TonyCinTX

The Debt Conundrum, Part 2

steve graves:

Apparently you didn't read what I wrote; the difference is in how you spend it. If I borrow $100K to buy an 18-wheeler so I can become an independent trucker, I am investing. If I borrow $100K so I can spend six months on a world tour, I am not investing. The truck can (hopefully) pay for itself in time, the world tour cannot.

Likewise, the interstate highway system has paid for itself a thousand times over in reduced costs for businesses and consumers; it was an investment that is still worth maintaining. It would also be an investment to borrow and spend money on energy research and building energy producing facilities in wind, geothermal and thermal solar. They, and what we learn from doing them, will pay for themselves in time. There are several reasons to think so.

Your basic analogy is flawed; when it comes to money the poison is not in the dosage, the poison is in the intent and use of the money acquired. So yeah, the government may have borrowed money and blown it on pointless stuff, those are sunk costs. But if there is a way to borrow money and invest it, the investment may payoff not only itself but the sunk costs and more. Again, look at the Interstate Highway system: A few hundred billion invested, a few trillion returned in the pockets of businesses and consumers when their trading ranges and access to markets got expanded by the existence of highways where there were none before.

The Innovation Dividend: Efficiency Isn't Growth

Oops, I meant not counting the bottom 5% or top 5%, I mistyped. We trim a total of 10% off the population to keep outliers from skewing the stats.

The Innovation Dividend: Efficiency Isn't Growth

Personally, I think the best measure that would capture this a median discretionary income of people. Or at least say a 10% trimmed average (i.e. not counting the bottom 5% or top 10%) of discretionary income, either way inflation adjusted against a basket of staple items that have been around for centuries (like bread).

If Craigslist or Google or eBay are leaving money in people's pockets, that should be reflected in greater discretionary income. Ignore businesses altogether; if people have greater discretionary income, that will flow to savings or purchases or investments.

The basic idea is that lower costs for consumers produce higher profits for consumers, but since they aren't selling anything we can't measure "profit" in a traditional sense. Their top-line revenue (a salary) may not change at all. What changes is the amount left over after a basic average allowance for food, shelter, transportation and insurance; that is their discretionary income.

The Debt Conundrum, Part 2

Allow me to point out a logical inconsistency:

Mr. Quinn repeats the canard that one cannot borrow one's way to prosperity. This is a lie. Most new businesses are started with borrowing. The stories of maxxed out credit cards and second mortgages in the early stages of businesses that made it big are both legion and legendary. Those guys borrowed thousands and made millions, even billions. Who says you cannot borrow your way out of trouble?

The distinction is what you do with the money acquired. Mr. Quinn wants us to invest in an energy overhaul; so do I. If we had to borrow half a trillion from China to do it, wouldn't it be worth it to get us off oil and on to electric cars and trains fueled by geothermal, wind, solar and ocean energy?

Also, borrowing at one rate to pay down a higher rate is actually a reduction in expense. The US government can borrow at a real rate of less than 2%. If our government borrows at its low rate in order to reduce consumer interest rates that are running at 24%, (say through some legislative trick or another) wouldn't that cut consumer expense and improve their prosperity? Expenses do matter in economics.

Then on to vilifying health care! (I worked in a large hospital for three years as a consultant, and my wife works in one still): Health care is the only for profit industry in which the majority of "customers" are presented with the choice of imminent pain and death or agreeing to the sticker price. Hospital administrators know this, and that is why you pay $15 per tablet for Tylenol.

Mr. Quinn and others may not have made this connection yet, but let me point something out: We have government do jobs that we do not WANT done at a profit. We don't want our police force to be a for-profit organization, we don't want our health inspectors to be either, nor our safety inspectors, or our garbage collectors, or any of our consumer protection agencies like the FDA, FAA or SEC. A profit motive would create too much potential for corruption in these jobs, and that is why we have the government do them. For all that the US Postal service gets dissed, they deliver a letter cross country for 50 cents, while the same delivery by a for-profit carrier like FedEx costs at least $10, twenty times as much.

Well, health care is in the same boat. In the last forty years the non-profit wing has failed, and no longer provides competition for the for-profit wing. The for-profit wing has won, by cutting costs, cutting quality, carefully following the borderline of the absolute minimum legally required effort and oversight, and exploiting their captive relationship with patients by literally extorting them. Your money or or life, buddy.

And that is the point when we as a society can and should stand up and say, "This is a job for the government." Not so they can make a profit, not so they can dictate our health care or force us to exercise, and not so they can eliminate the for-profit trade: So they can provide a counter-balance and competition for the profit-at-any-cost boards of corporations.

There are services we do not want the public sector to provide, even if that can be done at a profit. In recent decades, health care has become one of them; the profit motives of hospitals and pharma is now bankrupting people, endangering their health, or just plain killing them by withholding care and medication they cannot afford. That is not good for society.

Although I agree with the points made by Mr. Quinn, his arguments are weakened when he does not understand basic entrepreneurial economics (you CAN borrow your way to prosperity, just look at FedEx), or basic political philosophy.

Buffett Gets 'Comeuppance' After Gold Outperforms

Gold beats inflation; at least if you invest in something that tracks real gold prices.

I own both BRK-B and Gold in approximately equal dollar values. I think Gold does better when the economy sucks; BRK-B does better when the economy rocks.

Buffett's problem of the day is that his companies are earning slower, and not beating inflation. When inflation is tame, he gives us great companies that beat inflation and deliver real returns. But that is not the situation now, and probably won't be for the next six years or so. It doesn't have anything to do with Obama either; it is just the natural outcome after deregulation allowed speculation to destroy the financial system. Until we get over that, BRK isn't going to do that great because nothing is going to do that great.

Stocks Will Fall 37% or Gold Will Rally 60%

Actually gold has several industrial uses; it is a great conductor and the only metal that does not oxidize. It doesn't rust, period. Not only that, but gold in general is highly resistant to corrosives and acids; and highly reflective of electromagnetic radiation. It is used as a very thin layer of shielding on satellites, effective but weighing almost nothing. Gold is the most malleable and ductile pure metal known. It is used inside billions of electronic chips as the connecting wires to the outside world, and as a coating on sliding connectors that must be reliable.

Stocks Will Fall 37% or Gold Will Rally 60%

Why use the MEDIAN stock to gold ratio, especially the median over 106 years?

How about telling us when was the last time the gold to stock ratio actually WAS 5.4, or less than that?

World finances changed fundamentally after WW II, and there is no reason on EARTH to include any financial data from before 1945 in any analysis of any kind, at least not without more justification than just because you say so, or just because it gives you the number you want. Essentially you are telling people that data from 1903, before World War One, is an essential part of this analysis; because it certainly contributes to which ratio will be the median.

Let's take a look at the last 64 years, since 1945, and see what the median ratio is there. Or perhaps we will look at the linear trend, or robust regression. I see no reason to believe the median ratio is the best predictor (or even a good predictor) of where we should be, when the world is changing.

For example, would anybody believe us if we used IBM's median revenue since inception to predict its revenue next year? I think not. Why then should we believe the ratio of DJIA to Gold should be a constant?

Gary Shilling: Say Goodbye to the Great Gatsby Era

Just to counter the blithering political idiot above; I am a C-level executive in a corporation and I earn in the top few percent of the country and I voted for Obama without any expectation of a handout. He has reversed field on a few things I find important, but I was and remain willing to pay DOUBLE my current taxes if it would produce universal health care and eliminate our dependence on Middle Eastern oil, preferably replacing it with wind, geothermal, natural gas and thermal solar power. We have enough of these home grown energy sources to power the entire USA 250 times over our current usage.

So no, I and my colleagues did not vote for Obama looking for a handout at the expense of the rich, we ARE the frikkin' rich, and we want a government that isn't wasting trillions on wars and debt when a few hundred billion can solve the problem here at home AND boost the economy at the same time.

Economic collapse will devalue my assets just like anybody else's, and I want a government that does what I frankly cannot do, which is to pool my taxes and invest billions in basic research and science and development, so we can get divorced from the Middle East altogether.

If Gold Bugs' Fantasies Came True

Up front, I have 1/4 of my assets in gold and 3/4 in various stocks. I own no other commodities. That said, it comes down to alternatives. You have to put your money somewhere.

I lived through the Carter inflation at least, and in any inflationary scenario the last thing you want to hold is CASH.

Does it matter? Yes, because the two alternatives are
a) Lose half your purchasing power,
b) Lose ALL your purchasing power.

Do I get to keep it? Honestly, why worry? If society falls apart, police protection vanishes and we are overrun by murderous gangs, nothing we own is safe anyway. They will take our homes, our property, and in all likelihood, our lives, since the food supply will dry up and 95% of us could not fend for ourselves in that environment. Game over.

What happens afterwards? The most likely scenario is not some Mad Max fantasy, it is what we have already seen in the 1930's. Global Depression, soup lines, 30% unemployment, etc. Like then, this will lead to political tension and wars. However, even in such "end of the world" times (and that is how they all saw WW II) gold was not worthless.

What happens afterward is not worth worrying about either, because again, the question is one of alternatives: Do you want to enter that era with empty pockets, or with gold in your pockets?

I have worked as a computer consultant on the periphery of the criminal justice system, and seen enough depositions, trials, gangs, and criminals to last me a lifetime. There are some tough, ruthless mofos on our streets, my friends. Now I do own a handgun, but I maintain zero illusions about my ability to fight them off in some Mad Max societal collapse scenario. They win.

So why worry? The only "afterward" that counts is one in which there is some semblance of law that keeps your assets from being stolen or seized by the government. Again, the Great Depression is the model there, and I'd rather go through that with something, instead of nothing.

The Dow's Weight in Gold

Oh c'mon, a linear trend on an obviously exponential curve? This is a joke, right?

Not by any chartist magic, but by simple robust statistical fitting to *appropriate* curves, we can see a significant chance of the Dow settling in at the 6000 range (but more likely 9000) and a rise in Gold to 1200 with what seems like inevitable inflation (not hyper). I can't even see where a ratio of "5" or "7" is on this stupid chart.

The biggest thing holding Gold down right now is increased supply due to sales of scrap gold (old jewelry), which has risen due to the recession, and will play out in a few years.

So let us ask the most basic question: By what logic is the relationship between Gold and the Dow meaningful at all? I don't understand what the interaction between these is supposed to be; it isn't like a company where earnings and growth and the value of future opportunity all determine the stock price, which can thusly be used as a rough proxy for judging the competence of the company, or at least the public perception of the prospects of the company.

I think this Dow/Gold comparison is just a skewed version of the Dow itself, it tells us nothing new.

What's Buffett's Ideology?

Buffett's ideology is pretty simple; he invests in many things that he believes have a high probability of success. Over the decades, two things have happened.

First, although at core he remains a "value" investor, experience, losses, and successes which he had avoided have refined his ability to judge value, and see what is important. He summarizes this in every annual letter to shareholders.

Second, with wealth and backing, he has found new opportunities unavailable to him as a younger man, simply because a guy with billions can solve thorny problems which cannot be solved by a guy with a few million.

I don't understand this obsession with Buffett's "ideology." How many times must he elucidate it? He says he often knows within ten minutes whether he is interested in an investment or not. What can he possibly be looking at in ten minutes?

I will tell you: Who is buying the product and why? What are the margins? Where is the protection? Who is the competition? Why *this* company instead of them? What makes this company special, protected, or the most certain to succeed?

It isn't rocket science. If anything, I'd say the one thing Buffett has that other investors do not is self-discipline. Buffett can sit on forty billion dollars for a *year* without feeling compelled to *do* something with it. What Buffett has is the ability to wait, and wait, and wait, and still recognize and execute quickly when he sees an insanely low risk/reward ratio.

99.9% of investment managers are not willing to tell their clients, "We didn't see anything worth doing this year. Not one darn thing. So we sat on your money. Maybe next year!"

Buffett is so willing, and quite explicitly.

Seven Reasons the Market Has Already Bottomed

I won't believe we hit the bottom until the unemployment number turns around. And if we look at under-employment, meaning people technically "employed" but working half time or less or for less than half their peak salary, the equivalent unemployment rate is 15%.

I know the market will recover before the real economy does, but for now I don't think we have enough information on the depth and breadth of the unfunded corporate commitments to be calling a bottom. Let's wait and see what happens when we hear GM will officially enter Chapter 11, about 54 days from now (unless the Obama administration gives them an extra few months to come up with an impossible plan.)

Stick with Gold and the Oil Stocks

The USA has four great clean natural resources that could replace oil within ten years. Besides natural gas (which burns cleaner than coal, oil or gasoline), we have wind power and thermal-solar that have both been proven to generate electricity competitive with our dirtier alternatives. We also have proven geothermal electric on hundreds of installations right here in the USA, some are fifty years old and still working. Geothermal is a zero emission solution, perfectly clean, and requires nothing but a drilled hole. We know how to drill! A plant can be built for a few million dollars and pay for itself within five or six years. The energy is free, and a geothermal plant is about the size of a standard warehouse, literally.

We don't need biofuels. We don't need to invent clean coal. A wind turbine pays for itself in three years and lasts for twenty five. All we lack is the political will to actually change gears, because the change would put existing wealth at risk.

Lessons From Past Bear Market Bottoms

This one is different, but it sure seems to me some stocks are becoming insanely under-valued (i.e. much less than their asset values, breakup values, or rational valuation based on revenue and profits). Look at Berkshire Hathaway, for god's sake!

I haven't sold a thing in three months, and don't ever have to sell. I am not on margin and I won't sell at a bottom. Of course that means I have no money to buy either, but so be it.

I think one danger that might affect others is margin calls; as the market declines brokers call for margin, and that forces people to sell *other* stocks at a loss to generate the cash needed for the margin call. Which stocks do you sacrifice? The ones you have lost the least on; which is the better stocks in the market, which puts selling pressure on the good solid stocks in the market like Berkshire.

I think the author fails to take into account the changes in margins. Back in the 80's the best margin I could find was 50%. I got burned and quit using it, but in recent years brokers offered me 25% and 30% margin routinely.

I don't know what the current rules are, but back in the day stocks had to be off margin when they dropped under $5 a share. If that rule still holds, what does it mean that GM dropped under $5?

Why Is Everybody Selling as Buffett Is Loading Up?

birder: BRK-B is $4650 a share. Plebian shareholders can get such a good deal. Half my portfolio is BRK-B, and it is on track or ahead of schedule for a compounded 10.7% annual return for the last five years.

Buffett takes a mere $100,000 annual salary and no stock options or anything else. 99.99999% of his billions comes from his share of Berkshire. BRK-B is directly tied to the price of BRK-A (1/30th of a share of BRK-A). That means his interests are directly aligned with those of his shareholders, he doesn't make any money unless you do.

So the average shareholder can indeed get exactly the same deal as Buffett, he uses the power of bulk buying and big deals to benefit all of us. I think it is hilarious how many pundits out there are constantly telling us how to invest like Buffett, or what the next Berkshire Hathaway is, when the original is still available and still delivering exactly what he has always delivered; the best business analysis, investment and negotiation brain on the planet.