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Josh Patt's  Instablog

I am a software engineer with 20 years of experience in high-tech, who has been investing in equity markets from an early age. I have been investing actively in shares of commodities related companies for the past 6 years.
  • Imbalances and Stimulus

    There is a joke going around the internet about the economic stimulus that goes like this:

    It is the month of August in a resort town that sits next to the shores of a lake. It is raining, and the little town looks totally deserted.
    It is tough times, everybody is in debt, and everybody lives on credit.
    Suddenly, a rich tourist comes to town. He enters the only hotel, lays a 100 dollar bill on the reception counter, and goes to inspect the rooms upstairs in order to pick one.
    The hotel proprietor takes the 100 dollar bill and runs to pay his debt to the butcher.
    The butcher takes the 100 dollar bill, and runs to pay his debt to the pig raiser.
    The pig raiser takes the 100 dollar bill, and runs to pay his debt to the supplier of his feed and fuel.
    The supplier of feed and fuel takes the 100 dollar bill and runs to pay his debt to the town's prostitute, who, in these hard times, provided her services on credit.
    The hooker runs to the hotel and pays off her debt with the 100 dollar bill to the hotel proprietor to pay for the rooms that she rented when she brought her clients there.
    The hotel proprietor then lays the 100 dollar bill back on the counter so that the rich tourist will not suspect anything.
    At that moment, the rich tourist comes down after inspecting the rooms, and takes his 100 dollar bill, after saying that he did not like any of the rooms, and leaves town.
    No one earned anything.
    However, the whole town is now without debt and looks to the future with a lot of optimism.
    And THAT, ladies and gentlemen, is how the Economic Stimulus Plan works.

    There are different versions, but the above one is typical.

    The point is that this is NOT similar to the economic situation that the world is currently in. In short, in the little village in our story we have a closed loop where everyone owes about the same as is owed to him, probably because everyone in the little village does an honest day's (or night's) work and produces about as much as he consumes.

    They are not actually "living on credit", they are just holding off paying for services because of a shortage of money. Nobody has a dime, so they provide services to each other on credit, but in the end they are all credit-worthy and living within their means. When a balanced system gets stuck because of a lack of money, then a little bit of liquidity can grease the wheels and get everything moving again.

    Our problem in the world today is that nobody wanted to make an honest living. We all wanted to leverage up so that we could get rich quick. We are living off the work of others and many of us are not producing nearly as much as we consume.

    Some of us are living on credit, others off money gained through speculations or borrowed based on inflated asset prices. None of this is sustainable. This is what people are talking about when they mention imbalances.

    The imbalances need to be corrected. If the stimulus doesn't fix them, then it will not solve the problem.

    Disclosure: No positions

    Josh

    Jun 17 09:08 am | Link | Comment!
  • Institutional Investment during a World Financial Crisis

    I recently attended DC Finance's Tel Aviv Institutional Investment conference http://dcf.co.il/semi2.... I came away with a better understanding of the Israeli institutional investment world and with some insights that may be of interest to independent investors no matter where they’re located. 

    Since Israeli banks are prevented by regulation from managing mutual funds or pensions, the main players in the Israeli institutional investment space are the large investment houses and insurance companies (Psagot, Clal, Migdal, Harel, etc.).
     
    There are no beneficiary managed IRAs in Israel. All pension money is managed by investment houses in pension funds, so these institutions control most of the local investment capital.
     
    The views of the analysts at the large investment houses ranged from bullish to bearish, but institutional investing isn’t about market timing. Institutional investors generally work within a set asset allocation framework, and their goal is to maximize return and minimize risk within that asset allocation.
     
    Still there was much discussion about where the world economy is headed. People predicted a “back to basics” shift in finance – less leverage, less complex instruments and more careful risk analysis.
     
    Leo Leiderman of Bank Hapoalim explained that the world has been getting very large doses of financial medicine and these will definitely have side effects. The medicine may also only be temporarily relieving the symptoms, not curing the disease. Government deficits and inflation are the most likely side effects. If these deficits are mostly due to a drop in tax revenues, then markets will react positively, but if the deficits are also a sign of increased government spending it will be a problem.
     
    Regulation was a big topic and there was a lot of talk about increased regulation as a result of the crises. Yossi Bahar (former director general of the Finance Ministry) pointed out that regulation is not a magic wand – too much is as bad as too little.
     
    Doron Tsur of Psagot, who had warned of the potential credit crisis before it broke, explained that predicting a crisis is easy; getting the timing right is the difficult part.
    He said that central banks and governments are trying to inflate financial markets by brute force methods. So what you see on your computer screen doesn’t reflect the real world. He sees nothing in the real economy that supports the rally in world stock markets.
    In equities, a few months ago there were companies selling for distressed prices. This is like getting a sick horse for a good price. This makes sense – if the horse gets better then I got a good deal. But today you are paying full price for a sick horse, which doesn’t make any sense.
     
    A number of people saw a disconnect between the prices of stocks and bonds. Spreads are high, implying default rates that are not reflected in stock prices. This disconnect will have to resolve itself one way or the other.
     
    The difference between the investment practices of institutions and individuals is shrinking. ETFs are not just used by retail investors; there is a sharp increase in the use of ETFs by institutional investors.
     
    Despite the fact that Israeli markets have held up relatively well, it was agreed that there is a need to diversify more into global investments.
     
    American institutional investors are also diversifying globally. The guest speaker at the conference, New York City Comptroller and candidate for mayor William Thompson, said that the NYC pension funds are investing more in international equity, private equity and real-estate. They also made their first investment in clean energy which he referred to as “only a first step”.
    He explained that “we are long term investors. We try not to abandon strategies in place, but make subtle changes as needed along the way.”
     
    Most Israeli institutional investors still see commodities as speculation. They are beginning to understand that they don’t have to be used this way. Commodity holdings could increase from the present near 0% allocation, once the institutional investor starts to understand how commodities work as an investment.
     
    There is one last key point that I took away from this conference: Institutional investors need to get positive returns. Pension funds and Insurance companies have assumptions on minimal expected returns and they base their financial models on them. They simply will not keep money at near 0% interest for long. If interest rates remain this low, they will look for something to do with their cash to generate returns – they have no choice.
     
    Many individual investors will behave in the same way. Even if cash is our best investment option now, we will convince ourselves that there is something better because we refuse to accept a 0% return. The difference of course is that we do have a choice.
     
    Dosclosure: No positions
     
    Josh Patt 
    Tags: Istitutional Investing, Israel
    May 26 11:20 am | Link | Comment!
  • Good Exit Point for TBT

    I just sold my position in TBT on its move up today. While I think that long term rates will continue to rise, I suspect that they may pull back some after their recent rise and I don't want to be holding TBT in that case.

    Josh

    Tags: TBT
    May 07 03:54 pm | Link | Comment!
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