Tag Archives: layman finance

The euro crisis no one is talking about: France is in free fall [Fortune]

A fascinating article by Fortune Magazine! A full read is mandatory.

Given investors’ confidence in its sovereign debt, and its image as Germany’s principal partner in the sturdy, sensible “northern” eurozone, you’d think that France endures as the co-guardian of the endangered single currency. Indeed, the rate on France’s ten-year government bonds stands at just 2%, just a few ticks above Germany’s. From a quick look at the headline numbers, France doesn’t appear nearly as stressed as the derisively titled “PIIGS,” Portugal, Ireland, Italy, Greece and Spain. So far, the trajectory of its debts and deficits isn’t as distressing as the figures for the PIIGs, or even the U.K. and the U.S.

France’s vaunted role in the creation and initial success of the euro enhances its aura of solidity. It was President Francois Mitterrand who in 1989 persuaded Chancellor Helmut Kohl to back monetary union in exchange for France’s support for German reunification. In fact, France and Germany, along with the Netherlands, dramatized their commitment by effectively uniting the franc and deutschemark in a currency union that held their exchange rates in a narrow band, and heralded the euro’s birth in 1999. In the boom years of the mid-2000s, France virtually matched Germany as the twin growth engine of the thriving, 17-nation eurozone.

A deeper look shows that France is mired in no less than an economic crisis. The eurozone’s second-largest economy (2012 GDP: 2 trillion euros) is suffering more than any other member from a shocking deterioration in competitiveness. Put simply, France’s products — its cars, steel, clothing, electronics — cost far too much to produce compared with competing goods both from Asia and its European neighbors, including not just Germany but even Spain and Italy. That’s causing a sharp and accelerating fall in its exports, and a significant decline in manufacturing and the services that support it.

The virtual implosion of French industry is overlooked by analysts and pundits who claim that the eurozone had dodged disaster and entered a new, durable period of stability. In fact, it’s France — not Greece or Spain — that now poses the greatest threat to the euro’s survival. France epitomizes the real problem with the single currency: The inability of nations with high and rising production costs to adjust their currencies so that their products remain competitive in world markets.

So far, the worries over the euro have centered on dangerously rising debt and deficits. But those fiscal problems are primarily the result of a loss of competitiveness. When products cost too much to make, the economy stalls or actually declines, so that even modest increases in government spending swamp nations with big budget shortfalls and excessive borrowings. In this no-or-negative growth scenario, the picture is usually the same: The private economy shrinks while government keeps expanding.

That’s already happened in Italy, Spain and other troubled eurozone members. The difference is that those nations are adopting structural reforms to restore their competitiveness. France is doing nothing of the kind. Hence, its yawning competitiveness gap will soon create a fiscal crisis. It’s absolutely astonishing that an economy so large, and so widely respected, can be unraveling so quickly.

The world’s investors and the euro zone optimists should awaken to the danger posed by France. La crise est arivée.

You can read the full article here.

Gold Wheres it Going? How the World’s Safehaven has lately turned into Just another Risk Asset

Gold has been one of the hottest investments on the planet the last few years. However only a few people understand that there is a lot of money to be made on the daily, weekly, and monthly, fluctuations of gold. “Gold bugs” will tell you and they are correct its an ultimate store of wealth, hedge against hyperinflation, hedge against US fiscal problems with US dollar, and so on.

I am here to give you a different perspective. All of those are correct, but lets get down to the core of why gold moves and how it does move.

In August, the US got downgraded from AAA to AA from S an P ratings. This caused a huge move in Gold based on Safe haven demand.  There are two reasons gold moves, either it moves as a safe haven asset when the stock market is crashing, US political gridlock damages economy, Fed Cuts Interest Rates, Fed prints more money via quantitative easing etc.  The move that has taken Gold from 1000 to where is it now is the QE1 and QE2 Programs enacted by our federal reserve.

When you look at the Financial Crisis of 2008,  Gold hit a high of 1000, and during the crisis sold off to below 800.

The same thing has happened with the European Debt Crisis, even though gold is still a winning safe haven trade, when big Hedge Funds, are loosing a lot of money they have to sell their winners to cover losses. John Paulson , of Paulson and Co, was the largest shareholder in the Spider Gold ETF GLD.  His 13f Filing shows he recently cut a big position in gold. His fund is down 44% this year, and this is from a guy that made billions betting on sub prime mortgages to fail, which means his investors made money while everyone else in 2008 lost.  His other trades were doing so poorly that many in the market feared he would have to sell his only big winner gold, in order to help his fund. All other hedge funds followed.  This is why we have seen a change in Gold lately.

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Win, Lose or Vanish. A Diagnosis of the Psychology of Investing Through the Art of Card Playing

Luck was a servant and not a master. Luck had to be accepted with a shrug or taken advantage of up to the hilt…Bond saw luck as a woman, to be softly wooed or brutally ravaged, never pandered to or pursued…

Casino Royale – by Ian Fleming

Although lifted from a fictional adventure of 007, created by Ian Fleming, the above quote vividly illustrates how a gentleman should tango with Lady Luck; whether you are betting on the stock market or on the green velvet card table in Monte Carlo.

Many people may believe that betting in a card game is risky and highly dependent on the mood of Lady Luck. However, a layman investor may be making the same mistakes as an oblivious gambler.

A game like Poker is in fact a perfect simulation of what goes on in the grand scheme of the investment universe. The same emotional traps set at the card table are very well the same traps that devour many investors.

Let us examine the vices of investors by using the game of Poker as a referential case study.

Vice #1 Future can be predicted

Card players like to predict what cards will turn up next based on cards already shown on the table. This is the same mistake as how investors become overly optimistic based on past information about a stock or a fund.

If a card player is trying to make a flush (five cards of the same suit) and he is holding two hearts with two others showing as community cards on the table, the card player is very tempted to think the next card turning up would be heart. However, hearts are only one of the four suits, and his odds are in reality less than 18.75%  (given one deck of cards, and no other players). Four hearts have already turned up, so in the deck of cards, only nine more hearts are present.

Similarly, emotional investors are overly optimistic about past winners and overly pessimistic about past losers. Certain investments, especially mutual funds, are advertised with high historical returns which may not have any impact on the future returns. Certain stocks also meet the criteria of investor emotional bias, e.g common stock of Ford Motor Co. was trading @ $1.43 in 2008, with a recent high of $12.51, and not much has changed in the fundamentals of the company, only the emotions are stabilized.

When investing with a portfolio, one must examine the long term. Examine the 10 year or 8 year history, and not just how the stock or fund performs in the past couple of years. For a fund, examine the fund size, fees, turnover, and manager tenure. For mutual funds, an investor must be diligent in conducting their research regarding the funds that have been closed by the company. Mutual funds with consistent losses are closed and do not show in the historical rate of return as presented in the pamphlets.

For a stock, look at the inherent value of the company, just like good old Mr. Buffett would. Do not invest in a stock just because the price has been rising. “Value Investing”, anyone?

Trying to form a pattern based on random past information is as reliable as a naïve woman trying to predict your future by reading horoscopes. If you still believe in horoscopes, then perhaps you should never be allowed to approach the card table at Monte Carlo or the stock market. Please go back to watching the “Twilight” series.

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