checking acounts + travelers’ checks.
M2: M1 + savings accounts + small time deposits + money market accounts in banks + non-institutional money market fund shares.
M3: M2 + large time deposits + institutional money market fund shares.
I want to note here that this is all just leverage. Currency (cash) backed 100% by commodities would not be leveraged. Currency backed by “full faith and credit” is leveraged. The multiplier effect certainly makes anything above and beyond currency leveraged.
Using debt or debt-equivalent instruments to increase the power of a currency or investment. The U.S. is leveraged to its eyeballs, and when the rubber band breaks, it’s going to be catastrophic.
What is “fractional reserve banking” and the multiplier effect?
Pure, unmitigated leverage. The government prints money and then lends it to banks, requiring banks to keep some amount of that money on hand (reserve requirement). Banks then lend out the rest, which eventually winds up in other banks. Those banks keep some percentage of it on hand, and then lend out the rest. Which winds up in still other banks, who then lend out anything beyond reserve requirements. And so on. And so forth.
Did I mention that the multiplier effect is pure, unmitigated leverage?
What would happen if we went back to the gold standard tomorrow?
Going back to the gold standard would have both good effects and bad effects — bad in the short term and very good in the long term.
1. The government would peg the dollar to gold, and gold would go through the roof, which would mean more demand. Any currencies backed by gold would go much higher. Other currencies would either have to follow suit, or suffer miserably.
2. The economy would go through some short-term volatility and then stabilize.
3. Inflation would cease to exist in any meaningful way. In fact, the global economy would probably become generally deflationary, with pockets of explosive growth. This would be very good for the average person: higher employment, better technology, higher standards of living, and longer life expectancy.
This is all predicated on the idea of a truly free market; you cannot have a gold-backed currency without freedom from governmental intervention. Also, it’s really hard to imagine a true gold standard without the concept of competing, private currencies. That’s a pre-requisite for a true gold standard, but not absolutely necessary to improve conditions immensely.
Can you define “Austrian Economics?”
The so-called Austrian School is a body of economic thought started in the late-nineteenth and early 20th centuries. Several of its founding members were Austrian (hence the name), including Carl Menger, and Ludwig von Mises — both of whom I discuss frequently in my articles. The Austrian School is extremely free market and laissez-faire (or hands-off). We believe in decentralization, private, commodity-backed currencies, and limited governmental fiscal and monetary policy. We also maintain that inflation is not defined as rising prices, but rather as the printing of money and the easing of credit.
Some modern proponents of the Austrian philosophy are Peter Schiff, Ron Paul, Jimmy Rogers… and me!
How does Austrian Economics compare to Keynesian Economics?
As I said in the previous explanation, Austrians are extremely laissez-faire, whereas Keynesians believe the best way to handle different economic conditions is through the use of governmental policy — whether fiscal (taxation), or monetary (use of interest rates and currency-in-circulation). Keynesianism derives from the theories of John Maynard Keynes. Interestingly, Keynes came to repudiate his own theories, and even believed governments would use currency and interest-rate policies to confiscate the wealth of its citizens.
What is “recession-proof” investing?
Recession-proof investing involves placing capital in places that have the potential not only to offset the effects of an economic downturn, but also to give the investor some positive rate of return. Our current economic crisis has inspired governments across the globe to print massive amounts of currency, and to ease credit. In response, many of us have bet against government debt and currencies, and bought instruments — like commodities and metals — that we believe will do very well as currencies fail.
ETFs are exchange traded funds. An ETF is a managed fund that seeks to emulate some underlying commodity or index. ETFs trade just like regular stocks, so they’re easy to buy and sell. You can buy or sell ETFs on everything from the Dow Jones Industrial average, to the yen, to oil, to gold, to Treasuries.
My definition of value investing comes directly from the philosophies of legends like Warren Buffett, Ben Graham, David Dodd, Philip Fisher, and Charlie Munger. The most basic tenet of value investing involves finding companies with strong barriers to entry — meaning their business models make competitiong prohibitive. Next you start tearing apart their financial statements to get around the phantom number of net income (or earnings), and trying to find what value investors call “free cash flow.”
The difference between earnings and free cash flow is subtle, but extremely important. Earnings are easily manipulable — through arbitrary items lik depreciation. Free cash flow takes earnings and adjusts them for these subtle but vital differences. Over time, the difference can be huge. Free cash measures a company’s true ability to generate wealth for its shareholders.
Beyond free cash flow, value investors look for low debt, high profit margins, and high return on capital. And once an investor has found a suitable candidate, it’s simply a matter of buying at the correct price. Value investors look for what they call “instrinsic value” — which is derived by looking at free cash flow, in relation to other aspects of the company — after which, they try to buy below that number.
Value investors are often called “buy-and-hold investors,” simply because value investing involves buying stocks and holding them as long as possible.
Considering your stance on the economy, are you still a value investor?
I do not believe equities (stocks) are a good investment right now. I believe the United States government is systematically destroying the dollar, and I believe that, while stocks will likely rise in coming years, they will fail to outpeform the inflationary price increases resulting from the failure of the dollar. After the dollar collapse, I believe stocks will once again be superior investments, and I will in all likelihood invest heavily in the best businesses on earth.
TECHNICAL QUESTIONS AND ISSUES:
How do I subscribe to your blog’s RSS feed?
RSS seems like a very daunting technology, but it’s actually very easy to use. Simply click on the RSS icon or link. That will bring up a new window or tab. All you have to do is highlight the URL (the URL is the line in the bar of your browser that starts with “http://www…”), copy it, and paste it into the “Add feed” area in your RSS reader. There are many, many RSS readers out there, including Google Reader, Netvibes.com, and Bloglines.com. If you want to create a page that contains all your RSS feeds, all you have to do is sign up online (Google Reader for example) or configure the appropriate application (Outlook, Mac Mail, Thunderbird, et cetera).
For more information, you can easily search Google, and it will tell you more than you ever wanted to know about RSS feeds!
-
Technical Analysis Videos
1929 Stock Market Crash All Over Again?
This is a terrifying video comparing the 1929 stock market collapse to the current economic environment (click chart for video). Is another equity implosion on the way? Consider these facts: More...
Stocks Are on the Fence Waiting for Inflation and/or Earnings (Tech Analysis Video)
This technical analysis video of the Dow Jones Industrial Average suggests that the stock market doesn’t know exactly what it wants to do, and is poised to make a substantive move in one direction or the other. How’s that for a commitment? Welcome to the wonderful world of charts, graphs, and moving averages! More...
Partners
