Monday, January 12, 2009 2 comments ++[ CLICK TO COMMENT ]++

Some quick thoughts...

Quick thoughts on some issues...

Stock Market In Real Terms

Naked Capitalism has an excerpt of Marc Faber's letter (I'm not a subscriber) in which he says the stock market is not cheap if you adjust for inflation. A chart showing DJIA deflated by CPI is used as evidence to imply that the market is nowhere near being cheap. This seems like flawed thinking to me (correct me if you see any mistake in my thinking.)

It makes no sense, at least to me, to assume that the stock market (in real terms) has to stay within a range. That would only be the case if you assumed that stock returns match inflation in the long-run. Everything I have read indicates that stocks beat inflation over the long run. Therefore, stock indexes, such as the DJIA, should trend upwards even if you adjust for inflation.

What Marc Faber is doing is more appropriate for commodities, which do not necessarily beat inflation in the long-run (there are some exceptions such as timber if I recall.) Commodities in real terms should be flat or even negative (agriculture is a good example of one that has trended down for a hundread years) but not stocks.

Corruption In India

I'm not from India but come from that part of the world so it's not surprising to me, but foreigners will finally see how corrupt countries like India are. Satyam was a fraud and is not necessarily indicative of anything. However, recall how the World Bank banned it for corrupt actions. Well, Wipro, another leading business process outsourcing company, was revealed by the World Bank to have been banned back in 2007 as well. This was clearly news to investors, with the stock off around 7% on NYSE today. The amount involved is very small and World Bank isn't a big customer to the company but it still shows how corruption is instilled in these firms. Now, the World Bank is quite famous being corrupt itself, not to mention bizarre policies being executed, including hiring neoconservative superhawk Paul Wolfowitz for the top job a few years ago. Nevertheless, it is not comforting to see companies like Wipro being engaged in these questionable activities.

I suspect that stock market investors will finally start discounting emerging market stocks. Hopefully the invisible hand of the free market will clean up all these corrupt companies and the culture.

Gold May Not Be Severely Overvalued

One of my big investment ideas this year was going to be shorting gold. The thinking is based on the fact that consensus is for high inflation in a few years (I'm in the disinflation/deflation camp and don't expect high inflation) and the fact that it has gone up for 8 years in row and might be the best performing major asset in the last 10 years (or maybe even last 15.)

Well, I've been doing some research and preliminary indication is that gold is not overvalued (it may be overvalued slightly but not enough to risk shorting it.) I view gold as a quasi-currency which means that it primarily trades off the value of a currency (essentially money supply) and supply/demand doesn't matter much in the long run (assuming that mine supply doesn't increase significantly.) The latter point conflicts with many who view gold as a commodity and hence try to value it based on jewellery demand and the like. Gold is not a commodity! In contrast, something like silver is a commodity (it used to be a quasi-currency a long time ago but is not anymore.)

I'll post my results when I get a chance but I did a very crude estimate for the "expected" price of gold by adjusting its price in the early 70's, when it started trading freely in US$, by the growth in money supply since then. Gold around $700 to $900 seems reasonable. If one is considering a short, they should only contemplate shorting at, say, $1000 to $2000; or only if they are certain the money supply is going to contract severely in the future (i.e. severe deflation.)

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2 Response to Some quick thoughts...

January 12, 2009 at 8:55 PM

In one of his books, I think "Adventure Capitalist," Jim Rogers wrote about the corruption in India.

If memory serves, he was in Turkey and saw loads of corruption. He was told, just wait until you reach India. Then he did, and what he saw didn't change that.

January 13, 2009 at 3:10 PM

I come from those parts and I hate to say it but corruption is one of the things holding back those countries.

But, at a price, everything is an attractive investment ;)

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