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The Daily Reckoning | Wednesday, May 11, 2011
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Henry Chiang Just Made Coal and Oil Obsolete
On July 12th, Henry unloaded his secret technology in a 23-minute speech at a private investment conference.
What he described is absolutely shocking...
In fact, there's too much to describe in this space, so I urge you to take a look at the presentation we recently filmed on this matter.
The Value of a Millisecond Why the Speed of Information is Meaningless If You Don’t Know How to Use It
Reporting from Buenos Aires, Argentina...
Joel Bowman
Yesterday up. Today down. That's the basic story for stocks and commodities. Gold, oil and the Dow all rallied yesterday. All were down last we checked this morning; gold under by $15, oil off by a couple of bucks, the thirty blue chips down a hundred points...maybe more by now.
In any case, you don't read The Daily Reckoning for minute-by-minute updates and fraction-of-a-percent microcap moves. We don't claim to operate effectively in that space anyway. We're a daily, not a "minutely." We don't offer data. We present ideas. At least we try to. Each service has its place, of course, but there is a difference.
Last week, while your editor was shacked up in New York City, we sat down to lunch with a very interesting fellow. He was in the business of servicing - that is, providing information for - high frequency trading desks.
"We're talking millionths of a second here," he told us over a Peroni beer, somewhere around Midtown. "The space is highly competitive and, as such, people pay big bucks to get their information first, so their computers can go to work executing trades, ahead of the pack. In this business, being first is everything."
It was fascinating stuff, really. We listened intently, trying to piece together what photon went where and which algorithm fit with which solution. There were lots of sketches on napkins and strange hand gestures going on. Very exciting. Somewhere during the conversation, however, we began to think about the little guy, the investor without access to all this whizz-bang information speeding toward his home office computer, tucked away in the den a thousand miles from Midtown Manhattan. What chance do they have, we wondered?
"We're getting to such a thin edge right now," our friend continued. "Eventually - and nobody knows quite when - it won't be possible to go any faster. The problem now, believe it or not, is the speed of light. There's only so fast a photon can go, you know."
"Ah yes, those photons and their pesky speed limits. Bummer."
"There are very promising new technologies out there that will eventually allow us to feed more data through the lines quicker, and for computers at the receiving end to gather up larger chunks of information more easily. But this takes time and money, research and development. It will come, but not overnight. In the meantime, you get a cluster of servers, all battling over millionths of a second."
No question there is big business in piping in - at phenomenal speeds - highly time-sensitive information, which these trading desks then use to buy this...sell that...tweak this...adjust that.
With so much hyper-fine tuning going on, and tens, nay hundreds of millions of dollars sloshing around in a veritable orgy of optic fiber delivered information, how does your average investor stand a chance? How can he compete, other than to place his money with one of these "first receiver" trading desks...forking out exorbitant fees for the privilege, no doubt?
"The thing is," our friend continued, "everyone basically has the same strategy. Their models are so similar that competing for a millionth of a second advantage has become an enormous business. I'd have to think - and I'm not a trader, mind you - that being original would be worth more than just being fast. Being original, by definition, means you're first...however long it takes."
Bits and bites of data are immensely important, in other words, but it's what you do with that basic information that will set you apart from the crowd. That's where fresh, original ideas - and the ability to generate them - come in handy. There's little point in getting information first if you don't know what to do with it, or if that information is somehow compromised. These trading desks may be first, but who's to say they are first to be right, and not merely the first to fall off a cliff?
In any case, there's nothing wrong with spending a little more time - more than a few millionths of a second - nurturing and nourishing your own, individual investment strategy. In fact, some investment strategies take many years, generations even, for the benefits to fully express themselves. Bill Bonner has more on the super long haul strategy in today's column, below... FINALLY! A "video presentation" that's 100% fluff free!
In this new video presentation market analyst Alan doesn't try to pull the wool over your eyes. In simple plain English he's going to tell you how his recommendations delivered big results in 2010! Interested?
Then click here now to learn more.The Daily Reckoning Presents Compound Effort Over Time, Part II
Last week, we discussed the real secret of success. As you knew all along, there is no secret. Hard work over a long period of time pays off - just like compound interest does the job on your savings. 
Bill Bonner
"Compound Effort Over Time," is how we put it.
The longer and harder you work at something, generally, the more success you have.
But we left an intriguing idea dangling. What if you could work at something longer than a single lifespan? What if you could keep compounding for more than one generation? What if one generation could help the next succeed?
The idea is both self-evident...and shocking. In America, you are supposed to be self-reliant, self-sufficient and independent. You should believe that you are responsible for your own success. You are supposed to be able to do whatever you want to do...and go as far as your luck and pluck permit.
What if it weren't true? What if your success in life depended largely on your parents and grandparents?
Driving across Baltimore recently we went through a working class neighborhood called Dundalk. Fifty years ago, it was a neighborhood of white, blue-collar factory workers and their families. Men earned good wages at the GM plant...at Bethlehem Steel...in the ship terminals, mills and factories. Women stayed home and raised their families.
And today? The factories are largely gone. Now, men work in lower- paying jobs in the service sector. Women are single mothers. But they're still in Dundalk.
We have no facts. Just observations and guesses. But fact-finders have already concluded that America has much less 'social mobility' than it used to have...even less than Europe's sclerotic social-welfare states.
Why do people stay in Dundalk? Are they genetically programmed for the lower middle class? Are they culturally suited for low-skill, low- income employment? Are they educationally prepared for nothing else?
Sociologists argue over the causes. What interests us are the effects. For whatever reason, the next generation picks up where the last one left off.
We know that wealth is accumulated over many generations. We know that just by looking around. Our generation did not build many of the edifices we see...nor clear the fields where crops are planted...nor invent the automobile, the aeroplane, the television or the toaster. We inherited those things, and much more besides.
We know too that if you're born in New York rather than New Delhi, you're likely to be richer. And we know that if you're born to a rich family in midtown Manhattan, you're likely to be richer as an adult than if you're born to a poor family in Harlem. And yet, how many people take responsibility for their children's wealth? How many figure out how to compound their success into the next generation...and beyond?
There are many things that take more than a single generation to accomplish. If you want mature oak trees lining your driveway, for example, you had better think in terms of generations...or start very early. Olive trees can take an entire generation - 35 years - before they produce a decent harvest. Then, they live for centuries longer.
And what about a skill or a reputation? How long does it take to build a reputation as a great beer maker? A great winemaker? A great guitar maker? Or a great banker?
Not years. Generations.
The Martin family started making guitars in 1811. Now, everyone has heard of Martin guitars. The family is still making them.
The Beretta family is still making guns; the business was begun in 1526.
The Rothschilds have been in banking since the 18th century.
The Lemoine family started publishing books in Paris in 1772; they're still at it too. And the Hoshi family in Japan has been running a hotel for 1,200 years!
Of course, these are rare examples. But there are a lot of businesses that involve delicate judgments, unusual habits, or the kind of specialized knowledge that is very hard to come by in a single generation or learn in school.
Parents mortgage their houses to send their kids to school. But the parent who advises his child to stay in school or graduate school may be doing him a big disservice.
The common belief is that people who get advanced degrees earn more than people who don't. Statistically, this is true. But it is misleading. It doesn't mean that any individual who gets a degree or advanced degree will earn more than if he didn't. All it means is that taking the whole population, average people who have more education tend to earn more than average people who have less education. Doctors earn more than carpenters. Engineers earn more than backhoe operators. But the average person earns an average salary. Obviously, if you want to earn an average salary you are better off in a field where the average is high.
But what about earnings that are not average? What about the fellow who was going to be a doctor...and instead decides to start a business of his own...or goes to work for a pharmaceutical company? Would he be better off with more years of book learning...or more years on the job?
To ask the question another way, would Bill Gates have had more success if he had stayed in Harvard and gone on to law school? We don't know. But it is unlikely.
To turn to a more common example, what about the child who is destined to enter the family firm? Is he better off spending more time in school or going right to work? Almost every parent would say - 'let him stay in school as long as possible.' If pushed to identify the merits of further education, the parent would say 'it can't hurt.'
But maybe it can hurt.
People learn, no matter where they are and what they do. So, the real question is, where are they likely to learn more...or which kind of learning will be more valuable?
Book learning has a value - especially in the sciences. But if the hypothesis of "Compound Effort Over Time" is correct, it may be more valuable to begin early accumulating the instincts, experience and hunches that prove so valuable in real life.
Plus, time spent in school may not only be less productive...it may be counterproductive. Much of what is taught - depending on the discipline - is not knowledge at all. It is nothing more than intellectually fashionable claptrap which later proves to be completely false. Imagine the poor family that sends a child to an Ivy League school so that he may get a degree in economics or finance. Then, it sends him to a business school so he may deepen his understanding of the subject. By the time the kid finishes school, the family has spent nearly $300,000 on his education.
Then, when his studies are finally completed, he comes back and applies the latest theories of finance to the family fortune. Had he arrived on the scene in 2005-2007, for example, he might have loaded up the family with a portfolio of mortgaged-backed derivatives, in order to earn higher yields from 'safe' investments.
He might have applied Modern Portfolio Theory too...like the geniuses running Harvard's endowment...and wiped out half the family fortune.
Or maybe he would turn his education to the business itself. You can imagine him telling dad and the old-timers that there were new and better ways to do things...and that they should be trying to 'maximize shareholder value' by leveraging the firm.
The old timers would shake their heads.
"No... Debt doesn't seem like a good idea..." they would say.
Or, "Hmmm... Something doesn't seem right..."
But asked to explain why they were reluctant to put the new learning to work, they would have a hard time arguing the point. They would only have hunches and habits, the accumulated wisdom of decades; it wouldn't stand up for long against the mathematical proofs offered by the young MBA!
Finally, the old guard would give up:
"Well, I guess you're right. We can increase our return on equity by borrowing money... I guess that makes sense."
And it did make sense - for a while. In 2006, the firm might have been more profitable than ever...and maybe even have bought a corporate jet and begun expanding into new markets.
"Well, I guess Sonny was right," the old man could say to himself. "It is a new era."
And so, the firm - like Lehman Bros. - that had done business successfully ever since the War Between the States, loads up with debt. And then, when the next major cyclical downturn comes, it goes broke!
Julius Caesar never earned an MBA. Nor did Cornelius Vanderbilt. Or Henry Ford. Or Andrew Carnegie. Or practically any of the great successes of business and financial history. MBAs hadn't been invented!
Caesar learned his trade by following in his father's footsteps. His father showed him how to be a praetor, a senator and governor of an Asian province. Caesar learned how to talk to people. He learned how to think. He learned who he could trust. His father made the introductions. His father set the pace. Then Caesar was able to step into his father's footsteps, and keep on walking.
Caesar did not start from nowhere. He did not start with nothing. He started off where his father left him. He launched his career with the capital his father gave him - skills, reputation, experience, money, and contacts.
One of the many under-rated legacies a parent can leave a child is a good reputation. Trust can take generations to build. We trust Mr. Martin to build guitars because his family has been making them for many, many years. We trust Mr. Ford knows how to make cars and Mr. Hershey knows how to make chocolate.
"The thing about doing business in China," said a man sitting next to us on the plane, "is that it can take a very long time to build up trust. And without it, you're lost. They don't trust you. So they won't treat you very well. That's how they protect themselves, by cheating you first."
Trust reduces the cost of doing business. Less need for lawyers and contracts. No need for insurance, bonds and hold-backs. That's one reason ethnic groups tend to prefer to do business internally. They understand one another. They know what to expect. They know who they can trust...and how much.
Even in well-known, open careers such as filmmaking, banking and politics, trust, contacts and 'brand' awareness are extremely important. It's tough to break into acting or politics, for example, but it's a lot easier if your parents had already opened a breach in the wall. The number of people in the trade today whose parents and grandparents were also in it prove the point; there are far more of them than would be predicted by pure chance. Of course, it's easy to see why. The children know how the business works; outsiders don't. They have the contacts; newcomers don't. People in the business trust them to know what to do and how to do it. So, it's much easier to gain entry for someone such as Angelina Jolie (father: Jon Voigt), Michael Douglas (father: Kirk Douglas), Jeff Bridges (father: Lloyd Bridges)...or dozens of other well-known political figures.
Of course, that could be said of almost every career and every business - whether it is plumbing or haberdashery. One generation lays a foundation. The next can build on it.
Regards,
Bill Bonner
for The Daily Reckoning
Joel's Note: So how, exactly, do you leverage this "compound effort over time," as Bill puts it? How do you invest, not just for your own security, but for that of your children...and their children, too? Obviously the risk appetite involved in this kind of investing is smaller; you don't want to speculate and wipe yourself out. It's more about allowing incremental gains to accrue, compounding over time. Interested Reckoners may wish to see this presentation to find out how Bill is implementing the super long haul strategy to protect and grow his own family money.Gold... How Best To Benefit From History's Anti-Fiat Currency Hedge...
Nine Simple Ways You Can STILL Get Rich With Gold in 2011
Even as gold soars to record new highs, a respected Harvard geologist reveals how you can STILL use gold nine different ways to get rich.
Get the details on this epic profit forecast - right here.Bill Bonner...reckoning from Beijing, China... The Economic Recovery Fantasy Stocks went up yesterday. They've gone up so far, for so long we almost wish we had bought some.
But wait... Look at the stock market in terms of gold. Stocks have lost more than 75% of their value over the last 10 years - and they're still going down.
Yesterday, gold went up again. So did oil. The sell-off we've been expecting is still in the future. But a sell-off is coming. Because this economy is still in a Great Correction; much remains to be corrected.
Nothing we read about the economy is consistent with the feds' description of it.
The way they tell it, the economy is now recovering from a recession - thanks to their decisive action. But the facts don't support the recovery fantasy.
Homeowners, for example, are still getting killed. More than 28% of them are now underwater.Bloomberg is on the story:More than 28 percent of US homeowners owed more than their properties were worth in the first quarter as values fell the most since 2008, Zillow Inc. said today.
But getting a clear picture of the economy is hard.
Homeowners with negative equity increased from 22 percent a year earlier as home prices slumped 8.2 percent over the past 12 months, the Seattle-based company said. About 27 percent of homes with mortgages were "underwater" in the fourth quarter, according to Zillow, which runs a website with property-value estimates and real-estate listings.
Home prices fell 3 percent in the first quarter and will drop as much as 9 percent this year as foreclosures spread and unemployment remains high, Zillow Chief Economist Stan Humphries said. Prices won't find a floor until 2012, he said.
The number of homes with negative equity rose to 16.2 million in the first quarter from 13.1 million a year earlier, Zillow said.
In Las Vegas, 85 percent of homes with mortgages were underwater, the most of any city tracked by Zillow. Other metropolitan areas in the top five were Reno, Nevada, at 73 percent; Phoenix at 68 percent; and Modesto, California, and Tampa, Florida, both at 60 percent. Zillow has tracked negative equity since the first quarter of 2009, when more than 22 percent of homes were underwater.
Here's another Bloomberg report that tells us something interesting. A good part of current consumer spending is not coming from a recovery; it's a by-product of the fall in housing prices:May 6 (Bloomberg) - Melissa White and her husband stopped paying their mortgage in May 2008 after it reset to $3,200 a month, more than double the original rate. That gave them extra cash to pay off debts and spend on staples until their Las Vegas home sold two years later for less than they owed.
Regards,
"We didn't pay it for about 24 months," said White, who quit her job as a beautician during that period after becoming pregnant with her first child and experiencing medical complications. "What we had, we could put towards food and the truck payments and insurance and health things I was dealing with."
Millions of Americans have more money to spend since they fell delinquent on their mortgages amid the worst housing collapse since the Great Depression. They are staying in their homes for free about a year and a half on average, buying time to restructure their finances and providing an unexpected support for consumer spending, which makes up about 70 percent of the economy.
So-called "squatter's rent," or the increase to income from withheld mortgage payments, will be an estimated $50 billion this year, according to Michael Feroli, chief US economist at JPMorgan Chase & Co. in New York.
Bill Bonner,
for The Daily Reckoning
Thursday, 12 May 2011
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