I see that SAC portfolio manager Mathew Martoma, convicted of selling a pharmaceutical company's stock based on insider information received prior to an announcement, faces a sentence of up to 45 years in jail.
While I wouldn't want to stake my freedom on an unsophisticated NY jury's understanding the legal subtleties of insider information (and its ability to resist the powerful US Attorney's office and their 95% conviction rate), I'm not questioning that Martoma may have broken the law and be deserving of some punishment.
But I do question the fairness and proportionality of up to 45 years — or even 10 years or 5 years — when we on this List every day see strong evidence of others trading on inside information prior to an announcement. Beyond Victor's flexions trading prior to government announcements, it is common (usual, one would say) prior to a company's takeover or other highly favorable event to see the stock moving up in the days prior to the announcement. In fact, when there is no prior movement and the announcement comes as a complete surprise, it is remarked upon how unusually well the secret was kept.
I dislike cheats, but this kind of non-violent, non-Madoff-like offense (whether there's an actual victim is questioned by some academic experts) could better be punished, for example, by a monetary fine and a year of community service devoted to helping disadvantaged businesses and families with their financial strategies.
BTW, I'm sure Martoma's legal expenses are already in the millions of dollars. And if the idea is to get him to testify against Steve Cohen, I'm sure some sort of deal was offered to him before his indictment or trial, and if didn't accept then, why should Martoma be pressured now after he apparently thought he was innocent enough to take his chances in a trial, and when his ratting on Cohen on the verge of a long-term prison sentence would be even less reliable?
Why is the prospect, or actual imposition, of this kind of overly severe prison sentence so easily accepted by media reports, legal commentators, and the public? Where is some sense of proportion and fairness?
January 13, 2014 | Leave a Comment
On rare occasions one comes a person whose instinct in a specialized field (such as law, medicine or investments) is almost always right.
I saw this is law, where an older lawyer I knew would immediately point me to the right answer, even before the research had been done. I imagine this is also true of a doctor who at any early stage usually seems to have a feel for the right diagnosis (House?). Or an investor who can tell immediately that something sounds good, or bad.
But I also once knew a company general counsel whose instincts about legal questions was virtually always wrong. After privately making fun of the fellow for some time, it occurred to me this was equally valuable. All I had to do was ask his opinion and I could feel reasonably comfortable going the other way.
I see that Secretary Gates has much the same approach. In his new book he says (quite amazingly, so he must feel strongly about it) that Joe Biden has been wrong on virtually every military and national security issue for forty years. And when asked in a television interview broadcast today whether he went too far, Gates recounted the following anecdote:
"Mr. Gates said on one occasion, when driving back to the Pentagon, Adm. Michael Mullen, then chairman of the Joint Chiefs of Staff, noted that for once Mr. Gates and Mr. Biden had agreed on something in a meeting. Yeah, I said, that is why I am rethinking my position.”
I have been emailing my 8-year-old grandson a daily quotation or one-line advice (about sports, learning or life in general), which he seems to enjoy.
But I am running out of quotations and pithy advice relevant to a young person. Does anyone have either a good source of these, or some particular favorite quotes or advice?
Ralph Vince writes:
Here's some for you Dan. You may want to edit them for a younger mind, plus, you may not agree with all of them, but these are some that come to mind as I sit here and thing about it:
1. Don't try making sense out of it. You're in an insane asylum – things are not going to make sense, people will do things that don't make sense, that they cannot adequately explain. People don't know what makes them tick, only that they tick.
2. Happiness, of course…is all in your head. If you don't know that, if you haven't come to that realization, you will never be happy.
3. The Bull Market Syndrome. People, when they are met with success, take personal credit for it (bull markets breed geniuses), and when they are met with failure, blame luck.
4. Actually, luck is responsible for both! If you can only die by being struck by lightning, eventually, you will die by being struck by lightning! Conversely, if a man were to live forever, and bought a lottery ticket every week, eventually, he will win the lottery, with a probability that approaches certainty. Just stay the course, keep doing today what you must do today. As Woody Allen says, "Fifty percent of success is just showing up."
Luck Trumps Brains. To get luck, keep showing up each day with your shoes on.
5. Creativity trumps money every time.
6. Fortunately in life, you don't have to succeed at everything you do, only a few things. One success often justifies all prior attempts.
7. You can buy great a education – you can not buy brains.
8. The Oswald Principle: Usually, the best course of action in life, is to take no action (and usually, the best thing to say is nothing!). The guys in jail or there not because they didn't do anything. Usually, you should just sleep in! If nothing really bad happens today, as my friend Oswald said to me in eighth grade, it's been a good day!
9. You don't have the problems you think you do. Actually, the only real problems are health and criminal problems. Everything else is just a frivolous, meaningless nuisance.
10. Never say never. Everyone, however righteous they may claim to be, however upstanding they say they are, will, under the right circumstances commit the crime. A cold morning, wet, hungry, tired, angry….they'll do things they never dreamed they would!
11. Everything is going to be OK. It always is.
12. You never know what's going on in someone else's life. Before you do or say something nasty to them, realize this. Perhaps they have just gotten some awful news of some sort. You never know what is going on in someone else's life.
13. Don't pressure yourself. Just take care of today's things today, and relax…we got all the time in the world. The proper attitude in performance of anything, be it athletic, mental, etc., is a kind of relaxed, aware, confident attitude. You see it manifest in sport all the time (Ali, Ramirez…..or hitting a gold ball).
14. Don't complain and don't explain.
15. Don't react or engage emotionally with others. There is great power in stoicisim, in a cold, blank, stare back when others are trying to engage you in a fight.
16. Similarly, if it is someone you love or must live with, trying to engage you in an argument, practice avoidance. Just try not to be around them, to avoid them. Go out for a walk.
17. Live "in the tunnel," but think outside of it. In other words, deal with the mundane, immediate issues at hand, think as out-of-the-box as you can.
18. You can always "lift" more than you think you can.
19. Women will be as bad as they are allowed to be.
20. You should pray for your enemies — you need them. You need to have some enemies to keep life interesting.
21. Treat those you love as though they were going to die at midnight.
22. Your body is a record of how you have cumulatively cared for it.
23. The easiest way to learn things in life, is through observation. Sit back, watch all the ways everyone around you will figure out to how to screw up.
24. There are two ways to learn something. The easy way and the hard way. With the easy way, someone tells you something and you learn it. The hard way is the way we usually learn things, and we usually don't learn it the first time through. So the easy way, you see, is the equivalent of a windfall. (note to teachers – you can cause the easy way in others if you can convey a different perspective on a problem, a manner wherein the person learning thinks, "Ah, I see it now."). The moral here is that there is no point lending money, time or advice to help people out if they aren't going to listen to you, if they are going to insist on remaining on their own vector, unchanged by your advice, wherein they are going to learn their lesson the hard way with or without your giving them time, money or advice. So don't give it unless they are going to incorporate it.
25. Do not succumb to the suffocating culture of comfort. If you are comfortable, you are in trouble, you just don;t see it heading towards you.
26. Remember – your best trades are ahead of you.
A commenter writes:
The time to abandon is when you have to step UP into the lifeboat (or raft). Any other time is premature.
Vincent Andres writes:
A creative man is motivated by the desire to achieve, not by the desire to beat others.
All philosophical con games count on your using words as vague approximations.
A refusal to vote represents a definite expression of political opinion, a rejection of the candidates & the programs offered.
Credit is not…a magic piece of paper that reverses cause and effect, and transforms consumption into a source of production
if men want to oppose war, it is statism that they must oppose.
Man is not a lone wolf and he is not a social animal. he is a contractual animal.
and many more from A. Rand here.
The highest laws of the land (America) are not only the constitution and constitutional laws, but also contracts - H Arendt
The most radical revolutionary will become a conservative the day after the revolution. - H Arendt
Concentrated power is not rendered harmless by the good intentions of those who create it. - M Friedman
"Governments never learn. only people learn." - M Friedman
"Humility is the distinguishing virtue of the believer in freedom; arrogance, of the paternalist."
It takes a special sort of man to understand and enjoy liberty - and he is usually an outlaw in democratic societies.
The average man doesn't want to be free. he wants to be safe.
Sorry if not all quotes are appropriate for a 8 years old.
There are many specialized twitter accounts who deliver 1 or several quotes per day. There is one for Ayn Rand.
Try to always practice good manners; be particularly polite, deferential and prepared at bars, gas stations, convenience stores and parking lots for these places are fraught with others over-valuing matters and ready to imprudently defend their claim.
There will be fights, unavoidable fights, they will find their way to you, you don't need to look for them.
Paolo Pezzutti writes:
It's not how to achieve your dreams. It's about how to live your life. -Randy Pausch
Throughout the centuries there were men who took first steps down new roads armed with nothing but their own vision. -Ayn Rand
Last night Elizabeth and I watched the 2006 Mike Judge movie Idiocracy, available on Amazon prime streaming.
It is not great cinema and only mildly funny, but it's the most subversive, un-PC movie I've ever seen. The story is based on reasonably accurate reverse eugenics (dysgenetic?) of the country becoming genetically stupider. More relevant today than when made because of all the current talk about Hispanics and even the Republican Stupid Party having to transform itself to appeal to Hispanics, the movie features a President Camacho.
Supposedly Fox wanted to bury the movie, only doing its contractual minimum in theatrical release, with no trailer promotion or screenings for critics, and open in minimal cities. But it has apparently acquired something of a cult following, with DVD revenues now nine times the theatrical.
Anyway, I was amazed how honest (if you have any fear IQ in the country is genetically declining). Although I guess the usual MSM critics, instead of having a fit over it, either didn't see it, or thought it was somehow a proponent or example of the stupidity that the movie was satirizing.
January 30, 2013 | Leave a Comment
Orde Wingate, the eccentric British general who made his reputation in the 1930s-1940s by leading unconventional troops in Palestine, Abyssinia (Ethiopia), and Burma:
His pioneering efforts to add guerrilla tactics to the arsenals of conventional armies often met with disdain and disbelief from more conventionally minded officers. Wingate did not care. "Popularity," he believed, "is a sign of weakness." Considered by his peers to be either a "military genius or a mountebank" (opinions differed), he had been locked in an unceasing war against his superiors from his earliest days.
Even as a young cadet at the Royal Military Academy, Woolwich, he "had the power," recalled his best friend, "to create violent antagonisms against himself by his attitude towards authority." Later, as a junior officer, Wingate was known to begin meetings with generals by placing his alarm clock on the table. After it went off, he would leave, announcing, "Well gentlemen, you have talked for one hour and achieved absolutely nothing. I can't spend any more time with you!"
Wingate's first rebellion was against the stifling religious atmosphere in which he was raised. His father was a retired Indian Army colonel with a devotion to a fundamentalist Protestant sect called the Plymouth Brethren. He and his wife brought up their seven children, including "Ordey" (his family nickname), in what one of his brothers called a "temple of gloom," with prayer mandatory, frivolity forbidden, and "fears of eternal damnation" ever present.
By the time he arrived at Woolwich, to train as an artillery officer, he had left the Plymouth Brethren, but he never lost his religious outlook. For the rest of his life he would be deeply influenced by the Bible, on which he had been "suckled" and which a friend said "was his guide in all his ways." Another legacy of his childhood was that he developed a violent aversion to being regimented. At Woolwich he was in constant trouble, and he formed a low opinion of the "military apes" who tried to discipline him.
After graduation he learned Arabic, and in 1928 he joined the British-run Sudan Defense Force as an officer overseeing local enlisted men. Here he battled elusive gangs of slave traders and poachers within Sudan, learning the hit-and-run tactics he would employ throughout his career.
He also developed many of his unconventional habits, such as wearing scruffy clothing ("his socks were very smelly and all in holes," a subordinate later noticed), subjecting himself to great danger and discomfort, and receiving visitors in the nude. (He would become notorious for briefing reporters in his hotel room while "brushing his lower anatomy with his hairbrush.")
Read the full article here.
One of the pleasures of visiting the declining city of Chicago (perhaps the next Detroit), is to visit the Seminary Bookstore in their new location, 5727 S. University Avenue, They have a great collection of quasi academic books, i.e. the kind that professors write for popular consumption, and the current text books can be bought a few blocks west at the University Bookstore.
Compared to the old store, it has much more room, much more light and glass windows, and plenty of places to sit and read. And unlike the old store, it's possible to find your way out without being buried by a ton of musty books if you don't get lost in the basement. I am one of those unfortunates who was not educated enough in my college days to have a good grounding in all the disciplines that make up the world of knowledge so I like to update myself periodically in areas that I am weak in or should know much more about, especially for market actualization or knowledge to share with my kids.
Perhaps the list of books I bought might be of interest to some scholars or would be market people. Microeconomics by Besanko and Braeutigan
Industrial Organization by Luis Cabral
Investments Bodie, Kane, Marcus (ninth edition)
Stochastic Modeling Barry Nelson
Scorecasting Moskowitz and Wertheim
The Evolution of Plants Wills and McElwain
Survival by Minelli and Mannuci
Thieves, Deceivers and Killers, Agosta
The Birth of the Modern World 1780-1914
The Lions of Tsavo, Patterson
Modeling Binary Data by David Collett (second edition)
Historical Perspectives on the American Economy, Whaples
Viruses, Plagues, and History, Olstone
Plastic (a toxic love story), Feinkel (for the collab for her new business)
The Power of Plagues, Sherman
Quantitative Ecological Theory, Rose
Think Python, O'Reilly (for my kids who want a job in the future).
Beautiful Evidence by Edward Tufte
All of Nonparametric Statistics by Larry Wasserman
Number Shape and Symmetry by Diane Hermann and Paul Sally
Nonparametri Statistics with Applications to Science and Engineering, Paul Kvam and Brani Vidakovic
Discrete Multivariate Analysis by Yvonne Bishop et al
Modeling with dta by Ben Klemens
Python Essential Reference by David Beaszley
The Origin of Wealth by Eric Beinhocker
America, Empire of Liberty by David Reynolds
The Entrepreneur (classic texts by Joseph Schumpeter) Marcus Becker
A History of Everyday Things: the birth of consumption in France, Daniel Roche
Civilization by Niall Ferguson (the west and the rest)
The Americans (the Colonial Experience) by Daniel Boorstin
Triumph of the City (how our greatest invention makes us richer, smarter, greener, healthier and happier) by Edward Glaeser
The Big Red Book by Coleman Barks (bought by Susan)
The Founders and Finance, Thomas McCraw
A Nation of Deadbeats (an uncommon history of America's financial disasters) by Scott Reynolds Nelson. (this one I have to read immediately)
Rome by Robert Hughes
The American Game: capitalism, decolonization, world domination and baseball by John Kelley ( 173 5 by 8 pages only)
Exploring the city (inquiries toward an urban anthropology ) by Ulf Hannerz
Brokerage and Closure (an intro to social capital), Ronald Burt
All the Fun's in How You Say a Thing (an explanation of meter and versification) by Timothy Steele
The American Songbook by Carl Sandburg (for Aubrey)
The Measure of Civilization (how social development decides the fate of nations) by Ian Morris
Freaks of Fortune ( the emerging world of capitalism and risk in America by Jonathan Levy
The Invention of Enterprise (entrepreneurship, from ancient mesopotamia to Modern times) by David Landes et al
I feel like Louis L'amour who gave lists of books he likes to read in The Wandering Man without telling what he got out of them, but I do not have enough erudition to tell based on skimming them how valuable or interesting they are. Any suggestions or augmentations on that front would be appreciated and perhaps helpful to others.
Kim Zussman writes:
University of Chicago is now ranked #4 by US News — the highest ever. This is a big jump from the era of the low tax predecessor to the former con law professor, and will hopefully have a favorable impact on South side murder rates.
Dan Grossman writes:
Unintended Consequences by Edward Conard is the best book I have seen on the subprime crisis and current government tax and economic policy.
January 23, 2013 | 1 Comment
As Adam Smith remarked, a country can bear a lot of ruin (ie, a lot of damage from government policies). And I had been assuming O's second term would be largely ineffective due to his lame duck status, the Republican House, and the country's and even the media's becoming bored by and turning against O the way it eventually did with Jimmy Carter.
But now we have (i) O's hard-line, no-compromise inaugural address, (ii) clear indication O's policies will be implemented by executive order rather than attempts to pass laws through Congress (eg, earlier announced non-enforcement of laws dealing with illegal immigrants; last week's gun control measures; budget and debt ceiling measures; today's announcement the long-standing ban will be lifted on women in combat), (iii) the Republicans' total wimpiness and ineffectiveness in countering or standing up to O, and (iv) the public and the media seemingly loving it all and just wanting more (as one tiny example, the very popular Phil Mickelson having to apologize for a fairly mild statement about his work incentive under a 60% combined Fed and Calif service rate).
I know the stock market is very smart, far smarter than any individual theorist like me. But I have to ask, is the market discounting all that will be coming from the administration during the next four years? O's second term is only two days old and look what we have so far. Four years of it can perhaps be a lot more ruin than Adam Smith could imagine in smaller, less sweeping governmental days.
Today I heard a striking point about the British Navy, a frequent subject on this site.
At the start of WWII the British Navy was the largest in the world, but its effect on WWII was inconsequential. (I know Stefan will probably give various counter-examples but still, this statement is certainly accurate in relative terms compared to, say, the RAF, the American Navy, etc.)
The reason was the British Navy was out of date in forward thinking. It still thought battleships were the key, although they were fairly useless, and it had not really taken into account the effect of airpower — the key role of aircraft carriers and also the effect of enemy aircraft on British naval operations. Maybe also hadn't sufficiently taken submarines into account.
A lesson to all of us about military and other institutions, and life in general.
David Lilienfeld writes:
The Royal Navy had two impacts on the war:
First, it made the Mediterranean a British lake. There was never any contesting that control throughout the war. Second, it prevented Sea Lion. Whether Hitler would have prevailed in such an invasion is great fodder for holiday discussions with cognac by a blazing fire in the fireplace.
As for battleships, they still had a role–shore bombardment–but it was hardly the dominant role it had had pre-war. It's interesting that the Japanese looked at the air raid on Pearl Harbor as a partial success even as they didn't touch the US carriers or the critical US Navy's (and Army Air Forces's) supplies of fuel.
I'd been wondering, even if Obama and the Republican House did reach an agreement to avoid the fiscal cliff, how it would be possible to negotiate all the crucial terms before the Christmas recess.
From yesterday's proposals, I now understand. They are not trying to negotiate what you and I would view as an agreement with substantive terms. Instead what they are trying to negotiate is just the numbers. For example:
1) $800 billion of tax revenue increases, from "millionaires and billionaires" or at least from "the wealthy"; and
2) $1.2 trillion of spending "cuts", of which (i) $400 billion would be from Medicare and Medicaid (but of course no benefits would be cut, so would have to come from "administrative savings"; and (ii) the remainder to come from "wind-down" of the Iraq and Afghanistan wars.
They would then congratulate themselves, and maybe each other, on the wonderful compromise they have reached to save the American people from going over the cliff. And the stock market would go up initially and then straight down as it did after Obama's election. And any substance would be put over to the first half of 2013, when there is far less media and public attention, to try to work out how these numbers are to be achieved (to the extent they are to be achieved at all).
Far better to go over the cliff. At least then the American people would have a half-way honest view of where we stand.
I once saw Koufax pitch.
In his honor, here are some tidbits:
He was signed by the Dodgers for a $14,000 bonus and $6,000 annual salary.
His career was, of course, before free agency. When he and Drysdale were at top of their careers and held out together (refused to report to Spring training for six weeks), he eventually settled for a $125,000 salary.
Inside baseball language in those days was not very PC (perhaps still isn't). In 1965, when big decision for first game of World Series was whether to start Koufax or Drydale, manager Walter Alston came into clubhouse and announced, "I'm going with the Jew."
Notwithstanding modest earnings, lack of endorsements and very limited TV career, he retired to Maine and seemed to live a distinguished, very private post-baseball life.
He married, and eventually divorced, a highly attractive daughter of actor Richard Widmark.
I was saddened to see that, through the advice of his childhood friend Mets-owner Fred Wilpon, Koufax lost a considerable amount investing with Bernie Madoff.
Apparently the vacation picture of Romney and wife on their jet ski is considered a campaign gaffe in a league with Kerry on his windsurfer (pic ), and almost in a league with Dukakis in his funny helmet driving that Abrams tank (pic ).
I certainly don't see it that way. Far from elitest, or Frenchy, like Kerry windsurfing, I would think jet skis much more blue collar (like snowmobiles and ATV vehicles), noisily tearing around the lake to the annoyance of elitists in the sailboats or sitting on their terraces drinking gin-and-tonics.
Perhaps it was the added fillip that blond and buff Ann Romney was driving the jet ski, doubly annoying the collectivists.
Or as the Chair would say, just the media with their now constant agenda of favoring Obama at all costs.
I respectfully disagree with Rocky and Stefan (happily without fear of counter-argument, since each has said it is his last post on the ACA decision and thus will not be able to respond).
If it was Roberts' attempt to throw a false gift to the liberals by upholding the ACA, while at the same time establishing the principle that the individual mandate violates the Commerce Clause, he did a pretty incompetent job of it.
Because his tax justification of the ACA has provided a new road map to Congress, broader than the Commerce Clause, under which roadmap virtually any infringement of our liberties can be upheld.
If the President and Congress wish to require each of us to purchase an electric car, simply pass a law that each person must purchase an electric car or pay a tax of $5,000.
If the President and Congress wish to require each of us to eat certain low fat or locavore foods, simple pass a law that each person must purchase such foods or pay a tax of $2,000.
I will forego the broccoli example and countless others, but they are obvious.
In the words of Richard Epstein, a favorite law professor of a number on this list, Roberts was "too clever by half":
"On the crucial issue of the individual mandate and the taxing power, Roberts sounds like a lawyer who is too clever by half. The point here is ironic, for without question, the Chief Justice came to his decision by self-consciously marching to the beat of two drummers: judge and statesman… The entire edifice that underlies the ACA on this critical mandate rests on a constitutional house of cards. If the legislation fails under the Commerce Clause, there is no reason to resurrect it by engaging in extravagant machinations with the words "tax" and "penalty." No umpire would accept such a shaky result. No statesman should either."
And in his half-baked approach, he squandered a once-in-a-generation opportunity to strike a blow for the Constitution, limited government, and individual liberty.
I'm wondering why Jamie Dimon is so popular with the media.
He's always treated with kid gloves.
Even today's $2 billion was referred to as a "rare black eye".
Is he married to a black woman? Or gay?
Or have some other fact in his background that leads to his being treated as such a good guy?
I'm so out of things I have no idea what's going on here.
Victor Niederhoffer writes:
The more one thinks about it, the more that one believes that Dimon and Buffett have the same hallmarks that make them beloved by the intellectuals and the media. What those hallmarks are, I can't put my finger on exactly. Perhaps it's a zacharian, "your own man says that you must be low".
It's what I call the no-bullshit bullshit factor. Americans like leaders who say, "The buck stops here. And I screwed up." Buffett took a 300+ million dollar whack on some energy bonds that collapsed. And he stood up and took the blame. And no one blinked. He does that regularly. I think the press likes to hear people stand up and say, "I screwed up. I was wrong. I take responsibility. This was bad and stupid." There are countless examples of this in politics, sports, commerce, etc. They don't like people like Audrey McClendon who say things like "I apologize." But who never stand up and say, "The buck stops here and I was wrong."
Victor Niederhoffer adds:
One doesn't admit "I was wrong" when there are likely to be lawsuits as this wouldn't seem very good to a jury when defending yourself against damages. There must be an exemption from civil and regulatory liability for such activities in support of the greater good here that enables one to take blame for such "egregious" behavior and at the same time get it past your lawyers.
Laurel Kenner writes:
The Administration needs a whipping boy, and Lloyd was tired of the job. Anyway, Dimon likes harpooning whales in a highly public, loss-producing way. Remember what happened when he announced to the world that he would be liquidating Salomon's book. Call him Ahab.
Victor Niederhoffer writes:
Perhaps he serves as a depository and station stop in the revolving door for former flexionic officials when they need money in various forms. Also, as a symbol of the trillions of bail out moneys that were taken away from the forgotten man, and given to the banks to invest in such useful activities as synthetic credit derivatives at the CIO's office (note the symbolic name sort of like showing the tv showing bush war activity while beggars starve on tv during a movie to show you're a fellow traveler), he must be shown to be Holier than the Pope to symbolize the verisimiliture, the halcyon nature of the transfer of the trillions and the reason for the lack of jobs.
Rocky Humbert writes:
Folks, we can debate the politics, but don't miss the macroeconomics here. If they had done this by making a few hundred billion in new loans, people (but perhaps not the shareholders) would applaud (at first).But if they do the same trade by buying the CDX index, it confuses people. But it's really the same thing. Therefore, I think it's a multi-dimensional cognitive dissonance. Between the people who want the banks to loan. And the people who don't want them to use derivatives. And the people who hate Jamie Dimon. And the people who love Jamie Dimon. And the fact that as a multiple of price/tangible book value, their stock is among the most expensive money center bank. Lastly, the 10Q says that if the yield curve steepens by 100 basis points, their 12 month pretax earnings go up by $549 million. And, their credit losses made a new cycle low.
When I was a Yale undergrad, I took a class called "Lessons of Japan." The course was a mixture of economics, policy and sociology, and the goal was to explain why Japan was so successful; how US industry should model itself after the Japanese; how the Commerce Department should be like MITI; and how the interconnected corporate holdings of Japanese companies ("Zaibatsu") were a key to lasting profitability and success. (There was also a mention of morning calisthenics for assembly line workers.)
It looks like Yale has updated its curriculum! From an interview with Steve Roach, former Morgan Stanley economist/permabear and now lecturer at Yale:
ROACH: … one of the great courses I'm teaching at Yale is called "The Lessons of Japan." You spend five weeks studying what happened in Japan and developing metrics to calibrate the excesses pre-bubble, the mistakes made post-bubble, and then we look at that template relative to other countries in the developed and developing world and there's a lot of striking similarities. Especially insofar as the U.S. and Europe let these bubbles and policy blunders distort the real side of their economy. It would be one thing if these were just financial or market-driven excesses. But they're not.
Dan Grossman writes:
One of the great mysteries to me in recent years is why Japan is not doing better, its economy not growing faster.
I used to do quite a bit of work in Japan, and I was always impressed by the intelligence, hard work and cooperative dedication of Japanese businesspeople. Yes, maybe they screwed up somewhat from a government economic standpoint, but why should that be so important compared to all skills and expertise of major Japanese companies, and their position close to China where they can both take advantage of cheap Chinese manufacturing and serve as the gateway for many business interactions between China and the Western world.
Nor am I impressed by the conventional explanation that a part of the problem is Japan's failure to allow immigration, that its static population will doom it to know low growth and an aging population. I don't see that massive legal and illegal Hispanic immigration is so economically so advantageous for the US. And there are great advantages to Japan in maintaining its homogeneity and its happy, fairly classless interactions between all levels in Japanese society.
Actually I have heard from Japanese friends and visitors that life in Japan these days is quite good. The population is prosperous and happy, with far fewer problems than in the US and Western Europe.
I guess my puzzlement is why Japan has not been a better investment, why its stock market has not been performing better.
In Dec 2010, Daily Spec announced a contest for best investment ideas for 2011 at this link . Several volunteered to judge the contest. And this seems necessary as there were many intricacies in judging. As a start to declare the winner, would those who feel they are in the running for the winner's prize, please alert me to their recommendations, the results, and why they feel they may be near the top. Thank you. Vic
Dan Grossman writes:
Vic, below is my contest-entry email, with the results indicated in italics. It should perhaps count in my entry's favor that my percentage gains were achieved without the use of derivatives or other form of leverage, and that they were very specific stock predictions, easy for anyone to implement and make money from.
As indicated, if I am lucky enough to win, I will donate my prize to a free market or libertarian nonprofit organization.
Trying to comply with and adapt the complex contest rules (which most others don't seem to be following in any event) to my areas of stock market interest:
1. The S&P will be down in the 1st qtr, and at some point in the qtr will fall at least 5%. S&P wasn't down for the quarter but second part of prediction was accurate in that S&P fell 6.4% from Feb 18 to Mar 16.
2. For takeover investors: GENZ will (finally) make a deal to be acquired in the 1st qtr for a value of at least $80; and AMRN after completion of its ANCHOR trial will make a deal to be acquired for a price of at least [corrected in followup email to $16]. GENZ (50.93 at contest date) was acquired early in the year for a then-current value of $74, but including a contingent right which could still bring total value to $80. AMRN (8.20 at contest date) was not acquired, but soon traded above 16 for some two months.
3. For conservative investors: Low multiple small caps HELE and DFG will be up a combined average of 20% by the end of the year. HELE and DFG had a combined price at contest date of 58.58, and a combined price at year-end of 75.00, for a combined average gain of 28%.
For my single stock pick, I am something of a johnny-one-note: MNTA will be up lots during the year — if I have to pick a specific amount, I'd say at least 70%. (My prior legal predictions on this stock have proved correct but the stock price has not appropriately reflected same.) MNTA was 14.97 at contest date and 17.39 at year-end, for a gain of 16.17%.
Finally, if I win the contest (which I think is fairly likely), I will donate the prize to a free market or libertarian charity. I don't see why Victor should have to subsidize this distinguished group that could all well afford an contest entrance fee to more equitably finance the prize.
Best to all for the New Year,
Yanki Onen writes:
Once again I would like to thank all of the contributors to the daily spec word press for sharing their insight and wisdom. It is a never ending journey. Below were my ideas but to be quite frank I don't know if they were eligible for the contest. But if they were results should be alright
1) Going long csco and long put lost $2,18
2) Sell contango buy backwardation trade for cotton buy selling spreads
made a lot of money but I don't know how to quantify that cause it is trading call 3) Leveraged ETFs suckers play. This strategy was right in the money and made quite a sum.
Our lively hood depends on what we make of the beloved mistress, if you get a long she is quite charming. Thanks for the challenge. Also would like to use this opportunity to wish you all a great prosperous new year.
Phil McDonnell writes:
My trade on the Silver ETF SLV was closed out when the ETF hit its target price of 40 as stated in the original instruction (at the bottom). On April 11, 2011 the trade was exited with the following post to the list in reply to a suggestion from Big Al:
Yes, they are short puts. Yes, you are right. In my original contest entry I said close out the 'entire position' if and when slv hits 40. So I think I need to go with that. I don't think we were allowed to change our original entries beyond fixed original. instructions.
So taking the SLV at this morning's open when silver broke 40 it went out for .12. The net on the calendar spread was 2.50 less .12 is 2.38 credit. On a cash investment of .50 this is a return of 376%. After a dismal January the Phoenix rises from the ashes.
Originally I wrote:
If 40 is not reached then exit on 2/31/2011 at the close.
Correction it should have been: 12/30/2011 instead of the nonsensical
And here is my corrected submission:
When investing one should consider a diversified portfolio. But in a contest the best strategy is just to go for it. After all you have to be number one.
With that thought in mind I am going to bet it all on Silver using derivatives on the ETF SLV.
SLV closed at 30.18 on Friday.
Buy Jan 2013 40 call for 3.45. Sell Jan 2012 40 call at 1.80. Sell Jul 25 put at 1.15.
Net debit is .50.
Exit strategy: close out entire position if SLV ETF reaches a price of 40 or better. If 40 is not reached then exit on 12/30/2011 at the close.
Brendan Dornan writes:
Thank you very much for putting on the contest. The reason I started to write a blog is to document some picks, and hopefully build a reputation after a decade of being in isolation behind the screens. The contest enabled this goal. Thank you for the opportunity.
The contest entry updates earlier this year did not include my entries, probably because the access to quotes for the instruments added an extra degree of difficulty, so allow me:
1. Credit Default Swaps on:
· +99.44% : French Gov CDS
· +70.80% : German Gov CDS
· +99.88% : Italian Gov CDS :
2. Short the Euro + Far OTM put options near parity · +% : 1.3224 - 1.30469, not great: learned spot FX poor for tail event trades. 3. Long Put X-Warrants or CDS on any Hong Kong or Chinese Property Developer · +103.20% (20.64% X 5 for warrant use) Shanghai Property Index,
3a. or Credit Default Swaps Chinese 5 year Government Debt · +118.26%: China Gov CDS
Extra Credit: · + 214.25% : Short Copper:
o 4.4455-3.4695 NYMEX Copper HG
o ($111,375 - $86,725) = $24,650.00
· Short Iron Ore, Cement, similar declines (SWAPs would have done well) · + 52% : Short Japanese Industrials via CDS o Hugh Hendry's fund is up and can be a proxy · +32.96% peak, but plunged -60.80% below open : Cleveland Biosciences (CBLI) o Although unsuccessful, CBLI spiked higher amid the Japanese Nuclear Meltdown, serving its purpose as a hedge
Stanley Rowen writes:
And the winners are…? I fortunately did not participate in last year's contest (my guesses turned out to be non-winners. But, I am indeed curious if there will be a major article posted to Daily Speculations dot Com with the winners? I'm looking forward to it.
Victor Niederhoffer comments:
These entries from the contest for 2011 investments. These are the ones so far in the running. Would any like to add their selections to this list for judging.
Some years ago I was a tourist in Turkey and I hired the captain of a small sailboat to take me out for the day. The captain could only speak a little English but enough for me to learn he was a retired Sergeant from the Turkish Army.
When I said to him the Turkish Army had a reputation as very fierce fighters, he explained that was necessary because Turkey was surrounded by bad countries — the Syrians, the Iraqis and, shaking his head, the worst of all, "the Greece people".
As I scan financial news reports from Europe over recent weeks, the Sergeant's words echo back to me: "The Greece people, very bad."
[No offense to SpecListers or others who may be of Greek descent. I just liked his serious and striking English phrasing: The Greece people, very bad.]
Paolo Pezzutti comments:
I think an extremely weakened Greece could destabilize the area. You heard also that "the government of Greek Prime Minister George Papandreou has sacked the top commanders of the Greek Armed Forces in one afternoon.
The move came within 24 hours of Papandreou's announcement that he intends to hold a referendum on the European Union's bailout package, which is widely seen in Greece as a ploy to forestall early elections." Very unusual move in a NATO country.
The Government's $535 million loan guarantee to solar company Solyndra on a hurry-up schedule to comport with highly publicized visits by Biden and Obama, followed by Solyndra's bankruptcy and taxpayer loss of the entire amount guaranteed, has prompted considerable criticism in the media and Congress.
The Solyndra case was able to garner such public outrage because political contributions by the company's backers were so clearly on the record, the Government's due diligence was obviously put secondary to the Administration's self-promotion schedule, and Solyndra's quick bankruptcy revealed the Government's incompetence in choosing which "green jobs" company to support with taxpayer dollars. But the true lesson of this sad case is that the Government's SBA (Small Business Administration) and Green Jobs programs are virtually always incompetent and politically motivated.
It is extremely difficult for private venture capitalists to analyze and decide which early-stage companies are likely to succeed. And private venture capitalists possess great expertise, and have the extreme incentive and personal discipline that the money they are risking is their own and that of their investors. The Government on the other hand has practically no expertise in such complex and subtle analysis, and lacks personal discipline in that the money being risked belongs to no one in particular. Or worse, wasting the money is considered a positive because it is part of a "stimulus program", or is necessary to "help small business which, as we all know, generates most of the jobs." Further, lacking true expertise and personal financial discipline, the Government will inevitably be influenced by political considerations.
The upshot is that virtually every Government SBA and Green Jobs guarantee or grant will be some version of a scam, either from the standpoint of incompetence or outright fraud, resulting in loss to the taxpayers of the great majority of the tens of billions of dollars allocated to these programs by the President and Congress. But in most cases it will take several years for the recipient company's difficulties to become clear, and by then no one will notice.
Equally detrimental (although much more difficult to notice or understand), subsidies to these economically undeserving companies distort the market and are significantly damaging to other businesses who are more competent and seek to play by the normal rules of capitalism. This happens is various direct and indirect ways. A subsidized company like Solyndra drives up the price of expert labor and specialized raw materials, to the detriment of non-subsidized competitors. Subsidized Solyndra will also tend to charge prices that do not cover its true costs, again hurting honest competitors.
And more subtly, the enterprise prices and ownership of businesses themselves will be distorted.Without the Obama Administration subsidy, Solyndra would have been in trouble in early 2009.The owners would probably have been forced to try to sell out at a distress price. If the company had any value at all, it could have been purchased by more competent management at perhaps ten cents on the dollar, and that management may have had a good chance to make an economic success of Solyndra, to the far greater benefit of its employees, suppliers and customers.
I can testify this is not just theoretical. For many years I have been in the business of trying to acquire and run small companies in a variety of industries. I cannot tell you how many times, when I analyzed and made what I considered a fair market bid to purchase a company, I was told that my bid was too low, that the broker for the seller was arranging for another buyer to obtain an SBA loan to purchase the company at a higher price. Such a buyer, who typically would not have the personal net worth to buy the company, was in effect getting a free option: Either he would be successful with the company and pay off the SBA loan. Or he would be unsuccessful and be relieved of the loan through bankruptcy. And in the meantime he could draw a salary and expenses from the company and live quite well.
September 19, 2011 | 15 Comments
Perhaps the Chair has not yet been apprised of (or, more likely, refuses to lower himself to comment on) Obama's new proposal to tax "millionaires" at a new and higher income tax rate, which Obama apparently plans to campaign on by terming it "the Buffett Rule" (cf "the Volcker Rule), based on the Sage's recent op ed piece to the effect that he should pay a higher tax rate to bring him up to the rate paid by his secretary.
In the course of attempting to explain to Elizabeth and other sensible but tax-unsophisticated family members why Buffet's op ed piece is fraudulent and self-serving, I have found the following the clearest and most effective explanation:
Buffett has a net worth of $70 billion. I have read that based on the fairly modest net capital gains he realizes each year (all he needs to live extremely well on) he pays income tax of about $7 million a year. Thus his yearly income tax represents about 1/10,000 (0.0001%) of his net worth.
The average young, single working stiff makes, say, $60,000 a year, and if he's lucky has a net worth of perhaps $20,000. He might pay almost $20,000 a year in income tax, which would mean his yearly income tax represents almost 100% of his net worth.
And let's take an older middle-class family with a hard-working husband and wife making a combined $250,000 a year, who have saved and purchased a house and have some other investments. If they have been highly successful in their house and other investments, they might have a net worth of perhaps a $1 million. If they pay approaching $100,000 in income taxes, this would mean that their yearly income tax represents almost 10% of their net worth.
To reprise each year's income tax payments at current rates:
Young working stiff, 100% of net worth.
Hardworking H& W with successful investments (well within Obama's "the wealthy"), 10% of net worth.
Buffett, 0.0001% of net worth.
So Buffett's unselfish proposal is: That the middle-class family paying 10% of their net worth each year pay significantly more. That perhaps even the young working stiff pay slightly more. And that Buffett himself pay a little more but since his relative income is so low, still close to 0.0001% of his net worth.
Yes, let Obama run his campaign by lauding Buffett for his unselfishness, and for Buffett's explaining tax fairness to the public in such clear and folksy way.
Phil McDonnell adds:
I agree with Dan that the Sage's comments on this are completely disingenuous. He will never get hit by the tax he proposes. He only makes a salary of $524k/yr because that is what he chooses to take. Rich people have a great deal of control over how they get their income. They can hide it in corporations that do not pay dividends. They can choose not to take capital gains in years with high taxes on such. Alternatively one can take capital losses as offsets. They can choose to pay themselves a dividend.
In Buffet's case the vast majority of his money will never be converted to capital gains because it will be donated to the Gates foundation to provide a nice future income for his kids and their kids. It will never see estate taxes either. The idea that the problem is all about the tax rate is a deceitful canard.
May 30, 2011 | 7 Comments
One has to wonder why this whole "college is a waste of time" meme has suddenly become so prevalent. Is it because so many people have trouble with college loans? Too many writers who have nothing more to say about O's birth certificate?
Thinking one can predict the future based on what one does in the present is a persistent human foible. For sure a lot of kids go to college who don't need to. But is this truly something new? Would anyone sensible make a decision based on what they read about this subject? Unfortunately some probably will.
It remains to be seen how employers of the future will react to resumes that state "I am really smart but I didn't go to college because I read online that it was BS; but I really am smart."
One of my kids is 1/2 way through college and the other is just entering this fall– and I don't spend any time at all thinking it's a waste of time or money; it's been a path to prosperity in my family where none of the previous generation had any education past high-school (if indeed they finished that at all).
On the other hand my wife and I went to CUNY at a time where the cost was $35/semester. That's not a typo.
But I still wonder what's behind the impetus to discredit higher education?
Ken Drees writes:
I get the vibe that the intent is more of a cost justification issue. You don't send a kid to college who gets middle of the road grades and majors in marketing anymore. The job market out of college is poor and will continue to be poor. College now will set you back serious money as a percentage of household income and there will be serious debt burdens on the student and parents upon graduation. You can't put the college payments on the credit card or the home equity loan anymore.
I believe that a college bound child needs serious career planning up front, which is tough to do since kids sometimes do not know what they want to do prior to going off to the higher education arena. Like the union bubble which is feeling the backlash from the debt riddled state pockets empty reality, colleges need to step back, cut back, stop the pay raises–else enrollment is going to crater and the pie shrinks.
Victor Niederhoffer comments:
A college education will always serve as a signaling device to employers and partners and parents that one is capable of being admitted under highly competitive circumstances and then has the fortitude to stick with the program, and finish the requirements, and the moral fiber not to have been kicked out. The signaling will always be of value and the rate of return from college should stay relatively constant.
Russ Sears comments:
Very similar qualifications could be said about homeownerships, commitment to paying a mortgage and good citizenship of being a good neighbor. When a persons limit to leverage has no bearing to what they could reasonably expect… many with nothing to loss will gamble with somebody else's money. This of course creates a bubble in some areas where there will be large oversupply of X degrees. For instance everybody will think in 2022, "what were they thinking taking forensic science and $100 grand of loans?"
The problem is when you use the argument that is it "should" be worth it to argue that everybody has a "right" to upgrade there lives. Further when you grant this "right" to any 18 year old capable of getting a high school degree you are bound to get many that should not have been given this privilege without working a few years and tasting responsibility. I still believe orginially there was a segment of responsible people that were granted sub-prime loans. These people however, proved to be the exception to the rule when everybody was given this right.The difference may be that those youth that are the sharpest will see the "bubble" within these areas and avoid them.
Could we be looking at the class of 2011? on a resume and subconsciously think what a deadbeat?
James Goldcamp writes:
I agree with chair's analysis of the signaling value of education, but one also wonders at what cost. I would find it hard to believe the return on invested capital has not gone down with both greater real costs and general degree (volume) inflation over time. It occurs to me that a rigorous self study program with standardized tests against which one could be compared might provide some lesser but nonetheless valuable signaling vehicle at 1/20th the cost of the current college education. Interestingly, one hire we had years ago was more known for his perfect SAT than his multiple Ivy degrees.
Thomas Miller writes:
This anti college education and anti home ownership "debate", seem to reflect a negative attitude that is growing in this country. The theme seems to be "dont even bother to go to college or strive to own your own home. it's not "worth it." just give up and settle for less." Of course college education or home ownership is not for everyone, but those that propagate these defeatist platitudes, (especially the ones that do it on internet blogs read by a large audience), are doing a great disservice to young people. "just settle for less" is not the attitude that made this country great. A generation ago, many that chose not to pursue college could get a decent job with benefits and be fairly sure of being able to retire from that job. There are very few of those jobs available now. The gap between those with a college degree and those without will continue to widen.
Russ Sears comments:
I believe those that are "anti" college are saying take more risks start a business instead.
And for those that it will not turn out for the better, it's not good government to guarantee the loan. More responsible decisions will be made if they have to compete for access to loans like anyone else.
Ralph Vince replies:
I cannot speak for others, but I am not advocating a "give up," or defeatist attitude here. I speak with those who have children of college age frequently, as well those who ARE of college age frequently too. One of these day, I'm going to stop speaking to people who don;t take my advice (most people are incapable of taking advice, we simply have to learn things the hard way, and usually more than once)
I hear an awful lot of talk from all of these people that a college education is necessary to enter the American job market, as though it were a ticket to the dance, a means to an end as it were.
(I should point out in full disclosure I do not have a college education. I am self taught. When I decided I should learn math, I started with algebra, geometry, trig, analytic geometry, calculus, topology…..eventually stochastic differential equations, which is used (with near exclusivity) to model prices with (a nice target for a math track for someone interested in the markets, but I find these methods model prices with a degree of reality akin to Oz modeling Kansas). When I wanted to learn literature, I started with Homer, then Virgil….through to the 1950s. Of course one cannot study everything and anything, you have to make selective, intelligent decisions (which is where talking with others comes in) and someone must WANT to dispal their ignorance (and this is the key attribute, the acknowledgement of our ignorance and a desire to overcome that — whether formally educated or not).
The last time anyone ever asked me about my educational background was probably when Reagan was running against Carter.
So when I look at what people are learning, and WHY they are learning it, I DO come away in MOST cases with a "Why bother with that?" attitude.
So once we acknowledge that there are two reasons for edication:
1. To dispel our ignorance, and ultimately, to study material we are passionate about, should have such good fortune, and
2. To make ourselves, personally, a marketable product (i.e. posses a marketable "trade," be it electrician, brain surgeon, or truck driving certificate)
people can make better decisions. Unless they are fortunate enough to be a trust fund kid, they need #2. A mere college degree does NOT provide that — this is a wives tale that floats about America wherein a lot of money is being wasted in its pursuit.
#1 is a luxury — one must have the good fortune of finding what fires their jets at a young age, aside from pornography, and find a way to pursue it. If they have the resources and time, college is the way to go. If not, anyone with a spark and a modicum of resourcefulness will find a way to pursue it.
I've spoken of this before. The number of persons from the 2000 census to the 2010 census is up 20%, the number of households, nowhere near that amount. Clearly, in the not-so-distant future, either much housing must be created or much work must be done to convert the "cul-de-sac development" McMansions into 2 and three household homes. What young person is a yeoman plumber out there, or plasterer? Not many, certainly not many over the past 10 years — but it is the fastest track to acquiring #2, above, for most.
And most need #2. Not everyone needs #1, and if they have that luxury, nothing will stop them from pursuing it. But the notion of borrowing a lot of money for a ticket to a dance based on some parent's misguided model of reality (Oz!) is something the educational institutions feed on, benefit by and play to.
Jim Lackey writes:
College is the time to meet your mate, your equal. For the fortunate men, it's the better half you spend life with.
In your college years, there is only so far you will go…. Either to fake it, to fit in/get ahead or rebel against, to get off easy and/or explore the adventures of danger. The gist is how you act when no one you know is looking. Sin may resurface later in life. For certain people, the hypocrisy of life will rear its ugly head. If a married couple knew each other during these years of growth and uncertainty it's near impossible to argue later the lack of full disclosure prior to marriage.
A grievance can always be resolved. A slight, an imaginary hurt, the lack of full disclosure–the "I thought I knew that person". That person will hate you til the day they die.
My guess that is how/why bitter divorces ruin families… vs the much higher than average success rate of current marriages from my anecdotal evidence of family, friends and cohorts that married some one they knew from school.
Jeff Sasmor writes:
Good article on "What's a Degree Worth" :
What Are You Going to Do With That?
For the first time, researchers analyze earnings based on 171 college majors
By Beckie Supiano
Tuition is rising, the job market is weak, and everyone seems to be debating the value of a college degree. But Anthony P. Carnevale thinks these arguments are missing an important point. Mr. Carnevale, director of the Georgetown University Center on Education and the Workforce, has argued that talking about the bachelor's degree in general doesn't make a whole lot of sense, because its financial payoff is heavily affected by what that degree is in and which college it is from.
Now, new data from the U.S. Census Bureau sheds light on one big piece of Mr. Carnevale's assertion: the importance of the undergraduate major. In 2009, the American Community Survey, the tool the bureau uses to collect annual estimates of population characteristics, included a new question asking respondents with a bachelor's degree to give their undergraduate major.
After combing through the data, Mr. Carnevale says, it's clear: "It does matter what you major in."
Laurence Glazier writes:
After the signalling provided by college qualifications, the deliberate undertaking of full-time employment may signal the willingness to allow creative fruit to wither on the vine. A shibboleth of perspective. So many wait for retirement (which may not come) to allow vent to such aspirations, but the law of the farm dictates regular irrigiation throughout a lifetime.
To this end there would be much benefit to all if full-time work became less the norm. The end of government subsidy of unsound housing loans would reduce the pressure on people to suppress their finest qualities.
The Harry Potter books emerged not in spite of the writer's modest circumstances, but aided by them.
David Hillman writes:
Very astute observations.
A laborer can be trained to dig a ditch to a certain depth. A monkey can be trained to dance to the organ grinder's tune. Even a plant can be 'trained' to grow in the desired fashion. But few of the former are, nor neither of the latter can be, trained to *think* and creatively problem solve.
One might speculate that emphasizing skills, specialization and technology in educational curricula and employment qualifications may be the culprits.
While a college education being increasingly available only to the affluent because of financial considerations is, indeed, an issue, perhaps another of our chief concerns should be that we are creating a nation of people who are trained, rather than educated.
Kim Zussman writes:
The "education ruins thinking" argument has value, but simply looking at dollars a college degree pays more than just HS diploma. BLS stats below shows increasing income with formal education: about $400/week more for college grads - which of course does not include harder to value assets like volume of learning, tutored critical thinking, facility of life-long learning, status, access to better mates, good memories, signalling, etc.
One would need about 10 years of the additional (median) college grad salary to pay for 4-year private degree (ignoring taxes). Would the degree be worth it if it took 20 years to pay off?
Unemployment rate Education attained Median weekly earnings
in 2010 (Percent) in 2010 (Dollars)
1.9% Doctoral degree $1,550
2.4 Professional degree 1,610
4.0 Master's degree 1,272
5.4 Bachelor's degree 1,038
7.0 Associate degree 767
9.2 Some college, no degree 712
10.3 High-school graduate 626
14.9 Less than a high school diploma 444
8.2 All Workers 782
Note: Data are 2010 annual averages for persons age 25 and over.
Earnings are for full-time wage and salary workers.
Source: Bureau of Labor Statistics, Current Population Survey
Rudolf Hauser writes:
The question of a rate of return on a college education is not that easy to measure. For one, it will vary greatly on the college attended both by cost and quality of education. It would also vary greatly by the course of study and how much a person actually learned as opposed to just getting by and having fun. Even taking account of these variables, it is not an easy question to answer. The math is a simple discounted present value calculation, but the inputs are something else. For one, the attributes of those attending college and those not attending will differ. Those with an interest in learning and working hard, more personal discipline and more ambitious are more likely to be attending college than those who are not. Those people are more likely to earn more than the group that does not go to college even if they had not gone to college. So while the value of the education is the difference in what they earn in the future compared to what they could have earned had they not gone to college, one cannot just assume the latter is what those without a college education currently earn. In addition what is actually earned will not be a single average or medium figure but will have a wide distribution around it based on good or bad fortune, who you know, and countless factors beyond one's control. Costs while being educated in addition to direct costs of tuition ,books include difference in living costs relative to what they would be had one not gone to college and opportunity costs of lost potential earnings from working rather than going to school. Then there is the question of how much of the difference is due to signaling as opposed to the value of what was learned and contacts made during school. That is real but could change if the marketplace found alternatives to such signaling. If lower education had more strict criteria for graduation and grades the signaling value of a college education might lessen as employers had more confidence in that and prior work experience. The cost of loans may also vary, so that how the education is financed will matter a great deal.
In addition to monetary economic measurement, there are other benefits that might be gained. Meeting a spouse has been mentioned by list members as one such benefit. Learning about many areas and learning how to learn, may enrich one's life as a person, contributing to the value one has to society and family and to one's personal richness of life and happiness. But if prospects do not turn out as one hoped, it can also lead to unhappiness. The question then is how much one wishes to pay for these other potential benefits or negatives (i.e., the probability of disappointment). Some areas of study such as general liberal arts, might be expected to have a higher risk of low or negative economic returns than more specialized fields, but specialization runs risks if those skills become of less use to society.
On a personal level, I do not believe it make sense to send a kid to college unless they are actually going to work hard to learn. If not, it might be best for them to work for a time and see how difficult life can be without a college education. Often they may then go to college and actually make the most of it rather than going at a younger age and goofing off.
I might also add that education need not be in the classroom. The time spent learning on one's own is also education. One need not attend college to learn. It might not have much signaling value but it certainly helps in many areas. The cost is the value of the time spent either in terms of the value of one's leisure or economic opportunity cost.
The ability to learn might be enhanced by a formal education. One of the things I would advise a person attending college to learn is how different disciplines think. The way a lawyer thinks about problems, the way a scientist does, the way a creative writer thinks , the way an economist thinks differ and are specialized in some ways that takes a time to learn. The first course in microeconomics is difficult for many students, for example. The more ways of thinking one understands, the broader ones ways of understanding the world, understanding other people and in solving problems. Some of the great innovations come from taking of advantages in knowing something about other areas of learning that provide insights into the problems in your area of interest.
David Hillman writes:
Ok, then, I meant the focus to be on the point of training versus education. If it requires more updated or timeless references than those to the 20th Century, so be it, and I beg pardon.
(1) Backhoe operators are *trained* to operate them, but there are many instances of heavy equipment being stuck because the operator failed to *think* about the application.
(2) Musicians can be *trained* to play an instrument, but without a proper foundation, i.e., *education* in music theory, history, etc., while the music may be technically correct, it is often dry and mechanical, uninspired and with an 'off-the-shelf' feel.
(3) An air traffic controller can be *trained* to direct aircraft, but when an emergency arises, he/she must *think* of how to resolve it, not unlike,
(4) A 9-1-1 operator being *trained* to follow protocol, but when that protocol does not apply, hopefully, that individual may be capable of *thinking* of a way to prevent loss of life.
And, what of entrepreneurs like you and me? How can one be *trained* to brainstorm an idea out of thin air, then take it from the drawing board to reality? But, one can certainly be educated broadly enough to think creatively, make connections, take calculated risks and solve problems. Even in strategic planning, one can follow a plan, but the successful execution of it requires feedback from the real world and adjustment, which requires the ability to think, not just the ability to follow an SOP manual.
Clearly, a liberal arts education is not for everyone and the rise of tech schools and alternative forms of education and training should be applauded. For those who require training, the more well-trained they are, the better off will be all of us who depend upon their services. But, one should not necessarily depend upon them to do anything other than the job for which they've been trained, nor to be able to *think* creatively when faced with a situation or event for which they have not been trained. Trained mechanics may depend upon a diagnostic computer and trained line cooks upon a recipe, whereas a great mechanic might 'feel' a rough idle and a great chef might improvise a dish. The latter two have the ability to think and create, some of which is natural, but a good deal of which may also come from an education.
Nor is a college education always the right thing for someone at any given time. There are plenty of examples of individuals who failed to perform well in college as a recent high school grad, but did stellar work 'going back to school', my own being one of them.
Some eschew those who are 'too educated' as being 'troublesome' precisely because they can think. However, if I knew nothing of one's natural intelligence, and had to choose, I'd probably go with the educated over the trained.
That said, neither education nor training has much to do with 'smarts.' For that, you either are, or you are not. Some of the dumbest guys I've known have had PhD's, but so have some of the smartest. Likewise, some of the least educated have been the smartest and most capable, but there have been many that are dumb as a box of rocks.
As someone once told me, "it's better to healthy and rich, than to be sick and poor." I'm kinda thinking it might also be better in the long run to be smart and educated, than to be dumb and trained.
Stefan Jovanovich writes:
David is right. If there is any fault to his argument, it would lie in his optimism about the capacities of higher education. But, then, my cynicism about schooling comes from having literally grown up in the business and from being a 2nd generation academic bum. (There are not many fathers and sons who share the distinction of having gone to graduate school in English literature solely because they had no better idea of what to do and the GI Bill would pay for it.) School, like most things, is what you make of it. My difficulty is that "education" is now what "national defense" was in the 50s and beyond; an open-ended appeal for more money that is always justified in the name of some higher good that is incapable of being questioned.
Jeff Rollert writes:
I concur with Ralph, and if you believe in the concept of singularity, then a repetitive answer method is most likely to be replaced by a machine.
For me, I believe that standard problems will have standard solutions already applied to them before I'm even aware of the problem. So if one were to find employees who where good at sensing/finding the "unknown-unknowns" then they would have to have a non-standardized approach - in other words a non-academic approach.
Lastly, in a logic sense, how can something be a "value" but still be "expensive"? Aren't these mutually exclusive?
Tim Melvin writes:
We have dealt with both sides of the college issue here in the past few years. My daughter on her quest to be the world only libertarian teacher had no choice. To teach you must have three degrees and credentials. She has on semester left and has pulled a 4.0 throughout. She may have learned some basic teaching techniques she did not know but the general education element was lost on one who reads like her. When I look at the top 10 majors in US colleges I have a hard time seeing what we are producing except middle managers. Teaching and nursing are the only to that offer a truce vocational choice. I would love to have had four years to study literature, but I question the employment value of the degree itself. The top tier schools may be different but is seems to me that our universities are teaching fixed values and information, not how to think. How to think has to be either installed by your parents or learned on your own. I cannot see where this can possibly be worth the cost today. Perhaps Colonel Depew can add a though on this but I think teaching the young to read the Great Books Curriculum would go farther than the current middle management factory that are most schools today.
I never went to college. Truth be told I dropped out of high school at the enthusiastic recommendation of the local authorities. What education I have I obtained from between two covers in the style of Louis L'Amour– I suggest that book as a manual on learning to think by the way. I read constantly when I was a kid. My mother was wise enough to let us read anything we wanted regardless of content. If there was something we didn't understand she made us find the source material to explain it..and this was back in the day when Encyclopedia Britannica was still the source of knowledge not the internet. I have continued to read ravenously all my life. I read anything and everything. I have found that even fiction often contains lessons for life and can be a source of knowledge. As an example, I read two or three of Robert Parker's excellent Spenser series. Great detective books, but read a few and you will learn two or three good quick dinner recipes, several literary quotes worthy of further research and how to win a fight. Many of us on the list have followed the chair's lead and studied the great lessons of Monte Walsh, Don Quixote and Patrick O' Brian. Randy Wayne Whites Doc Ford novels often contain insights into the biology of floridian waterways and the everglades. Knowledge is everywhere if you know how to think. I fear today's world of standardized testing and assembly line universities may not be teaching that valuable skill.
Think about this. The two greatest innovators and business men of the past thirty years both dropped out of college. Some schools may be worth the price tag. I suspect most are not.
My son on the other eschewed school in favor of making a few bucks. He discovered he had a real talent for and love of business. Within six months or so of going to work at Boater's Worlds he was managing one of the top producing stores in the company…at the age of 20. We talked about school and he told me flat out "I can't see the value of spending the money. I have two MBAs working for me now because they can't find jobs that pay enough, and my part time staff includes a phd in English." He moved on when the Ritz family folded the chain. His former district manager brought him over to his new company and he is moving up the rank there. He just undersands the art of working hard and making money. He may need a few accounting classes some day but four years at some state university would have been a waste of time and money.
We need more thinkers who have a passion for knowledge and more curious explorers and fewer managers and chair holders. That's on us as parents as much as the schoools. If our children go onto college make sure they know how to think and the univerisity allows them to do so.
Stefan Jovanovich writes:
Dropping out can be useful even for scholars. Peter Green (the #1 biographer of Alexander the Great) did it.
So did Eddy's favorite professor who didn't teach art history.
Eddy's most treasured legacy from 4 years at Cal was giving Professor Jacobson the recording of her version of the Super Mario tune. He had heard her play it on the UC Carillon and wanted it for the ring tone on his phone.
Dan Grossman writes:
Found this interesting blog post by Steve Sailer proving the value of higher education:
A column on a new Gallup Poll asking "Just your best guess, what percentage of Americans today are gay or lesbian?"
"The mean guess was a ridiculous 24.6%. Only 4% said less than 5%, which is probably the best guess.
Polling companies seldom ask questions on which people can make obvious fools of themselves, since those can raise questions about the value of opinion polls.
Looking at the demographic crosstabs, it's evident that low intelligence people were most likely to wildly overestimate the percentage of homosexuals: 53% of people making under $30,000 annually said that at least 25% of the population was gay, and 47% of those with no more than a high school education. 43% of Democrats versus 24% of Republicans got the question wildly wrong.
In general, people are terrible at estimating or remembering demographic statistics. A 2001 Gallup survey, right after the release of 2000 Census results, found that the average American estimated that 33% of the population was black and 29% were Hispanic. That adds up to 62%, but who's counting? Not most people.
In that 2001 survey, nonwhites estimated that 40% of the population was black and 35% was Hispanic (adding up to 75%). In contrast, people claiming postgraduate degrees estimated that 25% were black and 24% Hispanic (only about double the Census numbers), which proves the value of advanced education."
When holding the ball for the last shot (several examples in last night's playoff games), isn't it clear there is a tendency to wait too long?
I realize, especially when score is tied, you don't want other team to get the ball with sufficient time for it to set up a decent play and shot.
But taking that into account, the team holding the ball ("offense") should also factor in:
1) extra time needed to set up play and take final shot if offense players cannot get to planned positions, something goes awry, etc;
2) extra time needed if defending team interrupts or delays offense's final shot;
3) if offense misses but needs extra time for tip-in or for offensive rebound and second shot;
4) the possibility of the ball being lost or stolen while dribbling or passing around waiting for last shot;
5) the possibility that the offense is on its last legs, that the defense is the better or fresher team and will win in overtime, so there is a higher premium on the offense giving itself the highest chance to break the tie and win in regulation, rather than go to overtime.
More often than not, and especially last night, the team holding the ball winds up with a low-percentage shot (or even no shot). Taking all the above factors into account, shouldn't the coach and go-to guy of the offense start their final player a few seconds earlier?
James Goldcamp writes:
The answer is, yes, especially with respect to #3 below. Also, another ploy is that when you know a team will hold for last shot at about 15 seconds left if I were on defense I would trap the ball handler and generally pressure knowing the player is afraid to shoot before 5 seconds or so and feel their coach's wrath; it's like a free option for the defense knowing you have a fixed strategy opponent.
The other thing that drives me nuts is with TV announcers where a team is down 2 points with the last possession saying "they don't need a three here", especially on the road. It's well known refs fail to call fouls at the end of a game ("put away the whistle"), so your player is likely to get fouled on a contested drive at the end resulting in a low percentage shot. Better to get a clear three off and win or lose it at that moment (again especially on the road where overtime will work against you); and if you shoot early enough three pointers are notoriously harder to rebound for the defense.
Just like in football, basketball experts and coaches are generally too conservative with strategy I think generally for the fear of looking stupid or reckless.
Pitt T. Maner III writes:
Usually 7 seconds seems to be the amount of time chosen to start the last play. Given that you have about a 1 in 3 chance of winning with the final play in a tie ball game, and you want to eliminate all possibility of the opposing team getting another look if you miss your final shot, there is a bias to starting the final play late.
Could be considered an example of risk aversion. Better to not win and go into certain OT than to have a potential (if only slight chance of) loss when leaving 2 to 3 seconds on the clock.
Even the best players in the clutch are below 50%. The conservative NBA coaching decision is often to go with your best shooter on an isolation one-on-one and to start the move to the basket at 5 to 7 seconds. It avoids a lot of post-game fan negativity which has to be a consideration. You would think (game theory wise) that a mixed last shot strategy of alternating players and plays would produce a higher win percentage but what coach wants to try that in the playoffs! Better to go with 5 seconds and your known Jordan, Horry, Kobe, LeBron being double covered than go with an alternate strategy.
Here is a list of the best "clutch" players.
Even NBA players "choke" (on occasion), so that if the final play starts too early there is probably a greater risk of potential turnover or poor clock management if several passes are made. There is a "dear in the headlight" phenomena when there is too much time to think about taking a shot–too many options and players not used to handling the ball in pressure can cause a freeze up. The defensive team may also make a decision to foul your worst free throw shooter. (although choking effects seem diminished in last 15 seconds according to following research)
It would be interesting to know what the risk of losing an NBA game is with only 1, 2, 3 ,4 , 5 seconds, etc. left on the clock.
Around 7 seconds appears to be the threshold time to running an effective play when taking the ball in from end to end.
This is a great article on the NBA choke effect:
We analyze the effects of pressure on performance using National Basketball Association (NBA) free throw data from the 2002-03 through 2009-10 seasons. We find strong evidence that players choke under pressure—they shoot 5-10% worse than normal in the final seconds of very close games. Choking is more likely for players who are worse overall free throw shooters, and on the second shot of a pair after the first shot is missed. In general, performance declines as pressure increases (as game time remaining decreases, and as the score margin decreases, whether the shooter's team is winning or losing). However, we find no evidence of choking when games are tied in the final 15 seconds. We also fail to find evidence of performance under pressure being affected by home status, attendance, and whether or not the game is in the playoffs.
Instead of all the stories about seizure of the most significant and detailed terrorist intel in history, wouldn't it have been wiser to leak the story that the hard drives and cellphones were pretty much wiped clean, that OBL was scrupulous in protecting his terrorist network? That way all OBL's Al Queda lieutenants and contacts might have been misled for a time, might not have changed all their communication and codes and scattered away immediately from their existing locations.
But I guess this continued bragging for the media and electorate is a lot more important than actually rolling up the OBL's network.
Pitt T. Maner III writes:
The geological clues from the early OBL videos looked promising at the time in the efforts to pinpoint his location. Perhaps more of these type of physical backdrops will be uncovered in recent pictures, videotapes, hard drives, etc. There are probably similar electronic data location clues as well.
Dr. Jack Shroder, a geologist from the University of Nebraska Omaha, was a key player in the field of geomorphological hide and seek:
After September 11, local reporters contacted Shroder and others at the Afghanistan Studies Center. Then, one day, a reporter for the San Francisco Chronicle called and asked him if he knew where Osama bin Laden was in the September video that aired on CNN. "In an inadvertent moment, I let that San Francisco Chronicle guy know that I knew where it was and all hell broke loose after that." Shroder says he knew the rocks and landforms and could place them in the western Spinghar (White Mountain) region of Tora Bora and nearby. "I was smart enough to know that I ought to mislead the media a little bit before I gave away something that I shouldn't have." So, to protect the sensitivity surrounding bin Laden's whereabouts, Shroder told the reporter a location he knew was probably not exactly right. He didn't want the press to have that precise information before the U.S. government did.
One of my favorite employees has a funny husband. Raised in the Midwest, his folksy sayings are often quoted by her during surgery. "Daddy's on the floor!" he shouts, in the morning once he's arisen from a night's slumber; out of bed, ready for a day's enlightenment (in retirement). The man of the house has arisen….and to every one and the only listener, he requires the family's attention.
This phrase again came to mind with yesterday's image of an Osama lieutenant; lying executed next to a child's fluorescent green toy water pistol. Some children have mass murderers for fathers, and I wondered if as a result this child is less a child and father is less a father.
We read they lived in full purdah– wives are required to not slumber with their husbands. And that the master killer wore a traditional salwar kameez when posing for the described portraits. Cultural traditions that seem different from ours, but in framework the same. The daughter who witnessed her father's disassembly was named for a spy who "killed a Jewish spy at the time of the prophet"; though it was as not so much this kind of spy that laid him down as it was cowboys of different cultures.
Dan Grossman writes:
I admire Kim's lending a little sanity to the Administration's celebration of the event.
I myself have no problem with sending Navy Seals to execute someone we are at war with, who planned the terror attack that took the lives of 3,000 Americans and that has cost us all years and hundreds of billions of dollars of delay, pat-down, and other sniveling procedures as we continue to allow the government (in what is more a "theatre of security" than anything effective) to permanently disrupt the lives of 310,000,000 of us. What I do feel uncomfortable about is:
1. Having the raid televised back to the White House situation room so that Obama (who was so crucial to the planning that he was actually on the golf course and had to rush back), Panetta, Hillary et al. could watch every step. This had to make the raid less efficient and more dangerous to the Seals, and why was it at all necessary other than to give the situation room viewers the false thrill of video-game-like participation?
2. The Administration's putting out the story (presumably to somehow justify the execution) that the unarmed OBL acted in a "cowardly fashion" when the Seals burst into the bedroom where he was with his family. Let us imagine how Obama himself, Panetta, Hillary or any of us might act if we are in our bedroom with our family and armed executioners burst in about to shoot us in the head.
And if Obama had to fly to Ground Zero and then fly to the Navy Seal base to keep the favorable publicity going (but of course not "to spike the ball"), it would have been classy to have invited George W. Bush to appear at Ground Zero with him. For all his faults, Bush did have a calming effect on the country and show personally bravery by, among other things, throwing out the first pitch at Yankee Stadium at a time when there was great fear of another attack and credible rumors of a nuclear weapon in NYC.
Th former motto on the Bahamian flag would be good against the flexions:
Expulsis Piratus Restituta Commercia
(Expel Pirates Restore Commerce).
Lactose Intolerance is a compelling example of recent evolution. Belies the common belief that evolution takes hundreds of thousands of years, and that human evolution under civilization (rather than the wild) has slowed down.
Lactose intolerance is NOT a defect or disease. The default condition of humans (and others) is lactose intolerance. There is no reason why humans, certainly not adult humans, should be able to easily digest the maternal milk of another species.
Humans as they began in Africa were lactose intolerant. Humans migrated from Africa to the Middle East, Africa and Asia. As humans in the Middle East and then Europe domesticated the cow and the goat, it became a tremendous evolutionary advantage to be able to digest the milk (and cheese) of such species. When a mutant gene for lactose tolerance arose there, it spread incredibly fast because it allowed for far greater nutrition and survival, especially in high diary farming Western European countries. I believe something like 99% of the native population of Denmark is lactose tolerant.
In Asia, diary cows and goats were not highly developed. While a separate (from the European one) lactose tolerance mutant gene also came about in Asia, its spread was much more limited. Thus a majority of Asians share lactose intolerance with Africans. For the same reason. It was the original, default condition of humans, and the mutation did not spread as rapidly and fully as it did in Western Europe.
I highly recommend The Master Switch by Tim Wu. It's a new book, by an Internet entreprenuer turned Columbia law professor, on the last hundred years of communications and communications policy. An exciting read and certainly the most engrossing book by a law professor I ever read.
I haven't read the book, her WSJ article, or followed this at all. But are the Asian-American children's academic and music results a fair statistical test of their mothers' methods? How many Asian-American youngsters are there in the NFL or the NBA? That is, maybe their success in academics and music relates to some other than their maternal environment.
Jim Sogi writes:
Ralph Vince writes:
If I were to believe the argument, then I would have to believe that black mothers raise their kids to be great defensive corners, and miserable placekickers (The socio-economic argument, that sports like football draw the poorer kids and hence the duskier kids by some reasoning, just knocked out of the ballpark).
Football is a sport where you see the minor physical differences under great magnification. That's not to say someone cannot be of primarily Asian descent and not be a great defensive corner (or placekicker). But the empirical data certainly seems to speak to an awful lot.
I refuse to disregard empirical data. (Just as I may believe in the notion of fiscal conservativism, but can clearly see empirical correlation between GDP growth and government deficit spending– even that clown Krugman [no defensive corner he], like a broken watch, right on occasion).
Dan Grossman responds:
But genes play a big role in whether you can demand that your child get an A in advanced calculus or make first seat in the violin section of the orchestra. With that in mind, let's contemplate the genes being fed into those Chua children who are doing so well.
Maternal grandfather: EE and computer sciences professor at Berkeley, known as the father of nonlinear circuit theory and cellular neural networks.
Mother: able to get into Harvard (a much better indicator of her IQ than the magna cum laude in economics that she got there); Executive Editor of the Law Review at Harvard Law School.
Father: Summa cum laude from Princeton and magna cum laude from Harvard Law School, now a chaired professor at Yale Law School.
Guess what. Amy Chua has really smart kids. They would be really smart if she had put them up for adoption at birth with the squishiest postmodern parents. They would not have turned out exactly the same under their softer tutelage, but they would probably be getting into Harvard and Princeton as well. Similarly, if Amy Chua had adopted two children at birth who turned out to have measured childhood IQs at the 20th percentile, she would have struggled to get them through high school, no matter how fiercely she battled for them.
Accepting both truths—parenting does matter, but genes constrain possibilities—seems peculiarly hard for some parents and almost every policy maker to accept.
January 9, 2011 | 1 Comment
It's amazing how Obama continues to misunderstand what a businessman is (and how the media happily carries the ball forward for the misunderstnding).
Far from a businessman, Bill Daley's most important characteristic is that he's the son and brother of long-time Chicago mayors cum heads of Democratic political machines. He was paid $5 million dollars a year by JPM not because he is a wonderful business executive and strategist, but to head their lobbying effort. He's a political fixer, an influence peddler, and no self-respecting businessman would be pleased with his appointment.
July 18, 2010 | 1 Comment
What is the Purpose of a Country?
An article I read today about the possible breakup of Belgium caused me to think: What is the purpose today of a country? Especially a large country like the United States, as opposed to a smaller and perhaps more locally responsive country like, say, Switzerland or a Cascadia nation consisting of Oregon and Washington states.
Aside from some superficial cheerleading aspects (“We’re Number 1.” “We won the World Cup.”), I would list the following as the most important modern characteristics and purposes of a country:
1. A free-trade zone, to give the efficiencies of trade over a sizable market.
2. A powerful army, to be able to assert oneself in the world and boss around other countries.
3. The power of deciding who to let into the country.
4. The power to transfer wealth to politically influential interest groups from a large population of productive citizens.
Briefly analyzing the usefulness (as opposed to the popularity) of these main purposes:
1. A sizable free-trade zone is highly important economically. But in modern times a sizable free-trade zone is no longer identical with nationhood, the most prominent example being the European Union. Similarly, if Cascadia or New Hampshire were permitted to break off from the United States, such smaller country could still be a member of NAFTA. We thus can ignore this claimed purpose of a large country and concern ourselves only with the other three.
2. As to a powerful army allowing us to coerce others around the world and conduct wars even in remote and unexpected places like Iraq and Afghanistan, Spec Listers will differ but I myself think the Swiss model of a strong army basically to defend one’s borders is the better, less provocative, and less expensive (both in lives and treasure) way to go.
3. Deciding who to let into the country, i.e., immigration policy, is important because it affects the future composition of the country, perhaps even the country’s character and economic well-being. In dealing with this highly contentious issue, I suggest it may be more amenable to resolution if it could be dealt with on a lesser scale than the current national United States. For example, if certain regions of the U.S. were eager to welcome large numbers of immigrants from Mexico while Cascadia or New Hampshire were not, separation of Cascadia or New Hampshire into a separate country would, at least as a thought experiment, allow each smaller nation to adopt an immigration policy desired by its citizens. Americans strongly favoring immigration could remain in (or move to) those parts of the former U.S. with laws encouraging freer immigration, while Americans desiring less immigration could remain in (or move to) a Cascadia or New Hampshire with more restrictive immigration laws. In addition to providing these otherwise irreconcilable groups of citizens with the policy that each desires, we would also learn over time which immigration policy will prove more successful. Finally, even before such radical step as separation of a Cascadia or New Hampshire, our thought experiment may be instructive to us on the question of permitting a state like Arizona to follow a somewhat more rigorous policy of enforcing existing immigration laws than, say, California.
4. Perhaps most instructive of all is the final listed purpose of a modern large country: access to a very large group of productive citizens from whom wealth can be transferred to politically powerful interest groups. And by interest group, I certainly do not mean to limit the analysis to one or the other end of the political spectrum. Rather, I mean the entire range of interest groups with power to access and influence the political process, Wall Street, large corporations, labor unions, farmers, the AARP, minorities, etc. And as a small change compared to the financial rewards accruing to the interest groups, also benefiting are the government officials themselves, who tend to be rewarded more with power and acclaim than with cold cash. The key is the very large group of productive citizens from whom $700 billion can be taken for a TARP program to bail out large banks, $1 trillion for a stimulus package to fund every business, labor and government project every powerful Congressman can conceive of, etc., etc. It is the scale that makes it possible. The productive citizens of a more modestly sized, more directly responsive entity like Cascadia or New Hampshire would be far less likely to surrender 50% of their earnings (and acquiesce in their government’s borrowing more than the remaining 50%) to subsidize their politically influential and less productive neighbors. But in the United States, a country of 300 million with still a considerable tradition of individual economic effort and hard work, such fantastic sums can be skimmed off with comparatively minor protest.
Stefan Jovanovich opines:
There is nothing in the history of American government to suggest that small = beautiful where offense to liberty is concerned. The actual experience of Americans has been that the freedom to light out to the territory has been the principal restraint on the desires of local oligarchies to impose their will on everyone else. (One should always remember that the first official act of the Harvard Overseers was to request that the Governor of the Bay Colony require everyone to attend Congregational church services on Sunday. As the number 1 supplier of ministers Harvard found God - for once - to be on its side.)
An arithmetic caution: The powerful army of the United States - something required under our Constitution - costs less than compulsory primary and secondary education - something nowhere mentioned in the same document - even though there is now considerable evidence that the military's own schools are now the principal source of practical education in the United States.
The immigration debate can be easily solved if the country will answer the larger question that keeps being evaded: what ownership rights in their own country do citizens have? The liberal/libertarian point of view pretends that citizenship as an inheritance or earned right has no property value, even though it clearly does (why else would ICE still be taking bribes?).
Discussions of secession should start by answering the question that states rights advocates have always wanted to leave aside: which debts and assets do the people leaving the Union want to take with them? The advocates of states rights under the Articles of Confederation wanted the liberty that the Revolution had won without paying their share of the debts that the war had incurred; I have no doubt that the patriots for Cascadia will demand the same sweet deal.
The Swiss Army thing really needs to be put to rest. Against actual invaders - the French being the most recent - the Swiss have shown the same record that all small countries do - initial resistance followed by capitulation. That is no argument in favor of having military bases in Turkey, but it is very much an argument against the fantasy that local militias are a guarantee of liberty. Where they have been, it is because they militia had the big battalions on their side. (The British were outnumbered 3 to 1 in their retreat from Lexington and Concord; in the siege of Boston they were outnumbered by the same margin.)
Americans don't surrender anything close to 50% of their earnings to the government; hell, the government is the largest source of their "earnings" (sic) right now. The current debate is over who gets the graft and how much. That is the most enduring truth of American history and - ironically - the source of the nation's salvation so far. Americans work the system until the system stops paying off; then they look for a new one that offers better odds.
Suddenly my "buy" list has a large number of companies which have never graced the list before. They are property and casualty insurers. Although they have sufficient capitalization, their volumes are too small for me to get involved. Does anyone know why they would be in favor?
Dan Grossman writes:
Volumes too small for you to get involved… You must be quite a heavy hitter, trading millions of shares.
I don't know what you mean by in favor, but because the insurance companies held mostly bonds, including mortgage bonds no one knew the value of, they were beaten down to very low levels, below book value, PE multiples of four or five. Now bond valuations are normalizing, and I guess the insurance stocks are returning to reasonable levels.
Scott Brooks writes:
I deal a bit in the insurance world and I have to say that this baffles me. Insurance brokerage firms that I deal with are hurting big time. Premiums are down as small businesses (which insurance brokerage firms have as clients) continue to layoff, not hire, and generally decrease payroll.
Maybe their revenues are down, but their margins are looking better, but I find that hard to believe since every P&C guy I know is busting his butt to bring on as many new clients as possible and bidding as low as possible to "buy" the business. The problem is that their competitors are doing the same to them.
Vince Fulco comments:
A few I follow remain at a healthy discount to book value (WTM, CNA) and I've been wondering when the rising tide would lift these ships– since other industries are being given the benefit of the doubt that conditions are normalizing — and when would some of them get credit for adequate portfolio management and improving pricing and underwriting activity. Loosely speaking, a properly running P&C company can trade from .9-1.3x book and when the punch bowl really overflows, multiples of 1.5-1.8x are possible. Still plenty of room vs. normalized valuations. Why it has taken the crowd until now to really start bidding them up, I remain puzzled particularly vs. underlying corporate performance. It would seem the investors wanted to wait the half life of the bond portfolios to ensure no more problems as most run short duration portfolios.
Secondarily, there had been concerns within the industry about six months back that the Obama administration would go after the Bermuda-domiciled ones doing biz in the US for a bigger tax bite. That seems to have fallen by the wayside for now. Talking my book as I've owned WTM off and on for the last seven years.
Ken Drees adds:
The big question is since these insurance companies were screwed by their debt holdings, took writeoffs and have muddled through — some with Tarp but most P&C did not get Tarp — where do these companies park their cash now? They used to make money in the derivative leverage through the bond kingdom — outside of normal operational gains through underwriting. What is the risk of their holdings now? I don't see many stock buy backs from these guys and I don't see dividend rates that have gone up — both factors here would show that companies would rather pay out earnings or reinvest in themselves. Will they be able to ring the registers as normal through the bond markets?
Kim Zussman replies:
At a recent lecture by a business law attorney, the take-away message was "everyone needs business practices liability insurance." He went through a litany of litigations; violations of overtime laws, rest-breaks, bonuses not being factored into overtime calculations, performance reviews, extensive paper-trailing, s_xual harassment (including a married doctor who had relations with a woman six times before hiring her, then continuing to pursue her on the job).
In an environment of increasing regulation/litigation, empowerment of little old ladies in lieu of rich guys, and increasing taxes, the deductible expense of increasing insurance coverage could make sense — even though lining pockets of bureaucrats and their legal co-conspirators.
Phil McDonnell asks:
Vince, I have a question. For CNA the ratio of receivables to revenue is about 100%, for wtm it is about 75% (by eye). That would correspond to 12 and 9 months worth of receivables they are owed by their customers. Are their customers really the slowest payers in the world or am I missing something?
Dr. McDonnell is the author of Optimal Portfolio Modeling, Wiley, 2008
Vince Fulco responds:
Not sure where you are looking but the largest receivables on the balance sheet from the last few years relates to business they've reinsured with others. WTM management is generally more risk averse than their peers and is inclined to cede segments of their business to better define their upside/downside. These arrangements have truing up terms, conditions and times which make the receivables ratio more lumpy than an ordinary industrial concern. The mix of biz between them and CNA is probably another factor.
If you are speaking specifically to 'insurance and reinsurance premiums receivable', they've been 21-22ish% of revenues for the last few years. I have no specific answer for that but it doesn't seem out of line if we think of the balance sheet as a point in time.
I haven't read The Big Short, but after seeing the Lewis interview on 60 Minutes it's clear to me the book is quite illogical and contradictory. Somehow that makes it like Gladwell's, the book that the media loves, and will doubtless be the most popular. See the good paragraph posted below from an amateur Amazon reviewer.
As the Chair will testify about the nature and culture of AIG, the most ludicrous claim of all is that innocent, naive AIG was forced or tricked into writing $20 billion of credit default swaps by Goldman Sachs.
What are these points Lewis wanted to make? I suppose the major tension of the book is the teeter-tottering between the greed/evil genius of the major Wall Street firms (on one hand), and then the utter stupidity and incompetence of Wall Street (on the other). It is a difficult balance to strike, and one reason it is difficult is because, well, one can not have it both ways. Lewis can not claim, as he astonishingly and explicitly does, that Goldman Sachs made AIG write credit default swaps on the subprime mortgage industry, guaranteeing AIG's demise and Goldman Sachs flourishing, but then on the other hand claim that the firms had no idea what they were doing, and were completely shell-shocked by what happened to their CDO's (the collateralized debt obligation instruments which served as the toxic assets you hear so much about). This inconsistency permeates the book, and tonight on 60 Minutes I heard Lewis repeat what his major thesis is: Wall Street did not know what they were doing. This is the correct thesis. But it is wholly imcompatible with the obscene Goldman Sachs conspiracy movement that has taken over the Oliver Stone mainframe of our society. Even a Michael Lewis fan like myself was taken aback by the audacity of this oft-repeated contradiction.
Kim Zussman comments:
The better story is not the book but the author. Lewis, a Princeton/LSE grad, had a first career as a successful bond salesman at Solomon. He left finance to become a more successful author, colorizing Wall St villains and others.
"Be the house"
Nick White comments:
I know Mr. Lewis isn't terribly popular 'round here (though I enjoy his writing a great deal - pinch of salt or otherwise)…but I think Kim nailed it when he observed, "be the house". Full marks to Lewis for parlaying his edge. What's more, he's hardly ever been bashful about his motivations or disposition in the industry.
By his own admission, (see excerpt from business week interview below) he seeks to illustrate the issues through characters he (and us) can grab hold of. Sure, it sensationalises the story a bit - but it makes the complexity of all this a bit easier for those who aren't familiar with all the personalities, actors, products and institutions. The only way vast swathes of the non-professional population will understand this mess is through exaggeration, analogy and over-simplification. Hell, even most of those within the industry will probably only understand it this way.
He's also been great in giving credit to people who did the real homework and who have the nitty gritty facts and figures on this crisis– girls like Anna Katherine Barnett from Harvard (see this article and link to her paper there). Maybe it's just me defending the old school tie, but I've been long Mike Lewis for many years and will continue to be. Of course, I've never met him, so I simply take him at face value as an author. Others here may know him from a different angle. To me, he's an interesting and engaging social commentator and, like the rest of us here, can only put his pants on one leg at a time– none of us are perfect.
I, for one, am really looking forward to reading his book. Will surely be better than Paulson's and a nice perspective change from Andrew Ross Sorkin's.
SCHATZKER: You note early on in the book that John Paulson made more money than anyone had ever made so quickly on Wall Street. So why not make him more a part of this story?
LEWIS: I spent time with him. And he was very friendly. I could have made him part of the story very easily. But I had a purpose for this story. And the purpose was I wanted to explain to the reader what on earth had happened. And to do that, it helped that the characters themselves had to learn about these markets, that they didn't understand these markets to begin with.
So the reader could learn with them.
John Paulson happened to be oddly positioned inside the financial markets in that he was one of the few people who made his living shorting bonds and looking for bonds to short. His motives were, to me, less interesting. He's much more a purely economic animal. And so he didn't have a great distance to travel to get to the trade. And in addition I'm writing a story. And the story is driven by these characters. And it's got to be true. I can't make it up. I don't want to exaggerate what this thing means to a character.
The people who I was interested in were the people who had laid it all on the line, where they started out thinking, "A nice little trade," and they'd end up, essentially, that if this didn't work out, their careers were over. And Paulson had very cleverly but, from the character, the logical point of view, less interestingly structured his financial life so that he was going to win either way.
When he went to investors and said, "Give me your money so I can short the subprime mortgage bond market," he didn't say this is a bet we want to make because we're all going to get rich. He said your whole portfolio is premised on this not happening, this catastrophe not happening. Give me a tiny bit of your money and put it in this as an insurance policy. And if it works out, it will be a hedge. And if it doesn't work out, the rest of your portfolio is fine.
So there wasn't a lot at stake there. He made a lot of money when it worked out. But he wasn't set up to be in a lot of trouble if it failed. And I was particularly interested in the people who were set up to be in a lot of trouble if it failed.
February 12, 2010 | 11 Comments
Father talking about his daughter (triggered by whether she should charge for shoveling people's walks, or do it for free):
No kid among my daughter’s friends or my wife’s students has ever worked for pay (except maybe at camp), but they have put in vast numbers of entirely pointless community service hours in places like Guatemala and Costa Rica, entirely ignorant of the whacked aid economics of sending 14 year olds to “build” houses in rural communities in the Third World. My daughter and her friends are rapacious — not as capitalists, however, but merely as consumers. Once my wife mentioned to someone at one of the DC private schools that this was not an effective way to help people in the developing world, and that as far as she could tell among her private school students, they understood perfectly well that this was crazy — the response was almost exactly, “Well, it’s really about our kids, isn’t it?” The take-away by the kids was, they understood that the economics of it were whacked — and that the priority was that they have a good “experience” doing good things for poor people. In the end, their community service was just another form of consumerism.
To the extent these kids have been educated in the ethics of production — it is entirely an ethics of therapeutic production, the helping professions, in which they are extending assistance to those not in their privileged positions, for which they merely happen to get a paycheck that appears mysteriously from some third party. It teaches them inequality, to start with — the inequality that goes with the patronizing condescension of the expert who ministers to the masses (there are indeed experts; but what I refer to here is not expertise, but the sensibility of expertise, which is a sensibility acquired long before and independent of whether one has actual expertise; my kid and her friends have the attitudes, even by the teen years). It also teaches them that payment comes from third parties, not the party to whom one provides the “services.” It is not the equality of market exchange among freely consenting equals. It is not any kind of market production at all. This is a very big problem when that is the in-training of the next elites, because what we call capitalism is as much sensibility as sense.
My kid’s problem is not to learn to do good things for people. She knows how to do that and understands too well the sensibility of it. My daughter’s biggest need is to learn how to negotiate in a straightforward way, a business-like basis, in which she will not presume that because she’s a nice kid and this isn’t a ‘real’ market transaction, she doesn’t need to do a good job, or that she is somehow a rapacious little profiteering scamp if she thinks she should get paid. Learn that it is okay to negotiate to a deal. You have no idea how hard that concept is for kids raised in a purely pro-bono environment. They are scared to make an offer or bargain; it seems low-class and grasping.
Jeff Watson writes:
As a kid, I was constantly berated because I realized the value and utility of money at a very early age, yet everyone turned to me as the lender of the last resort. When someone wanted to borrow five dollars (a princely sum in 1967) I was more than glad to lend the money provided the debtor paid $6 at the end of the week. At that time, I had around $200 floating around on the street, with a big Greek kid who collected on commission. Many a time, I ended up in the principal's office, the debtor, his mother, and the principal hammering me and threatening me when he refused to pay. I was careful, not doing business on school property and after school hours, but these people were not only trying to avoid the interest, but to bust the trade altogether. Since I had the high moral ground, I spoke my piece about bad parenting, welshing, and the bad lessons taught by not paying one's bills. Still, I ended up in detention and had to get my father involved, as none of these transactions took placed on school grounds or on school time. My dad had a Svengali way of getting me out of trouble, and it was business as usual. Still, I had many deadbeats, surrounded by their overprotective mothers, who refused to pay. Somehow, my Greek cohort would find their bicycle, ride it to Madison Street, and sell it for substantially more than the $6 owed us. In all honesty, we took our rightful cut, and put the rest in an envelope and sent it to the deadbeat. We kept a list of deadbeats, and sold the list for a song to the neighborhood bookie, who was glad to get such information early. If you think it's tough making money as an adult, making money as a kid is twice as tough… It's not the making money, but the collecting money over the shadow of overbearing parents. I tried to be a different type of parent… I let my kid take his lumps, and when he cried due to getting ripped off, taught him that he just had a learning lesson. Since he got ripped off, he learned to think things thorough. Since then, I have financed several of his businesses, such as DJing, Notary Public, crab trapping, shell diver, buying and selling surfboards. While he hasn't gotten rich, he knows the key to retail is in buying correctly.
Adam Kretschmann remarks:
Too bad one of the kids parents wasn't a lawyer. A juvie record for usury and theft might have helped you recognize the "value and utility" of the law as well as the dollar.
Jeff Watson replies:
In Illinois in the 1960s the usury rate was ~45% thanks to Sears Credit. Anyway, if any adult messed with me in a legal sense, they would have city inspectors crawling over hsi house and business, before their mortgage was called. My dad and grandfather always insisted in a call provision in a loan, just for certain unexpected contingencies with intransigent borrowers. I feel no empathy for people borrowing money, as they walk into it with both eyes open, and their promise to pay it back is more than a promise, it’s a covenant.
Russell Sears adds:
I remember well the few times I spent hours shoveling a sidewalk for a negotiated price of $5, only to be handed a quarter or a buck. It is hard for a kid to argue with a old miser. But it was easy to watch him become snowbound the next big snowfall. Word spread quickly.
On "progressive visionaries", by a fellow I know:
"[The author] went to college with these people, and for a brief time 40 years ago was one of them. He recalls their thinking. They have been striving to gain real political power for all these years, and in the process have carefully taken control of the unions, public education, most big city governments, and much of the underlying federal bureaucracy. The election of 2008 was the culmination of their lifetime of strenuous effort, and it awarded them the Presidency, insurmountable majorities in both houses of Congress, the prospect of soon controlling the U.S. Supreme Court, and one or two serviceable crises by which to justify hurried and drastic action.
This is the Golden Opportunity, the one they have been working towards all their lives. They will never, ever again have such an opportunity. If they let this slip away, all is lost, possibly for generations. But more than that, their lives will have been utterly wasted, their very identities shattered."
Alan Millhone comments:
The British Navy at the dinner table is best approach to politics.
Stefan Jovanovich returns:
The sagas about the British Navy during the Napoleonic Wars are wonderful; but the notion that there was an absence of the discussion of politics at the ward room table for reasons of civility alone is a part of the fiction that has no basis in fact. The very purpose of the British Navy was political; and the men in the Navy were unambiguously candid about what the politics should be — mercantilism, not free trade — and ruthlessly dismissive of anyone who did not agree with them.
Politics was not "discussed" precisely because the only political argument of the day was about whether trade should allowed to be "free" — i.e. restricted only by tariffs and not by gunpowder; and the British Navy was, for reasons of understandable self-interest, "agin it". It very much helped their cause that most of their political opponents were no more in favor of "open" trade than Napoleon was. Instead, like the people whom Dan described in his post, they were believers in a "rational" authority that would have made a Marxists proud.
Here is how Henry Dundas, Stephen Matarin's fictional father, and First Lord of Admiralty saw the purpose of the Royal Navy:
"…be the causes of the war what they may, the primary object ought to be, by what means we can most effectually increase those resources on which depend our naval superiority, and at the same time diminish or appropriate to ourselves those which might otherwise enable the enemy to contend with us in this respect… I consider offensive operations against the colonial possessions of our enemies as the first object to be attended to in almost every war in which Great Britain can be engaged."
One interesting aspect of this is the extent to which abolitionism in Britain was an extension of mercantilism and the slavery patrols off West Africa were, in fact, a jobs program for the Royal Navy whose cannons could no longer thunder and men could no longer plunder. James Stephen is known to our age as Wilberforce's brother-in-law and as an abolitionist; but, like Dundas, his prominence came primarily from his devout support of the idea that British commerce should always be the handmaiden of the British Navy. You can detect a whiff of that nostalgia for the good old days in what James Stephen wrote in 1802:
"To impoverish our enemies used, in our former contests with France and Spain, to be a sure effect of our hostilities; and its extent was always proportionate to that of its grand instrument, our superiority at sea. We distressed their trade, we intercepted the produce of their colonies, and thus exhausted their treasuries, by cutting off their chief sources of revenue, as the philosopher proposed to dry up the sea, by draining the rivers that fed it. By the same means, their expenditure was immensely increased, and wasted in defensive purposes. They were obliged to maintain fleets in distant parts of the world, and to furnish strong convoys or the protection of their intercourse with their colonies, both on the outward and homeward voyages. Again, the frequent capture of these convoys, while it enriched our seamen, and by the increase in important duties aided our revenue, obliged our enemies, at fresh expense, to repair their loss of ships; and when a convoy outward bound, was the subject of capture, compelled them either to dispatch duplicate supplies in the same season, at the risk of new disasters, or to leave their colonies in distress, and forfeit the benefit of their crops for the year. In short, their transmarine possessions became expensive encumbrances, rather than sources of revenue; and through the iteration of such losses, more than by our naval victories, or colonial conquests, the house of Bourbon was vanquished by the masters of the sea."
James Stephen, War in Disguise of the Frauds of Neutral Flags (London, 1805)
Let's run this by the various new ethics courses Harvard now requires in its Law and Business schools.
Making a two billion dollar payment to JP Morgan Chase (or whomever) to terminate a swap agreement is not, it seems to me, buying a security in a public market that might be affected by premature disclosure. Rather, it is a calculation by the parties of the amount the swap agreement is under water, and thus the amount Harvard must reimburse JP Morgan Chase for Harvard to be let out of the swap agreement.
If this is accurate, then the reason for suppression from the public hearing and the bond documents Harvard's intended use of the bond proceeds is not to protect Harvard's swap termination transaction from fluctuation due to market rumors. Rather, it's to protect Harvard management from the embarrassment of disclosing its unfavorable swap transaction and its horrendous use of billions of dollars of endowment funds contributed by loyal alumni.
Thus the question for the ethics courses: Is Harvard's suppression of the customary or legally required disclosure of its intended use of the funds ethical?
I used to do a lot of business in Japan and I think very highly of Japanese businessmen (unfortunately they rarely include women at high levels). They have an industrious, highly intelligent population, are very interested in business, and a good base as the second largest economy in the world.
It is a great mystery to me why they (and their stock market) have not done better in recent years and I have never seen any good explanation of it. Okay, they had a bubble that burst, government policies that were not great, and they have an aging population. But so what? They had plenty of opportunity to recover on their own in spite of whatever the government has been doing. (BTW their government policies could not be any worse than our current ones, so if government policies are the test, we're in big trouble.)
Has anyone seen or can anyone give a decent explanation of why Japan has lagged?
Ken Drees writes:
1. LDP party out of power after 55 years.
2. Exports and profits slumping via USA trade like others Asian exporters.
3. Big(gest) holder of USD denominated debt.
4. Aging populaton (nothing new), but 81 billion spending package just announced, more internal stimulus to follow?
5. Need to diversify their surplus holdings like others (China, Brazil, Russia, et. al.)?
6. New party administration playing a little differently with USA — recent Obama trip no real results, prior to that some grumblings about USA debt, etc.
7. Japan equities — bottoms in 1998, 2003, 2009 — skewed symetric reverse head & shoulders – or just bumping along the bottom?
8. Will need to strengthen export markets everywhere and keep USA markets open and profitable. Japan's growth lies with its neighbors if USA doesn't fix itself.
9. Yen carry trade over, yen rising — conflicts with strategic direction that exports and export profits need to be robust.
10. Zugszwang-lite Japan — any small move doesn't change game for the better. Are there any good moves available?
How will the new party lead? If they cannot rope in the yen to improve exports can they stimulate spending via QE and weaken yen at same time? Or is this approach too slow and meandering? There seems no real strong moves available unless global imbalances happen first and allow Japan countermove possibilties. Japan seems still to be unable to escape via its own power.
Is Japan getting tired of being tired?
Charles Pennington adds:
A broad-brush explanation is that the Nikkei got way out of line with other world markets and has spent the past 20 years returning to normalcy.
The Japanese price to earnings ratio was "well over 100" in the late 80s, and now it's 33 (reported by today's Financial Times), still higher than the US at 22. Earnings for the S&P are up about 2-3 times over their level in 1989, and perhaps the Nikkei's are as well, but if the P/E fell from, say, 200 down to more normal value of 33, a value much more in-line with other world markets, well, that explains a lot.
The Chair will rightly point out that this is retrospective, descriptive, and not predictive, that Japan's interest rates are (or at least were) lower, that the accounting may be different. Also, Mr. Grossman doubtless already knows all these figures, so he is looking for a better explanation, which I don't have.
Kim Zussman adds:
Country-stock could be like "best company" studies, showing admired firms under-performing the rest. Presumably established/successful companies/economies have less upside than currently dire situations. And more downside?
Vince Fulco replies:
To the list I would add traditional factors such as:
1. Shareholders — very far down the societal list of all stakeholders in the corporate world. The stock market is generally considered more for gambling (no jokes Dr. Z!)
2. Much heavier reliance on debt financing (too much) due to roots in maibatsu/keiretsu structure whereby a conglomerate's banking branch handles all the financing needs
3. No Carl Icahn or Guy Wyser Pratte influence to shake up entrenched mgmts and unlock under-utilized assets. The quote is 'the nail which sticks up gets pounded down'. A few have tried over the years but are usually labeled degenerates or cowboys and run out of town one way or another.
4. Years of very low ROI, white elephant projects by the government, to keep happy important constituents of the LDP (the old group in power) such as construction and the mob — i.e. the bridge to an island with 50 people on it, which we almost got in Alaska a few years back.
5. Legacy obligations which haven't been addressed but simply kicked down the road as we've emulated so well in the last 12 months.
Ken Drees responds:
Vince, Kevin, Kim and Charles have all provided excellent observations as to Japan's inbred entrenched-ness, inabilities to move, and relative over valuations. Also, the idea that is was the once high flyer status albatross, so all these past behaviors are in the rear view mirror, yet they continue to taint the view of Japan as an old has-been power country. But change agents may now be inside this yesterday/today paradigm. So far Palindrome's reflexive reinforcement of trend is still in force. The malaise continues. Will some new change agent surface? Will the reflexive reinforcement finally be breached.
The early elements for a change exist. To bet on a new bullish Japan is a long shot. But how much money can be made betting the field? Tax policy can be repealed, monopoly/hands in hands can be abolished, small investors can be made more ownership level. All the levers to lift the old dead stump and turn it over are at the ready. Or is this a dead end due to lack of will? Is Japan a stunted growth, never ever to leave off-broadway? If a global imbalance rises up, will Japan change tack and ride out on a new wind? I am watching Japan, if only since they since they are shackled to the USD. Maybe the impetus for change is at hand. This new administration in Japan — what do they owe the US?
Stefan Jovanovich replies:
The Japanese are certainly not hidebound where their Navy is concerned. They are the dominant sea power in their part of the world. From the folks at StrategyPage.com:
"Japan is currently the second largest naval power in the Pacific (after the United States), with a total of 32 destroyers, nine guided-missile destroyers, and nine frigates. The older Tachikaze-class guided-missile destroyers are being replaced by the new Atago-class destroyers. Japan also has 16 modern diesel-electric submarines. The Chinese navy is larger in terms of ships. They have 25 destroyers and 45 frigates. However, of these 25 destroyers, 16 are the much older (than Japanese equivalent) Luda class. Most of the frigates are the obsolete Jianghu class ships. China has 60 diesel-electric submarines, but most of them are elderly Romeo and Ming class boats. China's Han class SSNs (nuclear attack subs) are old and noisy. In terms of modern vessels, China is not only outnumbered, but the Japanese ships spend more time at sea and the crews are better trained. The Chinese are also at a disadvantage when it comes to naval air power. Most of China's naval fighters are old. They have a growing number of modern J-11s (a copy of the Russian Su-27) and the Su-30MKK. Japan is almost at parity in terms of numbers (187 F-15J/DJs and 140 F-2s to 400 Chinese J-11/Su-30MKKs). Japan has better trained pilots, although China is trying to close that gap as well."
Yishen Kuik adds:
The attention to detail and sense of duty of their workforce is amazing, and the public infrastructure in Tokyo is of a very high quality — certainly better than Boston, DC, New York or the Bay Area. Tokyo is much bigger than all these four areas. It makes New York seem small.
It's not entirely clear to me why their equity markets haven't done better, but the "obvious" explanations of long term multiple contraction and shrinking internal aggregate demand seem to be correct.
I believe GDP per capita in Japan has been rising all along at the same pace as in the US since 1989, so it isn't as if quality of living in Japan has been frozen at 1989 levels. From what I can tell walking around the streets, they still enjoy a comparable standard of living to anywhere in the OECD, and have an unemployment rate (whatever that means in Japan) of 5.0%
Henrik Andersson replies:
Some investors are expressing great fear about the debt given the large amount maturing in the coming 12 months that is held by citizens, as Yishen writes, and given it has "no foreign demand, no domestic savings, structurally declining tax receipts and savings due to demographics, etc." Any views on this?
The top line numbers for the country are stagnant, but the per capita numbers don't look so bad. Japan might have a ton of public debt, but most of it is yen denominated and some 3/4 of it is held domestically by its own citizens.
Dan Grossman writes:
Two thoughts perhaps follow from the helpful comments of Prof. Pennington and Mr. Kuik:
1. Based on the two-decade decline in average Japanese stock PEs from 200 to 33, why shouldn't average US stock PEs decline further from the current 22 if government policies following bursting of the bubble are equally ineffective in the US as they have been in Japan?
2. If since 1990 the U.S had avoided illegal and legal immigration anywhere near the extent to which Japan has, the US unemployment rate would probably also be 5%.
Vitaliy Katsenelson adds:
Please look at slide 14. Japanese valuations at the of 1989 were incredibly high, add to that a lengthy deleveraging process on the corporate side and leveraging (debt to GDP has tripled) on the government side and you also have anemic economic growth.
Vince Fulco writes:
Here is fascinating article in the WSJ re: a foreigner helping a small japanese village manage the downside of the demographic slowdown. One wonders how much more pervasive this sclerotic 'no change' attitude really is…
Charles Pennington adds:
There's a nice column by Lisa W. Hess in the Dec. 28 Forbes about investing in Japan.
She claims that small cap companies are even more undervalued than large cap, and recommends buying the Topix rather than the Nikkei.
Allocation of capital on a macro, national scale is an important but under-studied subject, relevant to analysis of the cureent economic situation.
While the collapse of the Soviet economy seems multi-determined and very difficult to analyze, misallocation of capital (MAC) was a key, if not the key, ingredient. From the outset Soviet Communism was famous for its Five-Year Plans for investment and capital allocation. In the beginning the Plans emphasized catching up in major industrial areas where Western countries had obviously been successful — steel, machine tools, electric power — and the growth of the Soviet economy did well. There was even talk among US experts of the higher-growth-rate Soviet economy eventually surpassing that of the US.
But by the latter 20th century, US and other Western economies had become more subtle and technologically-oriented. Economic growth depended on research and fast-moving investment into high tech areas — inventions and products that initially seemed minor or almost invisible, discoverable only by haphazard groups of large corporate and tiny individual entrepreneurs, totally unpredictable to government bureaucrats.
In this environment Soviet Communism was hopelessly outclassed. Its top-down planning and traditional love of Five-Year Plans and machine tools could not keep up with Silicon Valley. Billions of dollars of Soviet capital were being allocated to projects with marginal or even negative returns, while growing billions of dollars of American capital were being allocated to the then unusually high returns of Silicon Valley and the like. Compounded over 30 or 40 years, this makes for an incredible difference in result, collapse for one and tremendous prosperity for the other.
What are the implications of this for present times?
First, we have a situation in the US where major portions of our very large economy are being shifted from allocation by entrepreneurs, who in the aggregate know where to allocate capital (not because they are so smart but because they are governed by highly diverse market forces), to allocation by Congress and government bureaucrats, who don't. (And "don't know" is charitable, since their political incentives of pork and saving failing constituencies make the government allocations even less economic.) That has to be far less favorable for long-term US economic growth.
Second, we have China. While the Chinese are probably smarter, or more uptodate, than the Soviets were in their allocations, and are dealing with an economy much more open to market forces (particularly in having to cater to US purchasing allocations), can the Chinese in their government-directed investment and capital allocations continue to escape the defects of the Soviet allocations?
And with the likelihood of the Chinese misallocations being covered up by phony statistics over many years (the same type of phony statistics that misled not only the Soviets themselves but sophisticated outside observers such as the CIA), isn't this a situation that will sometime lead to a pretty dramatic day of reckoning?
By the way, I have not read any academic or investment research on capital allocation/misallocation and the above is pretty much off the top of my head. Thus I would be grateful for good citations or sources to contradict or modify my views, or to better educate myself in this area.
Stefan Jovanovich comments:
I think Mr. Grossman exaggerates the extent to which American "capital" has been allocated by entrepreneurs in the years since 1925. Wealth has certainly been created by enterprising individuals; but the extent to which the national wealth has been allocated by the government should not be ignored. One statistic always comes to mind when I read praise for American "capitalism" — the amount of money spent on the Manhattan Project alone was more than the entire historical investment in the U.S. auto industry. Silicon Valley — which looks a good deal like Detroit in the mid-1930s these days — was very much the product of the military-industrial complex Eisenhower questioned. Mr. Hewlett and Mr. Packard got their start by selling oscilloscopes to the Army, and but for the need for control devices for ICBMs, they would still be growing fruit in the orchards around San Jose.
What defeated Soviet communism was the absence of private money, the inability of individuals to save their own wealth in a form that could be spent by them. Everything in the Soviet Union was rationed; it was the ultimate single payer system. The question for which none of us has an answer is will private money continue to exist in China when that country has its banking and credit crisis? (Of course, the cynics I know are asking the same question about the present banking system in the United States: "What do you think of the American system of private money, Mr. Gandhi?" "A most excellent idea.")
P.S. For the first 60 years the Soviets' allocation of capital was not greatly inferior to our own where military technology was concerned. Their ability to literally move their entire industrial base 500 to 1000 miles east while defending themselves against the Wehrmacht is a miracle of raw production that more than equals anything done by Kaiser's shipyards and Boeing's B-29 factories in Kansas. Imagine the German Army invading the United States through the Champlain valley and capturing Boston, Pittsburgh, Cleveland, Philadelphia and New York and the United States' moving its entire steel and auto industries by rail to Nebraska in the midst of winter.
P.P.S. The B-29 was built in Kansas because of the assumption that the United States might be subject to the same kind of sustained bomber offensive that the Allies had been conducting against Germany. The failure of the Germans to develop the significant heavy lift capacity for bombing and transport is probably the single top down command decision that doomed them; if they had invested the effort into development of a 4-engine bomber that they put into rocketry, they would have won. Instead, the Allies did, which allowed them to discover after the fact — thank you, Professor Galbraith — that bombing was a complete failure.
Kim Zussman replies:
One could make the case that the tech bubble was partially the result of the collapse of USSR:
- The political stability risk-premium in the US went down post-Soviet threat (markets move in reverse to risk premium change)
- Defense spending went from 6% to 4% of GDP from 1990-2000 (see attached chart from this site). Some of that went toward tech investment (Note that defense spending went up post 911, and stocks/ROC 00-10 was not as good as 90-00).
- Check out what happened to Japan and Germany stocks post-defeat, and St. Petersburg post-Bolshevik.
I am a reasonably knowledgeable baseball fan (read a lot of Bill James) but have always wondered about the following very basic question:
Batter hits a line drive, but he is out because he hit right at a defensive player. Is that predominantly luck, a few feet left or right and it would have been a hit? Or has the defense correctly positioned its player and the pitcher correctly pitched to the batter to make it likely he would hit where the player is? I realize it's not 100% either way. But is it, say, 75% luck? Or 75% that the defense has correctly positioned itself and the pitcher correctly pitched to make it come out that way?
Phil McDonnell replies:
The game is played both ways. The batters try to aim for holes in the defense. The usual infield holes are between 1st and second, up the middle and between the 3rd baseman and shortstop. The outfield holes are the left center gap and right center gap. It is rather easy to hit a ball exactly where you want in a soft toss to yourself. The real problem is when the batter is facing a 90 mile an hour pitcher with maybe a little break on the ball. The key is to time the swing so that the bat hits at exactly the right angle. Sometimes batters just miss.
It is sometimes said that football is a game of feet and inches. If that is true then baseball is a game of millimeters. For example a ball hit squarely on the widest part of the bat will generally result in a line drive. But if the ball hits a little high then it may result in a fly ball or even a simple pop out. A little low and the batter will ground out.
Pitchers know that batters rely on timing the swing in order to hit the ball where they would like it. The key pitching counter strategy is to vary the speed of pitches. There is no pitcher in the major leagues who does not have a fast ball and at least one other off speed pitch. Changing speeds is the key to good pitching.
Pitch placement is also essential to good pitching. Generally most pitchers will throw fast inside and soft away. This forces the batter to read the speed earlier than otherwise if he is trying to place the ball by timing his bat angle.
Sometimes the fielders get into the act as well. The second baseman and shortstop will often read the catcher's signals and signal each other as to who will cover second base and who backs up if there is a runner on 1st. In this situation the batter will try to hit 'behind the runner' aiming for the hole between 1st and second. The double play 2nd to short to 1st is slightly more difficult than the short to 2nd to 1st. The reason is that shorts and 2nd basemen are always right handed. The guy at second has to turn his body in order to make the throw back to second with the shortstop covering.
The defense knows the batter will try to hit behind the runner and counters. The pitcher will tend to pitch fastballs inside to make it hard for the batter. The shortstop will probably play closer to 2nd to take the throw. This frees up the 2nd baseman to field a wider range.
There are statistical services that teams buy which analyze where a player is most likely to hit the ball. Usually it is shown as a scatter chart on a baseball diamond. Ted Williams was famous as a player who would predominantly hit to the right side of the field. Consequently several teams came up with the Williams shift, where they left only one outfielder and one infielder on the left side of the diamond. Initially the shift worked and Ted struggled a bit. But he finally demonstrated the fatal flaw in that defense by successfully bunting toward 3rd base which had a gaping hole.
In any one at-bat using these strategies only gives one a small edge, maybe 10%. The average player bats maybe 500 times in a season and there are nine players, so about 4500 chances in a season. On defense there are about the same number of chances for a total of maybe 9,000. But as in trading and gambling, over time a small edge adds up to a winning strategy.
Dr. McDonnell is the author of Optimal Portfolio Modeling, Wiley, 2008
Dean Davis adds:
On the two youth teams I coach we move our players into spaces where they have a greater chance to make a play depending on the pitch I call. For example I'll signal the right fielder to move in and to his left when I am pitching a right hander at the belt, but off the plate (away). That results in many outs from weakly hit fly balls to right field that would otherwise be singles that drop in. Sometimes we luck into a grounder hit through the hole that the tight right fielder can throw out at 1st. I build a defensive game plan around the tempting pitch that is hard to hit well.
Ken Drees writes:
In early youth leagues we were coached to check out the third baseman's position. If a right handed batter simply turned himself somewhat towards third base and opened his stance towards left, he could aim a hit down the line or in the hole depending on the 3rd baseman's position. This also gave the batter a better chance of making it to first since it was the 3rd baseman or left fielder against runner. The 3rd baseman had to field and make the long throw over to first and beat the runner. This was versus hitting the ball up the middle, where pitcher, second baseman or short stop seemed to be covering and the throws to first were more manageable.
This technique is erased as you go up the ladder, but it does help early players get some action if they seem to always be hitting straight into the defense. It also helps to eliminate hitting into easily turned double plays.
Rodger Bastien responds:
It's my view that it's mostly fortunate for the pitcher that the batter hit it directly to the fielder, with an assist to the defensive alignment, in some cases. In most instances, a batter is trying to simply make solid contact when facing a pitcher with outstanding stuff. When facing a pitcher who is struggling or faced with an at-bat that dictates situational hitting (i.e. man on 2nd no outs, need to hit to the right side to advance the runner) the batter is more likely to attempt to hit the ball somewhere specific. The defensive alignment plays a role due to the positioning of the fielders that is based on the advance scouting that each teams does which determines each hitter's tendencies throughout the season. Like so many things, this part of the game is more of an art than a science.
Laslo Minks remarks:
My belief is that it’s pure luck. You want to hit line drives, usually up the middle. And a good hitter goes with the pitch, you pull an inside pitch (if you are right handed) to left-field and an outside pitch to right. You want to hit it just over the infielders heads, but it is ridiculous to think that you are, for instance, trying to hit around the shortstop. The point of trying to hit line drives is that the horizontal velocity is the fastest and therefore most difficult to field. You hit line drives regularly and you will have a good batting average. You play the odds. If you hit it right to the shortstop or second or third baseman, that is just bad luck. Anyone who says differently is overthinking it.
September 11, 2009 | 2 Comments
What is the explanation (either your own or the "conventional wisdom") for why bonds have been rallying concurrent with a strong stock market and all the talk about recovery?
Bloomberg news reports:
The $12 billion of [long term govt bonds] offered yesterday drew the strongest demand in more than two years. The U.S. Treasury auctioned [a total of] $70 billion of notes and bonds in three sales this week to help finance a record budget deficit. “It was a stellar auction at much lower rates,” said Thomas Tucci, head of U.S. government bond trading at RBC.
Paolo Pezzutti adds:
It seems that all assets are going in the same direction (commodities, bonds, stocks). Is there anything negatively correlated that one could consider to diversify?
Alston Mabry has a one word answer:
Phil McDonnell also replied:
Same day correlations for various assets with respect to stocks (SPY) for the last 105 days:
FXY yen -44%
TLT 20yr -32%
So there are still some things that are negatively correlated with stocks. Same day correlations are not useful for Granger-style prediction [of one time series from another], but they are useful for reducing the risk of a portfolio constructed using the various assets.
It should also be noted that just because price levels have gone up over a certain period of time [i.e. an upward drift in both series] does not mean that the price changes are positively correlated. The preceding correlations were calculated based on daily net changes in order to avoid the spurious correlation problem caused by using price levels.
Vincent Andres answers:
Why have bonds been rallying? In the past, government(s) were putting their hands in the machine only under exceptional/rare occasions. Now they are doing that on a regular basis. Markets (as we used to know them) have never been so oligopolistic and manipulated. The fact that old rules like stocks up/bonds down (and many others) now no longer works is simply one of the signature of all those oligopolistic interventions.
A possible scenario : The stock rally being a completely constructed one, concerning in fact only a restricted number of actors. Those actors aside, the stock markets were not rallying, that is what bond buyers believe and why they buy bonds.
For our stock "markets" (and some others), just a facade subsists.
I was hoping some one here may be able to help me out. After four years of dating my girlfriend, I have finally decided to ask her to marry me. I am in the early stages of looking for a ring and am obviously wanting to get her the best ring I can. Unfortunately what she deserves and what I can afford are two different things. Therefore my hope is that someone on this list knows someone that would be able to get me some type of deal on an engagement ring. I'm not looking for a hand out by any means, I just want the best value for my money. I'm also looking to get it pretty soon as I believe both of us would like to get married before I leave for Afghanistan next year. Thank you in advance to anyone who is able to help me out!
Dylan Distasio replies:
Good luck with the proposal! Unfortunately I don't know someone who can give you a deal on a ring. However, I would highly recommend checking out Blue Nile. They have beautiful diamonds at all price levels, quality levels, cuts, etc. at very low prices compared to retail. I am incredibly happy with them from personal experience. I was able to get a very high quality diamond for an engagement ring that my wife is now wearing. They also offer settings if you want to one stop shop. They ship quickly, and the diamond appraised at approximately 50% higher than what I paid. Most importantly though, it is a beautiful stone. My co-worker also had great luck with them. I'm not a Blue Nile shill, just a satisfied customer.
Charles Pennington weighs in:
Borsheim's is pretty good. With them I don't think you have to worry you're getting ripped off. You can call them on the phone and just talk with them about how much you're thinking about spending, and they'll provide a host of options for you. If you want, they'll even ship one or two out to you so that you can have a look. If they do rip you off, you can go complain to Warren Buffett at the next Berkshire Hathaway shareholders' meeting!
Caution: She may want a ring from Tiffany, even though you both know the extra money is just for the blue box.
Dan Humbert takes an unconventional view:
Don't waste your money on something so ridiculously overpriced as a diamond (especially since you indicate you are short on funds and are off to Afghanistan, meaning you'll have a lot more important things for you and your fiance to spend your limited funds on). If you and your fiance want an engagement ring, cubic zirconiums are nearly as good, and I understand there are now even better man-made diamonds that a jeweler cannot distinguish from natural diamonds — it takes an expert with sophisticated equipment. Exact types and prices are well-covered in the recent book Spent by Geoffrey Miller. No one else will be able to tell, and you and your fiance have no obligation to confess that you were not so wasteful as to buy in to De Beers's monopoly and ridiculous advertising that you should spend 25% (or whatever obscene portion of your year's salary) on the diamond.
Taking it a step further — this being a libertarian-oriented site, why get married at all? You and your love should set the terms of your own wonderful relationship rather than letting the government, courts and lawyers dictate the terms. It's a lot more romantic to voluntarily win each other's love each day, than to be obligated by the government to stay together unless and until expensive and debilitating proceedings involving lawyers and judges allow you to change the terms.
The dissenting view gets support from Kevin Humbert:
Dan offers excellent diamond advice. After losing a number of "real" diamonds to both women and thieves, I decided to look into synthetic diamonds as an alternative some time ago. At the risk of sounding cynical you don't blow through as many ring-requiring ceremonies & occasions as I have without incurring significant financial loss… and that's before the rings are even factored into the equation. Man made diamonds vary wildly in price & quality. Even so, the discount to comparable high quality diamonds is high enough to make something man made a no-brainer for me. As for whether anyone notices if it is real or not, I can't recall having met anyone outside of the jewelry industry who is impressed with a diamond wedding ring one way or the other, either real or synthetic.
But Laurel Kenner interjects:
Gentlemen! A fake gem sends the wrong message. And relationships without marriage usually turn out to be fakes, too. Just ask a wife whether her marriage is real or not.
An anecdote from Chris Cooper:
I once had an employee who had already made a lot of money from stock options owned by her husband and herself as executives at a big tech company. When they got married he told her she could have a one-carat ring now, or for every year she waited he would increase the size by an additional carat. After several years she caved in, and could be seen flaunting a 5-carat flawless solitaire in important business meetings. A stone of that size does tend to attract the eye.
Legacy Daily sends a specific suggestion:
Congratulations! Engagement and marriage are indeed very special life events. I have jewelers in the family who would be happy to help. I just called them to let them know that they might hear from you. Feel free to contact Artinian Jewelry.
John Lamberg looks back:
A word of advice: When your wife to be picks out a wedding ring, no matter what price, run, do not walk, to the counter and purchase it. Do not repeat the mistake I made many years ago and say, “let’s think about it…”. Some mistakes are never forgotten.
Victor Niederhoffer also reminisces:
I bought mine for 25 cents at Woolworth on 86th and Third Avenue. And as the poker player said after he took his real diamond from her the day of the wedding to throw into pot, "she's still wearing it."
Given that one can listen at low cost/free on the Internet to the best professors in the country giving courses in many leading subjects (MIT has all its courses free online, Yale and Stanford some of theirs), how long will consumers be willing to pay $200,000 for four years of Ivy League and other leading private courses often taught by uninspiring assistants and graduate students — often, in the case of math and science courses, mumbling foreign graduate students whose English is incomprehensible? I well realize that a degree from a leading private university is a considerable signal to employers, potential spouses and others, of one's intelligence and diligence (and I also realize that the $200,000 cost is usually not borne by the consumer him- or herself). But still, how long in this age of technology, outsourcing and arbitrage can such a differential persist?
Steve Ellison reports:
In an NBER paper, Avery and Hoxby state:
If [a student with very high college aptitude] acts as a "rational" investor, not bound by credit constraints … then he need make only two calculations for each college in his choice set. Supposing that the student has figured out the cheapest way to attend each college, given the aid offered him, his first calculation is the present discounted cost of attending each college j …
His second calculation is the present discounted value of the consumption he enjoys at college j plus the present discounted value of the stream of income generated by the human capital invested in him at college j …
Jeff Sasmor reacts:
What college student thinks this way? As someone who has just gone through this process with an intelligent child entering college (Barnard) next fall, the decision involved more emotional choices than rational ones.
1. What school best fits what I think I want to do with my life?
2. What school has the type of people I want to hang out with for the next four years?
3. I want to get out of NJ. Even though I was accepted into Rutgers' Honors program I don't want to go there, yuk. I want to go to a brand-name school. I want NYC because I want to experience an urban lifestyle. You know, I'll need a bigger allowance!
4. Don't lecture me, I don't care what it costs.
Riz Din shares:
I was painting our fence the other day while listening to a variety of quality podcasts and lectures (painting a fence takes longer than I thought) and I had similar thoughts.
The differential has to fall over time because the act of standing in front of a group of people and lecturing them is outmoded in today's world and is fast becoming commoditised through technology. The idea of an institution herding students into a room at a fixed time and having a one-sided conversation with them while they rapidly jot down all the salient points just doesn't hold water when there are much better, more productive ways of teaching. I start to drift after the half hour mark in many lectures and being able to press 'pause' on the lecturer would have been a real boon.
Universities can be extremely slow to adapt (e.g. Latin was standard at Oxford and Cambridge several hundred years after other places of learning adopted English), so overhauling the entire way of teaching may be some years in the making. Nevertheless, I think the education establishments are going to have to figure out how to better differentiate themselves because we thankfully live in a world where one's prospects depend less on one's place of learning or social standing and more on one's capability. Just as increased competition in the forex world led to massive spread reductions over the years, forcing many banks to evolve and differentiate their forex offerings with value-added propositions such as better research, option strategies, trading systems, etc., so universities and other places of learning must adapt their models. As a hybrid model at least, I can foresee on-line lectures combined with seminars and other, more interactive modes of learning. In today's world, perhaps knowledge isn't power because it isn't scarce, and the emphasis is increasingly on the the application of knowledge.
April 22, 2009 | 4 Comments
One of hardest things to do is nothing. To rest. It goes against everything. The urge to do something can result in disaster. Especially the urge to catch up say when price passes you by or you miss a fill.
Victor Niederhoffer writes:
In reading Deep Survival ( which one has eschewed for many reasons), one comes across the chapter on panics. The conflict between trying to achieve a goal, of food shelter and a mate, (always there) , and being lost causes great discombobulation. Great foolish activities leads to people refusing to survive when it was so close. One finds the same conflict between lost and goal in markets. For example, one has a target. You put your limit in. The algorithm boys move in front of you. The price moves away. You are lost. You have a goal. There is a tendency to panic, to die when it would have been so easy to go down the previous path, or use your tools. A terribly poignant and applicable sensation.
Chris Cooper responds:
Those lessons about paying attention are reiterated in depth in a book I recently finished, "Traffic: Why We Drive the Way We Do" . It is full of counter-intuitive evidence regarding driving and safety. Especially noted is that seemingly unsafe situations can be safe simply because people pay attention.
Dan Grossman replies:
I agree with Chris, Traffic is a great book. Both for understanding driving/road safety and for other aspects of life.
Book was the only advice in my life that changed the way I drive. For example, now realizing statistically how dangerous changing lanes is (what a high percentage of accidents are caused by it), I change lanes far less frequently.
Also makes one appreciate how less safe red light cameras (now common in NYC) are: More accidents caused by stopping short at red lights to avoid camera tickets, than by finishing scooting through.
Alan Millhone writes:
Hello Mr. Sogi. I had an old friend that told me , " if you miss one deal there is usually another around the corner somewhere ". Regards, Alan
Legacy Daily comments:
So true… I don't know which is a bigger regret: the buyer's/seller's remorse or the regret of chasing a price to get a fill then seeing the market go back to the original order level. The price frequency distribution helps (not always) against my wrong instincts so the new routine is to remember the eye exercise program in those moments.
1. Blink ten times by closing the eyes as if falling asleep (very slowly). This help re-wet the eyes.
2. Look away from the computer and gaze at a distant object outside or down the hallway. Looking far away relaxes the focusing muscles inside the eye to reduce fatigue.
3. Look far away at an object for 10-15 seconds, then gaze at something up close for 10-15 seconds. Then look back at the distant object repeating the cycle 10 times.
4. Take a break, stand up, move about and stretch the arms, legs, back, neck and shoulders.
Kevin Eilian writes:
Wisewellian - that which effects your move the least effects your opponents the most (courtesy of chair).
If the people had been told the truth about the Civil War (on both sides), they would not have been so gung-ho about having 600,000 of their young men slaughtered over an issue that every other country in the world settled without violence.
And will Doris Kearns Goodwin, Obama, and most of all the original thinkers who read DailySpec, please some day have some slight recognition that Lincoln's was in fact a failed presidency (far bloodier and more bungling than George W. Bush), not to be emulated in any way. While Lincoln was a wonderful speaker, writer and politician, he failed to follow the advice of even his abolitionist cabinet members like Seward not to provoke the South into fullscale war. And most importantly, even after the crazy states like South Carolina had seceded, [his mistake was] not to negotiate to keep in the Union the far more important moderate states like Virginia, North Carolina and Tennessee, as most citizens there (including Robert E. Lee) fervently desired.
Stefan Jovanovich responds:
After people had seen the true costs of the war, they became less enthusiastic; but both sides were as excited and thrilled as a Super Bowl crowd when the thing started. As one State Senator from Georgia said, after it was all over, "After Fort Sumter I promised you that we could whip those Yankees with broomsticks. And we would have. But the nasty so-and-sos refused my choice of weapons." The few temperate-minded people — like Sam Houston and Ulysses Grant — who pointed out that wars were nasty, expensive and stupid and that there was no Constitutional right to secession were either ignored or actively reviled.
The "Lost Cause" school (diLorenzo et. al.) of historians who blame Lincoln for "starting the war" are like the America First diehards who [blame FDR] for conspiring to allow Pearl Harbor to be bombed so we Americans could aid the British. (What I have never understood is how they can be so mad at Roosevelt but have nothing but admiration for MacArthur, who allowed his B-19s and B-24s to be blown up on the runways a day after Pearl.) I can understand the appeal of these dandy conspiracy theories. Blaming the American President absolves the Southern secessionists and Japanese war party from their clear moral responsibility for starting the damn things for truly vile reasons. (Footnote: There is only one substantive difference between the American and Confederate Constitutions; the Confederate one makes slavery a "right"; the WW II Japanese record of violent racism towards everyone else is still so astounding that it does not need to be covered up. Even after you read the record, you have trouble believing the facts. They are that awful.)
Neither indictment will stick. Lincoln had to skulk into Washington on the train because the people in Baltimore were literally mad for secession. After Fort Sumter there were so many volunteers for the Union that potential recruits were turned away on the grounds that they would not be needed. Robert E. Lee did not "fervently desire Virginia to remain in the Union". He resigned his commission and immediately accepted another one from Jefferson Davis himself. As much as Grant respected Lee as a soldier (and threatened to resign his own commission when President Johnson tried to have Lee tried as a traitor), Grant remained convinced that, if Lee had honored his soldier's oath of office to preserve, protect and defend the Constitution and had said so before the Virginia House of Delegates, the war could have been avoided because the vote would have gone against seccession. As it was, it barely passed. Unfortunately, the same cannot be said for North Carolina. Tennessee did have a serious debate, but the vote was never in doubt; and once it was over, the citizens rushed to the recruiting offices. (That is why Peyton Manning's alma mater are called the "Vols ".) The anecdote about Seward is a complete canard. Seward thought he should have been President, and he assumed, as Easterners have done to this day, that a bumpkin from west of the Appalachians like Lincoln would defer to him in Cabinet meetings. When Lincoln had the gall to insist that, as Chief Executive, he would determine policy, Seward began a lifelong campaign to prove that the lawyer from Illinois had been nothing but a "Great Ape" and a bumbler. If Lincoln deserves any blame, it is for his timidity, not his provocative behavior. There is a good deal of reason to believe that if he had followed Jackson's example in the Nullification controversy and immediately sent troops and warships to Sumter (he only sent supplies in a commercial steamer, without even an armed escort), Beauregard and the other nuts in Charleston would have backed down.
But all this is speculation. What is certain is that, once the war started, both sides — being Americans — were not about to back down; and that is a reason to honor all of the people who fought, even those who chose the wrong side. It was their free choice. They were not dragooned or drafted. That is the main reason it lasted so long and was so terribly bloody.
One of the most highly-regarded components of the proposed stimulus package is the computerizing of medical records. Pres-elect Obama says this will save the government $80 billion dollars a year and will in effect pay for covering the uninsured.
Let's analyze this a little, especially since we have many readers owning (or working at) financial firms who know something about computerizing and securing sensitive records, and paying for developing, maintaining and continually updating the IT departments, hardware and software that will be necessary for every doctor's office, clinic, hospital and pharmacy. Computerized medical records may be a good idea, but anyone who thinks this elaborate nationwide IT set-up will cost less than the extremely cheap file folders currently found in most doctors' offices has never had much to do with IT.
Does anyone remember the computer systems development of certain other entities which took years of — and still could not work?
Now let's make the heroic assumption this time it will be different and the Gov will get a national computerized record system to operate within a reasonable number of years, within budget, and properly protecting from unauthorized disclosure everyone's very sensitive personal medical information. Let's think in a slightly sophisticated way about the effect on costs.
Doctors get paid these day (by Medicare, Medicaid and insurance companies) by listing all the diagnostic and therapeutic procedures they carry out for which reimbursement is permissible. When each doctor is computerized and can have his computer instantaneously search through thousands of possibly-applicable reimbursement codes, does anyone think there will not be more codes checked and listed by the computer? Would an average medical bill 20% higher be a reasonable projection?
And how about all the vaunted enhancements provided by a computerized record system such as alerting the doctor to alert each patient when to return for a further test or procedure or for adjustment of the patient's medication? Assuming doctors' offices will be competent enough to comply with such computer alerts, how many more doctor visits and additional charges will this generate, to be paid for by the Gov or private insurance?
And these are just two of the more obvious cost consequences, with more subtle cost consequences sure to emerge as health practitioners learn to game the system. Computerized medical records may be a great idea but anyone who thinks they will cost less, $80 billion less, is smoking dope.
Let's consider the analogy of your financial records — income records, expenses, receipts, stock purchase and sale records, purchase dates and cost-basis records extending over many years — that you keep for calculation of your income tax each year. Some handwritten, some computerized, but from various different, incompatible, software systems.
How inefficient! Why doesn't the Gov develop a uniform computerized financial record system, securely protected from unauthorized access or disclosure, which your tax preparer, or the Gov itself, could use to calculate your yearly income tax? According to the, uh, Brookings Institute, such a national computerized system could save the country $80 billion a year.
Or should we rely on people to keep their own financial records? But wait, the average person is not medically — I mean financially — trained. These records are too important to each person's medical — I mean financial — health to leave to chance. And some people don't even have computers. Or filing cabinets. Nah, let's not rely on relatives or volunteers to help those few; we need a computerized financial record system to take care of everyone.
Okay, okay, enough. It's clear from this reasonably close analogy what the solution is — people should keep their own computerized medical records. And, amazingly, the way to do this already exists on the Internet, for free, without waiting years for an elaborate, confidential, Gov system to be developed.
Take a look at myhealthfolders.com (and I'm sure there are others). For free, you can in a few minutes set up for each family member an online medical record file, protected by a password (which you can change after you have given anyone temporary access). Or an employer, again for free, can set up a medical record file for each employee. And each time you go to a doctor, or to the hospital, or to the emergency room, you (or, if you are unconscious, your medical emergency bracelet or emergency card in your wallet) can reveal the website and password so your medical records can be immediately accessed.
And each time you visit a doctor or hospital, you can ask them to update your online medical file. Or if they are too obstinate or inefficient to do so, you can ask for a copy of your new medical record (which you have the right to by law) and update your online file yourself.
Would some politician please suggest this instead of appropriating billions on it in the stimulus package? And then be forced to wait to see how many years, at what cost overrun, and at what compromise in protected confidentiality, the Gov computerized record system takes?
This is not just a theoretical discussion. Collect your last blood test results, the prescription and otc drugs you take, and go here to begin setting up your computerized medical record file.
Alan Millhone comments:
There will always be millions who remain uninsured in the US unless you are on welfare and get a free medical card that comes along with your welfare payment each month. Also if you are on some kind of disability thru SSI, etc. you get a free medical card with your monthly payment.
On another post I see mention of computerizing medical records. Some years back the government came out with a 'paper reduction act', another farce.
Also any kind of public works project related to schools, bridges, roads, etc. will fall under Davis-Bacon, prevailing wage, Union wages and the money in the project will be eaten alive due to the exorbitant labor costs associated and just the 'big boys' will be able to bid who can secure enormous bonds for the various projects. All this TARP and stimulus money is like pounding sand into a big rat hole. I am just a realist and not a dreamer.
A bridge collapses in Minnesota a couple of years ago and it becomes virtually unanimously agreed that our country's roads and bridges are seriously outdated and the main component of any "stimulus package" should be the rebuilding of our "infrastructure". (That the Minnesota collapse was due to a design flaw rather than age seems to have gotten lost in the shuffle.)
Of course no one really knows how much infrastructure would be appropriate since there is no market in it and building new roads and bridges seems to get decided upon based on such factors as political influence and earmarks.
Let's guess there are a few hundred thousand bridges in the country (depending on exact definition of bridge). If most of them were seriously deteriorating, wouldn't more than one bridge fall down every couple of years? And doesn't the fact that bridges practically never fall mean that they are actually in pretty good shape? Maybe even in much better shape than the minimum needed?
I don't mean to make light of the personal tragedy of the three people who died when the Minnesota bridge fell. But what is going on here? Media crying wolf? Politicians drumming up public fear so they can justify their pork? Statistical and economic ignorance by the media and politicians? All of the above?
Thank goodness there was that bridge to nowhere or we'd have no check at all on infrastructure spending and the stimulus package would be two or three times as large.
Pitt T. Maner III comments:
With respect to infrastructure I wonder if the fiber optic business will at some point make a revival. Thesis being there is a need to maintain and upgrade the Information Highway /Internet. Companies like Corning were once selling at 10X from where they are today. Is there another technology that will replace those older fiber optic lines?
Stefan Jovanovich adds:
As the noted philosopher Homer Simpson once said, "Public transit is for losers." Roads offer individuals choice; "mass transit" is the planners dream. As James concedes, it is also a guaranteed money loser. Roads and bridges actually pay for themselves; the tolls here in the Bay Area have been subsidizing BART for more than 3 decades. The presumption that the dreaded foreigners in the auto and oil industry will benefit disproportionately from road construction is mercantilism at its finest. I thought we all shared the odd notion that the consumers should decide matters, not the producers. (Oh, wait, that would mean a "rescue plan" that focused on the depositors — my bad.)
December 14, 2008 - (Buleumberg News). This evening at a press conference in Iraq, an unidentified assailant threw two shoes at George Bush in rapid-fire succession, which the president nimbly avoided.
Given the lackadaisical Secret Service response - no agents dived to take a shoe for the president, nor returned fire with their own shoes - the breakdown in security was considered complete, and it is expected heads will roll.
It’s not yet clear what shoes were used in the attack, but according to Jane’s, Florsheims (which several experts have suggested they might be) are more of a long-range shoe, whereas the Gucci is favoured by NATO countries for short-range tactical operations (and mess parties). Nike’s may look scary, but they are mostly just rubber and canvas, and generally better suited for crowd control.
It’s not clear how the assailant acquired the shoes, or who financed them, but there’s been no shortage of shoes on the black market since the collapse of the old Soviet Union.
The anti-shoe lobby, born of the sordid Imelda Marcos years, is of course outraged, sparking worldwide demonstrations outside Italian embassies for better shoe-control.
The president had not yet revealed what he plans to do after he steps down in January, but the White House did acknowledge that dodgeball offers have started pouring in from across the country.
Dec/15/2008 03:52 GMT FR/23B
Nigel Davies remarks:
I was quite impressed with the Prez’s deft shoe avoidance and wonder how many other politicians would have shown similar dexterity. For example out of the last three Democratic Prez nominees I believe that only Obama would have shown a similar level of skill.
Dan Grossman agrees:
I agree with Nigel, Bush was very deft in dodging the shoes, with minimal movement, not flinching or making a big deal of it.
Raises the question, what President was the best athlete? Probably Bush 41, at least at time in office, because good athlete and relatively young. A runner and cyclist, undoubtedly an infinitely better golfer than Clinton (even though latter made such a big deal of it) and Eisenhower. But consider:
Bush 39 was a star baseball player at Yale, while Bush 41 only a cheerleader. Bush 39 a wartime fighter pilot, survivor of crash, parachuted on 70th birthday.
Kennedy a good athlete and golfer, although severe back problems.
Ford a star football player, so could well have been best of all, athletic reputation unfairly ruined by Chevy Chase.
Washington was best horseman in Virginia.
Jefferson rode horse for days to inauguration in Philadelphia or some such.
Don't know enough about 19th century presidents.
November 25, 2008 | 5 Comments
I agree with Vic that level of market probably (more than) reflects future difficulties in the economy. But in case this not so, I have been unable to find good articles or explanations of worst-case scenarios, i.e.:
1. What would happen on the downside if credit crunch/market seize-up continues?
2. What in some detail would a "depression" as opposed to a "recession" mean in today's modern context, with all the changes built up since 1930s?
3. Probably most relevantly, what are the downsides of bailing everyone out and of new, larger stimulus packages, which are paid for by borrowing trillions of dollars –not so much how it is repaid, which it never will be, but what gets gets closed out when resources are diverted in this way?
4. Also, downside of uncertainty of continued government measures, and of delaying or not letting markets clear, of keeping bankrupt companies in business, keeping housing and other asset prices from falling to a level that would cause money on the sidelines to come rushing in?
I have not seen good articles or opinions of smart economists or financial writers on the above — can anyone point me to some of these? Or can any readers who have thought about give a quick opinion?
Kevin Depew responds:
1. what would happen on the downside if credit crunch/market seize-up continues?
If the market were allowed to fail, there would be great devastation as many bankers and their friends, including the captains of the so-called "good industries," would go out of business. Then, chaos would ensue as enterpreneurial-minded men and women create untold ways to save and then re-direct capital to all manner of business ventures we can scarcely even imagine.
2. What in some detail would a "depression" as opposed to a "recession" mean in today's modern context, with all changes built up since 1930s?
"We live in a world of euphemism. Undertakers have become "morticians," press agents are now "public relations counsellors" and janitors have all been transformed into "superintendents…But pretty soon the word "recession" also became too harsh for the delicate sensibilities of the American public. It now seems that we had our last recession in 1957-58. For since then, we have only had "downturns," or, even better, "slowdowns," or "sidewise movements." So be of good cheer; from now on, depressions and even recessions have been outlawed by the semantic fiat of economists; from now on, the worst that can possibly happen to us are "slowdowns." Such are the wonders of the "New Economics." - Murray Rothbard (1969), "Economic Depressions: Their Cause and Cure"
3. Probably most relevantly, what are the downsides of bailing everyone out and of new, larger stimulus packages, which are paid for by borrowing trillions of dollars (not so much how it is repaid, which it never will be, but what gets gets closed out when resources diverted in this way)?
"[T]he government must never try to prop up unsound business situations; it must never bail out or lend money to business firms in trouble. Doing this will simply prolong the agony and convert a sharp and quick depression phase into a lingering and chronic disease. The government must never try to prop up wage rates or prices of producers' goods; doing so will prolong and delay indefinitely the completion of the depression-adjustment process; it will cause indefinite and prolonged depression and mass unemployment in the vital capital goods industries. The government must not try to inflate again, in order to get out of the depression. For even if this reinflation succeeds, it will only sow greater trouble later on. The government must do nothing to encourage consumption, and it must not increase its own expenditures, for this will further increase the social consumption/investment ratio. In fact, cutting the government budget will improve the ratio. What the economy needs is not more consumption spending but more saving, in order to validate some of the excessive investments of the boom. Thus, what the government should do, according to the Misesian analysis of the depression, is absolutely nothing." - Murray Rothbard, "Economic Depressions: Their Cause and Cure"
Rothbard wrote this stunning essay in 1969. Today, a mere 39-40 years later, we have succesfully ignored every paragraph, contravened every prescriptive statement and chosen the diametric opposite of every word he wrote.
Nigel Davies writes:
Chess players use the term 'unclear' for such situations, there's no precedent so who knows. So good articles will, by definition, be a contradiction in terms as there's no way to establish an opinion based on any kind of historical precedent. The case of Japan may be very misleading because they experienced a deep recession whilst doing business with a world which was booming (or at least bathing in temporary liquidity).
Of course things may be more understandable when one adjusts one's time scale. When, for example, did we last have three closes up?
GM Davies is the author of Play 1 e4 e5: A Complete Repertoire for Black, Everyman, 2005
Laurel Kenner writes:
Mark Pittman, whom I'm glad to have helped hire at Bloomberg some 10 years ago, reported yesterday that the U.S. government has pledged $7.7 trillion to ease the credit crisis. The total U.S. debt just topped $10 trillion, and does not include most of the new pledges. Mr. Pittman has been way out in front of his media peers on this story.
My other favorite source is Amity Shlaes, a scholar who writes excellent columns for Bloomberg. This year, she published The Forgotten Man: A New History of the Great Depression, and it is quite illuminating as to how the New Deal affected the economy.
There is a tremendous preponderance of negative news. 14 of 16 headlines on my monitor are negative.
Credit defaults are up.
Unemployment is up.
A forecaster predicts Dow 5000.
Recessions are likely.
Yes. As I write this with S&P down 20, is this good or bad? Is the economy in a recession as of March '08 good or bad when it is announced nine months late? it's due to oil prices that we were not in one so far, but it will almost definitely put us in as of 9 30 2008 GDP, and later, because oil prices are added back to GDP and the previous adjustment was way up, and this one way down.
Does this override the 10 P/E and the resilience and the Triumph of the Optimists? One can give up principles or try to manage money properly and take account of laws of economics and the required return that investors demand, let's say 60% a year when VIX is this high.
Dan Grossman adds:
To quantify, the 30 to 1 leveraged assets referred to by Vic that have been/are being reduced or liquidated to create the current environment, at the beginning of 2008 the five largest investment firms (don't know exact definition) held $4.3 trillion of assets.
September 6, 2008 | 5 Comments
Can someone give some explanation why Intrade indicates Obama 59% likely to win and McCain 41%, while the polls show them about even?
Are there any other web sites you find useful in predicting the election?
Alex Forshaw replies:
The polls don't show them as even. Additionally, the most credible polls (Gallup, Rasmussen, ABC/WP) are generally the ones which show Obama with the largest leads.
Real Clear Politics has a summary of some of the major polls.
Tom Marks and Jason Ruspini add:
There are two methods to predict the election.
The prediction markets such as Intrade and Iowa Election Markets (chart) are probably the best predictor. As of 10pm EST today Intrade is giving 57% chance for Obama and 43% for McCain. Iowa is also 53 vs 47.
Another way is to look at polls. However, the polls generally cited by news organizations are national polls which on the surface is fundamentally flawed since it is the Electoral College Vote and not the Popular Vote that determines the election result.
What you must do is look at state polls and infer the Electoral Vote implied by these polls. Fortunately there are some very nice web sites that do the work for you. They automatically look up the results of the latest polls and apply statistical adjustments (such as weighting polls differently depending on accuracy and timeliness, or performing Monte Carlo simulations to incorporate the inherent inaccuracy of any poll) to come up with their forecast.
The three best Electoral Vote prediction sites based on state polls are:
Reading about the methodologies these sites use can be interesting for those who are statistically oriented. Most people probably only care about the result. Currently Prof. Moro gives 314 votes for Obama. Prof. Wang gives him 311 while FiveThirtyEight gives 309 to Obama. (As every schoolboy knows it takes 270 electoral votes to win the election).
In summary, both methods of prediction currently favor Obama. The rough equality shown by some national polls is misleading.
Associated Press (AP) is a cooperative owned by the major newspapers. Its purpose and history have been to preserve the monopoly power of its entrenched owners against newcomers, both new newspapers and others.
Where permitted (most prominently in the agricultural field, for example Ocean Spray Cranberry growers or Blue Diamond Almond growers from whom Victor and I used to buy for our American Almond company), cooperatives are a government-sanctioned cartel allowed to limit production and fix prices.
I was amused recently when my niece, a star at business school, proudly announced to the family she was taking a summer job at AP because it was a "non-profit". When I explained that it was only non-profit in the sense of Ocean Spray Cranberries, designed to maximize the profits of its owning commercial companies, she became quite annoyed.
This "I only want to work for a non-profit" preference of young people is very common these days. Whenever I try to explain that working for a non-profit tends to be less socially useful than working for a "profit", I get nowhere. (My point being that a "profit" has to be socially useful or it would not exist, and ditto for the job they are paying you for. While there is no such feedback or test for a "non-profit" company and job.)
I'd be interested if someone could better explain it, or point to a source that better explains it.
James Florio speaks to students about political life
Issue date: 2/28/08
The discussion ranged from advocacy to energy conservation last week as the College students and faculty listened to former Governor of New Jersey and U.S. Representative James "Jim" Florio share his experiences as a politician. Listeners filled Moyer on Feb. 20, 3-4 p.m., as Florio led a discussion on "Government Leadership in the 21st Century."
Jim Florio is a perfect case study of self-defeating government economic policy.
Before his term as governor, NJ was a prosperous, low-tax state, successfully winning businesses and entrepreneurs from its high-tax neighbors, NY and PA.
Then Florio, in violation of his specific election promises, raised marginal tax rates so much as to transform NJ into one of the highest tax states in the nation — in some ways the highest, if one takes into account all the tricks such as taxing long-term capital gains at the highest rate and not allowing capital loss carry-forwards.
From that time forward the NJ economy has been one of the worst performers, a downward spiral of declining business growth, insufficient tax revenues and continued self-defeating efforts to raise revenues through increased sales taxes and the highest property taxes in the country. NJ has become the state losing population at the highest rate in the country.
And even though right next to the strongest-in-the country NYC real estate market, NJ real estate has been one of the worst.
Jim Birk notes:
PA is not and has never been a high tax state. The only businesses that moved from PA to NJ were offered outrageous government incentives by NJ that PA was wise to not compete with. It is interesting that about half of the NJ state employees working in Trenton live in PA. PA has better housing prices, lower property taxes and a lower income tax than NJ.
The bears pretended to go away last week when the S&P went up 5%. They left a 1 day decline of 18 points on Monday as a gift to bulls to buy, but when they did they were hit with a immediate 5% decline the next two days. Its very similar to the Trojan Horse left by the Greeks and one wonders if it's a general tendency that can be quantified. e.g. is there an inordinate tendency to visit the previous 20 day low?
One of the most non-economic things to a businessman is the inordinate tendency that analysts put on sales increases. One of the first things that good businesses do is winnow their customers down so that only the most profitable are there. The wealth of a business is increased when profits go up, not when sales go up. Any business can increase sales by selling low margin goods at a small profit. But the good businesses try to sell their products to the customers that have the greatest desire for it, as that way they can reduce the consumers surplus and increase profits. There must be some very flawed studies relating to biased data files that showed in the past that sales increases add additional information that the earnings changes don't reveal, and this has probably caused countless investors to sell stocks when profits increase and sales decrease or in the case of Cisco, or Microsoft, and countless others, the forecasted sales increase is not up to expectations. It must make treasurers who are business people very jaundiced concerning the rationality of investors when they run their business well, increase profits, in tough conditions, and find that their stock is killed when the sales level is below expectations. Any closely held business would think it magnificent to increase profits on reduced sales.
Perhaps the signaling effect of sales increases is mistaken for good business sense. I would hypothesize that companies that beat earnings forecasts but miss sales forecasts and go down in price perform substantially better than the averages.
Tarred by the same brush. How many times can the market do down irrationally when this or that indicator, this or that official, signals that the economy is not growing as fast as it has in the past x years.Forget about the fact that each months figures are generally reversed or revised in the next announcement,and that the figures generally are meaningless because of special seasonal adjustments, and assumptions, and political tinkering in many cases, and that sometimes bad sales for a retailer and many others is much better than good sales because it means they got rid of all the good stuff in the previous month. Suppose the worst is true, and the rate of growth slowed from 3% to 0% or -1%. ? The recession would be brief, the bounce would come, and what difference does it make if the economy goes down 1%, then up 4% two years versus up 3% each year. Stocks are supposed to be valued based on an infinite stream of discounted earnings. That's not affected by one years change in the path. Nor are recessions a good time to sell stocks as the same way when the market turns down when the news is recessionary, the market will look for any silver lining for a change in direction when the economy is in the doldrums.
The Nikkei which closes at 0115 gmt continues to forecast the US market with reasonable accuracy . The most recent was the 5% decline on 2 06 in Japan which forecasted the subsequent 2% decline in the US on 2 06. The Nikkei closed at 13080 on wed morning in the us. It is trading at 13060 as I write, up from a 13005 open.
Dan Grossman wonders:
Perhaps modern tech businesses like Microsoft and Cisco have such high gross margins that sales are always profitable and it is never good to have sales growing at less than forecast by management or predicted by analysts.
You and I are used to old-time businesses with low margins and high overheads that have variable aspects. In these businesses it would sometimes be valuable to get rid of less profitable customers. But perhaps in the software business with 70 and 80% margins, no customer is worth getting rid of.
Steve Leslie comments:
I have always thought that earnings can be anything you want them to be, based on accounting choices such as depreciation rules, depletion, inventories, not to mention shell accounts (ENRON), outright fraud, and other sophisticated techniques and methods. However sales are what they are. You either sold a product or you did not. It is a more objective indicator.
Price to Sales Ratio (PSR) is just one useful measure. I am sure there are a host of others that the fundamentalist can use to extract information out of a company’s cash flow statement and balance sheet.
I like to use services such as IBD and research companies such as Zack’s and Value Line to provide valuable information and I go from there.
Given the remarkable performance of older players like Clemens and Pettitt, has anyone pointed out that perhaps one of the main thrusts of investigation should be whether there would be a beneficial effect for all of us in using moderate replacement quantities of substances like steroids and HGH that decline significantly with age?
I for one would like to know more and would appreciate article citations, book recommendations, and information on physicians specializing in the field.
Chris Cooper replies:
Such beneficial effects are apparent to anybody with an open mind. Nevertheless, the idea that a performance-enhancing drug might actually make you healthier is the kind of message that is not acceptable to the mainstream. Aging is not "normal", it is a disease, and should be attacked like any other disease, with an eye to minimizing the deleterious effects.
What you are referring to is often called hormone replacement therapy (HRT). The approach is to use drugs and nutrients to bring the body's hormonal balance back to what it was when you were a young man. Is it surprising that if you achieve this, you actually feel much more like a young man? Why does our culture consider this to be undesirable? My goal is not simply to be healthy as it is commonly defined, but to strive for optimal health, a very different concept.
A good book to start with was written by my doctor Philip Lee Miller, called Life Extension Revolution: The New Science of Growing Older without Aging. Dr. Miller is in the SF Bay area. Also I've heard good things about the Kronos Centre in Phoenix.
Janice Dorn writes:
One of the contributors to my just-released book is a world-renowned authority on optimal health. I took nine years of my life, and traveled 1.5 million miles outside of the United States to every country in the world (some many times) in search of life extension and radical wellness methods. Needless to say, it was an incredible journey, and it continues to this day.
Caveat Emptor. There are many charlatans out there, and we are in largely-uncharted waters. It is a passion for me, and I believe that the goal in this area of life is to delay, avoid and eventually reverse death.
Jim Sogi suggests:
Perhaps a better way is hard effort. I still get out and surf 20 foot waves last week and take time to surf at least four times a week and train when there is no surf. No pill will keep you in shape without effort. Just the thought of a pill is enough to kill the will to motivate effort required to maintain and build strength, flexibility and stamina. It's like technical analysis, it offers an easy way without the work, and will lead to more harm than good. I see many men really going downhill. They don't stay active. Laird Hamilton says, "Keep Moving!" That is the best way to stay fit. I compete with the young guys everyday in a competitive lineup in the water for waves. I can't outperform them, but have other strengths which give advantage. It's hard work. It takes hours everyday to stay moderately fit, and more to build strength. That's the problem, most don't and won't take the time and effort to maintain and build strength and gradually lose it. Strength from a pill won't help without the agility, flexibility and stamina that are the other components of fitness. Don't worry about the pill, just get out and spend the hours everyday to stay fit.
Chris Cooper responds:
Yes, a better way is hard effort. I have gotten more benefit from the sports that I train for than I have from the drugs that I take. The drugs are an incremental benefit, though, and I am certain that I am better off with them than without them. And you may find, as I do, that instead of being de-motivating, they actually increase one's desire to participate.As an example, suppose you are taking testosterone. If you are not exercising, it will do little to build muscle. You still get the other benefits, such as general feeling of wellbeing, increased libido, increased optimism. It enables you to build muscle faster, because that only happens if you put in the effort. It's not magic, you still have to do the work — but testosterone also makes it possible for older men to train as hard as they did when they were younger, because your body will recover more like it used to.
Larry Williams opines:
The flap about HGH in baseball is pure propaganda, based on my personal extensive testing of it. I concluded it was expensive and of little, if any help, in waging the war against old man age — a view that is now also backed up by science.
Ken Smith responds:
Studies are studies and not reports from individuals. I am an individual. The studies cited older people. I am an older people. My individual report differs from the studies as reported.
I can tell you resistence exercise will promote better body tissue and that the same exercise will tear tendons, ligiments, induce on-going pain. There came a time when the benefits diminished and the pain increased.
I am reminded of a story told by an author about his last visit with his grandmother. She was quite old, in her 90s As they conversed during her feeble days, on one of those days, her last it turned out, she asked him for a small glass of wine, told him there was a time for everything, sipped the wine, closed her eyes and passed on to the next dimension.
Russ Humbert remarks:
I would not be so quick to rule it out Growth Hormone for enhancement. The Chinese women seemed to have had much success with using it for distance running in the mid 90s. Several of the women were running times better than the men. However, they also ran extreme high mileage and were practically starved while setting several women's world records before their coaches where caught transporting drugs through customs before an international competition. Several of the stars went insane under such a regiment.
Charles Pennington enquires:
I'm open-minded about this, and I went as far as to buy the book written by Chris's physician, who seems like a reasonable guy. But the Life Extension directory of doctors isn't re-assuring. There is just one doctor listed in Manhattan, Dr. Majid Ali, whose website is Fatigue.net. Featured there are "Hydrogen Peroxide Baths and Foot Soaks" "The Oxygen View of Pain Management," "Bowel Detox," "Water Therapy," and "Dr. Ali's Castor-cise."
I also checked for a practitioner nearby in Connecticut. Doctor Warren Levin, in Wilton CT, is at Medical-Library.net. The general garishness of the site, the endless list of specialties — "Magnetic Field Therapy," "Juice Fasting Therapy," "Auriculotherapy" — and even the Ron Paul promotion (Ron Paul == more permissive environment for quacktitioners [which is fine]) all leave me skeptical.
I wonder if Chris's physician could recommend someone in Manhattan who has a more rigorous, scientific approach than these guys.
Chris Cooper replies:
Perhaps these links will be more productive:
Steve Leslie extends:
I think back to the 1960s when the medical profession and the tobacco industry discounted the evidentiary link between lung cancer and smoking as anecdotal. And for 40 years after that the tobacco industry still fights in courts as to smoking and COPD, lung disease, heart disease and emphysema — long after they have paid billions of dollars to settle various class action lawsuits and agreements with attorneys generals throughout the country and have watched 450,000 American citizens die every year from smoking related illnesses.
I watched my father wither away and die as a result of a lifetime of smoking cigarettes.
Now some want to debate that the beneficial effects of steriods and HGH in adults outweigh the anecdotal risk. And I think of those in professional wrestling such as Chris Benoitk who committed multiple murders of his family and then suicide, professional footballers such as Lyle Alzado, dead from brain cancer, professional baseball players such as Ken Caminiti, dead and an avowed steroid abuser, high school boys by the tens of thousands who experiment and take steroids and commit ‘roid rage and suicide, and the untold thousands of recreational users who develop enlarged hearts and forms of cancer such as prostate cancer while juicing just to get bigger muscles.
Chris Cooper clarifies:
There is no medically documented connection between suicide and anabolic steroids. The medical data also say, "Supraphysiological doses of testosterone, when administered to normal men in a controlled setting, do not increase angry behavior." 'Roid rage is a convenient media myth. Steroids may very well cause changes in feelings, but that is far from causing major behavioral changes like those suggested above.
Take Chris Benoit as an example. When doctors examined his brain they found that it resembled the brain of an 85 year-old Alzheimer's patient. It had suffered so much trauma and had so much dead tissue that normal function was not a possibility — while dangerous personality, behavior, and temperament changes were more than probable. During his time as a professional wrestler with the WWE, Benoit had subjected his body to head trauma hundreds of times, most notably with his signature "Flying Head Butt" as well as dozens of other highly flashy (and dangerous) moves.
Steroids are being unjustly demonized, just as marijuana was in Reefer Madness, followed by equivalent media behaviour regarding LSD, Ecstasy, and many other drugs. Certainly steroids have their downside, and just as with recreational drugs, should certainly not be used by minors. But perspective is not allowed in times like these, where fear is inflamed to further the objectives of those who will benefit.
Steve Leslie continues:
I dispute Mr. Cooper’s assertion that the is no medical documentation connecting steroids and suicide or rage. That is ridiculous. At a Senate Caucus hearing Don Hooten testified that his son Taylor, while in high school, began using and abusing steroids and committed suicide.
Mr. Cooper furthermore claims that Chris Benoit murdered his family and then committed suicide because of years of suffering numerous concussions and possible dementia. Did he personally perform an autopsy on Mr. Benoit? Has he examined the autopsy report? Where does he draw his conclusions from? In short, what specific research does he quote? Furthermore, what are Mr. Cooper's qualifications in forensic pathology and/or psychiatry?
Mr. Cooper further argues that it is some sort of a myth, steroid usage and its association with massive mood swings and subsequent rage. He then compares steroids to marijuana and says that it is being demonized by an uninformed public. Not to stop there he equates such unfair demonizations with LSD and ecstacy and “other drugs.”
He diminishes the risks to an absurd level and I am severely shocked and alarmed.
Chris Cooper responds:
Don Hooten runs the Taylor Hooten Foundation, established after his son committed suicide. Now Mr. Hooten runs around the country telling everybody that it was because of steroids, when there is no evidence pointing to that. According to Steriod.com,
There had been no active anabolic steroids in Taylor's body for two months prior to his suicide (according to a report on the THF website) At 17, when he killed himself, his hormone levels had likely returned to completely normal, and only metabolites of nandrolone (not active compound) were still detectable.
And no, I didn't personally perform the autopsy. But here is a quote from the doctors who did, via SportsLegacy.org,
SLI's tests showed that Chris Benoit's brain had large amounts of abnormal Tau protein in the form of Neurofibrillary Tangles (NFTs) and Neuropil Threads (NTs). Multiple NFTs and NTs were distributed in all regions of the brain including the neocortex, the limbic cortex, subcortical ganglia and brainstem ganglia, and were accompanied by loss of brain cells, a condition for which no other neuropathological evidence for any chronic or acute disorder could be found.
Gordon Haave adds:
It is silly to say that one can't quote the work of someone else. That is, one can't comment on an autopsy unless one performed it himself. If we took such an approach all of the time, there would be nothing to write about.
Furthermore, in the interest of scientific inquiry, providing anecdotal stories to a statement about a lack of research does not prove anything. I have no dog in this fight, but I admire people who challenge orthodoxy.
Police and government officials seem to feel there is a legal distinction between rights and privileges. For example, driving is frequently referred to as "a privilege, not a right."
Despite having attended Harvard Law School (maybe I was asleep during the privilege discussion), I am unable to follow this distinction for such a basic means by which one is able to get around in modern society.
Especially for this liberty-oriented site, I would think driving is clearly a basic human right, like free speech or walking or s-x. Subject to reasonable regulation perhaps like having to take a driving test, or not having been convicted of drunk driving. But it seems to me everyone who complies with this reasonable regulation has an absolute right to drive.
While I would be wary of questioning such a favorite phrase when next stopped ("Officer, I think you are playing with words: Driving is obviously a right, not just a privilege"), is there some distinction here that means something or is it just officious silliness?
Russ Herrold replies:
tFrom ancient memories, formerly rights/privileges had differing meaning, but there is a line of cases post-Reconstruction, keying off the 14th Amendment's application of federal Constitutional limits upon the states ('Privileges and Immunities') at the federal Supreme Court. That line whittled away to nothingness the former [Founders'] distinctions of States Rights vs Federalism, and with it, the judicial need for a way to distinguish and dis-agregate rights from privileges.
J.T. Holley writes:
I was taught by my father (a truck driver) that it was a privilege to drive on Interstates! They were built by the "Gummit" and maintained by the States. Now where I'm from anything dirt or gravel is your own and is a right.Don't know if anyone has every written or spoken of roads but to be observant you can see the straighter the road the more a privilege, the curvier the more a right! I guess out West it's a little different? If you go through rural Virginia you see wavy roads that meander. Most visitors ask "why is it so curvy?" The reason is that they go along property lines. Those lines can't be violated, and if so then it is a privilege to do so, but if you remain on your own property then it's a right to do so!
"Sometimes the British Shoot an Admiral to Encourage the Others." Horatio Hornblower's Worst Nightmare By William S. Lind
The tiff over maritime boundaries in the Shatt-al-Arab between Iran and Great Britain seems to be over, with the British sailors and Marines released and returned to the U.K. I continue to suspect a deal was made regarding the five Iranian Revolutionary Guard officers held by the U.S. in Iraq. If they go home in a few weeks or months, it will be a quid pro quo, regardless of how much Washington and London deny it.
For Britain, and especially for the Royal Navy and Royal Marines, the incident ended in utter disgrace. The initial surrender of the British boarding party to what appears to have been a much larger Iranian force is the only defensible British action in the whole sorry business. Even in Horatio Hornblower's Royal Navy, a British frigate captain was not disgraced if he struck to a French or Spanish ship of the line. Force majeure remains a valid excuse.
But everything else that was said or done would have given Hornblower or Jack Aubrey an apoplexy. The failure of HMS Cornwall to foresee such an event and be in a position to protect her people; the cowardice — there is no other word for it — of the boarding party (including two officers) once captured; their kissing the Iranian's backsides in return for their release; and perhaps most un-British, their selling their disgraceful stories to the British press for money on their return — all this departs from Royal Navy traditions in ways that would have appalled the tars who fought at Trafalgar.
Yet that is not the worst of it. The worst of it is the reaction of the Navy's higher-ups. According to a story in the April 7 Washington Times, the Royal Navy's top commander, Admiral Jonathon Band, leapt to the boarding party's defense with virtually Jerry Springeresque words:
He told the British Broadcasting Corp. he believed the crew behaved with "considerable dignity and a lot of courage" during their 13 days in Iranian captivity.
He also said the so-called confessions made by some of them and their broadcast on Iranian state television appear to have been made under "a certain amount of psychological pressure."
"I would not agree at all that it was not our finest hour. I think our people have reacted extremely well in some very difficult circumstances," he said.
Had the captives been 10-year old girls from Miss Marples' Finishing School, Admiral Band's words might make some sense. But these were supposed to be fighting men from the Royal Navy and Royal Marines! Yes, I meant men. What Politically Correct imbecile detailed a woman to a boarding party?
To understand just how bad the whole business is, one must first know a bit about Hornblower's navy. In the latter half of the 18th century, the Royal Navy developed and institutionalized what we now call maneuver warfare or Third Generation war. By the Napoleonic Wars, it was all there — the outward focus, where results counted for more than following orders or the Fighting Instructions; de-centralization (Nelson was a master of mission-type orders); prizing initiative above obedience; and dependence on self-discipline (at least at the level of ship commanders and admirals) . It is often personified as the "Nelson Touch," but it typified a whole generation of officers, not just Nelson. In the 19th century, the Royal Navy lost it all and went rigid again, for reasons described in a wonderful book, Andrew Gordon's The Rules of the Game. But Hornblower's and Aubrey's navy was as fast-acting, fluid and flexible at sea as was the Kaiserheer on land.
I told Andrew Gordon that I would someday love to write the intellectual history of that first maritime incarnation of maneuver warfare; he replied that the source material to do that may not exist, since Royal Navy officers of that time were not writing things down. He may be right, but I think one incident holds the key to much of it: the execution by firing squad, on his own poop deck, of Admiral John Byng.
In 1756, at the beginning of the Seven Year's War, the French took the island of Minorca in the Mediterranean from the British. Admiral Byng was sent out from London to relieve the island's garrison, then under siege. He arrived, fought a mismanaged battle with the attending French squadron, then retired to Gibraltar. Deprived of naval support, the garrison surrendered. Byng was court-martialed for his failure, found guilty, and shot.
The reason Byng's execution played a central role in the development of maneuver warfare in the Royal Navy is the main charge laid against him. The capital charge was "not doing his utmost" in the presence of the enemy. In other words, Byng was executed not for what he did, but for what he did not do. Nothing could have done more to spur initiative in the navy. As Voltaire famously wrote, "Sometimes the British shoot an admiral to encourage the others." Encourage the others to take initiative and get the result the situation demands is exactly what it did. Without Byng, I doubt there would have been a Nelson.
Byng's execution points directly to what went wrong in the Royal Navy in the Shatt. It is not so much what people did as what they did not do. Neither the fleet commander nor the commander of HMS Cornwall prepared for such a situation. When it happened, Cornwall did not react. The captured sailors and Marines did not think about anything except their own skins. The Royal Navy, as represented by Admiral Band, seems decided to do nothing about its disgrace except pretend it did not happen.
It is perhaps appropriate that the Royal Navy's senior officer in the boarding party was a Lieutenant Felix Carman. The whole business represents Hornblower's and Aubrey's worst nightmare: the Brits have become the Dons.
William S. Lind, expressing his own personal opinion, is Director for the Center for Cultural Conservatism for the Free Congress Foundation.
Towards the end of a verbose survey of contemporary doomology in today's Financial Times, Larry Summers offers his policy nostrum.
If, as may prove the case, the dominant economic concern becomes a shortage of demand, it is incumbent on the Fed to provide stimulus so as to maintain conditions for growth and financial stability.
Daniel Grossman adds:
The recent spate of Larry Summers' economic/market pronouncements is probably an attempt to burnish his image as a prestigious consultant to hedge funds and financial firms. Moreover, it might be to signal his interest in leaving the Harvard that denigrated him in favor of a leading cabinet post in a future Democrat administration.
It appears one can talk one's personal availability book as effectively as one's investment book.
I don't know why the recent remark from Prince Charles annoys me so much more than any other politically correct celebrity pronouncement. I guess it's just that this elitist wimp, who has never worked a day in his life, would casually call for the "banning" of the world's largest restaurant chain, a company that provides clean food (not to mention Professor Pennington's morning Egg McMuffin) at reasonable prices to literally billions of working people and their families worldwide. It is so mind-bogglingly inappropriate and unintelligent.
Nigel Davies writes:
This, from YouTube, will make you feel better, we Brits have used it for years.
From Peter F. Drucker, The Essential Drucker:
"There are innovators who are 'kissed by the Muses,' and whose innovations are the result of a 'flash of genius' rather than of hard, organized, purposeful work. But such innovations cannot be replicated. They cannot be taught and they cannot be learned….
"But also, contrary to popular belief in the romance of invention and innovation, 'flashes of genius' are uncommonly rare. What is worse, I know of not one such 'flash of genius' that turned into an innovation. They all remained brilliant ideas.
"The purposeful work of innovation resulting from analysis, system, and hard work is all that can be discussed and presented as the practice of innovation…. And the extraordinary performer in innovation, as in every other area, will be effective only if grounded in the discipline and master of it.
"Purposeful, systematic innovation begins with the analysis of … the seven sources of opportunity: … [which are] the organization's own unexpected successes and failures … incongruities … process needs … changes in market structures … changes in demographics … changes in meaning and perception … [and] new knowledge. All sources of innovative opportunity should be systematically analyzed and studied. It is not enough to be alerted to them….
"An innovation, to be effective, has to be simple and it has to be focused. It should do only one thing; otherwise it confuses. If it is not simple, it won't work. … All effective innovations are breathtakingly simple. Indeed, the greatest praise an innovation can receive is for people to say, 'This is obvious. Why didn't I think of it?'"
Dan Grossman writes:
In considering innovation/invention, I would add the US probably has a more flexible society for welcoming change, and a more varied capital market for financing innovation, which is probably why innovation seems to do better here.
The current popular explanation for the market's persistent strength is "worldwide excess liquidity" (a la Sam Zell's singing Christmas card).
Under this view,
1) Where is all the excess liquidity coming from?
2) And why is there more liquidity being created now than in normal other good economic times?
Dan Grossman writes:
Maybe the world is awash in liquidity and maybe it isn't. But the central banks of the number 1 and number 2 economies are restrictive and have been that way for some time:
Jim Sogi writes:
I am sure everyone has noticed that the market refuses to go down. Every time the bid pauses, after a small airdrop, buyers come back to bid it back in force. The liquidity is a tectonic event, like the movement of plates. Once put into motion by years of pump priming in the US, in Japan, in China, it is hard to hold back.
While the monetary authority is restrictive in its pronouncements, it is not necessarily so in practice, with low rates below short-term rates, which would cause liquidity to flow to equities under the Fed model. Typically, as with any political movement or group situation, once a consensus is created it is hard to change the direction and the momentum tends to overshoot the changing circumstances. It is a typical group dynamic caused by the difficulty of getting people to agree. And as with the gambler's being more certain once the bet is made, decisions become etched in stone and are hard to change. When currencies move, they tend to overshoot their mark. When risk is deemed to be low, the consensus continues even beyond the time and circumstances justify. Remember 1995? It seemed the market was really high then. But it shot up like crazy over the next five years.
Old metrics of liquidity such as M3 don't work. George and Phil mentioned the role of derivatives. Is there a way to measure the derivative market? What are the indicators? Currencies measure the relative strength of flows of capital, goods, and fiscal and monetary balances between nations, and are important measure to consider in a multivariate way similar to gold and commodities that reflect and predict equities.
Japan's new equity highs and yen lows reflect a political and economic dynamic of a growing economy with its monetary gear in reverse. Very odd. Both the US and Japan benefit from weak currencies against the Euroland, and despite the jawboning and posturing, the currencies stay low. The fiscal power is exercised by the Executive but the power, in theory, is in Congress. This is separate from the monetary power of the central banks. The two are related, but are not formally coordinated. The size of the currency markets surpasses equity and debt and is subject to intervention in scope beyond both.
As the floating fiat currencies mature, the competition between nations may become more intense. While liquidity is good, now, there is not much of a squeeze. Reading some of the old books, there were some tense moments when bars of gold had to be shipped from England to New York to keep things afloat. Benjamin Franklin argued for printing money to stimulate commerce. All nations have incentive to inflate their currencies to keep growth from falling back into recession. What happens when the confidence, rather than gold, that keeps the currencies afloat turns dark?
It's a very difficult issue to understand. Thanks all for your help.
Bud Conrad writes:
Nice charts. I appreciated your sharing them. I agree with your base point, and want to see if I understand the importance of this analysis.
A little more explanation would help me apply the observations. The red curve fit looks like it is at a higher rate for the Japanese. Can you give me your fit percentage annual growth for each? The size is hard to read on my small screen.
Do you have an explanation of the big drop in Japanese monetary base? I think there were shifts in the policy of the BOJ in May 2006, around going off the Zero Interest rate policy but I can't recall the actions taken. Would they fit though the Japanese end point were higher or lower than the US? Is the monetary base an important measure now that there is so much credit created outside the banking system that is not regulated, and for which there is no reserve requirement, and now people prefer paper money to credit cards?
From Bill Rafter:
U. S. Monetary Base is the combination of currency in circulation and deposits in Federal Reserve Banks. It is released bi-weekly in seasonally adjusted form by the St. Louis Fed. It is also released weekly in non-seasonally adjusted form. I can seasonally adjust the weekly data myself, but then I would be the only one with that data. Since much of market action is sentiment-based, it's best to see what everyone else is watching, so I use the default.
The Base must grow at the rate of the population growth and economic growth or risk causing deflation. Thus in the long run the Base growth will be exponential with some positive and negative feedback influences. The best way to fit it would be with a parabola. That's what the red line represents. The software that I use (our own*) does that easily and produces the formula giving the growth rate. Off list, I will send you a text file with the base and parabolic fit numbers. What is absolutely amazing is that the fit is so perfect from inception. To me this means that there is a "natural" target for the Base. Whether the Fed admits to a target or not is inconsequential. One exists. Once you have acknowledged that, then it is a small step to say that growth in excess of the target is accommodative, and less than it is restrictive. The two spikes (Y2K and 9-11) prove that the Fed has control.
The Japanese Monetary Base numbers are available monthly. They consist of currency and deposits and are available raw and ARIMA adjusted. I used the latter in my chart. The Bank of Japan did have an inflation epiphany last May, when the numbers showed a huge contraction. Some have attributed the sell-off in our equities markets at that time to the BOJ action. Yes, the growth rate in the Japanese Base is considerably greater than that of the US. Please don't flame me for saying so, but I attribute that to (a) inexperience and (b) BOJ having less independence from the government than our own Fed does.
Credit is created outside the central bank infrastructure, but sooner or later, that money hits the banking system where it is recorded in the Base.
Note to members: I would be happy to produce additional information based on monetary numbers from other countries. Send me links. Europe would be particularly useful. Australia and Russia are probably just warts on the elephant's butt. China is a question mark. I assume that even the rural areas are somewhat dollar-influenced. I don't know how China's banking system works, but assume it is run by benign neglect. Therefore, a lot of what goes on there shows up in the U.S. numbers.
* To all: I have previously offered the software free to list users. That offer still holds. Just send me an email if you want a serial number.
December 18, 2006 | Leave a Comment
John D. Rockefeller took the high road in everything he did. He was a great businessman with grand visions: of constantly expanding his markets by lowering his costs, of improving quality and expanding the product line, and reducing costs so that more consumers could enjoy the benefits of things such as illumination and transportation. His philosophy for the future included buying during panics.
I am naturally an optimists, and when it comes to a statement of what our people will accomplish in the future, I am unable to express myself with sufficient enthusiasm.
He was a master at vertical integration, and here are some of the innovative things he did in the last 19th century to lower the price of his basic product, kerosene, from 18 cents a gallon in 1870 to 2 cents a gallon by the end of the century. He built the most modern refineries to leave no part of the crude oil he bought unused, his chemists developing a hundred products including Vaseline, Maybelline, wax. He produced his own barrels to store the oil, manufactured his own sulfuric acid and glue, grew his own trees, built his own wagons.
He was a master at marketing. He created the first World Wide brand, the Standard Oil Co., created and operated a fleet of boats to transport the product, built his own storage facilities and railroad ties, built and operated his own pipelines, sold directly to the consumer, and had his own purchasing agents in the oil field. He developed a world wide export business.
There is no man in American Business who has been more unjustly criticized than him. His business plan was to constantly lower the price of his product and increase his markets. When he did such for products like kerosene and gasoline, lubricating oil, wax and paint, he increased consumer surplus, and therefore the consumer’s wealth. His average cost curve was lower than that of other competitors due to everything above, and due to his superior management abilities and technology. There were increasing returns to scale that Pashigian attributes to such things as how the cost of a pipeline increases by a linear factor of the diameter yet the volume of oil increases by the square of the cross sectional area of the pipe. From 1870 to 1895 the Standard reduced its cost of manufacturing kerosene from 18 cents to 2 cents, and during the 1870 to 1900 period he was able to increase his market share of the refining business from 25% to 85%. He did this by reducing his cost of refining oil from 3 cents to 1/2 a cent per gallon and passing the resulting reductions in the costs on to consumers in the form of price reductions. This contributed to the common person, being able to read during the night, and the replacement of highly inflammable whale oil with kerosene in lamps.
Naturally his competitors tried to get laws passed that would protect them from his cost advantages. They accused him of getting rebates for large use of the railroad, but such rebates, as Vanderbilt announced, were available to anyone with such volume of business. They accused him of predatory pricing, but economists agree that there was no evidence that such pricing existed, and if there had been predatory pricing, it would have been detrimental to the Standard Oil Co. as they would have lost on their much higher volume of production. The main beneficiary would have been the consumer during the low price era, as their consumer surplus increased further. He was accused of buying out competitors at distress prices, but he probably created more wealth by buying out hundreds of inefficient refiners and offering them cash or stock in the Standard Oil Co., than anyone else in early business history.
As an aside, various old multi-millionaire wives of former owners have been trotted out to complain that they wish their husbands had not sold out to Standard when they did, on the theory that there is no better way to discredit a man’s reputation than to accuse him of meanness to a woman, but in every case any fair minded person would have to conclude that such complaints were unjustified as the the widow’s own advisers and relatives have often weighed in against the misgivings.
Indeed there is no person in business history who has led a more exemplary life, created more wealth for the consumer, given more to charity, including the forming of the Rockefeller University, the founding of the University of Chicago, and the forming of the Rockefeller Foundation. It is natural that the enemies of capitalism would have to vilify him and make him out to be what Matthew Josephson and the Palindrome call Robber Barrons without any reference to the facts on hand, which are well described in books by Alfred Chandler, and Allen Nevins, and articles and books by Burton Folsom.
In a subsequent installment I will detail some of the lessons I have learned from reading these books, and The Random Reminiscences of Men and Events by Rockefeller himself.
James Morin adds:
I am about half way through Titan, the Life of John D. Rockefeller Sr. by Ron Chernow … full review to come … but it is an incredibly engrossing, unbiased and detailed account thus far, and much of what Vic mentions is well represented; a highly recommended read.
Dan Grossman offers:
I am afraid I must respectfully disagree that Chernow’s book is unbiased.
It is the engrossing story that makes the book a good read. But Chernow is biased as well as unknowing on economic and business aspects. At his ending appraisal Chernow quotes JD’s accurate and even exciting statement that he did more good for more people by operating Standard efficiently and reducing the price of kerosene than by all his (massive and creative) philanthropy, but Chernow fails to begin to understand the quote and goes on to discuss the puzzling contradictions between John D as a grasping monopolist and philanthropist.
Since this was an authorized biography for which the family opened its historic files, the Rockefellers should be ashamed of themselves for participating in the sullying of the reputation of their founder and greatest member.
Along this line, see the extraordinary recent public letter to Exxon (current name of Standard) by Senator Jay Rockefeller unsubtly threatening them with massive opprobrium and government action for financing research on global warming with which he and other demagogic senators do not agree.
December 4, 2006 | Leave a Comment
We have often talked about the signaling effect of hubristic utterances like “We are the best”. “We are first in class, best in class, and I believe we will own this class for as long as it exists” said John La Mattina, Pfizer’s senior vice president for global research, in a November 30th, meeting with analysts. In retrospect, Mr. La Mattina must have known about the problems brewing with Torcetrapib, and this must have been troubling.One wonders about the statistical significance of 82 deaths out of 7,500 for the combined regime of Lipitor and Torcetrapib, versus 51 deaths among 7,500 people for the Lipitor regime alone. This is a statistic that should really be computed by re-sampling. One would take a 1.1% probability and a 0.7% probability and run 7,500 trials for each, noting the difference in proportions random numbers. Then repeat 10,000 times to come up with the probability of observing a difference of 31 in 2 groups of size 7,500. Not having the artful simulator around, one uses the formula below.
The standard error of difference between proportions is the square root of: p1 q1 / n1 + p2q2/n2, where p1 is close to 0.01 and q1 =0.99. Thus, the standard error is the square root of (1/100x 7500 + 99/100 x 7500), or 1/86, so the difference is some 22 standard errors away from expectations. This is a very big number, and re-sampling would not change it that much … but this is also an artifact of small standard errors for small proportions.
Despite this, this kind of exercise shows what is wrong with decision making based on the chances that something can do harm rather than based on the expected value of costs and benefits. One has seen many lines of evidence that these drugs have much life enhancing value. And is a difference of 31 deaths per 15,000 — let us say 150 years of total life expectancy — really comparable to the benefits that such a drug might have vis a vis reduced heart attacks, and enhanced life expectancy. Probably not even close.
Multiply this by the hundreds of drugs not approved, the thousands that do not get tested at all because they have risks, and the other tens of thousands that do not get invented because only the billion dollar companies can afford tests like this at all (consider the approximately 1 billion dollar cost to test a drug like this), and you see the incredible loss to life.
It would be like not using a system because it loses big 30 times out of 15,000 without taking into account how many times it makes big.
Roger Longman adds:
You heard, I suppose, that they have now completely abandoned Torcetrapib? No one knows the data, but the independent monitoring board killed it… apparently independent of the hypertension issue.
In any event, I completely concur about the predictive use of hubristic utterances, as we’ve seen with Rumsfeld, Cheney, Bush & Co. And it is particularly ridiculous with drugs.
Dan Grossman comments:
While I want to think further about the implications, my initial reaction centers on the massive misallocation to one fairly marginal drug category (anti-cholesterol) caused by the combination of dinosaur drug companies like Pfizer and overly expensive, overly time-consuming, mandated statistical testing and approval procedures, (This appears a fairly equal alliance and I am not blaming only the government.)
Anti-cholesterol (anti-lipids) is one of the only, actually the only, drug regimen where the favorable circumstance of government and medical recommendation, easy and understandable measurement through an annual blood test, and effective drugs and marketing, has been able to convince tens of millions of healthy consumers to take a drug every day at an annual cost of some $25 billion.
But this category has now succeeded. Cholesterol levels have fallen and, perhaps partially as a result although it is far from clear, so have heart attacks. And now there are generics (and Pfizer’s $12 billion Lipitor will in a couple of years also be a generic) that can bring about the same result for pennies a day. So the therapeutic problem is now taken care of at low cost, the $25 billion category can be cut to a couple of billion, with great cost saving and benefit to the public.
But Pfizer has not read Schumpeter, and with its $12 billion Lipitor grandly insists on “owning” this category “as long as it exists”, the way Proctor & Gamble or somebody might “own” the multi-billion dollar toothpaste category. It cannot give it up, even though there are probably only marginal advances in cholesterol lowering to be made in return for increasing billions of dollars chasing hoped-for slight advances, and any molecule with a slightly different mode of action that can desperately be combined with Lipitor and thus perhaps extend Lipitor’s patent life.
So Pfizer, and Merck, and Astra-Zeneca, and now Abbott with its multibillion dollar acquisition of KOS, will now spend a hundred billions dollars (literally, look at their research budgets) on this drug category that has already succeeded, instead of in a truly free, Adam Smith market where the natural incentives would be to spend the money in drug categories far more needed for the cure of disease and the advancement of human health.
John Tierney mentions:
What I would also like to know is the expected mortality rate for a study of this kind, a study involving subjects and drugs of these kinds. Clearly the Lipitor-only mortality rate of 0.68% must be well-below the threshold, otherwise there would be calls for it to come off the market as well. But there are none. And apparently the combination mortality rate of 1.09% is well over the expected mortality rate, and hence the rush to end the trials. Casino operations, I am told, make or lose money based on small differences in the percentage that the house is favored in games of chance. Pharma shouldn’t be reduced to such a state. For an interesting article on this …
To me the most significant lesson of recent international military undertakings has been how a country's taking action risks sacrificing what that country previously enjoyed in the power, reputation and deterrence of potential action.
For example, going back to the 1967 and 1973 wars, the Israeli military had the reputation of being unbeatable by its Arab neighbors. This gave Israel very valuable deterrent protection against its hostile, far more populous enemies.
But when Israel launched a major attack on Hezbollah in Lebanon and was unsuccessful in that Hezbollah was able to fight it to a draw, major damage was done to Israel's military reputation and deterrent power. Israel is now far more vulnerable to attack by hostile neighbors and by major terrorist organizations. With the benefit of hindsight, Israel should never have risked its reputation and deterrent power in a voluntary war unless it was virtually certain of prevailing and thus keeping its reputation for invulnerability and deterrence in effect.
Similarly, after the First Gulf War, the bombing campaign in Bosnia and the impressive early destruction of the Taliban in Afghanistan, the US had an awesome reputation of being the world's sole superpower, with virtually unlimited high tech military power several orders of magnitude above that of any other country.
But for the US to undertake a major invasion of Iraq that turns out unsuccessful, to become bogged down in a losing war against militarily unimpressive enemies, has done incalculable damage to the US's ability to cow hostile nations with its military potential. Again with the benefit of hindsight, the US should have thought long and hard about risking the unparalled military reputation and deterrent strength it enjoyed.
Now that the US's perceived military strength and ability to deter is far less, Iran can do what it wants in developing nuclear weapons and funding/arming Hezbollah, and even North Korea can feel pretty safe in its provocations. The degraded military reputation of the US also gives it far less ability to influence Russia and China to help with Iran and North Korea. And Russia can also feel free to strongarm our ally Georgia (the country, not the state) with little or no complaint from the US.
(I am not dealing here with the question, moral or libertarian, of whether the US should be attempting to deter or influence other countries. Only with the question that if it wants to, whether it has the power to do so.)
Finally, the relevance to investing of giving up the power of potential is, I believe, tenuous. It is true that when one moves from cash to a committed investment not easy to sell, one loses the potential to invest in other things or to remain in cash. But there is no reputation or deterrent value that one is giving up, since stocks and other investments are not capable of being threatened or deterred. (Except perhaps in rare cases where an extraordinarily rich investor like Icahn or Kirkorian is threatening to buy a massive amount of a company's stock if the company refuses to do what he wants.)
Prof. Marion Dreyfus replies:
A deterrent power that is never invoked, on the other hand, becomes a straw man, and ankle-biters will proceed to a series of provocations to test the level of tolerance of that so-called massive deterrent potential. Israel had been repeatedly provoked by thousands of Kassams and Katyushas against northern cities, and precisely how many thousands of incursions it can sustain is not an exact science. Nor is it in her interests to permit little gangrenous groups to pick off her soldiers and murder them at will.
This leaves out the concomitant scandalousness of the unpreparedness of the IDF. Both in terms of tank platoons and soldiers guarding the perimeter, there was a feebleness of deployment that stuns most of us familiar with the power of the IDF. A major contributor to the lack of overwhelming force and the triumph of the IDF, too, was the constant effort to save civilians, which is no way to win a war against soulless automata. had the Israelis conducted the war in the way most nations would and do, it would have won inside of a week.
Craig Cuyler replies:
These points could also be related directly to proper means of speculation, ballyhoo deflation and scientific method in trading. The US government has ignored almost every rule of proper speculation and here are just a few off the top of my head:
1. The US got itself into a war based on spurious correlations (the link between Bin Laden and Hussein)
2. Hindsight bias (Bush snr's previous Iraqi war in which the US came out relatively unscathed with its reputation intact)
3. Data mining (the Hunt for WMD's and the Yellow Cake uranium from Niger, both which didn't exist)
4. The doomsday scenario (pre-emptive attack on Iraq would prevent further attacks on US) - Iraq was never going to attack the US it didn't have the means,
5. Trading on tips and unsubstantiated rumours (the US being conned by Big Oil and others with their own agenda),
6. Trading with too much leverage and no risk management (how long can the taxpayer pay for this mess in Iraq, how many more innocent people on both sides must die before the stop loss is hit?).
As Dan says, the situation has weakened America's military position and standing in the global community and the direct beneficiaries are the Iranian Mullahs and psycho's like Kim Jong Ill who are now emboldened to develop their own nuclear arsenals. This is similar to when hedge funds like Amaranth get themselves into trouble and the market knows that it can press its advantage until the protagonist capitulates - this is what Iran, Jordan, Hezbollah, Taliban, North Korea and others will do. When an investor or a speculator puts on a trade for the above reasons there can be only one outcome - failure!
Stefan Jovanovich responds:
The 1973 war (what the Israelis call the "Yom Kippur War" and their opponents call the "Ramadan" or "October" War) was the worst crisis in Israeli military history. Within the first week the Egyptians crossed the Suez Canal and breached the Bar-Lev fortifications in what was probably the greatest feat of Moslem arms since the Turkish defense at Gallipoli. The Bar-Lev fortifications had cost $500 Million (in today's dollars roughly 1/3rd of the 2007 Israeli defense budget) but they were breached with water cannons, rubber rafts and hand-carried weapons and the battalion holding them was effectively wiped out. There are other details of the war that match the failure of the Bar-Lev line, but it is enough to note that, immediately after the war was over, a special commission headed by Chief Justice Shimon Agranat of the Israeli Supreme Court was appointed to investigate "why Israel had been caught by surprise and why so much had gone wrong during the war itself". The commission's report, completed in January 1975, was highly critical of the performance of the IDF on several levels, including intelligence gathering, discipline within the ranks, and the mobilization of reserves. Among the facts in the report was the disclosure that the IDF needed the emergency airlift of $1 billion of ammunition (in 1973 dollars) from the United States to avoid literally running out of bullets. To gain a proper sense of the scale of this potential disaster, it is useful to know that the entire cost of the war for the Israelis was $5 billion. (One of the bitter reflections that we Viet Nam veterans try to avoid considering is whether the 1975 Democratic Congress would failed to fund the reinforcement of the IDF as cavalierly as they refused to resupply the ARVN.) The Yom Kippur War ended the political future of Moshe Dayan. Ariel Sharon was lucky enough to have retired as commander of the Southern front 3 months before the war began. Had he remained in command, he, too, would have seen the end of his career as a figure in Israeli politics.
The tactical difficulties the IDF experienced against Hezbollah have a great deal in common with the mistakes of the Yom Kippur war. The Israelis badly underestimated the usefulness of anti-tank weapons against infantry (most of the IDF casualties were from blast and shrapnel, not bullet wounds) just as the IDF underestimated the lethality of Sagger missiles.
As for American bombing in Bosnia (sic) (the air strikes were in Serbia proper), the American after-action reports are almost sarcastic in their assessments. The Serbs, displaying their native criminal ingenuity, managed to shoot down an F-15 using cell phones and 1970s-era Soviet missiles. The USAF was unable to even "bounce the rubble" since most of the "targets" destroyed in Kosovo turned out to have been decoys. The U.S. Army had to wait a month to cross the Danube while the combat engineers (not under fire) rebuilt the bridges. When they finally made it across, they discovered (surprise, surprise) that their M1A1s were too heavy for the roads. The war ended General Wesley Walker's military career and began his political one.
Fortunately, both the IDF and the U.S. armed forces have learned from their mistakes and will continue to do so. The wars being fought in Iraq and Lebanon (yes, it is still going on) have taught both militaries that tactical intelligence can no longer sit even at the brigade level; it has to be down at battalion and even company level. Both militaries have also learned that they have to have the ability to jam enemy electronic signals not just in the air but at the street corner level. These are revolutions in military affairs comparable to the development of armor and automatic weapons.
To conclude that "US's (and, I presume, Israel's) perceived military strength and ability to deter is far less" is to go against all the known facts of what those countries' enemies are actually doing. Both the Russians and Chinese are working as fast as they can to abolish conscription and reduce overall troop strengths. Both have effectively conceded to the Americans permanent air and space superiority by ending their next generation fighter programs. The field strength of Hezbollah, Al Qaeda, Taliban and the Baathists has been reduced to the level of banditry and local thuggery, and their internal documents speak of reduced levels of financial and military support and, in some cases, of outright despair. Their only hope is to win the battle of CNN.
I can go on, but what would be the point. That the New York Times and Washington Post and CNN remain unaware of what is actually going on in the Middle East and East Asia is hardly surprising, given the fact that their correspondents no longer spent any time in the field but leave that to their native stringers. That members of the list continue to retail the daily "everyone knows" historicisms of the "authoritative press" is disappointing.
Laurence Glazier replies:
More than 20 years ago, I remember reading media assessments that Israel was unlikely to survive more than a few years. I think this is still a good case to be contrarian. Other things being equal, Israel is and will even more so be one of the economic powerhouses of the present century.
There are — as ever — challenges.
Aumann may shine in game theory and bible code analysis but Buffett gets the nod in buy and hold.
J. Klein replies:
It was not only media assessment. 30 years ago I bought land in Israel, and all my friends advised against it, Israel couldnt last, too much risk, what a meshugge thing to do. It turned out to be a hit, by far.
Israel government has announced that it is planning a second wave of settlement erradication. The idea is to cut ourself free from our turbulent, violent, suicidal, no-good neighbors by a good fence. It is only expectable that Prof. Aumann, a believer, would argument against it, since we are giving up land aka Promised Real Estate.Nobel Prize does not make him a prophet, and less so in his hometown.
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