My blogging program, Wordpress, added a nice Flash based uploader (multi-select and progress bars!), and I needed an excuse to try it out.
So, here are some of the more amusing cartoons and pictures I’ve seen about the bailout:
(from http://www.investors.com/)
(from the Chattanooga Times Free Press)
(via a different Vijay)
Of all the companies out there, I really admire UPS and FedEx. Here are two companies that went against a government sanctioned and heavily subsidized monopoly, and armed with private capital and their own smarts, they are winning.
The US Post Office has a government granted monopoly on first class mail. This monopoly advantage basically gives them all the facilities, trucks, and personnel they need to run package delivery services; essentially a large chunk of the US package delivery service is subsidized by the taxpayer.
And against these odds, UPS and FedEx are able to be profitable entities. Amazing.
So when Fred Smith, the FedEx CEO, was featured in a recent WJS article entitled “Washington is the Problem“, I read it with interest.
It’s worth reading the whole article, but I’ll mention a few parts that I really liked.
First he talks about how the tax structure and regulations give preferential status to banks. For example, for a company to raise money (i.e. get loans), they need to have a dollar of assets for 10 cents of “risk”. Banks, however, have one dollar of assets and $25 ot $50 of risk!
That means for every dollar in the bank, the bank lends out around $25 to $50!
With leverage like that, of course the banks can make great returns for short periods of time — until it all crashes down and the tax payer is forced to bail them out. As a result, the pay the banks offer attract the best and brightest.
So what happens is a misallocation of talent. Instead of our smartest kids going into production engineering to build factories, they go to Wall Street and move money from point A to point B. They don’t actually produce anything valuable, they just build Ponzi schemes.
The second point he made is that we’re at the point in this country where fewer people pay income taxes than don’t. And since the non-paying majority can just vote to take the money from the productive part of society, you have a problem for the overall economy.
I like Fred Smith. I don’t agree with him on everything, but the fact that his company employs 290,000, has $38 billion in sales, and owns 300 jet airplanes in face of competition that’s heavily subsidized, you got to take him seriously. :-)
This is a great clip of Jim Rogers sharing his thoughts about the economy and how to invest to protect your wealth.
Some of highlights:
He’s a smart guy and one of the few that predicted this crash. I completely agree with him that this downward swing is a great buying opportunity.
He said one thing that I’m still trying to wrap my head around: you’ll know we’re at the bottom when the market goes up on bad news.
I think that he’s referring to the fact that news lags fundamental market shifts. As this crash started, the “good news” was still coming in and most people didn’t grasp what was happening. For for the recovery, we need to watch for the market going up, even though news is bad and people are still thinking it’s going down.
First of all, a lot of news and indicators are backwards looking. Unemployment numbers are never for today, they are for last month. Likewise, with sales, revenue, and inventory numbers.
Second, the mainstream (especially the media) is always slow on the uptake.
We just need to get out ahead of the crowd and then we’ll know when to jump back in the market. :-)
I really like drinking soda, but I’ve basically stopped drinking it for a couple of reasons: (1) I’m trying to lose weight and (2) I’m trying to avoid High Fructose Corn Syrup.
High Fructose Corn Syrup is used in most foods in America as a sweetener because corn subsidies and sugar tariffs make it cheaper to process corn to make sugar rather than just using sugar.
Since other countries don’t have these tariffs and subsidies, their food has real sugar. And so their food tastes better.
While I was living in Seattle, a friend of mine offered to pick up some pure sugar soda for me while he was in Canada. We texted throughout the day and the conversation went a little like this:
Friend: “In Vancouver, did you want some coke?”
Me: “Heck yeah, I’m sick of what passes for coke in this country.”
Friend: “How much do you want?”
Me: “Um… I don’t want to bother finding other people that want some, just bring enough back for me.”
Friend: “12?”
Me: “Make it 24″
<some time passes>
Friend: “Done. I got your coke in my car”
Me: “Sweet. I can’t wait. I missed the good stuff.”
Friend: “Yeah.. the Mexican stuff is pure too.”
Me: “Yeah, my favorite is in India, it’s as pure as you can get.
<some time passes>
Friend: “I got your stuff past the border guard. Those guys didn’t even have me open the trunk.”
Me: “Yeah you could probably smuggle anything across that border.”
Friend: “Yeah”
<some time passes>
Friend: “OK, you coke is in Redmond, want to come get it?”
Me: “Heck yeah, I can’t wait for it. Party tonight!”
Luckily the FBI agent reading my text message conversation was smart and figured out what we were really talking about.
But still whenever I think of that conversation, I think how lucky I am not to be a prisoner in Guantamo right now. :-)
While we lived in Seattle, I had to drive by 3 or 4 car dealerships on the way to work. I started to pretend to gauge the relative strength of the economy based on the density of new cars in their lots. Surprisingly it sort of worked!
Since we moved to Boulder, I obviously don’t have the same commute. But I quickly discovered a new economic indicator. On my way to work, I drive by a Walmart and then drive by a Whole Foods. The relative utilization of those parking lots is very interesting.
In the past few weeks, I’ve seen more and more cars at Walmart and fewer cars at Whole Foods. It used to be impossible to find a parking spot at Whole Foods, especially around the after work rush. The last two times I went, easy parking and no wait at the cashier.
Yesterday, I refined my metric more; the number of Toyota Priuses in the parking lot of Whole Foods vs Walmart.
It’s well known that all Prius drivers are religiously against Walmart, while Whole Foods is similar to a cathedrals for them hybrid drivers. In normal circumstances, you will never see a Prius at Walmart.
But yesterday I saw two Priuses at Walmart. One could be an aberration, but two?
I guess the economy really is in bad shape.
Remember how “the bailout has to pass, otherwise the economy will fall apart”? Well, it passed and the economy is collapsing. Our politicians just don’t get it, we will have a recession regardless of how much money they waste while pretending to “do something”.
On Friday, for the 3 hours the market was open after the bailout passed, the DOW lost 484 points ( ~$600 billion). Today, we’re down 567 points so far (~$700 billion).
Wasn’t the bailout supposed to prevent this?
I guess not; so that $700 billion revolving credit account for the Treasury to buy worthless assets and the $150 billion in pork did nothing to settle the markets.
And today The Guardian reported this:
Fears are mounting that many Wall Street banks and financial firms will refuse to participate in the US government’s $700bn bail-out package, leaving global markets and world economies in a perilous state for months to come.
‘There is a growing feeling that banks … might instead decide to tough it out,’ said Thomas Caldwell, chairman and CEO of Caldwell Financial, a $1bn-plus fund manager.
Wait a second. We were told that the bailout had to happen immediately since the banks need the money now.
But the banks are saying, “Well… I don’t know. We might participate in the program or not. We’re not sure. We’ll get back to you. We might just tough it out.”
So in reality, there was no urgency. The banks didn’t need this, they aren’t even sure they will take it. They think they can just “tough it out”.
In the end, we were lied to by our politicians. And despite 90% of the American people being against it, our politicians thought they were smarter than the rest of us “common folk”. Well, I guess they were wrong.
The bailout isn’t stopping the economy from collapsing and the banks don’t even want to participate. So in the end, it’s just a collosal waste of our money.
I’ve been thinking about how to explain stocks to people who don’t know anything about them and I think I’ve come up with something.
Strictly speaking owning a stock is owning a small piece of a company. As a co-owner of the company, you technically get to help decide what the company does. But in reality, since a company like Google has around 315 million shares, and you own on the order of 10’s or 100’s, you don’t get any real power. Occasionally you may get to do something like vote things like who sits on the board.
Some stocks have a regular dividend they pay out. Take Microsoft, they have an annual dividend that’s about 50 cents per share. With the current share price, you’re looking at 2%. Not bad, but you can easily get a CD from 2.5 to 5% without any risk in your capital (after all a stock can lose value, but a CD can’t).
So the “ownership rights” and dividends are essentially worthless. So why do people hold stocks? Because they think they will appreciate.
And why would a stock appreciate? The ownership rights and dividends rarely change. The stock only goes up in value because people think it’s more valuable.
So, in a nutshell, here’s how you explain stocks: “Stocks are just like beanie babies.”
Why? Their value is based on market perception. Take the dot come bubble: everyone thought internet companies were great and their demand drove the price up and up. Then they realized that the internet companies were stupid. So demand fell, and prices fell.
Now, notice that you can replace the words “internet companies” with “beanie babies” and it reads the same. Both dot com companies and beanie babies were stupid in the first place, but popular perception said otherwise.
In the case of dot com companies, they had no business model and were losing tons of money. In the case of beanie babies, they were just stupid stuffed animals.
So, stocks are just like beanie babies. It sounds weird and oddly incorrect, but I can’t finish out why. Maybe it’s just the truth — no matter how uncomfortable it makes you feel. :-)
This video is from 2 years ago; it’s your typical business talk show with analysts.
In the video, Peter Schiff is spot on. He was able to see this mess coming. And everyone else? Listen to them laugh at him.
Keep this in mind when you try to figure out what you think.
Are you listening to the guys that saw this coming? Or are you listening to the guys that were blindsided by this?
Remember, the White House, Paulson, and Bernanke were just telling us a few weeks ago that the economy is strong!
Austrian economists, however, saw this coming. They also saw the Great Depression coming. Maybe we should listen to them now.
Ron Paul saw this coming for a long time. Here’s what he said about Fannie and Freddie in 2003 (read the whole article):
Ironically, by transferring the risk of a widespread mortgage default, the government increases the likelihood of a painful crash in the housing market. This is because the special privileges granted to Fannie and Freddie have distorted the housing market by allowing them to attract capital they could not attract under pure market conditions.
…
Like all artificially created bubbles, the boom in housing prices cannot last forever. When housing prices fall, homeowners will experience difficulty as their equity is wiped out. Furthermore, the holders of the mortgage debt will also have a loss. These losses will be greater than they would have otherwise been had government policy not actively encouraged over-investment in housing.
And here’s a link to his explanation of what happened and how to fix it.
No bailout required. :-)
As the nation is closely watching the big $700B bailout fiasco, Congress is very quietly bailing out the US automakers:
[Ford, GM, and Chrysler] receive up to $25 billion in low-interest loans to help them develop technologies and retool factories to meet new standards for cleaner, more fuel efficient cars.
…
The secretive deliberations … seemed to ensure that the spending measure would have a low profile.
The US automakers get a $25 billion loan??? On top of that, the low interest rate and high inflation mean that the automakers will pay back fewer real dollars then we are lending them!
In other words, we’re giving them 10 loafs of bread now, and in a few years, they will give us 8 loafs of bread back. Would you agree to that? No? Too bad, Congress agreed on your behalf.
The reason that a lot of people dislike government spending is that government spending is a misallocation of capital.
Simply put, if left to their own devices, would people (e.g. the market) give money to Ford, GM, and Chrysler in return for less money later? I would guess no. And why? It’s stupid. I have better uses for that money.
But the government does it anyway.
There are two reasons for this. (Well three, if you count the fact that our politicians have been bribed, I mean, lobbied for this.)
First is the simple fact that people are less careful with someone else’s money. If Congress was using their own money, would they have lent it out?
Second is the that people are not smarter than the market. People cannot allocate capital as efficiently. This is why all those Communist states keep failing. Central planners, no matter how smart, cannot possibly make decisions better or faster than the market.
You know how corn based ethanol turned out to be a bad idea? The government didn’t get the memo; they are still subsidizing it.
Another indication that this is misallocation of capital is the fact that the market would not do this. Ford, GM, and Chrysler couldn’t get a loan with these terms on the open market. Why? No one felt it was in their best interest to do so.
A simple way to say “misallocation of capital” is “waste of money”.
Now, undoubtedly people will say that this is necessary to keep American institutions and American jobs safe.
And that is completely wrong.
First of all, American jobs? I drive a Japanese car and it was built in Tennessee by Americans. And I’m pretty sure it has at least as many parts made in America as the “American” cars.
Second, bad companies need to fail. This makes room for good companies that will fill the void. And the fewer barriers to entry the government throws in the way, the faster newer companies will show up. And those companies will make better products, sell more cars, and, as a result, employ more people.
Why do Ford, Chrysler, and GM need help? These are bad companies. They make stupid decisions — agreeing to untenable labor contracts, betting the business model on pickup trucks and large SUVs as gas prices are skyrocketing, and not improving the quality of cars, to name a few.
As a result, they keep needing to be bailed out.
It’s better for the country if bad companies are allowed to fail. If a country bails companies out indefinitely, the country is basically nationalizing industries. At that point, the country itself is guaranteed to fail; it will in aggregate be spending more money than it is making. Just like all the communist nations that keep failing.
Is it any wonder that Congress passed this bill as quietly as possible?
So, there’s a lot that I want to say about the current economic conditions and the idiotic plans coming out of Washington. But for now the one thing that I wanted to talk about is the amount of simple fallacies in all these discussions and how the media and analysts repeat them without realizing how stupid they sound.
Consider “Bernanke: Recession certain in absence of bailout“. Um… a recession is coming no matter what. Unless you can figure out a way for homes to go up 10% a year while wages stay stagnant indefinitely, we’re in an asset bubble caused by loose credit standards. Home prices have to come back in line with wages. This isn’t speculation, it’s basic economics.
A recession is inevitable no matter what, even with the bailout. Notice the headline doesn’t say that the bailout will prevent recession, it just says, without it we’ll have a recession; that’s a nice lie of omission.
The headline may as well read, “The sun rising in the East is certain in absence of bailout.” or “Recession certain in absence of Vijay being named King of the World.”
Another one that’s annoying me is, “If we don’t pass this bailout, things will get a lot worse.” That’s just classic false dilemma. That tactic frames the discussion as just two choices: this bailout or nothing. Well, that’s just wrong; there are plenty of options.
Framing the discussion this way is disingenuous. When you have to resort to these tactics, your position is probably wrong.
Last one I wanted to mention for now is part of Obama’s four point plan. It’s not so much a fallacy as just stupidity:
Mr. Obama proposed a new “financial stability fee” on the entire financial service industry to repay any losses that affect taxpayers,
On the entire industry? So every bank is charged this fee? So the cost of business for every firm went up. And guess what? They will pass the cost on to their customers. So Americans will pay more for banking (more fees, etc.), the banks will take the extra payment, give it to the government, and they will give it back to us?
In the end, we pay for our refund!
Um, Obama? You graduated from Harvard right?
Apparently the vaulted Ivy League education is vastly overrated.
The flaw is the “entire” part of the proposal. The banks that should pay the fee are the ones that used the program. Not everyone. New banks and banks that didn’t take the bailout (if any) don’t have to pay the fee and can pass those savings up to the customer. This way the bad banks that take our money are punished and the good banks are rewarded.
It’s called free market economics. Apparently it’s not something presidental candidates need to know.
