Book Review: The Great Depression of Debt

After reading Warren Brussee's The Great Depression of Debt, you may feel compelled to buy canned goods, water, and weaponry. If a Depression is coming and is as bad as Brussee thinks it will be, Americans are in deep trouble (and yes, "trouble" is a euphemism for something else). Here's one typical excerpt:

[I]t will take until 2012 or 2013 before the economy bottoms out and our economy again begins to grow. In the meantime, the stock market will drop dramatically, unemployment will be over 15%, and the dollar will lose its position as lead currency. Our country will be humbled as it is forced to adapt to a far lower and simpler standard of living. [page xii, hardcover, Wiley, 2009]

The problem with Brussee, however, is that his unpolished writing style mutes his persuasive power. For example, he uses far too many exclamation points, which is especially inappropriate when his message is that a financial apocalypse is near. In fact, I almost stopped reading after seeing yet another unnecessary exclamation point. While I'm glad I continued reading, Brussee needs to improve his writing style. In any case, below are his major points.

1. Brussee neatly summarizes the problems of having a large trade deficit:

If these [U.S.-debt-buying] countries get tired of the current decline in the dollar, which makes their investments net losers, they will will instead use the deficit funds to buy investment instruments elsewhere, for example in Europe. However, the United States needs these countries to buy our bonds because that is how we fund our deficit spending. So, if the foreign investors start to hesitate to buy our treasury bonds, the interest on the bonds will have to be raised high enough that the foreign investors won't go elsewhere. [page 28]

From what I've read elsewhere, if the current state of affairs continues, at least 2 to 3% of America's budget will go to paying interest to foreign investors. That's not a politically stable situation.

2. Listen up, market bears and Nouriel Roubini fans: Brussee thinks the S&P 500 will hit 423. As of February 27, 2009, the S&P 500 was 735.09, so Brussee believes the stock market--which is at 12 year lows--is 42% overvalued (See page 66).

It gets worse--according to Brussee, "[b]y 2013, people in the United States will have given up...the stock market will be akin to poison for most people...We will withdraw from many trade relationships with other countries, having set up trade barriers in response to our country's huge financial and unemployment problems." [page 83] These predictions may come true, but Brussee takes his pessimism to a level of hysterics, which ruins his credibility:

Retirement age will be changed in 2011 to age 70...A law will be passed that companies cannot lay off any more people due to reduced sales...The birth rate will go to zero...No one will want to bring a child into the very tenuous economy that will be gripping the United States. [Page 82]

Let's examine these claims. First, Brussee is vague when he refers to "retirement age," but he is probably concerned with Social Security. However, Social Security is not America's worst problem--Medicare is the much larger elephant in the room. Social Security's problems can be temporarily alleviated by raising payroll taxes and limits. Both these solutions will probably occur before Congress raises the retirement age to 70 for Social Security benefits. As for extending Medicare's eligibility age, it is very difficult to deny senior citizens necessary health care. In addition, senior citizens are a powerful voting bloc and will use their political power to prevent any major changes to Medicare. (See The Simpsons' "Wild Barts Can't Be Broken," Season 10, Episode 11, for a hilarious reminder of senior citizens' voting power.)

Second, the day Congress--with its influential corporate lobbyists--passes a law preventing layoffs is when a socialist party gains majorities in Congress. (Before you make jokes about the Democrats, remember which president increased our deficit by trillions of dollars in just eight years.) What will most likely happen first is that Congress will make it more expensive for companies to lay off workers, increasing corporate unemployment insurance contributions, or lengthening the time period employees can accept unemployment insurance. At most, Congress may require companies to pay some severance pay to laid-off employees.

Third, the idea that America's "birth rate will go to zero" requires an almost impossible set of events to occur: one, all illegal and legal immigration must stop; two, the Catholic Church must cease having influence over its adherents; and three, unplanned pregnancies must cease, or abortions must become as ubiquitous as Starbucks. Yet, none of these things will happen in our lifetimes. Whoops, there goes your credibility, Mr. Brussee. That's a shame, too, because Brussee makes some very good points. See below.

3. Brussee is against Obama's shovel-ready recovery plan, but for clean and renewable energy:

Where possible, government money given to industry should be accompanied by matching funds from the receiving company. In this way, the involved company has a vested interest in success... It will be very tempting to invest money on rebuilding our infrastructure, like roads, bridges, dikes, and so on. This was done in the thirties depression, and we are still enjoying the benefits of this work in our parks and in our infrastructure. But, as desirable as this is, funds invested in infrastructure will not lead to self-sustaining additional jobs...We must stay focused on meaningful job creation...Eventually the goal must be to develop completely electric vehicles. [pages 111-112]

Brussee is saying that shovel-ready stimulus is only a short-term fix. If the government spends money on building bridges, at some point, the bridge will be built, and the job will go away, and it's back to square one. Prior to reading the above paragraph, I had not thought about this now-obvious point.

4. Some random facts:

a. The wealthiest 1 percent of people currently own 40 to 50 percent of the country's [America's] wealth. [page 68]

b. Inflation is running at a 6 percent annual rate. [page 37]

c. In Smithers and Wright's Valuing Wall Street, the authors state that, when using a buy-and-hold strategy, investors never lost money when they were invested in stocks for 20 years. [page 145]

5. What makes Brussee more interesting than the average world-is-coming-to-an-end "economist" is that he's not a gold bug--he's a TIPS (Treasury Inflation Protected Securities) bug:

[G]old actually went down in price from 1933 (when the United States went off the gold standard) to 1968. It also generally lost money after its peak in 1978. So, it appears that for most periods between 1933 and 2007, the real value of gold did not keep up with inflation...Although gold may be a good crisis hedge...gold has generally not been a good inflation hedge. [page 123]

Investors interested in Brussee's investing tips may want to explore iShares Barclays TIPS Bond (TIP) and/or Vanguard Inflation-Protected Securities (VIPSX).

6. Here is Brussee's investment strategy:

[B]uying the most recent stocks added to the Dow, when the S&P 500 price/dividend is 17.2 or below; [and buying] stocks anytime the price/dividend ratio on the S&P is at or below 17.2. We will not only putting investment money into buying these stocks, but we will also sell all the TIPS we have accumulated and use those funds to buy stocks. When the price/dividend again goes above 17.2, we will stop buying stocks with new investment money and start buying TIPS. If the price/dividend goes above 28, we will sell all the stocks we have accumulated and use the funds from the sale to buy TIPS. [pages 116, 261]

Got that? What's the price/dividend ratio right now? Good question--that kind of current data is harder to find for average investors. Googling "price/dividend ratio" got me nothing current or useful.

7. Brussee is obviously a number junkie, and I loved his inflation stats at the end of his book [See page 296 et al]. Brussee lists the inflation rate in each year, from 1900 to 2007, along with some other numbers. You can get more economic numbers by going to Robert Shiller's website, located here.

Overall, Brussee has some compelling ideas. It's unfortunate he intersperses unlikely scenarios in between his rational ideas, which reduces his credibility. Readers deserved more respect and less sensationalism, especially with all the other good ideas in The Great Depression of Debt.

Disclosure: I own shares of TIP.

Berkshire Hathaway's 2008 Annual Letter

Every year, Warren Buffett issues a fun, easy-to-read letter to his shareholders. Here are this year's highlights:

Cash is King: As the year progressed, a series of life-threatening problems within many of the world’s great financial institutions was unveiled. This led to a dysfunctional credit market that in important respects soon turned non-functional. The watchword throughout the country became the creed I saw on restaurant walls when I was young: “In God we trust; all others pay cash.”

Government will get bigger without a firm hand: Moreover, major industries have become dependent on Federal assistance, and they will be followed by cities and states bearing mind-boggling requests. Weaning these entities from the public teat will be a political challenge. They won’t leave willingly.

The government's interference in credit markets is causing some disruptions: Though Berkshire’s credit is pristine – we are one of only seven AAA corporations in the country – our cost of borrowing is now far higher than competitors with shaky balance sheets but government backing. At the moment, it is much better to be a financial cripple with a government guarantee than a Gibraltar without one.

On bond insurers: By yearend 2007, the half dozen or so companies that had been the major players in this business had all fallen into big trouble. The cause of their problems was captured long ago by Mae West: “I was Snow White, but I drifted.” [Mae West, of course, was the rebel Hollywood sex symbol known for her wit.]

Public pensions are still a major concern: Local governments are going to face far tougher fiscal problems in the future than they have to date. The pension liabilities I talked about in last year’s report will be a huge contributor to these woes. Many cities and states were surely horrified when they inspected the status of their funding at yearend 2008. The gap between assets and a realistic actuarial valuation of present liabilities is simply staggering.

For more on this important topic, see my previous posts, here, here, here, here, and here.

On buying ConocoPhillips (COP) and the future of oil prices: I in no way anticipated the dramatic fall in energy prices that occurred in the last half of the year. I still believe the odds are good that oil sells far higher in the future than the current $40-$50 price. [Looks like investors who want to get a better deal than Mr. Buffett may want to consider buying COP.]

Just darn good writing and advice: Beware the investment activity that produces applause; the great moves are usually greeted by yawns.

On derivative contracts: Receivables and payables by the billions become concentrated in the hands of a few large dealers who are apt to be highly-leveraged in other ways as well. Participants seeking to dodge troubles face the same problem as someone seeking to avoid venereal disease: It’s not just whom you sleep with, but also whom they are sleeping with.

Questions at this year's annual meeting will be handled differently--various journalists will sort through the questions and pick which ones to ask: The journalists and their e-mail addresses are: Carol Loomis, of Fortune, who may be emailed at cloomis@fortunemail.com; Becky Quick, of CNBC, at BerkshireQuestions@cnbc.com, and Andrew Ross Sorkin, of The New York Times, at arsorkin@nytimes.com. From the questions submitted, each journalist will choose the dozen or so he or she decides are the most interesting and important. (In your e-mail, let the journalist know if you would like your name mentioned if your question is selected.)

Disclosure: I am bullish on ConocoPhillips (COP).

California's Governor Race

From the looks of it, the next California governor will be either eBay's former CEO Meg Whitman or Tom Campbell. I hope it's Tom Campbell--he seems very reasonable and has experience as a professor, lawyer, and politician. I like Meg Whitman, too, but Arnold (unfortunately) showed that California politics is too much of an insider's game to favor hard-charging corporate types.

In any case, I am sure most Californians are sick of politics as usual after the budget fiasco, so perhaps we'll get an exciting dark horse candidate. No matter whom Californians elect, the state's main problem is that voters keep approving expensive propositions. For the last time, we don't have any money. Smart Californians should vote "no" on every proposition until California has a budget surplus and can afford to do nice things.

Youth Basketball: Passing Drills

Some readers may know I coach youth basketball on Saturdays. Today, my team finally started passing the ball effectively. (Not quite as good as the L.A. "Showtime" Lakers, but our team is indeed named the Lakers.) The first month of coaching, it's so hard to get the kids to do anything other than basics. Most of the kids don't know each other, and some personalities may clash, but after a few weeks, coaches should move the focus from basics to teamwork. In short, if you want your kids to play effectively, teach them to pass well.

One drill I use to teach kids to pass is "2 on 3." I pick a kid to play defense with me and the rest of the team forms a line in front of us. Then, the first three kids in line have to score against me and my defensive teammate. There is always one offensive player open because it's 2 defensive players against 3 offensive players. If either defensive player swats/blocks the ball, the entire non-defensive team does five pushups. Once there is a change of possession, the next three kids play offense, while the first three offensive players go to the back of the line.

Initially, I make sure any kid who doesn't take a wide open shot gets his shot swatted with authority (I've always wanted to use the phrase, "swatted with authority," in a sentence). After the entire team does pushups several times, no one wants to get his/her shot blocked again. As a result, this drill creates a team culture/peer pressure against taking covered shots.

After about five minutes of this swatfest, I ask who wants to play defense. By this time, the kids are either tired of doing pushups; think it's fun to block shots; or just want to follow the coach. Thus, the drill also manages to make playing defense fun. I highly recommend this drill.

The other passing drill is "2 on 2," with the offensive team having to pass the ball at least three times before taking a shot. The kids move from defense to offense and go through the line. The passes must be at least three feet away--no handoffs are allowed (I call this rule, "No football"). If anyone does a handoff, both offensive players do 10 pushups and move to the back of the line. For some reason, "2 on 3" is much more effective than "2 on 2."

Passing is the key to having an effective youth basketball team, and unfortunately, it is the most difficult skill to teach. Good luck to all the coaches out there, and please post a comment if you have other effective passing drills.

So You Want to Open Your Own Business

The 2/23/09 WSJ had a special report on small businesses, titled, "So, You Want to Be an Entrepreneur." It listed ten questions to ask yourself before becoming self-employed. Here are the two most relevant questions to ask:

1. Are you willing to sacrifice your lifestyle for (potentially) many years?
2. Are you a self-starter?

I found the WSJ's report timely, because I have a friend who left a well-paying job to go into business for herself, thinking she would be highly profitable the very first year. After over a year in business, she is becoming discouraged by the fact she made only $20,000, mainly from activities unrelated to her core business. I wish my friend had read the WSJ report, which warns, "Entrepreneurs frequently won't pay themselves a livable salary in the early years...until their business is financially sound. That can take eight years or longer."

From my battle-tested perspective, I think my friend is doing very well if she made $20,000 her very first year; however, because she made $80,000 in her old salaried job, she feels frustrated. If you're founding a business, it will take two years to lay the groundwork to get a consistent book of business. I don't care if you're doing law or construction--it takes time and money to advertise and get clients to recommend you to their friends. Think about it--would you recommend someone who hasn't been around for at least two years? Here's my advice: if you want your business to succeed, you need to first save enough money to last at least two years. Then, you need to make sure you're comfortable with the idea of not making a dime until the third year.

But it's question #2--whether you're a self-starter--that really grabs my heart. I call this the Mariah Carey/Chumbawamba rule, after two great songs by the aforementioned artists--"Shake It Off," and "Tubthumping." Basically, my rule is this: The last person standing wins. Therefore, if you want to be a successful businessperson, you need to be able to shake off failure, get back up again, and keep going forward. If you're ultra-persistent, you'll probably succeed. For example, an ex-girlfriend once called me a George Foreman lawyer--I don't have much style, but I just keep coming at you. Unless I run into a Muhammad Ali, chances are, I'll be the last man standing.

The WSJ has a curious term for this attitude--"hypomania," taken from John Gartner's book, The Hypomaniac Edge. The book "theorizes that many well-known entrepreneurs have a temperament called hypomania. They're highly creative, energetic, impatient, and very persistent--trait that help them persevere even when others lose faith." [Emphasis added.] I agree wholeheartedly, and I'm glad there's a positive name for my impatience and energy. Let the hypomania begin.

Interesting Websites

I've got a headache, so today's post will be short--just some links to sites I found interesting:

http://blog.pology.com/

http://www.1000wattblog.com/2009/02/show-me-the-market-1.html

http://www.ellensplace.net/ar_pboy.html

Apple's Annual Shareholder Meeting (2009)

Apple, Inc. (AAPL) held its 2009 annual shareholder meeting on February 25, 2009. The meeting took place at Apple's Cupertino, CA headquarters. The majority of shareholder attendees appeared to be 45+ years old (the sea of white hair in the room was noticeable). Apple sometimes offers some food on the second floor, but this year, only coffee and tea were available. I noticed an inspiring mural above the coffee canisters titled, "To the crazy ones." The full text is below, and it complemented pictures of famous non-conformists, including Muhammad Ali, Cesar Chavez, and John Lennon (I did not recognize the man on the top upper left hand side--if anyone knows who he is, please add a comment).

Here's to the crazy ones.
The misfits. The rebels.
The troublemakers. The round
pegs in the square holes - the
ones who see things differently.
They're not fond of rules and
they have no respect for
the status quo. You can praise
them, disagree with them,
quote them, disbelieve them,
glorify or vilify them.
About the only thing that you
can't do is ignore them.
Because they change things.

- Jack Kerouac
quoted in an Apple Computer Ad, 1997
(search youtube.com to see the ad)

It's the perfect way to summarize Apple's image, isn't it? Unfortunately, this year's meeting was uneventful due to the absence of Steve Jobs. The only other "celebrity," Al Gore--who is on Apple's board of directors--appeared again this year and was noticeably more trim. After Apple's general counsel, Dan Cooperman, concluded the formal part of the meeting, COO Tim Cook made a short presentation. Tim Cook appeared in jeans and a black collared shirt. If memory serves me well, Steve Jobs appeared in a black turtleneck and jeans last year. Mr. Cook appeared to be doing his best to mimic Steve Jobs, even using some of his mannerisms. Overall, Mr. Cook did a good job, but unconsciously or not, he's trying to copy Steve Jobs. It won't work--no one has Mr. Jobs' charisma, so Mr. Cook eventually needs to find his own style.

Before the Q&A session began, Mr. Cook emphasized some sales results. He said Apple had sold 55 million iPods in 2008. Apple had also sold 13.7 million iPhones in 2008, surpassing its goal of selling 10 million. Meanwhile, iTunes was a raging success--Mr. Cook noted that Apple was the #1 music reseller, asking "Do you know who number two is? Wal-Mart! Can you believe that Apple sold more of something than Wal-Mart?"

The Q&A session itself was disappointing. After another shareholder called everyone socialists for advancing health care and environmental proposals, the running joke was "socialism." People jokingly said they were not socialists, used the word "socialist" whenever possible, and Mr. Cook opened the floor to questions from "conservatives and socialists alike." In any case, here is a short summary of the Q&A session:

1. Apple has "no comment" on the SEC investigation relating to Steve Jobs' health and a possible late disclosure of his health. (By the way, I am surprised Apple's lawyers don't cite the California Constitution and its right to privacy whenever this issue comes up--yes, an individual's health is important to a company, but it's also a private matter, and forcing a corporate officer to provide updates about his health would seem to violate the California Constitution. I realize the SEC is a federal agency and therefore not obligated to follow state law, but I don't see a direct conflict here--California's right to privacy is an extension of the federal right to privacy found in the U.S. Constitution.)

2. In the most lighthearted moment, an Apple shareholder asked everyone to stand up and sing Happy Birthday to Steve Jobs, whose birthday was yesterday. Most shareholders complied and delivered a rousing birthday song to Mr. Jobs. (You can't understand how devoted Apple shareholders are to Steve Jobs until you see the love in person--even when he's not there, shareholders make a point to include him.)

3. Another shareholder questioned Apple's diversity efforts. Its board of directors appears to be almost all Caucasian. (Apple does have an Iranian/Persian officer, Sina Tamaddon, as well as board member Andrea Jung of Avon Products, Inc., but like most companies, could use more diversity in its upper ranks.)

4. Another shareholder questioned why Apple pulled out of MacWorld. Mr. Cook responded that it had "other ways to reach many more customers."

5. A shareholder brought up Apple's advertising on risque shows, such as Two and Half Men. I thought the shareholder's comments backfired--she made explicit sexual references from the show, which must have been embarrassing, and probably got more people to become interested in watching Two and a Half Men.

The most interesting substantive issue was Apple's refusal to implement a shareholder proposal that passed last year. (This year, other than the re-election of directors, all shareholder proposals failed to pass.) Last year's successful proposal related to "Say on Pay" and executive compensation. I was very surprised to learn that when it comes to shareholder proposals, Apple operates like the Electoral College--a majority vote isn't enough to actually win. This was made all the more ironic by the presence of former presidential candidate Al Gore. It appears Apple is an iconoclast in every sense of the word--even when it means ignoring successful shareholder proposals. This seeming rebuke to shareholders won't dampen Apple's base, though. As long as Steve Jobs is around somewhere, shareholders will come to the Apple temple every year to engage in their own version of honoring their esteemed leader.

FYI: I was quoted briefly in this Reuters article:

http://blogs.reuters.com/mediafile/2009/02/26/apple-annual-meeting-proves-entertaining/

In case you're interested in another perspective, here is a shareholder meeting review I found to be accurate (except for the spelling of (Shelton) "Ehrlich"):

http://www.appleinsider.com/articles/09/02/25/apple_shareholder_meeting_dominated_by_politics.html

Disclosure: I own an insignificant number of Apple (AAPL) shares.