Jeremy Grantham: Be persuasive. Be brave. Be arrested (if necessary)

Found via The Big Picture.

I have yet to meet a climate scientist who does not believe that global warming is a worse problem than they thought a few years ago. The seriousness of this change is not appreciated by politicians and the public. The scientific world carefully measures the speed with which we approach the cliff and will, no doubt, carefully measure our rate of fall. But it is not doing enough to stop it. I am a specialist in investment bubbles, not climate science. But the effects of climate change can only exacerbate the ecological trouble I see reflected in the financial markets — soaring commodity prices and impending shortages.

Hussman Weekly Market Comment: Little Dutch Boy

In the Mary Mapes Dodge book titled Hans Brinker, there is a fictional story within the story of a little Dutch boy who, on his way to school, notices a hole in the dyke. Having nothing else to fix the leak, he plugs the hole with his finger and stays there through the night until workers come to repair it. We are now into the fourth year of efforts to print trillions of little Dutch boys out of dollars and euros in order to stop a tide from crashing through a fundamentally damaged dyke. All of this has bought time, but no workers have arrived, and no real repairs have been done.

The holes seem only loosely related: non-performing mortgages, widespread unemployment, massive U.S. budget deficits, a “fiscal cliff” sideshow, inadequate European bank capital, European currency strains, a surge of non-performing loans in China, and unexpected economic softness in Asia and global trade more generally. All of this gives the impression that these problems can simply be addressed one-by-one. The truth is that they are all intimately related to a single central issue, which is the utter unwillingness of politicians around the globe to accept and proceed with the inevitable restructuring of bad debt, and their preference to defend the bondholders of a fundamentally rotted financial system.

But haven’t things improved? No doubt, bank balance sheets have been relieved of transparency through changes in accounting rules. Nonperforming loans have been easy to kick down the road thanks to an interminable “amend and pretend” process whereby a month or two of mortgage service is exchanged for extensions that tack delinquent payments onto the back of the loans. Meanwhile, banks have recouped some of their losses through wider interest spreads, by refusing to refinance higher interest mortgages, and by paying lower interest costs as a result of monetary policies that provide zero interest compensation to savers.

But aside from the appropriate equity wipeout, debt writedown, contract renegotiation and reissuance of General Motors, very little debt restructuring has occurred anywhere else in the economy – certainly not in financial or mortgage debt. Meanwhile, the European banking system faces major capital inadequacies, particularly in Spain, where delinquent loans have surged to record highs. The Federal Reserve just altered its annual stress tests for too-big-to-fail banks to now include the risk of a slowdown in Asia. The U.S. budget deficit remains near a peacetime high, with little prospect of substantial reduction even if the so-called “fiscal cliff" is resolved. The European economy is clearly in a fresh recession. We continue to infer that the U.S. also entered a recession during the third quarter. This will not be helpful to deficit reduction efforts.

The wit and wisdom of Warren Buffett – By Carol J. Loomis

Fortune met Warren Buffett by accident in 1966. I was writing an investing article about another man, Alfred Winslow Jones, who wasn't famous at that moment, but was about to be because of the article. Jones was running something called a hedge fund, and Fortune's description of what that was and how Jones operated started a miniboom in the hedge fund business. Buffett Partnership Ltd. -- a sort of competitor of Jones's fund -- got a single line in the article. To my everlasting dismay, I misspelled Buffett, giving it only one "t."

A bit later, my husband, John Loomis, met Buffett and came home saying, "I think I have just met the smartest investor in the country." I'm sure my eyes rolled. But then I, too, got to know Warren (and his wonderful late first wife, Susie) and realized how impressive this largely unknown fellow was. The Loomises bought stock in his small company, Berkshire Hathaway (BRKA); we became good friends of the Buffetts; and ultimately I became the pro bono editor of his increasingly famous annual letter to shareholders.

Meanwhile, Fortune set off on a long-term course of covering Buffett. He got two paragraphs and a picture in a 1970 Fortune story called "Hard Times Come to the Hedge Funds" -- his fund was a rarity, having 13 straight years of profits -- and by 1977 we were running a 7,000-word piece by Buffett on "How Inflation Swindles the Equity Investor."

Now, 46 years after Fortune first met the man, we have a book, Tap Dancing to Work, that collects everything important we've done about him (and some lighter stuff too), with commentary written by me. All the articles mentioned above, from the A.W. Jones story on, are in it -- and that's just the start. In total, the book is a Buffett banquet.

……………..

Related book: Tap Dancing to Work

Richard Feynman quote

“A scientist is never certain. We all know that. We know that all our statements are approximate statements with different degrees of certainty; that when a statement is made, the question is not whether it is true or false but rather how likely it is to be true or false. ‘Does God exist?’ When put in the questional form, ‘how likely is it?’ It makes such a terrifying transformation of the religious point of view, and that is why the religious point of view is unscientific. We must discuss each question within the uncertainties that are allowed….We absolutely must leave room for doubt or there is no progress and there is no learning. There is no learning without having to pose a question. And a question requires doubt. People search for certainty. But there is no certainty. People are terrified — how can you live and not know? It is not odd at all. You only think you know, as a matter of fact. And most of your actions are based on incomplete knowledge and you really don’t know what it is all about, or what the purpose of the world is, or know a great deal of other things. It is possible to live and not know.”

Richard Duncan quotes

“The surge in debt, asset prices, and spending generated strong growth in profits. As total credit market debt doubled between 1999 and 2007, so did profits—for both the financial sector and the nonfinancial sector.

Higher income and higher profits produced higher tax revenues for all levels of government. Federal tax revenues increased five times between 1980 and 2007. State and local tax revenues rose three times between 1988 and 2007. The surge in tax revenues made possible an even greater increase in government spending, which, in turn, created still more economic growth.”

–Richard Duncan, The New Depression

Steve Keen Presentation: Production, Entropy and Monetary Macroeconomics

Link

.....................

Related book: Debunking Economics - Revised and Expanded Edition: The Naked Emperor Dethroned?

Kyle Bass' latest letter: The Central Bankers' Potemkin Village

Found via Zero Hedge.

Link to: The Central Bankers' Potemkin Village

Kyle Bass

Luck and Skill Untangled: The Science of Success

Found via The Big Picture.

The world around us is a capricious and often difficult place. But as we have developed our mathematical tools with increased sophistication, we have in turn improved our ability to understand the world around us. 

And one of the seemingly simple places where this occurs is in the relationship between luck and skill. We have little trouble recognizing that a chess grandmaster’s victory over a novice is skill, as well as assuming that Paul the octopus’s ability to predict World Cup games is due to chance. But what about everything else?  

Michael Mauboussin is Chief Investment Strategist at Legg Mason Capital Management who thinks deeply about the ideas that affect the world of investing and business. His previous books have explored everything from psychological biases and how we think to the science of complex systems. In his newest book The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing he tackles the problem of understanding skill and luck. It is a delightful read that doesn’t shy away from the complexity, and thrill, of understanding how luck and skill combine together in our everyday experience.

Bass Says Half His Firm's Money in Subprime Bonds (video)

Found via the Corner of Berkshire & Fairfax.

Nov. 16 (Bloomberg) -- Kyle Bass, chief managing partner and principal of Hayman Capital Management LP, talks about his firm's investment strategy, U.S. fiscal policy and Europe's debt crisis. He speaks with Stephanie Ruhle on Bloomberg.

Richard Duncan quotes

Another longer excerpt from The New Depression (taken from my Kindle highlights, so the excerpts aren’t necessarily the paragraphs I have put them in below, and there may be things in between that I didn’t highlight). I've been posting a lot of excerpts as I think this book gives the clearest description of the way credit has changed our economy over the past few decades. As Duncan states in the book, we've switched from Capitalism to Creditism, and the economic rules and theories of this system have yet to be figured out, but they are different. Keynes, Mises, Rothbard, Fisher, Minsky, and other great economists developed their theories in a much different financial and economic world, and I think it is important to realize this when developing the right framework today. Many of their thoughts are timeless, and many have been misinterpreted. 

“By the time the credit crisis began in 2007, the debt issued (and the credit extended) by the GSEs and the asset-backed security (ABS) issuers had radically altered the size and structure of the U.S. economy. Combined, the GSEs and ABS issuers had $12 trillion in debt outstanding, up from $1 trillion 20 years earlier.

What did Fannie and Freddie and the ABS issuers do with all the money they borrowed? They lent it to the household sector in the form of mortgages and consumer credit. Between 1982 and 2007, the mortgage debt of the household sector rose ten times to $10.5 trillion. Consumer credit increased six times over the same period to $2.5 trillion.

Relative to the overall size of the economy, the financial sector’s debt rose from 21 percent of GDP in 1980 to 116 percent in 2007. The household sectors’ debt rose from 50 percent to 98 percent of GDP over the same period.

Adding all sectors together, total credit market debt averaged around 150 percent of GDP between 1946 and 1970. That ratio moved up gradually to 170 percent by the end of the 1970s, but then accelerated sharply during the 1980s, ending that decade at 230 percent. The rate of debt expansion slowed during most of the 1990s, but surged again from 1998. By 2007, total credit market debt to GDP had hit 360 percent.

That ratio understates the impact that so much credit growth had on the economy. That is because credit, as it expanded, caused the economy to expand, too. The numerator in the equation influenced the denominator. Put differently, the credit growth caused the economic growth—or, at least, much of the economic growth.”

–Richard Duncan, The New Depression