Tuesday, September 30, 2008

Federal "Stay in Your Home" Insurance

Never thought I'd be happy about Congressional ineffectiveness, but in this case I'll make an exception.

Their inability to get anything done properly has given us a (few) breathless seconds to think about alternative steps to help soften our inevitably bumpy return to Earth from our debt-propelled cruise through the stratusphere.

I'll stay within the conceptual confines of "big government action" that apparently everyone is hungry for right now. How about ....

A new Federal "stay in your home" insurance program. Here's how it might work: Anyone with a mortgage on their primary residence can sign up for a Federal plan which allows them to opt for a renegotiation as an alternative to foreclosure if they have permanent trouble making payments. Eligibility criteria might look at the ratio of monthly mortgage payment to average monthly household income. The terms of the renegotiation should be standardized: either lower payments by extending the lifespan of the loan at the same rate ...

... OR lower payments by swapping with the Federal government a portion of the loan balance for a portion of the home's appreciation when the house is sold (or when it is paid off or refinanced, whichever comes first).

Tactically speaking, on the front-end, the insurance program would cut a one-time check to the lender for that portion of the loan, and the payments would be re-calculated based on the new balance and the original loan lifespan. On the tail end, the house sale would be subject to an additional "swap tax" which would be the greater of the amount originally "swapped" or a percentage of the capital gains large. The percentage would be set at re-negotiation based on the ratio of initial loan value to "swap" amount. For example:

If the borrower STILL fails to live up to their new, lowered, expectations, they might choose to swap again if there's enough home equity ... or the lender would proceed with foreclosure.

Clearly negative-ammortizations and HELOCs above 100% of equity would not be eligible. I'm sure realtors and mortgage bankers can think of other sensible clauses to ensure the homeowner doesn't simply let the house go to shambles. On the other side of the moral hazard coin, we'd have to figure out how to guard against abuse of the program or artificial manipulation of sale price.

The free marketeer in me would like to see these programs offered by the financial industry, not the Feds in the interests of overally efficiency for the macro economy, but I present this idea as a government plan to demonstrate that it could be run with minimal risk to taxpayers. A big buzz-concept in the coming years will be public/private cooperation. Applying that to my idea would be as simple as allowing the government turn around and sell these swaps in the open market in order to ensure market pricing.

Monday, September 29, 2008

Chalk One Up for Democracy

Has the Paulson Plan finally awakened the sleeping giant again?

Representative democracy seems to be working today, as US citizens have put a (finally) irresistable tidal wave of pressure on their elected officials NOT to sell our childrens' financial futures down the river.

Evidence: the government's internet servers for websites including http://www.house.gov/ have been entirely overloaded all day with citizens logging in to express themselves to their elected officials. Mark my words: they'll report a record number of hits over the last 24 hours.

Friday, September 26, 2008

How About a Plan That DOESN'T Bankrupt the Country

By now I've made clear my disapproval of the socialist programme Paulson proposed. What a disappointing liberal in conservative clothing. I'm slightly softer on Bernanke, who's still trying to recover from his delivery from the womb of academia into the real world where execution is the bugbear of pristine theory.

I understand that "everyone" (read: those loud enough to get Washington's attention; read again: whomever can wield the most bucks and/or votes for the politicians) is in a hot lather to secure their place in history by putting their fake-smiling face on something impressive.

Guys, what would impress ME is something WORKABLE, SIMPLE, TRANSPARENT, SUSTAINABLE, FISCALLY SOUND, PRO-LONG TERM GROWTH (as opposed to pro-short term bubble, leading to long-term crash), PRO-CAPITALIST, PRO-GDP.

I do NOT believe ... in fact it's just asinine and insulting to think we would believe ... that credit has flatly "siezed up" and the only answer is a bail-out. Perhaps the borrowers don't like the current rates, but there is ALWAYS money available to be lent if the rate is high enough. Yes, it will hit their profit and thus their stock price and thus their bonus. Deal with it or get out!

Same goes for equity issuance: if the firm is, indeed, a going concern with a simple liquidity problem, there are ALWAYS investors available to buy in if the value is good enough. As we saw this week with Buffett and Goldman, a true value investor sees through the temporary assyncronicities and depressed market valuations created by the "fire sale" prices at which the so-called "toxic" assets are currently trading ... and the mark-to-market rules which are launching these depressed asset prices like cannonballs into the accounting hulls of these financial ships.

But I'm not just here to carp about others' plans ;-)

Without further ado, I offer my own rescue plan:

  1. Central banks manage market liquidity and interest rates via open-market operations ... as they've been doing all along
  2. Central banks act as lenders of last resort ... as they've been doing all along. They must, however, lend at market-equivalent (risk-compensating) rates, not politicized giveaway rates. If the (true, non-hyped) size of the crisis merits, these central banks should be allowed to lend at longer maturities (30 days up to 2 years) in order to provide some financial stability for borrowers. Collateral requirements must NOT be softened.
  3. Congress must immediately cancel their winter hibernation. They can go on vacation once they've balanced the ENTIRE Federal budget, not a day before. If they can't do it before the election, they should be replaced by the voters. I don't care what it takes, we have to stop living on credit, and Washington is the best place to start.
  4. Insolvent companies must go bankrupt. Period. Using the money available via points 1 and 2 above, new entrepreneurs will have a spectacular opportunity to take over businesses and run them better.
  5. Insolvent households must go bankrupt. Period. They don't have to lose their jobs. They don't even have to lose their roofs (they can rent their McMansion from the new owner or they can negotiate a new lending arrangement via mandatory bankruptcy arbitration). But the Escalade must go. The European trip must go. The morning Starbucks must go. The 52-inch flat screen must go ... which means the digital cable can go too. Groceries must come from Costco, not Whole Foods. Yes, I love these things too, but those who have put themselves in a financial pinch must now do whatever it takes to get current expenses below current income so they can start paying down debt or building up savings. Period.
  6. Incompetent politicians, bankers, and executives must be demoted. Just one notch. There's never been clearer vindication of the existence of the Peter Principle of promoting people until their job is beyond their capabilities.
  7. The mark-to-market rule must go. Accountants and regulators over-reacted to earlier problems by creating opposite but bigger problems. Something better must be found in short order, but for now it's just causing unnecessary liquidity crunches and extreme volatility. Next time: try matching asset valuation to it's NPV based on expected length of holding, not frenetic current market price.

If I have to concede a point it is this: If the US government MUST take on assets, they should be placed in a new US SWF. For expediency, this SWF can initially be managed using the governance and by-laws of Temsek (a long-standing Singapore SWF). Everything must be transparent and done at market rates. The fund should be managed for profit by a set of (private, contracted) fund managers using the afore-mentioned Temsek goals on profitability and long-term stability. Period.

I'll be back with a post about longer-term steps...

... Suffice it to say banking regulation must be revised, not to increase the presence of government, but to bring it up to the 21st century and to set capital free to seek the proper balance between maximized returns and minimized risk without economic/financial/business novices in the government meddling.

... Suffice it to say bankruptcy regulation must be more expedient and cooperative without economic/financial/business novices in the courts and law firms meddling.

... Suffice it to say we need an entirely new take on government accountability.

... I'll be back!

Wednesday, September 24, 2008

What Will Tomorrow Bring: Black Ink for Everyone!

Putting my conspiracist hat on...

Isn't RTC2 (aka TARP) shaping up like a back-door SWF ... only on borrowed money, since that's the new American way?
Aww, you shouldn't have. I always wanted the US to have a SWF! And this one's a bee-ute!

Perhaps this is just a big surprise present to future generations ... kinda like how High School seniors give the school a parting gift before graduation. Just think ... Paulson, in all his wisdom, and with his near-zero cost of capital, buys up major chunks of US assets.

He lets them ripen.

He sells them for twice the purchase price. He pays off the national debt, puts Social Security on sound footing, and even has left-overs for Obama's gazillion-dollar social and healthcare programs.

Merry Christmas, 2058!

Tuesday, September 23, 2008

Dear Hank

To Hank with love ... I'd like to offer you a gift. Out of my own pocket, I want to buy you a nice long vacation. I'm serious. Anywhere you wanna go, any price, any number of weeks. Anything you ask. You need to get away for a while. You've done quite enough here, thank you.

Yes, I'm breaking up with you. It's not you, and it's not me. We've just grown apart. Well, to be frank, your deal-making addiction and shop-a-holism just leaves no room in your life for me. Don't feel ashamed. You're not alone ... and it wasn't your fault. The peer pressure from those rowdy new buddies of yours down in Washington must have been just too much. I care enough about you to say this: seek help. Really. You'll thank me someday.

Honestly, warts and all, I'd keep ya ... but it would never last. I just can't afford the kind of lifestyle you require. If I was made of money, I promise, I'd have bought you the auto industry like you asked last Christmas. I kept working weekends saving up for that "Brazil" place you said would make you my best friend forever ... but darn the luck, I put everything I ever had in the markets, and well, you may have heard they're gone.

I did the math and it turns out I can't even pay the minimum balance on that credit card you used to buy 10% of America's home loans for a trillion bucks. I think you probably could have gotten that cheaper if you had looked online. I know you like to shop, but I think you need to take this one back to the store. It's just over the top. Garish. Gaudy. You don't want to be gaudy, do you?

No, I'm going it alone ol' chap. Probably won't be emotionally ready for another Trust Me Treasury Secretary for a long time. You'd best return some of the stuff you bought or find yourself 300 million new sugar daddies and mommies before the next installment payment comes. Try Russia or China. I hear they have some extra ones.

May God bless and keep you far away from us,

Your most humble, loyal servant for the forseeably indebted future,


Monday, September 22, 2008

Follow Up: Gears and Levers Buried at the Roots (updated)

Yes, here I am already with a follow-up less than 12 hours after my initial post. I just couldn't resist linking my stream-of-consciousness with that of John Steele Gordon, who guest-authored an awesome Freakonomics blog today. While I called out evil's name: DEBT ... he called out the names of its creator: The Fed (via artificially low interest rates) and Fannie and Freddie (via artificially low interest rates).

Behind both: Congress and the executive branch

Perhaps Barney Frank should have taken the fifth back in 2003 instead of putting his foot in his mouth incredibly:

in my view, the two government sponsored enterprises we are talking about here, Fannie Mae and Freddie Mac, are not in a crisis ...

I do not think at this point there is a problem with a threat to the Treasury ... if investors take some comfort and want to lend them a little money and less interest rates ... there is no guarantee, there is no explicit guarantee, there is no implicit guarantee, there is no wink-and-nod guarantee. Invest, and you are on your own ...

Fannie and Freddie have played a very useful role in helping to make housing more affordable ... a mission that this Congress has given them in return for some of the arrangements which are of some benefit to them to focus on affordable housing ...

I believe that we, as the Federal Government, have probably done too little rather than too much to push them

Hat tip to Mark J. Perry for plumbing the NY Times archives to find an even more obvious smoking gun ... and more importantly, genuflection and alms to Steven A. Holmes for (perhaps unwittingly) playing Cassandra. He spake thus in 1999:

...Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits...

''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer...

...Fannie Mae is taking on significantly more risk ... the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.

Unlike FnF, the Fed is supposed to be independent of political wrangling, but Greenspan himself griped in his book about the unprecedented level of meddling he saw in his last years ... as well as in the future:

In the political arena, the pressure to make low-interest-rate credit generally available and to use fiscal measures to boost employment and avoid the unpleasantness of downward adjustments in nominal wages and prices has become nearly impossible to resist

I fear that my successors on the FOMC [Fed], as they strive to maintain price stability in the coming quarter century, will run into populist resistance from Congress if not from the White House

To John's list of culprits, I will add the following ... with a caveat: good came with the bad. Low interest rates only presented the opportunity for the imprudent to over-borrow. High savings in certain pockets of the world economy enabled cheap lending in other pockets.

OK, caveat said ... the US government would not have been able to support their low-interest strategy for long without:

  • Asian Savers (the Chinese government buying Treasuries, Japanese middle-managers saving 110% of their income, a billion citizens of industrializing countries squirreling away a buck apiece) flooding the money markets with dollars over the last 15 years

  • Oil Producers (ditto)

  • Baby Boomers (saving up for retirement; granted, they borrowed in lockstep)

Cartoon credit: www.cartoonstock.com
Updated to include Barney Frank Quote 9/23/08 1:30 PM EST

Gears and Levers buried at the Roots

I can't help but stick my neck out here to clarify one thing. The root cause of our current predicament is not evil lenders, stupid homeowners, bad regulations, greedy bankers, "hocus pocus" derivatives, markets, meltdowns, mania, panic, capitalism (or any other ism), Glass-Steagall, Wall Street, Main Street, Countrywide, Lehman, Bernanke, Bush, or even Greenspan.

We would not be where we are today ... markets would not be dry ... banks would not be belly-up if we did not have the ridiculous current levels of ...


aka leverage
aka mortgage
aka credit
aka gearing

Debt is a multiplier on both upside profit and downside losses. It's an inflator of risk ...

... as I've been trying to convince people for quite some time. For example:

April 18, 2008 Blog Entry:
An investment bank borrows heavily and throws the funds into risky investments. The investments go south, the bank can't pay its loans, and the whole market panics, making it impossible for other, sound banks to continue their activities... nationalizing is bad when Chavez and Castro do it. Bad when Musolini and Mao did it. Why, then, should it be any different for us?

April 13, 2008 Blog Entry:
I-Banker's bag-o-tricks: ... Leveraging: This must be the oldest trick in the bag. ... When in doubt, borrow to take risk. Even better - use the fail-safe "steroids for investments": borrow some money and dump it into your wimpy underperforming investment. Suddenly your measly 1% return on initial investment looks like 10%. As long as the interest you pay is less than the return you make, you look like Midas.

Thankfully, with tonight's announcement that Morgan Stanley and Goldman have been persuaded to become regulated as banks, their leverage ratios will climb down the stairway to heaven a bit, but the notion that we EVER had ANY firm (or individual) geared to 50x assets is ridiculous. If that's what it takes to get the life-blood of profit from their industry, then it has already turned to stone. Nouriel Rabini correctly called such arrangements a "Ponzi Game" "pyramid scheme" and "house of cards" back in a blog from January 2007 with help from Gillian Tett.

Nobody in the industry, the government, or the media can credibly say they weren't warned.

Sunday, September 21, 2008

What Will Tomorrow Bring: Finance (what else?)

At the risk of stating the obvious, this list is merely a shotgun shot pattern of data points. Nobody can know the full landscape.

  • Perhaps most irritatingly, the ostriches everywhere will feel (indeed, seem) vindicated by their do nothing approach to everything from regulation to legislation to investment
  • Reports will emerge from Austria that Joseph Schumpeter is turning in his grave as free-marketeers become the 21st century's lepers, especially in government and academia.
  • The Fed wins the Regulator Cage Fight and gains a mandate to be the seamless Uber-regulator of the financial markets. Think UK FSA.
    • All other agencies will be put under the Fed (a political move) but eventually will be dissolved.
    • Clearly, their biggest challenge will be insurance. As I've said and said before, the biggest scariest messes lie therein.
    • The Fed will finally reconcile with the FDIC and the SEC by absorbing their expertise and adopting their methods in those areas.
    • Specifically, the Fed will establish divisions and regulatory teams for each of the types of risk: credit, market, operational, counterparty, interest rate, economic, actuarial, etc.
    • Each financial institution will be subjected to a pot-pourri of regulations and exam teams based on their cocktail of risks.
    • The interesting wild card here will be the opportunity for greater cross-pollination among the divisions. In other words: will the Fed's credit risk team learn anything from the market risk team, or will they maintain their philosophic differences?
  • The next cage fight will center on financial reporting. Are SEC requirements too useless to justify their burden? Are FASB and GAAP just inadequate? Is IAS any better? Was the "mark to market" rule lethal? Why do FIs have one set of numbers from their Finance deparment, and another totally irreconcilable set of numbers from their Risk department? Why are neither in line with market prices? Why don't banks follow valuation methods from the real estate industry for their other illiquid or unique assets? What can be done to REALLY standardize reporting with a common lexicon (think XBRL) and a single database, not of documents, but of raw, equivalent data from which investors can do their own reporting and math?
  • Leverage ratios will finally fall to saner levels, at least in the financial industry. This is one contagion I hope DOES spread to the greater economy.
  • Because of the above, the industry will take a long time to get back to its current size. A dollar is a dollar. Consolidation was necessary anyway. This week just accellerated it.
  • In a few days, I'll be going into detail about how risk management models, leverage, and the decisions people made based on both, ran amok and sabotaged the financial industry. For now, I'll say this: unless and until they are re-jigged, these models will cause numerous perversities:
    • Many models use moving averages of historical prices/spreads/defaults. Our current period of radical change and volatility is the proverbial pig in a python in these models. Until the python poops the pig out, the models will continue to go ballistic by prescribing sky-high interest rates, required rates of return, collateral requirements, and loan eligibility criteria. The wise FIs will simply give their pythons some castor oil and get it over with.
    • The subset of risks considered "uninsurable" will skyrocket and there will be calls for a new "insurer of last resort" ... paid for by guess who.
  • This new "RTC2" (my name, not theirs) is like the new WPA but for financiers, bureaucrats, and, of course, lawyers.
    • There will be no end of confusion about what assets are eligible.
    • There will be no end of debate about what institutions should be eligible.
    • Whatever rules are drawn up will be considered full of moral hazard. Intrepid hedge funds and whale investors (or unscrupulous ones, depending on your POV) will arbitrage between the "covered" and the "uncovered" assets.
    • The bean-spilling is going to be two-thumbs-up entertainment for a long time. I just can't wait to see who fesses up to what.
    • The "RTC2" asset liquidation will ride the line between inefficiency and incompetence It will be nine tenths politics, one tenth theft (just like eastern European voucher auctions). Asset prices will be determined at fiat, since the administrators will lack the know-how to do anything else. Based on what Hank said today, the objective is to re-create markets for asset classes where none exists ... so there's no right or wrong answer about valuation anyway. In the end, though, house prices will fall further in spite of demand.
    • Barney Frank's pet project of nullifying executive compensation packages will inevitably fly, but hopefully will be at the firm's discretion or open to independent arbitration.
  • Hedge funds will be the next front line. We'll all find out that they're not just scams set up to feather the beds of the rich (that's Washington!). Only after they're allowed to go bust will talking heads realize that hedge fund shares are owned by pension funds, banks, and governments. They are integral market participants.
  • Everyone will know who Tim Geitner is ... and will see lots of him for decades
  • Certain people will know who Luigi Zingales is ... and we will see lots of him for decades
  • All levels of corporate governmental America will launch massive lobbying campaigns to get their "fair share" of bailout money, now that the great taxpayer wallet is permanently open for pillage
  • Short-term Treasury yields will actually go down due to flight to quality, saving the Fed's bacon for a while ... but the ultimate effect of this entire fiasco will be:
    • A decade of higher volatility (pinging between inflation and deflation)
    • A ballooning Federal budget deficit
    • Overall increased inflation as the government prints their way out of this massive debt
    • Clearly, increased taxes across the board ...
    • ... Which will chop several percentage points off of GDP for a while ...
    • ... Which will depress corporate revenues (and the stock market) ...
    • ... Which will cause increased bankruptcy and joblessness ....
    • ... Which will lead to poverty, and need for handouts ...
    • ... Which will lead to the vicious cycle of increased government costs, and decreased revenues leading to cycle upon cycle of tax hikes ...
    • ... Unless we, as a nation, can take control of the political process and enforce the desperately needed fiscal prudence.

Saturday, September 20, 2008

To Those Foresaking Maestro

Last time I checked, he warned those of us who bothered to listen ... and warned us .... and warned us again. He even offered prescriptions for the event (see below).

I suppose it's (unfortunately) human nature to desire someONE to blame for pain. Time after time, each crisis needs a fall guy. Just one will do. Two are OK as long as they're joined at the hip. Any more than that and our WIP brains apparently throw a cyclic-redundancy bluescreen.

I won't tilt at that imperfect human predillection, but I will adamantly fight against another one: the tendency to tear down the ascendant.

Do not repeat NOT vilify Alan Greenspan as the economic anti-christ responsible for the errs of a billion. For shame the growing hoardes of talking heads who are doing so (check out dailylife.com for the latest list). For shame those (see below) who insist on ignoring the last 28 years of unprecedented prosperity, innovation, wealth creation, and reduction in poverty.

There is a critical difference between being coerced to harm yourself ... and not being prevented from doing so.

Just a few apropos quotes for our near future (not all from the book):

any form of government guarantees of credit lessens the need of financial counterparties to earn a reputation for honest dealings

The benefits of broadened home ownership are worth the risk. Protection of property rights, so critical to a market economy, requires a critical mass of owners to sustain political support

History has not dealt kindly with the aftermath of protracted periods of low risk premiums

Protectionism will do little to create jobs and if foreigners retaliate, we will surely lose jobs

Anything that we can do to raise personal savings is very much in the interest of this country

The more flexible an economy, the greater its ability to self-correct in response to inevitable, often unanticipated, disturbances and thus to contain the size and consequences of cyclical imbalances

Whatever you tax, you get less of

How do we know when irrational exuberance has unduly escalated asset values? ... We should not underestimate or become complacent about the complexity of the interactions of asset markets and the economy

Regulators can pretend to provide oversight, but their capabilities are much diminished and declining. In practice they have to rely on "counterparty surveillance to do the heavy lifting".

regulation approved in a crisis must subsequently be fine-tuned.

The Current Hall of Shame:
Tim Iacono: The Mess that Greenspan Made (yes, he has a whole blog devoted to his mission)

Friday, September 19, 2008

Bull Riders, Bear Wrestlers, John Galt, and the Sage of Omaha

I love it! There are so many internecine topics crying out for coverage right now. There are just so many new data points to connect, and so many old ones to scrub. Would that I could just pause time for a few days and pound out blog after blog after blog.

So you may find it strange that I choose the following softServ topic for today's blog rather than join the cacophony decrying the end of the world as we know it. And I feel fine.

Most recent days, I've felt like my investment strategy has been bull riding: think of nothing but holding on tight enough to stay in the saddle for the next 8 seconds. How many 60-year-old bull riders do you know? I didn't think so ... although at least they outlive the suicidal bear wrestlers. At least bulls don't have fangs, claws, or a taste for human fillet. I keep asking myself ... isn't there a better way?

As Rome burned this week, I continued my slow read of Atlas Shrugged, pretty convinced that John Galt is again among us. Cracks me up thinking of the demise Kerry Killinger's titanium comb-over should he have to roll up his sleeves and chop wood for a living in "the Gulch." (PS: what perfect casting to pick Jolie as Dagny in the upcoming flick.)

What with all the panic and gloom, however, I felt a deep need for some tranquility. I took time, therefore, from my slow read for a quick one. The Tao of Warren Buffett. I thought it would be wise to temper the urge to get caught up in every wave of hype and panic in our schizophrenic markets (and likely real economy) with a little refresher on value investing.

So, here are a few of Warren's Rules. Decide for yourself how well you (and we) are following them.

Rule No. 1: Never Lose Money.

Rule No. 7: It's easier to stay out of trouble than to get out of trouble.

Rule No. 11: It takes 20 years to build a reputation and 5 minutes to lose it.

Rule No. 12: The market, like the Lord, helps those who help themselves. But unlike the Lord, the market does not forgive those who know no what they do.

Rule No. 18: My idea of a group decision is to look in the mirror.

Rule No. 20: You should invest in a business that even a fool can run, because someday a fool will.

Rule No. 39: I am a better investor because I am a businessman and a better businessman because I am an investor.

Rule No. 43: You have to think for yourself. It always amazes me how high-IQ people mindlessly imitate.

Rule No. 49: It's only when the tide goes out that you learn who's been swimming naked.

Rule No. 60: The business schools reward difficult, complex behavior ... but simple behavior is more effective.

Rule No. 76: When proper temperament joins with the proper intellectual framework, then you get rational behavior.

Rule No. 79: When you combine ignorance and borrowed money, the consequences can get interesting.

Rule No. 81: We attempt be be fearful when others are greedy and greedy only when others are fearful.

Rule No. 82: The mot important thing to do if you find yourself in a hole is to stop digging.

Rule No.84: I buy stocks when the lemmings are headed the other way.

Rule No. 87: Risk comes from not knowing what you are doing.

Rule No. 93: I want to be able to explain my mistakes. This means I do only the things I completely understand.

Rule No. 99: If we can't find things within our circle of competence, we don't expand the circle. We wait.

Rule No. 103: It won't be the economy that will do in investors; it will be investors themselves.

Rule No. 104: For some reason people take the cues from price action rather than from values. Price is what you pay. Value is what you get.

Rule No. 107: At the beginning, prices are driven by fundamentals, and at some pint, speculation drives them. It's that old story: What the wise man does in the beginning, the fool does in the end.

Rule No. 109: A pin lies in wait for every bubble, and when the two eventually meet, a new wave of investors learn some very old lessons.

Rule No. 113: Look at stock market fluctuations as your friend rather than your enemy--profit from folly rather than participate in it.

Rule No. 114: Great investment opportunities com around when excellent companies re surrounded by unusual circumstances that cause the stock to be misappraised.

Rule No. 115: Uncertainty actually is the friend of the buyer of long-term values.

Rule No. 119: Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years.

Source: The Tao of Warren Buffett by Mary Buffett and David Clark

Monday, September 15, 2008

Follow Up: Having Faith Enough to State the Obvious

In a previous blog I quoted Douglas Adams' take on politicians. Here's what another Adams had to say:

"In my many years I have come to a conclusion that one useless man is a shame, two is a law firm, and three or more is a congress." - John Adams (1735 - 1826)

Frankly, I have to modernize this one slightly ... north of 10,000 useless men, you've clearly got a corporation on your hands.

Sunday, September 14, 2008

For You and Me a Silver Lining; For Wall Street and Washington a Lesson; For Banks an Opportunity; For Insurance Yet Another Worry

Hey, I'm in a good mood tonight. I'll leave the Fannie/Freddie feeding frenzy to a million able bloggers. The deal stinks. Period. As the FT said last week, Paulson should stick to bird watching. Were he still head of Goldman, he'd be screaming about the current level of Treasury meddling.

Here's my contrarian silver lining spin:

  • Perhaps the Treasury and Fed noticed what nationalizing FnF did to the market consensus about the long-term financial viability of the US. There is a faint hint today that they may have inasmuch as prediction markets are beginning to suggest Lehman will be allowed to fold (as it should). The Fed has signalled their approval of this solution by throwing a doggie biscuit to the rest of the Street in terms of loosening it's collateral requirements at the discount window. This is sorry pandering, in effect further nationalizing the industry's financial woes.
  • Even this might have a silver lining. Perhaps this will score the (historically trustworthy) Fed another point on the (historically brazenly political) Treasury in the regulator cage fight.
  • Perhaps this will also lead other banks to think twice about their decisions regarding risk and capital reserves. The fact that "solid" long-standing pillars of US and global finance can be brought down by the whims of a credit rating downgrade, a liquidity pinch, or 2 bad quarters in one or two business lines ... ridiculous. Most small businesses are vastly more resilient.
  • I can't tell you how many deal meetings I've sat through where the i-bankers, the traders, the brokers, the analysts bluster and storm management into concession over the concerns of their colleagues on the other, dusty, stodgy, "20th century" side of the firm such as commercial bankers, trade financeers, and risk managers. Perhaps the fact that Merrill is going to B of A finally will cause people with money to finally see conclusively that there's more hype than opportunity in the trendy Wall Street mantra about "21st Century finance" where brokers take over everything and the stodgy old banks go extinct. Banks are stodgy because they actually have something scarce and tangibly valuable to shepherd (the bank's capital). It's no secret that the prudent boring ones like Chase and B of A and BNPP and HSBC who were "too slow to modernize"are now the only ones with money in their britches and no internal panic to fight.
  • Perhaps the whole credit crunch will nudge people to live on their income, not their paper gains.
  • Perhaps this will inadvertently save a few acres of virgin US property from slash-and-burn urban sprawl.
  • Perhaps it will nudge the government to be just a bit more fiscally responsible as their cost of rolling debt goes up.
  • Perhaps Republicans will finally feel embarrassed enough about ridiculous growth of the Federal government on their watch to start walking the walk of limited government with some real (even if unappetizing) admissions ... along with the right solution.
  • Perhaps Palin will blurt out that FnF were created by a democrat (Johnson) in the first place ... If it doesn't go over well, she can plead innocent youthful exuberance.

Honestly, though, I have no silver lining yet when it comes to AIG. I've bemoaned (sometimes tongue in cheek) the accumulation of assets inside these insurers, and their appetite to participate in any financial market, product, or hype irrespective of their clear inability to keep up with the financial engineers enough to understand what they're doing. Should the current financial industry brimstone and hellfire spread to the insurance industry (and how could it not?) I fear what may come out of the bellies of those whales.

Monday, September 08, 2008

Buy!/Sell! #4: Macro Sports Bets


+ NHL going global with expansion leagues worldwide, starting with a huge play in Eastern Europe and Scandinavia. If they really get crazy, they might let these guys compete for the Stanley Cup.

+ NFL going on the road (domestically) by having teams play at least one game per regular season in a neutral US or Canadian city, particularly those without their own team. The trick is for the NFL marketing eggheads to figure out combos of (team A + team B + city demographics) would yield the most excitement and thus revenues. Here's just a few random ideas:

  • Pats v Raiders game in Tempe, catering to all the ex-SoCalites now in AZ
  • Bengals v Indy in LA ... Cali kid back home to whip the demi-god
  • Dolphins v anybody on Long Island, NY
  • Jets v 49ers in Las Vegas
  • Broncos v anybody in Austin TX
+ Sponsorship bidding wars for blue-collar, squeaky-clean, photogenic Joey Logano (youngest winner in NASCAR history).

+ Knowshon Moreno (Georgia tailback) as the dark horse Heisman candidate

+ Rugby as the next high school lacrosse

- MLB ... unless they make it a timed game

- Regular-season NHL games ... jeez louise, does ANYbody watch games before the playoffs?

- Raiders (until they can find proper discipline)

Saturday, September 06, 2008

Follow Up #2: Yeah, what HE Said!

Well, ya lose some, ya win some:

North Korea has fallen off the wagon again. The dumb shits are starting to re-build the same Yongbyon reactor they blew up with much fanfare three months ago. See for yourself here and here.

the Elton John of Islam, Mummar Gaddafi, the man whose first act as leader of Libya was to rename all the months ... the man who NNDB calls "A dictator known as much for sponsoring international terrorism as his impeccable fashion sense" ... the man who Reagan called "Mad Dog" ... the man who calls himself the "brother leader" in his own personal blog ... the man who really DOES have FemmeBots ... the man who flys with his camel ... has now decided to hold hands with the Great Satan and extoll the virtues of freedom, markets, and democracy:

[Libya] must reformulate itself in a new, free, and democratic way ... As long as money is administered by a government body, there would be theft and corruption ... You always accuse the popular committees of corruption and poor management ... These complaints will never end ... So everyone have their share [of oil revenues] in their pockets and manage.
Read all about it here.

Photo Credits: Reuters

Thursday, September 04, 2008

Let's Play Interact! Part 2: The Answer

If you're reading this blog and haven't read Part 1, STOP NOW and check it out first.

If you've already played: thank you! I promise the answer key is shorter than the questions. In fact, it's one word long. The word is nothing. In each case, the most likely response was for people to simply go on about their business, pretending as though nothing had happened. The Earth continued to revolve around the sun. No harm done. No time "wasted" from their busy schedules. No shame felt. But an ounce of civility was squandered. No connections made. No lives improved. No needs met.

Predictable: perhaps.
Pessimistic: probably.

What would you have done?
Honestly, now.

Sure, some people, some times will go out of their way. Here's my call to arms: we, who consider ourselves the cutting edge of civilization need to turn that "some" into "most." Individually.

Yes, individually.

Let's not let the nanny politicians try to legislate ethics on us. Let's beat 'em to the punch and follow the Nike doctrine: Just Do It.

I don't mean to belittle any fragile me-generation egos out there, but unless you're carrying a heart in an ice chest, prevnting a plane from crashing, or sniping a suicide bomber, you DO have sixty seconds to stop what you're doing and care for your fellow human. Not all of them at once; don't emotionally bankrupt yourself tilting at windmills.

If everyone simply reached out to the person to the right and the person to the left of you, we'd have twice the helping hands we'd need. Call me a socialist euphorist idealist. My response to that was published a few days ago in my blog Shout Out to the Individual.

Wednesday, September 03, 2008

What Will Tomorrow Bring: Tuning Out

Let's face it: evidence is piling up that the flight of Planet Earth is oversold. Open spaces, at least in most of the US, Europe, Asia, and even Africa are getting smaller, rarer, and more pressured. They're already having to kill elephants in Africa and we all know what's going on with the mountain gorillas. They'll soon be literally pushed off the face of the Earth.

We're far better at adapting, but the population squeeze increasingly impacts us as well. Enough people talk plenty about the health impacts (ahem, India). What about the psychological? Oh, and then there's the info-overload we all fight on a daily basis.

In the not too far-off future, we will find that our inability to "get away" will necessitate a new escape: "tuning out." I'm not talking hippie-style sitting in the woods. I'm not talking about leaving your Crackberry on silent during dinner. I'm talking about total in-place mental disengagement. Our mental circuit-breakers will demand that we simply stop our brains or they'll do it for us.

Some day you'll ask your co-worker "What are you doing on your day off, Jane?" and she'll tell you "I'm just tuning out." And she'll mean it.

On one hand, this opens the potential for an amazing expansion of the meditative industry.

On the other hand, this will cause a loss of potential production, collaboration, and learning.

Until we can re-master the skill of FOCUS and just move a teensy bit slower, we will find ourselves resorting to "tuning out" to escape our physical realities.

Tuesday, September 02, 2008

Follow Up: Dream Team?

My hope and prediction back in February was that John McCain would be the Republican nominee (a pretty safe bet even then) and that he would choose Joe Lieberman as his VP. Even then, it was clear that Joe was his running mate de facto. Clearly, John would have been most comfortable with Joe at his right hand for the next 4 years. That has not changed, yet it appears that the ninny nanny social conservative Faith arm of the party found enough leverage (read: blackmail) to push Joe out in favor of someone who walks their talk (we think, fingers crossed)...

It is the tragedy of partisan politics that those in charge focus solely on differences. Joe is, after all, pro-military, pro-security, pro-Israel, pro-limited government, pro-agressive foreign policy. He's highly experienced. He is as pious about his religion as the Evangelicals are about theirs. He's as morally squeeky clean as they all wish they were. In fact, I fully believe that's why John loves having him around: they're peas and carrots ... or maybe Batman and Alfred. Two birds of a feather deep down who have developed a personal relationship and trust that supercedes philosophical differences.

More tactically, he would just might have tipped the balance in certain eastern states.

I'll give Palin the benefit of the doubt. That's all I can muster so far. Listening to Joe tonight at the Republican convention, he said all the right supportive things, but what I heard was a concession speech. And that made me sad.

Shout out to the Individual

I'll admit it: I was in love before I ever met Ayn. It's in the genes.

I'm enjoying a slow re-read of Atlas Shrugged at the moment. It has an apropos message considering the current state of political affairs. Apocalyptophiles among us would argue that in this election year, we're at the inflection point between the individual and the collective. Me? I take a slightly softer line. We're at an inflection point. There have and will be many.

Some people wish they were members of the Fight Club or the '27 Yankees. Me, I wish I was in the Class of '43 aka the Collective. The human animal is driven by self-interest. Period. Or as the Objectivists say it (via Wikipedia):

A society is, by Objectivist standards, moral to the extent that individuals are free to pursue their goals ... mutual consent being the defining characteristic of a free society.
To take it one step further: A maximally happy society would be one in which each member maximizes his own happiness (as long as his actions don't decrease others' happiness).

To restate that in economic terms: The only way to successfully maximize society's gross utility is for each member to maximize his own.

Sounds pretty evil and selfish, right? Uh, Right. I'm as bemused and perplexed as Ayn and Alan when people disagree with this obvious truism. In fact, I secretly believe that everyone agrees with it, but just doesn't like the logical consequence to society. We fear that a society of selfish people would be one where the strong take advantage of the weak. They fear that man's basest animal nature would lead to a least-common-denominator unravelling of society. They counter that in today's enlightened, progressive, cutting-edge society, we all must be persuaded to take from ourselves a bit and hand to the lesser among us. Equality is their driving aim.

To them, I'd like to offer my own consolation: self-interest is not mutually exclusive with the collective good. Much of the First World has gotten so wealthy that people have begun to feel they don't need their community. Frankly, they don't know what they're missing. I know from personal experience that people can improve their own happiness by helping others.

My argument doesn't just rest on feel-good charity. The central paradox of human motivation is that the most selfish thing we can do is to gain a sense of place in their community: a sense of being needed and valuable gives one a deeply satisfying sense of individual security.

Perhaps I should call this the theory of reverse enlightened self-interest.

Monday, September 01, 2008

Let's Play Interact! Part 1: The Questions

Here's how it goes: I'll give you the scenario; you'll guess what most likely happens next; then I'll be back in a few days with the answers so you can check yourself. The list is long, so if you have an ADHD lifestyle like I do, read what you have time for. You'll get the point.

A married man notices that his co-worker looks very pretty today. It's not a sexual thought, nor would he ever cheat. He thinks he would make the co-worker feel good by saying something. What happens next?

A wide-eyed college-bound kid sits waiting for his flight. An old, unaccompanied man sits in an adjacent seat...
What happens next?

... The gate attendant announces "all aboard" but the old man doesn't seem to notice...
What happens next?

... The flight gets underway. The kid wonders if the old man got on the flight. It makes him think of his grandma who lives way down in Florida...
What happens next?

... The kid finds his seat and starts reading his book. The lady in the next seat smiles to herself. He reminds her of her son. And that book is one she really loved...
What happens next?

... The lady in the row in front of them just can't get her baby to stop crying as the plane takes off. It's driving everyone nuts.
What happens next?

Three businessmen sit at a bar after work, bullshitting and watching the sidewalk outside for eye candy. A roughly dressed woman with a white cane stands waiting to cross the street...
What happens next?

... The walk sign comes and goes several times but she just stands there, looking more and more agitated, starting to draw the attention of passers-by.
What happens next?

A mom is driving home on the freeway. She sees a car ahead weaving between cars, riding their bumpers, and jockeying from lane to lane aggressively...
What happens next?

... She stops at the grocery store, where she sees a young guy store employee eyeing a young customer...
What happens next?

... She also spots a familiar face in the produce aisle. Both their sons go to the same school. She wonders if the rumors are true. Is the lady really filing for divorce? Those poor kids!...
What happens next?

You get in a cab and find a cell phone on the seat ... and an iPod.
What happens next?

Your co-worker in the next cube has been grumbling all morning. He can't figure out how to get the darn computer to do what it's supposed to.
What happens next?

A gay man orders his daily Starbucks Latte. He thinks the barista guy is definitely cute, maybe gay, but there's no way to be sure.
What happens next?

You're taking your date to a movie. You're in line to buy popcorn. The show is about to start but the girl behind the counter is SO SLOW ...
What happens next?

...You're finally next in line. The guys in front of you is wasting time fumbling for exact change.
What happens next?

Joey's taking his turn walking the dog. He can't help but notice how much garbage there is on the street. Too bad there's no garbage can around.
What happens next?

Another of those commercials comes on TV with the starving kids in Africa.
What happens next?

Four friends at a game are trying to take their own picture.
What happens next?

On the subway platform, a pair of confused tourists stare at the map and argue.
What happens next?

A tipsy guy at the ballpark is trying to carry too many beers and brats back to his friends. He keeps spilling on other people and nearly dropping the dogs. People are getting mad.
What happens next?

The news reports another record-breaking Federal budget deficit. Then the go back to the "breaking news" about the dresses that will be worn at the Oscars.
What happens next?

A teen sees another teen jamming to his iPod and wonders what the guy's listening to.
What happens next?

You pass a car parked on the side of the freeway.
What happens next?