 | | The Daily Reckoning | Thursday, October 13, 2011 |
- And the Nobel Prize in Economics goes to...oh, who really cares?
- Four specific lessons every truly successful investor already knows,
- Plus, Bill Bonner on Irish-style austerity, a nagging weakness for old stones and plenty more...
-------------------------------------------------------
Why the warning behind this image could...
“Forever change the way you think about the stock market...
Open your eyes to what you can and can’t expect from the United States government...
And even change the ease at which you’re able to buy and sell things...
Click the image play button to first learn the warning...and some simple ways to prepare for the uncertain times ahead.
|  | | | Claiming to Know the Unknowable | | Winning the Nobel Prize by Way of Fatal Conceit | |  | | Joel Bowman |
Reporting from Buenos Aires, Argentina...
“This is used very widely. Finance ministries, central banks, universities...all over the world.” — Tore Ellingsen, member of the committee for the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.
That was all we needed to know about the work of Americans Thomas Sargent and Christopher Sims, who were Monday awarded the Nobel Prize in Economics for work, according to the newswire, Reuters, “that governments use to gauge the effect of policy.”
For almost four decades have “finance ministries, central banks [and] universities...all over the world” been using the pair’s models. And here we are, in 2011...after a lost American decade, standing atop the largest, stinking debt pile known to history and with an economy teetering on the precipice of imminent collapse. Bravo fellas!
“Central to research the two conducted separately in the 1970s were efforts to model and quantify cause and effect in economies,” explained the wire story, “including the complex interplay of state and central bank policy with the expectations of people and businesses.”
There you have it, Fellow Reckoner...a couple of very smart guys who used complex models to measure how central banks, central planning authorities and central policy makers’ decisions impact market expectations. An exercise in what Hayek called “the fatal conceit,” the arrogant belief that anyone — whether armed with calculators, pocket protectors and a turbo-charged intellect or not — can model and understand something as complex as the global economy...and then write and/or advise policy designed to move it in the desired direction.
Alas, the Hayeks and Hazlitts of yesteryear are in short supply today. Now we have Krugman at The New York Times and Martin Wolf over at the FT. And Bernanke at the Fed...Geithner at the Treasury...and Obama in the White House. What mortal transgressions induced this wretched luck?!
“One of the main tasks of macroeconomic research is to comprehend how both shocks and systematic policy shifts affect macroeconomic variables in the short and long run,” the Nobel Academy waffled on in a typically lofty statement. “Sargent’s and Sims’s awarded research contributions have been indispensable to this work.”
The prize, you will notice, did not go to any of your Daily Reckoning editors. Not to Bill. Nor to Addison. Nor to Eric. It is true, Fellow Reckoner, that these three gentlemen have been ahead of the curve in calling every major financial and economic bust up of the past decade — from the tech bubble through to the housing bubble and, more recently, the ongoing, debt-induced (largely central bank caused!) state and sovereign meltdowns on both sides of the Atlantic.
But, unlike Sargent and Sims, these reckoners formulated their predictions based on the ineffectiveness of government policy. Through that lens, the crack up booms and subsequent busts were plain to see.
If only our fellow reckoners published a book or two, documenting their findings for the record!
Oh wait...here’s one...and another...and yet another.
Oh well...there’s always next year.
As it happens, two of our three in-house, non-Nobel Prize-winning economists are in Baltimore for an emergency Safety & Survival Summit right now...along with a string of other non-Nobel-decorated analysts, including Chris Mayer, Alan Knuckman, Byron King, Patrick Cox and our newest Agora Financial edition, Michael Pento.
We’ll bring you updates from the conference as it unfolds. And, for those of you who enjoy listening to the entire presentations by way of MP3, we’re making those recordings available next week. If you want to put your name down for a set, you can do so today here. The price jumps 40% the minute the conference finishes (tomorrow afternoon), so now is a good time to snag one.
| | | | Only 62 People Know Exactly Why These Four Companies Could Change the World |
Now you’re #63 “on the inside” — and you’re on the verge of raking in lasting wealth.
This could go down in history as the story of our era. Click here for all the details.
|
| |
| | The Daily Reckoning Presents | | The Great Crash and Beyond | |  | | Chris Mayer |
The worst quarter for stocks since the first quarter of 2009 sent me back to the dusty archives of finance. Amid old tomes, I searched for what I might learn from the dark markets of years past.
I found a collection of articles called The Great Crash and Beyond. They date from 1979, put together on the 50th anniversary of the crash of 1929. Only a handful of years before, the market fell by half (1973-74). Inside, I find writers reflecting on the mosaic of Wall Street history and the continuity of markets across the time.
There are many useful ideas here to keep in mind as our own potential collapse unfolds. If we did suffer another crash, it would be the third in little more than a decade, following on the heels of the 2000-02 and 2007-09 meltdowns. (As I write, the market is down about 17% from its highs on the year.) A few of my favorites follow.
Investors place too much emphasis on economic forecasts. These forecasts are too often in error. They repeatedly miss economic turns and predict turns that never occur. Too often, forecasts are mere extrapolations of current trends.
One humorous example comes from Shepherd Mead’s How to Get to the Future Before It Gets to You. He imagines going back in time to 1860, when horse manure was a health problem in New York City streets. Manure averaged 1 inch in the middle of New York City roads. Ten years earlier, it was half an inch. Therefore, using prevailing growth rates, one would forecast about 170 feet of manure in the streets by 1970.
Such a forecast might lead to investing in horse oat companies. Heeding such a forecast would lead the investor to ruin because it misses that: (1) people would change their behavior well before it got to that point; (2) horses would not exist in such number to produce the required manure; and (3) something might replace horses (i.e., cars).
It sounds ridiculous, but that is the point. People make and believe similar forecasts all the time in markets. Surely, you’ve come across, for instance, forecasts about the world running out of some resource (like oil). But no pattern is perpetual. “The more widely held the belief in the persistence of a pattern,” Arthur Zeikel tells us, “the less likely it is to continue.” (Zeikel was the head of Merrill Lynch’s money managers at the time). His rule of thumb here is useful: If an expectation is taken for granted, then it should be questioned all the more.
As historian Barbara Tuchman wrote, “You cannot extrapolate any series in which the human element intrudes. History, that is, the human narrative, never follows and will never follow the scientific curve.” Human beings are an adaptive lot. Investors often miss the countervailing forces that work to undo trends of all kinds.
Investors put too much weight on their own most recent experiences.Sometimes market rhythms have less to do with economics than psychology, as author Peter Bernstein explained. The great bull markets are never made by investors still smarting from memories of disaster. And the sickening drops of great bear markets are not made by “investors whose happiest hopes are daily being realized.”
“In short,” Bernstein sums up, “collective memories — or lack of memories — of the participants are the ultimate determinants of those key buying and selling opportunities that investors dream about.” The 1929 crash and its aftermath soured people on the market for a quarter-century. Conversely, the steady run-up in stocks from 1982 had people believing in “stocks for the long run.” This helped fuel the manic 1990s. In both cases, ingrained memories ensured investors would miss the big turns.
I think this idea helps explain too why the market swings in 2011 have been so wide. People have 2008 fresh in their memories. They are afraid it will happen again. It makes for skittish investors. Such fears, too, kept many investors on the sidelines in the epic rally from the March 2009 bottom, in which stocks nearly doubled.
The main advice here: Understand that, as human beings, we overweigh our recent experience, which makes us susceptible to missing out on change.
There are always too few true investors. As money manager Robert Kirby wrote, “Today, we make it look as though we are ‘investing’ through our extensive research and computers.” But at the end of the day, many people still flip stocks based on “recent price behavior, rather than a careful assessment of what the company’s future operating performance is apt to be.” Some things never change. This is evident today, in which the average holding period for stocks is scarcely eight months.
Kirby also said you should think about investing in stocks as you would think about investing in real estate. Then you would focus on the asset itself and the return it generates. Cash flows must be paid out or invested wisely. Otherwise, there is little benefit in owning the stock. Also, if you treat stocks like real estate, you know you can’t flip a stock to someone else so easily.
(I know this example is ironic, given the recent blowup in the housing market. It was ironic when Kirby used it in 1979, too. And he knew it. “Growing speculation in real estate is beginning to violate all those time-honored investment rules,” he wrote. Kirby notes, with disapproval, the sale of Aspen condos for a net return of 3% annually to the buyer. This when Treasuries paid 9%, and Fortune 500 companies sold for 6-8 times earnings.)
“When you buy a nonmarketable asset that offers a limited application of the greater fool theory (selling it to someone else at a higher price later on),” Kirby writes, “you have to focus on the return that asset is likely to provide internally, should you have to retain ownership for an indefinite period.”
I love this idea, because I think if people thought of stocks as real estate, they would be more careful about what they bought. They would think longer-term and be better owners. Their results would be bound to improve.
It’s all about the price paid. Bernstein makes a fascinating point about this. If you bought stocks in 1924 and held them through thick and thin until 1936, you would’ve enjoyed a 7.6% annual return, before taxes and not including reinvested dividends. “Meanwhile,” Bernstein writes, “the cost of living had fallen by 20%.”
That’s smashingly good with the Great Depression in the mix. But it all depended on when you bought and when you sold. In 1924, stocks were still cheap, and in 1936, they were dear. And that made all the difference.
But alas, human nature will never change. Most people buy stocks when they are strong and high, and sell them when they are low and weak. Reflecting on a long history of booms and panics, Zeikel wrote: “It was true in 1870, it was true in 1929, it is true today [in 1979], and it will be, to be sure, true tomorrow.” Indeed, it still holds.
This is not bad news for you, however. How so? Here we give the last word to Bernstein. “Inefficiency is good news for investors,” he wrote. “Inefficiency, after all, breeds opportunity.”
Regards,
Chris Mayer
for The Daily Reckoning
Joel’s Note: As mentioned above, Chris is in Baltimore for our emergency Safety & Survival Summit right now...along with a string of other non-Nobel-decorated Agora Financial analysts. His speech, titled “Stocks...in case the world doesn’t end,” ought to be a cracker.
If you’d like to secure an MP3 recording of it — along with the rest of the presentations — here’s an order form link. They’ll be released next week...but the price goes up by 40% when the conference finishes, tomorrow afternoon. If you want to lock in that discount, better grab one today.
| | | | | Bill Bonner | | Handout Nation | |  | | Bill Bonner |
Reckoning from Dublin, Ireland...
The Dow rose 102 points yesterday. Gold rose $21.
Nothing to get excited about...so let’s move on.
“Ireland is the only country that has been able to pull off any significant amount of austerity,” said Chris Hunter, an analyst with the Bonner Family Office here at its Irish headquarters.
“And it seems to be working. The Irish are remarkably passive about it. We haven’t had any riots. Not even a lot of complaining.
“I guess we realized it was a bit of a lark all along. I mean, building big houses all over the country. There was a time when property in Dublin was more expensive than property in London. We knew it couldn’t last. We knew we’d have to pay for it someday. So, here we are...and we all seem to accept the fact that it’s going to be difficult.”
We drove up to Kilkenny to have lunch with economist David McWilliams. He gave us a simple explanation of the European economy:
“If the Germans expect us to continue to borrowing money from them so we can buy their big cars, they’re going to have to accept the fact that we won’t always pay them back. It’s going to be like it was in ancient Israel. Every 50 years, debt was forgiven. It was a jubilee year. We need to do something like that.”
Later in the day, we went to look at a house for sale. Your editor has a weakness for old piles of stones. Especially if they are in bad shape. This qualified on both points. It was an Italianate mansion built in 1841. And it is falling down. The wind and rain blow through the broken windows. Dry rot eats through the floor joists. Horses trot over the once-gracious lawns.
Vandals and thieves have attacked the houses. Fireplaces are missing. Upstairs, they tore up the floor to take out the lead pipes. And in the front, someone is using the front steps as a stone quarry. Huge slabs of stone have been stolen. Anything that could be easy sold has been picked up and taken away.
“What price would you put on something like this,” we asked a local architect.
“Well, three years ago you could have gotten millions for it. There were plans to turn it into a hotel and a resort. But now, it’s not worth anything. The owner went broke. It’s in the hands of the bank. And the banks want to get rid of these places as fast as possible.
“You can see why. It’s falling down. They stole the lead off the roof so water is getting in. Another winter and it will probably not be restorable. And right now, it’s actually worth less than nothing. It’s a liability to the owner because he has to spend money to protect it. I’m sure you could get it for nothing. But if I were you I’d put in a bid for less than nothing. I’d make them pay me to take it off their hands. Because it is going to cost a fortune to fix it up.”
Is your editor fool enough to fall for another old fix-up special? He’s done it before. Several times. And he’s lost money almost every time. Will he do it again? Stay tuned!
Yesterday, Jose Manuel Barroso, president of the European Commission, lauded Ireland for having stuck to its austerity program. Ireland seems to be getting back on its feet.
But wait. What’s this? The WSJ reports that Ireland will have to cut another $5 billion:
DUBLIN — Ireland’s Fiscal Advisory Council Wednesday said the Irish coalition government will require four billion euros ($5.5 billion) of budget adjustments to meet a key 2012 target demanded by its bailout lenders, adding the country ought to consider even deeper cuts to impress financial markets.
The European Union and the International Monetary Fund lenders require the government reduce a budget deficit of about 10% of gross domestic product this year to 8.6% in 2012. To reach that target, government ministers have said it will consider “at a minimum” €3.6 billion in spending cuts and tax rises in its 2012 budget.
However, slower-than-expected economic growth will require an additional €400 million in adjustments for 2012 and total cuts of €4 billion, the fiscal council said. The council was set up to provide independent non-binding advice to the government after the country last November needed an EU and IMF bailout when the cost of rescuing its banks got too much to bear.
And urging the government to cut even deeper, the council said cuts of as much as €4.4 billion should be considered in order to pare the budget deficit to 8.4% of GDP in 2012. It urged the government to also exceed its bailout targets in future years by reducing the deficit to only 1% of GDP through 2015. That is much lower than the nearly 3% target set by the EU and IMF. So the knife goes deeper. How long before the Irish howl?
And more thoughts...
Zombies to the right of us. Zombies to the left. Zombies everywhere. When Ronald Reagan first entered the White House only 30% of US households were supported by government benefits. Then came the Morning in America years — which were supposedly a lurch to more free-market policies. And then came the Bush years...the Clinton years...the Bush II years...and now the Obama years. And year after year, Republican or Democrat, there was a constant...or near constant: more and more zombies. The only exception was a brief period at the end of the Clinton years. In all other years, the zombies multiplied. And now we find that nearly half of all households get some form of government handout. The Wall Street Journal reports:
Families were more dependent on government programs than ever last year.
Nearly half, 48.5%, of the population lived in a household that received some type of government benefit in the first quarter of 2010, according to Census data. Those numbers have risen since the middle of the recession when 44.4% lived [in] households receiving benefits in the third quarter of 2008.
The share of people relying on government benefits has reached a historic high, in large part from the deep recession and meager recovery, but also because of the expansion of government programs over the years.
Means-tested programs, designed to help the needy, accounted for the largest share of recipients last year. Some 34.2% of Americans lived in a household that received benefits such as food stamps, subsidized housing, cash welfare or Medicaid (the federal-state health care program for the poor).
Another 14.5% lived in homes where someone was on Medicare (the health care program for the elderly). Nearly 16% lived in households receiving Social Security.
High unemployment and increased reliance on government programs has also shrunk the nation’s share of taxpayers. Some 46.4% of households will pay no federal income tax this year, according to the nonpartisan Tax Policy Center. That’s up from 39.9% in 2007, the year the recession began.
Most of those households will still be hit by payroll taxes. Just 18.1% of households pay neither payroll nor federal income taxes and they are predominantly the nation’s elderly and poorest families.
The tandem rise in government-benefits recipients and fall in taxpayers has been cause for alarm among some policymakers and presidential hopefuls.
Benefits programs have come under closer scrutiny as policymakers attempt to tame the federal government’s budget deficit. President Barack Obama and members of Congress considered changes to Social Security and Medicare as part of a grand bargain (that ultimately fell apart) to raise the debt ceiling earlier this year. Cuts to such programs could emerge again from the so-called “super committee,” tasked with releasing a plan to rein in the deficit.
Republican presidential hopefuls, meanwhile, have latched onto the fact that nearly half of households pay no federal income tax, saying too many Americans aren’t paying their fair share. Of course, this only refers to those who get “benefits” from the feds. Millions more live directly on salaries paid by the feds. And then there are the millions more who live on salaries paid to them because of federal subsidies, tax angles, legal requirements and so forth. Think of the lawyer working for Goldman Sachs whose job is to keep the company from running afoul of the SEC. Think of the paper shuffler working at the University of Maryland whose job only exist because the feds subsidize education. Think of the private contractor getting paid billions to build the biggest embassies in the world.
They are all zombies...all doing things that probably shouldn’t be done at all...all draining the economy of real wealth.
And there are so many of them that the mathematics of democracy have now turned against it. More zombies than productive citizens. More people with a stake in further federal spending than people with a keen interest in stopping it.
And so, the feds borrow. The feds spend. And more and more of the real economy shifts away from real production...and towards the zombie economy...of pretend work and make-believe production.
Regards,
Bill Bonner
for The Daily Reckoning |
|
|
|
The Daily Reckoning U.S. Edition
Posts
