Financial Sense Blog

In the world of stock, commodities, and real estate investing, it is common knowledge that capital flows to where inflation exceeds the cost of borrowing. Clearly, if you can borrow at 4% and inflation is 6% it pays to borrow money and speculate in the appreciating stocks, commodities, and real estate. This is the situation in many developing nations today, especially in China, India, and some other countries in Southeast Asia and Latin America; borrowing costs are less than the commonly accepted “true” rate of inflation. Additionally, companies and industries are growing, and this makes stocks in those countries doubly attractive.

A friend of mine met an interesting real estate investor recently. The guy claimed that he escaped the entire market crash relatively unscathed. At first, I didn’t really believe it, but his strategy made a lot of sense. I thought that it was worth passing along.

Stock buybacks have been in the news a lot lately. Sitting on piles of cash and too nervous to invest in new workers or plant and equipment, many companies have started to deploy their cash reserves to buy back their own stock. So far this year, according to stock market research firm Birinyi Associates, firms have announced they will purchase $273 billion of their own shares, more than five times as much compared to this time last year.

The ink had barely dried on the October 24th, G-20 communiqué, aimed at averting a global trade war, before cynical currency and commodity traders began doubting its durability, and seeing it as a simple propaganda ploy. G-20 finance chiefs agreed in Gyeongju, South Korea to refrain from massively printing their currencies to promote exports, and instead, to allow markets to decide foreign exchange values.

The formula to watch looks like this: Profit = Sales – (input cost + production cost + overhead). If companies want to subsidize consumers by keeping prices down, then profits are squeezed. If they want to offset input costs with offsetting production and overhead costs, then labor (consumers) and capex gets cut.

Sometimes the picture is not clear. This type of trading environment is what separates the men from the boys. Risk management is not well understood, but it is vital to successful investing and trading.

With talk of quantitative easing round 2 (or QE2 for short), the potential government bailouts of Fannie Mae and Freddie Mac, and mounting problems with state finances, government pension funds, and funding for social programs all coming to a boil ahead of this election season, one thing seems to be abundantly clear: there is much more federal spending still to come. Hundreds of billions more.

If you are heading north on the Chesapeake Bay, just above where the Patuxent River enters it, and you will see the Cove Point liquefied natural gas terminal and gas processing plant. Journey on, about three miles, and you will see a superbly landscaped industrial installation that, unlike the gas terminal, blends into the cliffs of Maryland. This is the Calvert Cliffs Nuclear Power Plant, which has been making electricity quietly, efficiently and abundantly since 1975.

Gold and silver have had a sharp move downward in response to China’s first interest rate hike last week while the stock market continues to move forward begging the question.

It is genuinely amazing that so many economists and investment professionals continue to promote “business as usual” investment advice. Their clients will surely pay a steep price for this “head in the sand” approach to investing. Here’s why.