Any political system is bound to fail

Any political system is attractive in its theoretical definition.

The dreamers who conceive them and discuss them transfer their enthusiasm to the masses. The masses eventually believe in the system.

Steadily the human element takes a preeminent role. The human element bastardizes the system because people seek power.

Power leads to greed. Both eventually distort the initial definition of the system.

Milton Friedman got us all excited about his monetarist--free market approach. Now, however, the bureaucracy (read: vested interests) are not allowing the system to work. Distortions are introduced such as new regulations and new levels of regulatory power groups.

We are profoundly changing. Ports need to become more efficient. Yet we refuse foreign investors to do the job.

Where are we heading? Our system is changing. The masses do not know. The new power groups are distancing themselves more and more from us. They do it for our own good. But crisis follows crisis as never before.

More on https://www.peterdag.com/.

George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977

Bear Sterns and more ......

The bureaucrats are busy deciding how to control the financial system.

My idea, learned from studying centuries of human thinking, is that it is inevitable for democracies to evolve in the absolute control of only one power group: the bureaucrats.

The recent financial crisis (eg. Bear Sterns) gives a great opportunity to our bureaucracy to increase its power on how our financial markets should work.

Every crisis, which is caused by too much regulation, gives new impetus to this trend.

It is inevitable. More and more power will be concentrated in the hands of fewer bureaucrats. This is the reason the dollar is weak.

More on https://www.peterdag.com/.

George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977

Big government is not the solution

Barack Obama, who has been a step behind rival Hillary Clinton in proposing remedies to the housing and financial crises, jumped ahead of her this week by advocating broader regulation of Wall Street.

Obama called for the Federal Reserve to be given greater supervisory power when it acts as lender of last resort. He also urged stronger capital requirements for financial companies and a consolidation of regulatory agencies.

Big government stifles our desire and will to produce because big government is invariably accompanied by higher taxes.

And higher taxes are not the solution to our problems.

More on https://www.peterdag.com/.

George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977

A correction like many others?

The stock market has the tendency of entertaining us with a 10% correction in the first half of the year.

It resumes its trend up until summer to surprise us once again in the third quarter with another 10% correction.

Since 1987, the overall upward trend has been close to 8% (if stocks are held for at least 10 years and bought in the channel shown in The Peter Dag Portfolio -- as they are now). Add to this number the average 2%+ dividend and you get an interesting 10%+ total return.

Will this year follow the average pattern? The noisy and depressing pessimism makes me bullish!

More on https://www.peterdag.com/.

George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977

An important market signal

........ an interesting study .......while the market averages typically yield 10-12% annually over the lifetime of an individual investor, most of these investors only capture about 2/3 of this return. The reason was not due to poor funds that these investors put their capital into, but instead resulted from the fear and greed cycle that so many can fall prey to. In this study, an investor was much more likely to liquidate a portion of their account - or even their entire retirement - during difficult market times. In essence, the typical investor would take money out of the market at the worst possible time (near a market bottom) due to the fear of further price deterioration.

Conversely, individuals were more likely to add to their accounts or even leverage positions when the economy was running at full tilt (or closer to a market top) which put more assets at risk precisely at the wrong time. The study simply pointed out that a disciplined and steadfast approach yielded much better returns than trading according to the fear or jubilation that comes with bear and bull markets.(Source:http://seekingalpha.com/article/69761-are-we-at-a-key-inflection-point).

I have known several wealthy professionals and businessmen who did exactly this. They panicked at the wrong time. They could not stand the erosion of the value of their portfolio and decided to sell everything and have everything in cash. This is exactly what they are doing now!

They need peace of mind and their mental setup breaks down at important turning points.

They will be the same investors that, feeling left out after a 20% move in the market, decide to take aggressive positions trying to catch up the lost ground. They will be penalized again by buying close to a market peak in the midst of economic and financial euphoria.

Keeping a sound investment perspective is a difficult psychological feat. No doubt about it. And this is the reason many portfolio managers practice meditation to keep a sound and relaxed thinking process.

More on https://www.peterdag.com/.

George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977

Towards the nationalization of the banking system

Forget lower interest rates. For the Federal Reserve to keep the financial markets from imploding it needs to buy troubled mortgage bonds from banks and securities firms, say the world's biggest Treasury investors (Source: Bloomberg).

Step 1. Create a financial orgy thanks to the low interest rates environment created by Greenspan.

Step 2. Encourage derivatives/leveraging excesses with the excuse they create liquidity (as per Greenspan's testimony).

Step 3. Do nothing to avoid the housing debacle and the fall of the house of cards created by the financial system.

Step 4. "Bail out" the financial system by buying the financial garbage created with the blessing of a bloated bureaucracy which was supposed to supervise them.

More on https://www.peterdag.com/.

George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977

Forget about the Fed language.....

What is important is that they want to keep the financial system out of trouble and help avoiding a disastrous recession by lowering short-term interest rates.

All their other wordings is just nonsense.

The markets understand this. Stocks are soaring. Gold is strong. Energy trusts are strong. The dollar is weak.

The markets are consistent.

More on https://www.peterdag.com/.

George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977

Let me say it again....

A currency reflects the financial and economic strength of any country.

The demise of the dollar is a sad testimonial on the effectiveness of our leaders, as I have been writing over and over again in this space.

Gold and commodities are the only way to protect your assets from the ravages which are causing the fall of our currency.

More on https://www.peterdag.com/.

George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977

The fever chart of any country

Sydney Homer, a superb historian of interest rates and the bond market, once said in a marvelous conceptual sweep: interest rates are the fever chart of any country.

In any country, throughout the centuries, the average rate of interest has been close to 5%-6%. The greater is the difference from this ideal level, the greater are the problems facing the country. Credit issues and slow unstable growth are the typical problems.

The 1970s were an example of high interest rates and inflationary times. The 1990s were the “right” times with interest rates close to 5%. 2000-2002 and now are examples of times when interest rates are close to 1%-2% associated with huge wealth destruction. You do not need to be an economist to know what is happening.

Yes, you might ask, but what about the Fed? The Fed is a powerless and overrated actor. They cannot control or anticipate the markets because they are powerless. They just print money once they recognize there is a problem. And when they recognize it, more often than not it is too late.

I used to meet regularly with Fed officials and economists. A Fed official used to remind us that the problems were very familiar to the Fed and all their PhDs knew what had to be done. He was so pompous to be almost intimidating.

Without going back too far in time, the lesson of the 2000s is an example of how powerless a central bank can be. Lesson: low interest rates reflect huge problems.

The level of interest rates relative to inflation is also an important measure. Inflation is under control when short-term interest rates (rate on 13-week Treasury bills) are greater than 1.4 times inflation.

When interest rates (now 1.42%) are much lower than 1.4 times inflation (1.4 times 4.4% = 6.2%), economic conditions become unstable and favor hard asset investments as the dollar sinks.

Right now the markets have driven interest rates down because this is the level needed for the credit issues to mend. Meanwhile we will be facing an inflationary bias because rates are well below the safety zone of 6.2%.

More on https://www.peterdag.com/.

George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977

Globalization is here

For years we have been talking about globalization and the fact that the world is flat.

Let's wake up. What we are experiencing in the US is the effect of globalization. Globalization is here. It is not an abstract concept. The sad truth is that our country was not ready for it. We thought we could make it. We are not.

Let me say this again. The relentless decline of the dollar is the testimonial of this simple truth. Furthermore, its weakness will hinder the capacity of American business to invest and expand overseas where the opportunities are.

I do not want to sound critical of the American people. I am critical of our leaders who did not prepare us to this momentous event.

More on https://www.peterdag.com/.

George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977

No wonder the dollar is weak

About 75%, yes 75%!, of the employment gains over the past year have been in health care and restaurants, according to the Liscio Report.

What is happening to us? What happens to rocket scientists, electrical engineers, physicists, mechanical engineers, ....

The dollar reflects our productivity growth. But we cannot be more competitive in the world arena by becoming better waiters.

More on https://www.peterdag.com/.

George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977

Financial risk rising as interest rates collapse

Financial risk is rising. Treasury yields are collapsing. The rate on 13-week Treasury bills sagged to 1.42% from 2.19% two weeks ago.

The Fed will have to lower the fed fund rate to 1.75% immediately.

Meanwhile, credit is tightening and banks and financial institutions keep failing. The dollar, of course, reflecting this undesirable investment environment, is falling.

Thank you Greenspan for the glorious mess we are in. Mr. Bernanke is trying to copy your endeavours as interest rates fall to 1%.

The markets always win and have an indecorous way of humbling everybody!

More on https://www.peterdag.com/.

George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977

Risk premium keeps rising

March 6 (Bloomberg) -- Credit trading models used by Wall Street have gone haywire, raising company borrowing costs even as Federal Reserve Chairman Ben S. Bernanke cuts interest rates.

Rising low-grade bond yields, due to rising risk premium, undermine the positive affect of lower short-term interest rates. They reflect a tight credit market in spite of huge availability of liquidity in the banking system.

In other words, the markets are tightening and there is nothing the Fed can do about it. Unless they become more aggressive.

More on https://www.peterdag.com/.

George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977

California needs more money

California Democrats, apparently unable to curb spending, say may not approve a state budget until they get a tax increase, IBD reports. Revenues, though growing rapidly, have not kept pace with spending. To close the gap between spending and revenues, the politicians ask for a $5 billion tax hike.

This is exactly what I have been writing about on this blog and in my The Peter Dag Portfolio. People ask. Politicians give. They run out of money. People get upset because they do not get what promised. Politicians raise taxes. This is how big governments become bigger.

The ultimate result is that the bureaucracy gains enormous power and we do not know how to defend ourselves once we recognize we are paying a grotesque tax bill.

I am familiar with a city that has a superb, ample and superbly equipped library. Yet they run out of money and could not buy magazines. The public protested. What was the purpose of having a nice library with no magazines? The politicians convinced the town new taxes were needed to provide the needed publications.

It is an irreversible process. People ask. Politicians give. We pay more taxes and our standard of living declines. The tragic issue is that no one really knows when to stop. Any ideas?

George Dagnino

The problem with the equity market

Financial risk.

The market peaked last summer when the measure we developed to asses financial risk started rising. It has been rising since then and the stock market has done poorly.

It looks like financial risk has stopped rising. This is the first piece of good news of the past six months.

Stocks will resume rising when financial risk heads lower.

More on https://www.peterdag.com/.

George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977

More on why the Fed is irrelevant

If they were so smart and powerful they would have acted to avoid the 2000 equity bubble.

If they were so powerful and smart they would have acted to avoid the immense wealth destruction caused by the implosion of the 2000 equity bubble.

If they were so smart and powerful they would have acted to avoid the housing bubble.

If they were so smart and powerful they would have acted to avoid the implosion and the immense wealth destruction caused by the housing bubble.

If they were so smart and powerful they would have acted and recognized the derivative bubble (caused by the touted financial engineering community) instead of saying that it was adding liquidity to the markets.

If they were so smart they would have recognized the seriousness of the current economic predicament and lower the fed funds rate as soon as the rate on 13-week Treasury bills started sinking.

If they could not prevent the immense loss of wealth of the past 10 years, if they could not stabilize the markets in times of unusual volatility (which they were probably the main reason), what are they doing besides making speeches on our problems and writing sophisticated research papers on the financial market?

The markets are too powerful and smart for the Fed to handle. Is it time to recognize the limits of this institution and re-define it?

More on https://www.peterdag.com/.

George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977