For the last several months, Princeton professor Paul Krugman has become increasingly agitated about what he feels is a disastrous mistake in the making -- a sudden global obsession with "austerity" that will lead to spending cuts in many nations in Europe and, possibly, the United States.
Krugman believes that this is exactly the same mistake we made in 1937, when the country was beginning to emerge from the Great Depression. A sudden focus on austerity in 1937, it is widely believed, halted four years of strong growth and plunged the country back into recession, sending the unemployment rate soaring again.
In Krugman's view, the world should keep spending now, to offset the pain of the recession and high unemployment--and then start cutting back as soon as the economy is robustly healthy again.
Those concerned about the world's massive debt and deficits, however, have seized control of the public debate, and are scaring the world's governments into cutting back.
Which fate is worse? It depends on your time frame.
Cutting back on spending now would almost certainly make the economy worse, at least for the short run. Not cutting back on spending later, meanwhile (and Congress has shown no ability to curtail spending), will almost certainly keep us on a road to hell in a handbasket.
The White House's own budget projections show the deficit improving as a percent of GDP to about -4% by 2013. After that, however, even the White House doesn't think things will get much better. After a few years of bumping along at about -4%, the deficit will begin to soar at the end of the decade. And thanks to the ballooning costs of Medicare, Medicaid, and Social Security--along with inflating interest payments from all the debt we're accumulating--the White House expects the deficit to soar to a staggering -62% of GDP by 2085.
What Krugman and his foes agree on is that that's no way to run a country. And it's time we finally faced up to that.
In the meantime, we'll continue to fight about what to do in the near-term. And Krugman thinks he has lost that war and we're headed for another Depression.
***
Many prominent investors, and economists are now warning that our economy is in big trouble. On the left many are arguing for more stimulus spending, while on the right many are arguing for cutting spending. The one theme these "doomsayers" have in common is that they all are painting a not so pretty picture of the US economy.
On the left, Nobel Laureate Paul Krugman recently penned a frightening op-ed in the New York Times. Krugman, warned that the United States has entered the initial stages of a third Depression. In his view, inadequate fiscal and monetary stimulus, coupled with obsessive worry about short-term, record breaking budget deficits, are increasing the probability of a long, deflationary-driven Depression.
On the right, economists, and politicans are calling for the Government to cut spending, which they predict will lead to the collapse of the dollar at current rates. Ron Paul, and Peter Schiff have called for painful spending cuts, higher interest rates, and end to bailouts.
Tuesday, June 29, 2010
Sunday, June 27, 2010
Li Lu on BYD
What I think we are doing today with our investment in BYD in China is really helping China march towards a modern era of prosperity. BYD is providing a solution to both China and the US, to migrate from the past to a way that gets us out of the unsustainable carbon age that we live in. Global warming is a vital concern to every human being, so China is providing a great contribution to everybody with BYD. America has had a great history of invention and here is a great company in China that is about to make a major contribution to human civilization with cheap electric vehicles and solar power.
Ultimately we will have to get our energy from the sun. Most of the energy, even fossil fuels (plants that die and then go into the ground), all originally come from the sun. So if you can figure out a way to take energy from the sun and power vehicles, while using batteries to store it, inexpensively — will really make renewable energy power everything. The combination of those things holds the key to the future of industrial civilization that we are about to embark on. We didn’t set out with BYD with this in mind, it just happened that way. With great companies, it only looks logical in retrospect. Think about how Bill Gates started Microsoft. I don’t think he knew up front that he would take the entire market — at that time it did not exist. It is the same way with our investment in BYD. Ultimately, I think finding an inexpensive way to store energy that we harness from the sun will be a huge contribution for both China and the US, but more broadly our entire civilization.
[via lethean46]
Ultimately we will have to get our energy from the sun. Most of the energy, even fossil fuels (plants that die and then go into the ground), all originally come from the sun. So if you can figure out a way to take energy from the sun and power vehicles, while using batteries to store it, inexpensively — will really make renewable energy power everything. The combination of those things holds the key to the future of industrial civilization that we are about to embark on. We didn’t set out with BYD with this in mind, it just happened that way. With great companies, it only looks logical in retrospect. Think about how Bill Gates started Microsoft. I don’t think he knew up front that he would take the entire market — at that time it did not exist. It is the same way with our investment in BYD. Ultimately, I think finding an inexpensive way to store energy that we harness from the sun will be a huge contribution for both China and the US, but more broadly our entire civilization.
[via lethean46]
Wednesday, June 16, 2010
The 200-day moving average
The market dispatch people (Elizabeth Strott and Charlie Blaine, not to mention Reitmeister below) keep mentioning the 200-day moving average as a key technical indicator. So what's up with that? Here's a Mark Hulbert article about it.
***
ANNANDALE, Va. (MarketWatch) -- It was Voltaire who famously said that the perfect is the enemy of the good. And, though he wasn't talking about investing, he very well could have been: The relentless pursuit of a "perfect" market timing system can lead to an inferior result.
Take market timers who rely on the 200-day moving average to determine whether they should be in or out of the stock market. It is by no means a perfect system, as I'll discuss in a moment. But, by the same token, it has proven difficult -- in practice -- to do better.
Though trend-following systems have a long history, I suspect that the popularity of the 200-day moving average in recent decades can be traced largely to Richard Fabian, who during the 1970s began championing a 39-week moving average (virtually the same as a 200-day moving average). At the time, Fabian was editor of the Telephone Switch Letter, an advisory service that has since gone through several metamorphoses and is now edited by his son, Douglas Fabian, and called Doug Fabian's Successful Investing.
Fabian the Elder told subscribers that they need not spend more than a minute a week determining whether they should be in stock mutual funds or cash. If the market was above its average level of the previous 39 weeks, then they should be in the market -- and otherwise in cash.
Compared to almost all other market timing systems I monitor, this one was the simplest. And yet, it also turned out to perform quite well: For the decade of the 1980s, for example, it was the very best performer of any tracked by the Hulbert Financial Digest.
Still, the approach was (and is) not perfect, and Fabian was one of the first to say so. He often said, for example, that a 52-week moving average system would produce superior long-term returns than the 39-week system. He nevertheless stuck with the 39-week average because he believed that investors would not be willing to sit out the intermediate-term declines that a longer-term moving average would require.
Researchers in recent years have raised even more serious theoretical questions about this market timing system. One was that its market-beating potential appeared by the late 1990s to have become greatly diminished, leading some to speculate that the veritable golden-egg-laying goose had been killed by too many investors trying to follow the 200-day moving average. (Read my 2004 column mentioning some of this research.)
Another chink in the 200-day moving average's armor is the argument, advanced by Ned Davis of Ned Davis Research, that the approach works primarily during secular (long-term) bull markets. One of the hallmarks of cyclical (shorter-term) bull markets, according to Davis, is that during them, trend-following systems tend not to work. (Read my Sept. 1, 2009 column on Davis' argument.)
Given these apparent defects, you might think that doing better than the 200-day moving average would have been relatively easy, especially in recent years. But it hasn't been.
We know because Fabian the Younger has been trying to improve on it, almost from the point he took over the advisory service from his father in the early 1990s. On balance, his deviations from the mechanical 39-week moving average system have cost his model portfolio.
***
ANNANDALE, Va. (MarketWatch) -- It was Voltaire who famously said that the perfect is the enemy of the good. And, though he wasn't talking about investing, he very well could have been: The relentless pursuit of a "perfect" market timing system can lead to an inferior result.
Take market timers who rely on the 200-day moving average to determine whether they should be in or out of the stock market. It is by no means a perfect system, as I'll discuss in a moment. But, by the same token, it has proven difficult -- in practice -- to do better.
Though trend-following systems have a long history, I suspect that the popularity of the 200-day moving average in recent decades can be traced largely to Richard Fabian, who during the 1970s began championing a 39-week moving average (virtually the same as a 200-day moving average). At the time, Fabian was editor of the Telephone Switch Letter, an advisory service that has since gone through several metamorphoses and is now edited by his son, Douglas Fabian, and called Doug Fabian's Successful Investing.
Fabian the Elder told subscribers that they need not spend more than a minute a week determining whether they should be in stock mutual funds or cash. If the market was above its average level of the previous 39 weeks, then they should be in the market -- and otherwise in cash.
Compared to almost all other market timing systems I monitor, this one was the simplest. And yet, it also turned out to perform quite well: For the decade of the 1980s, for example, it was the very best performer of any tracked by the Hulbert Financial Digest.
Still, the approach was (and is) not perfect, and Fabian was one of the first to say so. He often said, for example, that a 52-week moving average system would produce superior long-term returns than the 39-week system. He nevertheless stuck with the 39-week average because he believed that investors would not be willing to sit out the intermediate-term declines that a longer-term moving average would require.
Researchers in recent years have raised even more serious theoretical questions about this market timing system. One was that its market-beating potential appeared by the late 1990s to have become greatly diminished, leading some to speculate that the veritable golden-egg-laying goose had been killed by too many investors trying to follow the 200-day moving average. (Read my 2004 column mentioning some of this research.)
Another chink in the 200-day moving average's armor is the argument, advanced by Ned Davis of Ned Davis Research, that the approach works primarily during secular (long-term) bull markets. One of the hallmarks of cyclical (shorter-term) bull markets, according to Davis, is that during them, trend-following systems tend not to work. (Read my Sept. 1, 2009 column on Davis' argument.)
Given these apparent defects, you might think that doing better than the 200-day moving average would have been relatively easy, especially in recent years. But it hasn't been.
We know because Fabian the Younger has been trying to improve on it, almost from the point he took over the advisory service from his father in the early 1990s. On balance, his deviations from the mechanical 39-week moving average system have cost his model portfolio.
Monday, June 07, 2010
The Dilbert Portfolio
When I heard that BP (BP, news, msgs) was destroying a big portion of Earth, with no serious discussion of cutting their dividend, I had two thoughts: 1) I hate them, and 2) This would be an excellent time to buy their stock. And so I did. Although I should have waited a week.
People ask me how it feels to take the side of moral bankruptcy. Answer: Pretty good! Thanks for asking. How's it feel to be a disgruntled victim?
I have a theory that you should invest in the companies that you hate the most. The usual reason for hating a company is that the company is so powerful it can make you balance your wallet on your nose while you beg for their product. Oil companies such as BP don't actually make you beg for oil, but I think we all realize that they could. It's implied in the price of gas.
Perhaps you think it's absurd to invest in companies just because you hate them. But let's compare my method to all of the other ways you could decide where to invest.
Technical analysis
Technical analysis involves studying graphs of stock movement over time as a way to predict future moves.
It's a widely used method on Wall Street, and it has exactly the same scientific validity as pretending you are a witch and forecasting market moves from chicken droppings.
Identify well-managed companies
When companies make money, we assume they are well-managed. That perception is reinforced by the CEOs of those companies who are happy to tell you all the clever things they did to make it happen.
The problem with relying on this source of information is that CEOs are highly skilled in a special form of lying called leadership. Leadership involves convincing employees and investors that the CEO has something called a vision, a type of optimistic hallucination that can come true only in an environment in which the CEO is massively overcompensated and the employees have learned to be less selfish.
Track records
Perhaps you can safely invest in companies that have a long history of being profitable. That sounds safe and reasonable, right?
The problem is that every investment expert knows two truths about investing: 1) Past performance is no indication of future performance. 2) You need to consider a company's track record.
Right, yes, those are opposites. And it's pretty much all that anyone knows about investing. An investment professional can argue for any sort of investment decision by selectively ignoring either point 1 or 2. And for that you will pay the investment professional 1% to 2% of your portfolio value annually, no matter the performance.
Buy companies you love
Instead of investing in companies you hate, as I have suggested, perhaps you could invest in companies you love.
I once hired professional money managers at Wells Fargo (WFC, news, msgs) to do essentially that for me. As part of their service they promised to listen to the dopey-happy hallucinations of professional liars (CEOs) and be gullible on my behalf. The pros at Wells Fargo bought for my portfolio Enron, WorldCom and a number of other much-loved companies that soon went out of business.
For that, I hate Wells Fargo. But I sure wish I had bought stock in Wells Fargo at the time I hated them the most, because Wells Fargo itself performed great. See how this works?
Do your own research
I didn't let Wells Fargo manage my entire portfolio, thanks to my native distrust of all humanity. For the other half of my portfolio I did my own research. (Imagine a field of red flags, all wildly waving. I didn't notice them.)
My favorite investment was in a company I absolutely loved. I loved their business model. I loved their mission. I loved how they planned to make our daily lives easier. They were simply adorable as they struggled to change an entrenched industry. Their leaders reported that the company had finally turned cash positive in one key area, thus validating their business model, and proving that the future was rosy. I doubled down. The company was Webvan, may it rest in peace.
But what about Warren Buffett?
The argument goes that if Warren Buffett can buy quality companies at reasonable prices, hold them for the long term and become a billionaire, then so can you.
Do you know who would be the first person to tell you that you aren't smart enough or well-informed enough to pull that off? His name is Warren Buffett.
OK, he's probably too nice to say that, but I'm pretty sure he's thinking it. However, he might tell you that he makes his money by knowing things that other people don't know, and buying things that other people can't buy, such as entire companies.
-- by Scott Adams
People ask me how it feels to take the side of moral bankruptcy. Answer: Pretty good! Thanks for asking. How's it feel to be a disgruntled victim?
I have a theory that you should invest in the companies that you hate the most. The usual reason for hating a company is that the company is so powerful it can make you balance your wallet on your nose while you beg for their product. Oil companies such as BP don't actually make you beg for oil, but I think we all realize that they could. It's implied in the price of gas.
Perhaps you think it's absurd to invest in companies just because you hate them. But let's compare my method to all of the other ways you could decide where to invest.
Technical analysis
Technical analysis involves studying graphs of stock movement over time as a way to predict future moves.
It's a widely used method on Wall Street, and it has exactly the same scientific validity as pretending you are a witch and forecasting market moves from chicken droppings.
Identify well-managed companies
When companies make money, we assume they are well-managed. That perception is reinforced by the CEOs of those companies who are happy to tell you all the clever things they did to make it happen.
The problem with relying on this source of information is that CEOs are highly skilled in a special form of lying called leadership. Leadership involves convincing employees and investors that the CEO has something called a vision, a type of optimistic hallucination that can come true only in an environment in which the CEO is massively overcompensated and the employees have learned to be less selfish.
Track records
Perhaps you can safely invest in companies that have a long history of being profitable. That sounds safe and reasonable, right?
The problem is that every investment expert knows two truths about investing: 1) Past performance is no indication of future performance. 2) You need to consider a company's track record.
Right, yes, those are opposites. And it's pretty much all that anyone knows about investing. An investment professional can argue for any sort of investment decision by selectively ignoring either point 1 or 2. And for that you will pay the investment professional 1% to 2% of your portfolio value annually, no matter the performance.
Buy companies you love
Instead of investing in companies you hate, as I have suggested, perhaps you could invest in companies you love.
I once hired professional money managers at Wells Fargo (WFC, news, msgs) to do essentially that for me. As part of their service they promised to listen to the dopey-happy hallucinations of professional liars (CEOs) and be gullible on my behalf. The pros at Wells Fargo bought for my portfolio Enron, WorldCom and a number of other much-loved companies that soon went out of business.
For that, I hate Wells Fargo. But I sure wish I had bought stock in Wells Fargo at the time I hated them the most, because Wells Fargo itself performed great. See how this works?
Do your own research
I didn't let Wells Fargo manage my entire portfolio, thanks to my native distrust of all humanity. For the other half of my portfolio I did my own research. (Imagine a field of red flags, all wildly waving. I didn't notice them.)
My favorite investment was in a company I absolutely loved. I loved their business model. I loved their mission. I loved how they planned to make our daily lives easier. They were simply adorable as they struggled to change an entrenched industry. Their leaders reported that the company had finally turned cash positive in one key area, thus validating their business model, and proving that the future was rosy. I doubled down. The company was Webvan, may it rest in peace.
But what about Warren Buffett?
The argument goes that if Warren Buffett can buy quality companies at reasonable prices, hold them for the long term and become a billionaire, then so can you.
Do you know who would be the first person to tell you that you aren't smart enough or well-informed enough to pull that off? His name is Warren Buffett.
OK, he's probably too nice to say that, but I'm pretty sure he's thinking it. However, he might tell you that he makes his money by knowing things that other people don't know, and buying things that other people can't buy, such as entire companies.
-- by Scott Adams
Wednesday, June 02, 2010
Tuesday, June 01, 2010
Extraordinary Popular Delusions
Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackey is considered must-reading by many investment professionals. The material is classic, but I found the writing archaic and the reading of it sometimes ponderous. (After all, it was written in 1841.) The book is available for free on the internet, for example at
I found Richard Band's summary of the pertinent sections of the book much more readable (and shorter). That summary is found in Chapter 2 of his book Contrary Investing. It's out of print but you can get it cheap used at Amazon.
[via value_investment_thoughts 7/31/05 (that long ago?) since I'm considering swapping my mostly unread copy at paperbackswap]
Hmmm.. that link no longer works (though it's sort of still at archive.org). Try this one (linked from wikipedia)