Pete Peterson talking sense

Peterson is another old fashioned rich businessman from Nebraska with some solid perspective on the challenges that we face as a country.



Here is some more interesting commentary from the greatest economist alive-- Bob Shiller
http://www.ritholtz.com/blog/2008/11/shiller-crisis-may-run-for-years-and-years/

Warren Frank--a great Marine

Things may be going well in Iraq, but that still doesn't make me feel any better about the situation. Another Marine I knew has died in Iraq.

Warren Frank and I first met at the Infantry Officer Course (IOC) in Quantico, VA. He was in my platoon at IOC and at times we were assigned to the same fire team (four man group). My greatest memory of Frank was during a training evolution at Twenty Nine Palms training. Frank was assigned as the fire team leader for our machine gun section. We spent the entire day hiking our weapons and ammo to a hill on the training grounds from which we would provide suppression fire for the rest of the platoon. Once we reached the hill and set up our position everyone wanted to roll over and die. Frank immediately found a way to put us in good spirits. He first pulled up his shirt and showed his tattoo of an American flag on his stomach and said, "oohrah!" Everyone on the our small team laughed and tensions relaxed. Next Frank went into a history of his life at the Citadel. I can't even remember the details of the stories he told, but I do remember one thing: I have never laughed so hard in my life. I remember laughing so hard that my sides hurt and my cheeks hurt--all the pain of dragging machine guns through the desert and up hills became a distant memory. Even though Frank was our peer, at that point he was our leader and the guy who eased our minds and prepped us for the mission.

Sad to see another GREAT man, Marine, and American pay the ultimate sacrifice...


I will post pictures of Frank during IOC when I get back to my main computer in Chicago.

http://patriotguard.org/Forums/tabid/61/postid/1028809/view/topic/Default.aspx

http://www.defenselink.mil/releases/release.aspx?releaseid=12375

http://www.militarycity.com/valor/3839838.html

The doghouse

http://bewareofthedoghouse.com/videoPage.aspx
Here is a ploy by marketers...clever...but dangerous :)

Silly solutions to the financial crisis

Sometimes I wonder if common sense gets trumped by confusion/details/thinkingtoohard

Here are the supposed 'fixes' to the financial market:

1. ban marked to market accounting

-how can this possibly be a good idea? We need transparency, honesty, and integrity in this market these days. The last thing we need to do is ban something that forces the banks to tell the world that the assets they hold are HUGE TERDS.

simple example: You are going to give a loan to a bum on the street who has a basket of old clothes and other goodies he has found on the street. In assessing how much money you want to loan the bum you have to see how much his basket of crap is worth. One option is to ask around the block and see how much people are willing to pay for his junk (this would be marked to market accounting). The other option is to let the bum tell me how much his crap is worth...who in their right mind is gonna believe the bum? Especially if he tells you his basket of junk is worth 5x what the market will pay!!!

2. Buy up assets that nobody wants to buy and then tell the public you plan to make money

-This is one of the silliest things I've ever heard. The government proposed (at one point, this may be off the table for now) to buy toxic assets that nobody in the private sector wants to buy and then claim that they will make taxpayers money over the long haul. Sure, maybe in the future they will turn positive, but if they were such a great deal, why did every single hedge fund manager, mutual fund manager, and investor on the planet decide these assets weren't worth buying???

3. Basing decisions on where the hockey puck currently sits and not anticipating where it's about to go.

-Futures markets, long term pricing trends, and many professional economists concur that housing prices need to fall another 15-20% on average. All the solutions on the table don't factor in this very real possibility. Of course, once this reality is factored into the equation the bailout numbers soar into the trillions, and politicians don't want to reveal that possibility; however, as a taxpayer I WANT TO KNOW THIS REALITY so I know the idiots in the government are gonna find a solution once and for all and aren't going to be coming back every few months to ask for more bailout money!

Crazy marlin

Fish really aren't that bright

NFL? Rhodes Scholarship? Neurosurgeon?

this guy is really motivating.
http://www.nytimes.com/2008/11/23/sports/ncaafootball/23rolle.html?ref=education

Buy America's small companies. I am.

If you aren't involved in the market these days you are really missing out on one of the greatest real-life dramas ever witnessed. Win, lose, or draw, I'm having a lot of fun!

I pointed out some of my issues with Buffett's 'Buy America. I am' sentiment. Here's the post.
The basic idea in that post is that there is a good shot at great depression 2.0 and perhaps worse, however, market commentators disregard this possibility. The idea that you can tell people to buy America just because it's always been a good buy in the past is dishonest and shows a lack of appreciation for black swan type events and an under reliance on the history of nations.

A more honest way for market commentators to present their statement is as follows: 

"I recommend you buy the market at the current price because I believe the market is pricing in a XYZ% of collapse, but I believe the US economy will return with a probability higher than XYZ%, and therefore I think buying the market is a good bet." 

If presented this way, it would ensure people understand that buying the market IS NOT RISKLESS--even over the long-term. I think it is reckless for Buffett and other market cheerleaders to make statements that essentially say, "buy the market because it never goes down over the long term." Inherent in this statement is that there is no risk in buy-and-hold long term investing--this is simply not true.

So...all that said, I think the DOW and SP 500 are still fairly priced and perhaps overpriced given the probabilities of depression; however, the Russell 2000, which represents smaller companies, is already pricing in a major recession and perhaps a depression!  

I think there is a decent shot of us falling into great depression 2.0, but its definitely not a guarentee--we still got a lot of 'hidden aces' up our sleeve that could be used to save us from the abyss. Even so, I think small stocks have priced in this risk--and then some! 

Buy America's small companies. I am.

The carmakers suck

http://mjperry.blogspot.com/2008/11/should-we-really-bail-out-7320-per-hour.html

Here's an idea: next time your employees band together and fight for wages/benefits that are above competitive market rates remind them that over the long-term it will drive you out of business.

The plan ahead for the carmakers is easy:

bankrupt, reorganize, and emerge under a model more akin to Honda or Toyota.

The biggest argument against this is 'a bankrupt GM will scare car buyers.' Here's my response: THE MONEY YOU LOSE EACH QUARTER IS GREATER THE VALUE OF YOUR ENTIRE BUSINESS! hint hint GM, nobody expects you to be solvent anytime soon, if ever--you are already bankrupt for all intents and purposes!!! Whether you stay with your overpriced, inefficient systems, and have the government subsidize your efforts, or you go bankrupt, reorganize, and limit the cost to taxpayers, car buyers are not going to see a 'bankrupt GM' any different from a 'pile of crap, government sucking car company.' In fact, my guess is that GM will actually be worse off if they become a government welfare recipient. I know that I will personally refuse to buy a GM car if it feels as though they are screwing me over. If they 'man-up' and credibly change their ways going forward, and stop leaning on the government as their savior I think they could spin this as a way to convince the American public that the US carmakers are organizations American's should support.

Below is the carmakers 'scare the world' video that attempts to convince us that bankrupting the car companies will send us into a depression. Here's another flash update: WE ARE ALREADY SET TO GO INTO THE GREAT DEPRESSION! Ooh-rah! Now everyone can be frugal like me and I won't have to feel bad about living below my means--maybe I'll be popular...yipee!!

Common sense trumping the "experts"

This is one of the more telling stories in the financial markets. Watch this video debate between Art Laffer (the 'expert') and Peter Schiff ('the common sense guy'). It's amazing how wrong Laffer is in all of his predictions and estimates....


Here's another video of Laffer talking about the "amazing" bush economy


...and yet, now that we are in the middle of the very crisis he did not even come close to aknowledging, he now has articles on "The End of Propserity" http://online.wsj.com/article/SB122506830024970697.html and a book about the end of prosperity.

I'm turning our hedge fund into a bank holding company

Here is the application for applying for access to the TARP. I figure everyone else is looking for a freebie--why not me!!!!!!!!!!!!!!
http://www.ustreas.gov/press/releases/reports/applicationguidelines.pdf

Larry Summers didn't say men are smarter than women..

Clarification for everyone who claims Summers said 'Men are smarter than women.'
http://mjperry.blogspot.com/2008/11/larry-summers-continues-to-be.html

here is the source

Happy Marine Corps Birthday

http://www.marines.com/main/index/winning_battles/history/missions/founding_of_the_marine_co

Time to bargain for a bigger stipend

Booth sends 300mm to our b-school.
http://www.chicagotribune.com/business/chicago-u-of-c-business-school-booth-nov06,0,1746880.story
pretty cool.

Great Depression 2.0

Update: I just found out they now have 3x ETF funds, or funds that match 3x a particular index...they can't be serious.
http://finance.yahoo.com/q?s=bgu
So last night I was reading this book "The Great Crash: 1929" for the second time. The similarities with the fundamental issues (high leverage in bubble assets) in today's economy are scary similar.

1.
THEN: Back then the Fed was lending out cheap money (similar to past 5 years).
NOW: The Fed over the past 5 or 6 years lent out very cheap money.
(This is GOVERNMENT INTERVENTION for the record--damn you Greenspan for giving the Senate baffoons a soundbyte that FREE markets failed...the markets never were free!!!!!!!!!).

2.
THEN: Individuals and businesses started thinking that stocks were the asset that could not drop in value
NOW: Housing would never go down because population was growing, land is fixed, blah blah blah.

3.
THEN: People borrowed more and more money from the banks to leverage up their position in stocks. The banks, who could borrow from the fed for 2-3%, were happy to turn around and lend it out to stock speculators for 6 or 7% because the loans were essentially risk free. The banks reasoned that margin loans were risk free (almost) because they could always liquidate the stock position to cover their loan.

NOW: This time around the banks thought mortgages were relatively risk free, because there was a home backing up the loan and they could always rely on the collateral to save their ass.


4.
THEN: Some people realized that the FED's policy of low interest rates was causing a huge bubble in stocks because they witnessed the bankers clamour to borrow cheap and lend high. The minute politicians or regulators tried to do the right thing, they were berated for treason (a serious threat back then!) or trying to 'kill' the American economic engine.

NOW: Plenty of people warned of the bubble in the housing market and other assets and suggested raising FED rates, but again, people bitched because it would 'kill' the economic engine.

SIDENOTE: Notice how in both cases it was a GOVERNMENT intervention that caused a market failure? If banks were forced to compete for funds and the FED wasn't there to lend them infinity at any rate it would have naturally curbed lending practices because as more people wanted to borrow, the rate would go up and curb demand...but alas, we want to blame the 'market' for screwing this up...stupid...


3.
THEN: Wall Street came up with the concept of the investment trusts, which would pool a basket of stocks (basically a closed end fund). They would then sell this package to investors as a low-risk way (high diversification lowered the risk according to the rhetoric of the day) to invest in stocks, which 'always' went up.

NOW: This time around Wall Street packaged mortgages into pooled products and told everyone that they are low risk because the underlying assets are diversified and uncorrelated.

4.
THEN: Wall street used leverage within the investment trusts to buy stocks, levered investment trusts were then bout by speculators who used leverage to buy the investment trusts. What you ended up with was levered, levered stocks.

NOW: This is similar to the CDO squared, derivatives, Credit default swaps, hedge funds, private equity buyouts, and other insane levered products we have today. Easy money, brings easy leverage.

5.
THEN: Eventually, stock prices were sustaining a ponzi scheme that Wall Street was proud to accomodate. For every product they could sell, and for every margin loan they could lend--they were making dough. It was a perpetual money machine as long as the FED kept rates low and the cost of borrowing from the government stayed put no matter how much you borrowed (supply/demand principles don't apply).

NOW: For every mortgage product Wall street could sell, and every mortgage transaction mortgage brokers could transact, more money was greasing the system. The housing ponzi scheme grew and grew.

6.
THEN: The bubble in stocks eventually burst, and the fallout in leverage created the massive shockwaves that annihalated the economic system.

NOW: This time around the housing bubble burst (worldwide and almost simultaneously) and the leverage that was used has created a massive shockwave that is annihalating the system.


Differences:

THEN: The 'solutions' the government implemented were poorly executed and did not fix the problem.

NOW: People say we are smarter and more sophisticated this time around...fine, for arguments sake I'll agree with that statement even though it is probably not true.

2.
THEN: Leverage was pretty insane, but it was focused on stocks.

NOW: Leverage is stratospheric, in every asset class, and global! This time it is homes, hedge funds, private equity, corproate lending, consumer credit cards, commercial real estate, etc. The total leverage in the system this time is probably multiples of what it was back then.

3.
THEN: The common reason cited for the Great Depression was the lack of initial government intervention and lack of liquidity in the system that allowed firesales and the house of cards to come crashing down in dramatic fashion.

NOW: Now, instead of letting market prices move to their pathetically low value, we are throwing TONS of money at the problem and letting the government intervene to try and save the world. Okay, so this may not let asset prices fall as much, but it will increase real rates long term (if they just issue debt) or it will end up in insane inflation (if they print money). Higher long term rates and/or inflation are not good alternatives.

Conclusion:

If history is any guide, we are likely entering the second Great Depression. That is a scary thing to contemplate, but I think it's a lot more likely then people realize. The "government can save the day" philosophy that is overtaking America is only worsening the problem. Every day a new constituency is claiming they are vital to America and they need more money and a handout. And it looks like we are actually giving these people/industries a seat at the table. This is a sure way to waste taxpayer money, prolong a recession, and warp market prices and incentives.


...but not all is lost...

Solution:

I see two possible solutions to this problem (this is actually the 'Seager/Gray' plan, which is VERY preliminary).

1. Invite anyone in the world with a Ph.D. or M.A in science or math a free pass into America and a tax credit, or similar incentive, if they put 20% down on a home. This will increase demand for housing, soak up supply, fundamentally rectify the root of our problems, and will flood America with productive, GDP generating individuals. We should also allow GM type companies to fail, sell the assets to non-unionized, efficient producers like Honda. Honda can give jobs to former GM/ford employees, but they will not have the high wages, healthcare, and sweet pensions that bankrupt GM in the first place. Union workers can either take market wage or go to Mexico--their choice.

2. Another solution is more drastic, but actually pretty good. We need to dig, dive, search--whatever the hell it takes--to use our natural resources, which are bountiful in America. We are blessed to have some of the greatest resources in the world and this is a huge source of wealth we could use to shore up our national balance sheet. We could save this for a rainy day, but its pouring at the moment and it's time to use it. At the same time we need to create some sort of chaos in Iran or Saudi Arabia so their supplies are restricted (0therwise, we won't make much money since selling resources in a recession isn't a profitable idea). This sounds drastic, but it would be the only method of ensuring resources prices stay high. We would essentially become the new OPEC and put a lid on Middle East Oil. It would also be poetic justice. After being beholden to the Arabs for all these years, who gouge us and control supply, we will control their supply, and sell our own resources to the world. We'll get rich and raise capital to save our asses, and they will no longer have influence. Awesome.

Anyway, I hope all of this is overblown, but I'm worried that history may repeat itself. Who knows...as Robert Shiller says, "forecasting humbles everyone."

Pinhead--Dick Morris

I try and watch O'Reilly Factor every night to get a dose of "fair and balanced" from the right. I do this primarily to counter most of the media outlets I watch and read from the left, which also claim to be "fair and balanced." I like O'Reilly--I think he is a good interviewer. What I have a problem with is some of the idiots he has on his show.

Case in point: Dick Morris.


I just heard him say that the stock market fell by nearly 500 points today because Obama is the President-elect. This is total nonsense. In-trade and other markets already earmarked Obama to win the election long before the actual election (the probabilities of Obama winning were nearly 90%). This was baked in the cake already. While there may have been a very small "Obama" effect upon the realization that Obama actually won, the real reason the market was crushed today was because of economic data released that was absolutely horrific...

Of course, if the market really had foresight to see the economic times ahead mixed with protectionism, taxes, market manipulation, and bigger government, it would have dropped another 30-50%. My guess is that the upcoming pain will probably be blamed on Obama as well; however, the person to blame for the next drop in the market will be the same people who voted for McCain and Obama--the American people. Overspending, undersaving, little sacrifice, and "easy" money attitudes for 20 years have created our situation. "Good" times ahead regardless of who is President. Nobody I know can grow wealth on trees.

My wife is smarter than the Gray boys

http://gregmankiw.blogspot.com/2008/11/larry-vindicated.html
It looks like Katie (a History Ph.D.) is smarter than me (business, but arguably Economics), cliff (business), or Ty (Doctor).
ha!

Adios