Fire The Economists

A bedazzling 80% of economists now believe the worst economic recession of our generation is over. And around 100% of them never saw the recession coming!

By nature, economists are herd-following lemmings.

Cyber Threats Are Real And Increasing

SAO PAULO (AFP) – On Wednesday, Brazil sought to uncover the cause of a massive and mysterious blackout overnight amid concerns of energy supply stability for the 2016 Olympics host nation.

The outage lasted around four hours and plunged nearly half the country into darkness after the country's biggest power plant experienced supply problems.

An estimated 70 million people -- more than a third of Brazil's 190-million-strong population -- were affected, according to the energy ministry, mainly in the major southern cities, including Sao Paulo and Rio de Janeiro.

The blackout occurred two nights after the U.S. television network CBS broadcast a report in which unidentified former U.S. national security officials claimed massive power outages in Brazil in 2005 and 2007 were caused by cyber hackers attacking control systems.

60 Minutes Featuring Cyber Terror Threat

Although Brazilian media were skeptical of that assessment, the U.S. channel said those incidents should serve as a wake-up call to the United States, which could see its own power supplies hit by computer sabotage.

What Asset Class Correlations Meant Last Year and What They Mean Today

Traditional “diversification theory” is based upon past history, where owning U.S. stocks, foreign stocks, REITs and commodities, etc., allowed for a reduction of downside risk in bear markets. That all fell apart in the autumn of 2008 when everything was collapsing; all asset class correlations essentially went to one. The only asset classes that held up were: Cash, U.S. Government Bonds and Managed Futures.

Since the market bottom in March of 2009, traditional asset class correlations have gone to one again. Since early March, when the rally began, the correlation between equities and high yield bonds, real estate investment trusts, industrial metals and oil are all 0.94 or higher. In other words, all those markets are moving in sync. Even gold has a remarkably high correlation of 0.76 with equities. Basically, an asset allocator could have thrown darts in March and found things that went up.

We do not throw darts. We rigorously evaluate asset classes and individual securities, looking for opportunities to reduce portfolio risk every day. Based upon the massive rally in the majority of asset classes, most investors and professionally managed portfolios are at high risk for another massive stumble, if and when it happens. We have significant allocations to the following, all of which have NOT been highly correlated with the stampede and should hold up well in the event of another turn down into a bear market:

• Cash
• Managed Commodity Futures
• Managed Financial Futures
• Gold
• Merger Arbitrage fund
• A Long/Short fund
• Short Term, High Yield bonds in GMAC and Ford Motor Credit

Extending Unemployment Benefits and New Home Tax Credit: More Signs That This Will Be No Normal Recession

President Barack Obama is set to sign a $24 billion economic stimulus bill Friday, providing tax incentives to prospective homebuyers and extending unemployment benefits to the long-time jobless.

GDP = Gross Deception Picture

The band, Styx, had an album in 1980 called the “Grand Illusion."

Wall Street and the news media went hog wild with euphoria last week when the GDP (Gross Domestic Product) grew at 3.5% annualized rate. This is a grand deception. In reality, the majority of the 3.5% came not from consumer spending or increased factory production but from government spending. If you remove the government stimulus, you end up close to zero or even negative. Thus GDP = Gross Deception Picture.

Making matters worse, millions of dollars of the stimulus have ended up in the hands of fraudulent citizens. An example would be the “first time home buyer credit” of $8,000. The inspector general for the U.S. Treasury recently testified before Congress that 19,000 filers had NOT purchased a home that filed for the credit. Another 74,000 filers were not first-time homebuyers. This totals over $600 million going to fraud. Five hundred people under the age of 18, most notably a four-year-old, have also claimed the credit. To add further insult to injury, 53 employees of the IRS have been found to file illegal claims.

Investing lesson:

Our government is running a Ponzi scheme by artificially propping up the U.S. economy via racking up trillions in debt. When the patient is taken off of stimulus life support, it may get very ugly again. This is why I believe that this will not be a normal recession recovery and that we are likely entering a phase of low economic growth for the next 5-10 years.

Why Invest With A Mutual Fund When The Manager Refuses To Invest With You?

Morningstar: 51% of mutual fund managers have ZERO invested in their fund. Just 9% of managers have more than $1M invested. If you do not eat your own cooking, the stew must not be very good. I have in excess of $1M invested in our mutual fund.

Investing lesson:

NEVER, EVER, invest with a mutual fund, company or financial advisor where they do not believe enough in the investment to invest in it themselves.

Investing And Entertainment Do Not Mix

Investing done right is quite boring for the average consumer. With the human emotions of greed and fear driving much of investor behavior, it should come as no surprise that investors fall victim to Ponzi schemes that they know, in their hearts, sound too good to be true, but go for it anyway. These range from Hedge Funds to Variable Annuities to TV “Pitchmen.”

Of course, that is not how it looks on TV: Jim Cramer yelling and Maria Bartiromo on the floor of the exchange for the closing bell. Why that's exciting stuff! Suze Orman as well.

CNBC + Investing = Action Sport.

Danger Will Robinson, Danger!

At the top of the tech bubble, investing became America's favorite spectator sport. Everywhere you went, CNBC was playing. I still think that there's something odd about sitting in your dentist's office watching CNBC, but back then you couldn't escape it.

It seemed to die down a bit as volatility dropped from 2004 to mid 2007.

Then it was back. Round-the-clock coverage of the "Financial Crisis" and insightful commentary from Jim Cramer. I have never been surprised that people watch Cramer. His show can be entertaining, but I can't believe that people act on what he says. It's like taking knife handling advice from a circus clown.

Investing lesson:

Take the time you used to spend watching “financial entertainment” and do something worthwhile or simply fun. Never, I mean never, ever, confuse “financial entertainment” for professional advice.