PCBE Presentation · 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 destroyed. (Milton

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PCBE Presentation

October 9, 2013 Prepared by Milton W. Berg, CFA

Table of Contents

Introduction Taxes, Inflation and Growth What is Money? The Fed and Monetary Policy John Maynard Keynes Market Outlook

© 2013 MB Advisors, LLC. All rights reserved. STRICTLY CONFIDENTIAL 2

Taxes, Inflation and Growth



$1 at 10.48% Grows to $9,596.15

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The Dow has gained 10.48% Per Annum Since 1921

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$959,600

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$1 at 31.92% Grows to $117,105,993,409.72

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29 Perfect Trades in 88 Years $117,105,993,409.72

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Druck Sthrdt Bufft

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Timing

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92 years

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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?


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.


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Capital formation should never be taxed

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Money!


What is Money?

Money in History. Gold, Silver, Copper


Wampum!


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.


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 destroyed. (Milton Friedman, Free To Choose Chapter 9)

Money today is unlike money ever before in history.

Money is not wealth! Money was never wealth. Redistributing money does not spread wealth.


MB Advisors View on Money

The shifting of money from producers to consumers is analogous to shifting a truckload of cow manure from farmers to wall street executives.


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.



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.


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WMT AAPL MSFT CITI XON VISA BKHT NESL GE

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JNJ

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The Fed and Monetary Policy


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.”



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.”



“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.


Bernanke October 2013


MB Advisors View on the Fed

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.



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.



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.


John Maynard Keynes


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.


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.


Keynes View

11. Control prices. 12. Subsidize home buying. 13. Raise all wages. 14. Employment rises with demand not with profit.


Market Outlook


Total Debt and GDP


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Nonfinancial Debt New High


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-14.5%

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-11.1%

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-7.9%

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-6.4%

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.

Documents

PCBE Presentation · 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 destroyed. (Milton