Finance and Stuff

Thoughts on finance and other stuff by Johan Lindén

Month: February 2012

Buffett Doesn’t Like Gold

Warren Buffett, the world’s most famous and richest investor, wrote the following in his annual letter to his stockholder:

“Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce — gold’s price as I write this — its value would be about $9.6 trillion. Call this cube pile A.

“Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?”

Steve Beck’s has some interesting points in his answer to this in an article at Marketwatch.com.

“To explore this question, simply exchange gold for cash in this comparison. Would it be wise to own a huge $9.6 trillion pile of cash over $9.6 trillion in diversified corporate value? The answer is the same, no. The wise investor would select the diversification and compounding of corporate productivity every time. What can cash do for you other than sit there, produce nothing and deflate at an historic rate of approximately 3% a year.

Should you then draw a conclusion that cash does not belong in your portfolio? Obviously not. Even Buffett himself would acknowledge that cash, stocks and bonds are fundamental building blocks of a portfolio. Cash is useful on several levels including liquidity, security, fixed value, and simplicity, to name a few. Therefore, although you may not want your entire portfolio to consist of one asset class, you may in fact want some of that asset class represented in a globally diversified account.”

Read the whole story here: http://www.marketwatch.com/story/buffett-rebuffs-gold-but-inflation-says-buy-2012-02-29

Related articles:
Gold Weekly Buy Signal
Gold Sentiment Among Market Analysts
Platinum and Silver vs. Gold
Should I Buy gold?

My Ideal Scenario

It is said be many, and I agree, that the stock market is rigged so that as many people as possible will be wrong as often as possible. This contrarian thinking is also backed by many studies which show that strategies that work are counter-intuitive.

So far it worked well for me trying to figure out the route of the market since I got active analyzing the market again last fall.

Let us take a look at my favorite scenario that I think will fool most people getting in the stock market at the worst time.

The facts are as follows:

  • Since last fall we have had many difficulties all over the world
  •  The stock market has risen a lot
  • Most people have been afraid of getting in the market
  • Most ways of measuring the trend is pointing up, which is what many people like to see before entering the market
  • The last movement up has been almost without any big draw-downs.

So most people now are noticing that the trend is up, they also read all the positive things happening in the economy (the bad things aren’t shown so much in media when the stock market is going up). So now people are looking at a time to enter the market. Every big draw-down now will likely attract a lot of money.

When the market finally enters a multi year high, just 2% up from where we are now, then they will throw their last dollars in desperation not trying to miss the rally. They do not even realize that they just missed a 25% move from the bottom. When that happens I think we reached a new multi-year high, maybe for many years to come.

This is just an ideal scenario that I would like to see. Of course there could be other similar scenarios or I could be totally wrong, but this would fit my expectation of the psychology and knowledge of the market.

Also note that I will short the market at a time when most of the traditional type of technical analysis would scream buy.

bear bull trap stock market top

Sentiment Getting Too Bullish

At this time I would recommend everyone to get out of all high risk assets such as stocks as we are reaching a multi-month high.

There are too many factors to mention but I will add two charts from the blog of SentimenTrader below.

What I would preferably see is that we get a new multi-year high which means above last summers high. We are very close to that now, only a few percent below. Then most people will reason that a new bull era has begun. That will be the mistake of the century. But at this time, at least get out of every high-risk asset and, and start taking small negative positions.

The market is now driven by enormous amounts of liquidity provided by central banks all over the world, and that is a strong force, but valuations driven by politicians rather than by value will be very vulnerable when reality takes its course.

sentiment chart rydex fundsrydex sentiment chart bearCharts from SentimenTrader.com/blog. If you are interested in contrarian analysis and market sentiment I highly recommend the subscriber service at SentimenTrader.com.

Inflation? Deflation? Financiation?

So what has happened lately in finance? Where is all the money going?

Federal Banks all over the world have printed money in true Keynesian style to counteract a falling economy.

In Europe, the European Central Bank, lent banks half a trillion for a mere 1% interest. It is basically the same blues that has been sung for the last couple of years and it is still going strong. I guess it ain’t over until the fat lady sings.

So where is this money ending up and why does not price indexes for goods and services increase?

Well, because a few people in the financial sector is taking all this money and are making themselves very rich. Think of it, you pay 1% interest, and the inflation is around 2-3%. So by just avoiding losing money you will make money with this ingenious system created by politicians and bankers.

If the market would have set the interest instead of politicians, would it be as low as 1%? Is all risk really calculated in that 1%? Now that is a ridiculous thought!

Stocks vs. Long and Short-term Bonds

The relative performance of long and short-term bonds vs. the S&P500 index for the last 5 years.

As one can see, even short-term bonds, the safest theoretically assets one can buy, have outperformed the S&P500 stock index.

bond comparison stock index s&p500

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