Monday, December 23, 2013

What Will Tomorrow Bring: Rough Waters

China liquidity crisis. I repeat, China liquidity crisis. Hold on to your hats, kids. I think we're in for a blow. 

Thursday, September 05, 2013

Five Rules to Guide Syria Policy

  1. Don't let Iran win the Syrian civil war
  2. Don't fall into the trap of being the World Police. Athens, Constantinople, Rome, and England already tried that
  3. No matter which Syrian faction you choose to ally with, 75% of the country will hate and resent and fight you. Don't pick sides
  4. Because of #2, the only acceptable justification for intervention is on humanitarian grounds
  5. Syrian peace is not a vital US interest. It IS a vital interest of Syria's neighbors: Lebanon, Jordan, Iran, Iraq, Turkey, Saudi Arabia, UAE, and (gasp) Israel. They are getting flooded with refugees. They are at risk of receiving SCUDs. They are at risk of spill-over instability. They should lead any intervention. They should build humanitarian supply/evacuation lines. They should host any refugees (humanely). To the extent they don't want to participate, they should fund intervention. If they lack specific technical capabilities, they should request US assistance. The UN, thanks to Russia and China is useless. Don't waste your time with that
It may very well be that the best response is, until five-way peace agreements are signed, a total economic, commercial, and travel embargo of the country, supplemented by an oil-for-food style humanitarian plan, led and executed by Syria's neighbors.

Turkey, the UAE, and Saudi Arabia in particular are vying for recognition that they have "turned a corner" from their insular, murky, iron-fisted past into first-world regional powers. They should view the current situation as a grand opportunity to demonstrate they are world-class by acting world-class.

Rule #3 aside, and broader than the Syrian civil war, is the Kurd issue. Creating a Kurdish state or independent self-administered region would create stability and solve numerous simmering conflicts all at once. Kurdish regions of Turkey, Syria, and Iraq have proven largely stable, predictable, and trustworthy. They are able to generate relatively stable governance structures and effective economic activity even under very poor circumstances. Turkey, Iraq, and Syria need to mature their approach from current passive-aggressiveness to acknowledging that current borders simply don't reflect the cultural and national landscape. There is something for each of them to gain by ceding political control, economic control, and even territory in the interest of furthering regional peace and stability. While any mideastern solution seems to cause 20 new mideastern conflicts, this one might be a risk worth taking.

Sunday, July 21, 2013


Dear Malcolm Gladwell,

Please stop talking.


Friday, July 19, 2013

Motown Lowdown

As far as I'm concerned, city bankruptcies are good with one possible exception.

The exception is pension funds. If the city changes the pension payments they promised to retirees, that strikes me as pretty evil. People plan their whole life for retirement based on the assumption that they will get certain pension benefits. These should be preserved. If Detroit had been smart, they would have insured or offloaded this liability long ago. It's simple math and stochastics. Let the experts in the financial world make it work.

Bondholders should be aware of the risks of lending money to cities with large deficits, so it shouldn't be any surprise that they'll get a "haircut" meaning less than 100% of their value back. In the mean time, they got interest on the bonds.

Aside from that, city bankruptcies allow cities to renegotiate every contract - suppliers, vendors, unions in a public way (as opposed to back-room deals). I guarantee you that there's plenty of fat to be cut here.

What is sadly missing from most municipal bankruptcies is austerity. Bondholders should really pressure Detroit to not only pay less for what they buy (my prior point) but also to buy less, cut services or at least make them cheaper, privatize or close inefficient departments, etc. These are tough decisions, of course, and can create a negative-reinforcement cycle where the city gets worse and more people move out. Ideally, they offset this by improving the economy and thus increasing revenues.

Wednesday, May 08, 2013

What Will Tomorrow Bring: Is it a Bubble?

Stock market indexes have broken records multiple times in past weeks. Yes, this is a stock bubble.

It will likely turn into a more general bubble on the price of everything  ... which is another way of describing .... inflation. This is just the mathematical result of the very-very-very low interest rates. 

On the other hand, the Fed (or Congress) can reverse the inflation in a couple of ways, all of which are like hitting the brakes on the Titanic ... the effect takes a long time to be felt, by which time the facts on the ground have largely changed. They can:
  • Threaten to change interest rate policy and people would  immediately change their behavior. People would borrow a lot and buy a few big items in the short term, but would reduce spending in the longer term
  • Increase interest rates or bank reserve requirements. Both would have the effect of reducing new borrowing, which would in turn reduce industrial production as well as family consumption. People don't buy cars as often when car payment interest rates are high.
  • Increase tax rates without increasing spending ... or reduce spending without changing tax rates
  • Toy with the exchange rate of the dollar (for example, through tariffs or WTO complaints)
  • Continue to be unclear about future US taxation and regulation policy. People are more conservative when they don't know what the future holds
  • Impose uncomfortable (or unknown) rules on future taxation and/or regulation of borrowing, buying, selling, and/or profits. 
  • "Prick" the stock market bubble either through taxes/rules or by convincing big investors that the world is scarier than they thought it was
However, all of the above will also reduce GDP and growth, which will increase unemployment.

The tougher question is how can we avoid getting drowned by the inflation if it happens. Options would include:
  • Horde stuff now which will rise in value faster than the coming inflation ... tough to know what this would be. You have to look at supply and demand (SnD) forecasts
    • Gold is one option, but as recent history shows, the SnD situation is sketchy. The majority of the supply is held by basically a cartel of central banks (US, Germany, Italy, France, China, Switzerland, Russia, Japan in descending order ... google "world gold holdings" for details) who keep threatening to dump it. If this happens, then individuals who own gold would get screwed. Recently, the ECB has tried to make countries sell their gold prior to getting a bailout. If Italy or Japan decided to do this, gold value would fall steeply. I prefer to protect my money from politics as much as possible.
    • Other commodities are another option (metals, minerals)
    • Oil is another option, but the recently-found supplies and the alternative energy investments may mess up supply as well as demand, and the mideast can always be annoying. Politics and money again.
    • Real estate is another one. The US SnD situation is pretty predictable, but the possibility of a change to the mortgage-interest-tax-deductibility rules might screw things up. Real estate abroad is often subject to politics.
    • Other limited-supply and high-demand valuables. Fancy cars. Wines. Jewelry. Industrial metals. Bubaru. Whatever.
  • Move money into assets in a foreign currency which is not going to have as much inflation. For example, if it's $1 per 1 EUR today ... and you think that USD will inflate faster than EUR for the next 10 years ... then you might want to convert your money to EUR today. Then, in 10 years, when it's $2 per 1 EUR, you could convert it back to dollars and buy stuff here. The key to this is finding assets in that foreign currency which will appreciate at an acceptable rate vs. what you could get in $.
    For example, assume you have $1000. You can:
    • keep it in dollars and buy something like IBM stock which will increase in value. Assume USD inflation is 10% and IBM stock increases at 15% per year. This would mean that over time you would neutralize inflation PLUS gain an extra +5% of appreciation each year. The net impact on your purchasing power (=what you can buy with your money) would be an increase of+5% per year. At the end of the first year you'd have $1050
    • OR you could convert it to EUR1000 and buy something like BNPP stock.  Assume that the USD/EUR exchange rate depreciates by 5% per year due to the US inflation situation. Also assume BNPP stock increases  7% per year. This would mean that over time your total appreciation in USD terms would be 5%+7% = 12%. This would neutralize USD inflation plus an extra +2% per year. At the end of the first year, you'd have $1020 if you converted back to USD, so it wouldn't be worth all the trouble. There's also the possibility of paying double-taxes on foreign income once you bring it back to the US.
  • Which brings us to inflation-proof profit-generating assets. Owning companies (or investment properties) creates a cash flow. Some companies/properties will "float" like a boat meaning that they can increase their prices at the same rate their costs increase (at least). These "inflation proof" companies would be good investments assuming they:
    • Have an innovation/growth/improvement/efficiency plan which will allow them to expand their market share and/or charge higher prices than competitors, 
    • Are in good financial health
    • Are not vulnerable to other inflation-related issues like floating interest rates on loans (or short-term loans that they have to frequently roll over)
  • Or you can just ignore it and hope that Social Security increases with inflation ... which it historically hasn't
As always, a "portfolio" approach is probably best, rather than putting all your eggs in one basket. 

An alternative is to outsource the decision to somebody you think is super smart. Obviously, an investment advisor is one way to do this, but another way is to invest in a company that you think will be smart about maximizing value in the face of inflation. For example, Warren Buffett has survived several periods of inflation and is very watchful of inflation. His Berkshire Hathaway would ... probably ... maybe ... figure out the smartest  way to preserve value. Buying shares in that company lets you ride his coattails.

Sunday, March 24, 2013

Yeah, What HE Said: Obama on Israel and Palestine

Per the Guardian:
"In what was billed as the most important public speech ever made by an American leader on the issue, Obama delivered a tough message to Israel."
Which basically was :
"Put yourself in their shoes - look at the world through their eyes. "
Which is what I've tried to advocate in countless debates on the issue. Understand your opponent's motivation. Find common ground. What seems self-evident to me, and I dare say most Americans, is all too frequently mocked and dismissed as psychobabble by people close to the issue. This makes me struggle to put myself in their shoes. I just don't get it. Mutually-assured misery seems like the least-best alternative, yet it is the de-facto choice by virtue of inaction. 
Obama is just as guilty as the leaders in the region and the lobbyists on the Hill. As I argued in a prior blog, lack of leadership is akin to murder in this situation. 
"Hey Bibi, Hill, Abu! Hey nationalists! Hey settlers! Hey martyrs! Hey donors-to-the-cause! Hey talking heads! You're all wrong. You're all culpable. You're all criminally negligent. Let history reflect that as your true legacy."
Perhaps he finally read my blog, because what Obama said this week was real leadership:
"You can be the generation that permanently secures the Zionist dream, or you can face growing challenges to its future … The only way for Israel to endure and thrive as a Jewish and democratic state is through the realisation of an independent and viable Palestine ... Israelis must recognise that continued settlement activity is counterproductive to the cause of peace"

Sunday, February 03, 2013

Follow Up: Taking Care of Our Heroes

A couple of years ago, dumbass Dunta Robinson lowered his head and changed the game of football. Watching his hit on DeSean Jackson was nauseating, but what really made me lose my appetite was the voice over "I don't know how you take this out of the game of football." And thus the tone was set. The rest of the season was a parade of whiny soundbites like "if you take those hits out of the game, you have to rename it 'coz it's not football anymore."

At the time, I blogged:
We can't stop talking about players who achieve super-human heroic feats, or coaches who execute strategies to snatch victory from the clutches of defeat...Football is nothing without it's heroes. We have to let them show off ... but not at the expense of knocking other heroes out of the game...menacing hits call attention to the embarrassing base nature of the hitters. These are not heroes. Their lack of humanity exposes that
Dunta got penalized 15 yards and $50k. In response, he did it again. And again. And again. Fast forward 2 years. Alex Smith will not be leading his team to a Superbowl victory after yet another helmet-on-helmet hit, this one by Jo-Lonn "Dumbass" Dunbar. One could lament that nothing has changed.

Things are about to. The conversation has changed. Football as an industry has come to realize they are in the midst of an existential crisis. Two thousand former NFL players have sued the league over head injuries. An NFL survey of players found that only 3% trust the medical staff. Goddell is clamoring to get on the right side of history. So should Dunta. After all, the players are both the creators and victims of this MMA-style turn the game has taken over the past few years. Football was football before helmets gave players the (false?) sense of security to launch themselves headfirst into human brick walls. It will be football after MMA stuff is gone. It might even be better.

Football is not getting ruined any more than a rebellious teen gets ruined by turning into a responsible adult.

Sunday, January 27, 2013

Leadership is being a first-mover on public sentiment

20 years from now, when Washington is dominated by a Hispanic agenda, Romney will wonder why he didn't put the Republicans squarely in front of that movement by uttering one word: "amnesty."

That he failed that assignment is proof enough he was unqualified to be president. As long as the Republicans insist on backing milktoast candidates hamstrung by idealistic, arrogant, and ignorant agendas, the Democrats will own the new Washington.