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Positioning a Portfolio for a Lousy Economic Environment
1) Why you think CPI will accurately reflect cost of living increases. Many people have written detailed articles of why CPI is a flawed measure of inflation. I have heard all the arguments that the money supply is collapsing and therefor these "experts" claim we are facing deflation right now. My grocery bill, health care costs, education expenses all say otherwise. Health and education have been increasing **at least** double the rate of CPI for two decades.
2) you talked in an earlier article about incentive problems. Well, the government's liabilities (TIPs, government employee wages and Social Security) all hinge on CPI, directly or indirectly. The government gets to define, and redefine, CPI at will -- and they have already major revisions during the Clinton administration (the Boskin Commission) and minor revisions during other administrations... Why would you buy a floating rate bond that pays off an index that is set by the debtor? This is a textbook case of conflict of interest
3) the implied par value "put" that is built into TIPs gives something of a floor on the CPI cashflow stream-- so this might make TIPs a good **trading** vehicle over the next year or two... but given that most people are not good at market timing, how do we know when to swtich out of TIPs?
4) please mention the tax problems of TIPs:
4a) if you buy them directly (not an issue if bought via a mutual fund). the TIP owner pays tax on the CPI "distribution&quo... even though the cash payment is not made until maturity.
4b) taxes are assessed on the **entire** interest. You pay taxes on the CPI "payments" -- meaning that even if CPI were an accurate measure of the cost of living, you are not protecting purchasing power over time
It seems to me that most people would be better off avoiding TIPs, which are really nothing more than a floating rate Treasury bond that pay off a questionable index. If you don't like nominal Treasuries, than you shouldn't like TIPs either
The Death of Profitable Journalism
Why should Google (or anyone else) pay a tax to support "quality journalism"? (assuming we could find and all agree on such a thing)
Why was the NY Times and UK Telegraph so hung up on force feeding their readers a paper based product? This is a classic example of timid management afraid to try a new product area for fear of cannibalizing the cash cow...
... and as happened in so many industries, when the timid management failed to adapt and try new products, someone else did it for them. Why should the innovators be punished? Is there any legitimate reason why newspapers did not embrace blogs from day one? (timidity is not a legitimate reason)
True "journalists"... are supposed to be neutral and objective-- but the vast majority of "news" reporting is highly opinionated. Without even getting to the content of articles, news editors constantly "decide" (unilaterally and very George Bush like) what is the most important news and what information is unworthy of mention. The articles themselves are filled with obvious opinions, omissions of fact, half truths, and on too many occasions outright inaccuracies.
If newspapers were meeting the public need, there would not have been a need for blogs. Technology aside, blogs were "created" by news organizations failure to do their job. Blogs are no more (or less) opinionated than so-called professional journalism -- the main difference being that blogs do not fraudulently claim objectivity
I will miss the NY Times when it is gone -- it makes for great kindling for my fireplace.
GM: More Bailout-Worthy than Citigroup
It makes zero sense to argue that, because Bush & Co made a terrible mistake, Pelosi/Obama & Co are somehow justified in repeating the mistake
Bailing out society's failures at the expense of its successful taxpayers is a clear recipe to ensure our children and grandchildren never see what used to be called the American Dream
Nationalizing Detroit
Talk about pie in the sky nonsense! Professors sit behind their guaranteed jobs (tenure) in a secluded ivory tower and pretend they can understand how the real world works.
Another popular saying, easily understood by millions of people who barely graduated from high school, is "money doesn't grow on trees". Its time we expect and demand that PhD's to grasp the concept.
Harvard Endowment: Punishing the Present to Benefit the Future?
First of all, Harvard earns enough on its endowment that it really doesnt need to charge any tuition.
In spite of enormous endowment earnings, plus an enormous tax advantage, plus the ability to charge different customers different prices to maximize revenue (something that is illegal for most businesses) -- Harvard still has to raise tuition by roughly twice the rate growth rate of GDP, and almost three times the rate of CPI... and it has been raising prices faster than the economy for decades.
Where does this money go? Harvard, like many schools, has literally hundreds of Deans. As you would expect, a Dean of each school and perhaps a Dean of Students. But then they have a Dean of Minority Students, Dean of African American Students, Dean of Asian Students, Dean of Latino Student, Dean of every ethnic group you can think of. Other schools add a Dean of Greek Life (fraternities/sororiti... Every Dean has a staff of several secretaries and a large number of assistants, each of whom also has a secretary. Residential life Directors and assistants, development directors, new facilities directors, existing facilities directors -- all of whom have a support staff.
Not even counting custodians or librarians -- most major universities have "administrative / support staff" that greatly outnumber the professors.
Purchasing? Most universities spend many times what the private sector does for the same goods/services... and that's before you factor in the cost of the staff whose job is supposed to be to rationalize purchasing.
I don't know Harvard's budget, but in a typical "big university", slightly more than half of the schools budget goes to things other than classrooms and professor salaries (the things we think are education). Most of the money we claim to spend on "education" in this country actually goes to something else.
Seniors, about to graduate into the real world with tens of thousands in student loans, would stage a riot if they realized where their money actually goes.
So what? College tuition has already reached a point where upper middle class families cannot afford it. Many marriages are delayed while the happy couple struggles to pay off their student loans before incurring a mortgage debt.
Its one thing to argue that EDUCATION should get a tax subsidy -- but that is not where the majority of the money goes. Academia has become a welfare program for bureaucrats.
And as another poster already commented, Harvard's culture of excessive out of control costs, is where a large number of government bureaucrats originate.
Money doesn't grow on trees-- every dollar spent on welfare / excess administration jobs is a dollar that could have gone toward actual education and/or a lower student debt.
Its high time Americans think about why we should continue to give large bureaucracies tax free existence. Mindlessly crying "education" really isn't going to cut it anymore -- its obvious the taxpayer subsidy is being diverted elsewhere
Whatever your thoughts, no business (not even a "non profit") is viable in the long term if costs grow significantly faster than the economy. Academia is on the verge of pricing itself out of existence.
Three Financial Stocks Worth Holding
WFC, like every other bank, claims to have (say it together now) "a very conservative loan portfolio". Whoopee, so did everyone else. Unless and until WFC publishes for more details on their loan portfolio, we have to assume this is on par with Dick Fuld telling us Lehman is solvent. We all know that WFC's loan portfolio is heavily concentrated in California (where home prices have fallen more than the national average). On that basis alone, real analysts (not the ones on Wall Street) would be worried about any company with a heavy California concentration.
I know in my state WFC sent out **UNSOLICITED** home equity checks through the US mail. Presumably, these went to people with high credit ratings -- meaning the loans will goose up Wells' statistics. But sending unsolicited loans through the mail (only requiring a scribble / signature to start?) is hardly a bank you can call "conservative&quo... I think its more accurate to say WFC knows how to manipulate average portfolio statistics.
As pointed out by another commenter, JPM runs the largest derivative book in the country. I doubt Jamie Dimon fully understands all the risks on (well, really off) his balance sheet -- and I am positive that the author has no clue.
BAC overpaid for Countrywide and Merrill. Ken Lewis is already backpedaling on whether BAC stands behind CFC debt -- its clearly not worth par, and probably not worth much at all. But since he bought CFC under the cover of darkness (and probably with the Fed's gun to his head), its not clear he can legally walk away. On Merrill, Lewis has stated unequivocally that he will shut the trading desks and focus on wealth management -- meaning the traders who actually know the risks on Merrill's books have zero reason to stay. Merrilll brokers can easily go into a private practice and outsource record keeping to Schwab, eTrade, Interactive Brokers, etc... its far from obvious why any of them want to deal with the bureaucracy of a mega bank.
And all three banks you mention face massive integration risks-- the corporate cultures of WFC / JPM / BAC do not match those of any of the companies they are acquiring. Risk systems (such as they are) are incompatible.
And all three banks are likely to face Citi's problem -- being too big to manage. I know CEOs are supposed to be able to leap tall buildings in a single bound and all that -- but the reality has fallen far short of that.
The management style needed to be a successful mortgage underwriter is not the same as the one needed to be a good wealth manager... A bank's best **trading** client might easily be a really bad mortgage risk. Having the same clients borrowing money and investing money is very obviously a doubling down of risk (from the bank's standpoint).
After G-20: The Beginning of the End of the Old Order
Next we have to get you to look at the effect of Keynes policies... Keynes policies completely screwed up the United Kingdom and turned it into an international bailout case by the 1970s. In the U.S., his policies were implemented in the form of the "Great Society" -- which failed in every way imaginable to achieve its goals. When you consider the economic costs dragged on through the 1970s and early 1980s when Paul Volcker finally cleansed the system via a very painful recession.
And yet, we still have head in the cloud college professors / socialist pretending Keynes policies were something other than a failure. Since we failed to learn from history, we now seemed doomed to repeat it.
Lets hope Volcker talks some sense into Obama.
GM Bailout Would Be Agony for Taxpayers
GM pays taxes on its banking businesses -- GMAC and Dietech. Before that, they made money / paid taxes on GM Hughes (which they bought and nearly destroyed) and on the former Perot Systems (which they did destroy). And they make money by selling (really leasing) their clunky cars to captive car rental subsidiaries (Hertz, Avis, etc) -- but again, that is really a financing business -- they dump the unsold cars at cost, and make money by renting the cars out (multiple short term leases).
The auto manufacturing business itself hasn't made money in decades
More Trouble in Store for Citigroup
"Not sure dismissing the highly paid producers is the way to go..."
Labeling traders and salespeople "producers" and the rest of the staff "cost centers" is the sort of thinking that got many banks into the situation they are in.
Many otherwise good sports players have fallen under the delusion that they (singularly) are the team, and all the other players are dead weight. Better coaches quickly rid these divas of their thinking before they mess up the entire team.
Without good back office people, trades won't clear and clients will get upset. Without good IT software, traders have trouble tracking all their trades -- the manual "T-sheets" of yester-year would never handle today's volumes.
And without a competent risk management department, banks would end up -- well, like they did end up. Over-emphasis on so-called "producers", while ignoring all the other producers that make the traders/salespeople's job possible -- is just another example of poor management on the part of CEOs.
If your bank has more than one employee (never mind 300K) -- it is a team sport. If the line guys don't do their job well, your star quarterback is just a target waiting to be sacked. Tell your linemen they are an expendable "cost center" and prepare to carry your quarterback out on a stretcher and loose the game.
And in the case of most banks, a lot of what the "producers" supposedly produced was really garbage. If the risk management department hadn't been gutted, the CEO might have known the difference.
Employee Healthcare Deductibles Are Becoming Punitive
www.washingtonpost.com...
www.nytimes.com/2008/0...
A co-worker of mine who talks a little too loud on the phone was recently speaking with her doctor and checking for drug interactions by listing all the medication she is on. The woman is about 40 years old and yet she is on dozens of medications. And her situation is far from unique.
Drug companies spend millions advertising directly to consumers-- my TV is filled with ads for everything from Zocor to Prilosac to ambien to who knows what. You may think consumers have no control over health care spending -- but I doubt the greedy profit seeking drug companies are advertising just for fun. They know you are wrong.
We are a country that takes a pill for absolutely every tiny little pain. We take pills to help keep us awake and vibrant during the day, and more pills to help us sleep. Are kids are doped up on Ritalin, while adults have a wide array of anxiety medications. Cholesterol drugs. Depression drugs. Blood thinner / thickening drugs. Biotech and pharmaceutical company stocks have been winners for years. There isn't enough room on this blog to list all the surgeries Americans insist on having. We are also a nation of couch potatoes who complain endlessly about obesity -- oh wait, we have expensive pills for that too.
Get off your lazy butt and go exercise outside. You will burn off some energy (no more anxiety pills) making you able to sleep. The sunlight and activity will treat your depression naturally. You won't be as obese, and your eyes won't hurt as much from staring at the TV all day.
Our healthcare costs are off the charts because of the choices we all make in our daily lives. Short of mandatory morning exercise, there is little the government can do to fix the problem and a lot they are likely to do to make it worse (facilitating fraud). We choose to take dozens of medications when we make life/work choices (stress) and when we make TV / exercise choices.
Whatever Obama does or doesnt do, he isn't going to get anyone's lazy butt off the couch and away from the TV
The Humility of Realism
Younger generations will get their turn, and they might be as bad as baby boomers -- but being young, they haven't yet reached the age where they have the greatest influence. Those positions belong (right now and for the last 15-20 years) to Baby Boomers.
Being fair though, we can't blame the Baby Boomers for Alan Greenspan. He was a failure of an earlier generation
The Humility of Realism
I do wonder about your second to last paragraph which starts, "Yes, the markets have failed because we let the credit creation inherent in a fiat money system run out of control. For the last 20 years, the Fed would never let a recession be severe enough that it would bring debt levels down, as the Fed did from the forties to the mid-eighties."
The Federal Reserve is **NOT** "the markets" no matter how big Alan Greenspan's ego ever gets. Alan Greenspan failed, just as he failed as a private economist. You argued quite effectively that it was the "Greenspan Put" that failed.
With all the interference from inept regulators (including Cox at the SEC, the inflating of GSEs by Congress, and Paulson recently) but mostly Greenspan -- we cannot draw any conclusions on the efficacy of markets. They were not allowed to function.
There is no place for a Federal Reserve in a truly free market. One could argue that a lender of last resort (who lends freely but dearly as advocated by Paul Volcker and others) is an improvement over a "pure" free market.
But the constant meddling and goosing and back seat driving of Greenspan cannot be called anything but a disaster. The U.S. is a victim of central economic planning -- the very same stuff that has screwed up so many other economies around the world.
In the end, that is why everything Paulson/Bernanke do to "fix" the problem is just making it worse... Central economic planners were and are the problem.
The G-20 Sings a Song of Sixpence
Keynes did not bring down the UK by himself, but his bone-headed theories on central economic planning certainly contributed.
Keynesian economics stays in economic textbooks mostly because college professors have a well documented socialist leaning. The country usually votes somewhere close to 50/50 Democrat/Republican -- even after Bush's bumblings, the country voted about 55/45 Obama/McCain. The country is somewhat centrist, as one would expect. College professors have done research on their peers and found that professors vote closer to 98/2 Dem/Rep. You are entitled to your opinion -- but the thinking of you and your colleagues is rather incestuous and not representative of the country as a whole.
The problems with Keynesian economic theories led to the rise of monetarists, neo-classical macro theorists, and a reincarnation of Austrian theories-- just to name a few. Prominent market theorists like George Soros completely reject the whole idea of markets finding any equilibrium. If Keynes' theories were as widely accepted as you claim, there would not have been a need for all these other schools of thought. You might emphasize Keynesian theories in your classroom, but that doesn't make the theories mainstream. Outside your classroom, you cannot threaten people with a bad grade if we don't agree with you.
Any analysis of the experience of Japan (and the US in the last couple years) thoroughly refutes the argument of a "liquidity trap". The Bank of Japan threw so much money at their "liquidity trap" that their govt debt is now over 300% of GDP -- and they have nothing to show for it. Bernanke has slashed interest rates and doubled the Fed's balance sheet -- and after all that Lehman failed while Merrill and Wachovia were days away from collapse.
A liquidity issue happens when banks won't lend to solvent borrowers. When people won't lend to insolvent borrowers, that is called common sense. Everyone -- from consumers to hedge funds to corporations to the government -- have more debt than they are able to service. Everyone needs to de-lever. No amount of extraordinary lending on the part of the Fed is going to change that.
Home prices got way too high as a multiple of income-- several standard deviations higher than the "norm" that existed before Keynes and several decades after Keynes. People do not have the income level to support home prices; making a loan (providing liquidity) to someone who cannot service the debt makes no sense.
An economy with too much debt already cannot be stimulated with more debt. There is no liquidity trap -- the whole idea is simply a shameless way for socialists to justify shifting more power to central economic planners like the Fed and Treasury. While Bernanke has issued some limited mea culpas, he hasn't had the courage to just come out and admit that Greenspan's policies were a major contributing factor to the bubbles and collapses of the last couple decades-- including housing.
Why Feds Shouldn't Regulate Insurance, Nor Own Insurers
Longer term though -- I was complaining about the over-emphasis on sales. I was very specific in saying that sales are not unimportant -- but that they are only PART of the business.
Too many inept managers focused 110% on sales and completely neglected everything else. This led to absurd levels of hubris on the part of sales staff, many of whom were glorified phone operators (many salespeople add lots of value, but during the "boom" many did not).
When a salesman "produces", how can you be so arrogant as to suggest that 100% of the credit should go to the salesman? If the firm has a reputation for not processing claims properly, clients won't do business. Clearly, some of the credit for the sale should be going to the claims processing people. If the firm doesn't manage risk well, than the firm will collapse and won't be able to pay claims -- so clearly, some of the credit must go to the risk management / actuaries. I could go on and on about other departments, but the basic message is this: it takes teamwork for a firm to be successful. Sales people often get very confused and think they are the whole team. During the boom, many big firms actually were so stupid that they labeled back office personnel as "cost centers" because they didn't bring in revenue like the head in the cloud sales force. If the rest of the team doesn't do its job, then you sales guys have nothing worth selling. The rest of the team must be recognized for its contribution as well.
It is ridiculous for talentless CEOs to fall over backwards for their top performing sales people -- but then not make a similar fuss over the top performing people in other departments. I have to keep saying this because the current thinking is so out of touch: if the rest of the staff doesnt do their job, YOU HAVE NOTHING TO SELL.
Sales people are simply worthless without something to sell. That's really just common sense-- but inept CEOs of late have forgotten. They focused 110% on sales and completely neglected everything else. Wall Street collapsed because moron CEOs forgot to reward risk management people. GM and Ford collapsed because they have neglected everything from cost controls to new product design.
Sales are important, and cannot be neglected... but so are many other facets of a business. The current crop of worthless CEOs forgot that. We have all seen sports teams where one player thinks he is God's gift to whatever sport -- coaches that are dumb enough to play along and neglect the rest of the team end up like AIG or GM or Lehman or Bear.
In the long term, there needs to be a balance ... but in the short term, most of these companies are going to have to over-compensate and over-emphasize risk management, and under-emphasize sales.
So short term: yes, cancel the sales trips. Long term, successful firms will recognize outstanding contributors throughout the firm.
The G-20 Sings a Song of Sixpence
Keynes economics were simply a means to an end -- he believed in central economic planning by all-knowing government bureaucrats and elitist academics like himself, which melded well with socialist ideas of the time. That makes him in the right place at the right time -- but hardly worthy of being called "brilliant"