Saturday, November 8, 2014

Why Mark Zuckerberg Wears The Same Shirt Every Day

From Wikipedia:

Decision fatigue refers to the deteriorating quality of decisions made by an individual after a long session of decision making. It is now understood as one of the causes of irrational trade-offs in decision making. For instance, judges in court have been shown to make less favorable decisions later in the day than early in the day. Decision fatigue may also lead to consumers making poor choices with their purchases.

The 10 Most Expensive Homes In The World

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Thursday, November 6, 2014

Precious Metals NAV Opportunity: Central Fund Of Canada

NAV stands for Net Asset Value. In simple terms it means the premium or discount you pay for the assets that are stored at a fund.

Imagine a fund holds 10 ounces of gold and the gold price is $1,000. The fund has $10,000 of assets held within their vaults. Let's say this fund allows 10 investors to purchase shares within this fund. With $10,000 in the fund each share would be worth $1,000. At $1,000 the NAV would be 0.0%.

When the Sprott Physical Silver Fund (PSLV) first launched in November of 2010 the premium was close to 0% and I was fortunate to have moved money into the PSLV fund around the time of the launch. Over the next 13 months the premium on the PSLV moved up to 32%. I sold my holdings at the time (January 2012) and moved them into the SLV (silver ETF). I was able to time the top almost exactly (complete luck) and the NAV on the PSLV collapsed downward soon after to about 6%. I then transferred my SLV funds back into the PSLV where they have been since.

I discussed my concern around the hefty 32% PSLV premium at the time (see Purchasing Precious Metals: NAV Considerations)  saying that I only liked to use the SLV as a short term trading tool and not a long term investment vehicle. I prefer to know that a fund is backed 100% by physical metal that can be redeemed upon demand. At that time I recommended investors take a look at the Central Fund of Canda (symbol CEF), which held only a 1% premium in January 2012. This fund holds 60% of its assets in gold and 40% in silver, and it rose from the 1% premium to over 8% in the months ahead (again, the timing was lucky).

During the metals destruction over the past few years this premium has collapsed downward and it now sits at negative 10%. Going back to our example above in the $1,000 gold fund, this means if 10 investors were purchasing shares within the fund they would pay $900. Essentially they would own a claim on $1,000 gold for $900 dollars.

For investors new to the market that are looking for gold and silver exposure for their portfolio, or those that are wishing to add to positions during the current price massacre, I believe this is the best option to do so. Please understand that if the precious metals prices continue to free fall and the NAV on the CEF continues to move further into the negative territory you will be hit with a double paper loss in the short term.

However, if precious metals prices ever bottom and rise again in our lifetime and the NAV were to move back into the positive (or even less negative), you will experience turbocharged gains on the upside.

I am not a financial advisor, please speak with one before making any investment decisions. 

Tuesday, November 4, 2014

Marc Faber: Most Countries Are Engaged In A Ponzi Scheme; It Will Not End Well

From Marc Faber:

 - U.S. treasuries represent value only when compared to the insane returns in other developed countries.

 - Japan, and most countries around the world, are engaged in a Ponzi scheme. It will not end well.

- It will be perceived as positive if Republicans win U.S. elections, but in the real world it does not matter who is running the insane asylum.

- He still likes to own a percentage of his wealth in gold. He recommends diversification.

- If oil falls below $75 to $70 it can become negative for the U.S. economy.




Monday, November 3, 2014

How The Japanese Economy & Financial System Will Implode

The Japanese central bank (the Bank of Japan) shocked markets last week when they announced they will be increasing the size of their current quantitative easing program. They will increase the amount of money they are printing monthly to 80 million yen, which is equivalent to 700 billion US dollars.

With the Federal Reserve (U.S.) and Bank of England (U.K.) currently on hold with their QE programs, the European Central Bank only just beginning the process of putting their next QE program together, the Bank of Japan has taken center stage in the global currency wars.


To help put the extraordinary size of Japan's QE into context, you must look at it relative to the size of their overall economy. If the bank of Japan were to print $1 billion and send it to the company Apple, they would probably not even notice. If they were to print $1 billion and send it to someone reading this site, it would most likely change their life significantly.

An equally sized QE program relative to GDP in the United States would be $3 trillion annually. The Bank of Japan already owns 25% of all Japanese state bonds and its balance sheet will increase by a size equal to 1.4% of Japan's GDP every month.

The Japanese Pension Fund recently announced they would be reducing their holdings of Japanese Government Bonds from 53% of their portfolio to only 35%. The Bank of Japan will essentially step in and buy every bond that is sold from the pension fund and then some.

What will the Japanese Pension Fund do with its new cash? They will buy stocks by increasing their foreign and domestic holdings to 50% (25% each) of the portfolio size. In order to reach these targets the Pension Fund will need to purchase $90 billion of Japanese equities and $110 billion of foreign stocks by June of next year. Stocks markets around the world rejoiced on Friday.

Japanese government bonds experienced falling interest rates on Friday as well. I want to give you the current yields on Japanese government bonds. These are not typos:

JGB 2 Year Bond: 0.02%
JGB 5 Year Bond: 0.11%
JGB 10 Year Bond: 0.45%

If you lend your money to the Japanese government for 5 years they will provide you with a return of 0.11% annually. Essentially they will provide you with nothing.

What could possibly go wrong?  I don't even know where to begin.

The Japanese government is telling the world that they will continue to raise the size of their QE programs until they reach 2% annual core inflation. Core inflation does not include the cost of food and energy (what Japanese people need to live on), but headline inflation does. This inflation measure is now running at 3.2% annually:
This means that while Japanese investors are receiving between 0.02% to 0.45% on their government bonds (almost all Japanese debt is held within their borders unlike the U.S.), their cost of living is rising by 3.2% annually. Monthly expenses are only one side of the equation. Unfortunately, when we look at real wages in Japan they are also plunging.


When you add a rising cost of living and falling wages with the massive tax hike announced earlier this year you have a collapse in household spending, which has fallen for six straight months.


Japanese is currently running at 250% government debt to GDP.  The debt burden has grown so enormous that if interest rates were to rise to about the 2% level on government bonds, it would consume 100% of the revenue the government takes in annually. When you include the corporate, household and financial sector, total debt to GDP is over 600%.

The following shows Japan's government debt relative to tax revenues:


By promising the financial markets that they will not stop QE until they reach 2% inflation, they are essentially promising the markets they will lose money if they hold government bonds below that interest rate. This is why the government pension fund is selling its bond holdings rapidly (and every other rational entity or person on the planet will soon follow).

The Bank of Japan understands that rising rates will cause Japan to immediately self destruct so they stand ready to print an unlimited amount of money to keep rates low. The problem with this strategy is that inflation is not something you move up and down like a thermometer.

When core inflation hits 2% it will most likely continue higher and it could begin to move higher at a very rapid pace. This could occur due to a rapidly fallen yen which would cause import costs to surge for Japanese citizens (Japan currently imports almost all their energy needs due to the shut down of their nuclear reactors following Fukushima). The yen has fallen by 40% since mid 2012 against the dollar, euro and Korean won. It is down 50 percent against the Chinese yuan.

When the yen breaks there be a flood of Japanese government bond sellers who are getting crushed by holding bonds at low interest rates combined with high inflation. In order to stop inflation and a falling yen from spiraling out of control the Bank of Japan would have to raise rates and sell bonds. If the only buyer becomes a major seller you will see interest rates skyrocket. Japan has painted itself into a corner.

Japan will be the first major developed market to see their sovereign debt market implode and it will mark the next chapter of the sovereign debt crisis. During this stage market participants will see the negative effects of quantitative easing (the hangover) at the same time they witness the impotence of central bank's ability to stop a currency crisis.

If I lived in Japan I would be 100% diversified away from the yen, and I would be very concerned about a coming banking and economic crisis. It will be devastating for most of their citizens who do not escape the tragedy in time (financially). My hope is that policy makers around the world watching the horror unfold will learn from the mistakes Japan is currently making and change course in time to avoid the worst case scenario within their own borders.

While Greece is a spec of dust within the global economy, Japan is responsible for 5% of all economic growth. The collapse of their currency and bond markets will send earthquakes throughout the financial system.