Bill Fleckenstein on the U.S. Dollar

Bill Fleckenstein, a hedge fund manager, hates what we've done to the American dollar and says a weaker dollar won't fix our trade deficit:

http://moneycentral.msn.com/content/P93626.asp

We don't export enough to solve our trade deficit. What we need to do is stop consuming beyond our means and start saving, which is what will be forced upon us eventually.

Bill's Archives:

http://articles.moneycentral.msn.com/Commentary/ByAuthor/BillFleckenstein.aspx

Foreign Debtholders and National Debt

It's one day early, but Happy Halloween. If the above chart doesn't scare you, click on the link below and view the national debt:

http://perotcharts.com/home/

The Big Picture (apologies to Barry Ritholtz)

The stock markets went up substantially today and yesterday because the Fed cut interest rates to 1%. Interest rate cuts usually cheapen a country's currency, lower the available interest rates for CDs and regular savings accounts, and make commodities, like oil, more expensive. Thus, the joy of seeing your stock market gains should be tempered by the fact that in real terms, if you are a saver, your chances of losing to inflation have increased dramatically. One valuable lesson I've learned from the recent turmoil is to increase exposure to commodities if I know the Fed is going to cut interest rates. I had done so indirectly by investing in a Brazilian fund and it is now paying off handsomely--at least today. Who knows what tomorrow will bring? I had also recently invested a small amount in TIP, which may help as a hedge against core inflation.

As for directly saving, I had hoped to buy an ING 4.25% CD, but apparently Washington Mutual (now JP Morgan) places a five day hold on any transfers. The 4.25% offer still exists, and I am hoping ING maintains it, at least until tomorrow, when my transfer money is available.

Call me a young curmudgeon, but all of this strikes me as folly. The reason we got into this mess is because Greenspan lowered interest rates to 1% and held it there for too long, and now, to correct the problem caused by the lower interest rates, we are going to lower interest rates to 1%--the exact same action that got us in trouble in the first place. I can't help but think of the old saying that insanity is doing the same thing over and over again and expecting different results. We better pray Bernanke is good at timing the economy and will raise interest rates as soon as possible. Otherwise, we might be in for another pop in a new bubble five years from now.

Margaret and Helen on Goldwater

Apparently, Margaret and Helen have taken the blogging world by storm:

I’m old enough to remember the Republican party of Barry Goldwater - when the party stood for fiscal responsibility, small government and personal freedoms. I remember when I could talk with friends about politics and just agree to disagree. And then religious nut cases decided that if you didn’t agree with them you were immoral. So they went and elected George Bush President so he could take the Republican Party from being a party full of respectable people to a party filled with asses, jackasses and yes - [people] like Sarah Palin.

Margaret and Helen

It's nice to have people who remember what real Republicans used to stand for.

Arbitrage Opportunity?

Rohm & Haas Co. (ROH) shareholders approved a deal with Dow Chemical (DOW). The offer is apparently going to be an all-cash deal, although there is some risk that the deal's terms may change. I just bought 40 shares of ROH today. ROH is selling at around $68/per share, and DOW's offer was to buy them at $78/per share.

BUD is another possible arbitrage play, but I have not bought any shares of BUD.

The efficient market hypothesis would say that the lower price is due to the risk that the deal will not get financing and will collapse; however, in a world of 1% interest rates, that kind of risk should not be providing an arbitrage opportunity of 10% or more. Warren Buffett, of course, hates and disagrees with the efficient market hypothesis. These are interesting times.

The information on this site is provided for discussion purposes only and does not constitute investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities or make any kind of an investment. You are responsible for your own due diligence.

Steve Forbes on Gold and the Fed

Steve Forbes, in November's Commonwealth Club magazine, says ignore the Fed and look at gold prices:

How do you know whether this thing [market situation] is getting better or not? Don't listen to the Federal Reserve--they speak what sounds like the English language but is designed to leave a fog of confusion. [Instead] Just look at the commodity markets, particularly the gold price. This has worked for 4,000 years; it'll give you a good indication whether they're doing it right or wrong. Right now, gold has come down a little bit, but it's still high, $870 or $880 an ounce. If it stays in that range, expect that more strange things will happen. If it comes down to the $600, $500 range, and they keep it there--don't let it fall below that--we'll be okay; we'll get out of this pretty quickly. Just watch the commodity markets, not what these folks [at the Fed] say.

Snarky. And probably true. As of October 29, 2008, gold was between $740 and $750 an ounce.

Alec Baldwin on Family Court

Behind Alex Baldwin's funnyman persona is a libertarian--at least when it comes to the family court system. In the Commonwealth Club's November 2008 article (pp. 45), The Ex-Files, he talks about "parental alienation" and government corruption. Most citizens think the court system is there to protect them and be fair. Mr. Baldwin's experience should hammer home the reality that court systems are not blessed with any special fairness--they are government agencies, and like all government agencies, have the same incentives and disincentives to work hard and to achieve just results.

The difference in family court, Baldwin argues, is that the incentives are aligned to work against the family and against fairness:

The whole custody evaluation system in Los Angeles is corrupt. It is bankrupt. That is the problem. The judges can do whatever they want to do, which is what you learn about all courtrooms in this country.

In other words, your case is only as good as the judge you (randomly) get. Baldwin points out that state court judges are subject to political pressure, causing an "implied corruption":

These judges are there by appointment, or they run for political office. Either way, there's a mechanism by which they can be punished if they don't get it. If they don't serve the pit boss, you make a call to Sacramento and say, "Get rid of this woman." ... So there is implied corruption in the terms that they work for these law firms.

[J]udges and lawyers are never going to help us. Schmucks like me walk in...and they suck it [your money] out of you. They think it's great. Why change that?

In other words, the incentives for lawyers to work things out are misaligned in civil litigation, and even more so in family court.

I used to work in a family law firm's offices, and the first action they usually took upon being hired was to file for a restraining order and include the worst possible allegations against the opposing side.  Allegations of physical or verbal abuse (no matter how slight) would be submitted to the Court, which expected these kinds of allegations and seemed inclined towards granting a restraining order.  So of course the other side would get one or try to get one, and now you've got these emotionally-charged allegations going back and forth, which required the use of mediators, facilitators, and numerous government employees. If you ever get divorced, look up collaborative divorce--it may be cheaper and, more importantly, easier on your soul.

Update on November 23, 2008: I found a link to Alec Baldwin's speech:

http://weimarworld.blogspot.com/2008/09/alec-baldwin-discusses-la-family-court.html/pres02.htm

Cops and Robbers

In today's SJ Merc (October 27, 2007, page 2B), John Woolfolk talks about police officer pay in San Jose:

Basic pay for a San Jose officer is now $108,167, excluding overtime; with benefits, the total cost comes to $147,614.

Note that the basic salary excludes overtime pay, which can be substantial. The SJ Police Department is now asking for a 4% raise. Each 1% in raises costs San Jose taxpayers 1.9 million dollars each year. If the city is inclined to grant any raise, it should be in the form of a higher salary, which can be more easily tracked than benefits. The costs of increased benefits, such as pensions, are almost impossible to determine until they become due.

Vanguard's John Bogle on Investing

John Bogle on Investing:

http://www.nytimes.com/2008/10/26/business/26bogle.html

“If you were to put your money away and not look at it for many years, until you were ready for retirement,” he said, “when you finally looked at it, you’d probably faint with amazement at how much money is in there.”

Corporate Bond Yields: the Best Indicator?

I was watching CNBC today, and one manager made perfect sense. He said stocks were low based on valuation, but he was in cash. He indicated he was going to wait until the market stabilized before investing in stocks, because right now, the market was behaving irrationally, and he did not want to risk timing a recovery too early. He also said that when yields on safer (GE, etc.) corporate bonds narrowed, that might be the time to buy stocks. He was long cash and corporate bonds. If you want to follow his advice, you may want to consider buying iShares S&P U.S. Preferred Stock Index (PFF), a preferred shares ETF, and/or T. Rowe Price's Corporate Income Fund. I own PFF, and may buy some of the T. Rowe Corporate Income fund.

The Government's Pension Plan

The AP's Erica Werner on why government employees aren't like average Americans:

http://finance.yahoo.com/focus-retirement/article/106022/Meltdown-Retirement-Blow-Is-Softer-for-Lawmakers

She has some interesting points about why government's interests may not be aligned with the people's interests.

Frigor Chocolate and the Economy

So many people have made sensible comments about the bottom being far off, I feel anxious. Their arguments, unfortunately, make sense:

1. The recession is just beginning to hit Europe.

2. The unemployment rate will rise, as companies lay off employees (e.g. Yahoo).

3. The ARMs (adjustable rate mortgages) are going to be re-set at higher interest rates, causing more foreclosures, and placing more downward pressure on housing prices.

4. The dollar will weaken, as the Chinese and Japanese begin to put more of their money in Euros to diversify their holdings.

When anxious, I suggest eating chocolate. Here is a link to the best chocolate I know of, called Frigor:

http://www.cailler.ch/en/sor/fri/default.asp

At least Warren Buffett is buying U.S. shares, so the optimists have good company.

Death Penalty Economically Unviable?

Gerry Uelman writes that the benefits of the death penalty don't outweigh its costs (Fall 2008, Santa Clara Law, pps. 10-11):

Because the death penalty is being sought, the prosecution and defense must actually prepare for two trials, one to determine guilt, the other to determine the sentence...those elements added approximately $500,000 to the cost of a homicide trial.

The bottom line: a conservative estimate of the current cost of our death penalty law in California is $137.7 million per year...to total $232.7 million [after implementing commission's recommendations].

I used to be pro-death penalty until I saw how the system works. I am still pro-death penalty in principle, but from an economic perspective, most studies show it's better to have life without parole. The other benefit of life without parole over the death penalty? Humility. The ones that were wrongfully convicted may get a chance to prove their innocence through DNA or some other new method.

Stocks Update

I just did the math, and from December 7, 2007 to today, October 24, 2008, I've lost around 24% in my retirement funds.

Remember, if your accounts decrease by 10%, you need to make more than 10% to break even. Thus, my portfolio has to go up 32% so I can get back to where I was in December 2007. Sigh.

Update on October 27, 2008: another blogger is in the same boat:

http://escapebrooklyn.blogspot.com/2008/10/sounds-good-in-theory.html

Capitulation, Japanese-Style

Apparently, Japan's market has now gone down to 1982 levels. Oh, it gets even worse--DJIA futures are down 352+ points last time I looked. [It got worse--see chart above.]

http://www.bloomberg.com/apps/news?pid=20601101&sid=aRTtcZqFRnII

Sigh. I wish I could go to sleep and wake up in May 2009, when I think the Dow will be back up to 10,000. In any case, I call capitulation. I called it too early before, but I call it now. October 24, 2008. Capitulation.

Update on October 24, 2008: no 1,000 point drop today, but it's still a bad day--DJIA still down 200+ points.

Atwood on Debt

Atwood hits the nail on the head in her 10/21/08 NY Times Op-Ed:

Atwood Op Ed

But at some point we stopped seeing debt as a simple personal relationship. The human factor became diminished. Maybe it had something to do with the sheer volume of transactions that computers have enabled. But what we seem to have forgotten is that the debtor is only one twin in a joined-at-the-hip pair, the other twin being the creditor. The whole edifice rests on a few fundamental principles that are inherent in us.

In my "OCM" post, I made the same point:

OCM Post

It wasn’t just leverage that caused this financial collapse—it was the attenuated way in which various people could make money. For example, a mortgage broker could loan hundreds of thousands of dollars over the phone to an applicant or after meeting him for half an hour and filling out some forms. After this initial contact, the broker had no interest whatsoever in the applicant/debtor. The broker received a fee from the bank for giving it the loan, and the bank sold the loan it generated to other investors as part of a larger package. The story is old now, but deserves to be told, because too many people miss its crucial point: attenuation leads to irresponsibility.

Somebody Saw It Coming

Check out the Economist's cover, dated March 2007. Hat tip to "Escape from Brooklyn" blog:

http://escapebrooklyn.blogspot.com/

South America Decoupling from U.S.?

Is South America finally decoupling from the U.S.? The CS Monitor seems to think so:

http://www.csmonitor.com/2008/1024/p06s01-woam.html

Greenspan at the Confessional

I hate to kick a man when he's down, but the NY Times beat me to it:

http://www.nytimes.com/2008/10/24/business/economy/24panel.html

I remember Greenspan raising interest rates towards the end of his tenure (ah, the days of earning 5% on basic money market accounts). Greenspan did see the excess--just not soon enough.

As Tom "American Treasure" Toles implies in this 3/4/05 Washington Post cartoon, how independent was Greenspan? Was much of Greenspan's unwillingness to raise rates was because of the Bush administration's policies and Greenspan's desire not to lose his job?

Living on a Prayer

From The NY Times:

http://www.nytimes.com/2008/10/23/garden/23foreclosure.html

Forty-four percent of employees live paycheck to paycheck, according to a survey conducted by MetLife in late 2007, and 48 percent of American households have less than $5,000 in liquid assets according to Edward Wolff, an economist specializing in the study of poverty and income distribution at New York University.

Funny: Bernanke to the Rescue

In these volatile times, we gotta have some humor. Here's a funny Bernanke montage explaining the monetarian philosophy (i.e., when times are bad, the government should inject/drop money to stimulate the economy). Make sure the music is on--it's the music that makes everything so good:

http://moneyhelicopters.ytmnd.com/

Hat tip to Prof. Mankiw.

European Econ Forecast

Clever economic weather forecast from the FT:

http://www.ft.com/cms/s/0/3af6c64c-9eb6-11dd-98bd-000077b07658.html

Hat tip to Barry "The Big Kahuna" Ritholtz.

Hoover Institute

The Hoover Institute has a great link to some educational videos:

http://www.hoover.org/multimedia/uk/

Not exactly economics per se, but close enough.

B&N Free Cappuccino Offer (Thru 10/31)

I love cappuccinos. B&N is offering a free one through October 31, 2008:

Barnes and Noble Coupon

Hope it works.

Don't Worry, Be Happy

NY Times says many Americans won't be affected by the bailouts because relatively few of them pay any taxes:

http://economix.blogs.nytimes.com/2008/10/20/americans-shouldnt-worry-about-the-bailout/

Law: Performance Reviews

Here is an interesting article on whether companies should keep doling out performance reviews:

http://www.hrlawyersblog.com/2008/10/articles/hr-management/getting-rid-of-performance-reviews/

From my experience, performance reviews are used against the employer and constitute one of the few pieces of evidence readily available to a potential plaintiff.

Colin Powell on an American

Colin Powell on Kareem Rashad Sultan Khan:

http://news.yahoo.com/s/mcclatchy/20081021/pl_mcclatchy/3078971

There is a picture accompanying this article elsewhere that apparently belongs to Platon for the New Yorker. The picture shows the soldier's mother, Elsheba Khan, clasping her son's tombstone. It is not to be missed:

http://www.newyorker.com/online/2008/09/29/slideshow_080929_platon?slide=16