How to Double Your Trouble

If you are confident you picked the right horse, doesn't it make sense to double your bet?  Not necessarily, at least in the arcane world of investing in leveraged exchange traded funds (ETFs).  You can bet right on a leveraged ETF and still lose.  Not an attractive bargain.

ETFs seek to track the performance of a specific index or benchmark by holding a number of stocks or bonds.  Some ETFs mirror the broader stock market indices like the S&P 500, while others have a narrower focus, such as an oil and gas index.

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Health Care Reform and Our Antipathy to Change

Writing in today's Washington Post about the problems of enacting health care reform, Michael Kinsley states: "Americans are in total agreement that the current situation is intolerable in all areas and that change -- big, immediate change -- is essential.  But as soon as change might actually happen -- as soon as we leave the abstract for the particular -- we panic."

Kinsley cannot seem to get his arms around why this is the case, beyond the obvious reason that there is serious disagreement over the details of reform.  The only explanation he can come up with is that we really don't want reform in the first place.  Not a very satisfying answer.

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Economic Stability Leads to Instability

It has been said that democracy is the worst form of government, except for all others.  The same  may be true of capitalism as an economic system.  Apparently, achieving steady growth and low inflation -- an enviable environment -- can actually cause market bubbles like we have just experienced.  Or as the economist Hyman Minsky put it, "stability leads to instability."

The problem arises when people believe that the future will be like the recent past.  When the economy is humming along, it is quite easy to be confident that such benign conditions will continue.  Confidence makes people all too ready to take on more risk. 

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Bananas, Corn, and Inflation

In a recent article in Barron's, the columnist Thomas Donlan asks "Which is a better store of value, bananas or corn?"  He rightfully concludes that corn is superior.  Bananas go from green, to yellow, to black in short order -- they become worthless rather quickly.  Corn, on the other hand, can be stored for long periods of time if the kernels are properly handled. 

In these less agrarian times, we store our wealth in dollars (unless you're hoarding gold bars or barrels of oil in your back yard).  Dollars tend not to decay, but they can lose their value via inflation.  Inflation eats away at money by reducing the value of its purchasing power.

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Risks of Inflation

Many analysts state that we need to embrace the "new normal," predicting that the U.S. economy will grow at a rate of 2% for a while instead of its historical average of 3.6%.  With lackluster economic growth being a real possibility for several years, it may be surprising to hear that a big debate is going on regarding the prospect of higher inflation.  The concern over inflation arises from the dramatic increases in both the money supply and federal expenditures.  Ben Warwick of Quantitative Equity Strategies describes the situation as: "the Treasury keeps printing currency and the Fed keeps spending it in attempt to bolster the flagging economy." 

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