[ReverseEngineer]

Let us say a given person has $1M in "Wealth". In today's economy, nobody actually need $1M on a daily basis to buy food, although they could soon.

The spare capital they have gets invested into a variety of assets, could be some in equities in companies they think might have good long term growth potential, could be in precious metals if they think these hold value, could be in bonds if they think the bond issuer is good to pay off on the bond. In the carry trade across currencies, one bets one nation against another in terms of a perception of economic wherewithal under given market conditions and how that currency will perform given policies of the government on interest rates and what the inflation level is.

So even the richest people (and by no means do I think $1M makes you rich, its just a nominal pricing of relative wealth at the moment for the purpose of this post) don't actually have $1M in CASH at any time, most of it in fact is diversified thru many types of investments. The theory here being, in diversification there is some security, some things go up while others go down. Generally true in past markets, not true in this one. EVERYTHING is going down in its value, there is no portion of the market than can perform well in this situation. I will try to explain the reason for this as best I can by simplifying the leveraging problem and the risk swap problem.

There is a certain amount of real value in the equities traded and the real property packaged up in securities. However, in order to theoretically reduce the risk inherent in betting on any of these things, a derivatives market was created which in terms of its monetary value outstrips the actual value in real estate or equities. Meanwhile, in both areas, in order to keep growth going the money supply was increased faster than the actual production of real wealth, and banks which leverage out at 10:1 really only have assets to cover 10% of their positions on any given bet, at best (discounting bets in the swap market).

So what happens in the case where you see a rapid devaluation of wealth past around the 20% point through a large market segment, as happenned in Real Estate? Since the asset class is in the portfolio of most of the large holders of wealth and can represent more than their actual holdings of real wealth, the balance sheet goes quickly negative. If you cannot offload the bad assets to some other dumb ass buyer, you bleed red ink on the balance sheet in perpetuity, or until the asset class rebounds, which in this case it won't anytime too soon (and really never, but lets not go that road).

So, anyone who trades in any of this stuff basically is watching paper wealth go up in smoke, and quite rapidly these days, and its quite difficult for such folks to grasp hold of the fact there just is NOTHING you can invest in that will serve as a safe repository for the Funny Money.

Not to trivialize the problem, but as I have said in other threads, you cannot secure this paper wealth in any way, you might as well buy Red Fox Fur Mittens if they are useful to you. The monetary system is toast, brought to you courtesy of economists who built such a complex series of interconnected debt obligations they no longer grasp why things are not operating according to their principles. Its not really all that hard to understand, and the market hardly humbles us all. It only is humbling those who have invested a lot of their paper wealth in it, and rapidly. I personally find it hilarious to see such folks confused and scrambling to offload bad debt and deleverage. What idiot would BUY it from you? Well, I suppose there is a Sucker Born Everyday, just hope you can find one in time.

Reverse Engineer

[ReverseEngineer]

I'm going to try to retitlethe thread by changing the subject title since it got split off from another thread by the mods. Haven't tried this one before.

Reverse Engineer

[Nano]

I think your missing something important.

The main aim of a solid investment strategy is to profit from the relative difference in performance between different industries and/or countries. By using the different asset and derivative classes it is possible to increase 'paper wealth' under any circumstances, provided you have made the right choice in regard to which industries will perform better relative to other industries and you have hedged the different types risks properly.

You might not make double digit gains this way, but you should be able to outperform the interest rate on government bonds at all times.

[ReverseEngineer]

I think your missing something important.

The main aim of a solid investment strategy is to profit from the relative difference in performance between different industries and/or countries. By using the different asset and derivative classes it is possible to increase 'paper wealth' under any circumstances, provided you have made the right choice in regard to which industries will perform better relative to other industries and you have hedged the different types risks properly.

You might not make double digit gains this way, but you should be able to outperform the interest rate on government bonds at all times.

If a downspin takes long enough and there is a discernible difference in how fast any given economy spins down, you could make a profit on the difference.

However, what you see here is a rapid downspin across all economies. You can identify a fundamental risk factor in all the economies of course, that is the Oil card. Even the suppliers are at risk because the downturn in the economy of the consumers means demand destruction, and they of course have populations they have to support on proceeds of the sale of oil.

I'm sure you could make a short term profit short selling something. However, whatever profit you might make is tied to the value of the currency involved, and that itself is unstable. If somebody could really identify an economy or investment that could weather this storm, I think they would have by now. Capital flew from equities to commodities for a while, but the prices could not be supported, so those who bought high futures contracts are getting reamed now. Folks who invested heavy in silver are wondering just when if ever they will see their money again, the underlying question in the original thread this post got split off from. For what reason this was done was not explained, it would be nice if somebody would do that

Also would be more correct would be to retitle this thread "Markets and Investing under Peak Oil". If my handle is going to be attached to the thread as author, I'd like it to have a more appropriate title. It really was just a response to the Trader's Corner thread, not intended to be a thread of its own. Just a request of course.

Reverse Engineer

[cube]

...
Not to trivialize the problem, but as I have said in other threads, you cannot secure this paper wealth in any way,...

You can short the stock market.
// addon:
You can make money going up
and
You can make money going down

[MrBill]

In your haste to teach us something we already know you seem to have forgotten many simple truths:

All assets trade relative to one another. No asset has an absolute value. So as one asset loses value, but definition another asset gains value. You make a profit by arbitraging between asset classes.

Financial assets lose value relative to physical assets and vice versa. Inflation makes cash less valuable. Deflation makes cash more valuable. If all assets are over-priced then cash is under-valued and vice versa.

As one currency loses value then by definition another currency is rising in value. You sell one, you buy another and vice versa.

Post peak oil depletion and other finite resources just limit growth in the real economy, and therefore the value of financial assets based on the value of the underlying economy. So when fuel is scarce, land on which to grow food, and food itself, will be very valuable relative to, say, labor that is in surplus.

Also, even if financial assets lose, say, 75% of their value, if my assets relative to your assets only lose, say, 37.5% of their value, then I am still 100% ahead of you. My purchasing power has not lost as much as yours. That means after 'the crash' I can afford to buy twice as many assets as you. Even if that is two acres of land and two cows versus your one acre and one cow.

In a bear market one does have not to try to make money, but to try to lose as little as possible relative to everyone else. Just keeping your job, a roof over your head and enough to eat may be enough to emerge from a recession/depression in tact, and may be considered a significant victory relative to those that lose everything.

I know you 'believe' you have the 'moral high ground' and you have gone so far to call me 'dense', but really I have read absolutely nothing in your posts that impresses me as a genuine insight. The more you write the more I realize you really do not understand what you are talking about. Maybe you're bored or lonely? I do not know? But I think you should preach less and learn more about finance and economics yourself! God Bless.

[Heineken]

I agree with Bill.

Reverse Engineer is the most arrogant new member I've seen in a long time.

It's OK to express opinions about things you don't understand. I do that all the time on economic issues. All I can draw on is common sense, not an economics degree. My own half-baked economic theory is based on the premise that you cannot get something for nothing, except through a temporary aberration of reality. I'm comfortable operating from that foundation, even though I know it's very thin.

Just make sure your opinions are couched as opinions, not the word of God. When you do that you look like a fool.

[MrBill]

Thanks Heineken. I notice a depressing lack of time and media attention being given to healthcare issues in the US election. What do you think? McCain wants to tax existing benefit plans? Obama wants to expand coverage, but has not said how he would pay for it?

[Heineken]

Bill, I notice a depressing lack of attention to ALL the issues in this campaign. It's become just another childish food fight, a boxing match between advertising agencies. It's really sickening to watch. Many of the commercials contain outright lies.

It looks to me as though under Obama I'd get something---some sort of insurance I'd have to pay for, but at an affordable rate for someone on my low fixed income. Under McCain I'd get more of the current arrangement, which leaves me in the cold.

Obama would help pay for social programs by increasing taxes on the rich and raising the capital gains tax from 15% to 20%. He'd actually cut taxes on people making less than (approximately---I don't recall the exact figure offhand) $200,000. I also think he'd cut the military budget, although I don't know if this is part of the official platform. Certainly he'd reduce spending in Iraq, drastically---that's part of his platform.

We could have had a fine universal health plan in place and working by now if Bush hadn't squandered the national treasure in Iraq. I'll think about things like that when I'm lying there with my broken leg.

[cube]

I agree with Bill.

Reverse Engineer is the most arrogant new member I've seen in a long time.

Do you remember, LoneSnark?
I think he was worse!
//
to summarize what MrBill just said but using my own interpretation:

I don't need to outrun the bear, I just need to outrun YOU!

sounds about right?

[MrBill]

Real people, real problems. But just keep telling yourself that 'economics is not a science' so that economic pain you're feeling is not real! ; - ))

[jdmartin]

All assets trade relative to one another. No asset has an absolute value. So as one asset loses value, but definition another asset gains value. You make a profit by arbitraging between asset classes.

Financial assets lose value relative to physical assets and vice versa. Inflation makes cash less valuable. Deflation makes cash more valuable. If all assets are over-priced then cash is under-valued and vice versa.

As one currency loses value then by definition another currency is rising in value. You sell one, you buy another and vice versa.

Post peak oil depletion and other finite resources just limit growth in the real economy, and therefore the value of financial assets based on the value of the underlying economy. So when fuel is scarce, land on which to grow food, and food itself, will be very valuable relative to, say, labor that is in surplus.

Also, even if financial assets lose, say, 75% of their value, if my assets relative to your assets only lose, say, 37.5% of their value, then I am still 100% ahead of you. My purchasing power has not lost as much as yours. That means after 'the crash' I can afford to buy twice as many assets as you. Even if that is two acres of land and two cows versus your one acre and one cow.

In a bear market one does have not to try to make money, but to try to lose as little as possible relative to everyone else. Just keeping your job, a roof over your head and enough to eat may be enough to emerge from a recession/depression in tact, and may be considered a significant victory relative to those that lose everything.

Great post, right on the money. This post should be a sticky. What we're seeing is a large scale reordering of the economy, which will create an entirely new economic order. As you've said, just because some things (paper, invisible "assets") are losing value, doesn't mean that other things (metals, oil, nat gas, land, food, etc) aren't gaining value relative to the currency being used and relative to other assets either gaining, or losing value at an accelerated pace. I see the appreciation every week at the grocery store!

Bottom line for the chaos in all the markets is that there's no consensus on what assets are appreciating long-term. For my money, geographically favorable land is always a sure bet, but there's no guarantee. Still, you can't print more land. You can't mine or drill for more land. The basics of food and shelter will always have to be met as long as there's humans around, so to me it's a safe common denominator.

[Byron100]

Bill, I notice a depressing lack of attention to ALL the issues in this campaign. It's become just another childish food fight, a boxing match between advertising agencies. It's really sickening to watch. Many of the commercials contain outright lies.

It looks to me as though under Obama I'd get something---some sort of insurance I'd have to pay for, but at an affordable rate for someone on my low fixed income. Under McCain I'd get more of the current arrangement, which leaves me in the cold.

Obama would help pay for social programs by increasing taxes on the rich and raising the capital gains tax from 15% to 20%. He'd actually cut taxes on people making less than (approximately---I don't recall the exact figure offhand) $200,000. I also think he'd cut the military budget, although I don't know if this is part of the official platform. Certainly he'd reduce spending in Iraq, drastically---that's part of his platform.

We could have had a fine universal health plan in place and working by now if Bush hadn't squandered the national treasure in Iraq. I'll think about things like that when I'm lying there with my broken leg.

I agree...this political campaign is just sickening to watch...it really is all about the marketing and not about the issues, isn't it?

While I'd love to be able to vote for Obama for the same reasons as you've stated above, I just don't think he's going to be able to pull that sort of thing off. He's made so many promises, all of which requires money we don't have, so what's to make me think that I'll able to get cheap, affordable health care in an Obama administration? I'm thinking he's just going to get in there and say, "Oh, we can't do this...we're just to have to leave things like they are." We need someone with a real backbone that's willing to stand up to the interests, and crush them down as needed in order to give the voters what they truly need. I just don't see Obama as a man with backbone.

Perhaps my thinking is misguided...perhaps can you shed some light as to the chances of Obama actually being to deliver forth on his health care proposals?

You might be heartened to know that I'll not make up my mind who to vote for until I'm *in* the voting booth. Not now, not the day before, nor on the walk to the polls...I'll decide when I'm looking down at the ballot in front of me. I somehow think if more people did things this way, we'd not have quite the mess as we do today in this country, but then again, that's just me.

[ReverseEngineer]

Maybe you're bored or lonely? I do not know? But I think you should preach less and learn more about finance and economics yourself! God Bless.

I'll work on being less preachy. Far as boredom and loneliness goes, when you live alone you have a lot of spare time on your hands to write. Anyhow, plenty of others here write plenty, whether its out of boredom or loneliness I have no idea, I'm just trying to catch up in post numbers

On the question of the relative value of financial assets versus physical assets, you run into the problem of ownership and meaning. If the bank which issued you a mortgage has gone bankrupt, who owns the property? Does it revert to the government which assumes the mortgage? Who owns it then if the government goes bankrupt? What is the value of real property if it intrinsically loses its value, the house nobody will buy, the auto plant which is obsolete, the road structure too expensive to maintain? Which asset here do you try to hold onto, and why?

In the end, what has real value left sorts itself out, but as you have bankruptcy after bankruptcy in banking, construction, shipping etc, it becomes quite hard determine who owns what and the currency itself loses meaning for identifying the ownership or as a means to trade ownership. So eventually you devolve down into a power struggle for taking ownership over whatever it is that is left with some real value and start the process over again.

Now, about the only thing I think we all might agree has real value is food, so ownership of a farm on which to produce food would seem like a good investment. However, if production of the food on the land requires oil on a mechanized farm and the oil is too scarce, as a business it is not a good investment. It might provide enough for you and your family farmed by hand and animals, but there will be a power struggle to keep that land and those animals against others who do not have any land. You only own this so long as you can keep it.

How will Health Care be paid for? Like the road system, the Health care system we had cannot be paid for no matter what you based the currency on, Gold, Silver, Oil whatever. It is intrinsically too expensive to maintain.

I am going to apologize for being over the top and preachy as a result of my boredom and loneliness. However, I also have been looking here for some new insight into how the monetary system might be kept afloat and how you could continue to trade when so many things we once thought had real value like a Hummer or a Suburban Home have lost intrinsic value. If you bought them outright, you basically have a hunk of junk on your hands. If you bought them on credit, whoever loaned you the money can repo them and now has a hunk of junk on their hands. I don't see where anyone makes any real money when so many of the "things" we once thought held value don't have value anymore, and when so much investment of time and energy essentially went to waste in building them. If you can explain how this is possible by trading one currency against another, or buying silver or gold or any other investment strategy, I am interested to hear what it is.

Reverse Engineer

[Byron100]

Just one more thing I'd like to toss out there. Nothing, I repeat, *nothing* gets done without labor. Food doesn't get grown without labor, land doesn't become habitable without labor, gold in nice, shiny coins don't become that way without labor, and even stocks don't get traded without people actually doing the work performing the trades.

So why is it that labor is so undervalued in society...when it should be the most valuable commodity there is? Especially the kind of work that actually gets stuff done, such as harvesting crops or building houses, teaching children, etc. I'd love nothing more than to see everyone stop work for a full month...I do mean everyone. (Might actually happen someday if we get a bird flu pandemic or whatever.) Let's see what society thinks of the value of labor then.

Just something for you folks to chew on, is all.

[BigTex]

Anyone who wants to know how to provide durable wealth protection should read "Fail Safe Investing" by Harry Browne.

It's really not that complicated.

Understanding the difference between investing and speculating is a good place to start if wealth protection is the goal.

[Heineken]

Maybe you're bored or lonely? I do not know? But I think you should preach less and learn more about finance and economics yourself! God Bless.

I'll work on being less preachy. Far as boredom and loneliness goes, when you live alone you have a lot of spare time on your hands to write. Anyhow, plenty of others here write plenty, whether its out of boredom or loneliness I have no idea, I'm just trying to catch up in post numbers {Text deleted. Ecessive quoting.-FL}
I am going to apologize for being over the top and preachy as a result of my boredom and loneliness. However, I also have been looking here for some new insight into how the monetary system might be kept afloat and how you could continue to trade when so many things we once thought had real value like a Hummer or a Suburban Home have lost intrinsic value. If you bought them outright, you basically have a hunk of junk on your hands. If you bought them on credit, whoever loaned you the money can repo them and now has a hunk of junk on their hands. I don't see where anyone makes any real money when so many of the "things" we once thought held value don't have value anymore, and when so much investment of time and energy essentially went to waste in building them. If you can explain how this is possible by trading one currency against another, or buying silver or gold or any other investment strategy, I am interested to hear what it is.

Nicely said. Shows that you're a very bright guy and that you're learning the ropes here and the social skills (I know how they can erode when you live alone).

You wrote, "How will health care be paid for?" Byron expressed similar doubts.

I answer, "How is ANYTHING being paid for?"

Nothing is being paid for. We are falling farther and farther behind, both nationally and as individuals, as we continue to spend far more than we earn.

There is so much waste out there---it's unfathomable.

Why are we so fired-up about fiscal responsibility when it comes to health care for little people like me, who've worked hard and paid taxes and obeyed the laws all their lives, and not raving about $300 military hammers or Olympic swimming pools for US soldiers on imperial military bases or sexual trysts between Energy Department staff and oil company employees?

All I know is that I pay taxes and that health care is one thing I could get for them that would have a direct and ethical benefit for me and millions like me.

It's a question of priorities. We're spending the money we don't have anyway, so what will we spend it on? Maybe if we spend more on health care, we'll have less to spend on redundant bombs and sexual junkets, and wouldn't that be a good thing?

Byron, you and I have something in common that should be kept in mind when you enter the voting booth.

[cube]

...Why are we so fired-up about fiscal responsibility when it comes to health care for little people like me, who've worked hard and paid taxes and obeyed the laws all their lives, and not raving about $300 military hammers or Olympic swimming pools for US soldiers on imperial military bases or sexual trysts between Energy Department staff and oil company employees? All I know is that I pay taxes and that health care is one thing I could get for them that would have a direct and ethical benefit for me and millions like me. ...

Can you handle the truth? Do you want the truth?

[Heineken]

Go ahead, Cube. Give me the truth.

[jdmartin]

Why are we so fired-up about fiscal responsibility when it comes to health care for little people like me, who've worked hard and paid taxes and obeyed the laws all their lives, and not raving about $300 military hammers or Olympic swimming pools for US soldiers on imperial military bases or sexual trysts between Energy Department staff and oil company employees? All I know is that I pay taxes and that health care is one thing I could get for them that would have a direct and ethical benefit for me and millions like me.
It's a question of priorities. We're spending the money we don't have anyway, so what will we spend it on? Maybe if we spend more on health care, we'll have less to spend on redundant bombs and sexual junkets, and wouldn't that be a good thing?

I don't disagree with your post, but did want to clear up one thing - the $300 military hammers is an urban legend. I'm not saying there wasn't one instance, once, somewhere, that that happened, but by and large things like that don't go on. I was in the Navy and I controlled the computer system where purchasing was done. I was actually surprised at how cheap the military got some of the things we used.

Otherwise, I agree. Though I did read the report (the actual report) on the MMS and I think it's a lot of ado about nothing, frankly. I didn't see anything so egregious in there that should bring massive outrage, certainly nothing on the scale of what our politicians do on a scale 100x worse every day. I think it's more a case of killing the little guy with a little dirt on his nose while ignoring the guys actually excavating the dirt.