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Fisher Investments Analyst’s Book Review: Exile on Main Street

December 30, 2010 Leave a comment

Spent: Sex, Evolution, and Consumer Behavior – Geoffrey Miller

Exile on Main Street (1972, Deluxe Remastered Edition – 2010) – The Rolling Stones

Life – Keith Richards and James Fox

Those dirty, filthy riffs. Those twangy, mangy licks. Those dissonant, pungent, partial chords. Keith Richards embodied rock and roll’s 1960s transition: bearing the new standard like a Young Turk and simultaneously paying homage to the roots of it all—Muddy Waters, Memphis, London and the mods, man! A hallmark of great pop artistry, particularly in music, is to be archetypal yet impossible to replicate.* And to this day, nobody really ever sounded like the Stones. You know it’s them in a bar or two.

But like all pop iconoclasm, it wasn’t just the art—it was the symbol. Keith Richards represents an indelible slice of Baby Boomerism, his life an embodiment of a whole generation—namely, its Dionysian dark side. This is reflected brilliantly in his autobiography, Life, one of the best books of its kind. Not because the drugged-out stories are so great (we’ve heard ‘em all by now anyway), but Richards writes like he plays—it’s rhythmic, punchy prose that moves on the page like a song. If you need a break from the newspapers and business books, this is a great choice.

Or you can get the Stones experience via different senses by picking up the recently remastered album, Exile on Main Street. It’s further down the line in their musical development from early hits like Satisfaction, but before they really kicked into high gear with Wild Horses and You Can’t Always Get What You Want. Richards is totally free on these tracks—it’s a folksy, bluesy mix of jams. The whole thing has a primordial feel to it.

As I made my way through these, I also happened to be reading Geoffrey Miller’s new book, Spent, about the evolutionary psychological underpinnings of consumerism. Exile on Main Street—the title alone—has its similarities:

Always took candy from strangers,
Didn’t wanna get me no trade.
Never want to be like Papa,
Working for the boss every night and day.

If that isn’t a nutshell view of how folks view today’s debt (candy), protectionism (trade), and Baby Boomers’ general relationship to their parents’ as Greatest Generation (Papa), I don’t know what is. And then, today’s general mood about the economy:

Feel so hypnotized, can’t describe the scene.
It’s all mesmerized all that inside me.
The sunshine bores the daylights out of me.
Chasing shadows moonlight mystery.
Headed for the overload,
Splattered on the dirty road,
Kick me like you’ve kicked before,
I can’t even feel the pain no more.

Miller’s book reaches back to this visceral, Stones-like place: positing, as most evolutionary psychology books do, that the key to understanding consumers is looking at how their brains are wired. That is, humans, like all animals, live to mate, and consumerism is at heart a ritual of display—showing how “fit” we are to attract the best mates. It’s all very sex, drugs, and…well, you get it.

This view makes a lot of sense, and Miller has done the most complete job to date enumerating humanity’s instinctual need to make a display of itself and how that translates into modern consumerism. He takes Steven Pinker’s ideas about instinctual behavior forward, even as he harkens back to Carl Jung’s archetypal psychology. There’s all sorts of interesting tidbits about how we gauge intelligence, why being conscientious is ultimately a show of good genes, and so on.

But, as with most books of their kind, this one often goes too far. Certainly, instinct represents one shade of consumerism (and a significant one at that), but it’s not the whole thing. Sorry, I didn’t get my iPhone just to show off to the world or my girlfriend—it’s just a really awesome gadget that makes other things like email and mobile internet way easier. And it’s fun.

Also, there’s no concept of progress here. Miller spends the introduction arguing that a cavewoman of millennia ago is probably as happy or happier than we are today. I’ll buy the notion that psychologically the world is more complex and difficult now, but the simple reality is that innovation and capitalism has taken much of humanity to new, better heights. I’d rather have my psychological neuroses than be in danger of starving (or being eaten myself!).

That said, Miller describes the concept of marketing in a way most do not, but is pinpoint correct: Marketing is not simply advertising, marketing is understanding what your clients want/need and being able to deliver that product. Marketing is the most important part of business acumen for an executive; it’s not just for Mad Men. The only other place I can recall this vital business lesson articulated so well is Ken Fisher’s first book, Super Stocks, going all the way back to 1984.

Also, Miller spends a good deal of time explaining that “fitness” displays have many false signals. Much ostensible virility, like what kind of car a guy drives, actually doesn’t prove the case at all, but tries to by proxy. This idea correlates very nicely with how many (to my view) can be fooled by what good investments really are. A true, “fit” investment is something that produces value, like a share of stock in a profitable company. But stuff like baseball cards, artwork, heck, even gold (for the most part), isn’t productive. Their value is assigned completely by human psychology—those human desires. Which doesn’t make them worthless by a long shot, of course, but if you take out the psychology, you don’t have much. Even Picasso’s worth is in the eye of the beholder. But though market prices gyrate, owning a share of a great company ultimately has a more tangible claim to value because the firm produces useful goods and services and, unlike a Picasso, adjusts to customer tastes (back to that marketing thing!). Maybe that seems like semantics, but give me the productive company any day as an investment.

The most important lesson of Spent is that the popular current view of “the consumer”** is wrong. All this hand-wringing in the media about “when will the consumer come back…they’re all tapped out!” is sheer nonsense. Human demand is eternal—it cannot be satiated, only stifled for brief periods. It will return because it’s inherent to who we are—it doesn’t need to be “stimulated.” What needs stimulus in a recession are the suppliers—incentives to make goods for people to consume. There will always be folks to buy things if the products are marketed competitively.

That was the whole crux of the Rolling Stones. They didn’t just get lucky. In archetypal rock star fashion, those guys played till their fingers bled, performed for empty halls, lived in poverty and only for the music for years. All that “market research” showed Mick and Keith how to write great songs people wanted to hear. From there? You know the story. Rock and roll was never the same—but no chance it was just Tumbling Dice.

* One of the great innovations Richards brought to mainstream rock was alternative tuning. He would tune his guitar to an open “A” chord, allowing him to play many chords only partially fretted. This effect created dissonances and atonal results that helped produce his signature sound.

** Minor pet peeve: Who ever decided it was “the consumer”? Basically all media says it this way. Isn’t it just “consumers”? There isn’t one giant person opening their maw to consume all things, is there?

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

Fisher Investments Analyst’s Book Review: Attack of the Indexers!

December 28, 2010 Leave a comment

Don’t Count on It!: Reflections on Investment Illusions, Capitalism, “Mutual” Funds, Indexing, Entrepreneurship, Idealism, and Heroes — John C. Bogle

The Investor’s Manifesto: Preparing for Prosperity, Armageddon, and Everything in Between — William J. Bernstein

I spent the last week or so reading just about everything John Bogle ever published. And man, is that guy cynical about the investing world! The title of his newest book, Don’t Count on It! is a mantra, almost self-help guru-ish in its repeated invocation, to be dubious about anyone or anything in investing. The book is a sort of “greatest hits” of speeches and excerpts from Bogle’s career. In this, it ebbs and flows—his personal reflections on building the Vanguard funds can be engrossing. But at 603 pages, one wonders about the editing—the book is frustratingly redundant, often repeating whole passages.

Bogle believes investing today is populated with products that overcharge and under-deliver; the system is overrun with marketing and lacks stewardship; and virtually no one can outperform the markets over time. So the best thing to do is get market-like returns via ultra-low cost index funds.

Well, that’s certainly a populist view. And a lot of his proclamations (getting rid of quarterly results for public companies, earnings restatements, etc.) go too far. But there’s much gold to be mined in Bogle’s views too. It’s a jungle out there for novice investors: The proliferation of products, not knowing who to trust…it’s daunting and folks do get burned. Heck, stock brokers at this point don’t even have a fiduciary duty to serve their clients’ best interests! And it’s at least plausible to argue expenses at many plain-vanilla type mutual funds could be lower. Vanguard, if anything, is simply spectacular at providing the public well-constructed index funds at low cost. (For years, my boss Ken Fisher has railed publically about the shortcomings of mutual funds and the like for many of the same reasons Bogle does.)

But there’s a rising tide in the industry countering all this: fee-based separate account management. (Full disclosure: That’s what we folks at MarketMinder do.) Registered investment advisers manage clients’ accounts separately (by far a more efficient thing than pooled mutual funds), have fiduciary duty to serve their clients’ best interests, take compensation as a percentage of assets managed (so there’s a big incentive to do well and right by the client), and can in fact long term beat the markets net of fees. I know this because I work for such a place. This simple framework, to my mind, solves most of the stewardship and cost problems Bogle rails against.

If you can’t (or don’t want to) find a manager you believe will consistently do those things, indexing can be fine enough. Just one problem: you still must decide on asset allocation (a trickier business than it often seems) and have the guts to stick with the strategy. A passive all-equity strategy went down just as much as the market in 2008. In other words, it’s still YOU who must be disciplined and sit tight when the world feels like it might be ending—that might be the toughest thing of all in this business. I, for one, witnessed many die-hard passive investors lose their gumption, sell out, and miss the big rally of 2009—doubly damaging. So, behaviorally, passive investing has its problems.

Actually, the indexers inadvertently prove one of the most important lessons for active portfolio managers and stock investors generally: At a minimum you want a strategy that captures the baseline long-term return of equities. To do that, you have to be in stocks. Most get this backwards: people fear losses way too much (now is a classic era for that). The simple reality is that, over time, stocks run circles around the hesitant. You can’t ease into stocks figuring there will eventually be a lower point to get in. That might feel intuitive after a decade of flat returns, but in practice it fails more than it works. This has been proven statistically over and over, but the investing community consistently turns a deaf ear to it.

Which brings us to Mr. Bernstein. There’s sort of a mutual admiration society between Bogle and Bernstein. You can’t read their work interchangeably, but most of it’s in the same ballpark. They cite each other often as influences. Bernstein’s latest, The Investor’s Manifesto, is really an update from his past books, The Four Pillars of Investing and The Intelligent Asset Allocator.

Bogle righteously emphasizes simplicity in a world of rising complexity. Bernstein says his Manifesto is the simplified version of his views, but a layperson will be befuddled after a few chapters. He seems to mistake brevity (and the book is brief) for complexity of concepts. Statistical explanations of how equity risk premiums are supposed to work, why (to Bernstein’s view) small cap stocks are better than large, and so on, will vex neophytes. Mr. Bernstein seems to sense this—which is probably why he argues it’s so difficult to outperform the market, so few can do it, and most are best served passively investing in index funds, a la Bogle.

But there’s some worthwhile wisdom in there too. Bernstein is one of the few to (rightly) favor being a student of market history and, as such, see that “the more you study market history, the fewer black swans you see.” Absolutely correct. And Bernstein interestingly discusses the “narrative” of a company. He advocates knowing the fundamental macro forces really driving share price—a story of the stock that explains why you hold it—instead of toying with the statistical gerrymandering that is valuation and financial statement analysis these days. Bernstein says investors tend to go for the sexy story, the sexy stock (Apple, anyone?), but often miss the companies that are less popular but really drive the economy—your heavy Industrials, Materials, commercial banks, and so on.

Bogle and Bernstein recognize that most folks planning for retirement (or are in it) need a lot of stocks to fight the effects of fees and inflation and achieve any decent return. Yet, they recommend a lot of bonds. This conventional wisdom has always been tough to justify when really scrutinized. It’s about as close as investing gets to a physical law (to my mind) that the long-term return on stocks is better than bonds. So, by definition, the more of a lower returning asset you hold, the lower your total expected return. Period. Yes, stocks are more volatile—a feature of the higher expected returns. But if your time horizon is long (which it is for most folks even in retirement), that can be ok. A good adviser, even if they don’t call every market environment rightly, should be able to help you navigate those times of rough volatility—not allowing you to get too high when stocks soar, but also not allowing you to panic when they fall a lot.

In the end, indexing can be a viable and low-cost way to get a well-diversified portfolio. But it doesn’t relieve individual investors of decision-making responsibility—no getting around it. For those who don’t want the onus, seek the help of a good advisor. Contrary to today’s cynicism, there are in fact many fine and responsible stewards who can help build your wealth over time.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

Fisher Investments Analyst’s Book Review: Political Turkeys

December 22, 2010 Leave a comment

A Journey: My Political Life, Tony Blair

Decision Points, George W. Bush

Obama’s Wars, Bob Woodward

Why on earth should an investor read a political memoir, or political history at all?

Foremost, memoirs are often hugely useful in recalling all that might have fallen from memory through a leader’s tenure. To read these books, one gets the impression it’s never-ending turmoil, there’s never a time or spot of surcease, of rest. Trouble lurks every-where, every-how.

Well, welcome to history. Those who read MarketMinder faithfully know we like to say there’s “never a dull moment,” and it remains a key lesson for stock investors. In spite of it all, economies do thrive, stocks do climb, and wealth is created. It just doesn’t often feel like it. Political books remind us there will never be a time in our investing lives when the world shouts “all clear, things are great,” and those who wait for it get stampeded by the bulls long-term.

Political memoirs never change anybody’s mind. They just confirm. If you thought George Bush was an ineffective executive, he still is; if you thought George Bush was a courageous leader in a harrowing epoch, he still is. Same for Tony Blair, who’s become something of the UK’s version of George Bush—folks love or hate him and no in between.

And make no mistake: Political memoirs aren’t about candor, they begin the process of legacy building for a retired leader. They’re meant to set the stage for how historians will judge their tenure. A closing argument, as it were. That makes these things full of rationalization, bias, skewed perspective, and yes, political speak. The simple fact is that we’ve always expected too much out of our leaders—who are just as flawed as any of us and that’s no different today than it was in prior eras—and that’s not the ultimate ethos of democratic capitalism, which places self-reliance at its core.

The upshot is you get a more intimate sense of what kinds of politicians these folks were. These books are studies in how to build and sustain a coherent political persona. And for better or worse, these were two of the most noteworthy of the era. There is no mistaking George W. Bush in Decision Points—the confident, simple language is all him. Same for Tony Blair—in A Journey, his dapper, eloquent but principle-based words can’t be mistaken for anyone else’s.

Many will be surprised to hear both the Bush and Blair books are better than other recent political memoirs. True, these guys aren’t Churchill or Lincoln, but theirs are better literary offerings than, say, Nixon, Carter, and Clinton’s. Blair is a gifted communicator who describes circumstances and their emotional hue with great skill. Bush, of course, was never known as a communicator. But it’s almost a virtue in his book. Decision Points is not a sweeping narrative; it’s a pinpointed view of what Bush felt were the decisive issues of his life and presidency. There’s very little tedium in his book, and that’s a nice change.

I read in another prominent publication that Bush doesn’t show much contrition in Decision Points. Whatever you think of him, that much isn’t true. There isn’t a chapter he doesn’t confess some mishap. It’s easy to love or hate Bush because, as his book really displays, he was stark—black and white and no gray. He didn’t do the wishy-washy political thing that most do. The real false sale of Decision Points is that it was largely billed as a study in executive management, and that it is not. Instead, it’s more like a series of vignettes on difficult situations and what happened rather than a schooling in the conceptual or tactical process of making executive decisions.

Blair is actually much less contrite than Bush. But he is so much more slick and eloquent in A Journey that he comes off humbler, even though the pure words he speaks are not. One can’t help but note how much Blair clearly emulates his political soul-mate, Bill Clinton. Blair is a master at seeming to bare his all emotionally, empathizing, sympathizing, but appearing strong and bold nonetheless. That is, he’s charismatic politically in many of the same ways Clinton was. Blair often talks in emotive tones, eschewing too much detail and tedium in favor of his personal reactions, his feelings, his perceptions, and the lessons he learned. Conversely, Bush’s prose is at times like a séance to channel the ghost of Ronald Reagan. In this, Bush usually falls short, but not always.

Rounding out the Turkey Day reading was Bob Woodward’s latest presidential war entry—Obama’s Wars. This book is about the same in tone, breadth, and quality as all Woodward’s previous works on the Iraq and Afghanistan wars—a sterling and faithful work of journalism. And sure, it’s a political “insider’s” perspective, but one gets the sense it’s all a bit too staged, a bit too clean and glossy. Even the cussing feels sanitized. There’s no revelation in these books, it’s more like a well-wrought, long-form narrative. That makes Woodward’s books excellent for getting an education on the main political and military issues of these conflicts. But it also makes them less insightful.

Wars will continue—we’ll even have more of them, and the same with presidents. Through those periods there will be highs and lows, but it’ll never be dull, that much we can say. History gives investors great context and shows today is no less or more angst-ridden or turmoil-trodden than epochs of the past. But we go on.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

The Truth Wears Off – an article for every investor

December 16, 2010 Leave a comment

Every investor should read Jonah Lehrer’s latest article from The New Yorker. It’s titled “The Truth Wears Off”, and is a study of a troubling phenomenon in science that so far lacks explanation—the “decline effect”; namely, that heretofore proven and replicated experiments are later being proven false and/or scientists are having trouble replicating results that serve as bedrock assumptions for full blown scientific paradigms. While this debate is usually reserved for the esoterics of science philosophy, it’s very relevant to investing.

Such anomalies demonstrate the slipperiness of empiricism. Although many scientific ideas generate conflicting results and suffer from fallingeffect sizes, they continue to get cited in the textbooks and drive standard medical practice. Why? Because these ideas seem true. They make sense. Because we can’t bear to let them go. And this is why the decline effect is so troubling. Not because it reveals the human fallibility of science, in which data are tweaked and beliefs shape perceptions. (Such shortcomings aren’t surprising, at least for scientists.) And not because it reveals that many of our most exciting theories are fleeting fads and will soon be rejected. (That idea has been around since Thomas Kuhn.) The decline effect is troubling because it reminds us how difficult it is to prove anything. We like to pretend that our experiments define the truth for us. But that’s often not the case. Just because an idea is true doesn’t mean it can be proved. And just because an idea can be proved doesn’t mean it’s true. When the experiments are done, we still have to choose what to believe.

So far, other folks I’ve spoken with react to this article mostly in this way: “This article isn’t too surprising because we all have behavioral biases we can’t guard against no matter how much we try.” Which is true enough, and a demonstration of just how far evolutionary psychology has made its way into the mainstream.

But there’s another basic feature to this, what I call the “Semiotic Effect”. Mathematics, and quantification generally, is lauded like a religion these days. People have this spiritual faith in numbers. Not just statistics per se, but the belief that numbers themselves have truth in them—are truer than any other mode of knowledge. When I tell a client something I believe will happen in the markets, they often respond with, “Prove it! Show me the numbers.” As if the presence of numbers in my argument make it more “true”.

Not so. At least, not always so. These same people miss the basic fact that numbers are not reality as such, but represent reality—numbers are at least a step removed from the actual world; they are signifiers. Describing anything economic in terms of numbers is by definition different than the true state of things. Slapping a signifier (symbol) on something real like a stock makes the world easier and cleaner to work with, and also easier to run those things through the rigors of mathematical logic. But when we start doing things like black-Sholes models, or even use accounting to describe a company’s financial position, it’s not the true phenomenon that we’re talking about—it’s the signifiers. Only the numbers can be put through math’s logic. So, what numbers and statistics do is provide a symbolic conduit for organizing information and presenting it in ways that help describe what markets do, what people do, what economies do. But that “step removed” feature of numbers means that this ability to organize and describe comes with a cost—when we deal in numbers and math, we can only describe the world, we can’t represent it perfectly. For a lot of things, this is no problem. Ascribing a number to something (say, sales of cars in 2010, or gravity’s effect on an apple in mid air) is neat and clean and function without anomaly. But in other matters, like human motivation and activity (the territory of economics and much of finance), it’s very poor indeed. Black-Sholes only works in theory—and is a robust enough concept to do a good job of describing how options should be priced…but fails all the time in the real world. Because the numbers and the math are poor signifiers for how markets can and do go sometimes.

Maybe this is tautological. But we have to remember this stuff—far too many in this business “seek the truth in numbers”, when really the truths of the world aren’t always part of that territory.

Monday Quick Takes

December 6, 2010 Leave a comment
  • A brilliant piece from John Tamny today, writing for Forbes, on how to see price stability and the Fed properly:http://blogs.forbes.com/johntamny/2010/12/05/price-stability-is-an-economically-dangerous-fad/
  • This bears repeating because most investors still don’t know it: Until the SEC rules otherwise, registered investment advisors must put clients’ interests first; brokerswho are not investment advisers basically don’t have to.
  • A handful of people have recently asked me if they think the Fed might curtail QE2 since the economy’s been so strong the last few months. Who knows, but it’s looking unlikely. If you think about the Fed’s dual mandate of employment and inflation…the employment part probably isn’t improving enough for Ben to hit the brakes. And with his dour comments on 60 minutes last night, QE2 seems on track for the time being.
  • Germany rejected calls to increase the European Union’s 750 billion-euro ($1 trillion) aid fund, but watch what they actually do, not what they say. Germany and other stronger euro nations will backstop those in trouble so long as the perceived benefit of easy trade and a coherent currency within the continent outweighs the costs. Right now, its still does.
  • Groupon reportedly snubbed Google’s ~$6 billion offer. To find someone else willing to pay that or more, or to actually grow the business and get it in a place where the founders can monetize $6 billion easily…best of luck, that’s a risky bet.
  • Looks like we’re gonna get a South Korean trade pact after all. Now, the trick is whether Congress will ratify it. At this point all we can say is the odds are probably a little better than 50/50, since this won’t get to Congress until January (where the new Congress will take over) and we really don’t know what their agenda will be. It does probably have a reasonable chance of passing—the whole point of these extended negotiations was to get something that could pass (the original agreement was signed in 2007, but had not been approved by Congress).  Even various partisan groups like the Chamber of Commerce have endorsed the thing. So we’ll see.
  • “Shadow-lending” in China is basically lending from sources other than official banks—some view this as a chronic problem and it’s been reported on frequently lately. It’s surely happening, but likely at a smaller effect than many claim. It doesn’t seem to influence infrastructure construction borrowing, which makes sense as any lending outside of government overview wouldn’t be involved in government projects. With the government owning roughly 70% of productive assets, this limits the scope of the shadow banking and likely focuses its on small businesses and consumption. It does make the money supply marginally more difficult to control, but generally not something to get riled up about. Besides, loan number fidelity in China is just one of oodles of economic data to question there. Also, what the Chinese call “shadow” banking is most of the time really more like non-bank investor groups. Not entirely different than PE, VC, and other capital firms here in the west.
  • Crovitz’s piece in the opinion section of the WSJ today is worth a look. Essentially, it posits the seldom cited view that Wikileaks founder Assange is not a champion of freedom of information, but explicitly an advocate of destabilizing powerful governments.

Weekend Brief

December 6, 2010 Leave a comment
  • So far a recovery in employment hasn’t had anything to do with the bull market or the economic recovery. See this week’s (or this year’s) returns relative to the new higher unemployment number.
  • Few will see it this way, but history could very well show that the US —more or less—did things right once the crisis hit. At the outset, huge liquidity provisions to keep the system afloat, and once the recovery took hold a few years later it looks like we’ll get extended tax cuts and probably even some spending cuts. QE2 notwithstanding (granted, that’s a BIG notwithstanding), that’s actually a pretty good way to navigate a financial crisis on in to a recovery.
  • One of my favorite things is to read Fed commentary literature—it’s some of the best speculative writing since Ray Bradbury. Everyone thinks they “know” what Ben is “really” trying to say in his speeches. Ignore that stuff and act according to what is done, not said.
  • A worthwhile readWho Pays for Big Government?
  • Russia hosting the World Cup will be less a grand display of the country and its prospects and more like a last gasp on the global stage.
  • A thought-provoking and worthwhile opinion piece from Gerald O’Driscoll Jr. in today’s WSJ on whether we even need a central bank, and how the world might look without one.
  • EU business confidence recently hit an all-time high. The EU economy will grow nicely this year and projected next year too. It’s a bizarre dichotomy right now between European sovereign troubles and their recovering/thriving private economies.
  • The ECB extending unlimited lifelines to banks one quarter at a time doesn’t really help much at this point—knowing you’ve got a backstop for another 3 months doesn’t address the real issues. Although, it’s probably good that they didn’t sunset the program. That the ECB is buying Portuguese and Irish bonds right now is fine enough, but the scale of the purchases as of right now is way smaller than previous programs—it’s not a big initiative at this moment. Maybe it’ll grow…
  • …you can think about the debt crisis in poker terms: Ben Bernanke’s got a terrible bluff—usually telegraphing his moves well in advance. Trichet’s got a great poker face, sometimes even misdirecting the public before making a move. He says he doesn’t expect another big stimulus initiative by the ECB—I wouldn’t hold my breath on that, particularly with EU finance ministers meeting in a few days.
  • One of the main reasons for Europe ’s current fiscal problems is political. Have a look at Prime Minister Zapatero in Spain —he’s getting more unpopular by the day. Meanwhile, he’s got to figure out a way to make his budget work and support the smaller Spanish banks with dwindling political capital. Tough to get things done in that environment.
  • An interesting thing about Obama and his administration is that they’re nothing if not persistent. Initiatives like the Healthcare laws and parts of FinReg looked DOA and yet eventually got done. And now the South Korean trade pact—which looked all but dead a week ago after the tepid G20 summit—now looks like it could actually get done again. That’s a good thing…the US has woefully under-participated in new free trade pacts this year where the rest of the globe’s done tons.
  • Surprisingly profound quote of the Day: “It’s always here and now my friend, it ain’t once upon a time!” – David Lee Roth

 

Thursday Briefs

December 3, 2010 Leave a comment
  • This just about says it all, courtesy of NYT’s Dealbook: “Who Got Help From the Fed? Maybe the question should be: Who didn’t…?” Word that the US would reportedly be ready and willing to back the EU should its fiscal stability come into jeopardy only corroborates the quip.
  • Rogoff and Reinhart’s It’s Different this Time, which is a fine piece of academic work, has become a financial weapon of mass destruction. It’s been the intellectual cornerstone for preemptive bailouts in Europe throughout this year.
  • If this European debt episode has proven anything, it’s that disparate fiscal policies with a unified monetary policy can’t work long-term. What these countries are grappling with, ultimately, is the fact they’re basically as strong as the weakest euro link, fiscally. And the stronger parts must backstop anyone in the club. That’s the part that’s game-changing—once upon a time Greece would simply default, restructure, and reenter the debt markets a few years later. Same for Ireland , Portugal , etc. But now, since they’re in the club, default isn’t on the table politically (but arguably could be economically). So you get this mess. Already by small degrees the euro members are being forced to link their fiscal policies, by force of the current moment rather than negotiation. How ironic—the debt crisis just might do more to unite Europe than Maastricht ever did.
  • John Cochrane’s opinion piece in the WSJ today is spot on tied to the euro mess: Ireland isn’t a national bailout, this second wave of the crisis is mostly a banking bailout under national auspices; contagion is self-created not a foregone conclusion; and, these banks should be forced to restructure their short-term obligations into longer-term ones at higher cost.
  • I’d advise against in any shape or form trying to telegraph the ECB’s next move. Unlike Bernanke’s Fed, they tend to remain coy and mum about what they might do. Apparently Spain , Portugal , and even Italy are privately pushing for some decisive action from Trichet and the gang. But Trichet has a great poker face and we probably won’t know anything until it happens.
  • So far, holiday sales are trouncing expectations. In my investing career, there’s never been a year where experts didn’t fret a poor holiday shopping season. Interestingly, it appears the importance of Black Friday is waning—customers are increasingly spreading their holiday purchases over time as opposed to the frenzy of one day. No doubt, internet sales contributed to this effect.
  • So, the big deficit plan will probably turn out to be a nonstarter. While the report got bipartisan praise, it’s unlikely to get enough votes to leave the Senate Budget Committee with enough votes for a full stamp of recommendation.
  • It’s disappointing offshore drilling on the east coast was nixed, but great in the intermediate to longer-term for high oil prices.
  • If the Bush-era tax cuts get temporarily extended for all income levels, that’s a fine enough thing. But temporary changes won’t change much long-term planning behavior. Would be great to see some of them become permanent. There is an underlying motivation to get these done in the lame duck session—doing them retroactively next year places a huge logistical burden on the IRS…all sorts of forms and revisions would need to be done hastily.
  • December is the best month on average for stocks. Sure seems off to a good start.

 

Tuesday’s Quick Takes

December 1, 2010 Leave a comment
  • Here’s one of the most important articles of the year: Economists’ Grail: Post-Crash Model. Simply, any economist worth their salt knows that the nature of complexity and accelerating change means math as it exists today in no way is able to predict the direction of markets or economies. The world is too big and deep and complex and has been for a very long time. So it becomes a profession of probabilities. These Sisyphus-ian attempts at math blended with psychology are noble, but a losing endeavor for those who must make practical predictions…like investors.
  • The euro sovereign debt thing ain’t over. Just don’t expect it to spark a new bear market. One of the oddities about the European situation right now is the disconnect from government finances and their actual economies. Ireland is set to grow +4% in 2011, and much of Europe is firmly in recovery. Germany ’s economy and stock market are up, as is European economic sentiment. Most of the rest of the world looks poised to post modest stock market gains for the year. That’s important because just a few months ago experts were declaring that asset markets were all unprecedentedly highly correlated. Yet, at least on a country basis for equities, there’s going to be some significant dispersion this year. Italy is down almost as much as Spain and Portugal , but Germany , Sweden , and others are doing just fine.
  • Germany does a lot of its exporting to other European countries that use the euro. So, expect them to keep talking tough publically about other euro countries in fiscal trouble, but ultimately lending their support. Maybe the only way it breaks down is if Germany itself becomes fiscally endangered, in which case you can bet they probably won’t be willing to go down with the ship. But we’re nowhere near that right now.
  • Obama’s proposed two year freeze on federal pay seems fine, but speaks to the overall lack of incentive to produce that comes with working for the government—pay isn’t based on any sort of output that I can see. This is also a clear signal to my view of Obama’s upcoming move to the middle to get reelected in 2012. Watch for a compromise on tax cut extensions to come next.
  • The revelation that Russia has moved missiles near NATO territory isn’t going to rankle markets now, but it’s worth noting. With the SMART treaty in jeopardy, this is a sterling example of how frisky Russia could get given their desperate population aging and economic problems—which will only get worse over time. Desperate countries do desperate things and look for last gasps at power on the international stage. Eastern Europe is prime territory for that drama over the next decade.
  • The brewing row in Florida over a phosphate mine and environmentalism is a global non-issue. If the US doesn’t do it, countries like Morocco , Tunisia , and China will provide all phosphate the world needs and more—and reap the benefits. Phosphate is used in everything from batteries to fertilizer, and the world will have a big need for it in the decades to come.
  • Note that the Wikileaks scandal is a non-issue to markets, and really not that big a deal generally. Why? Most of the stuff in those leaks are all things most well-informed citizens of the world more or less expected to be going on anyway. Rumors have surfaced that next on the Wikileaks hit list are confidential docs from a big commercial bank. Same principle probably applies there too—will be damaging to whoever gets hit, but the global markets will likely mostly shrug it off, if it happens at all.

 

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