Hyperinflation and the Loch Ness Monster

Inflation has been an all-purpose bogeyman since the 1970s, but a small amount of inflation comes with a healthy, growing economy.  The Federal Reserve focuses on managing inflation, not preventing it. We have written often that we feel the government measures inflation incorrectly, since the Consumer Price Index undervalues food, healthcare and energy costs. As a result, excessive inflation builds for a while before the government acknowledges it, and comes as a surprise, despite our constant measurement and analysis.

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Categories: Finance | Economics | Investing

0 comments - Posted by Dean Zatkowsky at 5:23 PM

Cut and Ruin

By Lance Helfert

Financial booms and busts result from many causes, but our short memories certainly play a key role. Experience and attention to history help investors remain calm during periods of increased market volatility, but also during extended periods of growth or decline. Brandes Investment Partners sent out a fascinating chart to shed light on "the cost of throwing in the towel," as they put it.

The table, which we have recreated below, shows peak-to-trough declines greater than 20% in the Dow Jones Industrial Average since 1960. It also shows the percentage change one and two years after the trough.

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Categories: Finance | Economics | Investing

1 comments - Posted by Dean Zatkowsky at 4:25 PM

Don't Be Afraid of the Big, Bad Bear

by Lance Helfert

A film producer told us that economic downturns are typically good for the film industry and the alcoholic beverage industry.  That is historically correct, but in recent years the film studios have been getting financing from hedge funds and other investment groups, so while people may indeed want to go to the movies to take their minds off the nation's economic woes, the studios may have trouble financing their wares. But his point still resonates: the economy reflects the daily needs and desires of the people within it.

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Categories: Finance | Economics | Investing | Optimism

0 comments - Posted by Dean Zatkowsky at 9:27 AM

It's All Connected

By Lance Helfert

Many people seem bewildered that the government's interventions have not instantly solved the financial crisis and driven the stock market back to pre-crisis levels. This merely emphasizes that the economy is complex, the stock market is imperfect and often inefficient, and human beings are absurdly impatient. The same expectation of instant gratification that fueled our credit binge now plagues the markets. We want answers NOW, just as we wanted bigger homes, bigger flat screen TVs, and bigger SUVs, NOW! Digital cameras give us instant photos, TIVO lets us time-shift our favorite programs and skip commercials, and of course, the Internet lets us find information and do our shopping anywhere, anytime. Ironically, our impatience with others for not fixing the economy distracts us from doing our part to fix the economy by staying calm and behaving rationally.

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Categories: Finance | Economics | Investing | Optimism

0 comments - Posted by Dean Zatkowsky at 1:49 PM

Troubled Assets

It will be a while yet before we know for sure whether the Troubled Assets Recovery Program (TARP) has been a benefit, a hindrance, or a scam. Within days of the act's passage, it became clear that the program's intentions - purchasing "toxic" assets from incompetent banks - would be clouded by the fact that no one could clearly identify the toxic assets or place a value on them.

That didn't stop the Treasury Department from spending $350 billion, but it got me wondering whether we've done a good enough job understanding the range of troubled assets threatening our economy. Bad loans held by reckless investors are trouble enough, but the quality of these so-called assets must be questioned also. Huge numbers of houses unsold or facing foreclosure are in suburbia, locations dependant on cheap oil and increasingly recognized as an untenable community structure. Adding insult to injury: many of the homes themselves, thrown together rapidly during an easy-money building boom, are not built to last. We call them troubled assets, but they are not assets at all. Will we throw good money after bad to prop up ghost towns?

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Categories: Entrepreneurialism | Finance | Economics | Investing

1 comments - Posted by Paul Orfalea at 10:03 AM

Resolve to Respect Liquidity

For most long-term investors, a temporary loss of liquidity isn't too much of a problem. By temporary, we do not necessarily mean "short-term." Even a long-term illiquid investment presents little trouble for someone with liquidity elsewhere. The market historically shows tremendous resilience and those who can ride out the storm for a few years need not turn temporary losses into permanent ones by selling during a liquidity panic.

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Categories: Finance | Economics | Investing

0 comments - Posted by Dean Zatkowsky at 11:01 AM