An oldie but a goodie, from C. Fred Bergsten, Peterson Institute, February 1, 2007:
http://www.iie.com/publications/papers/paper.cfm?ResearchID=705
Our external deficit has risen by an average of $100 billion annually over the past four years. It has climbed by an annual average of $80 billion for the past nine years. The trajectory, as well as the level of the imbalances, is clearly unsustainable.
In the background, you can almost hear Jack Nicholson bellowing, "You can't handle the truth!"
"And if an epitaph be my story, I'd have a short one ready for my own: I had a lover's quarrel with the world." -- Robert Frost
Tuesday, September 23, 2008
Monday, September 22, 2008
OCM: Other Countries' Money
Despite the failure of several financial institutions, the decline in worldwide stock markets, and unprecedented foreclosure activity, the average American still has no idea how much trouble we're in. America has become beholden to the international community’s willingness to lend us money. I haven’t seen anyone coin “OCM” as a phrase, but whenever you see someone using their credit card, mention OCM—Other Countries’ Money. OCM means realizing our money isn’t ours because of the massive deficits our government has incurred through its spending. Having a deficit means we are borrowing other countries’ money through the form of Treasury and bond sales. By running deficits and spending more than we make/collect, each cent we make no longer belongs to us—it belongs to our international creditors. As a result, we have lost financial control of our own country. If we had a surplus, for example, national healthcare would be a no-brainer. But after Iraq and the bailouts, we are now a nation of beggars. As the old saying goes, “beggars can’t be choosers.”
How did we get to this point? Less than a decade ago, we had a surplus. In 2001, President Bush inherited a 128 billion dollar surplus. Now, we have almost a half a trillion dollar deficit—and that’s just for the year 2009.
http://www.cnn.com/2008/POLITICS/07/28/2009.deficit/index.html
It gets worse. Overall, people agree we have a debt of at least 9 trillion dollars, although some entities, like the Peter G. Peterson Foundation, peg our national debt at an even higher number, 52.7 trillion dollars--see http://www.pgpf.org. The numbers have gotten so large, they seem almost imaginary, like Monopoly money, and that’s the danger—at a certain debt and spending level, the American dollar will lack credibility against the Euro, yen, and Swiss franc, not to mention gold. If the American dollar loses credibility, the entire worldwide financial system will be at risk. If that sounds too “Mad Max” for you, you just need to understand this key concept: we are debtors, and debtors don’t get to make the rules. When I hear people say they want to tie restrictions and regulations on AIG, Merrill Lynch, Fannie Mae, and Freddie Mac in exchange for taxpayer money, I cringe. It’s not “taxpayer” money, any more than the money given to you by your credit card company is “your” money. The money belongs mostly to the Japanese and Chinese, who have lent us trillions of dollars by buying up U.S. debt, bonds, and preferred shares. If we want them to continue financing our lifestyle—which they will do, because few other places contain citizens so willing to spend—they set the terms of the bailouts, not us. Thus, I have no interest whatsoever in what regulations and rules Americans believe should be passed prior to doling out the money to AIG et al. It’s not our money we’re giving to AIG et al—it’s the creditors’ money, and creditors make the rules because they hold the purse.
I am far more interested in what the Japanese and Chinese think about the bailouts. The fact that they are not demanding major restrictions is a pleasant surprise. Singapore and other sovereign wealth funds have lost billions of dollars loaning money to MGM Grand and other American companies. It’s a miracle they are not demanding more concessions or protection for loaning us money. The equivalent of what just happened—especially with Japan's Mitsubishi recently willing to buy up to 20 percent of Morgan Stanley—is like you and me going on a shopping spree, running up 1000 dollars in debt while unemployed, and coming close to declaring bankruptcy—only to have our credit card company reward us with a higher credit line and no punishment.
In large part, international investors are willing to forgive our transgressions because of the bailouts. The bailouts wiped out stockholders (held mainly by Americans and non-Asian investors) and preserved Fannie Mae’s and Freddie Mac’s bonds (held mainly by Asian and international investors). Thus, the bailouts were designed to convince our creditors America was a safe place to invest.
Only as a secondary effect might the government intervention, using taxpayer money, help American homeowners by increasing liquidity (“liquidity” being dependent on Japan and China continuing to put us in more debt by giving us more of their money). Government intervention worked—Asian markets recently swung back from double-digit declines, and liquidity is being restored to the worldwide economy. Some Americans have used this increased stability post-government-intervention to believe that deregulation itself was a bust or the cause of our financial collapse. Nothing could be further from the truth.
No rule or law could have saved us from ourselves and our greed. Remember that Warren Buffett himself called financial derivatives “weapons of financial mass destruction” in early 2003—over five years ago. See
http://news.bbc.co.uk/2/hi/business/2817995.stm
If someone with Mr. Buffett’s profile pointed out financial problems using language signifying the severity of a nuclear bomb and was unable to get anyone to take him seriously, what hope would a law have against this kind of indifference?
We had and have numerous laws to prevent financial and mortgage fraud. Laws against fraud exist in every state, and even if no express state statute exists, common law fraud can be pled in any county courthouse. Also, if you live in a company-friendly town, you can bypass your local state court judge and go to federal court under a 1968 federal law, the Truth in Lending Act (TILA). Thus, state and federal laws already exist to prevent financial fraud against consumers and homebuyers. Yet, no law could have prevented a bank from having lax standards for granting loans. Even if such a law existed, it may have forced a working class family to become permanent renters by requiring excessive upfront capital. In other words, laws don’t fix problems—they just arbitrarily create winners and losers. Furthermore, no law could have changed the common practice of mortgage brokers and real estate agents falsifying loan applications. Even if every D.A. in every county had dropped homicide cases in favor of prosecuting mortgage fraud, there would have been plenty of fraud to go around.
The problem wasn’t and isn’t a lack of regulation, but a lack of ethics and honesty. Unfortunately, there is no law that can curb the human appetite for greed when everyone is seemingly making money. Even a casual student of economics has heard of “tulip mania,” which took place in the year 1637. Back then, the price of a tulip contract sold for more than 20 times the annual income of a skilled craftsman; in other words, people were happy to exchange 41,600 hours of hard labor for a flower that you can now get for a buck at Home Depot. Financial bubbles happen, and then they pop. Unless a law can remove humanity’s attraction to getting rich, another bubble will occur, and more people who bought late in the game will be wiped out.
Overall, deregulation has helped the American consumer. Just twenty five years ago, the idea of an average college student being able to fly to Iceland and back was laughable. But the government deregulated airlines, and consumers have received low prices—just check out Southwest Airline’s deals. And that cell phone you have, with the cheap 1000 minutes a month? If the government hadn’t broken up Ma Bell in order to deregulate the telephone industry, you’d be paying twenty cents a minute because of regulations designed to help AT&T maintain a monopoly. The list goes on.
Deregulation is devastating only when unethical people are involved. For example, energy deregulation in California was working initially, until Enron decided to actively steal from Californians and intentionally increase the price of electricity through various shenanigans. The common factor in any bubble’s existence and inevitable collapse isn’t deregulation, but a lack of ethics. Stories from yesteryear indicate that local bankers knew more about their debtors than the local church. Whether apocryphal or not, the very idea that a banker today knows all of his debtors’ financial situations intimately is amusing—and that kind of ignorance should scare all of us.
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.
The financial debacle had nothing to do with regulations, or lack thereof. It had to do with our society itself, and how year after year, cities get larger, neighbors rarely see each other, and no one can reasonably promulgate a set of core principles each and every American believes in. We have become so reliant on laws rather than personal trust that we've had to pass laws to protect people when they help others. Many states have passed laws protecting Good Samaritans from being sued for helping others if their assistance unintentionally results in further injury. In other words, in some states, if you help a woman on the street replace a tire, and her tire happens to blow up in the middle of the street through no fault of your own, you can be sued for negligence and lose your life’s savings as a result. When a law has to be passed to counteract other laws that discourage others from lending a helping hand, something is deeply wrong, and the absence of laws is clearly not the problem.
I wish I knew the solution to our modern economic problems. I am too pessimistic to decree an amorphous form of morality as the solution—morality is so vague and subjective, it can masquerade as homophobia, Jim Crow, anti-Mormonism, or anti-whatever-the-minority-is. But capitalism, we too often forget, relies on mutual trust. I trust that when I make a loan, it will be paid back. I trust that when I give you a dollar, the paper will be honored by the next establishment when I want to buy something. I trust that a mechanic won’t rip me off if I go to get my car fixed—and if I don’t trust any mechanics, that means I have to do it myself and not spend any money, which restricts the economy. As another writer once pointed out, currency has value because it flows, like a current. Value is created when money moves from person to person and is worth nothing standing still.
If I had to venture a guess about to increase trust and ethics, I’d try to fix two problems: one, a non-stop treadmill of working hours that takes people away from their loved ones and their friends, creating higher living expenses and less time for parents to teach their children anything; and two, a lack of corporate responsibility to long-term shareholders and customers. As more people change residences and products more often, corporations become disinclined to foster long-term relationships and instead chase the bottom line, knowing they might never see a particular customer or resident again.
How do we fix these problems in an era of increasing competition? That’s the trillion dollar question. Unfortunately, we won’t get an answer if we wrongly frame the debate in terms of what laws to pass and how to increase regulation. The debate should be about OCM and realizing we are debtors who have made our children beggars because of our fiscal irresponsibility. It’s a painful truth to admit, but admit it we must—the first step to overcoming addiction to OCM is admitting we have a problem.
© Matthew Mehdi Rafat
Update on 2/28/2009: more on local bankers, from Warren Brussee's The Great Depression of Debt:
In the past, local banks gave mortgages to area home buyers, and the banks kept those mortgages. That was a big source of the bank's income, so they were careful about who got those mortgages. Banks verified income, employment, and past payment history. And they did their best to make sure that people did not get over their heads on the amount of their mortgages because they realized the high costs of foreclosures even if homes could be sold at their current market prices. There even seemed to be a morality involved, and bankers were looked up to in their communities as conservative protectors of wealth. [page 40]
Update on 8/13/2010, from Niall Ferguson's The Ascent of Money, page 262, Penguin, 2008-9:
"Once there had been meaningful social ties between mortgage lenders and borrowers. Jimmy Stewart [in It's a Wonderful Life] knew both the depositors and the debtors. By contrast, in a securitized market (just like in space) no one can hear you scream--because the interest you pay on your mortgage is ultimately going to someone who has no idea you exist."
Update: if you want to make the above issues very simple, focus on leverage. Leverage continues to be the major catalyst of financial collapse, along with a lack of diversification. In 2004, the SEC exempted investment firms with a market capitalization of over $5 billion from the net capital rule. Thus, Goldman Sachs, Lehman, Bear Stearns, and Morgan Stanley were no longer governed by the 12 to 1 leverage limit. These investment firms promptly increased leverage dramatically, sometimes up to a 40 to 1 ratio. The stock market soon became a casino instead of an efficient place to start up or evaluate companies. Not surprisingly, several firms collapsed or had to change their corporate structure. The exact same thing happened before, in 1998, with the most famous hedge fund at the time, LTCM:
"At the end of August 1997 [prior to the its collapse in August 1998] the [LTCM] fund's capital was $6.7 billion, but the debt-financed assets on its balance sheet amounted to $126.4 billion, a ratio of assets to capital of 19 to 1...On Friday 21 August 1998, it lost 550 million--15 per cent of its entire capital, driving its leverage up to 42:1." (Niall Ferguson's The Ascent of Money, pages 324, 327, Penguin, 2008-9)
Bonus: "In 2007, the United States needed to borrow around $800 billion from the rest of the world; more than $4 billion every working day. China, by contrast, ran a current account surplus of $262 billion, equivalent to more than a quarter of the U.S. deficit." (Niall Ferguson's The Ascent of Money, page 355, Penguin, 2008-9)
Update and counterargument on 5/25/12, from The Atlantic Monthly (June 2012), by William Cohan ("How We Got the Crash Wrong"):
"[T]he truth is that in recent decades, Wall Street firms have almost always been highly leveraged. For instance, according to a 1992 study by the U.S. General Accounting Office (now the Government Accountability Office), the average leverage ratio for the top 13 investment banks was 27-to-1 midway through 1991 (up from 18-to-1 in 1990). A subsequent GAO report, in 2009, noted that the big Wall Street investment banks had higher leverage in 1998 than in 2006. According to SEC filings, in 1998, the year before it went public, Goldman Sachs was leveraged at nearly 32-to-1, while in 2006 it was leveraged at 22-to-1. In 1998, Bear Stearns’s leverage was 35-to-1; in 2006, its leverage was 28-to-1. Similar patterns applied at Merrill Lynch and Lehman Brothers. To be sure, leverage has fluctuated over time: In the early 1970s, for instance, it was generally below 8-to-1. But in the 1950s, it sometimes exceeded 35-to-1. Of course, even a dollar of debt is too much if you are clueless about how to manage risk..."
"The problem on Wall Street has never been about the absolute amount of leverage, but rather about whether financiers have the right incentives to properly manage the risks they are taking. During Wall Street’s heyday, when these firms were private partnerships and each partner’s entire net worth was on the line every day, shared risk ensured a modicum of prudence even though leverage was often higher than 30-to-1. Not surprisingly, that prudence gave way to pure greed when, starting in 1970 and continuing through 2006, one Wall Street partnership after another became a public corporation--and the partnership culture gave way to a bonus culture, in which employees felt free to take huge risks with other people’s money in order to generate revenue and big bonuses. People are pretty simple: they do what they are rewarded for doing." More here.
From Nader A, on 5/26/12: "Leverage is not new--applying it to complex derivatives is over the last 15 years is. The LTCM group used to arbitrage penny differences on equity and fixed income markets, but with leverage, they could profit in the millions, until everything turned (mostly because short term liquidity changed). Someone once said of LTCM, "You guys are picking up nickels in front of steamrollers," meaning they were scooping up small differences but with large amounts of leverage.The real changes in Wall Street are "Off the balance sheet obligations." Balance sheets, income statements and cash flows do a poor job showing what a company potentially owes, which could change drastically over time. For example, Enron used Special Purposes Vehicles to stash debt from their balance sheets, but did not show their financial obligations when the SPVs soured. Lehman used repos to transfer debts before quarter ends. CDSes sold by banks started to increase in balance sheet obligations as debts widened. The problem in Wall Street today is that the current financial reporting does not reflect future obligations when "things change"; instead, it reflects current, optimistic, and biased asset values, which is okay until you have a "black swan" event. The other thing about [complex] derivatives is that it obfuscates the problem. The recent JP Morgan trade that went bad was a derivative based on a derivative based on a derivative. Once you apply leverage to complex, multi-level derivatives, then the problems become systemic. So with respect to the sovereign debt problems in Europe, it's not as much the problem of Greece defaulting, as it is the banks holding the debt falling into insolvency and triggering a cascade of derivative swaps."
Update on 6/3/12: from Sebastian Mallaby's 2010 book, More Money than God: "Capitalism works only when institutions are forced to absorb the consequences of the risks that they take on. When banks can pocket the upside while spreading the cost of their failures, failure is almost certain." (pp 13, hardcover, Penguin Press)
Re: the difficulties regulating leverage: "In the wake of LTCM's failure, Greenspan and his fellow regulators could see that the real challenge was the leverage in the financial system writ large. Ironically, this was what Soros had tried to explain to Congress in his testimony four years earlier. Sure enough, the culprits in the crisis of 2007– 2009 were leveraged off-balance-sheet vehicles owned by banks (known as conduits or structured investment vehicles, SIVs), leveraged broker-dealers, and a leveraged insurer. Hedge funds were not the villains.
If hedge funds were only part of the challenge, why didn't regulators clamp down on the wider universe of leveraged investors? Again, the answer echoes 1994: The regulators believed they lacked a good way of doing so. They could not simply announce a cap on leverage: The ratio of borrowing to capital was an almost meaningless number, since it failed to capture whether a portfolio was hedged and whether it was exposed to risks via derivatives positions. Regulators could not simply cap hedge funds’ value at risk, either: LTCM’s collapse had shown that this measure could be misleading. The frustrating truth was that the risks in a portfolio depended on constantly changing conditions: whether other players were mimicking its trades, how liquid markets were, whether banks and brokerages were suffering from compromised immune systems. The Fed’s Peter Fisher, who was at the center of the regulatory brainstorming following LTCM, could see the theoretical case for government controls on hedge funds and other leveraged players. But it seemed so unlikely that the government would get the details right that he never pushed for action." (pp. 245-246)
Update on 6/24/13: Michael Lewis warned about collateralized mortgage obligations back in November 1989: "The CMO stands for collateralized mortgage obligations, but bond salesmen call it 'toxic waste.'" (originally published in November 1989 in Manhattan, Inc.; re-published in Michael Lewis' The Money Culture, paperback, W.W. Norton and Company, pp. 105 (1991))
Update on 11/0/14:"Although they are established to protect both the security of ownership and that of transactions, it is obvious that Western systems emphasize the latter. Security is principally focused on producing trust in transactions so that people can more easily make their assets lead a parallel life as capital." -- Hernando de Soto, The Mystery of Capital (2000), paperback, pp. 62.
Update on July 2017: "As a man who did business with other people's money, the banker had to be intensely respectable... 'The function of bankers is to be trusted, not to be liked.' 'Adventure is the life of commerce,' wrote Walter Bagehot, first editor of The Economist, 'but caution, I had almost said timidity, is the life of banking.'" -- from The Bankers: the Next Generation (1997), by Martin Mayer, hardcover, pp. 5.
"[A]s Charles Rice of Florida's Barnett Banks puts it, 'The Harvard Business School never graduated an MBA that can't be hornswoggled by the businessmen of the Florida panhandle.'" -- Id. at pp. 10.
How did we get to this point? Less than a decade ago, we had a surplus. In 2001, President Bush inherited a 128 billion dollar surplus. Now, we have almost a half a trillion dollar deficit—and that’s just for the year 2009.
http://www.cnn.com/2008/POLITICS/07/28/2009.deficit/index.html
It gets worse. Overall, people agree we have a debt of at least 9 trillion dollars, although some entities, like the Peter G. Peterson Foundation, peg our national debt at an even higher number, 52.7 trillion dollars--see http://www.pgpf.org. The numbers have gotten so large, they seem almost imaginary, like Monopoly money, and that’s the danger—at a certain debt and spending level, the American dollar will lack credibility against the Euro, yen, and Swiss franc, not to mention gold. If the American dollar loses credibility, the entire worldwide financial system will be at risk. If that sounds too “Mad Max” for you, you just need to understand this key concept: we are debtors, and debtors don’t get to make the rules. When I hear people say they want to tie restrictions and regulations on AIG, Merrill Lynch, Fannie Mae, and Freddie Mac in exchange for taxpayer money, I cringe. It’s not “taxpayer” money, any more than the money given to you by your credit card company is “your” money. The money belongs mostly to the Japanese and Chinese, who have lent us trillions of dollars by buying up U.S. debt, bonds, and preferred shares. If we want them to continue financing our lifestyle—which they will do, because few other places contain citizens so willing to spend—they set the terms of the bailouts, not us. Thus, I have no interest whatsoever in what regulations and rules Americans believe should be passed prior to doling out the money to AIG et al. It’s not our money we’re giving to AIG et al—it’s the creditors’ money, and creditors make the rules because they hold the purse.
I am far more interested in what the Japanese and Chinese think about the bailouts. The fact that they are not demanding major restrictions is a pleasant surprise. Singapore and other sovereign wealth funds have lost billions of dollars loaning money to MGM Grand and other American companies. It’s a miracle they are not demanding more concessions or protection for loaning us money. The equivalent of what just happened—especially with Japan's Mitsubishi recently willing to buy up to 20 percent of Morgan Stanley—is like you and me going on a shopping spree, running up 1000 dollars in debt while unemployed, and coming close to declaring bankruptcy—only to have our credit card company reward us with a higher credit line and no punishment.
In large part, international investors are willing to forgive our transgressions because of the bailouts. The bailouts wiped out stockholders (held mainly by Americans and non-Asian investors) and preserved Fannie Mae’s and Freddie Mac’s bonds (held mainly by Asian and international investors). Thus, the bailouts were designed to convince our creditors America was a safe place to invest.
 |
| From March 2019 |
No rule or law could have saved us from ourselves and our greed. Remember that Warren Buffett himself called financial derivatives “weapons of financial mass destruction” in early 2003—over five years ago. See
http://news.bbc.co.uk/2/hi/business/2817995.stm
If someone with Mr. Buffett’s profile pointed out financial problems using language signifying the severity of a nuclear bomb and was unable to get anyone to take him seriously, what hope would a law have against this kind of indifference?
We had and have numerous laws to prevent financial and mortgage fraud. Laws against fraud exist in every state, and even if no express state statute exists, common law fraud can be pled in any county courthouse. Also, if you live in a company-friendly town, you can bypass your local state court judge and go to federal court under a 1968 federal law, the Truth in Lending Act (TILA). Thus, state and federal laws already exist to prevent financial fraud against consumers and homebuyers. Yet, no law could have prevented a bank from having lax standards for granting loans. Even if such a law existed, it may have forced a working class family to become permanent renters by requiring excessive upfront capital. In other words, laws don’t fix problems—they just arbitrarily create winners and losers. Furthermore, no law could have changed the common practice of mortgage brokers and real estate agents falsifying loan applications. Even if every D.A. in every county had dropped homicide cases in favor of prosecuting mortgage fraud, there would have been plenty of fraud to go around.
The problem wasn’t and isn’t a lack of regulation, but a lack of ethics and honesty. Unfortunately, there is no law that can curb the human appetite for greed when everyone is seemingly making money. Even a casual student of economics has heard of “tulip mania,” which took place in the year 1637. Back then, the price of a tulip contract sold for more than 20 times the annual income of a skilled craftsman; in other words, people were happy to exchange 41,600 hours of hard labor for a flower that you can now get for a buck at Home Depot. Financial bubbles happen, and then they pop. Unless a law can remove humanity’s attraction to getting rich, another bubble will occur, and more people who bought late in the game will be wiped out.
Overall, deregulation has helped the American consumer. Just twenty five years ago, the idea of an average college student being able to fly to Iceland and back was laughable. But the government deregulated airlines, and consumers have received low prices—just check out Southwest Airline’s deals. And that cell phone you have, with the cheap 1000 minutes a month? If the government hadn’t broken up Ma Bell in order to deregulate the telephone industry, you’d be paying twenty cents a minute because of regulations designed to help AT&T maintain a monopoly. The list goes on.
Deregulation is devastating only when unethical people are involved. For example, energy deregulation in California was working initially, until Enron decided to actively steal from Californians and intentionally increase the price of electricity through various shenanigans. The common factor in any bubble’s existence and inevitable collapse isn’t deregulation, but a lack of ethics. Stories from yesteryear indicate that local bankers knew more about their debtors than the local church. Whether apocryphal or not, the very idea that a banker today knows all of his debtors’ financial situations intimately is amusing—and that kind of ignorance should scare all of us.
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.
The financial debacle had nothing to do with regulations, or lack thereof. It had to do with our society itself, and how year after year, cities get larger, neighbors rarely see each other, and no one can reasonably promulgate a set of core principles each and every American believes in. We have become so reliant on laws rather than personal trust that we've had to pass laws to protect people when they help others. Many states have passed laws protecting Good Samaritans from being sued for helping others if their assistance unintentionally results in further injury. In other words, in some states, if you help a woman on the street replace a tire, and her tire happens to blow up in the middle of the street through no fault of your own, you can be sued for negligence and lose your life’s savings as a result. When a law has to be passed to counteract other laws that discourage others from lending a helping hand, something is deeply wrong, and the absence of laws is clearly not the problem.
I wish I knew the solution to our modern economic problems. I am too pessimistic to decree an amorphous form of morality as the solution—morality is so vague and subjective, it can masquerade as homophobia, Jim Crow, anti-Mormonism, or anti-whatever-the-minority-is. But capitalism, we too often forget, relies on mutual trust. I trust that when I make a loan, it will be paid back. I trust that when I give you a dollar, the paper will be honored by the next establishment when I want to buy something. I trust that a mechanic won’t rip me off if I go to get my car fixed—and if I don’t trust any mechanics, that means I have to do it myself and not spend any money, which restricts the economy. As another writer once pointed out, currency has value because it flows, like a current. Value is created when money moves from person to person and is worth nothing standing still.
If I had to venture a guess about to increase trust and ethics, I’d try to fix two problems: one, a non-stop treadmill of working hours that takes people away from their loved ones and their friends, creating higher living expenses and less time for parents to teach their children anything; and two, a lack of corporate responsibility to long-term shareholders and customers. As more people change residences and products more often, corporations become disinclined to foster long-term relationships and instead chase the bottom line, knowing they might never see a particular customer or resident again.
How do we fix these problems in an era of increasing competition? That’s the trillion dollar question. Unfortunately, we won’t get an answer if we wrongly frame the debate in terms of what laws to pass and how to increase regulation. The debate should be about OCM and realizing we are debtors who have made our children beggars because of our fiscal irresponsibility. It’s a painful truth to admit, but admit it we must—the first step to overcoming addiction to OCM is admitting we have a problem.
© Matthew Mehdi Rafat
Update on 2/28/2009: more on local bankers, from Warren Brussee's The Great Depression of Debt:
In the past, local banks gave mortgages to area home buyers, and the banks kept those mortgages. That was a big source of the bank's income, so they were careful about who got those mortgages. Banks verified income, employment, and past payment history. And they did their best to make sure that people did not get over their heads on the amount of their mortgages because they realized the high costs of foreclosures even if homes could be sold at their current market prices. There even seemed to be a morality involved, and bankers were looked up to in their communities as conservative protectors of wealth. [page 40]
Update on 8/13/2010, from Niall Ferguson's The Ascent of Money, page 262, Penguin, 2008-9:
"Once there had been meaningful social ties between mortgage lenders and borrowers. Jimmy Stewart [in It's a Wonderful Life] knew both the depositors and the debtors. By contrast, in a securitized market (just like in space) no one can hear you scream--because the interest you pay on your mortgage is ultimately going to someone who has no idea you exist."
Update: if you want to make the above issues very simple, focus on leverage. Leverage continues to be the major catalyst of financial collapse, along with a lack of diversification. In 2004, the SEC exempted investment firms with a market capitalization of over $5 billion from the net capital rule. Thus, Goldman Sachs, Lehman, Bear Stearns, and Morgan Stanley were no longer governed by the 12 to 1 leverage limit. These investment firms promptly increased leverage dramatically, sometimes up to a 40 to 1 ratio. The stock market soon became a casino instead of an efficient place to start up or evaluate companies. Not surprisingly, several firms collapsed or had to change their corporate structure. The exact same thing happened before, in 1998, with the most famous hedge fund at the time, LTCM:
"At the end of August 1997 [prior to the its collapse in August 1998] the [LTCM] fund's capital was $6.7 billion, but the debt-financed assets on its balance sheet amounted to $126.4 billion, a ratio of assets to capital of 19 to 1...On Friday 21 August 1998, it lost 550 million--15 per cent of its entire capital, driving its leverage up to 42:1." (Niall Ferguson's The Ascent of Money, pages 324, 327, Penguin, 2008-9)
Bonus: "In 2007, the United States needed to borrow around $800 billion from the rest of the world; more than $4 billion every working day. China, by contrast, ran a current account surplus of $262 billion, equivalent to more than a quarter of the U.S. deficit." (Niall Ferguson's The Ascent of Money, page 355, Penguin, 2008-9)
Update and counterargument on 5/25/12, from The Atlantic Monthly (June 2012), by William Cohan ("How We Got the Crash Wrong"):
"[T]he truth is that in recent decades, Wall Street firms have almost always been highly leveraged. For instance, according to a 1992 study by the U.S. General Accounting Office (now the Government Accountability Office), the average leverage ratio for the top 13 investment banks was 27-to-1 midway through 1991 (up from 18-to-1 in 1990). A subsequent GAO report, in 2009, noted that the big Wall Street investment banks had higher leverage in 1998 than in 2006. According to SEC filings, in 1998, the year before it went public, Goldman Sachs was leveraged at nearly 32-to-1, while in 2006 it was leveraged at 22-to-1. In 1998, Bear Stearns’s leverage was 35-to-1; in 2006, its leverage was 28-to-1. Similar patterns applied at Merrill Lynch and Lehman Brothers. To be sure, leverage has fluctuated over time: In the early 1970s, for instance, it was generally below 8-to-1. But in the 1950s, it sometimes exceeded 35-to-1. Of course, even a dollar of debt is too much if you are clueless about how to manage risk..."
"The problem on Wall Street has never been about the absolute amount of leverage, but rather about whether financiers have the right incentives to properly manage the risks they are taking. During Wall Street’s heyday, when these firms were private partnerships and each partner’s entire net worth was on the line every day, shared risk ensured a modicum of prudence even though leverage was often higher than 30-to-1. Not surprisingly, that prudence gave way to pure greed when, starting in 1970 and continuing through 2006, one Wall Street partnership after another became a public corporation--and the partnership culture gave way to a bonus culture, in which employees felt free to take huge risks with other people’s money in order to generate revenue and big bonuses. People are pretty simple: they do what they are rewarded for doing." More here.
From Nader A, on 5/26/12: "Leverage is not new--applying it to complex derivatives is over the last 15 years is. The LTCM group used to arbitrage penny differences on equity and fixed income markets, but with leverage, they could profit in the millions, until everything turned (mostly because short term liquidity changed). Someone once said of LTCM, "You guys are picking up nickels in front of steamrollers," meaning they were scooping up small differences but with large amounts of leverage.The real changes in Wall Street are "Off the balance sheet obligations." Balance sheets, income statements and cash flows do a poor job showing what a company potentially owes, which could change drastically over time. For example, Enron used Special Purposes Vehicles to stash debt from their balance sheets, but did not show their financial obligations when the SPVs soured. Lehman used repos to transfer debts before quarter ends. CDSes sold by banks started to increase in balance sheet obligations as debts widened. The problem in Wall Street today is that the current financial reporting does not reflect future obligations when "things change"; instead, it reflects current, optimistic, and biased asset values, which is okay until you have a "black swan" event. The other thing about [complex] derivatives is that it obfuscates the problem. The recent JP Morgan trade that went bad was a derivative based on a derivative based on a derivative. Once you apply leverage to complex, multi-level derivatives, then the problems become systemic. So with respect to the sovereign debt problems in Europe, it's not as much the problem of Greece defaulting, as it is the banks holding the debt falling into insolvency and triggering a cascade of derivative swaps."
Update on 6/3/12: from Sebastian Mallaby's 2010 book, More Money than God: "Capitalism works only when institutions are forced to absorb the consequences of the risks that they take on. When banks can pocket the upside while spreading the cost of their failures, failure is almost certain." (pp 13, hardcover, Penguin Press)
Re: the difficulties regulating leverage: "In the wake of LTCM's failure, Greenspan and his fellow regulators could see that the real challenge was the leverage in the financial system writ large. Ironically, this was what Soros had tried to explain to Congress in his testimony four years earlier. Sure enough, the culprits in the crisis of 2007– 2009 were leveraged off-balance-sheet vehicles owned by banks (known as conduits or structured investment vehicles, SIVs), leveraged broker-dealers, and a leveraged insurer. Hedge funds were not the villains.
If hedge funds were only part of the challenge, why didn't regulators clamp down on the wider universe of leveraged investors? Again, the answer echoes 1994: The regulators believed they lacked a good way of doing so. They could not simply announce a cap on leverage: The ratio of borrowing to capital was an almost meaningless number, since it failed to capture whether a portfolio was hedged and whether it was exposed to risks via derivatives positions. Regulators could not simply cap hedge funds’ value at risk, either: LTCM’s collapse had shown that this measure could be misleading. The frustrating truth was that the risks in a portfolio depended on constantly changing conditions: whether other players were mimicking its trades, how liquid markets were, whether banks and brokerages were suffering from compromised immune systems. The Fed’s Peter Fisher, who was at the center of the regulatory brainstorming following LTCM, could see the theoretical case for government controls on hedge funds and other leveraged players. But it seemed so unlikely that the government would get the details right that he never pushed for action." (pp. 245-246)
Update on 6/24/13: Michael Lewis warned about collateralized mortgage obligations back in November 1989: "The CMO stands for collateralized mortgage obligations, but bond salesmen call it 'toxic waste.'" (originally published in November 1989 in Manhattan, Inc.; re-published in Michael Lewis' The Money Culture, paperback, W.W. Norton and Company, pp. 105 (1991))
Update on 11/0/14:"Although they are established to protect both the security of ownership and that of transactions, it is obvious that Western systems emphasize the latter. Security is principally focused on producing trust in transactions so that people can more easily make their assets lead a parallel life as capital." -- Hernando de Soto, The Mystery of Capital (2000), paperback, pp. 62.
Update on July 2017: "As a man who did business with other people's money, the banker had to be intensely respectable... 'The function of bankers is to be trusted, not to be liked.' 'Adventure is the life of commerce,' wrote Walter Bagehot, first editor of The Economist, 'but caution, I had almost said timidity, is the life of banking.'" -- from The Bankers: the Next Generation (1997), by Martin Mayer, hardcover, pp. 5.
"[A]s Charles Rice of Florida's Barnett Banks puts it, 'The Harvard Business School never graduated an MBA that can't be hornswoggled by the businessmen of the Florida panhandle.'" -- Id. at pp. 10.
James Surowiecki on Financial Public Perception
Another great article on financial excess by James Surowiecki:
http://www.newyorker.com/talk/financial/2008/09/29/080929ta_talk_surowiecki
Mr. Surowiecki has a knack for telling the straight story, no matter how complex the facts.
http://www.newyorker.com/talk/financial/2008/09/29/080929ta_talk_surowiecki
Mr. Surowiecki has a knack for telling the straight story, no matter how complex the facts.
Symantec Corporation (SYMC) Shareholder Meeting
Symantec Corporation (SYMC) held its annual shareholder meeting today at its Cupertino, CA headquarters. Available food included a small spread of Starbucks coffee and untoasted bagels, with some juice drinks on ice. Shareholders received a free copy of Norton 360 Version 2.0 and a zip-up notebook with a pen and calculator inside.
There appeared to be about 25 employees attending, plus around 4 to 10 non-employee shareholders. Helyn Corcos, VP Investor Relations, was in charge of the logistics of the meeting. Ms. Corcos seems very detail-oriented and asked me to rewrite my full name on the sign-in sheet (my handwriting is usually illegible), and then noticed I held my shares in street name, i.e., through a broker. She referred me to another person, Mr. Wilcox, who indicated I could not vote at the meeting, because I had not requested a legal proxy. Later, Mr. Wilcox accepted my legal proxy and politely explained the process of converting the street proxy into a legal proxy. (A shareholder should mark on the ballot that s/he will be voting in person, and then mail his/her voting ballot back to the brokerage, after which it will send a legal proxy. I knew all this, but sometimes the ballot comes in the mail too late to mail it back and receive a legal proxy in time.)
Symantec's CEO and Chairman, John Thompson, led the entire presentation, starting with the formal part and then moving to the informal presentation. A link to Mr. Thompson's background is below:
http://www.symantec.com/about/profile/management/executives/bio.jsp?bioid=john_thompson
Mr. Thompson's informal presentation started with some company background. After explaining that Symantec helps consumers and corporations manage digital content, he pointed to four focus areas: control (handling your digital environment); security (adding that "keeping good things in is as important as keeping bad things out"); compliance (legal requirements); and availability (accessibility of your information). He mentioned Walt Mossberg's glowing review of Symantec's latest Norton Internet Security program:
http://ptech.allthingsd.com/20080917/symantec-rewrites-its-security-suite-to-curb-nuisances/
Mr. Thompson said "the number one issue is managing complexity," and Symantec's overall strategy was to "secure and manage" digital content. More specifically, Mr. Thompson identified five strategic areas:
1. Growing core franchises (security, etc.)
2. Scaling high growth businesses (data loss prevention, etc)
3. Seeding longer term growth (e.g., virtualization)
4. Going international
5. M&A
Symantec is in a good business. Data loss prevention is experiencing a 93% growth rate as more people buy computers and are willing to pay for online security. Symantec is ranked first in multiple categories in terms of market position and has a 58% market share in the fast-growing data loss prevention business.
Mr. Thompson said the company would use 1/2 of CFFO (cash flow from operations) for share buybacks, a very good sign.
The Q&A session started. I asked how Symantec differed from McAfee. I asked this same question from McAfee's CEO, who initially gave a confusing answer. Mr. Thompson's answer was clear and concise. He said McAfee focuses primarily on security, whereas Symantec has a dual focus of giving customers security as well as recovery tools. Mr. Thompson implied McAfee doesn't focus on helping its customers beyond avoiding disastrous online attacks.
Another shareholder asked about the Veritas acquisition. (Symantec bought Veritas and its large enterprise storage business in late 2005.) While seemingly a natural fit--Symantec does data protection for large enterprises, and Veritas handles storage for large enterprises--the acquisition ran into problems that have weighed down Symantec's share price. Symantec's shares were trading around $30 prior to the acquisition and now trade around $19, up from a 52-week low of $14.54.
This is where Mr. Thompson shined. Some CEOs will attempt to duck and dodge bad news, like MGM's CEO, who made overly optimistic comments at his most recent shareholder meeting. Other CEOs get upset at bad news or hard questions, like Enron's former CEO. But Mr. Thompson immediately took responsibility and didn't try to blow any smoke. He said that the execution of the Veritas acquisition has not been stellar, but has improved over the last twelve months. His answer was just the right length and with the perfect tone. I left thinking he knew exactly what the problem was and was on top of it.
Another shareholder asked about Mr. Thompson's thoughts on the recent financial turmoil (e.g., Lehman Bros and Merrill Lynch). Mr. Thompson said the underlying dynamics of his business have not changed--only the identity of the buyers/customers might change. He also indicated that financial companies cannot avoid online security compliance. He then turned the question over to the CFO, James Beer, who confirmed that 98% of Symantec's $2 billion were in banks (cash) or money market funds, not risky or illiquid instruments [such as auction rate securities].
I asked whether Symantec was working with VMware (WMV). Mr. Thompson said that Symantec was working with VMware and had demonstrated the "best backup capability" and very strong endpoint virtualization. He said Symantec might compete directly with VMware in the endpoint market rather than partner with it, because the nature of the software business fostered competition. (This can't be good news for VMware.)
Another shareholder asked a general question about phishing, and COO Enrique Salem said Symantec was working on numerous anti-phishing defenses, including "trustmarks." The meeting ended shortly thereafter.
After the meeting, I got a chance to hear Mr. Thompson speak informally with several people. Mr. Thompson has a gift when it comes to storytelling. He talked about a recent salmon fishing trip, which took place in an exclusive area. From a small story about fishing, he expanded into bears, even detailing an age range in which young male bears are the most dangerous. He expressed more interesting tidbits, like how you shouldn't get between a mother sow (pig) and her young offspring. He talked about silver salmon (after returning to their spawning stream, their coloring changes from pink to pale grey) and why you wanted to catch them right before or after they hit freshwater (they are used to saltwater, so when they hit freshwater, their skin "degenerates"--goes from pink to silver). When I was done listening, I came away thinking this is a man who notices the details and is a natural-born leader. I realized right then and there that Mr. Thompson is one of the most charismatic CEOs in Silicon Valley.
So much of enterprise security sales is about sales ability--the underlying software products aren't yet so different that technology is the primary differentiator. Having a CEO like Mr. Thompson provides Symantec with a clear advantage over competitors, because he is someone you want to listen to and have a drink with. Contrast this with McAfee's CEO, who, while certainly a nice man, doesn't inspire confidence and seems to throw out terms he doesn't fully understand to impress an audience. His offhand, irrelevant mention of the Basel II Accord still rings painfully in my head. I don't claim to understand it 100% either, but even the Dallas Federal Reserve Bank president declined to answer a question about Basel II publicly in a recent Commonwealth Club speech, saying it was too complex for a short answer and the questioner should speak with him privately.
It's worth noting that Symantec's meeting was very well-run--everyone knew what they had to do and adapted when necessary. When there was some static at Mr. Thompson's microphone, several people jumped and tried to fix it without interfering with the presentation. In contrast, during McAfee's shareholder meeting, I got the feeling that no one had spent substantial time planning the meeting in advance. In fact, one of McAfee's employees seemed upset non-employee shareholders had come to the meeting. Here, Mr. Thompson recognized a shareholder from last year and said hello.
If you're ever in a room with Mr. Thompson, go hear him speak. He's charismatic, dignified, and prepared. Mr. Thompson didn't just talk about salmon fishing after the meeting. He also briefly discussed politics. Not surprisingly for a man who has a preternatural ability to put people at ease, he said he supported Barack Obama because he was dismayed at how the country was becoming divided. He said we needed to work together, and he favored "statesmanship rather than brinksmanship." Regardless of your political beliefs, Mr. Thompson's natural leadership ability is exactly what shareholders should value in a CEO whose business involves sales. Between McAfee and Symantec, there is no question that Symantec appears to have a more professional management team. However, both McAfee and Symantec lack true diversity--there are no Asians/Indians on their Boards or in top management positions, which is an unforgivable oversight when some of the fastest growing markets are India, China, and possibly Vietnam. In time, I hope this oversight will change, but when the main problems with your company are diversifying upper management and finalizing an acquisition--neither of which directly impacts your underlying business--that's a good sign.
Disclosure: as of September 22, 2008, I own less than 20 shares of SYMC.
There appeared to be about 25 employees attending, plus around 4 to 10 non-employee shareholders. Helyn Corcos, VP Investor Relations, was in charge of the logistics of the meeting. Ms. Corcos seems very detail-oriented and asked me to rewrite my full name on the sign-in sheet (my handwriting is usually illegible), and then noticed I held my shares in street name, i.e., through a broker. She referred me to another person, Mr. Wilcox, who indicated I could not vote at the meeting, because I had not requested a legal proxy. Later, Mr. Wilcox accepted my legal proxy and politely explained the process of converting the street proxy into a legal proxy. (A shareholder should mark on the ballot that s/he will be voting in person, and then mail his/her voting ballot back to the brokerage, after which it will send a legal proxy. I knew all this, but sometimes the ballot comes in the mail too late to mail it back and receive a legal proxy in time.)
Symantec's CEO and Chairman, John Thompson, led the entire presentation, starting with the formal part and then moving to the informal presentation. A link to Mr. Thompson's background is below:
http://www.symantec.com/about/profile/management/executives/bio.jsp?bioid=john_thompson
Mr. Thompson's informal presentation started with some company background. After explaining that Symantec helps consumers and corporations manage digital content, he pointed to four focus areas: control (handling your digital environment); security (adding that "keeping good things in is as important as keeping bad things out"); compliance (legal requirements); and availability (accessibility of your information). He mentioned Walt Mossberg's glowing review of Symantec's latest Norton Internet Security program:
http://ptech.allthingsd.com/20080917/symantec-rewrites-its-security-suite-to-curb-nuisances/
Mr. Thompson said "the number one issue is managing complexity," and Symantec's overall strategy was to "secure and manage" digital content. More specifically, Mr. Thompson identified five strategic areas:
1. Growing core franchises (security, etc.)
2. Scaling high growth businesses (data loss prevention, etc)
3. Seeding longer term growth (e.g., virtualization)
4. Going international
5. M&A
Symantec is in a good business. Data loss prevention is experiencing a 93% growth rate as more people buy computers and are willing to pay for online security. Symantec is ranked first in multiple categories in terms of market position and has a 58% market share in the fast-growing data loss prevention business.
Mr. Thompson said the company would use 1/2 of CFFO (cash flow from operations) for share buybacks, a very good sign.
The Q&A session started. I asked how Symantec differed from McAfee. I asked this same question from McAfee's CEO, who initially gave a confusing answer. Mr. Thompson's answer was clear and concise. He said McAfee focuses primarily on security, whereas Symantec has a dual focus of giving customers security as well as recovery tools. Mr. Thompson implied McAfee doesn't focus on helping its customers beyond avoiding disastrous online attacks.
Another shareholder asked about the Veritas acquisition. (Symantec bought Veritas and its large enterprise storage business in late 2005.) While seemingly a natural fit--Symantec does data protection for large enterprises, and Veritas handles storage for large enterprises--the acquisition ran into problems that have weighed down Symantec's share price. Symantec's shares were trading around $30 prior to the acquisition and now trade around $19, up from a 52-week low of $14.54.
This is where Mr. Thompson shined. Some CEOs will attempt to duck and dodge bad news, like MGM's CEO, who made overly optimistic comments at his most recent shareholder meeting. Other CEOs get upset at bad news or hard questions, like Enron's former CEO. But Mr. Thompson immediately took responsibility and didn't try to blow any smoke. He said that the execution of the Veritas acquisition has not been stellar, but has improved over the last twelve months. His answer was just the right length and with the perfect tone. I left thinking he knew exactly what the problem was and was on top of it.
Another shareholder asked about Mr. Thompson's thoughts on the recent financial turmoil (e.g., Lehman Bros and Merrill Lynch). Mr. Thompson said the underlying dynamics of his business have not changed--only the identity of the buyers/customers might change. He also indicated that financial companies cannot avoid online security compliance. He then turned the question over to the CFO, James Beer, who confirmed that 98% of Symantec's $2 billion were in banks (cash) or money market funds, not risky or illiquid instruments [such as auction rate securities].
I asked whether Symantec was working with VMware (WMV). Mr. Thompson said that Symantec was working with VMware and had demonstrated the "best backup capability" and very strong endpoint virtualization. He said Symantec might compete directly with VMware in the endpoint market rather than partner with it, because the nature of the software business fostered competition. (This can't be good news for VMware.)
Another shareholder asked a general question about phishing, and COO Enrique Salem said Symantec was working on numerous anti-phishing defenses, including "trustmarks." The meeting ended shortly thereafter.
After the meeting, I got a chance to hear Mr. Thompson speak informally with several people. Mr. Thompson has a gift when it comes to storytelling. He talked about a recent salmon fishing trip, which took place in an exclusive area. From a small story about fishing, he expanded into bears, even detailing an age range in which young male bears are the most dangerous. He expressed more interesting tidbits, like how you shouldn't get between a mother sow (pig) and her young offspring. He talked about silver salmon (after returning to their spawning stream, their coloring changes from pink to pale grey) and why you wanted to catch them right before or after they hit freshwater (they are used to saltwater, so when they hit freshwater, their skin "degenerates"--goes from pink to silver). When I was done listening, I came away thinking this is a man who notices the details and is a natural-born leader. I realized right then and there that Mr. Thompson is one of the most charismatic CEOs in Silicon Valley.
So much of enterprise security sales is about sales ability--the underlying software products aren't yet so different that technology is the primary differentiator. Having a CEO like Mr. Thompson provides Symantec with a clear advantage over competitors, because he is someone you want to listen to and have a drink with. Contrast this with McAfee's CEO, who, while certainly a nice man, doesn't inspire confidence and seems to throw out terms he doesn't fully understand to impress an audience. His offhand, irrelevant mention of the Basel II Accord still rings painfully in my head. I don't claim to understand it 100% either, but even the Dallas Federal Reserve Bank president declined to answer a question about Basel II publicly in a recent Commonwealth Club speech, saying it was too complex for a short answer and the questioner should speak with him privately.
It's worth noting that Symantec's meeting was very well-run--everyone knew what they had to do and adapted when necessary. When there was some static at Mr. Thompson's microphone, several people jumped and tried to fix it without interfering with the presentation. In contrast, during McAfee's shareholder meeting, I got the feeling that no one had spent substantial time planning the meeting in advance. In fact, one of McAfee's employees seemed upset non-employee shareholders had come to the meeting. Here, Mr. Thompson recognized a shareholder from last year and said hello.
If you're ever in a room with Mr. Thompson, go hear him speak. He's charismatic, dignified, and prepared. Mr. Thompson didn't just talk about salmon fishing after the meeting. He also briefly discussed politics. Not surprisingly for a man who has a preternatural ability to put people at ease, he said he supported Barack Obama because he was dismayed at how the country was becoming divided. He said we needed to work together, and he favored "statesmanship rather than brinksmanship." Regardless of your political beliefs, Mr. Thompson's natural leadership ability is exactly what shareholders should value in a CEO whose business involves sales. Between McAfee and Symantec, there is no question that Symantec appears to have a more professional management team. However, both McAfee and Symantec lack true diversity--there are no Asians/Indians on their Boards or in top management positions, which is an unforgivable oversight when some of the fastest growing markets are India, China, and possibly Vietnam. In time, I hope this oversight will change, but when the main problems with your company are diversifying upper management and finalizing an acquisition--neither of which directly impacts your underlying business--that's a good sign.
Disclosure: as of September 22, 2008, I own less than 20 shares of SYMC.
Stocks Update, 9/22/08
After the big run-up last week, I sold some of my positions. Malaysia's political turmoil bothered me enough to sell EWM. If the news stories are to be believed, the majority Malay population appears to be having some conflicts with the generally more affluent Chinese and Indian citizens. Also, while politics can get bad in the U.S., you don't see a ruling party trying to jail their opposition through a criminal lawsuit involving allegations of sodomy. I feel sorry for the Malaysians, who have to see a wonderful country's image get sullied by these political troubles. Yahoo's (YHOO) decline is also bothering me. First, a hacker gets access into Gov. Palin's Yahoo email account; then today, Microsoft (MSFT) announces it is spending 40 billion dollars to buy back its stock, taking available funds away from a potential acquisition. I will sit tight with Yahoo, but this kind of continued mismanagement is troublesome. Prices below are mid-day numbers on September 22, 2008. My open positions track the S&P 500 exactly at a negative 11.21%. The list of trades below includes only positions involving at least 2,000 dollars.
Open Positions
EZU = -8.34
GXC = -7.97
IF = -22.1
SWZ = -12.68
YHOO = -4.98
[Average of "Open Positions": losing/negative average 11.21%]
Closed Positions:
Held more than seven days but less than one year (from May 30, 2008):
CNB = +10.0
EQ = -8.83
EWM =-11.61 [sold 9/22/08]
EWS = -12.98 [sold 9/22/08]
GE = -6.4
GLD = +8.61 [sold 9/22/08]
INTC = 0.0 (excluded from average; insignificant movement)
KOL = -10.36
PFE = -5.5
PNK = -16.7
PPS = -2.8
VNQ = +2.37 [sold 8/7/08]
WFR = +0.9 (approx; based on partial sales week of 8/4/08 in two separate accounts)
WYE = +2.4
[Overall Record for 7 days+ trades: lost an average of 3.92%]
[-50.90 / 13 trades]
Held less than 7 days:
DUK = (0%, excluded from avg) [8/07/08 - 8/14/08]; GE (1.0%); GOOG (0.8%) [7/28/08 - 7/29/08]; GRMN (-6.2%) [Sold 8/5/08]; ICE (2.0%), MMM (0.5%), MRK (0.1%), KOL (13.2%) [9/17/08 to 9/19/08]; NVDA (8.0%) [8/12 to 8/13/08]; PFE (1.3%), SCUR (15%); SO (-0.3%) [Sold 8/5/08]; TTWO (4.3%) [partial sales on 8/5/08, 8/7/08, and 8/8/08]; TTWO (2.2%) [9/9/08 to 9/12/08]
[Overall Record for ultra short-term 2 to 7 days trades: gained an avg of 3.49%]
[41.9 / 12 trades]
Daytrades:
PFE = +0.5%
GE = +0.5% (Updated on July 14, 2008; bought at 27.15, sold at 27.30)
XLF = +4.3% (Updated on July 15, 2008)
[Overall Record for daytrades: Gained an average of 1.76%]
Compare to S&P 500: losing/negative 11.21%
[from May 30, 2008 (1385.67) to mid-day September 22, 2008 (1230.30)]
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.
Open Positions
EZU = -8.34
GXC = -7.97
IF = -22.1
SWZ = -12.68
YHOO = -4.98
[Average of "Open Positions": losing/negative average 11.21%]
Closed Positions:
Held more than seven days but less than one year (from May 30, 2008):
CNB = +10.0
EQ = -8.83
EWM =-11.61 [sold 9/22/08]
EWS = -12.98 [sold 9/22/08]
GE = -6.4
GLD = +8.61 [sold 9/22/08]
INTC = 0.0 (excluded from average; insignificant movement)
KOL = -10.36
PFE = -5.5
PNK = -16.7
PPS = -2.8
VNQ = +2.37 [sold 8/7/08]
WFR = +0.9 (approx; based on partial sales week of 8/4/08 in two separate accounts)
WYE = +2.4
[Overall Record for 7 days+ trades: lost an average of 3.92%]
[-50.90 / 13 trades]
Held less than 7 days:
DUK = (0%, excluded from avg) [8/07/08 - 8/14/08]; GE (1.0%); GOOG (0.8%) [7/28/08 - 7/29/08]; GRMN (-6.2%) [Sold 8/5/08]; ICE (2.0%), MMM (0.5%), MRK (0.1%), KOL (13.2%) [9/17/08 to 9/19/08]; NVDA (8.0%) [8/12 to 8/13/08]; PFE (1.3%), SCUR (15%); SO (-0.3%) [Sold 8/5/08]; TTWO (4.3%) [partial sales on 8/5/08, 8/7/08, and 8/8/08]; TTWO (2.2%) [9/9/08 to 9/12/08]
[Overall Record for ultra short-term 2 to 7 days trades: gained an avg of 3.49%]
[41.9 / 12 trades]
Daytrades:
PFE = +0.5%
GE = +0.5% (Updated on July 14, 2008; bought at 27.15, sold at 27.30)
XLF = +4.3% (Updated on July 15, 2008)
[Overall Record for daytrades: Gained an average of 1.76%]
Compare to S&P 500: losing/negative 11.21%
[from May 30, 2008 (1385.67) to mid-day September 22, 2008 (1230.30)]
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.
Saturday, September 20, 2008
Barry Goldwater: Political Campaign Buttons
I ordered my first campaign buttons from Legacy Americana (www.legacyamericana.com). I finally understand why people collect the buttons--some of them are a beaut. I really like the gold-colored button above, despite its obvious symbolism (Gold = Goldwater).
Friday, September 19, 2008
Frederic Mishkin Defends Core Inflation
Frederic Mishkin, a former Federal Reserve Board member, wrote a WSJ opinion piece defending the core inflation measure. I've called core inflation a useless, misleading number:
http://willworkforjustice.blogspot.com/2008/08/inflation-revisited.html
I was eager to see how Mr. Mishkin would defend a statistic seemingly designed to insulate the government from macroeconomic criticism. Mr. Mishkin's article is below:
http://online.wsj.com/article/SB122169336538749851.html
To his credit, Mr. Mishkin intelligently argues that the Fed must maintain a "nominal anchor," and food and gas prices (what he refers to as "headline inflation") fluctuate too much to maintain a steady beacon.
As any statistician knows, however, there are ways to mitigate the extremes in any number sample. The Dallas Fed Reserve does just that by publishing "trimmed mean" figures, which are basically inflation numbers sans the extremes on either the high or low side. Mr. Mishkin provides a good defense of core inflation in principle, but I am still not convinced. A "nominal anchor" isn't going to provide any predictability if everyone knows the real numbers are much different than reality. Numbers need to have credibility first. That starts by acknowledging inflation numbers should include items most Americans use daily, such as food and gas prices.
http://willworkforjustice.blogspot.com/2008/08/inflation-revisited.html
I was eager to see how Mr. Mishkin would defend a statistic seemingly designed to insulate the government from macroeconomic criticism. Mr. Mishkin's article is below:
http://online.wsj.com/article/SB122169336538749851.html
To his credit, Mr. Mishkin intelligently argues that the Fed must maintain a "nominal anchor," and food and gas prices (what he refers to as "headline inflation") fluctuate too much to maintain a steady beacon.
As any statistician knows, however, there are ways to mitigate the extremes in any number sample. The Dallas Fed Reserve does just that by publishing "trimmed mean" figures, which are basically inflation numbers sans the extremes on either the high or low side. Mr. Mishkin provides a good defense of core inflation in principle, but I am still not convinced. A "nominal anchor" isn't going to provide any predictability if everyone knows the real numbers are much different than reality. Numbers need to have credibility first. That starts by acknowledging inflation numbers should include items most Americans use daily, such as food and gas prices.
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