Download PCBE-PRESENTATIONOCT 2013

PCBE Presentation
October 9, 2013
Prepared by Milton W. Berg, CFA
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Table of Contents
 Introduction
 Taxes, Inflation and Growth
 What is Money?
 The Fed and Monetary Policy
 John Maynard Keynes
 Market Outlook
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Taxes, Inflation and Growth
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$1 at 10.48%
Grows to $9,596.15
The Dow has gained 10.48%
Per Annum Since 1921
$959,600
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$1 at 31.92% Grows to
$117,105,993,409.72
92 years
Druck
Sthrdt
Bufft
Timing
29 Perfect Trades
in 88 Years
$117,105,993,409.72
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Inflation Confiscates,
Taxes Rob.
 Adjusted for Inflation of 2.84%:
 $9,596.15 becomes $730.39 in 1921 dollars.
 Did $8865.76 go someplace productive?
 $117,105,993,409.72 becomes
$132,301,446.23 after capital gains taxes of
25%, and inflation of 2.84%.
 Did $116,973,690,000 go someplace
productive?
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MB Advisors View
 For an economy to grow and for a nation to
accumulate wealth, taxes should be kept as low
as possible.
 Inflation destroys wealth and should be avoided.
 Taxes steal wealth.
 The total wealth of the nation, and the standard
of living for all citizens would be immeasurably
higher in a Capitalist low tax, low inflation
environment.
Capital formation should never be taxed
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Money!
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What is Money?
Money in History. Gold, Silver, Copper
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Wampum!
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What is Money Today?
 The government will accept pieces of US Dollar
paper in discharge of debts and taxes.
 Courts will regard them as discharging debts
stated in dollars.
 Why should they be accepted worldwide by
private persons in private transactions?
 Confidence game! Everyone thinks they have
value because in their experience they have had
value.
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What is Money Today?
 The value of money rests on a fiction!
(Milton Friedman, Free To Choose Chapter 9)
 This fiction is fragile and can be easily
(Milton Friedman, Free To Choose Chapter 9)
destroyed.
 Money today is unlike money ever before in
history.
 Money is not wealth! Money was never wealth.
 Redistributing money does not spread wealth.
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MB Advisors View RQ0RQH\
 The shifting of money from producers to
consumers is analogous to shifting a truckload of
cow manure from farmers to wall street
executives.
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MB Advisors View (continued)
 The modern form of money is unlike any type of
viable money in history. Therefore:
 Runaway inflation is possible.
 Severe deflation remains a possibility as well.
 It is the government’s acceptance of
money for taxes and debts that gives real value to
FIAT money.
 FIAT: Edict, Decree, Command.
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MB Advisors View (continued)
 There should be a free market in money.
 This is only possible if capital gains taxes are
eliminated.
 Gold, silver, the S&P 500 Index, AAPL stock, any
marketable item that is easily divisible and
transparent can and should serve as money in
our modern information age.
WMT
AAPL
MSFT
CITI
XON
VISA
BKHT
NESL
GE
JNJ
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The Fed and Monetary Policy
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Financial Panics are Inherent
in a Market Based Economy!
 Financial crises preceded the founding of the
Federal Reserve.
 Panics of 1819, 1825, 1837, 1847, 1857, 1866,
1873, 1884, 1890, 1893, 1896, 1901, 1907.
 Recessions of 1921,1929, 1937, 1974, 1980,
2000, 2007.
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Bernanke, November 21, 2002
 “The chance of significant deflation in the United States in the
foreseeable future is extremely small.”
 “Our banking system remains healthy and well regulated.”
 The Congress has given the Fed the responsibility of
preserving price stability , which most definitely implies
avoiding deflation as well as inflation.
 Deflation is not a monetary phenomenon! “It is a side effect of
a collapse in aggregate demand” “a drop in spending so
severe that producers must cut prices on an ongoing basis in
order to find buyers.”
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Bernanke, November 21, 2002
 Deflation “imposes an even greater burden on
households and firms that had accumulated substantial
debt before the onset of the deflation.”
 The Fed should “use monetary and fiscal policy as
needed to support aggregate spending.”
 Under a fiat (that is paper) money system, a central bank
should always be able to generate increased nominal
spending and inflation.
 Of course the “government is not going to print money
and distribute it willy-nilly.”
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Bernanke, November 21, 2002
 “A money-financed tax cut is essentially the equivalent of
Milton Friedman's “helicopter drop” of money.
 Keynes once proposed as an anti-deflationary measure
that the government fill bottles with currency and bury
them in mine shafts to be dug up by the public.
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Bernanke October 2013
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MB Advisors View RQWKH)HG
 The business cycle is an inherent part of capitalism. Any
and all attempts to soften or eliminate the business cycle
leads to slower long term growth and a poorer nation.
 Banks should be allowed to fail. Period.
 Regulation and Federal Reserve policy has increased
the systemic risk in the banking system.
 There will always be a lender or lenders of last resort.
 In a healthy economy there should be long-term
deflationary tendencies.
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MB Advisors View (continued)
 In Friedman's “Helicopter Drop,” and in Keynes mine
shaft scheme, look at where the money originated.
 What if credit card or debit cards were dropped from the
helicopter or buried in the mine shafts?
 Deflation remains a distinct possibility despite the efforts
of the Fed and Central Banks worldwide.
 It is the policies of the Central Banks that allow
borrowing to get out of hand. Credit deflation would be no
problem if there would be free market disciplined
borrowing in the economy as a whole.
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MB Advisors View (continued)
 In a free economy there will be a balance between
spending and saving.
 There is never a good reason to create inflation. Inflation
is robbery.
 Credit based money is not the equivalent of printed
money. Therefore QE and low rates do not guarantee
inflation.
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John Maynard Keynes
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Keynes View
1. The rate of interest is not self adjusting at a
level best suited to the social advantage.
2. High interest rates keep the world poor.
3. People refuse to lend on reasonable terms.
4. The way to bring interest rates down is to
create more money.
5. Money injected into the economy is no different
than traditional savings.
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Keynes View
6. Interest rates should be brought to zero.
7. Inflation can be controlled by raising taxes.
8. Consumption is the sole object of all economic
activity.
9. Say’s Law: If a society works and produces, it
will have the means to buy what it produces.
10. Keynes believed that consumption leads
production.
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Keynes View
11. Control prices.
12. Subsidize home buying.
13. Raise all wages.
14. Employment rises with demand not with profit.
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Market Outlook
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Total Debt and GDP
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Nonfinancial Debt New High
-6.4%
-7.9%
-11.1%
-14.5%
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Japan Digging a Deeper Grave
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Interest Payments and Gold
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Housing Prices and Gold
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Milton W. Berg, CFA
CEO & Chief Investment Strategist
Milton Berg, CFA, is the CEO & Chief Investment Strategist of MB Advisors, LLC. He has worked in the
financial services industry since 1978, with an impressive background in various roles on the buy side.
Milton founded MB Advisors in 2012 to address a need for high quality independent research with a macro,
technical and historical focus.
Milton began his career as a Commodities Analyst and Trader at Swiss based Erlanger and Company. In
1980, he was a Fund Manager at First Investors Corp. and managed a natural resource fund as well as an
option writing fund. In 1984, he moved to Oppenheimer and managed three mutual funds which were each
ranked as the #1 performer over a five-year period. Milton then became a Partner at Steinhardt, one of the
earliest hedge funds on Wall Street. More recently, he has worked with well-known titans of the hedge fund
world including George Soros, Stanley Druckenmiller (Duquesne), and Charles Davidson from Wexford.
Milton’s work has been featured in the Wall Street Journal, New York Times, Barron’s, and Institutional
Investor, in addition to other media outlets. His groundbreaking report “The Boundaries of Technical
Analysis” was published in the Summer of 2008 in the MTA’s Journal of Technical Analysis.
Milton has held a Chartered Financial Analyst designation since 1979. The Institute for Econometric
Research named Milton as the Mutual Fund Manager of the Year in 1987 (the three funds he managed had
a GPA of 45, 62, and 91% during the crash year). That same year, Milton was jointly named with Stanley
Druckenmiller as Mutual Fund Manager of the Year by Sylvia Porter’s Personal Finance Magazine.
Until now, Milton has kept his research proprietary and offered it exclusively to his colleagues at the hedge
funds where he worked. He now intends to shake up Wall Street by offering his analysis and conclusions to
select institutional clients through his new firm, MB Advisors LLC. Milton publishes his outlook of the equity
markets, the bond markets, commodities, and various other themes. In addition, he develops strategy
pieces and presents major investment ideas –— highlighting individual stock ideas from time to time.
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