The Glitter That Makes Markets Jitter

Where’s the silver lining?

“Gold is a hedge against inflation.” 

That’s such a long-accepted trope you probably don’t remember where you first heard it. Historically, it’s usually been true. The price of gold rises and falls like anything else, but it normally stays fairly closely pegged to the inflation rate. One way to think of it is this: an ounce of gold has always been enough to buy a decent suit of clothes, whether in 1849 when gold was going for $20, or in 2000 when it was up to $300.

But a not-so-funny thing has happened since the 2007 financial crisis — the price of gold itself has become inflated, maybe even hyper-inflated, shooting up to an all-time high last year of nearly $2,000 an ounce.

That’s a pretty nice suit.

So, what was going on there? Was it a bubble fueled by panicky investors here in the U.S.? Talk radio and investing forums were thick with gold hype during the worst of those years. Gold brokers were springing up everywhere, selling dubious gold certificates and engaging in the even more dubious practice of buying gold by mail. This all doubtlessly played a part.

But what played an even bigger role was the chugging engines of Asian economies. China and India, especially, weathered well that financial storm. They had fresh dollars to invest, but Western markets weren’t exactly attractive opportunities. So they invested in what conventional wisdom said was a dependable hedge against inflation. For almost five years Chinese and Indian purchases accounted for more than half the gold consumption in the world.

In the last 12 months things have begun to change. The Chinese and Indian economies have slowed, and with them their purchases of gold. Since September 2011, the price of gold has fallen more than 17% to a still-inflated but somewhat more sane $1,600 per ounce.

Will the slide continue? Or is this an example of a market correcting itself? Time will tell. If anything it’s an abject lesson — perhaps a painful one — for investors. Beware bubbles. Beware hype. And if you’re hedging against inflation, don’t buy in at inflated prices.

The C4:

1. Since the start of the 2007 financial crisis, we’ve seen some disturbing fluctuations in the price of gold; it shot up to an all-time high last year, reaching about $1,900 per ounce. Now it’s begun one of its steepest ever declines, dropping 17% in 11 months.
2. Looking back, there was clearly some gold fever here at home. Conspiracy theorists advocated hoarding while fast talkers were begging us to sell them grandma’s jewelry. That was the start of the bubble.
3. Asia is where the bubble blew up. India and China were just as hungry for gold, and they could afford much more. They started buying more than half of all gold on the market…until their economies started to slow. Which brings us to today.
4. Is gold still a hedge against inflation? History, as they say, is no guarantee of future performance. The price of gold will probably stabilize and it might even become a decent hedge again. But investors would be wise to remember: gold is a commodity, as susceptible as any to inflation and deflation. Markets have behaved irrationally when it comes to gold, and there’s no reason that won’t happen again.

Caveat Emptor

The cons are pros.

The more volatile the market gets, it seems, the more the rip-offs, con games and pyramid schemes proliferate. Con men know that investors are desperate to beat the meager returns they’re seeing from their conventional investments. And they know that desperate investors are easy marks.

There are sadly too many examples to recount. Bernie Madoff’s take ran to the tens of billions. Bayou Hedge Fund out of New Orleans created its own “independent” accounting firm (going so far as to forge office stationery) to hide a $450 million Ponzi scheme. And here in Akron, three now-convicted fraudsters plundered the venerable Fair Finance Company to finance their own lavish lifestyles.

The common denominator in all these cases is that innocent investors got ripped off. And no matter how many con men go to jail, there’ll be plenty more to take their place.

So how do you protect yourself? Start with this age-old defense: If it sounds too good to be true, it is. Any investment opportunity boasting of double-digit returns should be treated with great caution. Any that “guarantee” returns should be avoided like the plague (and probably reported to the Feds).

Next, do your own research. Learn everything you can before you invest. Talk to the firm’s employees and other investors. Check the Better Business Bureau and Attorney General’s office for outstanding complaints. And if the firm or fund references outside auditors, research the history and track record of those companies to be sure they’re legit.

Perhaps most importantly, think of all of your investments as risky propositions at best. Even Federally insured instruments, and securities listed on the major stock indices carry their own risk levels. Alternative investments might bring greater potential returns but their risks are commensurately compounded.

So invest with the same attitude with which you might go to Vegas: don’t gamble with money you can’t afford to lose.

The C4:

1. As conventional investment markets get more and more shaky, more unconventional investment opportunities present themselves. All too many of these are cons, because con men know that investors are looking for alternatives.
2. Caveat Emptor — let the buyer beware. Protect yourself before you invest. Be skeptical of all claims, no matter who's making them. Even friends and family, with the best of intentions, can rope you into a pyramid scheme. If it sounds too good to be true, it is. The greater return that’s promised, or even hinted at, the more skeptical you should be.
3. Do your own research. Independently verify, through multiple sources, every claim. Check out the histories of all principals and associated companies. Talk to employees and other investors. Check the Better Business Bureau and Attorney General’s office for outstanding complaints.
4. Finally, remember that investing always means risk. Don’t invest money you can’t afford to live without.

Is Lehman's off the ropes?

Will the Wall Street cornerstone climb back in the ring?

Looking back, the financial collapse of 2008 seemed to move like a glacier: slowly, inexorably, unstoppably. But in the midst of that slow-mo meltdown, a few memorable events struck with tectonic suddenness, altering forever our financial landscape and leaving us to wonder if there could ever be a recovery from such unprecedented economic shock.

The worst, by far, had to be the September 2008 collapse of Lehman Brothers, a 161-year-old cornerstone of Wall Street investment banking. Like so many bank failures of the time, this one was fueled by twin mistakes: an over-investment in mortgage-backed securities, and an inadequate supply of capital to cover the bets that were destined to go sour. The only unique part of Lehman’s story was the scale: they went down holding nearly $1 trillion in debt, resulting in the largest bankruptcy in U.S. history.

Knowing that, what do you say when Lehman’s emerges from Chapter 11 a mere three and a half years later? “Miraculous,” is what the bankruptcy judge said, and he’s right.

Despite its bankruptcy, Lehman’s was always flush with assets. Their real-estate holdings include some of the world’s most profitable hotels and office space. They’ve got tens of billions in private-equity investments and corporate bonds. They even own a sizable stake of Formula One Racing.

The management of Lehman Brothers has spent the last three years creating a liquidation plan, to turn those assets into a payday for Lehman creditors. The first checks are scheduled to go out in April, and are expected to total about $65 billion, or 17 cents on the dollar.

Not a great return, but certainly better than nothing, and probably much better than most creditors expected. 

So which part is miraculous — that Lehman’s has emerged from bankruptcy, or that they seem to be doing all they can to make things right? Either way it’s a sight to behold, and it’s nice to believe in miracles again.

The C4:

1. Lehman Brothers filed for Chapter 11 bankruptcy on September 15, 2008. It was the largest bankruptcy in U.S. history and one of the defining events of the Great Recession. 
2. Lehman’s is unwinding over $600 billion worth of debt by liquidating approximately $65 billion in assets.
3. After just three and a half years in bankruptcy, Lehman’s is emerging in March 2012 and beginning to repay creditors in April.
4. A concerted effort to do what’s right goes a long way toward fixing past mistakes.