Investing Curiouscatblog

Category: quote

  • What Does That Say About the Field of Economics?

    So few economists foresaw the current credit disaster, New York Times interview of James Galbraith.

    NYT: there are at least 15,000 professional economists in this country, and you’re saying only two or three of them foresaw the mortgage crisis?
    Dr. Galbraith: Ten or 12 would be closer than two or three.

    NYT: What does that say about the field of economics, which claims to be a science?
    Dr. Galbraith: It’s an enormous blot on the reputation of the profession. There are thousands of economists. Most of them teach. And most of them teach a theoretical framework that has been shown to be fundamentally useless.

    NYT: You’re referring to the Washington-based conservative philosophy that rejects government regulation in favor of free-market worship?
    Dr. Galbraith: Reagan’s economists worshiped the market, but Bush didn’t worship the market. Bush simply turned over regulatory authority to his friends. It enabled all the shady operators and card sharks in the system to come to dominate how we finance.

    Related: Rodgers on the US and Chinese Economies – Greenspan Says He Was Wrong On Regulation – Leverage, Complex Deals and Mania – What is Economics?

  • Buy American Stocks. Buffett Is.

    Buy American. I Am. by Warren Buffett:

    The financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.
    …
    A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense.
    …
    Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up.
    …
    Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

    Equities will almost certainly outperform cash over the next decade, probably by a substantial degree.

    Yet more great advice from Warren Buffett. I must admit I think buying stocks from the USA and elsewhere is wise, but there isn’t any reason to listen to me instead of him.

    Related: Financial Markets Continue Panicky Behavior – Great Advice from Warren Buffett – Stock Market Decline – Warren Buffett’s 2004 Annual Report – Does a Declining Stock Market Worry You?

  • 401(k)s are a Great Way to Save for Retirement

    401(k)s are a great way to save. Yes, today those that have been saving money have the disappointment of bad recent results. But that is a minor factor compared to the major problem: Americans not saving what they need to for retirement in 401(k)s, IRAs, even just emergency funds… Do not use the scary financial market performance recently as an excuse to avoid retirement savings (if you have actually been doing well).

    The importance of saving enough for retirement is actually increased by the recent results. You might have to re-evaluate your expectations and see whether you have been saving enough. I am actually considering increasing my contributions, mainly to take advantage of lower prices. But another benefit of doing so would be to add more to retirement savings, given me more safety in case long term results are not what I was hoping for.

    Now there can be some 401(k) plans that are less ideal. Limited investing options can make them less valuable. Those limited options could include the lack of good diverse choices, index funds, international, money market, real estate, short term bond funds… My real estate fund is down about 2% in the last year (unlike what some might think based on the media coverage of declining housing prices). And poor investing options could include diverse but not good options (options with high expenses… [ the article, see blow, mentions some with a 2% expense rate – that is horrible]).

    But those poor implementations of 401(K)s are not equivalent to making 401(k)s un-viable for saving. It might reduce the value of 401(k)s to some people (those will less good 401(k) plans). Or it might even make it so for people with bad 401(k) options that they should not save using it (or that they limit the amount in their 401k). I don’t know of such poor options, but it is theoretically possible.

    The tax deferral is a huge benefit. That benefit will only increase as tax rates rise (given the huge debt we have built up it is logical to believe taxes will go up to pay off spending today with the tax increases passed to the future to pay for our current spending).

    And if you get matching of 410(k) contributions that can often more than make up for other less than ideal aspects of a particular 401(k) option.

    Also once you leave a job you can roll the 401(k) assets into an IRA and invest in a huge variety of assets. So even if the 401k options are not great, it is normally wise to add to them and then just roll them into an IRA when you leave. If the plan is bad, also you can use an IRA for your first $5,000 in annual retirement savings and then add additional amounts in the 401k (if they are matching funds normally adding enough to get the matching is best).

    401(k)s, 403(b), IRAs… are still great tools for saving. The performance of financial markets recently have been poor. Accepting periods of poor performance is hard psychologically. But retirement accounts are still a excellent tool for saving for retirement. Using them correctly is important: allocating resources correctly, moving into safer asset allocations as one approaches and reaches retirement…
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  • Soros on the Financial Market Collapse

    George Soros published his most recent book in May 2008 – The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means. Yesterday Bill Moyers Interviewed George Soros:

    Markets have the ability to adjust and they’re very flexible. There is this invisible hand. But it is also prone to be mistaken.
    …
    This current economic disaster is self-generated. It was generated by the market itself, by getting too cocky, using leverage too much, too much credit. And it got excessive.
    …
    The financial system is teetering on the edge of disaster. Hopefully, it will not go over the brink because it very rarely does. It only did in the 1930s. Since then, whenever you had a financial crisis, you were able to resolve it.
    …
    the sort of period where America could actually, for instance, run ever increasing current account deficits. We could consume, at the end, six and a half percent more than we are producing. That has come to an end.
    …
    Right now you already have 10 million homes where you have negative equity. And before you are over, it will be more than 20 million.

    Related: Soros Says Credit Crisis Will Worsen Before Improving (April 2008) – Warren Buffett Webcast on the Credit Crisis – Rodgers on the US and Chinese Economies – – Personal Investment Failures

  • Canadian Banks Avoid Failures Common Elsewhere

    Canada’s banking system kept high and dry by strict regulation: Flaherty

    High banking standards have kept Canada’s financial institutions afloat and out of the kind of trouble that has sunk many of their international peers, Finance Minister Jim Flaherty said Wednesday.
    …
    Some of the fundamentals credited with keeping Canada’s banks in the safe zone were put in place nearly a decade ago by the Liberal government of Jean Chretien, including a refusal to approve any Canadian bank mergers.
    …
    The finance minister said Canada is in a strong position to deal with the global crisis, with a strong banking system, a stable housing market and a federal budget surplus. “Other countries have been increasing their deposit standards, but they’re still for the most part below the high Canadian standard,” he said.

    Related: Monopolies and Oligopolies do not a Free Market Make – Too Big to Fail – What Should You Do With Your Government “Stimulus” Check? – The Budget Deficit, the Current Account Deficit and the Saving Deficit – 2nd Largest Bank Failure in USA History

  • Poll: 60% say Depression Likely

    I would say the chance of a depression in the next 5 years is very unlikely. The last 2 years have been full of bad economic news but a depression is still not likely, in my opinion. However, much of the public, seems to think it is likely – Poll: 60% say depression ‘likely’

    The CNN/Opinion Research Corp. poll, which surveyed more than 1,000 Americans over the weekend, cited common measures of the economic pain of the 1930s:

    * 25% unemployment rate
    * Widespread bank failures
    * Millions of Americans homeless and unable to feed their families

    In response, 21% of those polled say that a depression is very likely and another 38% say it is somewhat likely. The poll also found that 29% feel a depression is not very likely, while 13% believe it is not likely at all.
    …
    The economists surveyed by CNNMoney.com said they saw a drop of 2% to 4% in a worst case scenario.

    I must say I don’t think those polled don’t really hold their belief very firmly. If you actually see a depression as likely you have to take drastic steps with your finances. I really doubt many of them are and instead think they are casually saying they think it is likely without really thinking about what that would mean.

    I don’t see it as likely and don’t see any need to change significantly what made good personal financial sense 2 years ago. The biggest change I see (over the last couple of months) is the importance of taking smart person finance actions has increased dramatically. The smart moves are pretty much the same but the risks to failing to create an emergency fund, abusing your credit card, losing a job… have increased dramatically.

    Related: Uncertain Economic Times – Personal Finance Basics: Health Insurance – Financial Illiteracy Credit Trap

  • Warren Buffett Webcast on the Credit Crisis


    Warren Buffett     quotes from the interview:

    • “In my lifetime I don’t think I have ever seen people as fearful economically as they are now”
    • “The major institutions in the world are all wanting to de-leverage”
    • “I don’t like what is going on with executive compensation“
    • “unemployment is going to go up under any circumstances, the 6.1 [% unemployment rate] is going to go higher, but whether it quits at 7% or whether it quites at 10, 11 or 12, depends on, among other things the wisdom of congress, and then the wisdom of caring out the plan congress authorizes”
    • “I just wonder if it [the $700 billion bailout] is enough”
    • “AIG would be doing fine today if they never heard of derivatives… I said they were possibly financial weapons of mass destruction and they have been, I mean they destroyed AIG, they certainly contributed to the destruction of Bear Stearns and Lehman”
    • The biggest single cause was that we had an incredible residential real estate bubble.
    • [on consuming more than we are producing] I don’t think it is the most pressing problem at all. We are trading away a little bit of our country all the time for the excess consumption that we have, over what we produce. That is not good. I think it is terrible over time.

    Related: Warren Buffett related posts – Credit Crisis Continues – Credit Crisis (August 2007)

  • Buffett’s Fix for the Economy

    I give more credence to Warren Buffett’s thoughts on this than anyone else, though, of course, he could be wrong. Buffett: My fix for the economy

    Warren Buffett suggested Thursday that the U.S. Treasury team with private investors to buy the distressed mortgage assets at the center of the controversial $700 billion Wall Street bailout, and said the price tag of the rescue plan may have to rise.

    Buffett, the chairman and CEO of Berkshire Hathaway (BRK.A), called the problems facing world markets “unprecedented” and warned of a “disaster” if Congress does not move faster to shore up the economy.
    …
    Under Buffett’s plan, Treasury would lend hedge funds, Wall Street firms or any other investors 80% of the price for distressed assets. Investors would benefit from borrowing at lower rates available to the Treasury. But the government would get first claim on the sale of those assets, which means it would get its loan back plus interest and possibly turn a profit. Only then would investors see a penny.

    “Now you have someone with 20% skin in the game,” explained Buffett. “Believe me, I won’t be overpaying if I’m buying with that kind of leverage. And you have someone [the investors] to manage the assets to the extent they need to be managed.”

    Buffett also noted that the presence of the government in the transactions would raise the price of assets above the absolute firesale levels for which they could now be sold. That would benefit the banks trying to unload them.

    It is a mess. And politicians should be held accountable for eliminating regulation (through law changes, political appointees that were chosen specifically to not enforce regulations, restricting money for enforcement…) to reward those that paid them a lot of money. But they won’t be, so there you go. I would love to be wrong about that but I don’t think I will.

    Related: 2005 annual meeting with Buffett and Munger – Misuse of Statistics, Mania in Financial Markets – General Air Travel Taxes Subsidizing Private Plane Airports – Central Bank Intervention Unprecedented in scale and Scope (March 2008)

  • Top 12 Manufacturing Countries in 2007

    The updated data from the United Nations on manufacturing output by country clearly shows the USA remains by far the largest manufacturer in the world. UN Data, in billions of current US dollars:

    Country 1990 1995 2000 2005 2006 2007
    USA 1,041 1,289 1,543 1,663 1,700 1,831
    China 143 299 484 734 891 1,106
    Japan 804 1,209 1.034 954 934 926
    Germany 438 517 392 566 595 670
    Russian Federation 211 104 73 222 281 362
    Italy 240 226 206 289 299 345
    United Kingdom 207 219 228 269 303 342
    France 224 259 190 249 248 296
    Korea 65 129 134 200 220 241
    Canada 92 100 129 177 195 218
    Spain 101 103 98 164 176 208
    Brazil 120 125 96 137 170 206
    Additional countries of interest – not the next largest
    India 50 59 67 118 135 167
    Mexico 50 55 107 122 136 144
    Indonesia 29 60 46 80 102 121
    Turkey 33 38 38 75 85 101

    The USA’s share of the manufacturing output of the countries that manufactured over $200 billion in 2007 (the 12 countries on the top of the chart above) in 1990 was 28%, 1995 28%, 2000 33%, 2005 30%, 2006 28%, 2007 27%. China’s share has grown from 4% in 1990, 1995 7%, 2000 11%, 2005 13%, 2006 15%, 2007 16%.

    Total manufacturing output in the USA was up 76% in 2007 from the 1990 level. Japan, the second largest manufacturer in 1990, and third today, has increased output 15% (the lowest of the top 12, France is next lowest at 32%) while China is up an amazing 673% (Korea is next at an increase of 271%).
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  • Naked Short Selling

    Short selling is when you sell something before you buy it (you try to sell high and then buy low later, instead of buying low and then selling high later). In order to sell short, you are required to borrow the shares that you then sell. So if I own 1,000 shares of Google (I wish), I could lend them to someone to sell. Nothing happens to my position, it is just that those shares are now allocated to that short sale. If I sell them then the short seller has to go borrow them elsewhere or buy the stock to close their position. In general the borrowing is either from brokers that hold shares for individuals or from large institution (mutual funds, insurance companies…).

    However from everything that I read it appears the SEC hasn’t bothered to actually enforce this law much. There was a bunch of excitement recently when the SEC announced it would bother to enforce the law to protect a few large banks, many of whom are said to practice naked short selling but didn’t like it when that was done to their stock. As you can see, this does make the SEC look pretty bad, when they chose to enforce a law, not in all circumstances, but only to protect a few of those who actually take advantage of the SEC’s failure to enforce the law to make money.

    CEOs Launch Web Site To Protect Short Sellers

    In 2005, the SEC required the publishing of the daily threshold lists, which include companies that have a high degree of FTDs [failure to deliver – stocks sold short with the promise they would borrow the shares but they then don’t]. Brokers are mandated 13 days to resolve any FTDs after landing on the lists. Despite this, some companies have been there for hundreds of days, with millions of failed shares.

    Some people find the whole concept of short selling bad since it is based on making money on stock price declines. I don’t feel that way and believe it can help the market. But it requires regulators that actually do their jobs and enforce laws. A favorite tacit of those who seek to keep open special ways for themselves to benefit from abusing the system is to try and make things seem complex. The recent SEC order saying they would enforce the intent of the law to protect a few powerful banks from the behavior many (or most) practice themselves for years shows that it isn’t that complicated.

    Adding the decision not to enforce the requirement to borrow shares to their recent decision to eliminate the requirement that short sales take place on down ticks in price (a measure put in after the 1929 stock market crash to not have short sellers accelerate market declines and insight panic seems like a really bad combination).

    Related: Shorting Using Inverse Funds – Monopolies and Oligopolies do not a Free Market Make – Fed Continues Wall Street Welfare – SEC data on “failures to deliver”