Letting The Air Out of The "Gold Bubble" Theory

What the gold bears don't seem to realize is that, despite its big gains, the gold market can't be a bubble when almost everyone seems to think it’s overpriced.

This is one of the characteristics of an actual bubble. Almost by definition, only a small group spots a bubble in real time and isn't seduced by the siren song. If you think about it, that makes some sense, because part of what drives the creation and growth of bubbles is the belief that you are not in one. Instead of being suspect, parabolic price appreciation gets rationalized away with statements like, "new economy," "this time, it's different" or "housing prices never go down."

Conversely, a widespread belief that steep price appreciation is unsustainable is a good sign that you are not in the midst of a bubble, since it is an argument against joining the action. Whereas during a bubble all you hear -- in the media, at parties or even from the bagger at the grocery store -- are the reasons you should jump in before it's too late.

The reason I bring all this up is because inane commentary about the gold market being a bubble continues almost daily, even despite last week's sharp correction. However, it recently occurred to me that virtually no one who recognized the tech-stock and/or real-estate bubble now says that gold is a bubble. In fact, almost all of us who identified those bubbles long before they burst actually own gold, and have for quite a while.

It is really only the people who missed the previous two who now think gold is a bubble. They were painfully wrong in the past, so now they are determined to spot the "next" one.

In addition, of course, I suspect that none of them own any gold themselves. So not only did they go 0-for-2 on the prior bubbles (Housing and dot-com), they have also missed out on as much as 600% of appreciation had they bought gold. That is a recipe for bias if I have ever seen one.

--Source

Milton Friedman's Euro Smackdown

As Europe's woes grow, the dollar could stage a strong comeback, rising 40% against the euro by September 2012. Why you should bet on the buck.

Speaking in 1998, just before the launch of the euro in January of the following year, monetary economist Milton Friedman said he was "not optimistic" about the new currency's prospects. "Suppose things go badly, and Italy is in trouble," he observed with eerie prescience.



An independently traded Italian lira, he pointed out, meant the problem could largely be addressed by a plunge in the lira's exchange rate. The downward adjustment in the exchange rate would, in effect, push the troubled economy's prices and wages much lower, in relation to those of neighboring economies, greatly enhancing relative competitiveness. But with a single currency shared by all neighbors, the surgical advantage of this single price-correction mechanism is no longer available. Prices and wages would actually have to fall instead, a much more difficult feat. The likelihood of such "asymmetric shocks hitting the different countries," said Friedman, meant that the euro had an uncertain future.



The economist, who died in 2006, didn't live to see some of his worst fears about the euro become reality, in the form of today's sovereign-debt crises. Plunges in separate currencies would have done much to prevent them, since the troubled debt would have had far more attractive values. But the asymmetric shocks now threatening this noble experiment have, to varying degrees, hit euro members Portugal, Italy, Ireland, Greece and Spain.

If currency adjustments within the euro zone aren't possible, however, then why not outside it? The dollar looks historically undervalued in relation to the euro (see chart). A good case can be made that the dollar is a buy at its current price of 70 European cents. The greenback might climb to parity with the euro over the next 12 months. Inversely, this means the euro, now worth about $1.43, would fall to $1, still well above its 82.7-cent low of October 2000.



So perhaps another major move, reflecting a very different sea change in perceptions, is just about to happen. Milton Friedman might approve.



--Barron's

The Keynes Vs. Hayek Rematch

Hayek’s apotheosis came in the 1980’s, when British Prime Minister Margaret Thatcher took to quoting from The Road to Serfdom (1944), his classic attack on central planning. But while Hayek’s defense of the market system against the gross inefficiency of central planning won increasing assent, Keynes’s view that market systems require continuous stabilization lingered on in finance ministries and central banks.



Both traditions, though, were later eclipsed by the Chicago school of “rational expectations,” which has dominated mainstream economics for the last twenty-five years (Milton Friedman, anyone?). With economic agents supposedly possessing perfect information about all possible contingencies, systemic crises could never happen except as a result of accidents and surprises beyond the reach of economic theory.



The global economic collapse of 2008 discredited “rational expectations” economics model, and has since brought both Keynes and Hayek back into posthumous contention. The issues have not changed much since their argument began in the Great Depression of the 1930’s. What causes market economies to collapse? What is the right response to a collapse? What is the best way to prevent future collapses? READ: The Austrians Have it Right







For Hayek in the early 1930’s, and for Hayek’s followers today, the “crisis” results from over-investment relative to the supply of savings, made possible by excessive credit expansion. Banks lend at lower interest rates than genuine savers would have demanded, making all kinds of investment projects temporarily profitable.



Every artificial boom thus carries the seeds of its own destruction. Recovery consists of liquidating the misallocations, reducing consumption, and increasing saving.



--Project Syndicate

The Line of Beauty

The Economics of Good Looks

Beauty has lost none of its power to bewitch, bother and get its own way, as various new studies on the economic advantages of good looks confirm.



Physically attractive women and men earn more than average-looking ones, and very plain people earn less. In the labour market as a whole (though not, for example, in astrophysics), looks have a bigger impact on earnings than education, though intelligence—mercifully enough— is valued more highly still.



Beauty is naturally rewarded in jobs where physical attractiveness would seem to matter, such as prostitution, entertainment, customer service and so on. But it also yields rewards in unexpected fields. Homely NFL quarterbacks earn less than their comelier counterparts, despite identical yards passed and years in the league. Not everything comes easier: good-looking women seeking high-flying jobs in particularly male fields may be stymied by the “bimbo effect” until they prove their competence and commitment. But the importance of beauty in the labour market is far more pervasive than one might think.



In America more people say they have felt discriminated against for their appearance than because of their age, race or ethnicity. Sexualised images are everywhere, and the world that has emerged is one in which no one can afford to pretend beauty does not matter. Pretty people, it seems, have all the luck.

--The Economist

Gold: Setting the Record Straight

•“We had a bubble in gold fueled by exasperation and the inability to make money in stocks. Investors were hit by all the bubble sales pitches that suggested gold was a ‘can’t-lose proposition.’” — Brian Dolan, chief currency strategist for Gain Capital, in a March 1, 2009, Chicago Tribune article that was unfortunately headlined, “Gold gains unlikely to pan out for long.”

Don’t you just hate it when gold goes over $1,000, falls to nearly $700, and then soars past $1,800? Clearly, this gold bubble will pop once the Federal Reserve announces that the economic recovery has been a grand success and it can now raise interest rates. But when’s that going to happen?



• “Gold is worth what you think it’s worth. It’s very difficult to value. There are no cash flows, so it has no intrinsic value. There is very little commercial use for it. It’s more of a trading vehicle.” — Bill Stone, chief investment strategist, PNC Wealth Management, in an Oct.9, 2010, New York Times article.

Yes, that’s why they say gold is morphing into a currency while other currencies are morphing into stuff you haul around in wheelbarrows.



• “Attempting to project or capitalize on price movements in gold is speculation, not investing.” — Steve Condon, director of investor advisory services for Truepoint Capital, in Cincinnati, in an Oct. 12, 2009, Associated Press article.

Got that? Buying gold is speculation. Buying paper, now that’s investing.



• “Too many naive investors got involved in gold. They must be taken out and given a right good caning.” — Dennis Gartman, a trader and publisher of the Gartman Letter investment newsletter, in a Dec. 8, 2009, Chicago Tribune article about “Newbie gold investors.”



I would like to see them caned as well...for making way too much money from the folly of the Fed.

• “It will move up, but the music always stops,” — Quincy Krosby, market strategist for Prudential Financial, in a Dec. 29, 2009, article by the Associated Press.

As we learned with the S&P downgrade, the music stops for a lot of investments. And when it does, it’s nice to own gold.



• “Our bottom line is this: Gold is a bubble now, and it is too late to get in. It is like someone who bought real estate in 2006, at the height of that bubble. You could get hurt really badly.” — Kimberly Sterling, Orlando, Fla. financial planner, in an April 2010 story by the Orlando Sentinel.

You know what else hurts? Not owning gold when it hits yet another new high.



• “Don’t put your money on a simple rock. … It is ‘fear metal’ — you buy it when you are afraid of every other investment.” — James Altucher, managing director of Formula Capital, in a July 12, 2010, blog post on The Wall Street Journal’s website, wsj.com.

Hey, at least it’s a pretty rock. And the people are fearful. Very, very fearful.

--MarketWatch

The Dismal (Pseudo?) Science

Fancy theories of macroeconomics defy basic common sense

Many consider economics to be their least favorite subject. Why? Because too often economic theories defy common sense. Indeed, economic bimboism (in the form of attractive but empty-headed theories) is rampant.



So, how did modern economics fly off the rails? The answer is that the "invisible hand" of the free enterprise system, first explained in 1776 by Adam Smith, got tossed aside for the new "macroeconomics," a witchcraft that began to flourish in the 1930s during the rise of Keynes.

Macroeconomics simply took basic laws of economics we know to be true for the firm or family—i.e., that demand curves are downward sloping; that when you tax something, you get less of it; that debts have to be repaid—and turned them on their head as national policy. This is a perfect Keynesian answer, and also a perfectly nonsensical answer.



As Donald Boudreaux, professor of economics at George Mason University and author of the invaluable blog Cafe Hayek, puts it: "Macroeconomics was nothing more than a dismissal of the rules of economics." Over the years, this has led to some horrific blunders, such as the New Deal decision to pay farmers to burn crops and slaughter livestock to keep food prices high: To encourage food production, destroy it.



Ultimately, the pursuit of economics is to overcome scarcity and increase the production of goods and services. Keynesians believe that the economic problem is abundance: too much production and goods on the shelf and too few consumers. Consumers lined up for blocks to buy things in empty stores in communist Russia, but that never sparked production. In macroeconomics today, there is a fatal disregard for the heroes of the economy: the entrepreneur, the risk-taker, the one who innovates and creates the things we want to buy.

Nevertheless, as Arthur Laffer reminds us, "All economic problems are about removing impediments to supply, not demand." Most modern economists ignore this simple fact. And that is why Americans hate economics.

--WSJ

The Futures of Civilization

On the glorious past and uncertain future of the West

Since classical antiquity, historians have tended to think that empires, like individual organisms, evince a discernible rhythm. They come into being, mature, and then, soon or late, decay and decline.



In Civilization: The West and the Rest, Niall Ferguson has come along to tell us that it need not be this way. Taking the long view of history has not, however, inclined him to the cheerful Whig presumption that civilization “shall not perish from the earth.” The study of history — described by Auden as “breaking bread with the dead” — is presumably too melancholy an endeavor to justify such vain hopes. Ferguson’s prodigious communing with the dead has led him to believe that not only will the forces of composition yield to those of decomposition, but they may do so with dramatic speed. If at times history appears to have a cyclical quality, he reminds us that it is actually far more haphazard.



Intimately acquainted with chaos theory, the author probes a sobering question: “What if history is not cyclical and slow-moving but arrhythmic — sometimes almost stationary, but also capable of violent acceleration?”



Ferguson has long been a firm advocate of hypothetical or “counterfactual” history — replete with “What if?” questions — on the grounds that history cannot be understood without appreciating that what we call the past was once the future. He stays loyal to this (unfairly maligned) method in Civilization, and harnesses it to superb effect. He maintains that without developing — or, if you like, downloading — these crucial innovations, civilization never would have climbed to its present height. It is impossible not to notice that the profusion of economically destitute and politically repressive states around the globe owe their status to the absence of one or more of the “killer apps.” What’s more, the undeniable decline of former leading states is largely attributable to their losing them or, as the case may be, casting them off.

It is hard to quarrel with Ferguson on this score; it is a simple fact, for instance, that the scientific revolution owed scarcely any debt to the non-Western world. One further fact assists in pointing up the contrast between the West and the Rest: In 1500, the future imperial powers of Europe were minor entities, accounting for about 10 percent of the world’s land surface and at most 16 percent of its population. By 1913 eleven Western empires controlled nearly three-fifths of the world’s territory and population and more than three-quarters of its economic output. So much for a universal civilization.



Ferguson is especially canny, however, on the imperial impulse that sought to make civilization universal. This will come as no surprise to those familiar with Empire, his illuminating work that painted the British imperial system as Oliver Cromwell asked to be painted: warts and all. Ferguson's Empire offered a subtle argument--that no better substitute had been evolved to promote freedom and prosperity in the world.

Indeed, as the son of a defunct Western empire, he seems to recognize the stench of decay. And it is not obvious that his nostrils are leading him astray. The only consolation to be found is in the fact that the future is, as Ferguson knows very well, no sure thing.

--Source

B-School Myths

Your peers will give you lots of tips and insights that will help you succeed in your career. In my experience, the majority of B-School students are lemmings. They don’t know what they want to do afterwards, so they just do what their peers say they should do (maybe that’s why they applied to B-School in the first place).

Ten years ago, everyone at my school wanted to be a dot com entrepreneur. That didn’t work out so well and most students later went back to being investment bankers or management consultants. Your peers don’t know what you want to do with your career. You need to start listening to that voice inside your head.



You are smarter than people without an MBA. You were smart enough to get in to Business School. That doesn’t mean you are smarter than other people without an MBA. Stay humble.



The Ivy League MBAs will be even more successful. An Ivy League credential will be a big plus for you on your resume – no question. However, you have to realize that if you’re getting an Ivy League MBA, you’re probably 10x more susceptible to the previously mentioned myths than other MBAs. Don’t let yourself be the next Jeff Skilling, the smart Harvard MBA, who worked at McKinsey and then went to Enron and drove the company off a cliff.



--Forbes