It’s only when the tide goes out that you learn who’s been swimming naked. — Warren Buffett

 

Warren Buffett’s ominous quote sprang to mind when it was revealed that the Bank of Moscow received an unprecedented $14 billion state rescue package on Friday. For now at least, this fiasco seems to be regarded as a compartmentalized instance of fraud — in contrast, we suspect that this could be just the tip of the iceberg.

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As the famed ‘QE2′ enters the final day of its existence, we find that – as ever – markets are moving in the manner that causes the greatest possible angst to the greatest number of consensual speculators.

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Markets have a tendency to move in generational cycles, so — with amusing irony — each generation has the opportunity to repeat the follies of their fathers and grandfathers before them. One of the greatest possible follies recently gripped the world; the passion for the production of credit. Since the bubble in credit production (and so banking stocks) peaked out in 2007, the mood of the market has gone through several of the stages of grief. We’ve denied the subsequent fall from greatness; we’ve got angry about it; we’ve even got depressed, irritated and frustrated by it; however we are yet to become apathetic towards it. This last stage requires the passage of a long period of time. Indeed, it requires an environment where the business of banking becomes … well … boring.

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Money trades on one side of every economic transaction in the economy. Hence, when it comes to entrepreneurial affairs, it should be ignored at one’s peril!

 

Analogies are usually a great way to illustrate concepts, so — to demonstrate the profound implications of a tainted monetary system — I thought I’d consider a world with orange juice as the sole legal tender. An ‘Orange Juice Standard’ — if you will.

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The private sector is in a long-term de-leveraging trend, and consequently the equity market is in a long-term sideways market (or worse!). Trends are not obvious these days, so it helps to have some additional technical tools. See the video and eBook below for some great insights into using moving averages effectively.

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A few months back, I wrote about a virtue of the MMT; namely, the way it focuses on sectoral balances. I think that this view is both interesting and useful for the contrarian investor. However, I do have some misgivings with the convictions of the typical Modern Monetary theorist. Here, I discuss some of the problems with the MMT frame of mind.

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One of the largest and most problematic instances of economic disequilibrium arises from a disconnect between ‘claims on wealth’ and wealth itself (to quote Carroll Quigley). When these two magnitudes diverge, a great proportion of the population can stray from economic prudence. In the West (at least), periods consisting of these divergences have become the norm – moreover, it would seem that anything else is quite unacceptable to the masses. Here, I consider the nature of such divergences and explore the investment implications of their resolutions.

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