I always laugh whenever I hear anyone say eejit hack claim “No one saw it coming!”
This video — featuring a thinner, less gray version of your humble blogger — discussing the coming housing storm in 2005 gives lie to that claim.
The advice: Sell banks, Sell Home Builders, Sell Home Depot and Lowes.
The post below comes courtesy of Tyler Durden of the Zero Hedge blog .
Funny how much can change in a month. After everyone was making fun of David Rosenberg as recently as June, not a single pundit who owns a suit and can therefore appear on CNBC dares to mention the original skeptic. Why? Because he has was proven correct (once again) beyond a reasonable doubt (and while we may disagree as to what asset class is best held into the terminal systemic collapse, Rosenberg has been one of the most steadfast and consistent predictors of the ‘non-matrixed’ reality in the world). Yet oddly enough there are still those who believe that a double dip (or, more accurately, a waterfall in the current great depressionary collapse accompanied by violent bear market rallies) is avoidable. Well, here, in 12 bullet points, is Rosie doing the closest we have seen him come to gloating … and proving the double dip or whatever you want to call it, is here.
Bloomberg News has an article titled No Double Dip Yet With U.S. Economy Punching Up Growth Figures. Completely amazing, including the commentary from the economists in the article who seem to prefer forecasting based on coincident or lagging indicators. Because the data are subject to substantial revisions in the future, it is absolutely imperative that economic forecasters draw on their judgement and experience when making their predications (have a look at On Economy, Raw Data Get a Grain of Salt on the front page of today’s NYT for case in point). Here is the reality.
And one final observation on GDP, which pretty much puts the double dip debate to rest:
If you look at the monthly U.S. GDP data, it is already apparent that the U.S. economy is fraying at the edges. The economy contracted in both May and June and has shrunk now in four of the past six months. That sounds pretty recessionary to us. As the chart below shows, over the past six months, real GDP has actually declined at a 1.5% annual rate, which is just about as bad as it got at the worst point of the tech wreck a decade ago.
Forewarned is forearmed.
Source: Gluskin Sheff & Associates (via Zero Hedge), August 17, 2011.
Via Digital Music News 30 Years Of Music Industry Change, In 30 Seconds Or Less… Each pie chart shows 1 year, from 1980-2010, based on RIAA revenue figures for the revenue contribution from various formats.
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US-based data of total recording revenue. And, here are the individual year source images, starting with 1980 on the top left and 2010 on the bottom right. Just pick a year and go, and download whatever you need.
Hat tip Josh
Tim du Toit is the editor and founder of Eurosharelab. He has more than 20 year of institutional and personal investing experience in emerging and developed markets. Tim is based in Hamburg, Germany. More of his articles can be found at Eurosharelab (www.eurosharelab.com).
Republished here with permission.
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This article is the combination of two research reports I found where James recommended the best investment books he has come across.
Be sure to read right to the end of the document to see the “hidden gems” James recommended.
In order to give his choices a little structure James created four categories of books and only allowed him to select five books in each group. He admits that there were many great books that just didn’t quite make his very restricted list.
(click in the book picture or the bold text to go to the Amazon page)
Classics
The first category is the timeless masters. The books in this group have lasted for generations, yet their wisdom seems often to go unheeded.
Security Analysis by Ben Graham and David Dodd
James prefers the original 1934 edition of this book (available thanks to a recent reprint). No other book covers such an immense array of investment knowledge. Whilst the accounting standards may have altered, the very essence of investing can be found within these pages.
Some may prefer the easier (and more comfortable to hold) read that is provided by Graham’s Intelligent Investor. Either or indeed both of these great books should be required reading for anyone serious about investing.
Chapter 12 of the General Theory of Employment, Interest and Money by John Maynard Keynes
Much of the General Theory will do little to help investors as it is concerned with economics. Keynes himself turned his back on trying to apply economics as an aid to investing as he put it “I can only say that I was the principal inventor of credit cycle investment… and I have not seen a single case of success having been made of it”.
However, Chapter 12 is very different from the rest of the book; it contains a wealth of understanding and analysis of the psychology and institutional constraints that bedevil investors as much today as they did when Keynes was writing in 1935.
You can print it out for free at Project Gutenberg Australia
The Theory of Investment Value by John Burr Williams
A third book from the 1930s (anyone spot a pattern emerging here?). John Burr Williams published his book in 1938 – having written it as his PhD thesis. Williams went to Harvard to study for his doctorate. His supervisor was none other than Joseph Schumpeter, who suggested that he looked at the question of intrinsic value of a stock. Williams actually published his book (backed in part by his own money) before he was awarded his PhD (a subject of much discussion at his viva).
The book contains the essence of the discounted cash flow approach to valuation. As such it far predates the more widely cited Gordon papers (as in Gordon Growth Model). The book not only lays out the process and examples of DCF but also contains perhaps the first treatment of the industry lifecycle (Chapter VII). Williams opens The Theory of Investment Value with words that have been value investors’ creed ever since “Separate and distinct things not to be confused, as every thoughtful investor knows, are real worth and market price.”
Manias, Panics and Crashes by Charles Kindelberger
First published in 1978 this is almost a candidate for our modern section. But it’s numerous reprints and editions since 1978 suggest that it has earned a place amongst the classics.
This book contains not only a history of most of the major bubbles in financial markets, but also provides a framework for understanding their progress and ultimately their demise. As such it serves to remind us that although bubbles usually arise on different assets, the pattern they follow is relatively consistent.
We have often used the Minsky/Kindelberger paradigm when discussing the path of bubble unwinding
Reminiscences of a Stock Operator by Edwin Lefèvre
Originally published in book form in 1923 (although published in Saturday Evening Post as articles prior to that), Reminiscences tells the barely fictionalised biography /autobiography of Jesse Livermore. Livermore battled with depression throughout his life; he finally lost the fight in 1932 when he took his own life.
Although a perennial favourite with traders, Reminiscences contains much advice that investors would do well to remember, such as “Another lesson I learned early is that there is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again.
I’ve never forgotten that.” Or “There is the plain fool, who does the wrong thing at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time. No man can always have adequate reasons for buying or selling stocks daily – or sufficient knowledge to make his play an intelligent play. I proved it.”
And “The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among the professionals, who feel that they must take home some money every day, as though they were working for regular wages.”
But perhaps my favourite quotation is “A stock operator has to fight a lot of expensive enemies within himself.”
Modern
To qualify to be in this section the book must have been written within the last ten years, but have the potential to become a classic given time.
The little book that beats the market by Joel Greenblatt
Regular readers will know that James is a big fan of Joel Greenblatt’s book. Indeed he has tested Greenblatt’s formula in non-US markets and shown it is a powerful tool regardless of the market under consideration.
In just 155 pages Greenblatt produces a mass of evidence showing that following a quantitative value orientated approach to stock selection can produce exceptional performance. But the book is more than just a quantitative take on the value process; it also contains gems such as “You must understand only two basic concepts. First, buying good companies at bargain prices makes sense… Second, it can take Mr. Market several years to recognize a bargain.”
Even better than that, the book is written so that an 11-year-old can understand it. But a lot of professional investors could do far worse than peruse this slim volume.
The little book of value investing by Chris Browne
James’s second choice in the modern section is another book from the little book series. This one written by Chris Browne of Tweedy Browne – one of the greatest living embodiments of value investing.
The very essence of the value approach and all it entails (patience etc.) are explored here in 180 pages.
The discussion on the margin of safety highlights the way in which value investors think about risk – a far cry from modern portfolio theory’s beta concept. Browne also explores issues such as how to distinguish a value trap from a value opportunity. Can be read easily in an afternoon, but should be repeatedly studied by value investors as a check on their own behaviour.
Fooled by Randomness by Nassim Taleb
In this book Taleb highlights just how easy it is for us to fall victim to spotting patterns in the purely random.
Every investor who has done well in a given period should read this book as a reality check, before they start to believe their own hype.
Anyone who is vaguely interested in the role of luck, chance and randomness will find Taleb’s book a source of much wisdom.
Contrarian Investment Strategies by David Dreman
One of James’ favourite books on investment. He only recently read Dreman’s book (since then he have obtained and read his previous two books.
This tome is packed with deep insights into the nature of the investment problem, and practical investment strategies designed to avoid some of the behavioural pitfalls that we all too often stumble into.
Dreman is also an empirical sceptic, and offers up good statistical evidence to support his analysis – something that is far too rare in the world of investment books.
Speculative Contagion by Frank Martin
Fo
r James’ final selection in the modern category I wanted a book that represented an investor’s real time experience of dealing with the market. Several books could have fitted the bill; Cunningham’s edited version of Buffet’s letter was a front runner, as was Chancellor’s edited version of Marathon Asset Managements’ views (Capital Account).
However, in the end I settled on Frank Martin’s Speculative Contagion. This book pulls together the annual reports that Martin had written to his clients throughout the bubble and burst years.
It is source of much investment insight. As regular readers will know James recently used Martin’s trinity of risks as a basis of a better way of thinking about the nature of risk from an investment perspective.
Martin’s book provides us with opportunity to see exactly how bad it feels to be on the wrong side of a bubble, but also delivers insights into the discipline needed to stick to sensible investment process though thick and thin.
Psychological
James mentions that the books in this category are close to his heart. They are books on psychology. They aren’t concerned with investing per se. Instead they are all concerned with the way in which we think and make choices.
Investing is all about making decisions and choices, and as such I think a good grip on psychology is vital for all investor’s hoping to conquer their internal demons.
The Robots Rebellion by Keith Stanovich
The title sounds like a Sci-Fi novel. However, the robots are us. Dawkin’s selfish gene ideas suggest we are effectively just a vehicle for the replication of genes. Stanovich argues that we may be the only species that have the ability to rebel against our genes.
At the heart of his approach is a dual system theory of thought (system X vs. system C for regular readers). The X system is very much a product of genetics, the C system provides us with a way of over-riding our genetic predispositions.
Stanovich explores how evolutionary psychology and the heuristics and biases literatures can be reconciled (an arena that James has tried to explore before). The book also covers how and where many of the major biases are likely to show up.
Strangers to Ourselves by Tim Wilson
Freud introduced the concept of the unconscious (at least as it is known in the West). Sadly people seem to equate Freud with psychology. However, academic psychology has little to do with Freudian concepts thankfully.
Tim Wilson’s book explores the modern concept of the unconscious (system X in many ways). He presents evidence showing that our actions are often outside of our conscious control. He also points out that simple introspection is not the answer, as we are more than capable of lying to ourselves. A brilliant, if disconcerting book.
How we know what isn’t so by Thomas Gilovich
This book is one of the best introductions to error prone human reasoning that I have ever come across. Many of the biases that I have explored in the context of finance are to be found within the pages of this book.
Gilovich covers such areas as our misperception of random events (hot-hands in basketball), our habit of seeking out information that agrees with us (confirmatory bias), and issues surrounding group influence on decisions.
Anyone interested in the pitfalls of human reasoning will find this a treasure trove of analysis.
Stumbling on Happiness by Daniel Gilbert
This book is really a book about the folly of forecasting. However, rather than focusing on the failure of GDP forecasts or interest rate forecasts, Gilbert is more interested in our forecasts about what makes us happy.
Gilbert is the leading expert in the field of affective (or emotional) forecasting. This book explores his research into why it is we don’t make decisions that would make us happy. Gilbert argues that someone else’s evaluation of how they feel in a given situation is a far better guide to how we will feel than our own prediction.
Not only is Gilbert’s subject fascinating, he is also an incredibly talented and funny writer, not to mention an astute observer of human behaviour with a wicked sense of humour.
The Psychology of Intelligence Analysis by Richard Heuer, Jnr
It isn’t often that the CIA is a good source of insight! However, this book pulls together Richard Heuer’s papers from 1978-1986 originally written for use within the CIA.
He neatly reviews the psychology literature as it relates to the processing of information, and its application to solving intelligence problems.
The overlap between intelligence analysis and investment analysis is surprisingly high. Both deal with decision making in the face of marked uncertainty. Heuer’s book is an easy read that more than repays its reading.
The chapter on the analysis of competing hypotheses should be mandatory reading for all financial analysts! This book may be the best value book on this list.
Hidden Gems
In this section James selected a hodgepodge of ideas and interesting reads, some are rare, some haven’t even been published yet, but all provide some powerful insights into the investment problem.
The Halo Effect by Phil Rosenzweig
This book is an empirical sceptic’s delight and should be required for all of those involved in the analysis of companies from the bottom-up. Rosenzweig takes much of what passes for analysis in the business world and shows it to be complete piffle.
Too many books in the business field go along the lines of Company “X” did exceptionally well for the last Y years, now study what they did and learn to apply it to your business. Or CEO of Company X created a culture of excellence, read this book and you can be like him.
Even the so-called data based books like ‘Good to Great’ or ‘In Search of Excellence’ are really little more than stories masquerading as science. They are subject to the garbage in, garbage out critique, low quality data will result in low quality conclusions.
My favourite section is on the halo effect – our habit of seeing one good trait and inferring lots of other good traits. It strikes me that analysts may often find themselves at the mercy of this effect – going and visiting a company, deciding they like the management and then inferring all sorts of desirable traits like future growth or cheapness.
Mindless Eating by Brian Wansink
Regular readers may recall that James used Wansink’s work as an example of the universality of behavioural patterns.
Exactly the same behavioural errors and mental pitfalls are displayed in the realm of food consumption and the financial markets. For those looking for an entertaining example of the wide spread nature of error prone human decision making this book is excellent.
It also provides yet more evidence of the importance of codifying rules to help overcome our behavioural biases.
The Inefficient Stock Market by Robert Haugen
A former academic, Bob Haugen now runs Haugen Custom Financial Systems.
His trilogy of books: The New Finance, The Inefficient Stock Market and the Beast on Wall Street are all excellent. But ‘Inefficient’ is my personal favourite. Haugen explores the failures of classical finance with his tongue firmly in his cheek.
He also extols the virtues of multi-factor quantitative models, and his web site has plenty of data to show that the out of sample performance of such models has been exemplary. This book neatly combines theory and evidence – a top read.
Margin of Safety by Seth Klarman
James says this is perhaps the best book on value he has read, although not the best value book I’ve read since copies appear to change hands at around £700-800! James was lucky enough to find someone with a copy of the book who was willing to let me borrow it.
Klarman’s discussions on the nature of value investing are priceless. As Klarman puts it “Value investing…is simply the process of determining the value underlying a security and then buying it at a considerable discount from that value. It is really that simple. The greatest challenge is maintaining the requisite patience and discipline to buy only when prices are attractive and to sell when they are not, avoiding the short-term performance frenzy that engulfs most market participants”.
James said that he displayed strong confirmatory bias when reading Klarman’s work. Klarman argues that value investors should be absolute return focused, and that the margin of safety is all important and central to risk management. He also explores both the behavioural biases and institutional constraints that prevent most investors from following a value orientated strategy.
Your Money and Your Brain by Jason Zweig
For those of you who don’t know him, Jason is a well respected writer on finance. He edited the latest version of Ben Graham’s Intelligent Investor. Given that James is a huge fan of Graham’s work and rarely think it can be improved. However, Jason managed the near impossible, he added value to Graham’s great text.
In this new book, Jason explores neuroeconomics as it applies to investing. The book is a pleasure to read – Jason’s writing style is second to none. For those who are fascinated by the underlying neurological correlates of decision making, this is a must read. It also hints at why we find it quite so difficult to change our behaviour, many of the behavioural biases appear to be a hard wired function of brain architecture.
In a June 2009 article James added a few titles to his reading list.
Even before we know the outcome of the 2008 crisis, there has been an outpouring of books covering what went wrong and why. James chose three books to cover this genre, all by authors who can legitimately claim to have seen the crisis coming.
Greenspan’s Bubbles’ by Bill Fleckenstein
James mentioned that normally he left the Greenspan bashing to Albert (a colleague at Societe Generale), but he loved this short book.
It’s a perfect antidote to the fawning ‘Maestro’ by Bob Woodward and the appalling ‘Age of Turbulence’ by Greenspan himself.
Fleckenstein and his co-author, Frederick Sheehan, go back and expose exactly what Greenspan was saying at the time. They lay bare not only the former Fed chairman’s complicity in the creation of bubbles (as if that wasn’t bad enough), but also his cheerleading activities in bubble promotion.
This is a short book that offers a damning indictment of the incompetence of the oft hallowed Greenspan Fed.
More Mortgage Meltdown by Whitney Tilson and Glenn Tongue
This book splits nicely into two sections. The first provides an in-depth analysis of the problems in the US housing market.
The authors succeed in making the dry technicalities of mortgage malpractices lively and engaging. The crisis has left more than enough blame to go around. Tilson and Tongue do a good job of ensuring that the guilty parties are named and shamed – from the Fed to Wall Street and the ratings agencies, all the way to the government and homeowners themselves.
The second part of the book walks readers through the analysis of six investment opportunities that are created by the crisis.
Whether you agree with the authors’ analysis or not (and generally I do) the real benefit of this section is the way it lays out the investment process that Tilson and Tongue follow, and shows how to follow this process using worked examples.
The book reads easily, as those who know Whitney have come to expect.
This is a great addition to any investor’s library.
Mr. Market Miscalculates by Jim Grant
He first recommended this book at the end of last year and it is a great example of a master wordsmith at work. Grant’s writing style is poetic and flows seamlessly as he moves from the insights of Thomson Hankey (sparring partner to Walter Bagehot) to documenting the disasters of the Mortgage Science Project (CDOs).
His insights lay bare the fallacy of Greenspan’s view that bubbles can’t be analysed ex ante.
Investment
So on to the second topic – investment. These books aren’t related to the current crisis but all provide deep insights into the nature of investing.
Memos to Oaktree Clients by Howard Marks
Regular readers of James’ notes will have come across references to Howard Marks and his letters before. To James they are in the same class as Seth Klarman’s comments – indispensable reading for those engaged in investing. Indeed Marks wrote one of the introductory essays in the 6th Edition of ‘Security Analysis’ which Klarman edited.
This book isn’t the easiest to track down (or indeed the cheapest at $200, available from Wave Publishing).
The book collects together some of the best of Marks’ writings from 1990 to 2005. The letters focus on Oaktree’s investment philosophy and its application to the current investment juncture. Given that Oaktree is a fixed income outfit, the letters show how useful a value perspective can be in that market.
The topics covered come close to my own heart such as the folly of forecasting, bubbles, the nature of risk and investment vs speculation. This is a collection that will have you returning on a regular basis to refresh your memory of Marks’ words of wisdom.
Distressed Investing by Marty Whitman and Fernando Diz
As James have regularly observed in the last six months, generally a backdrop of poor profits and massive leverage is the perfect breeding ground for distressed investing (both equity and debt).
Who better to provide a guide through such a world than Marty Whitman (of Third Avenue fame).
The authors walk the reader through the tricky pathways of reorganisation and bankruptcy. En route they chart the perils and pitfalls that can easily consume the unwary. They also elucidate on the nature of valuation and risk as it applies to distress investing.
The book is written for US investors, so much of the focus is on ‘going concern valuation’ (Chapter 7 style), rather than liquidation. Despite the US focus, I think the book contains enough perspective to be worthy of an international audience.
This is without a doubt the longest book on this year’s list, weighing in with an impressive (and slightly daunting) 966 pages!
Of course, technically Snowball isn’t an investment book. It is a biography of Warren Buffett, but to me the two are intimately linked. Schroeder does an admirable job of portraying Buffett ‘warts and all’. She documents the way in which Buffett built upon Ben Graham’s ideas and extended (often in ways that Graham himself would probably have disapproved).
But she goes further and provides us with a psychological profile which yields intriguing insights. For instance, Schroeder writes “he tended to extrapolate mathematical probabilities over time to the inevitable (and often correct) conclusion that if something can go wrong it eventually will.”
The Myth of the Rational Market by Justin Fox
It charts the history (or rise and fall) of the efficient markets hypothesis (EMH). His favourite quotation in the book is from Robert Shiller (during his angry young man phase in the early 1980s) when he describes the EMH as “one of the most remarkable errors in the history of economic thought.
It is remarkable in the immediacy of its logical error and in the sweep and implications for its conclusion.” Amen to that!
Psychology
The third category of books concerns James’ own favourite subject area – Psychology.
As Ben Graham long ago opined “The investor’s chief problem and even his worse enemy is likely to be himself.” The books in this section try to bring to life Graham’s observation and in some cases explain how we might try to defend ourselves against ourselves.
Animal Spirits by Robert Shiller and George Akerlof
Strangely enough James liked this book (confirmatory bias at work no doubt!). Akerlof and Shiller set out to provide us with some of the psychology that underlies Keynes’ rightly famous notion of animal spirits.
They choose five psychological elements found at the heart of various economic conundrums –confidence, fairness, corruption and bad faith, money illusion and stories. They then go onto to explain how these five factors interact to help us understand some of the mysteries of economics, such as why do economies fall into depression, why does involuntary unemployment exist, and why are financial markets excessively volatile.
In essence this book is a brave attempt to undo the separation of economics and psychology that occurred during the formalisation of the former. Some chapters hold together better than others, but ultimately the book serves as a powerful reminder that “left to their own devices, capitalist economies will pursue excess…There will be manias. The manias will be followed by panics”.
Think Twice by Michael Mauboussin
Michael is something of a pioneer in James’ field; it was he who first tried to reach outside the standard approach to finance to gain insights into markets, a furrow that James has since endeavoured to plough.
In his excellent new book, Michael takes the reader on a tour de force of behavioural decision errors. But he doesn’t stop there. Mauboussin also provides readers with concrete advice on how to avoid stumbling into some of the most common mental pitfalls.
As one would expect from any book written by Michael, it reads exceptionally well, the pages almost turning themselves. As ever, James often measures a book by the number of pages he has marked or turned down. ‘Think Twice’ has more than its fair share.
James mentioned that he I doesn’t agree with everything in the book. Michael places far more importance on the “wisdom of crowds” than James does. But for anyone willing to seek wider insights into the nature of decision-making and how we can avoid stumbling into mental pitfalls, this book is a must read.
Dance with Chance by Spyros Makridakis, Robin Hogarth and Anil Gaba
What happens when a statistician, a cognitive psychologist and a decision scientist decide to write a book together?
The answer is a book all about the ‘illusion of control’, which the authors define as trying to control what cannot be controlled, or to predict what cannot be predicted. In essence this is a book about the folly of forecasting – that’s why James enjoyed it.
The authors highlight the paradox of control. That is by giving up the pursuit of things we cannot control, we actually gain more control.
This is similar to the point I have made before on the need to focus on the process rather than on the outcome. Freeing ourselves from endless worrying about things we can’t control provides us with the ability to focus on the things we can.
However, sometimes the book appears to offer poor advice.
For instance, the authors seem to subscribe to the ‘stocks for the long run’ philosophy (buying stocks and holding them forever, regardless of valuation), which is anathema to James. However, if one can skip over these weaknesses, the book ultimately reminds me of Reinhold Neibuhr’s serenity prayer: “God grant me the serenity to accept the things I cannot change, the courage to change the things I can, and the wisdom to know the difference.”
Hidden gems
The final group of books are what James calls hidden gems. These are books from outside the mainstream (by and large).
Part medical thriller, part detective story, part history lesson, this book tells the story of the cholera epidemic in C19th London. Not a topic for fun or frivolity for sure. However, this is the tale of Doctor John Snow and how he set out to track down the root causes and transmission mechanism of the terrifying disease.
The ruling belief in Snow’s time was that cholera was spread by bad air and bad smells. The book recounts the way in which John Snow and Henry Whitehead eventually traced the spread of disease to the water supply.
The tale holds some powerful lessons for the way in which we should approach investment. Snow and Whitehead did their own work, they refused to be swayed by the popular beliefs of their time, and they continued to pursue the facts they uncovered until they reached the logical conclusion. Contrarians rejoice.
The final two choices are more personal to James than any other books on his lists.
In the past James has occasionally referred to Winnie the Pooh as a source of much underestimated investment advice. His Bloomberg header is a quotation from Pooh, “Never underestimate the value of doing nothing.”
James mentions that he is also a fan of eastern philosophy. These may seem like non-sequiturs, but both are brought together in one of this year’s hidden gems
A Gift to My Children by Jim Rogers
The wisdom packed into this little book’s 85 pages is wonderful. Much of it relates to investing, such as “If anyone laughs at your idea, view it as a sign of potential success” and “people are easily carried away by mob psychology”. Rogers also stresses the importance of history in understanding (both life and markets).
However, his favourite advice is this: “The basic principle to remember is this: They need you more than you need them… Don’t follow a boy to a different school, city, or job. Make the boys follow you”.
The Tao of Pooh and the Te of Piglet by Benjamin Hoff
Hoff uses the medium of the much-loved Pooh bear to expound and explain the essence of Taoism.
I have long felt that investors could learn much from such an approach.
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I continue to be of the mind that the Wall Street Bailouts were misguided, and that a massive Swedish style reorg would have been the best thing for the nation and the economy in the long run. Both Uncle Sam and the Fed would have provided the broad based debtor in possession financing required, and the losses would have fallen where they belonged — on the Shareholders and Bond Holders — and not the taxpayers.
The latest evidence of this: Data obtained by Bloomberg News through Freedom of Information Act requests, followed by months of litigation, and eventually, an act of Congress. (Wall Street Aristocracy Got $1.2T in Loans)
And the data ain’t pretty.
We knew that Citigroup (C), who borrowed $99.5 billion, and Bank of America (BAC), who took loans of $91.4 billion, were in trouble. I’ve been saying for the better part of 3 years now that they were, and likely still are mostly insolvent. But the surprise data point was Morgan Stanley (MS), got as much as $107.3 billion in loans, with no strings attached.
What should have happened?
Imagine if the government and the Federal Reserve were run not by knaves and fools and Wall Street sycophants, but instead, were run honestly for the benefit of the taxpaying voter. Imagine the goal was saving the banking system (not the banks), and the financial rescue was for the benefit of the taxpayers, not the bondholders. Naive thoughts, I totally understand, but hear me out.
A person who truly understood what had happened and why would have considered the following actions. Note these are not ideas come about with the benefit of hindsight, but what a small band of insightful people were saying at the time.
An honest broker of the situation would have:
1. Fire the senior management of the banks (see this)
2. Banned all lobbying activity as a condition of any aid (see this)
3. Forced a Swedish style prepackaged bankruptcy (see this and this)
Instead, we bailed out the bondholders and management, choking off hope for a robust recovery. We are in fact slowly turning Japanese, awaiting the next recession (and the next and the next).
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Source:
Wall Street Aristocracy Got $1.2T in Loans
By Bradley Keoun and Phil Kuntz
Bloomberg, Aug 21, 2011 7:01 PM ET
http://www.bloomberg.com/news/2011-08-21/wall-street-aristocracy-got-1-2-trillion-in-fed-s-secret-loans.html
Previously:
The Moral Hazard of the “Bad Bank” (January 2009)
FDIC Bair: Bank Chiefs Need to Go (May 2009)
Report: Paulson Lied to Congress, Public (October 2009)
Banking Sector Remains (literally) Unchanged (January 2010)
Elections: Money Talks Louder Than Ever (October 2010)
Too Bad Banks Missed Out On the GM Treatment (November 2010)
BofA Freddie Mac Putbacks Resolved for 1¢ on $ (January 2011)
The NYT reports that the White House and the NY Fed are pressuring NYS Attorney General Eric T. Schneiderman.
Given the sadly misguided history of both the Obama administration and the NY Fed (led by the President Tim Geithneir, now Treasury Secretary) when it comes to Bailouts, this is not a huge surprise.
But what is surprising is the utterly inappropriate behavior of Kathryn S. Wylde. She is not only a member of the board of the Federal Reserve Bank of New York, but occupies the seat supposedly reserved for the representing the public.
If the Times report is accurate, and the quote below represents Ms. Wylde’s comments, than that position is a laughable mockery, and Ms. Wylde should resign effective immediately.
The quote in question, which was reported to have occurred at Governor Hugh Carey’s funeral (!?!) was as follows:
“It is of concern to the industry that instead of trying to facilitate resolving these issues, you seem to be throwing a wrench into it. Wall Street is our Main Street — love ’em or hate ’em. They are important and we have to make sure we are doing everything we can to support them unless they are doing something indefensible.”
I do not know if Ms. Wylde understands what her proper role should be, but clearly she is somewhat confused. She appears to be far more interested in representing the banks than the public.
Note that the Federal Reserve (and indirectly, the NY Fed) are conflicted players in this. On the one hand, they are supposed to be bank regulators (a task they have performed poorly). But they are also substantial investors in the banks, and their regulatory oversight role is obviously conflicted.
There have been all manner of criminal and civil trespasses committed, and we should find out who ordered them, who committed them and why. AG Schneiderman should continue investigating the robo-signing, bring civil and criminal charges where necessary.
Recall that the original problems came about in large part due to Alan Greenspan’s Nonfeasance — the failure to perform his professional obligations of oversight and regulation. That any member of the Federal Reserve or NY Fed wants this closed before any investigation has been undertaken is a scandal of the highest magnitude.
Kathryn S. Wylde, and any other Fed member shirking their duties and committing nonfeasance should step down immediately.
>
Source:
Attorney General of N.Y. Is Said to Face Pressure on Bank Foreclosure Deal
GRETCHEN MORGENSON
NYT, August 21, 2011
http://www.nytimes.com/2011/08/22/business/schneiderman-is-said-to-face-pressure-to-back-bank-deal.html
No one saw it coming!
Awaiting Housing’s Big Chill
(380 sec.) Maxim Group’s Chief Market Strategist Barry Ritholtz predicts doom after the boom.
Forbes
http://www.ritholtz.com/blog/2008/08/housing-forecast-august-2005/
http://video.forbes.com/fvn/business/ab_maxim
Frederick Sheehan is the co-author of Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve.
His new book, Panderer for Power: The True Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession, was published by McGraw-Hill in November 2009. He was Director of Asset Allocation Services at John Hancock Financial Services in Boston. In this capacity, he set investment policy and asset allocation for institutional pension plans.
~~~
The death of the long-established risk-to-reward asset categories was the subject of “It’s Over.” From lowest to highest: cash, bonds, and stocks, are the pecking order of institutional investment policies. Pension plans and endowments that have wandered into warehouses and gas-pipeline management often retain the outline as a mental diagram. The assets with the highest assumed risk (using statistical measurements) are expected to produce the highest return. The genesis for this construction is the Capital Asset Pricing Model (CAPM), a deeply flawed academic theory.
“It’s Over” struck a nerve with readers who have suffered from its domination of asset management over the past three decades. Some gave speeches denouncing it, some forsook advancement, and many endured business-school indoctrination in bewilderment.
The CAPM is not worth further examination (other than the necessity to understand the structure of the institutional mind). However, there is one train of thought that should be considered by the average investor: the incapacity of the model to consider discontinuities. There is no room to “be prepared for the next time the world turns over.” That happens every generation or three, and it is happening today.
Quoting from “It’s Over”:
“There is also the much larger problem of constructing an asset pecking order with rigged asset returns and yields. The market rate for Treasury bills is not zero. The coming dislocation that institutional and retail investors face is, to most if not all, incomprehensible. Consider the reconstruction of Scarlet O’Hara’s Capital Asset Pricing Model after 1860. She discovered what can happen to chimerical fortunes built on the backs of government-fixed, zero-percent, risk-free rates.”
Each morning the news in the U.S. and Europe veers closer to the closing scene of George Bernard Shaw’s Heartbreak House. Recent market turbulence indicates recognition, but the disappearing euro and dollar are treated in the media as a distant political argument among economists, the most destructive group of cross-border planners imaginable. The Federal Reserve, U.S. Treasury Department, European Union, and European Central Bank are acting in unison – that is, in their own short-term interests. Doing so, the independence and viability of personal assets, pension plans, municipalities, colleges, and museums – you can add to this list – are at stake.
The debt-ceiling debate in the U.S. was the most pointless waste of air since Elizabeth Taylor divorced her twelfth husband. First, the debt-ceiling question is not the same as the question of whether the federal government will make good on bond payments, but the two became hopelessly intermingled.
Separating the two: A country that spends one dollar for every 59 cents in tax receipts cannot freeze its level of spending. As a practical matter, cash-matching of inflows to outflows was not possible with over 45 million Americans receiving food stamps, consumers having drawn down savings by $149 billion between September 2010, and April 2011 (during a period when inflation-adjusted spending fell), when 64% of the population is unable to put $1,000 together in an emergency (The National Foundation for Credit Counseling, August 12, 2011, Chicago Tribune), and with a military currently deployed in over 100 different countries. QED.
Second, the federal government did not waver from its commitment to meet bond payment obligations. This was not clear from listening to the media, or the U.S. Treasury Secretary, who bears the duty to defend the nation’s credit, integrity of the dollar, and integrity of his office.
Standard & Poor’s implicitly downgraded the U.S. Treasury Secretary along with the nation’s credit. On July 10, 2011, Treasury Secretary Tim Geithner settled the bond-payment question on Meet the Press: “Let me make this clear: The U.S. is not going to default. We are a country that pays its bills. We’re going to meet our obligations.” He contradicted himself on July 27, 2011, as stated in The King Report: “[B]y August 2, [2011], Treasury Secretary Tim Geithner says the government will run out of money to pay all its bills, including obligations to bondholders. “On July 28, 2011, Bloomberg reported: “The U.S. Treasury will give priority to making interest payments to holders of government bonds when due if lawmakers fail to reach an agreement to raise the debt ceiling, according to an administration official.” This was the case all along.
The double-talk was issued by a Treasury Secretary who did not pay his taxes until a Senate committee requested that he do so (the Internal Revenue Service reports to Geithner) and who acknowledges: “I never had a real job,” (April 2010).
Europe is even more distraught. This is a real, current crisis. The Eurocrats will do anything to prevent a dismantling of the euro; yet, it is coming to an end, or, about to be reduced in scope. The unelected authorities may be able to delay the inevitable, but that will require an enormous amount of money printing. Estimates of €1 trillion to save the Italian and Spanish banking systems are common, but, no one knows the side effects beforehand. Estimates of write-offs and losses over the past few years (Citigroup, Fannie Mae) have generally come up short.
French President Nicholas Sarkozy’s statement on August 16, 2011, that the size of the current bailout fund (EFSF) is large enough (€440 billion) is not credible. It is not clear if €440 billion is large enough to prevent Greece and Portugal from rupturing. It is possible that the August 16 meeting between Sarkozy and German Chancellor Angela Merkel ended with an agreement that it is time to cut bait. (They also dismissed “Eurobond” monetization, but euro-salvation initiatives never quite die.) They may have decided expansion of the money-printing adventure will drag France and Germany into the abyss.
Whether or not this is the case, European markets will be chaotic in the months ahead (as they will in the U.S.), with a good chance capital controls will be instituted to prevent Europeans from moving their money elsewhere: an example of a rare occurrence that has not been anticipated by the usual investment strategy. Swiss franc and gold movements show where the more alert European money is moving. Gold has risen from $1,500 on July 5, 2011, to over $1,800 on August 18, 2011. The consequences to U.S. banks, in such an intertwined financial world, are being discounted in the market.
Should an Iron Curtain of capital controls surround Europe, U.S. authorities may issue some gobbledygook nonsense of how Europe’s unfortunate decision forced the United States’ hand. Doing do, captive financial assets, with limited avenues of dispersal, will drift into 10-year Geithners and the common stocks of National Champions selected by the United Auto Workers and the chairman of the President’s Council on Jobs and Competitiveness, General Electric Chairman Jeffrey Immelt.
Now, the star of the show:
To Scarlett O’Hara, her family’s plantation in Georgia (Tara) was as risk-free as it comes. Probably to Mr. O’Hara, too, who did not contemplate hard times. When Scarlett wanted to chase other long-term assets (Ashley Wilkes), she told her father “plantations don’t amount to anything.” Mr. O’Hara fumed: “Land is the only thing in the world that amounts to anything, for ’tis the only thing in the world that lasts, and don’t you be forgetting it!” This sounds like an old Fannie Mae ad, not to confuse the honor of Mr. O’Hara and Jim Johnston.
Scarlett’s father favored the Capital Asset Pricing Model of the day (100% plantation weighting; risk-free, perpetual, cotton-backed dividends) as did the other, local, wealth-management offices. The plantation owners could not wait to beat those Yankees. (Lincoln and Hamlin, not Jeter and Rivera.) Defeat did not cross their minds. The book value of Tara and Twelve Oaks (Ashley Wilkes’ family plantation) was chiseled in stone, just as the historical stock-market and bond-market returns stamped in indelible ink by Jeremy Siegel, Rex Sinquefield and Roger Ibbotson, are as immutable to asset allocation today as they will be gone with the wind tomorrow.
Rhett Butler was what might be considered a contrarian thinker. It is approaching a truism today that a contrarian thinker does not mean much more than common sense. That is, once every generation or two, the world blows up. So it was with Butler, who told the war-whooping plantation owners: “I have seen many things that you have not seen. The thousands of immigrants who would be glad to fight for the Yankees for food and a few dollars, the factories, the foundries, the shipyards, the iron and coal mines – all the things we have not got. Why all we have is cotton and slaves and arrogance. They’d lick us in a month.” His comments were not appreciated, and why would they listen to this disreputable financier (which he was), lounging as they were at Twelve Oaks: “the beautiful white-columned house that crowned the hill like a Greek temple.”
The South marched off to war and Rhett Butler bought cotton. Scarlett did not approve. She told Rhett he was “vile and a mercenary.”
Butler disagreed: “Mercenary? No, I’m farsighted. Though perhaps that is merely a synonym for mercenary. At least, people who were not as farsighted as I will call it that. Any loyal Confederate who had a thousand dollars in cash in 1861 could have done what I did, but how few were mercenary enough to take advantage of the opportunities! [To deflect hostility after preventing money from leaving the European Union (and from the U.S, later), the euro authorities will blame the mercenary Europeans who are buying Swiss francs and gold. Such an accusation always goes down well with loyal, though not far-sighted, citizens when they suffer relative impoverishment at the hands of the authorities. - FJS] As, for instance, right after Fort Sumter fell and before the blockade was established [that prevented leakage from the Confederate financial system - FJS], I bought up several thousand bales of cotton at dirt-cheap prices and ran them to England. [Butler shipped his assets offshore - FJS] They are still there in warehouses in Liverpool. I’ve never sold them. I’m holding them until the English mills have to have cotton and will give any price. I wouldn’t be surprised if I got a dollar a pound.”
Scarlett’s reply sounds typical, though far more original, than that of a Wall Street airhead on CNBC: “You’ll get a dollar a pound when elephants roost in trees.”
On the 220-year-chart of cotton prices in the 2010 CRB Yearbook it looks as though cotton rose from around 10 cents a bushel in 1860 to $1.05 a bushel a couple of years later.
Scarlett, clinging to her ERISA-sanctioned policy, which was therefore legally risk-free, retorted: “[I] don’t need your advice. Do you think Pa is a pauper? He’s got all the money I’ll ever need…” This could be an occasion to discuss the topical question of what is money? (see:“Do you think Ben Bernanke is J.P. Morgan?”, but Butler, (or Margaret Mitchell), is an expert in the field.
Rhett, with a better historical sense than Scarlett, (even while she, herself, unschooled, would have been shocked at the narrow-minded, ahistorical theories of modern economists), replied: “I imagine the French aristocrats thought practically the same thing until the very moment when they climbed into the tumbrels.”
Meanwhile, back at Tara, Mr. O’Hara had stuck with the plantation owner’s CAPM: “The South had always lived by selling cotton and buying the things it did not produce, but now it could neither sell nor buy [because of the union blockade of southern ports - FJS]. Gerald O’Hara had three years’ crops of cotton stored under the shed near the gin house at Tara, but little good it did him. In Liverpool it would bring one hundred and fifty thousand dollars, but there was no hope of getting it to Liverpool. Gerald had changed from a wealthy man to a man who was wondering how he would feed his family and his negroes through the winter.” When it rains it pours: “With the new fall of currency, prices soared again. Beef, pork, and butter cost thirty-five dollars a pound, flour fourteen hundred dollars a barrel….[W]arm clothing, when it was obtainable had risen to such prohibitive prices that Atlanta ladies were lining their old dresses with rags and reinforcing them with newspapers to keep out the wind.”
Butler knew what he wanted in a girl and he made sure he got it – a woman who knew how to make money during bad times: “I’m going to be a rich man when this war is over, Scarlett….I told you once before that there were two times for making big money, one in the upbuilding of a country and the other in its destruction. Slow money on the upbuilding, fast money in the crack-up. Remember my words.” There were probably similar reminders when investment banks paid credit-rating agencies for AAA ratings on CDOs.
Rhett’s concept of money was so old that it’s new: “I’ve made money enough, and it’s in English banks and in gold. None of this worthless paper for me.” The Confederacy had been reduced to paper money, not necessarily a road to ruin but given Rhett’s belief: “the Confederacy is doomed….It had to go and it’s going now,” he took the only course of action a man with common sense would follow.
Rhett’s far-sightedness was not well received: “It simply made everyone furious that an old speculator who always said nasty things about the Confederacy should have so much money when we were all so poor.” If the Powers That Were had paid attention to the “nasty things” Rhett Butler willingly shared with anyone who would listen in 1860, he would have remained a shady, wealthy, but unimportant figure.
On the battlefield, writing to his wife (Melanie), Ashley Wilkes expressed contempt for the leaders whom he had trusted: “I see too clearly that we have been betrayed, betrayed by our arrogant Southern selves, believing that King Cotton could save the world. Betrayed too, by words and catch-phrases, prejudices and hatreds coming from the mouths of those highly placed, those men whom we respected and revered – ‘King Cotton, Slavery, States’ Rights, Damn Yankees.’” Ashley had trusted the Confederacy’s Committee to Save the World (see February 15, 1999 cover of Time magazine )
Rhett’s sermons were not in vein. Parlor discussions at Tara praised Southern advances but Scarlett listened in contempt. “They haven’t any idea what is really happening to themselves or to the South. They still think, in spite of everything, that nothing really dreadful can happen to any of them because they are who they are – O’Hara’s, Wilkeses, Hamiltons. [Or: Harvard, Princeton, the Fed. Or: pension plans, endowments, family offices. Or: stocks-for-the-long-run, Too-Big-to-Fail banks, Treasuries, money-market funds. - FJS] Oh, They’re all fools! They’ll never realize! They’ll go right on thinking and living as they always have and nothing will change them….They don’t change to meet changed conditions because they think it’ll all be over soon.”
Scarlett was witness to the fall: “The charred remains of [Twelve Oaks] had crowned the hill in white-columned dignity. The deep pit which had been the cellar, the blackened field-stone foundations and two mighty foundations marked the sight…Ashley had married his bride here but his son and son’s son would never bring brides to this house….The House was dead.”
This will be the lament of unfortunate trusts and endowments that mistakenly believed they have apportioned their assets for perpetuity.
Tara may have met the same fate but Scarlett had spirit – and was ruthless, inexhaustible, and refused defeat. Nevertheless, she needed aid and solicited her TARP: Rhett Butler. During her same train-of-thought quoted above (“Oh, they’re all fools!”), Scarlett concluded: “They think God is going to work a miracle for their benefit. But He won’t. The only miracle that’s going to be worked around here is the one I’m going to work on Rhett Butler.”
Rhett was not forthcoming: “I couldn’t give [you money] if I wanted to. I haven’t a cent on me. Not a dollar in Atlanta. I have some money, but not here. And I’m not saying where it is or how much. But if I tried to draw a draft on it, the Yankees would be on me like a duck on a June bug…”
From a zero-percent, risk-free rate, money could not be had at any price.
Much later in the book, Rhett explains in textbook fashion his refusal to participate in Scarlett’s miracle. Only a sampling is included here. It springs to mind that the author wrote a long story while concealing a coded tract on how to preserve financial independence, legally or illegally, during a time when the government has exceeded its legal authority: “If I’d drawn a draft they could have traced it somehow and I doubt if you’d have gotten a cent. My only hope lay in doing nothing. I knew the money was pretty safe, for if worse came to worse…I could have named every Yankee patriot who sold me bullets and machinery during the war. Then there would have been a stink because some of them are high up in Washington now.”
On that score, Rhett tells Scarlett how he secured his release from a post-War federal prison: “I employed a delicate system of blackmail on a friend in Washington who is quite high in the counsels of the Federal government. A splendid fellow – one of the staunch Union patriots from whom I used to buy muskets and hoop skirts for the confederacy…. [H]e hastened to use his influence, and so I was released. Influence is everything, Scarlett. Remember that when you get arrested. Influence is everything, and guilt and innocence merely an academic question.”
And so it goes.
Margaret Mitchell, author of Gone with the Wind, was very much surprised that her book was even publishable. She wrote to a reviewer at the time [1936]: “I wrote the book nearly 10 years ago…. It seemed, to be quite frank, pretty lousy and I never submitted it to any agent or publisher…. I wrote the book when the Great American Boom was at its height and the high tide of the Jazz Age was with us. Everyone I knew had a car, a radio, an electric ice box and a baby that they were buying on time (everybody except me!). Heaven knows I didn’t foresee the Depression…. I was writing about an upheaval I’d heard about when I was a small child. For I spent Sunday afternoons [hearing about men and women who survived the War and Reconstruction]…. I heard them talk about friends who came through it all and friends who went under…. And all during my childhood, I’d been told to be prepared for the next time the world turned over…. So I suppose that explains why I wrote a book about hard times when the country was enjoying its biggest boom.”
Some movie sequels are great, like Godfather II, Empire Strikes Back, Return of the Jedi, Toy Story 2 & 3, and Terminator II but most are not, like Godfather III, Revenge of the Nerds II, Dumb and Dumberer, and CaddyShack II. Many sequels of course overstay their welcomes. As we await Bernanke’s speech on Friday, many are calling for another QE sequel titled Printing, the Path to Prosperity. QEII as it’s otherwise known was well received by markets because it helped to lift asset prices, temporarily as we’ve seen, but critics knew there was no real life economic impact as evidenced by the almost zero growth seen in the 1st half of 2011. If QE3 gets the greenlight, expect again only a cheer from asset markets but a cheer that won’t last very long again because the Fed has well worn out its welcome that will give no help to actual economic growth. I’m of the opinion that we got pseudo QE3 on Aug 9th and the only thing Bernanke will do on Friday is explain the bullets he has left but won’t be pulling any of those impotent triggers now, likely disappointing asset markets. He had 3 dissenters just to get thru a timeline on ‘exceptionally low’ rates, the internal heckling has begun. Plosser said it well last week, “better part of wisdom was patience.”
"Markets can remain irrational longer than you can remain solvent." —John Maynard Keynes
After 3 quarters in a row that averaged just 1.2%, Q4 GDP grew 2.8%, a touch below expectations of 3.0% BUT Nominal GDP grew well below forecasts. Because the price deflator was up just .4% vs the estimate of 1.9%, Nominal GDP was up 3.2% vs the estimate of 4.9%. Personal Consumption rose 2.0% vs the forecast of 2.4%. Fixed Investment rose 3.3% helped by a 5.2% increase in equipment and software spending and residential construction rose by 10.9%. Trade was a slight drag on GDP growth and government spending was as well led by a 12.5% decline on national...
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