Monday, January 19, 2009

Comment on the Economy - "The Window"

As this economic downturn continues, I think it is worth a comment about the recent, unexpected by most, dramatic drop in oil prices to as low as about $32/barrel, with other commodities also dropping significantly.

Plus, with the dramatic drop in RE prices and stock prices, much money, and debt, has been removed from circulation or debt burden or possible circulation or debt burden, in the near term. So, as the government is essentially printing money by the trllions of dollars in trying to stabilize the financial system, stimulate the economy, etc, we have been granted a "window" to allow the "printing of money and issuing debt" as long as it is wisely used - like for investment in our infrastructure, energy, education, healthcare, etc - things which will eventually return more than they cost plus create jobs as unemployment has been increasing significantly.

The stock market has already had about $7T vanish, and RE probably more if commercial RE is included. So, for now, the expansion of money and debt to the amount of even a few trillion dollars, I just don't see as inflationary or of imminent danger to our currency. Yes, we must also come up with a plan to begin paying down our budget deficits and the large national debt, but for now, we have a "window". Sure, some want to argue that asset values, like stock prices, home prices, etc aren't money because they aren't included in pure monetary statistics like M1, M2, etc, but that simply is not true.

Sunday, January 18, 2009

My review of "The Great Depression Ahead"

Harry Dent's "The Great Depression Ahead" offers a lot of well-thought-out scenarios, using studies of cycles. Using them, he was pretty good in his 1993 book in calling for the 1990's economic boom and seeing the beginning of this decline. He might have missed the amplitude of the boom, but his approach does seem to have some value as a guide.

Things in the book, I think worth remembering are:

1. Leaps in science finally apply to economics, with micro-cycles being more probabilistic than macro-cycles which are more deterministic - cause and effect.

2. His S-Curve principle for new products overtaking old ones is helpful. Demographic and technology trends are perhaps the most helpful.

3. Oil/commodity booms tend to follow 30 year cycles. Though, he might not have caught the recent oil/commodity drop, it doesn't invalidate all his thinking.

4. Georege Soros is mentioned as calling 'an end of an era' in foreseeing the bursting of the credit bubble.

5. Demographics and low interest rates led to the housing bubble.

6. Geo-political cycles restrict a stock boom by about 50%.

7. He thinks 2011 will be the worst, with unemployment 12-15%, with the 'depression' lasting until about 2013.

8. Kind of funny, but he tracks potato chip spending, and he documents it peaking when a family head reached about age 42.

9. He sees 2008-2012 as survival-of-the-fittest among businesses, with the strong ones getting stronger.

10. He tracks 5000, 2500, 500, 250, 20, 10, 4, and one year cycles also. Perhaps, this is the book's weak point, since so many intersecting cycles may add too much confusion. But, he does focus on a few main ones, so I guess it could help a reader as things play out.

11. Stocks do better from May 1 - Oct 31. Although others have noticed this, he provides a helpful chart.

12. Estate taxes from dying baby boomers could be an unexpected windfall for stressed state budgets, since never before have we had such a large prosperous generation.

13. Globally, the innovation cycle will continue, if managed well.

14. Errors of LTCM are the same which are affecting the 'quants' in today's hedge fund meltdown. They are a) assuming the future will be like the past, b) assuming large gains/losses are too rare, and c) assuming investment returns are independent variables.

15. Dent mentions the book, 'Black Swan', when thinking just because you don't observe something doesn't mean it can't happen.

16. Stock/financial markets are not casinos. Casinos are closed systems with predictable odds. Markets are worse, because they contain induction errors, where price movements, themselves, affect future ones. Data points are not independent, so can't use standard bell curve distributions. Again, he mentions Soros, his 'reflexivity' concept - prices affecting prices. Volatility increases during phase transitions. Volatility is not a constant. However, the S-Curve can help somewhat.

17. Besides knowns and known unknowns, there are unknown unknowns, like the Russian bond default which caused the LTCM meltdown.

18. Republicans do better during growth and innovation phases, benefiting mostly the wealthy. Democrats handle shakeout and maturity phases better. helping everyday people. Need both.

19. Infrastructure investment is best when labor is freed up, like during economic downturns. The US spends about 2.4% of GDP on infrastructure, Europe - 5%, China - 9%, so we can handle added infrastructure spending during our downturn.

20. World trade during the 30's collapsed 67%. Something to keep in mind. Unlikely it will get that bad this time.

21. Iraq - the good thing is that maybe we learned not to try to be the world's policeman, an expensive thing.

22. The US regenerates its population at a better rate than other mature societies like Japan, Europe and Russia. Not great, but relatively better than a lot.

23. The green revolution could help the economy.

So, this is a good book, which should help a person evaluate what happens from here, in this economic meltdown.

Saturday, January 17, 2009

My review of "The Shock Doctrine"

A must-read!, review originally written on April 12, 2008

"The Shock Doctrine", by Naomi Klein, is a must-read for anyone who wants to get a clearer picture about what the US has done in Iraq relating to the 2003 invasion, from an economic perspective. The book begins decades before, from the lens of Milton Friedman and his advocates' approach to laissez faire, free-trade corporatist economics and government's role in making it happen.

She does seem to come from a viewpoint as seeing free trade, etc mostly just punishing the less fortunate. It should be noted that Milton Friedman did advocate a negative income tax to replace welfare. So, it is not that he and some of his advocates are either totally misguided or heartless. However, there are indeed excesses by many in powerful positions who really are either misguided or heartless or both.

From tsunamis to Hurricane Katrina to changes in government in Chile, the Soviet Union, Argentina, etc and the 'shock and awe' in Iraq, there are people with power who either wait for or effect some cataclysm to panic everyday people to accept what is really not in their best interest and looks to reward the well-connected.

I'll just mention a few things from the book which come to mind and I feel noteworthy:

1. The author uses the term, 'useful crisis', like with the Canadian debt crisis in the 90's, to create a sense of panic to justify potential cuts to social programs. This term is appropriate in generalizing what has happened around the world in different situations.

2. Donald Rumsfeld was a board member of ASEA Brown Boveri, the Swiss firm that sold nuclear technology to North Korea. Interesting!

3. Rumsfeld was Chairman of the Board of Gilead Sciences, maker of Tamiflu, the preferred treatment for bird flu, setting up Gilead to make tons of money as the government which he became a part of, then stockpiled the drug while Americans were warned of a possible mass outbreak of the disease. When Rumsfeld left the government, the value of the Gilead stock he still owned had gone up 807%. Interesting!

4. The 2006 Defense Authorization Act grants the president the power to employ the armed forces, overriding the wishes of state governments during a 'public emergency' which could include hurricane, mass protest or public health situation. Previously, the president could only invoke martial law in case of insurrection.

5. US orchestrated foreign coups seeking to protect corporate favorites, can sometimes try to sell the coup because the country is being alien to Americans simply because it is alien to an American company and thereby trying to undermine the US.

6. Paul Bremer, given the responsibility to remake Iraq, enacted a 15% flat tax and allowed foreign companies to own 100% of the profits in Iraq, not re-invest in Iraq and not be taxed. Plus, 40 year leases for foreign investors so any future Iraqi governments would be stuck with the deals.

7. The author reminds the reader of what the political scientist, Michael Wolf, had to say that conservatives never govern well because they believe that government, itself, is bad. Surely not always true, but it is certainly a thought to keep in mind when evaluating a conservative candidate for office.

8. The White House ignored most of the Iraq Study Group's recommendations except to now allow companies like Shell and BP to get long oil leases and keep most of the profits, effectively keeping millions of Iraqis in perpetual poverty.

This book is well documented with references and definitely a must-read.

My review of "Gangster Capitalism"

A very timely book! Review originally written on November 16, 2008

What makes "Gangster Capitalism" so worthwhile is that it helps in understanding what has led us to the 2007-8 financial meltdown. As the book shows, like during the 1920's, deregulation led the way for powerful companies to allow the very wealthy to get wealthier at the expense of average people by using poor working conditions, low wages, etc, plus at the same time supporting supposedly moral movements (against gambling, alcohol, drugs, etc) which mainly served the purpose of making these trades more profitable to crooks and therefore created rampant gangsterism there. The result was such a society wracked with gangsterism at all levels, but because most people felt they were prospering, few complained. But, then it all collapsed with the 1929 crash and resulting Depression, which led the way for FDR and the New Deal programs which increased regulation of corporations, repeal of Prohibition, etc. Though the Depression lingered until WWII, the New Deal was successful in restructuring our laws and public infrastructure to create a better footing for the prosperity which would follow. The book effectively traces how much of this regulation was reduced piece by piece, beginning in earnest with Nixon, using Cold War fears to tilt the nation toward more corporate power and away from reform, support of right-wing dictators around the world, re-energizing a 'moral crusade' especially by beginning the War on Drugs, thereby making the illegal drug trade super profitable, etc. The nation had shifted Right and even Democratic presidents like Carter who was instrumental in deregulating industry and Clinton who signed into law the repeal of Glass--Steagle weren't able to stop the shift. Then, the 'Gangster Capitalism" went on steroids with G. W. Bush. By 2003, corporate taxes only amounted to 7% of revenues, while payroll taxes amounted to 40%.

Of note, the book makes clear it is opportunity which leads to much crime, so the approach of massive deregulation of corporations, plus focusing on arrests and imprisonment for victimless crimes ends up with the wrong results, more entrenched crime, even allowing corporations to capitalize on a prison industry. The book is also good at highlighting how corporations and outright gangsters were able to corrupt legal drugs (price-fixing), tobacco, asbestos, body parts, autos (Pintos), etc. Some other things in the book, of note: Hamid Karzai included drug traffickers in his Afghan administration. And, our support of Suharto (Indonesia), Mobuto (the Congo), and Marcos (the Philippines) allowed 'looting' of these countries. A corrupt financial infrastructure included the BCCI bank and offshore banking to evade taxes also developed. Plus, laundering money from illegal arms sales, drugs, and so many other illegal activities passed through our financial system.

The book is definitely tilted toward a liberal way of looking at things, therefore it doesn't go into the good things about capitalism, but there are disturbing patterns which are important to understand, and this book does that very well.

My review of "Extraordinary Popular Delusions and the Madness of Crowds"

A classic, well worth reading! Review originally written on November 22, 2008.....

For a long time, I have wanted to read this 1852 classic, "Extraordinary Popular Delusions and the Madness of Crowds", by Charles MacKay, but why I decided to do so recently, was because I was hoping to get some insights into understanding our recent Housing bubble and 2007-8 financial meltdown. I am glad I read it, because I did indeed come away with some 'extraordinary' insights.

Sure, this book goes into some historic financial bubbles, like Tulipmania, the South Sea Bubble, and the Mississippi land scheme. But, when it got into other manias involving witches, the Crusades, alchemy, popularity of certain phrases/expressions, fortune tellers, slow poisoners, duels, admiration of thieves, haunted houses, etc., it awakened me that our financial meltdown wasn't simply a repeat of other financial bubbles. We had the Internet bubble only a few years prior to what was happening with Housing, so most of us should have not been so blinded as Housing got out of hand. But, it is clear that we were also suffering from an overload of all kinds of manias, which I think, because of the depth of this book, appeared to condition so many in our society to find an even greater safety in 'crowds'. In particular, words like liberal and socialist were not just argued against, but actually successfully demonized, along with targeted uses of words like 'traitor' for anyone not supporting a US war, even trying to affix the term, 'terrorist' to Barrack Obama. Witness the success of Ann Coulter books, Fox News, etc. It is like if you just wanted to be a renter, there must have been something wrong with you, even anti-American, not wanting to participate in 'the ownership society', another term feeding into a financial mania. Plus, was anyone warning that this 'ownership society' was based almost entirely on debt, hardly real ownership? Heck, we were told after 9-11, the patriotic thing to do was shop, never mind sacrificing for the war. Also, our almost maniacal adoration of celebrities, outrageous salaries for athletes and CEOs, long lines for new introductions of new Apple products, Harry Potter books, etc, etc.

We were a society primed with all kinds of 'extraordinary popular delusions', especially susceptible to a meltdown of generational proportions. Will we change? It does look like many are looking for some deeper societal transformation. But, as this book seems to show, transformation will be difficult, and we probably need to worry about transforming to just another mania, just as bad. We have a big task ahead.

Too bad Mr. Mackay isn't around to write about our current manias. Though the book is about 700 pages long, unless you are particularly interested in every detail of each mania, you can skim over lots of the details and complete the book in just a few days and still come away with a thorough understanding.

Friday, January 09, 2009

Update - Stocks, etc.

Since it has been about 1 1/2 years since I updated my blog, here's my update....

The main reason I created this blog several years ago was basically to track my investment approaches, particularly with stocks, allowing me to reflect on them as times change. So, here we are, a lot has happened, financially, during the last year or so. Well, my approach remains the same. I always want some stock investments, looking at them as I would in owning businesses, albeit just a fractional ownership in them, companies I want to own long term, having products which will likely always be in demand, are in good financial shape and which return good dividends. Plus, I will consider adding or subtracting from my positions as situations present themselves.

Like I said, my stock position remains basically the same, as follows, in order of biggest position to least. For perspective sake, stocks make up about 12% of my asset holdings, and that is about where I always intend to be.

  • KMB (Kimberly Clark) - My top holding.
  • PEP (Pepsico)
  • AEE (Ameren Corp) - I always want a utility and I will swap one for the other over time, the latest swap was PNW (Pinnacle West) for AEE. I did this swap for tax purposes.
  • PG (Procter & Gamble)
  • MMM (3M Corp)
  • KO (Coca Cola)
  • KFT (Kraft) - it has more debt than I like so I will probably keep only a smaller position in it. I do like its product mix and top brand names and track record of a good dividend. But, I'll watch it closely.
  • BMY (Bristol Myers Squibb) - Although I am wary about drug companies because of litigation risk, I'll go with a small position in it because it pays a good dividend, is in good financial shape, healthcare is something people will always need, might be a buyout candidate, and adds a little more diversification to my portfolio.

My major asset are CDs. I don't own a home, though I do think that is OK, as long as one doesn't go into much debt to do so. I have no debt at all, and never want any, though I do think some is OK for a home.

I also own US Treasuries, about 7% of my assets. Right now I own inflation protected ones (TIPS). The two I hold are...

  • 2015's
  • 2013's

I like them because they protect both against deflation and moderately against inflation (yielding about 3% annually for the 2015's, more if inflation picks up).

I also own some gold (coins), but it is only about 3% of my assets and use a safe deposit box to store it. Gold does not qualify as an investment, but I do think it is warranted as a small insurance policy on US currency.

I intend to further update my blog with some investment links which I like, and other stuff.