1. What is the best way to avoid future market bubbles?
a. Gold . . . lots and lots of gold
b. A survival bunker isolated on 30 acres in the woods, surrounded by barbed wire
c. By directly controlling universally needed assets
d. By only investing with the ‘good’ fund manager
2. How does big government relate to big business?
a. Government works for us, and will stop those corporate pigs from cheating the little guy
b. Government regulations shield big businesses from competition by increasing barriers to entry for new competitors.
c. Big Business has no influence on government now that the Republicans are out of power.
d. It doesn’t matter because all of the jobs in America are being outsourced to China.
3. What causes sustained price inflation?
a. Increases in demand from a hot economy pulling up prices.
b. Increases in the money and credit supply creating more dollars chasing fewer goods.
c. Big Oil, OPEC, and Corporate America
d. Evil HMO’s increasing the cost of health care
4. What is the principal risk of econometric technical analysis?
a. There is no risk if you know what you’re doing
b. The risk that your friends and relatives will become jealous of your success
c. The risk of no government assistance if you are not associated with Goldman Sachs
d. The risk of excessive reliance on quantitative models that do not have the ability to predict highly disruptive events that have never happened before.
Answers: c, b, b, d
Explanation of Answers:
What is the best way to avoid future market bubbles?
Market bubbles result from large numbers of people flooding an investment simultaneously based on speculation that the values will continue to climb, even in the absence of supporting fundamentals. It is pleasing to assume that one can find a ‘good’ fund manager who will anticipate these bubbles and avoid them, but the numbers clearly show that outperforming the market on a sustained basis is extremely rare, and that those who do so may only be ‘coin flippers’ who happened to guess correctly over an extended period of time.
Controlling universally needed assets such as rental housing helps individuals to avoid bubbles by decoupling from financial markets with cash producing physical assets. Gold represents an inflation stable medium of exchange (i.e. a constant value currency) but does not produce regular cash flow, and is therefore dependent on the whim of speculators for its market price. Finally, survivalist isolation may be attractive to some people, but is not the first choice for most investors. Thus, it becomes necessary to find ways for avoiding market bubbles without totally exiting from society.
How does big government relate to big business?
Government regulations impact the cost of operation for business entities. As the government increases regulations, it makes things increasingly difficult for new businesses to grow, thus shielding large business entities from competition. The circle closes when the business entities spend on lobbying politicians for legislation that further protects them from competition. In this way, big business and big government become two sides of the same coin, standing in the way of innovation and growth.
What causes sustained price inflation?
Changes in commodity prices can create temporary spikes and troughs, but the way that overall market prices establish equilibrium depends on the level of output, the amount of money in the economy, and the velocity with which that money circulates. A spike in the price of one commodity cannot move prices in the entire marketplace unless that price spike significantly contracts production. The only way that prices can increase in a sustained manner is for the government to continually expand the amount of money in circulation at a rate greater than the productivity improvement of capital and labor.
What is the principal risk of econometric technical analysis?
Technical analysis can be a very powerful tool, but it lacks the ability to predict future rare events that have never happened before. The reason for this is because econometric algorithms are based on market movements in past years. These models frequently do a fantastic job of modeling normal market gyrations, but cannot incorporate the impact of events that have never happened before. Because of this, over reliance on technical analysis leaves investors susceptible to the impact of rare events that cause massive market disruptions.
The Solomon Success Team
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Tags: financial fitness