economics
The Collapse of the Dollar and How to Profit from it
December 24, 2008 - 01:38 — bhugaOkay.
A pretty easy read, in which the Goldbug argument is pretty plainly laid out. 200 pages, said quickly: only smudging the gold with your own grubby fingers is good enough to save you from the government.
The underlying causes, which I agree with, are pretty well laid out. There are some conspiracy theories about the fed 'manipulating the price of gold', which are generally about the fed secretly selling gold to make the dollar look better. They are supported by a few snips from meeting minutes in 1995. I'm skeptical: I just don't think that the markets are that stupid. If they are, then isn't this theory complaining that the price did not rise fast enough and become a bubble, when more people should have realized it needed to happen right away?
Whatever. I'm no fan of the fed, but this is way into attributing to malice what can be attributed to serendipity.
At any rate, like most goldbugs, they highly recommend getting your hands on your gold up close and personal. No ETFs, pooled accounts, or gold certificates for a true gold-hoarder. They even have snips of legalese from the biggest silver trust ETF to prove how nefarious it is. What, they can suspend the creation/redemption of baskets if they are legally prevented from selling silver? What's the difference from having it on hand in that case? I won't be able to buy bullets in shady metals deals from all of my goldbug friends? Whatever.
Gold is money. But let's have a little perspective. Gold miners are not an asset class for diversification. Read Terry Coxon.
I lived through a brief bit of goldbuggery myself, in which I had to physically restrain myself from purchasing a shack on the bayou down around my hometown, get me a safe full of gold and shotgun shells, and spend my days rocking on the porch while the world collapses outside. I think this is a human cognitive bias.
I believe that this emotion is the same, on a large, heart-clutching scale, is the same one that makes humans make bad decisions about loss. Very few people would purchase, for $100, a 50% shot at $220, even though that 50% shot is worth, mathematically, $10. Meanwhile, a $1 lottery ticket worth $0.15, but with a tiny chance at $35k, is snapped up wholesale. Studies have confirmed it, over and over: our brains are broken. We do not understand risk. We fear loss much more than we appreciate the chance for gain, even when they are equivalent. Further, we fear much more things we have no control over--such as currency collapses run by foolish economists with voodoo formulas that have failed as many times in the last 100 years as they have been tried.
So we're helpless against the possible loss of all of our wealth, supplanted by the comforting knowledge that the last few times this kind of thing happened, everyone was calmed by a soothing world war to clear the slate. A perfect storm for our monkey brains, but, I think, not for the rational mind.
The main reason for this is that I don't think there's much that can be done if it comes down to owning physical gold. If you need physical gold, you need a gun, too, and I need to have bought a plane ticket 2 months ago. I fully believe that we're marching down a historical path that led to war 70 years ago, and I see no reason why that's impossible today. But it seems infinitely more sensible to me to be ready to run than to clutch at my wealth. If the world goes to shit, I will probably lose everything; I may not be able to get away in any case. I do not forsee scenarios in which clutching at my property does any better than accepting its loss. Shit happens.
I shall continue to invest as though the world will not come to an end (although more conservatively since Bernstein). I really need to figure out how to make the PP work when you don't know your end-game currency.
The Panic of 1907
December 23, 2008 - 20:15 — bhugaGreat.
This book is very well done--academic enough to satisfy my need for information, and enough flair of the characters involved to make a good yarn. It traces the banking panic of 1907, in which a few New York banks failed and caused a worldwide run on some institutions. It's the proximate cause of the creation of the federal reserve.
The book is important to free-marketers such as myself, as it shows that a world without a fed was not a rosy place. Bank failures and panics were common, especially before the fed, and this one, in particular, was handled by JP Morgan, who basically acted as the Fed. He put up enough of his own money, and more or less coerced the other banks and trusts to put up enough of their money, to save the system as a whole.
The story is the usual: a proximate cause, a credit bubble, and everyone wants their money at once. Some interesting points arise, however.
First, there's a lot of problems in a world where everyone has a central bank but you. One proximate cause of this run was the Bank of England's banning of American finance bills, which were paper that was exchanged for gold in London and brought to America and later converted back into dollars by selling pounds. This was essentially arbitrage against seasonal weaknesses of currencies, and harmless, but the BoE banned it in 1907 and the result was a shortage of money in the states (and an artificially strong pound). One can imagine how difficult it would be for an American bank to compete in such an environment.
The authors do a survey of literature and attempt to discuss what causes bank panics in the last third of the book. It's pretty striking how detached from reality most of the economics on this is. None address the issue that it's completely rational to try and get your money out of a bank in a hurry at the first sign of trouble: everyone knows it only has a small percentage of funds on hand. Instead, economists seem to believe that if everyone just behaved, it would all be okay. There are serious epistemological problems with a field that can believe a large-scale game of spanish prisoner will not be subject to occasional panic. This is to say nothing of the fact that banks all borrow short and lend long. In an equilibrium--what economists love to talk about but is impossible to achieve--this would be fine. But since life changes, this will simply fail every so often. Big surprise.
Austrians love to hate fractional reserve banking and the fed, and I'm generally with them. The fed has had a century to prove that it hasn't really helped a lick in dealing with the evil business cycle, and even if things sucked before it, it's time to get rid of it. But it's still important to remember why the fed came about in the first place. Combatively low interest rates by central banks make for a much more elegant and understated form of economic warfare, and we know how governments like war. Still, if I ran a country, I'd turn out my central bank overnight. My currency would appreciate a hundredfold overnight and my citizens would enjoy a dramatically improved standard of living. If the rest of the world wants to be so clever as to debase their currencies so that my people can take all of their useful goods, who am I to tell them no?
The Four Pillars of Investing
December 14, 2008 - 15:08 — bhugaFantastic.
I read this because I ran into a brick wall in a discussion with someone I work with. I pledged to read it so that I could more articulately defend why I disagreed with the concept of portfolio theory.
I got educated like a red-headed stepchild with this book. I had written off portfolio theory as bullshit, based on a few books that said the right things, but based them on unsupported axioms. This book does it right. There's a mountain of evidence here that I was wrong. Touché.
Berstein lays it all out, including a detailed list of human cognitive biases (my favorite kind of bias) displayed in investing. I had conquered most of them on my own, but lo and behold, there was I stared down by 'overconfidence', in big letters. Combined with the mountain of numbers in this book, I can now look at this and know my odds of choosing investments to beat capitalism itself for the next 30 years. To be concise, they are 'poor'. Although I did a very good job this year, I must humbly submit to facts, count my blessings that my first year messing with investments was such a critical one, having avoided huge amounts of potential losses, and submit to dullness.
Further, he goes to *great* pains to stress that most people have a lower tolerance for risk than they think they do. And, considering it, I do--my losses this year have occasionally been significant on an occasional trade, but never significant in terms of my savings. Thinking of how quick I am to take profits lest they be lost, I would not have had the fortitude to withstand a significant loss in a position that I know is correct (although really, I sort of did with gold, because I *know* that is correct). At any rate, there's very convincing data here. It's the same kind of reassurance that lets me get on an airplane.
I still have some disagreements. In particular, there's a contradiction within these 4 pillars: one is that you can't predict the markets better than the markets can. And the second is that markets occasionally go bonkers with despair or euphoria. It would seem logical that one could not predict the timing of bubbles, but one could make some intelligent decisions about them--say, by avoiding them entirely until after the bust.
But perhaps this is not such a contradiction. The book goes through great pains to note that 90% of returns are based on the choice of asset allocation, and much less related to the choice of individual securities within those asset classes. So perhaps it's okay to change the relative percentages of asset classes over time--he even mentions that daredevils might want to increase stock exposure after crashes. I'm not sure, though. Bernstein also recommends rebalancing every 2-5 years, which directly contradicts other, copious advice, which recommends it be done more or less as often it can be done fee and tax efficiently.
The biggest problem, though, are some macroeconomic concerns I still have. The dollar is going to lose a lot of value. That's not a prediction, it's a fact. So is the pound. So is the Euro. Realistically, the only currencies that are actually being used to purchase physical goods are the renminbi, the yen, and the won--even Brazil sells its oil for dollars. I'm not convinced portfolio theory will hold up in a reasonable way to the changing of the benchmark used to measure it. I have to think on that some more. I should be able to work it out for myself based on this book.
At any rate, this is probably the first book I would give to anyone saving $5000 for the first time. The bias bits and the history of bubbles are incredibly important.
I.O.U.S.A.
December 13, 2008 - 15:21 — bhugaMost excellent.
IOUSA is a companion book to the recently-released movie of the same name, which I, as a pseudo-dirty pseudo-foreigner, am not allowed to watch. It's a study of the national debt and what it means.
At this point, most of this is stuff I already know, thanks to good economics blogging and that kind of thing littering the landscape. However, what makes this book great is that 2/3 of it is actual primary source: interview transcripts, or sections thereof, made for the movie. They've interviewed a lot of the players involved: everyone from Greenspan to Forbes.
Reading interviews with these folks is quite impressive. I even got something out of reading an interview with Art Laffer, who's shown significant foolishness on youtube videos and been ridiculed for his simplistic Laffer curve. The interview shows him to be not so easily chastised...although it does not show him to be 'correct'.
The introduction is a pretty quick and accessible read, and I would recommend it to anyone who is just figuring this stuff out. It's just the beginning, of course, but it's well done. The truly damning numbers are elsewhere.
Original Debt
September 8, 2008 - 00:25 — bhugaThe US today explicitly backed all of Frannie's debt. All of it. Sovereign wealth funds in Asia are quite happy. I guess they would be, since this will delay the riots that should rightly occur in protest of the business model of taxing people so that they can invest their money in fraudulent American mortgage debt.
I, on the other hand, take a more grim view. Fannie and Freddie have outstanding bonds worth more than 5 trillion. How much of that is actually covered by their performing loans? It's utterly impossible to say, and the treasury, while admitting that there were not-quite-illegal accounting tricks to delay reporting losses, has neglected to mention how bad the picture really is. I wonder if they really know.
In case you're wondering what it all means, every American taxpayer is now on the hook for some $47,000. An undetermined amount of that will be covered by Frannie income. That amount does not include social security or medicare. Fully one-third of that $47k are these ridiculous Frannie MBS's. The percentage of that we can expect to be covered can't be estimated , since these now-public-property entities don't seem to have any meaningful reporting requirements.
Consider: My niece was born in April (woohoo!) She was born on American soil. This means she's American, and, adjusting for inflation, she can expect to be personally on the hook for more than $65,000 in federal debt the day she starts her first high school McJob at 14. Naturally, this applies whether she lives in the US or not. All of the things this money bought--bridges, roads, dead Iraqi children and, as of today, overpriced McMansions 110 miles outside of Phoenix--will all be crumbling into disrepair by the time she might want them (although I'm rather hoping she never really wants any dead Iraqi children; I never did).
My niece was born into Original Debt. If Original Sin is what dooms us to death, Original Debt is what dooms us to taxes--why shouldn't the two universal constants both begin at birth, after all? It worked for feudalism, after all.
Original Debt, like Original Sin, has its origins in the foolish actions of mankind, tempted by low-hanging fruit. Fortunately, it has no particular misogynistic connotations: today's batch of fools, for example, are balding treasury technocrats.
Original Debt is stickier than Original Sin. Original Sin requires an hour a week to fix, or to simply stop being catholic. My niece's Original Debt will require from 1/4th to 1/3rd of her every working hour, for life. And there's no converting: Americans who renounce citizenship are on the hook for taxes for 10 further years, and gaining citizenship elsewhere is not easy.
And just like Original Sin, Original Debt is not not a legal liability, but a moral responsibility. Many religions believe that intent is not as important as action. In that sense, my niece, at her first job, would be culpable for almost everything America has done in the last 40 years. She'll pay for wars that were fought before she was born. She'll pay for the uncomfortable retirement of, statistically, her very own 1.3 or so retired boomers. She'll pay for levees in New Orleans and bridges to nowhere, prisons to hold drug offenders and university research facilities, nuclear bombs and fusion research, drug enforcement helicopters in Columbia and, of course, speculator's homes in half-built subdivisions in Ohio. She'll pay the interest on the debt that financed all of these things, and her moral choices will, in sense, be thusly made for her.
It's arbitrary. It's unfair. Ethics aside, it's completely unrealistic to expect her or anyone else her age to pay off the debts we are running up today. We'll see how that goes, I guess.
The Long Emergency
August 15, 2008 - 02:27 — bhugaWhat drivel!
This one is just awful. The book is less a useful collection of information than a poorly-disguised rant about the author's personal dislike for big box stores, shopping malls, and in particular, suburbs. It's got all of the usual complaints I've come to expect from the anti-globalization crowd: wastefulness, ignorance, mass cultural disease. All at the hands of evil, autonomous corporations. All at the hands of insensitive American consumers. It's your fault!
The author's sole claim to fame appears to be a collection of writings bemoaning modern life. Here's a gem from the 'eyesore' page' of his site (the page is static html and appears to be updated monthly so that link won't be accurate forever; this entry is labeled 'August 2008'):
The [tatooing] activity taking place [in this shop], however, is a symptom of the growing barbarism in American life. Tattooing has traditionally been a marginal activity among civilized people, the calling card of cannibals, sailors, and whores. The appropriate place for it is on the margins, in the back alleys, the skid rows. The mainstreaming of tattoos (on main street) is a harbinger of social dysfunction.
If you want to say that, at least just say it. I'll disagree with you and move on. This book, though, is worth stopping to mock. It's a collection of pseudo-scientific claims proving the inevitability of the forthcoming disassembling of modern civilization, which the author is clearly looking forward to. The books subtitle is 'Surviving the Converging Catastrophes of the 21st Century'. The book is 300 pages. Of those, 70 are devoted to 'Living in the Long Emergency'. 40 more are devoted to a chapter on disease, water shortages, habitat destruction, and sundry other maladies. The rest are peak oil, done badly. He never really comes up with survival tips.
Huge portions of the book aren't really saying anything at all. They are just long, rambling descriptions of history with a tone that reaches condescending whenever our hapless forbears make another short-sighted decision to move away from focusing their lives anything 15 feet past their farm doors (that they built themselves, of course). I almost put this book down in about 5 different places; as it is, I skipped large parts of it; my time is better spent elsewhere. When I saw him paraphrase other authors I've read, and do it such that he completely missed their main points, I about lost it.
The author's personal plan for surviving the forthcoming apocalypse is to live in his upstate new york small town, with his woodworking tools and his buckshot, and to start a local newspaper. Life in the future without oil will be intensely local, you see, and he wants to be ready to cultivate that.
Of course he does. In fact, every one of his 'the sky is falling' dangers is accompanied by a prediction with a curious silver lining about community. Oil too expensive to ship clothes from China to Atlanta? Not to worry--the local textile industries will thrive again, even though they were already driven out of existence based on their own inefficiencies. We'll all become farmers again, teaching us the lay of the land. Kunstler takes time to worry that we've lost our cultural knowledge for how to manage farm animals. Well, I can't handle a horse, but I can read a book, and I'm sure someone has bothered to write it down. I'm sure I'm not well practiced, but it's not like these ancient arts simply disappear. In fact, when knowledge does disappear, it becomes a devil in the mind of people who can't stand the idea: a lot of people spent a lot of time recreating Damascus steel after it was lost, and we still haven't figured out how they made chainmail (unless they did it the hard way). These are definite exceptions, not rules.
Kunstler, for one, welcomes our new peasant communities. Have fun with that; I'll be in Switzerland, reading any book but this one.
Beyond Oil
August 15, 2008 - 02:07 — bhugaPeak oil from a point of view that is not Chicken Little's. In fact, from a very respectable point of view; the author's resumé is extensive. The entire book is from a geologist's perspective, and has scientific slant; almost nothing is assumed.
The book was a balanced view of peak oil, and in particular, examining the currently available alternatives. It's very well done: balanced, exceedingly well researched and cited, and accessible without being patronizing. The guy really knows his stuff. He knows just what it would take to make several different energy sources profitable, and mentions that they are billion dollar ideas if you want to try. He lists further reading.
He doesn't even have the religious 'peak oil is fact' thing. He shows how the American peak was predicted, how the math behind it works, and is very clear about the assumption one has to make for the formulas to hold. It's an easy axiom to adopt, and several resource peaks have shown it works.
He's also good about not mentioning his personal views on the topic. He only takes a tiny minute of your time for 3 or 5 pages at the end to mention how he feels about the whole thing. Decisions are yours to make: just the facts, ma'am. Fantastic.
This is easily the book I will give people on peak oil. I think there's a chance the apocalyptic crowd will be proven right, but I think it's vanishingly small. For all of the reasonable people, this one is the way to go.
