Mohnish Pabrai and Guy Spier at the Japan Investing Summit (video and transcript)

Link to: Mohnish Pabrai and Guy Spier at the Japan Investing Summit

Hussman Weekly Market Comment: Secular Bear Markets - Volatility Without Return

Present market and economic conditions highlight a fairly dramatic disparity between continued economic and valuation headwinds (particularly on a “cyclical” horizon of 18-24 months) and complacent short-term conditions that rest on the continuation of massive monetary and fiscal imbalances. It’s obvious even from a casual observation of economic conditions that these imbalances are inconsistent with a healthy economy; short term interest rates near zero, monetary base at 18% of nominal GDP (more than twice the level that would be consistent with short-term yields at even 2%), and a Federal deficit near 10% of GDP. Because it is an accounting identity that the deficit of one sector must be the surplus of another, and neither consumers nor our trading partners are running surpluses, it follows that our massive Federal deficit has temporarily driven corporate profit margins to historic highs about 70% above their norms even while wages as a percent of GDP have reached a record low.

Despite these imbalances, as long as Wall Street collectively closes its ears and hums, everything seems to be just fine. Sure, valuations are rich on the basis of normalized earnings, but stocks have performed well in hindsight. Sure, short-term interest rates are at zero, but investors have found what they believe is value in the higher interest rates available on junk debt. Sure, the labor force participation rate has plunged back to 1980 levels while every cohort of the population has lost jobs in the past 3 years except workers over the age of 55, but the payroll figures remain positive to-date. Sure, Europe is already in recession, with a largely insolvent banking sector, but for now, words have been enough to talk investors down from concern about any of that.

For our part, we continue to focus on the prospective market return/risk profile that has been associated with prevailing market conditions (including not only post-war and Depression-era data, but also data from the most recent cycle). The fact is that market conditions vary measurably over the course of the bull-bear market cycle. It's true that repeated “kick-the-can” interventions during the most recent cycle have created more variability in the lag between unfavorable conditions and subsequent market losses. Still, even this did not prevent significant corrections in 2010 and 2011. The corrections in 2012 have been fairly shallow despite fairly extreme conditions from the standpoint of our own return/risk estimates, but we also observed that in 2000 and 2007 – when it would have been tragic to confuse the postponement of bad outcomes with an escape from them. I have little doubt that the coming market cycle will provide extended opportunities for an unhedged and even aggressive exposure to market risk. At present, however, I am convinced that investors are mistakenly reaching for yield in credit-sensitive debt, misled by temporarily elevated profit margins in the stock market, overconfident about government safety nets, complacent about European risks, and still likely to be blindsided by a U.S. recession.

Michael Mauboussin on WealthTrack

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Related book: The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing

Related previous post: Luck and Skill Untangled: The Science of Success

Bunting’s Laws of Investing

Via The Big Picture. Thanks to James for passing this along.

Link to: Bunting’s Laws of Investing

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1. Sell stocks of companies that announce huge acquisitions, that overdiversify, or that spend a fortune on a lavish new headquarters.

2. Avoid stocks where management picks fights with analysts (or, by extension, hedge funds). See Overstock.com in 2005; Netflix in 2010.

3. Watch out when executives start selling a lot of stock — regardless of plausible-sounding excuses. Top execs in homebuilders, mortgage underwriters and Wall Street dumped billions before the 2008 crash.

4. “Run a mile” from all stocks in an industry going through a huge investment boom: Massive overcapacity and consequent collapse is inevitable.

5. Steer clear of investing in manufacturing companies. Their industries are usually plagued with extreme cycles of boom and bust, overcapacity and slumps.

6. Pay little attention to economists or market gurus.

7. Mistrust all mathematical trading formulas as well — they invariably fail just when you most need them to work.

8. Look for companies where the insiders are buying lots of stock.

9. Look for companies generating a lot of cash — a great sign of sustained outperformance.

10. Look for companies which have monopolies (or near monopolies), and those which manage to take out their main competitors.

11. Remember you are buying businesses, not just stocks. Pay close attention to the quality of the business, and especially the quality of the management.

12. Look for companies which have earned the trust of consumers, and which have very strong brand names.

The Economist: Best Books of 2012

Link to: The Economist Books of the Year

John Mauldin's Outside the Box - Looming Crisis: State Budgets Soon to Be Under Siege

In 2003, I was writing about the unfunded liabilities of state and local pensions. It was part of Bull’s Eye Investing, which came out in 2004. I caught some flak for being so pessimistic about the potential problems. Quoting:

Unless steps are taken soon, it is possible we can see shortfalls approaching $1 trillion–$2 trillion in state-sponsored pension funds within 10 years. A deficit of this size on the state level can truly be called a crisis. A tax increase or other adjustments to fund this will be a large drag on the economy.

Today in Outside the Box we explore the very sad fact that once again I was unduly optimistic. My good friend Ed Easterling shows that it is quite likely that the pension shortfalls are approaching $4 trillion. And the longer we wait to deal with the problem, the worse it will get.

Richard Duncan quotes

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).

The quantity theory of money held that (all other things unchanged) an increase in the money supply would cause an increase in prices and a short-lived boom and bust cycle that, in the end, would leave nominal GDP higher, but real GDP unchanged. The quantity theory of credit differs from the older theory in only one important respect. It contends that, under the current system of fiat money, the boom and bust cycle is much longer because now credit can expand for far longer than the money supply could within in the commodity money based system of the past. 

The “transition period” of the boom is far longer, but it is not infinite. It ends when credit ceases to expand. Ultimately, every credit-induced economic boom ends when asset prices become too inflated and industrial production becomes too excessive relative to the income of the public. The boom can only last if wages keep pace with asset prices and industrial output. When they don’t, the public becomes incapable of servicing its debt. Then the transition period ends, the boom goes into reverse and the depression begins. 

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…credit rarely ceases to expand until past loans begin to default in large numbers. Generally, credit growth goes on so long that it pushes asset prices to unaffordable levels on the one hand and it causes industrial production to exceed market demand on the other. At that point, not only does credit cease to expand, it begins to contract (at least for the affected sectors). The credit boom then becomes a credit bust as consumption and investment contract. 

In the United States, total credit market debt expanded every year without exception between 1947 and 2008. That created an extraordinary period of prosperity in which credit growth drove economic growth. The New Depression began in 2008 when that credit could not be repaid and, as a result, credit began to contract.

The 50 Best Animal Photos Of 2012

Found via The Big Picture.

Link to: The 50 Best Animal Photos Of 2012

TED Talk - Nina Tandon: Could tissue engineering mean personalized medicine?

Link

Reuters Special Report: How foreign firms tried to sell spy gear to Iran

In the summer of 2008, Iranian security agents arrived at the family home of Saleh Hamid, who was visiting his parents during a break from his university studies.

The plain-clothes agents, he says, shackled him and drove him blindfolded to a local intelligence detention center. There, he says, they beat him with an iron bar, breaking bones and damaging his left ear and right eye.

Hamid says the authorities accused him of spreading propaganda against the regime and contacting opposition groups outside Iran. The evidence? His own phone calls.

"They said, ‘On this and this day you spoke to such and such person,'" says Hamid, now 30 and a human rights activist in Sweden. "They had both recorded it and later they also showed me the transcript."

Hamid was not the only one. The Iran Human Rights Documentation Center and other human rights groups say they have documented a number of cases in which the Iranian regime has used the country's communications networks to crack down on dissidents by monitoring their telephone calls or internet activities.

Now a Reuters investigation has uncovered new evidence of how willing some foreign companies were to assist Iran's state security network, and the regime's keenness to access as much information as possible.

Documents seen by Reuters show that a partner of China's Huawei Technologies Co Ltd offered to sell a Huawei-developed "Lawful Interception Solution" to MobinNet, Iran's first nationwide wireless broadband provider, just as MobinNet was preparing to launch in 2010.

The system's capabilities included "supporting the special requirements from security agencies to monitor in real time the communication traffic between subscribers," according to a proposal by Huawei's Chinese partner seen by Reuters.