Related Kindle book: Complete Works of Seneca the Younger [For more from Seneca, see the first 5 listed books HERE.]
Related previous post: Stoicism quotes, thoughts, and readingsa16z Podcast: For Google, Android is a Tactic and Cloud is a Strategy (LINK)
Related books: Irrational Exuberance 3rd edition
Related book: Misbehaving: The Making of Behavioral EconomicsLeucadia National 2015 Annual Meeting Notes (LINK)
I feel today the way I felt in 1999-2000. The way I felt in 2007. Where the cycle is getting very extended. Things feel really excessive. And it's really frustrating, because I feel that the markets are not pricing risk properly, and yet they keep going up. And I really feel like banging my head against the wall. In the most recent issue of my newsletter, I say I spend more time at the gym because the alternative is banging my head against the wall, and that's really bad for the wall.
A Berkshire Opportunity Cost: Listed Family Firms
The Integrity of Clayton Homes and the Politics of “Investigative Journalism”Aswath Damodaran: The Value and Pricing of Cash: Why low interest rates & large cash balances skew PE ratios (LINK)
Related article (from 2002): What if It's All Been a Big Fat Lie?Was this the world's first murder victim? (LINK)
According to The Bible, Abel was the world's first murder victim, killed at the hands of his brother Cain.
But now archaeologists have discovered a skull dating from 430,000 years ago which shows distinct evidence of foul play.
Related books:
The Particle at the End of the Universe
From Eternity to Here
Related book: Reinventing OrganizationsBook of the day: Capital: The Story of Long-Term Investment Excellence
Factor screening on any of the aforementioned ratios suffers from a major flaw: Company value is determined by all future free cash flows discounted to the present. Rudimentary ratios fail to capture what could, should, or would happen to a company beyond the next year or two. Historical cash flows, book value, earnings, or momentum in the growth of any of these factors may not be comparable with what happens in the future for dynamic companies undergoing change. This renders these ratios useless as indicators of value. The key determinants for predicting the future earnings power of a company are actually qualitative. Factors like competitive positioning, industry growth, and the capital allocation ability of management are not adequately captured by simple ratios.
Earlier this month, a crowd filled an auditorium to attend a corporate annual meeting at which a folksy investor spoke about his company and the secrets of success. But they weren’t in Omaha to hear Warren Buffett talking about Berkshire Hathaway; this crowd came to the Altria Theater in Richmond, Va., for the annual meeting of Markel Corp.John Hempton on his visit to Hanergy while in China about six weeks ago (LINK)
“Sit down before facts like a child, and be prepared to give up every preconceived notion, follow humbly wherever and to whatever abysses Nature leads, or you shall learn nothing.”
Thomas Huxley
The greatest miscalculation in my career as an investor has been to underestimate the lengths to which the miscalculation of speculators can extend. I’ve had to correct that error twice, and even if the completion of the market cycle ultimately made the error irrelevant, the challenge was excruciating in the midst of the market cycle, at least until it was fully addressed. The fact is that valuations drive long-term returns, but over shorter horizons, stock prices are the result of whatever investors collectively believe, however reckless or detached from historical evidence those beliefs may be. As long as enough market participants are attached to the idea that risk is their friend (or enemy) regardless of the price, there is no natural limit to how overvalued (or undervalued) stocks can become. There is only one way to address this: measure investor risk preferences directly through observable market internals. Don’t expect an overvalued market to crash until internals deteriorate; don’t embrace an undervalued market too aggressively until internals improve.
It’s a lesson that value-investors have learned and re-learned throughout history. Even the legendary value investor Benjamin Graham discovered it, in his case by becoming constructive far too early during the market collapse of the Great Depression. The collective risk preferences of investors rule the short run, but valuations ultimately rule the long run. Graham famously summarized that lesson in one sentence: “In the short run, the market is a voting machine but in the long run, it is a weighing machine.”
Consider this: Wendy’s has 95 times as many units. It is 12 times Shake Shack’s size in terms of revenue. Yet, in terms of market cap, they are relative equals. As of now, Shake Shack has a market capitalization of $3.44 billion. Wendy’s: $4.18 billion.Walter Isaacson: TWO-MINUTE EXPLANATION OF EINSTEIN’S THEORY OF RELATIVITY (LINK)
Related documentary: A Brilliant MadnessCicero on Living a Stoic Life (LINK)
In my mind, the country’s economic policies should have two main objectives. First, we should wish, in our rich society, for every person who is willing to work to receive income that will provide him or her a decent lifestyle. Second, any plan to do that should not distort our market system, the key element required for growth and prosperity.
That second goal crumbles in the face of any plan to sizably increase the minimum wage. I may wish to have all jobs pay at least $15 an hour. But that minimum would almost certainly reduce employment in a major way, crushing many workers possessing only basic skills. Smaller increases, though obviously welcome, will still leave many hardworking Americans mired in poverty.
The better answer is a major and carefully crafted expansion of the Earned Income Tax Credit (EITC), which currently goes to millions of low-income workers. Payments to eligible workers diminish as their earnings increase. But there is no disincentive effect: A gain in wages always produces a gain in overall income. The process is simple: You file a tax return, and the government sends you a check.
In essence, the EITC rewards work and provides an incentive for workers to improve their skills. Equally important, it does not distort market forces, thereby maximizing employment.
The existing EITC needs much improvement. Fraud is a big problem; penalties for it should be stiffened. There should be widespread publicity that workers can receive free and convenient filing help. An annual payment is now the rule; monthly installments would make more sense, since they would discourage people from taking out loans while waiting for their refunds to come through. Dollar amounts should be increased, particularly for those earning the least.
There is no perfect system, and some people, of course, are unable or unwilling to work. But the goal of the EITC—a livable income for everyone who works—is both appropriate and achievable for a great and prosperous nation. Let’s replace the American Nightmare with an American Promise: America will deliver a decent life for anyone willing to work.
Related book: The Most Important ThingAre declining businesses good shorts? (LINK)
Related book (released this week): Superpower: Three Choices for America's Role in the World
Related link (video): Ian Bremmer on Charlie RoseRob Arnott: Does Unreal GDP Drive Our Policy Choices? (April 2011) (LINK)
Violent warfare is on the wane, right? Many optimists think so. But a close look at the statistics suggests that the idea just doesn’t add up
But most interesting — in Gilbert’s view — was how the team used the genetic data to predict interactions between individual organisms. In one example, they predicted that a flatworm belonging to the genus Symsagittifera would have a symbiotic interaction with a photosynthetic microalga of the genus Tetraselmis. To check, the team identified specimens of the worm and studied them under a microscope. Sure enough, they saw algal cells inside the worms and matched the DNA label of these algae to the ones predicted to be symbionts. “It was a beautiful study that shows you what network analysis, or ‘interactive-omics’, can actually achieve,” Gilbert says.'Stable' region of Antarctica is melting (LINK)
Related video: Cosmos A Space Time Odyssey - Season 01 - Episode 12
In modern science, and I include the humanities here, science in a German sense of science—rigorous scholarship across all domains—in modern science we've gotten used to the idea that science doesn't offer meaning in the way that institutional religions did in the past. I'm increasingly thinking that this idea that modernity puts us in a world without meaning—philosophers have banged on about this for a century-and-a-half—may be completely wrong. We may be living in an intellectual building site, where a new story is being constructed. It's vastly more powerful than the previous stories because it's the first one that is global. It's not anchored in a particular culture or a particular society. This is an origin story that works for humans in Beijing as well as in Buenos Aires.
It's a global origin story, and it sums over vastly more information than any early origin story. This is very, very powerful stuff. It's full of meaning. We're now at the point where, across so many domains, the amount of information, of good, rigorous ideas, is so rich that we can tease out that story.
.....
..................That is the key to what makes us different. You can ask what it is that allows us not to be locked within a limited, metabolic repertoire, but to keep expanding that repertoire. There may be a very simple answer. One should expect a simple answer because, on Paleontological time scales, this happens in an eye blink. It happens so fast that arguments that say, well, humans are different because of this, and this, and this, and this, and this, they don't work. There's got to be one thing that, like a key, unlocks a door. I suspect it's linguistic.
Chimps, we know have language. We know they can communicate ideas. We know that chimp mothers can teach their young to use sticks to extract termites from mounds. We also know that information does not seem to accumulate generation by generation in other species. If it did, we would see evidence of it. We would see a species that was gradually widening its niche. We don't see that. Humans have crossed a linguistic threshold. It's as if suddenly human language is more efficient. It's crossed a threshold beyond which information accumulates faster than it's lost. That means something profound. It means we're the first species in 4 billion years in which information accumulates across generations, through the cultural mechanism, not through the genetic mechanism. The cultural mechanism, of course, is orders of magnitude faster than the genetic mechanism.
Here, you have a species where information can accumulate across generations. That's it. That is the foundation for explaining everything that makes us different. If you add in that more information for a living organism gives you more control over resources and energy flows, then what you're doing is watching a species whose control over the energy flowing through the biosphere increases, and increases at an exponential rate. As information accumulates, some of that information speeds up the process of the accumulation of information. Printing is an obvious example, or the Internet. And basically that's it.
“We are at a point in the cycle where we feel virtually all assets are trading above their intrinsic value; some are in ‘highly priced’ territory, and there are few absolute bargains available,” said Marks. “However, on the basis of our history with cycles, we believe there’s somewhat further to go before we reach peak exuberance, and thus peak prices.”Sanjay Bakshi discusses contrarian investing (LINK)
Hong Kong’s best-performing stocks this year are tumbling even faster than they rallied.
Goldin Financial Holdings Ltd. and Goldin Properties Holdings Ltd., controlled by billionaire Pan Sutong, plunged more than 60 percent in Hong Kong trading Thursday. There was no immediate explanation for the drop. Before the rout, the two stocks surged more than 300 percent in 2015 for the biggest gains on the Hang Seng Composite Index.
The tumble follows the mysterious 47 percent plunge in 24 minutes by Hanergy Thin Film Power Group Ltd. on Wednesday, which erased $19 billion in market value before trading was suspended. The companies have other similarities. Hanergy is also controlled by single billionaire owner -- Li Hejun. Almost no analysts tracked Goldin Financial or Hanergy even as their market values swelled to more than $30 billion, making them among Hong Kong’s biggest listed companies, while doubts over the sustainability of the rallies increased.
Related book: Superintelligence: Paths, Dangers, Strategies
Related link: TED Talk - Nick Bostrom: What happens when our computers get smarter than we are?Book of the day (released a couple of days ago): Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires Trying to Reinvent Money
The decline of Hanergy Thin Film Solar Group Ltd. was as spectacular and inexplicable as its ascent.
Just 24 minutes of Hong Kong trading erased $18.6 billion of market value and wiped out almost four months of gains that made it more valuable than Sony Corp. of Japan. Those increases came as analysts and investors questioned why, exactly, this stock was increasing in the first place.
Tuesdays with Zinsser (LINK)The maker of solar equipment controlled by Li Hejun suspended trading after the stock plummeted 47 percent in the morning.
Related link: 10 Writing Tips from Legendary Writing Teacher William Zinsser, May He Rest in Peace
Related book: On Writing WellScott Adams talks to James Altucher (LINK)
Related book: How to Fail at Almost Everything and Still Win BigPBS FRONTLINE investigates the spread of dangerous pathogens in meat - particularly poultry (video) (LINK)
The books:
Hyperbole and a Half
The Magic of Reality
What If?
xkcd
On Immunity
How to Lie With Statistics
Should We Eat Meat?
It is unfortunately true that experts are generally better at seeing their particular kinds of trees than the forest of all life. Thoughtful laymen can become very good at seeing the forest, particularly if they lose their timidity about challenging the experts. When I speak of laymen ("laypersons," if you prefer) I am talking about everyone, because the expert in one field is a layman in all others. In the universal role of laymen we all have to learn to filter the essential meaning out of the too verbose, too aggressively technical statements of the experts. Fortunately this is not as difficult a task as some experts would have us believe.From Nassim Taleb in Antifragile:
I once testified in Congress against a project to fund a crisis forecasting project. The people involved were blind to the paradox that we have never had more data than we have now, yet have less predictability than ever. More data—such as paying attention to the eye colors of the people around when crossing the street—can make you miss the big truck. When you cross the street, you remove data, anything but the essential threat.From Chris Begg:
One of the most limiting biases for individuals attempting to make sense of complex systems is that they are a part of the systems. When you are part of the system it becomes increasingly difficult to see the forest for the trees. Each individual tree’s uniqueness and complexity can lead to confusion and ambiguity. The key is to attempt to step outside of the system and see the forest and trees for the essence of what they are.From Howard Marks:
Information and knowledge are two different things. We can have a lot of information without much knowledge, and we can have a lot of knowledge without much wisdom. In fact, sometimes too much data keeps us from seeing the big picture; we can “miss the forest for the trees.”
Greece came so close to defaulting on last week’s €750m International Monetary Fund repayment that the prime minister warned IMF chief Christine Lagarde he could not pay it without EU aid.
Athens ultimately made the payment without financial assistance from the bloc but only by tapping a rarely used emergency account Greece holds at the fund — an unorthodox transaction that amounted to borrowing IMF funds to pay the IMF.
Alexis Tsipras wrote to Ms Lagarde, warning that the IMF repayment would be missed unless the European Central Bank immediately raised its curbs on Greece’s ability to issue short-term debt.
The letter, first reported by the Greek daily Kathimerini but independently confirmed by the Financial Times, raises questions about how close Athens is to bankruptcy. In addition to payments due to the IMF next month totalling €1.5bn, the Greek government has struggled to meet its wage and pension bills, which must be paid at the end of the month.
The next €300m IMF payment is due on June 5.
A group of leading financial executives have urged authorities around the world to beef up their crisis-busting tool kits amid fears that ultra-low interest rates have increased the risks of financial instability.
The heads of companies including HSBC, UBS and BlackRock will on Monday release a joint statement backing the use of macroprudential tools, but warn that rules, if too narrowly applied, could push risks into the more thinly regulated realm of shadow banks.
Macroprudential tools are used to guard against emerging dangers such as overvalued property assets, in theory reducing the need for authorities to raise interest rates to rein in investor exuberance. Among the most developed are counter-cyclical capital requirements on banks and caps on the amount of debt customers can borrow relative to their incomes.
Related book: Startup CommunitiesI was an undercover Uber driver [H/T The Browser] (LINK)
It is hard to say what my “favorite” presentation was, as there were so many excellent ones, but Bill White’s would certainly be on a very short list. He was the former chief economist at the Bank for International Settlements and is now the chairman of the Economic Development and Review Committee at the OECD in Paris.
Bill may not be as familiar to some of my readers as he is to me, but he is one of my economic heroes. A little history: Bill predicted the financial crisis of 2007–2010 before 2007's subprime mortgage meltdown. As early as 1996 he was one of the critics of Alan Greenspan's theory of the role of monetary policy. He challenged the former Federal Reserve chairman's view that central bankers can't effectively relieve the causes of asset bubbles. On Aug. 28, 2003, White made his argument directly to Greenspan at the Kansas City Fed's annual meeting in Jackson Hole, Wyoming. White recommended to “raise interest rates when credit expands too fast and force banks to build up cash cushions in fat times to use in lean years.” Greenspan was unconvinced that this would work and said, “There has never been an instance, of which I'm aware, that leaning against the wind was successfully done.” If you’re not willing to take a little political heat, which clearly Greenspan wasn’t, then we may never know whether that would work. However, I disagree with Greenspan: I think that Volcker leaned quite successfully. Yes, there were recessions, so you might not see that as successful, but I think the long-term positive results of Volcker’s moves are evident.
That is the problem with having a monetary policy that is influenced by the political temperament and decisions of a small group of people. What happens is that people look around for scapegoats when a recession comes along, and they will point to a central bank that wasn’t as accommodative as they would have liked and blame the bank, rather than simply understanding that the business cycle is what it is. Bill White is my favorite central banker.
Central bank models, he told us, are artificial machines. His best quote was, “The basic problem with central banks: they think they know how the economy works.” Their models are built to be gamed and always assume a return to equilibrium. But there is no equilibrium – you are where you are. The problem with equilibrium models is that they don’t reflect reality.
An economy is like a forest ecosystem, not a machine. We are on a very bad path – debt is unsustainable. Notice the environment since the 2008 crisis: the Eurozone crisis is a limited variant on a global crisis; fiscal and regulatory restraint is not helpful; and monetary policy is the only game in town and is not effective.
Does White expect better days ahead? The IMF and OECD expect modest expansion – but they have very poor forecasting records. Why should demand suddenly strengthen?
Is low inflation really so great?
Looking around the world, Bill thinks that Abenomics could backfire. Can China adapt to a new growth model? Can the Eurozone sustain confidence? Political problems are everywhere (which Friedman and Bremmer highlighted!). It is much easier in today’s world for a crisis to spread worldwide because we have increasingly complex systems with far more linkages and rising correlations.
Hussman Weekly Market Comment: The "New Era" is an Old Story (LINK)OECD simulations indicate global fragility. Rising rates still threaten fiscal reform.
Bill was very critical of the seemingly single-minded focus on monetary policy. Monetary policy hasn’t delivered, and more of the same won’t help. He offers three endgames:
- Endgame 1: global recession, policy and long rates stay low, debt deflation, more aggressive monetary policy and hyperinflation in some countries. Japan is very vulnerable in this scenario.
- End game 2: Rapid growth with an orderly exit from debt. Rates rise, inflation under control, debt-servicing problems diminish.
- End game 3: Rapid growth with a disorderly exit: long rates rise sharply, a rush to exit from all risk assets, capital outflows from emerging markets, inflation expectations rise sharply, debt service problems increase, inflation fears fueled by fiscal dominance.
In the Q&A session Bill and I talked about the nature of current economic thinking and why it is inadequate. Independently, we’re both beginning to look at a new way to understand markets called Complexity Economics. It has several sources, but the current center of gravity is the Santa Fe Institute in Santa Fe, NM. I may be “forced” to go spend some time in Santa Fe, burrowing into this new way to look at economics. It is significantly more complex, as you might imagine, than equilibrium models are; and it will therefore be even harder to create models that actually work, but it is certainly a place to start.
Among the recurring features of speculative episodes across history is the appearance of “new era” arguments to justify the elevated prices, coupled with arguments that historically reliable measures no longer apply. In our view, the problem is not that investors search for new, more reliable tools of market analysis – that should always be an objective. The problem is when investors adopt theories and models that embed the most optimistic assumptions possible, run contrary to historical evidence, or embed subtle peculiarities that actually drive the results (see, for example, the “novel valuation measures” section of The Diva is Already Singing). Eventually, the final refuge of speculation is to abandon historically reliable measures wholesale, resting faith instead on the advent of some new era in which the old rules simply don’t apply.
John Kenneth Galbraith noted this phenomenon decades ago in his book The Great Crash 1929: “It was still necessary to reassure those who required some tie, however tenuous, to reality. This process of reassurance eventually achieved the status of a profession. However, the time had come, as in all periods of speculation, when men sought not to be persuaded by the reality of things but to find excuses for escaping into the new world of fantasy.”
In late-1929, Business Week observed: “This is the longest period of practically uninterrupted rise in security prices in our history… The psychological illusion upon which it is based, though not essentially new, has been stronger and more widespread than has ever been the case in this country in the past. This illusion is summed up in the phrase ‘the new era.’ The phrase itself is not new. Every period of speculation rediscovers it… During every preceding period of stock speculation and subsequent collapse business conditions have been discussed in the same unrealistic fashion as in recent years. There has been the same widespread idea that in some miraculous way, endlessly elaborated but never actually defined, the fundamental conditions and requirements of progress and prosperity have changed, that old economic principles have been abrogated… that business profits are destined to grow faster and without limit, and that the expansion of credit can have no end.”
“This time” is not different. There’s no question that investors have come to believe that somehow quantitative easing has durably changed the world – that central banks have (or even can) put a floor under the markets as far as the eye can see. But if you examine the persistent and aggressive easing by the Fed during the 2000-2002 and 2007-2009 plunges, it’s clear that monetary easing has little effect once investor preferences shift toward risk aversion –which we infer from the behavior of observable market internals and credit spreads. Monetary easing only provokes yield-seeking speculation when low-interest money is viewed as an inferior asset.
It’s not monetary easing, but the attitude of investors toward risk that distinguishes an overvalued market that continues higher from an overvalued market that is vulnerable to vertical losses.
Related book (released in a few days): Elon Musk: Tesla, SpaceX, and the Quest for a Fantastic FutureHorizon Kinetics: The Devil's Advocate Report, March 2015 [H/T @ChrisMayerAgora] (LINK)
Related book: The Dao of CapitalMorgan Creek Capital's Q1 Letter (LINK)
Julian Robertson has gotten extremely Bearish three times since I have known him, once in 1999 leading up to the Tech Bubble in 2000, a second time in 2007 leading up to the sub-prime melt-down and Global Financial Crisis in 2008 and late last year (and becoming increasingly more concerned this year). In each instance, he started off mildly concerned about imbalances that were building and then he became increasingly vocal in his public appearances, as the situation grew increasingly dire. On each occasion he made significant adjustments to his portfolios that ultimately preserved capital and generated superior returns over the course of the entire event and we would all be wiser, and wealthier, had we followed his lead when the Big Tiger turned into a Bear. The challenging part of the story is that on each occasion he was early in his calls for caution and the funds experienced less favorable performance either in the form of actual losses or perceived opportunity costs (the dreaded Fear Of Missing Out) during the lead up to the actual event. The problem with the big crisis events is that you can be hours early, but you can’t be one minute late on getting out of the way as the corrections happen too quickly and come at the precise time when everyone has convinced themselves that nothing bad could possibly happen.Stan Druckenmiller Sees ‘Massive' Problem Caused by Aging (LINK)
Related book: On Writing Well
Related link: A Guide to Writing Well
Magretta: What is a disruptive technology? Where does it intersect with your thinking about strategy?
Porter: This is a really useful and compelling idea, but it is badly misused and misunderstood to refer to any and every competitive threat. It would be more helpful for managers to use the term only for the far less common situation of real game changers.
A disruptive technology is not any new technology. Many new technologies are not disruptive. Nor is it any big technological leap, because many big leaps are not disruptive. A disruptive technology is one that invalidates value chain configurations and product configurations in ways that allow one company to leap ahead of another and/or make it hard for incumbents to match or respond because of the existing assets they have. So a disruptive technology is one that would invalidate important competitive advantages.
The Internet offers a classic case. It was disruptive where the mechanism for delivering information was fundamental to the product or service, where the business, in essence, was the delivery mechanism. Travel agents, for example, or the recorded music business. But in other cases, the Internet wasn’t disruptive because it was simply one more channel for communicating with customers or suppliers. In those cases, established companies with the best product sets and brands were simply able to incorporate the new technology. It wasn’t incompatible or inconsistent with anything they were doing.
Two questions will tell you whether you’re dealing with a disruptive technology or not. First, to what extent does it invalidate important traditional advantages? Second, to what extent can incumbents embrace the technology without major negative consequences for their business? If you stop and ask those questions, you’ll see that true disruptions are not so common. If you look over a decade, for example, at the hundreds of industries that make up the economy, I would guess that less than 5 to 10 percent would be affected by a disruptive technology.
Having said that, managers should of course be on the lookout for potentially disruptive changes. The advice they get tends to focus on just one form of disruption: a simpler and less costly technology is improved and gets good enough to serve a need that’s currently met by a more complex and more costly technology. So most managers look for the threat to come from below, from some upstart you’ve been dismissing as being irrelevant to your business. And then you learn to your horror that for a lot of customers, the upstart is good enough. To use my value proposition terms, the customers’ needs were being overserved by the “old” technology. The new one meets just enough of their needs at the right price. Disruption from below is an example of a focus strategy. If you focus on the customers who don’t need all the special bells and whistles, you can establish a beachhead. A focuser with a disruptive technology can enter your industry and ultimately grow to occupy a major position. This is the Southwest Airlines story.
But other forms of disruption play a role in strategy. The threat can come from above. You can have an advanced technology or a richer approach that performs at a high level but that can be simplified or streamlined to meet less sophisticated needs at much lower cost. We don’t have good evidence on which form is most prevalent, but both exist. Disruptive technology is compelling as a metaphor, but managers need to be rigorous about what’s creating the disruption. How does it impact the value chain? Relative price? Relative cost? The strategy fundamentals definitely apply here.
Related book: Bourbon Empire: The Past and Future of America’s WhiskeyZinc traders dig in as price rebounds (LINK)
Related book: The Patient Will See You NowAn interview with W. Brian Arthur on "Complexity Economics" (LINK)
Related book: Complexity and the EconomyDavid McCullough on Charlie Rose discussing his latest book, The Wright Brothers (video) (LINK)
“It was the greatest and boldest operation ever undertaken by the Federal Reserve System, and, in my judgment, resulted in one of the most costly errors committed by it or any banking system in the last 75 years. I am inclined to think that a different policy at that time would have left us with a different condition at this time… Business could not use and was not asking for increased money at that time.”
Adolph Miller, former Federal Reserve Board Member, testifying to the U.S. Senate in 1931 about the Federal Reserve’s 1927 interest rate cuts and acceleration of open market purchases – which fueled speculation and low-quality credit expansion that culminated in the 1929 peak, collapse, and ultimately the Great Depression.
"Credit expansion cannot increase the supply of real goods. It merely brings about a rearrangement. It diverts capital investment away from the course prescribed by the state of economic wealth and market conditions. It causes production to pursue paths which it would not follow unless the economy were to acquire an increase in material goods. As a result, the upswing lacks a solid base. It is not a real prosperity. It is illusory prosperity. It did not develop from an increase in economic wealth [i.e. the accumulation of savings made available for productive investment]. Rather, it arose because the credit expansion created the illusion of such an increase. Sooner or later, it must become apparent that this economic situation is built on sand."
Ludwig von Mises, The Causes of Economic Crisis (1931)
Plus ça change, plus c'est la même chose. The more it changes, the more it’s the same thing. One would think that the lessons from policy mistakes that led to the Great Depression and the Global Financial Crisis would have been remembered more vividly, but we can take solace that at least on the surface, it appears that those lessons are at least beginning to be remembered. On Wednesday, Federal Reserve Chair Janet Yellen began to openly recognize the risks to financial stability that have emerged after years of aggressive monetary experimentation by the Federal Reserve: “we’ve also seen a compression in spreads on high-yield debt, which certainly looks like a reach-for-yield type of behavior. I would highlight that equity market valuations at this point generally are quite high. Now, they’re not so high when you compare the returns on equities to the returns on safe assets like bonds, which are also very low, but there are potential dangers there.”
WHEN President Adolfo Rodríguez Saá told Congress on Dec. 23, 2001 that “the Argentine state will suspend the payment of its foreign debt,” legislators jumped to their feet with joy. Their cheering quickly morphed into a chant of “Ar-gen-ti-na! Ar-gen-ti-na!”
Today, it is Greece, led by a recently elected populist left-wing party, Syriza, that is contemplating a similarly drastic unilateral declaration of independence from foreign creditors and international financial institutions. Economists like Nouriel Roubini, a professor at New York University, have long argued that “Greece should default and abandon the euro,” using “Argentine-style measures” to prevent “a disorderly fallout.” Far from the sky falling in, they say, Argentina’s economy soon roared back to prosperity; Greece should follow suit.
But were the years that followed really so rosy for the people of Argentina?
Armed with old bones and new DNA sequencing technology, scientists are getting a much better understanding of the prehistory of the human species, writes Matt RidleyBook of the day (H/T Nassim Taleb): Birth of a Theorem: A Mathematical Adventure
Some that I haven't listened to but that caught my eye after a quick look through the list:
Books That Have Made History: Books That Can Change Your Life
Financial Literacy: Finding Your Way in the Financial Markets
How the Stock Market Works
The History of Ancient Rome
Understanding Genetics: DNA, Genes, and Their Real-World Applications
Behavioral Economics: When Psychology and Economics Collide
My vision of life is that everything extends from replicators, which are in practice DNA molecules on this planet. The replicators reach out into the world to influence their own probability of being passed on. Mostly they don't reach further than the individual body in which they sit, but that's a matter of practice, not a matter of principle. The individual organism can be defined as that set of phenotypic products which have a single route of exit of the genes into the future. That's not true of the cuckoo/reed warbler case, but it is true of ordinary animal bodies. So the organism, the individual organism, is a deeply salient unit. It's a unit of selection in the sense that I call a "vehicle".
There are two kinds of unit of selection. The difference is a semantic one. They're both units of selection, but one is the replicator, and what it does is get itself copied. So more and more copies of itself go into the world. The other kind of unit is the vehicle. It doesn't get itself copied. What it does is work to copy the replicators which have come down to it through the generations, and which it's going to pass on to future generations. So we have this individual replicator dichotomy. They're both units of selection, but in different senses. It's important to understand that they are different senses.
GMO's 1Q 2015 Letter includes Ben Inker's discussion on long-term government bonds in "Breaking Out of Bondage" and Jeremy Grantham's "Are We the Stranded Asset? (and other updates)," a discussion of long-term growth prospects in the U.S. as well as an update to "The Race of Our Lives" (1Q 2013).A few sets of notes from the Markel Meeting in Omaha, HERE, HERE and HERE.
Related book: The Little Book That Builds WealthSpring 2015 Issue of Graham & Doddsville (LINK)
The US private-equity investor could be in line for a $40m profit from the sale of two ships it acquired in a court-forced sale last summerThe strange case of Oaktree and Iran’s revolutionary guards (LINK)
At present, the most reliable measures we identify indicate that the S&P 500 is about 128% above the levels that would be historically associated with 10% long-term returns, and imply a net loss, including dividends, for the S&P 500 over the coming decade. Including a broader range of alternate (if slightly less reliable) measures brings that overvaluation to about 114% above historical norms, and results in our expectation of S&P 500 nominal total returns averaging just 1.5% annually over the coming decade.
I should emphasize that our total return projections embed the assumption of future growth in nominal GDP and S&P 500 revenues of 6% annually, despite the fact that these measures have grown at a rate of only 3.4% annually over the past 10-15 years. The reason we haven’t slashed our assumed growth rates is that historically, nominal growth and interest rate effects tend to cancel out in these projections. Specifically, if we get continued slow growth over the coming decade, we’re also likely to see depressed interest rates go hand-in-hand with that. The slower growth would negatively affect returns, but the lower interest rates could positively affect returns by encouraging somewhat higher terminal valuations. Historically, the 10-year Treasury yield has a positive correlation with nominal GDP and S&P revenue growth over the preceding decade, while stock valuations based on market cap/GDP or price/revenue have a negative correlation with nominal growth rates over the preceding decade. What we observe across a century of history is that those two effects repeatedly cancel out.