Monday, January 31, 2011
John Mauldin: A Bubble in Complacency
Gates Foundation: 2011 Annual Letter from Bill Gates
As I sit down to work on my third annual letter, governments in every corner of the world are facing tough decisions about how to reduce spending. Although foreign aid accounts for less than 1 percent of governments’ total budgets, it is one place being considered for cuts. As a result, health and agricultural assistance that saves lives and puts poor countries on a track for self-sufficiency is at risk.
The world’s poorest will not be visiting government leaders to make their case, unlike other constituencies, so I want to help make their case by describing the progress and the potential I see in key areas of health and development. Perhaps it is ironic for someone who has been so lucky to talk about the needs of those who have not.
I believe it is in the rich world’s enlightened self-interest to continue investing in foreign aid. If societies can’t provide for people’s basic health, if they can’t feed and educate people, then their populations and problems will grow and the world will be a less stable place.
Whether you believe it a moral imperative or in the rich world’s enlightened self-interest, securing the conditions that will lead to a healthy, prosperous future for everyone is a goal I believe we all share.
Many people don’t have a clear image of the benefits aid actually provides. That’s not surprising, because aid covers many different areas. Also, in the past some aid was sent to countries to buy friendship without real regard for its impact. However, today a significant portion of foreign aid is spent on hugely beneficial programs that improve people’s lives in both the near and long term.
Despite the threat to aid budgets, one thing that makes me optimistic about the future is the courage of leaders who are finding ways to make the welfare of poor people a priority. Under David Cameron’s leadership, the United Kingdom set a great example by keeping its promise to grow aid spending despite the cuts it had to make. It is inspiring to see a leader stand up for what he believes is right, even when it isn’t easy.
Hussman Weekly Market Comment: Mapping the Molecular Pathway of Autism
Last week, in collaboration with the Hussman Institute of Human Genomics at the University of Miami, we reported a new molecular pathway for autism. The study, entitled "A Noise-Reduction GWAS Analysis Implicates Altered Regulation of Neurite Outgrowth and Guidance in Autism ", was published in the open-access, peer-reviewed journal Molecular Autism (the paper is immediately available as a PDF, with diagrams and tables following the references. The formatted publication version should be online within a week or two).
The UM School of Medicine published a nice piece about it: Economist Revolutionizes Mapping of Genetic Pathway for Autism.
Why would an economist be doing genetics research?
At this point, some background is probably a good thing. Just over two years after my son JP was born, he was diagnosed with autism. That's shorthand, of course, because as any autism parent knows, the period between feeling that something is wrong and the time we accept a diagnosis involves such an endless parade of doctors, therapists and other professionals that it might as well include floats, Disney characters and a marching band. As the son of two physicians, having "jumped the track" from medicine in college, I decided that there was something inherently wrong with a world where parents were essentially told "Sorry, but your child has autism. We don't know what causes it, so we have very little advice to offer, except for early intervention - good luck with the cost of that - and a few medications. There are some charlatans and snake-oil salesmen down the street you might look into. And thanks for stopping by."
I spent four years at Stanford for my doctorate in Economics. JP is nearly 17. If you're passionate about something, you can learn a lot in that amount of time. By 2001, I had written a piece for the Journal of Autism and Developmental Disorders (Suppressed GABAergic inhibition as a common factor in suspected etiologies of autism). GABA is the main inhibitory neurotransmitter in the brain, and reduces the tendency of neurons to "fire" too easily. The basic idea of the GABA paper was to connect multiple lines of research which, taken together, suggested that autism might involve an imbalance between excitatory and inhibitory activity in the brain. A couple of years later, a genetics team led by Dr. Margaret Pericak-Vance (now at the University of Miami) identified an association between autism and a number of GABA receptor subunits. Perhaps because Dr. Pericak-Vance (Peggy) is a parent with her own special mission - visit www.jjvance.org - we instantly became friends, and have collaborated ever since.
I spend almost all of my time in one of three activities - finance, family or charitable projects through the Hussman Foundation. In recent years, much of the foundation's research has been centered on autism. Meanwhile, the finance research has been centered on "ensemble methods" to integrate the information from multiple data sets, and to better measure both risk and uncertainty*. As it happens, statistical methods can be adapted to approach difficult problems in both genetics and finance. So as we developed various approaches to integrate multiple data sets in our finance research, it was natural to extend those methods to deal with genetics data.
* In case separating "risk" from "uncertainty" seems like a distinction without a difference, risk is the extent to which possible outcomes are spread around a known average outcome, given that you know which "state of the world" you're in. Uncertainty is the extent to which the "state of the world" is itself in doubt, so even the average outcome is in question. For example, risk measures the chance that you'll roll something other than 7 given that you know that two six-sided dice are being thrown. Uncertainty is the possibility that the dice themselves might instead have eight, twelve, or twenty sides without your knowledge. Similarly, risk is the probability that the market will decline, given that you know that the economy is in a typical post-war economic cycle. Uncertainty is the possibility that the true economic environment might correspond more closely to the Great Depression than to the post-war period. The difference isn't trivial.
"A Noise-Reduction GWAS Analysis Implicates Altered Regulation of Neurite Outgrowth and Guidance in Autism"
Economist Revolutionizes Mapping of Genetic Pathway for Autism
Bill and Melinda Gates Interview
Saturday, January 29, 2011
Don't Confuse the Economy with the Stock Market
Here are a couple of paragraphs from Unexpected Returns that highlight the importance of being careful not to confuse the economy with the stock market.
Economic Growth and Stock Market Returns
The lack of correlation between economic growth and stock market returns for extended periods of time surprises most investors. Real growth in the economy and in earnings per share (EPS) averaged virtually the same rate from the mid-1960s to the early 1980s as from the early 1980s through 1999. While real economic growth was remarkably consistent over the two secular cycles, stock market returns differed dramatically.
Despite substantial growth in both the economy and earnings from 1965-1981, the market ended at the same level at which it had begun sixteen years earlier. By contrast, 1982-1999, a period of lower nominal economic and EPS growth, saw the market soar more than tenfold to produce one of the greatest bull markets in history. An investment of $100,000 in the S&P 500 in 1982 was worth well over $1 million by the end of 1999.
Gary Taubes Interview with Jimmy Moore
Friday, January 28, 2011
Thursday, January 27, 2011
George Soros at Davos
Link to: Bloomberg Video
Link to: CNBC Video
Nassim Taleb - AntiFragility: How (Not) To Be A Prophet
Link to: How (Not) To Be A Prophet
Related link: AntiFragility: How to Live in a World We Don’t Understand
Wednesday, January 26, 2011
James Simons - MIT Talk: Mathematics, Common Sense, and Good Luck: My Life and Careers
Curiosity Advertising Interviews Farnam Street
Tuesday, January 25, 2011
Jeremy Grantham’s 4Q Letter: Pavlov's Bulls
Monday, January 24, 2011
John Mauldin: The Unsustainable Meets the Irresistible
This week’s letter is a result of two lengthy conversations I had today, which have me in a reflective mode. Plus, I finished the last, final edits of my book, all of which is causing me to mull over the unsustainability of the US fiscal situation. There is a true Endgame here, and it may happen before we are ready.
The first conversation was with Kyle Bass, Richard Howard, and Peter Mauthe, over lunch (more on Peter, who has come to work with me, below). Kyle is the head of Hayman Advisors, a very successful macro hedge fund based here in Dallas. Then I recorded a Conversation with David Rosenberg and Lacy Hunt, which is one of the best we have ever done. Subscribers will be very happy. The new Conversation with George Friedman is now online, too. You can learn more about Conversations with John Mauldin at www.johnmauldin.com/conversations/ . And please comment on this and future letters in the readers’ forums of my new website. Now, to this week’s letter. My goal is to make this one a little shorter than normal. We’ll see how I do.
Hussman Weekly Market Comment: Sixteen Cents: Pushing the Unstable Limits of Monetary Policy
This week's comment focuses on the current, unstable stance of monetary policy. We'll start by reviewing some important monetary relationships. While I've included a variety of graphs and equations to support the analysis, I've boldfaced several key points, and my hope is that the text has enough detail that you can skip some of the equations if you're not a math fan.
The disturbing fact about this, however, is that inflation dynamics can potentially become unstable when a massive stock of base money is being kept in check by very low interest rates. This is because small increases in interest rates from near-zero levels imply huge changes in liquidity preference and velocity. If those changes are not offset by opposite and proportional changes in the monetary base, strong inflation pressures are likely to follow. Historically, it has usually taken an extended period of such inflation pressures (sustained over 6-12 months) before the implied inflation pressures are actually reflected in price levels. Temporary differences between the actual and implied GDP deflator are not very informative unless they are sustained.
Still, any sustained external pressure on short-term interest rates, even in the range of a quarter-percent or more, would require a rapid contraction in the Federal Reserve's balance sheet, or the upward pressure on velocity would create very strong incipient pressures on inflation.
Because the size of the monetary base has become so extreme relative to historical norms, the likely price pressures in response to even modestly higher short-term interest rates are equally extreme.
What factors could create pressures on inflation? By itself, monetary policy often involves a simple see-saw, where higher monetary base results in lower short-term interest rates, which induce people to hold that additional base money. Historically, both in the U.S. and internationally, the primary source of inflation pressure has been growth in unproductive government spending (i.e. spending that creates demand without materially expanding productive capacity - think Germany paying striking workers in the Ruhr). Now, it's very often true that government spending is actually financed by printing money, but in that case, we've long argued that the fiscal event is what drives inflation. Simply shifting the composition of government liabilities between Treasury debt and money (without changing fiscal policy) generally causes a change in the profile of interest rates: primarily affecting short-term rates to ensure that the new outstanding quantity of base money is held (as we've seen above).
While not all U.S. government spending is unproductive, it is easily seen that the inflation pressures of the late-1960's and 1970's accompanied a period where government spending was sharply expanding as a share of GDP (the 1981-82 recession provoked a final gasp of spending even as inflation receded from its peak). While the disinflation since the early 1980's has had some fits and starts, it is also clear that this period has - until recently - been characterized by relatively stable fiscal policy. From this perspective, the recent explosion of government spending as a share of GDP is a source of longer-term inflation concern.
In any event, completing the Fed's planned purchases under QE2 will require a decline in 3-month Treasury bill yields to just 0.05% in order to avoid inflationary pressure. Otherwise, liquidity preference will not expand sufficiently to absorb the addition to base money, even if we assume real GDP growth at a 4% rate. Given the extreme stance of monetary policy, the avoidance of inflationary pressures increasingly relies on a very persistent willingness by the public to directly or indirectly hold the outstanding quantity of base money in the financial system. Small errors will have surprisingly large consequences. This is not a stable equilibrium.
Sunday, January 23, 2011
Frontline’s 1997 Documentary “Betting The Market”
Steve Keen's Presentation at the AEA
Related link: Two Recent Interviews with Steve Keen
Friday, January 21, 2011
Thursday, January 20, 2011
Wednesday, January 19, 2011
The Characteristics of a Bear Market Rally
From Jeremy Grantham’s October 2003 Letter:
I concede that bear market rallies are a fairly nebulous concept because you cannot be sure what they were until later – the only proof of a bear market rally is that you go to a new low in the not too distant future. But despite this reservation, I cannot resist noodling with the concept.
The characteristics usually attached to a bear market rally are:
a. the prior low was not particularly cheap;
b. the leadership reverts back to that of the prior bull market;
c. the rally is sharp, unusually persistent while it lasts, and has a speculative tone, perhaps because investors are trying to make up lost ground;
d. investors’ hearts were only half broken by the previous low in the market, allowing confidence and speculation to recover rapidly.
And then some thoughts about that 2003 rally that are incredibly relevant today.
But, you may answer, this bear market rally is bigger in some ways (the Nasdaq is up over 50%, for example) than any previous bear market rally and certainly longer: no other bear market rally after the three great bubbles broke in 1929, 1965, and Japan in 1980 came close to this performance. And this is true! But it is also true that more stimulus and moral hazard has been offered to this rally than any previous one, by a wide margin. It is reasonable, therefore, to expect a big response and we are certainly getting it.
But Ben Inker, more cold blooded than I and less interested in semantics says, “Who cares what you call it, it’s going to end badly eventually because it’s overpriced.”
Greenlight Capital Q4 2010 Letter
Tuesday, January 18, 2011
Howard Marks – April 2001 Memo: Safety First . . . But Where?
As is usual from Howard Marks, this 2001 letter was full of wisdom. A few things I found extra interesting are below (Marks’ excerpts are in blue).
In the discussion about the prices of certain assets, I thought the third bullet point in the government bond section below was especially interesting to see. What a difference 10 years later:
Second, government bonds are quite highly priced today, thanks to:
the flight to quality that resulted from the pain in the stock and high yield bond markets,
the current low level of inflation, and
the looming scarcity of Treasury securities as budget surpluses erase the Federal debt (I'm not quite sure I buy that one).
Marks’ definition of alpha:
To me, alpha is skill. It's the ability to profit from things other than the movements of the market, to add to return without adding proportionately to risk, and to be right more often than is called for by chance.
More important, alpha is differential advantage; it's skill that others don't possess. That's why knowing something isn't alpha. If everyone else knows it, that bit of knowledge gives you no advantage.
Lastly, alpha is entirely personal. It's an art form. It's superior insight; some people just "get it" better than others. Some of them are mechanistic quants; others are entirely intuitive. But all those I've met are extremely hard working.
You want managers who have alpha, and you want them to be working in markets that permit it to be put to work. Only in markets that are not efficient can hard work and skill pay off in consistently superior risk-adjusted returns. I always say if you gave me 20 Ph.D.s and a $100 million budget, I still couldn't predict the coin-toss before NFL games. That's because it's something into which no one can gain superior insight. When someone says "my market is inefficient" or "I have alpha," make him prove it.
You want to be sure the claimed alpha is there. Just about everyone in this business is intelligent and articulate. It's not easy to tell the ones with alpha from the others. Track record can help but (a) it has to be a long one and (b) it's still possible to play games.
My advice to you is that when you find managers who do what they promise and seem to do it well, stick with them. Even the best manager won't be infallible, but staying with those who've demonstrated skill and reliability will reduce the probability of disappointment.
And a prescient prediction about hedge funds:
I expect hedge funds and absolute return funds to be promoted heavily by brokerage firms, mutual fund organizations and investment advisers and to become the next investment fad.
Link to 2001 Memo: Safety First . . . But Where?
Comparing Wealth Eﬀects: The Stock Market versus the Housing Market - By Karl E. Case, John M. Quigley, and Robert J. Shiller (2005)
The importance of housing market wealth and financial wealth in affecting consumption is an empirical matter. We have examined this wealth effect with two panels of cross-sectional time-series data that are more comprehensive than any applied before and with a number of different econometric specifications.
The numerical results vary somewhat with different econometric specifications, and so any numerical conclusion must be tentative. We find at best weak evidence of a stock market wealth effect. However, we do find strong evidence that variations in housing market wealth have important effects upon consumption. This evidence arises consistently using panels of U.S. states and industrial countries and is robust to differences in model specification.
For example, according to the results presented in Table 2 for Model I, a ten percent increase in housing wealth increases consumption by roughly 1.1 percent for the international panel, while a ten percent increase in stock market wealth has virtually no effect upon consumption. For the panel of U.S. states in Table 2 (Model I), a ten percent increase in housing wealth and in stock market wealth have about the same effect on consumption – an increase of 0.4 percent. According to the ECM model, Table 4 (Model I), the immediate effect of a ten percent increase in housing wealth is an increase in consumption of one percent for the panel of Western countries, while a ten percent increase in financial wealth has a negligible effect. According to the same model, the immediate effect of a ten percent increase in housing wealth is an increase in consumption of 0.4 percent for the panel of U.S. states while a ten percent increase in financial wealth has no effect. (Actually, the point estimate is negative.) Absent a second shock, the effect of a ten percent increase in housing wealth is reduced to 0.3 percent after four quarters and to 0.2 percent after ten quarters.
These calculations should not imply a false precision in the interpretation of our econometric models. Nevertheless, they do support the conclusion that changes in housing prices should be considered to have a larger and more important impact than changes in stock market prices in influencing household consumption in the U.S. and in other developed countries.
Bear Investor Says 'I Have Been Too Bullish'
Albert Edwards, a global strategist at Societe Generale well known for his bearish stance, said late Monday he has got it wrong and that he has been too bullish.
“I have long believed that a lost economic decade was an inevitable consequence of the gross mismanagement of central banks," Edwards wrote in note to clients.
"Our Ice Age thesis called for a long secular equity valuation bear market, just like Japan. Most reject the comparison with Japan, especially with regard to the US having better demographics. Indeed I felt that beyond the lost decade and secular bear market, the US outlook was much more upbeat that Japan's," he explained.
“But now, I am thinking I might have been too bullish,” Edwards added.
Monday, January 17, 2011
John Mauldin: Thinking the Unthinkable
Last week, in the first part of my annual forecast, I suggested that 2011 would be better than Muddle Through, with GDP growth in the US north of 2.5%. World GDP growth should be even better. This week we look at what I see as the real downside risks to that prediction. Oddly enough, the risks are not in the US but on the other side of both our oceans, in Europe and China. Plus, we will visit a few other items, assuming we have space (Bernanke’s recent speech just screams for some comments).
The Edge Question 2011: WHAT SCIENTIFIC CONCEPT WOULD IMPROVE EVERYBODY'S COGNITIVE TOOLKIT?
Blaming the Rat: Incentives, Motivation, and How They Interact – By Michael Mauboussin
Found via Simoleon Sense.
Link to: Blaming the Rat
Hussman Weekly Market Comment: Borrowing Returns from the Future
Two aphorisms regularly become popular during speculative periods in the market. One is the statement by John Maynard Keynes that "the market can stay irrational longer than you can remain solvent." The other is Warren Buffett's remark that "a pack of lemmings looks like a bunch of individualists compared with Wall Street once it gets a concept in its teeth."
It is widely understood that markets can experience extended periods of irrational speculation and valuation bubbles. This becomes problematic when people begin to rely on the irrationality of others as a justification for continuing to speculate, because at that point, they require the assistance of increasingly "greater fools" in order to sustain the advance. Keynes was quite right in the sense that one should never maintain a leveraged position against the market, because leveraged losses certainly do threaten solvency. But investors are not forced to accept risk just because other investors are speculating - there is no great risk in positions that accept no great risk. Moreover, investors cannot safely ignore valuations, because once valuations become rich, the returns from continuing to speculate are not easily retained even if they emerge for a while.
If actual returns did not periodically overshoot the returns that are warranted by fundamentals, we would never observe the extended periods of predictably excellent or dismal market returns that have historically corrected those overshoots. Presently, the probable outcome over the coming years leans moderately toward the "dismal" side, but nowhere as negative what we observed in 1929, 2000 or even 2007.
We have to be realistic that projected returns were actually driven to negative levels at the peaks of 1929 and 2000, so we can't rule out a further price advance that would compress projected long-term market returns to even lower levels than we observe here. Still, both of those valuation extremes were produced by multi-year periods of rapid, low-volatility economic growth, coupled with the introduction of revolutionary new technologies. A Federal Reserve policy that amounts primarily to rhetoric seems to be an awfully thin substitute at present.
World Economic Update: James Grant, Richard Koo, Ron Temple - December 2010
Found via The Big Picture.
I Like Ike: A Powerful Warning Ignored, January 17, 1961 - By Jeremy Grantham
As the 50th anniversary of Eisenhower's Farewell Address to the nation in 1961 approaches, in this Special Topic Jeremy Grantham examines the speech and draws parallels from Ike's time to today. (Jeremy's regular Quarterly Letter will be published in the next week or two.)
Friday, January 14, 2011
Hoisington Q4 Letter
Factoring in a 4% Q4 growth rate, the U.S. economy expanded by 3% in real terms from the 4th quarter of 2009 through the 4th quarter of 2010. Despite this rise in GDP, the unemployment rate remained stubbornly high at 9.6% in the last quarter of 2010, only slightly lower than the 10% rate it averaged in the same quarter one year ago. Positive real GDP growth with high unemployment is the definition of a growth recession. An even slower growth rate of real GDP should be recorded over the next four quarters, suggesting the unemployment rate will be essentially unchanged a year from now. As we have noted previously, this modest expansion is due to the significant over-indebtedness of the U.S. economy. We see seven main impediments to economic progress in 2011 that will slow real GDP expansion to the 1.5%-2.5% range.
First, fiscal policy actions are neutral for 2011. Second, state and local sectors will continue to be a drag on the economy and labor markets in 2011. Third, Quantitative Easing round 2 (QE2) will likely produce only a slight economic benefit as the Fed continues to encourage additional leverage in an already over-indebted economy. Fourth, while consumers boosted economic growth in the second half of 2010 by sharply reducing their personal saving rate, such actions are not sustainable. Fifth, expanding inventory investment, the main driver of economic growth since the end of the recession in mid-2009, will be absent in 2011. Sixth, housing will continue to be a persistent drag on growth. Seventh, external economic conditions are likely to retard U.S. exports.
Eclectica’s Hendry Turns Greece Profit Into China Failure Wager
Found via market folly.
Hugh Hendry is a man worried about the future. Although the hedge-fund manager beat more than 80 percent of his peer group rivals in 2010, Hendry laments that he’s part of an oppressed minority -- and likens the threat of hedge-fund regulation to the plight of the Roma migrants expelled from France last summer by President Nicolas Sarkozy.
“Social mood is hardening, changing, deteriorating: We see that not just in hedge funds; we see that in the very polite, previously libertarian societies,” says Hendry, dressed in an open-necked gray shirt and light-blue linen jacket at his Eclectica Asset Management LLP in London. “Hedge funds are a minority. Guess who else is a minority? People from overseas.”
Hendry, gesturing for emphasis, is just getting started on his defense of the downtrodden, Bloomberg Markets magazine reports in its February issue.
Link to: VIDEO
Buffett's 'Bailout' Guy: A Fox Business Exclusive w/ David Sokol
Thanks to Matt for passing this link along. There are 2 video clips after a brief intro.
He's a self-described 'kid from Omaha' who grew up to be a force in the world of business, a turnaround specialist who, at the height of the recession, took the reins of arguably the toughest business outside of housing and actually fixed it in record time.
I could be talking about Warren Buffett, who, in the '60's bought a floundering textile company and turned it into one of the most succesful conglomerate holding companies in the world.
I'm talking about David Sokol, the man who works for Warren Buffett. He runs two Buffett businesses: MidAmerican Energy and NetJets.
Wednesday, January 12, 2011
Bloomberg: Dongguan Ghost Mall Haunts China’s Property Boom
Via The Big Picture.
Bloomberg’s Paul Allen reports from Dongguan, China on the New South China Mall, which has remained mostly vacant since it opened in 2005. Jim Chanos, the hedge-fund manager who was one of the first investors to foresee the 2001 collapse of Enron Corp., reiterated last month China is on a “treadmill to hell” because of a reliance on property development for economic growth.
Meredith Whitney on CNBC
Video 1: Muni Market: Tale of 2 Cities
Video 2: "De-Banking" the Financial System
Tuesday, January 11, 2011
How a bridge champ beats the market
Found via Simoleon Sense.
You might say that Brad Moss aspires to be to bridge what Warren Buffett is to investing. It turns out that Moss, a bridge champion (he's never played Buffett but would like to), is a fine investor as well. This 40-year-old uses the skills he's learned playing cards to earn impressive returns at his small but growing hedge fund.
Wall Street has long been home to card players who turn their mathematical minds to finance. Moss, whose team is the ranking 2010 world champion and who is the American Contract Bridge League player of the year for 2010, draws a direct line from the game theory of bridge to his ability to assess investment risks. It's a skill that enabled him in the late 1990s to rack up personal wealth in the millions of dollars as an options trader in his native New York.
The connection with bridge, says Moss, is the ability to decide what data matter, and then to have the judgment to act on it. "In bridge and investing, you are constantly being bombarded with an enormous amount of information," he says. "The key is seeing all the possibilities." There's more. In bridge, an opponent's tempo of play will tell an expert more than an amateur. Similarly, in investing, knowing which market indicators to monitor, and when, is more critical than watching every piece of information.
David Einhorn on King World News
Monday, January 10, 2011
Bruce Caldwell on EconTalk
John Mauldin - Forecast 2011: Better than Muddle Through
On Early Warning Signs
Found via Simoleon Sense.
At a closed meeting held in Boston in October 2009, the room was packed with high-flyers in foreign policy and finance: Henry Kissinger, Paul Volcker, Andy Haldane, and Joseph Stiglitz, among others, as well as representatives of sovereign wealth funds, pensions, and endowments worth more than a trillion dollars—a significant slice of the world’s wealth. The session opened with the following telling question: “Have the last couple of years shown that our traditional finance/risk models are irretrievably broken and that models and approaches from other fields (for example, ecology) may offer a better understanding of the interconnectedness and fragility of complex financial systems?”
Unsustainable growth: Apollo Asia Fund: the manager's report for 4Q2010
When the time comes to write each quarterly report, I frequently start by listing all the developments which have most struck me during the quarter, and all of the issues which I consider most important. The latter list is increasingly dominated by big global issues - limits to growth, the disconnect between growth and welfare, environmental destruction, and the revenge of Gaia, to take a few which range beyond the unmended cracks in the financial system and the many vulnerabilities of stockmarkets.
None of this usually helps me to write the report, because the subjects are too big, the timetables too vague, and the implications for pricing of the Fund's securities relative to alternatives hard to determine. Yet the evidence of approaching limits, and of the ill-heeded consequences of past development, is coming closer and closer to home.
Much of the current Indonesian boom comprises the burnup of irreplaceable resources: unsustainable development without heed to externalities. And the same is true in too much of Asia. When I first came to Malaysia, jungle reserves seemed huge relative to the population and to the level of exploitation. How quickly that changes: from the air one now sees extraordinary urban sprawl, and heartbreaking devastation. It used to be a joy of life in the tropics that ugly development eyesores were quickly greened over, or even reclaimed by the jungle: now I am told that the topsoil is completely gone in many areas.
The video to the right is one which I considered mentioning on this site when it was first published, but hesitated to do so, in case my sophisticated readers thought it too simple. The power of compounding is very well understood by value investors, and bullish Asian analysts, yet not fully appreciated by all. The limits to exponential growth are well understood by another group, which includes indigenous tribes and others who are close to nature. The two groups do not necessarily overlap. Yet compound growth of financial assets may only be possible in a world experiencing economic growth. We have lived through a period when this has been unusually rapid and smooth, and arguably attributable to the discovery and exploitation of fossil fuels. This simple animation illustrates the limits to growth, and Liebig's law of the minimum. It comes to my mind repeatedly, in varying contexts, which are no longer distant and abstract - I commend it to you.
Dr. Atul Gawande on Health Care & the Age of Reform
Via Farnam Street.
Renowned surgeon, writer (Better, Complications, and The Checklist Manifesto), and medial thinker Dr. Atul Gawande interviews with WPUR's On Point. In this wide ranging interview, Dr. Gawande covers healthcare reform, measuring the quality of healthcare, the value of checklists, lowering the cost of healthcare, what healthcare can learn from agriculture.
Hussman Weekly Market Comment: "Illusory Prosperity" - Ludwig von Mises on Monetary Policy
Illusory Prosperity - Ludwig von Mises on Monetary Policy
"Credit expansion cannot increase the supply of real goods. It merely brings about a rearrangement. It diverts capital investment away from the course prescribed by the state of economic wealth and market conditions. It causes production to pursue paths which it would not follow unless the economy were to acquire an increase in material goods. As a result, the upswing lacks a solid base. It is not a real prosperity. It is illusory prosperity. It did not develop from an increase in economic wealth [i.e. the accumulation of savings made available for productive investment]. Rather, it arose because the credit expansion created the illusion of such an increase. Sooner or later, it must become apparent that this economic situation is built on sand."
Ludwig von Mises, The Causes of Economic Crisis (1931)
Historical note - The U.S. stock market lost more than two-thirds of its value over the following year
If one looks back to the recent housing crisis, it is clear that the policy emphasis on easy money was one of the primary elements that created the illusory prosperity of the housing bubble and eventually led to crisis. The same is true of the various other crises that we have observed over the past decade. At present, I am convinced that the misguided policies that have been pursued in response to the recent downturn will again be reflected as significant new strains within a few years, if not sooner. While we will exercise as much latitude as possible to accept moderate investment exposures when the evidence is supportive, we have to be aware of the longer-term outcomes that are being set in motion by the present course of monetary and fiscal recklessness.
Perhaps more than any other economist, Ludwig von Mises got the theory of money and credit right, because he made distinctions between various forms of money and credit that are often conflated by other theorists. The amount of real physical investment in the economy is, and must be, precisely equal to the amount of output not allocated to consumption but instead to savings. Unlike many other economists, Von Mises not only recognized this identity, but carried it through to what it implied for monetary policy. Specifically, he observed that all real investment in the economy must be financed by real savings, while the creation of financial claims (which he called "circulation credit" or "fiduciary credit") in the absence of those savings tends to distort prices rather than output.
What follows are writings that I have selected from Von Mises work. The warnings that he gave prior to the Great Depression were particularly acute. Though Von Mises concerns unfortunately went mostly unheeded, they speak volumes about the origins of the recent crisis, and the risks that we are likely to face in the years ahead. As you read these, keep the recent housing crisis and the recent actions of the Federal Reserve in mind.
Friday, January 7, 2011
Motley Fool Interview With David Einhorn
Thanks to Matt for passing this along.
David Einhorn is the president of Greenlight Capital and the author of Fooling Some of the People All of the Time, a compelling account of his battle with Allied Capital (NYSE: AFC). Einhorn also presciently called attention to Lehman Brothers' irregular accounting practices just prior to that firm declaring bankruptcy in September 2008.
Many of us at the Fool admire Einhorn for his investing ability and dedication to the principles of transparency and honesty. In the first part of our interview, he spoke about Allied, the Securities and Exchange Commission, and the ongoing threat to our financial system.
Thursday, January 6, 2011
Chris Martenson Interviews Dan Ariely
Looking back at the carnage created by the bursting of the credit bubble, it’s natural to scratch your head and ask “How did we ever let that happen?”. Behavioral economics exists to answer questions like this.
Last week Chris sat down with Dan Ariely, gallivanting behavioral-economics-researcher-extraordinaire, who is breathing new life into this previously obscure field of study. The resulting interview is full of fresh, non-intuitive insights and shines light on how the human brain is often hard-wired for irrational action when it comes to money.
One of the key takeaways for us was how Dan’s research provides an empirical explanation for why inflation will likely win the day: our mental programming leads us to prefer behavior that favors it.
LA Times article: A reversal on carbs
Most people can count calories. Many have a clue about where fat lurks in their diets. However, fewer give carbohydrates much thought, or know why they should.
But a growing number of top nutritional scientists blame excessive carbohydrates — not fat — for America's ills. They say cutting carbohydrates is the key to reversing obesity, heart disease, Type 2 diabetes and hypertension.
"Fat is not the problem," says Dr. Walter Willett, chairman of the department of nutrition at the Harvard School of Public Health. "If Americans could eliminate sugary beverages, potatoes, white bread, pasta, white rice and sugary snacks, we would wipe out almost all the problems we have with weight and diabetes and other metabolic diseases."
It's a confusing message. For years we've been fed the line that eating fat would make us fat and lead to chronic illnesses. "Dietary fat used to be public enemy No. 1," says Dr. Edward Saltzman, associate professor of nutrition and medicine at Tufts University. "Now a growing and convincing body of science is pointing the finger at carbs, especially those containing refined flour and sugar."
Americans, on average, eat 250 to 300 grams of carbs a day, accounting for about 55% of their caloric intake. The most conservative recommendations say they should eat half that amount. Consumption of carbohydrates has increased over the years with the help of a 30-year-old, government-mandated message to cut fat.
And the nation's levels of obesity, Type 2 diabetes and heart disease have risen. "The country's big low-fat message backfired," says Dr. Frank Hu, professor of nutrition and epidemiology at the Harvard School of Public Health. "The overemphasis on reducing fat caused the consumption of carbohydrates and sugar in our diets to soar. That shift may be linked to the biggest health problems in America today."
To understand what's behind the upheaval takes some basic understanding of food and metabolism.
Wednesday, January 5, 2011
Bill Gross – January 2011 Investment Outlook: Off With Our Heads!
If you’re ever in the mood for a glimpse of raw nature that closely parallels the human condition, read Annie Dillard’s Pulitzer Prize winning Pilgrim at Tinker Creek. We are all, in her well-documented tale, mantises eating and being eaten, mindlessly thrusting and flailing about in activity that would make little sense to a visitor from another space-time. What mimics the pelvic thrust of the male mantis is really the struggling ego of the human being, stretching for more habitable space, gasping (metaphorically) for purer air, reaching for dominance over what we know not. Herman Melville, speaking through the visage of Captain Ahab in Moby-Dick, writes that “all mortal greatness is but a disease.” The egos that seek renown, however, are hard to kill and expert at masquerading and wearing disguises. Even those advocating or living by the Golden Rule can be held suspect to some chemical – this time above the belt – that says, “Look at me, look at me.” Presidents, Dalai Lamas, and yes, bond managers are more than likely infected and affected as opposed to philanthropically or altruistically directed and intentioned.
If so, I’m not sure how one escapes from the philosophical darkness of this self-described “Tinker Creek.” Eastern religions speak to seeking the Buddha mind – an “unconscious” consciousness that supposedly confirms an “inner worldly” worldliness. Theoretically this can lead to Nirvana, which is the absence of ego – an antibody against Ahab’s mortal disease. “Nirvana” it is said, “soars on wings that whisper.” Perhaps, but almost all of us come into this world screaming and the decibels diminish but never really whisper as the chemicals of old age work their will. We are all, more than likely, doomed to be mantis-like – some of us eating, some of us being eaten, but none quite aware as to why we are at the dinner table in the first place.
Americans, unlike their developed world counterparts, have been eating their fill lately, and supping at a dinner table laden with pork and tax breaks for all. Unequivocally, we have been playing the part of the female mantis, munching on the theoretical heads of future generations, while paying no mind to the wretches that will eventually be called upon to pay the bills.
Warren Buffett Speaks Candidly to Vanity Fair About Who Might Succeed Him at Berkshire Hathaway
Found via My Investing Notebook.
The future of Berkshire Hathaway is the subject of intense speculation throughout the financial world, for millions of investors and at the company itself. “It is all we talk about [at board meetings],” Warren Buffett tells Vanity Fair’s Bethany McLean, who spent 11 hours in Omaha with the octogenarian Berkshire Hathaway C.E.O. to discuss who might lead the company he founded when, as David Sokol, one of his executives, puts it, “the bus hits.” Buffett, who has no plans to retire, tells McLean that he “tap dances to work.” His partner and vice-chairman for more than 40 years, Charlie Munger (who, at 86, is not a contender) also speaks to McLean for a profile that provides an in-depth look at Warren Buffett’s thinking on succession as well as the possible choices. Buffett also talks to Vanity Fair about the evolution of his investment strategy, his trust in the wisdom of American capitalism, his “pragmatic” investment style, and belief in luck.
Leda Cosmides & John Tooby’s Zurich Minds Talk: "Evolutionary Psychology"
Link to: Leda Cosmides & John Tooby’s Talk
Related previous post: Stone Age Minds: A conversation with evolutionary psychologists Leda Cosmides and John Tooby
Art De Vany's Zurich Minds Talk: "Evolutionary Fitness"
Related previous posts:
Excerpt from The New Evolution Diet
Art De Vany’s Essay on Evolutionary Fitness
Tuesday, January 4, 2011
Dan Loeb's Q3 Letter
Better late than never, especially with a great quote like this:
"Our challenge is not only to keep up with rapidly unfolding events around the world, but to keep our perspective fresh and differentiated from that of our competitors. As securities analysts we are truth seekers and problem solvers. We must satisfy ourselves with determining ranges of outcomes and potential scenarios rather than searching for, and ultimately fabricating, absolute truths. The only thing we are 100% confident in is that we are fallible, we don't have all the answers, and we will make some mistakes. However, if we are honest with ourselves and our colleagues, remain attentive to our own biases and deceptions, focus on process, attempt to understand why we erred, and engage in deliberate practice and self-observation to improve our decision-making ability, we will not only minimize our errors, but also ultimately become better people and better investors."
Link to: Dan Loeb's Q3 Letter
Albert Edwards, SocGen bear, takes a bite out of China
Thanks to Jason for passing this along.
Analyst famous for his Ice Age thesis sees a new economic crisis on the way
Stock markets ended 2010 on an upbeat note. The FTSE 100 index reclaimed the 6000 mark before slipping back, but still registered a 9% gain, while the S&P 500, the most widely watched US index, has regained the level seen before the collapse of Lehman Brothers.
There is an air of optimism among investors and a confidence among economists that a much feared double-dip recession has been avoided. A tough moment, then, to be bearish?
Not for Albert Edwards, the best known and longest-standing bear in the City. He has seen nothing to dent his Ice Age thesis – the term he coined as long ago as 1996 to describe the relative decline of equities versus bonds. He thinks there may still be another Japanese-style economic "lost decade" to endure. "Big structural bear markets take 19 years on average and have four recessions," he says. "We've had two."
Edwards is thus sticking to two eye-catching predictions. Stock markets will revisit their March 2009 lows (3512 for the FTSE 100). And, despite the hints in recent months of a return of inflation, gilt yields will fall below 2% (from 3.5% today) as deflationary forces reassert themselves. Oh, and for good measure, prepare for the hard landing in China and the crash in commodity prices.
Amherst Mortgage Insight: “Facebook” Analysis of the Non-Agency Market—Participants Underestimating The Housing Problem
Found via naked capitalism.
In this article, we argue that the housing overhang is not caused solely by the number of non-performing loans that exist in the market. The problem also includes the high rates at which re-performing loans are re-defaulting, along with the relatively high rates at which deeply underwater loans that have never been delinquent are going 2 payments behind for the first time. As a laboratory for this analysis, we look at each loan in the non-Agency universe a year ago, and examine its current status.