Observations

My uncle and I used to meet in Rome for a few days and walk through the streets, enjoying the captivating beauties of the old city. After many years without seeing each other, we found we were studying the same issues: philosophy, history, and the workings of the mind according to Asian thinkers.

Being a neophyte in this area, he suggested I read Sophie’s World by J. Gaarder, a fascinating, delightfully written, entertaining, challenging, and profound book.

The book is about the dialog between an old man and a young girl – Sophie (“wisdom” in Greek). She is brilliant, eager to learn with probing questions, questions that could very well be ours.

This book convinced me that we think the way we do because philosophers tried to understand the times they were living in. They focused their attention on social, religious, and political issues of their times.

Their contribution was to make us think. To challenge us. To give ideas, whether we agreed with them or not, on how to view old and new problems. The new wave of philosophers invariably captured these ideas and created new and more encompassing visions.

There is no doubt in my mind that we are the outcome of the past. What we do. The way we do it. How we live. Some of these aspects have always been the same. For a millennia. The form changes. The substance stays the same. Take for instance the way business is conducted and the incentive to organize “business shows”.

The western world struggled for 1400 years to break the chains of the Church of Rome. The Reformation unleashed a new vision for man. We learned to think by ourselves. It set the stage for geniuses like Copernicus, Kepler, Galileo, and Newton to challenge the way the world works. It unleashed creativity in all dimensions, ultimately allowing the birth of the Renaissance.

The insatiable sense that we could do anything was followed by discoveries of sea routes to new lands (America and Asia). These events created further discoveries and new challenges for philosophers. Their mental effort has benefited all of us.

(This Observations appeared in the 9-11-2006 issue of The Peter Dag Portfolio ).

George Dagnino, PhD Editor,
The Peter Dag Portfolio.
Since 1977
2009 Market Timer of the Year by Timer Digest
Portfolio manager

Disclaimer.The content on this site is provided as general information only and should not be taken as investment advice nor is it a recommendation to buy or sell any financial instrument. Actions you undertake as a consequence of any analysis, opinion or advertisement on this site are your sole responsibility.

STRATEGIC INVESTING FOR UNCERTAIN TIMES.
Learn how to manage your portfolio risk and sleep comfortably. Improve the certainty of returns by taking advantage of business cycle trends. Learn to use simple hedging strategies to minimize the volatility of your portfolio and protect it from downside losses.
You will receive your user id to access 4 FREE issues – and all the previous ones - of The Peter Dag Portfolio. Email your request to info@peterdag.com. New subscribers, please.

FOLLOW ME ON TWITTER @GEORGEDAGNINO FOR MY LATEST VIEWS.

THE CENTRAL BANK AND YOUR INVESTMENTS: ORGANIZATION OF THE FEDERAL RESERVE SYSTEM

Just prior to the founding of the Federal Reserve, the nation was plagued with financial crises. At times these crises led to panic where people raced to their banks to withdraw their deposits. A particularly severe panic in 1907 resulted in bank runs that wreaked havoc on the fragile banking system and ultimately led Congress in 1913 to write the Federal Reserve Act. Initially created to address these banking panics, the Federal Reserve is now charged with a number of broader responsibilities, including fostering a sound banking system and a healthy economy.

Establishing the nation's first central bank was no simple task. Although the need for a central bank was generally undisputed, for decades early supporters debated the delicate balance between national and regional interests. On a national front, the central bank had to be structured to facilitate the exchange of payments among regions to strengthen the U.S. standing in the world economy. On a regional front, it had to be responsive to local liquidity needs, which would vary across regions of the U.S. Another critical balancing act was that between the private interest of banks and the centralized responsibility of government.

What emerged with the Federal Reserve system was a central bank under public control with countless checks and balances. Congress oversees the entire Federal Reserve system, and the Fed must work within the objectives established by Congress. Yet, Congress gave the Federal Reserve the autonomy to carry out its responsibility insulated from political pressure.

Each of the Fed's three parts: The Board of Governors, The Regional Reserve Banks, and the Federal Open-Market Committee, operate cooperatively, yet independent of the Federal government to carry out the Fed's core responsibilities. What makes the Federal Reserve independent? Three structural features: the appointment procedures for governors, the appointment procedures for Federal Reserve Bank presidents, and the funding of the Federal Reserve.

There are seven governors on the Federal Reserve Board and they are appointed by the President of the United States and confirmed by the Senate. Independence is derived from a couple of factors. First, the appointments are staggered to reduce the chance that a single U.S. president could load the board with appointees. Second, their terms of office are 14 years, much longer than elected officials' terms.

The appointment procedure for Federal Reserve Bank presidents is also an element that provides independence to the Federal Reserve. Each Reserve Bank president is appointed to a five-year term by the Bank's board of directors, subject to final approval by the Board of Governors. This procedure adds to independence because the directors of each Reserve Bank are not chosen by politicians, but are selected to provide a cross-section of interests within the region, including those of depository institutions, known financial businesses, labor, and the public.

Last, but not least, what provides independence of our central bank is the funding. The Fed is structured to be self sufficient in the sense that it meets its operating expenses primarily from the interest earnings on its portfolio of securities. Therefore, it is independent of congressional decisions about appropriation. Even though the Fed is independent of congressional appropriations and administrative control, it is ultimately accountable to Congress and comes under government audit and review. The chairman, other governors, and Reserve bank presidents, report regularly to the Congress on monetary policy, regulatory policy, and a variety of other issues and meet with senior administration officials to discuss the Federal Reserves' and the Federal Government's economic programs.

At the core of the Federal Reserve system is the Board of Governors or Federal Reserve Board. The Board of Governors is located in Washington, D.C. and is a federal government agency - that is the Fed's centralized component.

The Board consists of seven members, called governors. These governors guide the Federal Reserve policy action. The seven governors, along with a host of economists and support staff, help write the policies that help make our banks financially sound and help formulate the policies that make our nation economically strong.

A considerable amount of information concerning the activities of the Board of Governors, of economists and specialized surveys that are performed by the Federal Reserve system are available on the Internet by accessing the web site of the Federal Reserve system. Investors are urged to carefully read the many reports and studies released by the Fed and available free of charge through the Internet. Governors actively lead committees to study prevailing economic issues from affordable housing and consumer banking laws to interstate banking and electronic commerce. The Board also exercises broad supervisory controls over member banks insuring that commercial banks operate responsibly and comply with federal regulations.

Probably their most important responsibility, however, is participating on the Federal Open Market Committee (FOMC), the committee that directs the nation's monetary policy. Heading the Board are a chairman and vice-chairman, who are appointed by the United States president to serve four-year terms.

The chairman reports twice a year to Congress on the Fed's monetary policy objectives, testifies before Congress on numerous other issues, and meets periodically with the Secretary of the Treasury.

The FOMC is the Fed's chief monetary policymaking body. The role of the FOMC is to manage the nation's money supply. The FOMC meets typically eight times a year in Washington, D.C.

At each meeting the Committee discusses the outlook of the U.S. economy and the best way to promote the economy's sustainable growth. The Committee then discusses how the Fed will use its various policy tools to put the policy in place. What the policy tools are will be discussed in the next section. Finally, it is used as a directive which drives one of three outcomes: easing, tightening, or maintaining the growth of the nation's money supply - whichever is conducive to fostering a healthy economy at the time.

The FOMC has nineteen members, twelve of whom are voting members - the seven members of the Board of Governors, the President of the Federal Reserve Bank of New York, and four other Reserve Bank president who serve one term on a rotating basis. At every meeting, however, all twelve Reserve Bank presidents participate in FOMC policy discussions, whether or not they are voting members. The minutes of the Federal Open Market Committee are also available on the Internet. These minutes are very valuable reading for those investors who want to learn how to analyze economic and financial data, how the Fed interprets these data, and how they use these data to impact the interest rates and the economic environment. This is definitely recommended reading for investors to establish a sound and informed investment strategy. Even if these minutes are available with some delay, they still provide valuable clues on monetary policy, and in which direction the Federal Reserve is leaning.

The third part of the Federal Reserve System is constituted by the twelve Federal Reserve Banks. The operations of the Federal Reserve System are conducted through a nationwide network of twelve Federal Reserve banks with branches around the country. Each branch of a Federal Reserve bank has its own board of directors of five or seven members. A majority of three or four, as the case may be, is appointed by the head office directors and the others by the Board of Governors.

The directors of each Federal Reserve bank oversee the operations of their banks under the overall supervision of the Board of Governors. They establish, subject to approval by the Board, the interest rates the banks charge on short-term collateral loans to member banks and on any loans that may be extended to non-member institutions. National banks are required by law to be members of the system. Commercial banks chartered by any of the fifty states may elect to become members if they meet the requirements established by the Board of Governors. The member banks own all of the stock of the Reserve Banks. Non-member institutions, that is institutions that elected not to be part of the Federal Reserve system, also include savings banks, savings and loan associations, and credit unions. The directors appoint and recommend the salaries of the bank president and first vice president, subject to final approval by the Board.

Earnings of the Federal Reserve banks are derived primarily from interest received on their holdings of securities acquired through open market operations and on their loans to member banks. More than eighty percent of Reserve Banks' earnings have been paid into the Treasury since the Federal Reserve System was established. Should a Reserve Bank be liquidated, its surplus, after all obligations have been met, would become the property of the U.S. Government.

(From Chapter 6 of my book Profiting in Bull or Bear Markets. Published also in Mandarin and on sale in China. The book is available at Amazon.com).

George Dagnino, PhD Editor,
The Peter Dag Portfolio.
Since 1977
2009 Market Timer of the Year by Timer Digest
Portfolio manager

Disclaimer.The content on this site is provided as general information only and should not be taken as investment advice nor is it a recommendation to buy or sell any financial instrument. Actions you undertake as a consequence of any analysis, opinion or advertisement on this site are your sole responsibility.

STRATEGIC INVESTING FOR UNCERTAIN TIMES.
Learn how to manage your portfolio risk and sleep comfortably. Improve the certainty of returns by taking advantage of business cycle trends. Learn to use simple hedging strategies to minimize the volatility of your portfolio and protect it from downside losses.
Receive your user id to access 4 FREE issues – and all the previous ones - of The Peter Dag Portfolio. Email your request to info@peterdag.com. New subscribers, please.

FOLLOW ME ON TWITTER @GEORGEDAGNINO FOR MY LATEST VIEWS.

THE CENTRAL BANK AND YOUR INVESTMENTS: ORGANIZATION OF THE FEDERAL RESERVE SYSTEM

Just prior to the founding of the Federal Reserve, the nation was plagued with financial crises. At times these crises led to panic where people raced to their banks to withdraw their deposits. A particularly severe panic in 1907 resulted in bank runs that wreaked havoc on the fragile banking system and ultimately led Congress in 1913 to write the Federal Reserve Act. Initially created to address these banking panics, the Federal Reserve is now charged with a number of broader responsibilities, including fostering a sound banking system and a healthy economy.

Establishing the nation's first central bank was no simple task. Although the need for a central bank was generally undisputed, for decades early supporters debated the delicate balance between national and regional interests. On a national front, the central bank had to be structured to facilitate the exchange of payments among regions to strengthen the U.S. standing in the world economy. On a regional front, it had to be responsive to local liquidity needs, which would vary across regions of the U.S. Another critical balancing act was that between the private interest of banks and the centralized responsibility of government. What emerged with the Federal Reserve system was a central bank under public control with countless checks and balances. Congress oversees the entire Federal Reserve system, and the Fed must work within the objectives established by Congress. Yet, Congress gave the Federal Reserve the autonomy to carry out its responsibility insulated from political pressure.

Each of the Fed's three parts: The Board of Governors, The Regional Reserve Banks, and the Federal Open-Market Committee, operate cooperatively, yet independent of the Federal government to carry out the Fed's core responsibilities. What makes the Federal Reserve independent? Three structural features: the appointment procedures for governors, the appointment procedures for Federal Reserve Bank presidents, and the funding of the Federal Reserve.

There are seven governors on the Federal Reserve Board and they are appointed by the President of the United States and confirmed by the Senate. Independence is derived from a couple of factors. First, the appointments are staggered to reduce the chance that a single U.S. president could load the board with appointees. Second, their terms of office are 14 years, much longer than elected officials' terms.

The appointment procedure for Federal Reserve Bank presidents is also an element that provides independence to the Federal Reserve. Each Reserve Bank president is appointed to a five-year term by the Bank's board of directors, subject to final approval by the Board of Governors. This procedure adds to independence because the directors of each Reserve Bank are not chosen by politicians, but are selected to provide a cross-section of interests within the region, including those of depository institutions, known financial businesses, labor, and the public.

Last, but not least, what provides independence of our central bank is the funding. The Fed is structured to be self sufficient in the sense that it meets its operating expenses primarily from the interest earnings on its portfolio of securities. Therefore, it is independent of congressional decisions about appropriation. Even though the Fed is independent of congressional appropriations and administrative control, it is ultimately accountable to Congress and comes under government audit and review. The chairman, other governors, and Reserve bank presidents, report regularly to the Congress on monetary policy, regulatory policy, and a variety of other issues and meet with senior administration officials to discuss the Federal Reserves' and the Federal Government's economic programs.

At the core of the Federal Reserve system is the Board of Governors or Federal Reserve Board. The Board of Governors is located in Washington, D.C. and is a federal government agency - that is the Fed's centralized component. The Board consists of seven members, called governors. These governors guide the Federal Reserve policy action. The seven governors, along with a host of economists and support staff, help write the policies that help make our banks financially sound and help formulate the policies that make our nation economically strong.

A considerable amount of information concerning the activities of the Board of Governors, of economists and specialized surveys that are performed by the Federal Reserve system are available on the Internet by accessing the web site of the Federal Reserve system. Investors are urged to carefully read the many reports and studies released by the Fed and available free of charge through the Internet. Governors actively lead committees to study prevailing economic issues from affordable housing and consumer banking laws to interstate banking and electronic commerce. The Board also exercises broad supervisory controls over member banks insuring that commercial banks operate responsibly and comply with federal regulations.

Probably their most important responsibility, however, is participating on the Federal Open Market Committee (FOMC), the committee that directs the nation's monetary policy. Heading the Board are a chairman and vice-chairman, who are appointed by the United States president to serve four-year terms. ,p>The chairman reports twice a year to Congress on the Fed's monetary policy objectives, testifies before Congress on numerous other issues, and meets periodically with the Secretary of the Treasury. The FOMC is the Fed's chief monetary policymaking body. The role of the FOMC is to manage the nation's money supply. The FOMC meets typically eight times a year in Washington, D.C.

At each meeting the Committee discusses the outlook of the U.S. economy and the best way to promote the economy's sustainable growth. The Committee then discusses how the Fed will use its various policy tools to put the policy in place. What the policy tools are will be discussed in the next section. Finally, it is used as a directive which drives one of three outcomes: easing, tightening, or maintaining the growth of the nation's money supply - whichever is conducive to fostering a healthy economy at the time.

The FOMC has nineteen members, twelve of whom are voting members - the seven members of the Board of Governors, the President of the Federal Reserve Bank of New York, and four other Reserve Bank president who serve one term on a rotating basis. At every meeting, however, all twelve Reserve Bank presidents participate in FOMC policy discussions, whether or not they are voting members. The minutes of the Federal Open Market Committee are also available on the Internet. These minutes are very valuable reading for those investors who want to learn how to analyze economic and financial data, how the Fed interprets these data, and how they use these data to impact the interest rates and the economic environment. This is definitely recommended reading for investors to establish a sound and informed investment strategy. Even if these minutes are available with some delay, they still provide valuable clues on monetary policy, and in which direction the Federal Reserve is leaning.

The third part of the Federal Reserve System is constituted by the twelve Federal Reserve Banks. The operations of the Federal Reserve System are conducted through a nationwide network of twelve Federal Reserve banks with branches around the country. Each branch of a Federal Reserve bank has its own board of directors of five or seven members. A majority of three or four, as the case may be, is appointed by the head office directors and the others by the Board of Governors.

The directors of each Federal Reserve bank oversee the operations of their banks under the overall supervision of the Board of Governors. They establish, subject to approval by the Board, the interest rates the banks charge on short-term collateral loans to member banks and on any loans that may be extended to non-member institutions. National banks are required by law to be members of the system. Commercial banks chartered by any of the fifty states may elect to become members if they meet the requirements established by the Board of Governors. The member banks own all of the stock of the Reserve Banks. Non-member institutions, that is institutions that elected not to be part of the Federal Reserve system, also include savings banks, savings and loan associations, and credit unions. The directors appoint and recommend the salaries of the bank president and first vice president, subject to final approval by the Board.

Earnings of the Federal Reserve banks are derived primarily from interest received on their holdings of securities acquired through open market operations and on their loans to member banks. More than eighty percent of Reserve Banks' earnings have been paid into the Treasury since the Federal Reserve System was established. Should a Reserve Bank be liquidated, its surplus, after all obligations have been met, would become the property of the U.S. Government.

(From Chapter 6 of my book Profiting in Bull or Bear Markets. Published also in Mandarin and on sale in China. The book is available at Amazon.com).

George Dagnino, PhD Editor,
The Peter Dag Portfolio.
Since 1977
2009 Market Timer of the Year by Timer Digest
Portfolio manager

Disclaimer.The content on this site is provided as general information only and should not be taken as investment advice nor is it a recommendation to buy or sell any financial instrument. Actions you undertake as a consequence of any analysis, opinion or advertisement on this site are your sole responsibility.

STRATEGIC INVESTING FOR UNCERTAIN TIMES.
Learn how to manage your portfolio risk and sleep comfortably. Improve the certainty of returns by taking advantage of business cycle trends. Learn to use simple hedging strategies to minimize the volatility of your portfolio and protect it from downside losses.
Receive your user id to access 4 FREE issues – and all the previous ones - of The Peter Dag Portfolio. Email your request to info@peterdag.com. New subscribers, please.

FOLLOW ME ON TWITTER @GEORGEDAGNINO FOR MY LATEST VIEWS.

THE CENTRAL BANK AND YOUR INVESTMENTS: INTRODUCTION

There is no doubt that trends in levels of interest rates are one of the most crucial variables in driving an investment strategy (Fig. 6-1). The reason is that they determine the kind of environment that impacts the stock market, the U.S. economy, inflation and the U.S. dollar vis a vis other currencies. For these reasons it is important to understand how short-term interest rates are driven, by whom, and how.

The central bank of any country and the Federal Reserve for the United States are the institutions that have the power and the authority to impact trends and levels of short-term interest rates. Because of their huge impact on the financial markets, we are devoting an entire chapter to the functions of the central bank. We will deal in detail with the central bank of the United States, which is called the Federal Reserve. Other central banks around the world have copied the procedures and the disciplines followed by the U.S. model.

We will look at how the Federal Reserve system is organized, how they conduct monetary policy, what monetary policy is, how they impact the growth of the money supply, and what the instruments of monetary policy are. Another important variable that is controlled by the Federal Reserve is the level of real interest rates, and we have seen in the previous chapter how this is a crucial variable to determine the kind of financial markets we should expect.

Growth in the money supply is one of the major driving forces of the business and financial cycles. There have been seven cycles in the growth of the MZM since 1955. In 1995 the eighth financial cycles began unleashing the same forces experienced in the previous seven cycles.

It is also important to recognize that at a time of crisis, central banks intervene to cushion the crisis. This happened in the 1970s when there were several bank failures. The main reasons for bank failures are usually twofold. The first one is rising interest rates, which represent the rising costs for banks, since banks have to borrow money to re-lend it at a higher interest rate. As short-term interest rates rise, because of Fed tightening and strong economic conditions accompanied by inflationary pressures, bank profit margins are squeezed.

The second reason for bank failure is that some banks have a loan portfolio that has been extended to marginal clients. During times of rising interest rates, these clients find it difficult to repay the loans. As a result, because of rising short-term rates, the raw material for banks, and problems with loan portfolios, bank failures are more likely. It occurred in 1992-1993 when there were real estate problems in the U.S. and the savings and loan debacle. It happened again during the financial crisis, which began in 1997 in Asia and expanded throughout the world, particularly in Brazil and in Russia in 1998.

During financial crises, a central bank has the crucial role of providing liquidity to the banking system in order to keep it viable and to make sure the crisis does not spread to other sectors of the economy and other economies around the world. The central bank recognizes the difficulties the banking system causes by rising short-term interest rates and issues related to the loan portfolio of the banks. These are typical problems the central bank follows very closely. The failure of a major bank, however, or a major global region, like Asia in 1997, forces the central bank to provide extra liquidity to the banking system, trying to make sure that the problems of the banking system do not spill over to the rest of the economy. The tools to increase liquidity in the banking system will be discussed in detail in the rest of this chapter.

Finally, we will look at how monetary policy impacts the economy, inflation, and the financial markets. The last section will deal with investment implications and how to use this chapter to recognize risk and opportunities in investing your money. It is clear, that the Federal Reserve has an enormous impact, not only on the U.S. economy, inflation, and its money supply, but also in providing assistance to institutions and countries that have difficulties so that the economy continues to expand in an orderly fashion.

(From Chapter 6 of my book Profiting in Bull or Bear Markets. Published also in Mandarin and on sale in China. The book is available at Amazon.com).

George Dagnino, PhD Editor,
The Peter Dag Portfolio.
Since 1977
2009 Market Timer of the Year by Timer Digest
Portfolio manager

Disclaimer.The content on this site is provided as general information only and should not be taken as investment advice nor is it a recommendation to buy or sell any financial instrument. Actions you undertake as a consequence of any analysis, opinion or advertisement on this site are your sole responsibility.

STRATEGIC INVESTING FOR UNCERTAIN TIMES.
Learn how to manage your portfolio risk and sleep comfortably. Improve the certainty of returns by taking advantage of business cycle trends. Learn to use simple hedging strategies to minimize the volatility of your portfolio and protect it from downside losses.
You will receive your user id to access 4 FREE issues – and all the previous ones - of The Peter Dag Portfolio. Email your request to info@peterdag.com. New subscribers, please.

FOLLOW ME ON TWITTER @GEORGEDAGNINO FOR MY LATEST VIEWS.

IS EUROPE GOING IN THE DIRECTION OF DETROIT?

Trends in debt-to-GDP ratio (source: ZeroHedge, Eurostat):
•Euroarea: 92.2%, up from 88.2% a year ago
••Greece: 160.5%, up from 136.5% a year ago
••Italy: 130.3%; up from 123.8% a year ago
••Portugal: 127.2%, up from 112.3% a year ago
••Ireland: 125.1%, up from 106.8% a year ago
••Spain: 88.2%, up from 73.0% a year ago
••Netherlands: 72.0%, up from 66.7% a year ago Scary!

George Dagnino, PhD Editor,
The Peter Dag Portfolio.
Since 1977
2009 Market Timer of the Year by Timer Digest
Portfolio manager

Disclaimer.The content on this site is provided as general information only and should not be taken as investment advice nor is it a recommendation to buy or sell any financial instrument. Actions you undertake as a consequence of any analysis, opinion or advertisement on this site are your sole responsibility.

STRATEGIC INVESTING FOR UNCERTAIN TIMES.
Learn how to manage your portfolio risk and sleep comfortably. Improve the certainty of returns by taking advantage of business cycle trends. Learn to use simple hedging strategies to minimize the volatility of your portfolio and protect it from downside losses.
You will receive your user id to access 4 FREE issues – and all the previous ones - of The Peter Dag Portfolio. Email your request to info@peterdag.com. New subscribers, please.

FOLLOW ME ON TWITTER @GEORGEDAGNINO FOR MY LATEST VIEWS.

LONG-TERM ECONOMIC AND INVESTMENT TRENDS: INVESTMENT IMPLICATIONS

In order to establish a long-term investment strategy, it is crucial for the investor to closely follow the current level of real short-term interest rates. We have seen that if real short-term interest rates are below 1.4, or short-term interest rates are considerably less than twice the level of inflation, the following conditions are likely to happen in almost any country.
• Rising inflation
• Rising commodities
• Volatile economic and financial cycles
• Very low productivity growth
• Very poor economic growth
• The tendency of corporations to raise prices rather than invest to improve productivity
• Low investment in technologies
• Soaring real estate prices
• Soaring land prices
• Rising art and coin prices
• Soaring long-term interest rates and sagging bond prices
• Soaring short-term interest rates
• Frequent protracted declines in stock prices with equities declining 20 to 40%

On the other hand, the above trends are reversed when real short-term interest rates are close to 1.4 or above this level, or short-term interest rates are close to two times the level of inflation.

The message of this chapter is that interest rates, their level and their trend, represent an important element to guide your investment strategy. Their careful interpretation provides a useful tool to develop a successful investment program. Higher than average real interest rates tell the investor that policymakers are determined to keep inflation under control and therefore maintain stable economic conditions. These economic conditions are usually associated with a strong currency. These are ideal times to invest in financial assets (for instance, bonds and stocks) and avoid hard assets (real estate, art, coins, precious metals and commodities). Furthermore, if short-term interest rates are close to 5-6%, the markets are confirming that the policies followed in a country are sound and there are no problems on the horizon.

If real short-term interest rates are very low, or worse, interest rates are below inflation, the implication is that the country is in serious trouble and monetary authorities are following an easy money policy to hide the problems. This is achieved, as will be discussed in the chapter covering the Federal Reserve and Central Banks, by letting the money supply grow very rapidly and keeping real interest rates very low. The odds favor higher inflation, higher commodities, unstable economic conditions and a weak currency. Investing in hard assets is the investment strategy that would likely be successful in this environment. Last but not least, avoid investing in countries with weak currencies. Always give preference for countries with strong currencies.

As the reader is beginning to realize, there are many forces that impact investment strategies. The trend in the economy, its growth, and its momentum, are the major determining factors. The level and trend, not only of interest rates, but also of real short-term interest rates and long-term interest rates provide crucial clues on the risk and opportunities of stocks and types of assets to be invested in. High and low real interest rates are driven of course by monetary policy. This will be discussed in great detail in the next chapter dealing with the Federal Reserve. That is one of the most crucial parameters for developing an investment strategy. The trend in stock prices and of the currency reflects all these forces. For this reason we will place the analysis and investment in stock prices as one of the last chapters after having analyzed all the forces that have a profound impact on their trend.

But first we have to explain how the Federal Reserve or the central bank of a country impacts the growth and liquidity and the level of interest rates. Then we will see how the action of the Fed translates into trends in commodities and inflation. We will then be ready to look at investment in bonds, and finally we will examine how the stock market is impacted by all these factors and develop some guidelines to minimize risk in portfolio management.

(From Chapter 5 of my book Profiting in Bull or Bear Markets. Published also in Mandarin and on sale in China. The book is available at Amazon.com).

George Dagnino, PhD Editor,
The Peter Dag Portfolio.
Since 1977
2009 Market Timer of the Year by Timer Digest
Portfolio manager

Disclaimer.The content on this site is provided as general information only and should not be taken as investment advice nor is it a recommendation to buy or sell any financial instrument. Actions you undertake as a consequence of any analysis, opinion or advertisement on this site are your sole responsibility.

STRATEGIC INVESTING FOR UNCERTAIN TIMES.
Learn how to manage your portfolio risk and sleep comfortably. Improve the certainty of returns by taking advantage of business cycle trends. Learn to use simple hedging strategies to minimize the volatility of your portfolio and protect it from downside losses.
You will receive your user id to access 4 FREE issues – and all the previous ones - of The Peter Dag Portfolio. Email your request to info@peterdag.com. New subscribers, please.

FOLLOW ME ON TWITTER @GEORGEDAGNINO FOR MY LATEST VIEWS.

Observations

In the last issue I wrote about balance, the Aristotelian Golden Mean. From the e-mails I received I realize now I wrote an un-balanced Observations.

No, I am not planning to retire. I am still too young at heart and I have too much passion for my work to even consider such an option.

I started playing tennis when I was a teenager. I liked the sport and the attention I was getting as I was becoming stronger. Being balanced was not my concern.

Our tennis club was inside ancient Roman walls (they are hollow to allow the Roman soldiers to move to different places). The locker rooms were inside and the tennis courts were close to the walls. The reason is that the building code in Rome forbids buildings to be erected within 200 yards of them.

I spent my days at the club basking in the sun and playing tennis. My grades, as you may suspect, were hurting. At the Italian amateur championship (lasting two weeks with 300 players participating from all over the country) I was ranked number one. And I won.

I could not stop playing tennis. It was so much fun. One day, however, a charming, unbelievably beautiful young lady came to the club to ask for information on how to become a member. I jumped from my leisurely position and ran to answer her questions. I was not alone. Several friends tried to be helpful too.

Then she left. After 20 minutes I told myself I could not lose her. I jumped on my scooter and after canvassing the many streets she could have taken, I saw her. I asked her if she wanted a lift. She did.

We started dating. I became more dedicated to my difficult studies, the most challenging degree at the University of Rome with a 40% success rate. She helped me. She encouraged me. She was there for me and supported my efforts. Tennis ceased to be a priority.

Finally my academic results improved.

One day I received the invitation to do research in a US university. It was my chance to see a new world and its people. After a few months she joined me, and Kathi and I got married. She gave balance to my life.

(This Observations appeared in the 9-11-2006 issue of The Peter Dag Portfolio ).

George Dagnino, PhD Editor,
The Peter Dag Portfolio.
Since 1977
2009 Market Timer of the Year by Timer Digest
Portfolio manager

Disclaimer.The content on this site is provided as general information only and should not be taken as investment advice nor is it a recommendation to buy or sell any financial instrument. Actions you undertake as a consequence of any analysis, opinion or advertisement on this site are your sole responsibility.

STRATEGIC INVESTING FOR UNCERTAIN TIMES.
Learn how to manage your portfolio risk and sleep comfortably. Improve the certainty of returns by taking advantage of business cycle trends. Learn to use simple hedging strategies to minimize the volatility of your portfolio and protect it from downside losses.
You will receive your user id to access 4 FREE issues – and all the previous ones - of The Peter Dag Portfolio. Email your request to info@peterdag.com. New subscribers, please.

FOLLOW ME ON TWITTER @GEORGEDAGNINO FOR MY LATEST VIEWS.

Observations

I delayed the project several times. I had to do it. It was getting too late in the season. I had to varnish the toe rails of my Sabre 38. A lengthy exercise.

Every morning, for three consecutive sunny days, I applied a coat in 85 degrees. I was leaning for about 3 hours for each coat. My back did not hurt and my head did not spin when I got up. This made me feel good. By the way, you can only drink water when you do this job.

Before painting, I jogged for half an hour to a store close by to have breakfast. I also jogged to go to lunch after I finished varnishing.

In the afternoon I had the chance to talk to Jim, a superb sailor who helped me take the boat to Annapolis from Hilton Head, where I bought it. He bought an old Bristol, fixed it up and now it looks like new. He sold his house and now lives on his boat. Jerry too has been living on a boat for some time. But he confessed he was ready to go back to work again. He seemed to have reached an important decision.

Ted also decided, at least in the foreseeable future, that living on a boat in Annapolis is better than cruising the Caribbean. I became slowly part of the life at the marina. People have different priorities and problems. Or so it seems. This is where we escape to find relief from the pressures of life and to place issues into perspective. A sailboat and the Bay offer the perfect setting.

Should I also live the rest of my life on a boat? Cruising from port to port? It sounds romantic and fascinating. But my answer, to my surprise, is “I am not sure”.

The challenge of life is about achieving a delicate balance of how we capture what the world has to offer --Aristotle’s golden mean. Too much of anything burns us out. Money, food, entertainment, exercise, sailing. I like my sailing escapades. But I also love to come back and become immersed again in other aspects of life such as the pressures of the daily market swings.

When my mind gets into a dreadful loop, I find an escape in thinking how well I varnished the toe rails.

(This Observations appeared in the 8-28-2006 issue of The Peter Dag Portfolio ).

George Dagnino, PhD Editor,
The Peter Dag Portfolio.
Since 1977
2009 Market Timer of the Year by Timer Digest
Portfolio manager

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Observations

There have been wars in the Middle East for decades with no foreseeable end. They are expanding again with ugly nuances (global terrorism). No solutions are in sight. What is the problem?

“We are in the early stages of what I would describe as the third world war,” Mr. Gingrich states. He is a superb thinker, so we must listen carefully to what he is saying. It implies the total destruction of the enemy, a feat still going on right now in the Middle East.

A Financial Times columnist suggests, however, the struggle between western capitalism and Islamism may end up looking a lot more like the cold war between the West and the Soviet Union.

Military action was not the solution then and was never employed to any meaningful degree against the Soviets. In those days the threat came from Soviet missiles. Now from poor religious fanatics and terrorists.

Communism eventually imploded because its economic system was obsolete and could not compete with that of the West. We won peacefully because our system was producing more wealth. This is a concept convincingly and scholarly stated in the two books The Rise and Fall of Great Powers and in The Birth of Plenty.

We are solving the wrong problem, which has been defined in religious terms. The current solution is to assert religious rights with whatever means. Destroy and kill. Kill and destroy, reminiscing the Dark Ages of man.

If you define the problem, however, as caused by desperate poverty, then the solution is totally different. Why don’t our leaders realize they are pursuing the solution to the wrong problem?

We have to invest money to build wealth in the region. Not to destroy and kill. War creates hate. We need to help the Middle Eastern people because they are poor and to assist them with the necessary infrastructures. Their history shows convincingly they do not know how.

They are desperately poor. Desperate people act desperately. Let’s show them the benefits of wealth. The Muslims in the USA and India understand this idea. Let’s try to solve the real problem and achieve peace!

(This Observations appeared in the 8-14-2006 issue of The Peter Dag Portfolio ).

George Dagnino, PhD Editor,
The Peter Dag Portfolio.
Since 1977
2009 Market Timer of the Year by Timer Digest
Portfolio manager

Disclaimer.The content on this site is provided as general information only and should not be taken as investment advice nor is it a recommendation to buy or sell any financial instrument. Actions you undertake as a consequence of any analysis, opinion or advertisement on this site are your sole responsibility.

STRATEGIC INVESTING FOR UNCERTAIN TIMES.
Learn how to manage your portfolio risk and sleep comfortably. Improve the certainty of returns by taking advantage of business cycle trends. Learn to use simple hedging strategies to minimize the volatility of your portfolio and protect it from downside losses.
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Observations

Oh! Italia, Italia!

Guilds are a very powerful voice in Italy. Newspapers, for instance, can be sold only by authorized newsstands. The list goes on and on. The government is now trying to break them and introduce more competition.

Italy is still anchored in a medieval mindset when guilds were authorized to set standards and protect professional interests. Following the fall of the Roman Empire, Italy has been constantly devastated, women raped, men tortured, cities destroyed and rebuilt-to-be-destroyed-again for almost 2000 years. The last event was WWII.

Attila, Germans, Swedes, Muslims, Greeks, Spanish, and English found Italy an attractive battleground. The Italians answered by building hilltop castles.

Italy’s main historical problem has been its failure to unite when other nations (France, Spain, England, and Germany) did. They chose to fight against each other.

Italy had two hundred years of glory: the Renaissance. Commerce through Venice, and then Genoa, Pisa, and Amalfi created unprecedented wealth.

The Medici family in Florence seized the opportunity and created the banking system to finance trade with India and China through the Middle East.

Money discovered and financed genius. It always does. The world could thus enjoy and benefit from such giants as Michelangelo, Leonardo, and Galileo.

But the tight grip of the church, the discovery of America, and the rounding of the Cape of Good Hope put the Italian merchants out of business.

The Renaissance waned. Knowledge and money moved north. Bach, Mozart, Kepler, and Newton were some of the offspring of the Italian genius.

The Italians failed to unite once again. The Church emerged one more time as the surviving power. And for another four centuries Italians managed to remain afloat.

Long live the guilds, the last remnants of a medieval mindset Italy failed to overcome!

(This Observations appeared in the 7-24-2006 issue of The Peter Dag Portfolio ).

George Dagnino, PhD Editor,
The Peter Dag Portfolio.
Since 1977
2009 Market Timer of the Year by Timer Digest
Portfolio manager

Disclaimer.The content on this site is provided as general information only and should not be taken as investment advice nor is it a recommendation to buy or sell any financial instrument. Actions you undertake as a consequence of any analysis, opinion or advertisement on this site are your sole responsibility.

STRATEGIC INVESTING FOR UNCERTAIN TIMES.
Learn how to manage your portfolio risk and sleep comfortably. Improve the certainty of returns by taking advantage of business cycle trends. Learn to use simple hedging strategies to minimize the volatility of your portfolio and protect it from downside losses.
You will receive your user id to access 4 FREE issues – and all the previous ones - of The Peter Dag Portfolio. Email your request to info@peterdag.com. New subscribers, please.

FOLLOW ME ON TWITTER @GEORGEDAGNINO FOR MY LATEST VIEWS.