The Sky is Falling, But Whom to Blame?

by Dana on March 20, 2009

finger pointing

The human mind cannot grasp the causes of phenomena in the aggregate. But the need to find these causes is inherent in man’s soul. And the human intellect, without investigating the multiplicity and complexity of the conditions of phenomena, any one of which taken separately may seem to be the cause, snatches at the first, the most intelligible approximation to a cause, and says: “This is the cause!”

Leo Tolstoy, War and Peace [via The Big Picture]

The populist pitch-forking movement has duly commenced, and fingers are pointed in all directions. In a classic case of pot calling the kettle black, all the players are now seizing populist rage to divert attention from itself. The momentum must be maintained, should the public calm down and re-assess, everyone is culpable.

Government

The whole debacle surrounding the AIG bonus is ridiculous. The government passed the legislation with the inserted lines that allowed for bonuses in the first place. Even if Chris Dodd is the culprit, surely it only serves to highlights the incompetence and indifference of the system. If what he’s saying is true (that the administration made him do it), then it shows complicity. This indignant outrage shown by politicians from both sides is nothing but political grandstanding to placate mass anger. Better this mess is channeled towards the evil executives than at the government, right?

The de-regulation of US financial system started with Clinton, and continued with the Bush administration. Policies from ten years ago directly contributed to the California black-out (Enron), and the current mortgage crisis. Without the government’s collusion in both banking deregulation and predatory lending practices, corporate greed would’ve had little opportunity to spread.

It doesn’t take much digging to see the hypocrisy of politicians now railing against exorbitant executive compensation or incompetence. For the most part, those very politicians were responsible for the rise in reckless risk-taking behaviour of those financial Einsteins. Members of the public are beginning to see the thinly-guised witch hunt as a way to deflect blame and secure public support. This kind of shameless and ingratiating behaviour from publicly-elected officials is insulting and condescending: because it pushes accountability away from itself, and props up effigies of greedy corporate executives for the public to burn.

The Year of Living Dutch

by Dana on March 19, 2009

Netherlands

Somebody once told me that out of all the diplomats Canada send out around the world, the highest turnover usually comes from, surprisingly, their UK bureau. It may seem baffling at first, but the explanation centres on the dissonance between expectations and reality. Expectation: UK is a British version of Canada. Reality: Not. It turns out the differences in weather, geography, attitudes and habits are so out of the left field, many could not cope with it.

A couple of weeks ago, my in-laws came over for dinner, and conversation turned to my experience of living in the Netherlands. Did I find it very different? Are the Dutch weird? No, and of course, no. When you’ve been encapsulated in an environment for an extended period of time, everything just, is. I imagined explaining to them the Canadian national obsession with hockey, Timbits, curling, and poutine: not easy. Besides, I hardly expected the Netherlands to be an European version of Vancouver. But after over a year of normalizing, here are some of the funny bits I can’t help but notice whenever I try to describe the more eccentric aspects of Dutch life.

Modesty and luxury

The Dutch are modest. It shows in the way they dress: very neat, very chic, but well-covered and anything but flashy. It makes them the butt of jokes with Belgians and Germans: that they are excessively frugal that borders on cheap. Although in all fairness, Dutch thinks the Belgians stupid; Germans fat, anal-retentive, and also stupid.

Modesty also shows in the houses they live in and cars they drive. Granted, there are obvious geographical limitations at play here. At 396 people per square kilometre, this is the most crowded country in Europe. So kudos must be given to the urban planners for a job well done. Walking, driving, or sitting on the train in the Netherlands, you would never think that.

Europe

Many are describing the Obama administration as one that is pragmatic, in stark contrast with the previous presidency that can perhaps be labeled as rather ideological. In little less than two months, he has managed to placate peeved European allies and sent Hillary off to smooth ruffled feathers with the Russians. It’s hard to say whether his pragmatism stems from his personal beliefs or merely a reflection of him acting out of economic and political necessity.

This is nothing new. Thirty years of Chinese economic progress took place on the back of pragmatism. And Hank Paulson’s rescue of Bear Stearns, Fannie and Freddie, and AIG? There’s some good material for a play: “When Pragmatism Trumps Ideology – The Tragedy of Hank Paulson in Three Parts”.

This leads me to wonder about the issue of pragmatism versus ideology when it comes to immigration, partially because I spent the better part of yesterday morning forking over a handsome sum of money for a resident permit in this fair European state.

The shifting demographics of most of Western Europe coupled with its social welfare system give me the chills. Everywhere I look, I see an overly generous welfare system that create skewed incentives in education and employment, while placing immense pressures on its working members.

It’s clear what needs to be done: find ways to raise birth rates, or find value-adding immigrants.  But what will Europe choose to fight for? Preserving its welfare system at the expense of increased immigration,  or give up the comfort of the post-war social contract and make do with less based on the status quo? I dug out some research I did last year, and found an unexpected relationship between social norms and the welfare state that may shed some light on the issue.  Below is the edited version.

School

If I was eighteen, and clueless about what I wanted to do with my life, I would do business school all over again.

I’m not eighteen anymore, so I would not go back to business school.  Not when there are many other ways of learning out there.

1. I’m not fit to give you any business advice

A couple of months ago, a friend of mine headed back to school in a remote community in interior BC.  She wrote to me, excitedly about her new surroundings.  She was also excited about a business idea she’s had: the campus was set up miles away from the nearest town, so why not start a grocery delivery service for the hungry students?  I was the only person she knew with a business degree, so it found me.

I started to write back somewhat vague and non-committal, than I stopped typing, hit the ENTER key, and wrote the following: “The thing is, a business degree is probably the least helpful to someone that wants to start their business, because in business school, all we got trained on was how to service someone else.”

I wrote this to concede that I had little practical advice for her.

I was not wholly clueless when it comes to entrepreneurship – I did get my hands dirty on a business for a couple of years during university, and that has proven to be one of the biggest confidence-booster of my life.  But whatever skills I had gained during this time became neutered in a classroom setting.

School trained us to become task-masters, one that is great at driving efficiency, expediency, and a razor-sharp ability to prioritize.  We become extremely proficient at functional tasks, but terrible at matters involving creativity and imagination.  It takes a smart and able person to answer a question correctly, but a non-conformist to re-phrase the questions posed in the first place. In face of the current crisis, I think that kind of out-of-the-box inquisitiveness might have been helpful.

OLYMPUS DIGITAL CAMERA

Given the present market bloodbath, there are many ongoing discussions on what the sensible investment strategy should be going forward, and whether one should still be investing in face of economic uncertainties at all.

Most solutions favour an old-school approach. Many personal finance writers have gone back to basic principles of investing such as dollar-cost averaging, diversification, looking at the long term, be calm when the market is fearful, etc. Many are viewing investment through a mostly unchanged framework as what we have become accustomed to. But my question is, in a time when the corporate world, government bodies, and media complex have abdicated or neglected to perform their roles, why aren’t investors moving towards a different paradigm?

Here are some ways that I see the rules of investing change in the coming decades.

Long-term sustainability. Once a successful business becomes a publicly traded company, the management team willingly subjects themselves to continual scrutiny by the market. Dozens of analysts pore over the company’s quarterly and yearly forecast and issue their own estimates. After each earning call, those whiz kids compare and contrast their estimate to the actual numbers and company forecast, and issue their “buy” or “sell” recommendations. The market then reacts, sometimes violently, if the quarterly numbers greatly exceed or disappoint the analysts.

As a system, we have a stock market that rewards short-term gains and profits. By doing so, we inadvertently create unsavory incentives for the management team to maximize short-term profits at the expense of pretty much everything else.

Remember Chainsaw Al? A self-proclaimed turn-around artist, Al Dunlop infamously presided over Sunbeam over a decade ago. Within three months of his installation as CEO, Sunbeam had cut over half its employees and eliminated 87% of its products. Employees saw working for him akin to trench warfare, many exhausted from having unrealistic goals imposed on them. Upon his firing, it became clear that massive accounting fraud had taken place. Revenues had been padded through various dubious or outright illegal revenue recognition techniques. The company was cash strapped. Share prices shot up from $12 to $53, before falling back to $11.

Who is too poor to afford a recession?

by Dana on March 13, 2009

Berlin too poor for recession

What’s worse than getting caught in an economic crisis? How about, not? I know it’s wrong to laugh at poverty, even the first-world variety, because there are plenty of sad situations out there.

But when the tongue-in-cheek headline laments, “Can’t even afford a crisis: Berlin’s poverty protects it from downturn”, that’s practically baiting you to light up just a tad bit, no? In the article, the author contends that Berlin is just too “cool” (I’m guessing economically) for the recession.

Recession? What recession? From Berlin, it’s been hard to tell that there is a global economic downturn. A lack of industry and years of high unemployment mean that Germany’s capital can’t sink much further.

And listen to this.

“We don’t feel it at all,” he said. “It’s a lot of theory, this crisis. These financial types, they make crises and they make stimulus packages — it’s all very hypothetical. Everything can’t always keep growing; you can’t have 4 percent growth every year. It just doesn’t have that much to do with real life.”

That’s right, in the eastern frontier named Berlin, the city has long accepted the concept of a no-growth economy.  Its lengthy money problems  have bizarrely insulated the city from a crisis rippling through from rest of the continent.  Its mayor proudly proclaimed the city “poor but sexy” in 2003, when the rest of the world was growing at breakneck pace. With unemployment hovering between fifteen and twenty percent, and a debt of €60 billion, Berlin is no stranger to financial crisis. It’s been in one for twenty years. Or any crisis for that matter, it’s been at those for the past century.

Berlin, from the onset, looks like that grubby teenager with badly dyed hair that’s greasy and streaky, bitten nails, jeans that are too long and hangs too low, with a T-shirt that begs for attention, and when you stare at it for too long, he looks up and glares at your with pure venom and then gives you the finger. And then you hear about his abusive father and alcoholic mother, and learn about him having to look after his grandfather with Alzheimer, has a job in the grocery store and occasionally turn tricks to bail his drug-addicted sister out of trouble. Something like that. That’s how Berlin feels to me: wounded and indignant, angry but indifferent, stalled but trying to push through.

the past

“How do I define history? Well it’s just one f-ing thing after another.” The History Boys

As market continues to hit record lows every week, everyone and their mother has felt the “lack of confidence” that haunts the economy. Things have gotten so bad, quipped Jon Stewart, that the “British are cheering us up”, “and it’s like Seattle over there, rain, but without coffee.”

What’s setting this recession apart from all its predecessors is the fact that so many fast-and-loose rules have been broken. We’re told that young people nowadays can’t count on an ever-rising standard of living anymore. Nor can we expect the truism that housing prices have nowhere to go but up, and thus always a good investment. It’s hard to trust high-return investment brokers too, even those you’ve known for 50 years. Your corner community banks might go out of business and the next thing you know, the FDIC will be running it. All of these uncertainties, strung together, signal the utter collapse of confidence. Whatever our previously held ideas of people, institutions, and truisms may have been, that foundation is shaken and cracked.

But how sensible was it for us to subscribe to these rules in the first place? In retrospect, could all these occurrences not have been a series of lucky coincidences, happily re-enforcing themselves into our collective memory, and has since then become a self-fulfilling prophesy?

In political science, there’s a theory that addresses this issue, although in different contexts. It’s the idea of constructivism. It rose to prominence after the Cold War, as no existing theories were able to foresee and predict the sudden collapse of the Soviet Empire. In retrospect, it was hardly sudden, but hindsight is 20/20. So the idea of constructivism challenged the traditional assumption that the external environment determines one’s interest and subsequent behaviour. That is to say, too much emphasis had been placed on the power and structural limits of the system, and too little on the players within. For example, instead of thinking of these awful 10-year plans as a product of Communism, try to see how the practice of central planning shapes and even further solidifies the Soviet utopian commitment.

What makes a good blogger?

by Dana on March 11, 2009

what makes a good blogger

It’s been a month since the Investoralist officially kicked off, and I thought I’d briefly pause and write about what I’ve learned so far.  Granted, a month is barely a blip, and some of the musings may seem pretty amateur to bloggers that have been labouring in this medium for years.  But hey, this is the Internet, everyone gets their piece.  And there’s hardly anything that I can do to prevent you from clicking away.  So off I go.

The need to provide value. Before I enrolled in politics – that was my choice for graduate studies, I was interested in the Middle East.  To prove it, I went traveling in the region and ended up living in Egypt for three months.  I took Arabic classes. Then I went to grad school, and realized that everyone was interested in the Middle East, and everyone has seen the sufferings of the Palestinians, first-hand.  I then promptly decided that I was no longer interested in the Middle East, since whatever problems it may have had, it was not for a lack of concerned political science students.  And if all these smart, motivated, and outraged graduates of political science studies around the world have yet to find a solution to the problem – other than becoming bitter and indignant and depressed, I had little to offer.  At least not through the same path.  Or not at all.

So now I find myself blogging about investing, which is a subject that’s pretty vast and covered by a lot of people.  The same issues are frequently debated up and down the journalistic and blogsophere chain.  Some opinions are fruits born from careful examinations of arguments and data, some agenda-driven, some are pure drivel and derivatives.  The issue of adding value to the discussion is never far from my mind when I write.

The need to be interesting. I’m not sure if the importance of being interesting should take a back-seat to providing value.  God knows that we are subjected to enough dull and dreary readings.  I can barely work up the will to look at my tax re-assessment from 2007 and call the government to see why they are demanding $64.36.

demograhics

This is part two of a two part post on the importance of demographics on one’s investment choices.  Part one addresses the perils of neglecting demographics, and today’s post will discuss investment ideas backed up by demographic trends.

The more sensible consumer mentality may also be applied to investments. For years, we have invested in trends that most people do not understand – many had little fundamental support behind it other than the sheer force of market momentum. The foolishness of that collective decision is reflected in overall market returns: during the past decade, the stock market has not treated us well.

Perhaps it’s time to look at investments that have the solid support of demographics and real demand behind it? Is it any surprise that during this crisis, Best Buy is down 47% and Family Dollar Stores are up 30%? Before the fundamental disarrays of the economy are addressed, it’s safe to say that products and services that meet essential needs will stick around. On a side note, would it also make a lot of sense to retrain those laid-off workers from the previous fluff economy in those fields that have long-term demands? Now going back to the idea of ongoing demands, here are some thoughts.

Follow the demands of the aging population and pay attention to healthcare related companies not run by crooks. In most of the developed countries, healthcare needs are hardly abating. The demands for various levels of medical care in the forms of doctors, nurses, medication, medical equipments, and assisted living will continue to rise every year. Yet the broken Medicare system in the US, along with issues of patents, the emergence of scandals and ethics quandaries related to the pharmaceutical industries, have tainted the industry reputation and sidetracked the dire issue on hand. But with pressing demands that will continue rising with time, it is an industry that demographers would pay close attention to.

demographics

This is a two-part article that addresses economic and investment implications of demographic trends. Today, I look at what happens when we ignore demographics. In tomorrow’s column, I look at some investment opportunities supported by population and demand trends.

I still remember presenting David Foot’s book Boom, Bust, and Echo in my high school economics class. It was the first time I was exposed to the idea. It was clear, succinct, and for me, absolutely mind-blowing (I was 17, ok?). Its sociological, marketing, economic and political implications kept me engaged and excited for weeks leading up to my talk. I still remember feeling exasperated at not being able to present the explanatory power of this concept within an hour of allotted time. This was before Powerpoint came along to provide structural assistance and graphics entertainment. So God bless my fellow classmates for sitting through the hour of what must’ve been an excruciatingly boring experience: me, with questionable level of articulateness, wildly gesticulating with my right hand, while waving pages of notes with my left.

It’s been a while since high school, and the over-use and abuse of the term has since left me disillusioned with its clairvoyance. The rest of the world must have discovered the magical potential of a concept that is always readily available to provide digestible explanations for, well, everything.

When I worked in the oil boom town of Calgary in western Canada, any high school drop-out rig worker or administrative assistant, when asked about the sustainability of sky-rocket crude prices, would shrug their shoulders and say: it’s China and India, they need oil, it’s all about demographics. The same line of reasoning was used to explain the rise of food prices last year: developing countries are getting richer and eating better, there’s an increase in demand, again, it’s demographics. The same explanation sufficed for the bio-tech and pharmaceutical stock rally every few years: the baby boomers, they’re getting older and need medication, it’s demographics!

What’s a reporter to do?

by Dana on March 6, 2009

Reporter

Jon Stewart tore CNBC a new one this week, sending ripples throughout mainstream media and blogosphere. “CNBC hating is mainstream!” Screams one headline. Then came the slew of media pundits, rushing to defend CNBC and by proxy, itself. This one in particular is especially lengthy and defensive. Below are some of the author’s grievances in face of much critique of financial reporting, and my thoughts on them.

We were ignored, then we were cut

It’s been a lousy decade or so for print publishing, and it’s getting worse. Budgets have been cut, newsrooms slashed. Business reporting in most cities is pretty bad, often an adjunct of local chambers of commerce. In other media, there’s been a turmoil of business models, as the Web crowded in, bringing with it a different style and lots of new bodies. Roles have changed. Anyone with a clue (many without) now writes a column or a blog. The business seems full of younger folks (a function of advancing age perhaps); the era when every newsroom had a cranky wise man with a cigar that had seen it all is sadly over. This is particularly a problem in financial journalism, which demands historical perspective and expertise. To make matters worse, finance has grown dramatically more complex, opaque, global over the past few decades. And despite that complexity, the rise of financial television and financial blogging has simplified coverage to an equity horse race, with an omnipresent pressure to predict. Besides, since when has most journalism at any given time been all that stellar? Who correctly called the Great Depression anyway?

Whoa, easy there with the gripings! The newspaper industry did suffer from a drop in readership (some were made up on the web), and a significant drop in advertising revenue from some of its now-bankrupt clients. But the article failed to mention that the largest contributor newspaper failures are the massive debts incurred between 2006 and 2007. For example, had the Tribune Company not triple its debt in one single transaction in a deal to take LA Times and Chicago Tribune private, they would still be able to report earnings in the 10-20% range of their revenues. But the burden of debt changed all that.

Who is worse off than you?

by Dana on March 5, 2009

misery

Growing up, whenever I screwed up in a test or assignment in school and had to face my mom, I would always preface my failure by citing more spectacular blow-ups by my classmates. The habit never escaped me.  Now instead of placating my parents, I use it as a self-administered sedative whenever things get bad.  By reminding myself that it could be worse.

It’s easy to fall into a depressing spiral these days.  There’s little voyeuristic pleasure in watching your economy on a high speed race heading for the cliff, especially when your savings and investments are wrapped in the vehicle.

But maybe you can take solace in the fact that we are all in this together.  And whichever corner in the world you might be, there’s some level of financial uncertainty, maybe even serious suffering going on.  But let’s take a break from self-pity today, and indulge ourselves in the guilty knowledge that out there in the big world somewhere, exist those that screwed up (or got screwed) way worse.

1. Iceland. With a population of 300,000, this northern tundra is the size of Kentucky. Inheriting this insular landscape with your large extended family, gifted with little other than thermal geezers and short days, the setting is already rather glum.

Add reckless Icelandic fishermen, stir in some explosive banking capital epitomized by a stock market that multiplied nine times from 2003 to 2007, and we get the tragic climax: a bankrupt country with debt 850% of its GDP.  To put that into perspective, an average of $330,000 is owed by every Icelandic man, woman, and child to its numerous and very angry foreign debtors.

What’s worse, to get out of this mess, the Icelandic has abandoned their currency, and now needs to claw its way up Brussels’ ass to save its economy. To be allowed entrance in the EU, it will most likely have no other choice than accepting reduced fishing grounds in exchange for debt forgiveness. The monumental humiliation of it all will shatter the Icelandic collective confidence for decades to come.

The unburdened psyche of America

by Dana on March 4, 2009

hubris

A few weeks ago, I seriously considered buying a Kindle.  After much research on the web, I realized the task was futile.  I live in Europe at the moment, so the Whispernet function would be useless here.  As I am Canadian, with no US address nor credit card, purchasing the device and subsequent ebooks would be impossible.  On a desperate whim, I called up a cousin of mine in Massachusetts, and asked if I could use her card and address to order.  She told me there’s a backorder of those anyway, so why not wait till they get stock?

Then a few days ago, my boyfriend showed me an article from Fast Company that promised a newer and cooler Kindle that might be available worldwide this coming December.  So I abandoned my previous wild goose chase and decided to wait.

Which brings me to this.  The US economy is in disarray and worse news keep coming.  But  there is something to be said about the level of innovation that continuously springs out of the country regardless of the wider macro-economic picture.  Think of some of the best inventions and brands around that provide real value to people everywhere.  Most of them are proudly American creations. It might not be apparent to those of you living there, but for us outsiders, we always have to wait!  The latest services, tech toys, ideas, sometimes they take weeks, if not months, to flow out to the rest of the world.

It’s easy to condemn excessive greed, risk-taking and the resulting hubris at a dire and troubling time like this.  But we should not forget that without some degree of speculation, risk-taking, and ambition, we might not have, say, Amazon.  As a side note, I’m not championing the speculation of paper and inflatable “assets” that so many have resorted to in this crisis, but tangible products or services that provide real value.  Now, this is the very Amazon that some ridiculed for years on end, for not turning a profit.  Ten years ago, amidst our general lament over the disappearance of printed pages, which analyst could have possibly said, yep, Amazon the online book retailer is gonna make reading sexy again?

farming

Do you remember what the most attention-grabbing headline was a year ago?  Before the US decided to embrace the “change” administration, before the credit bubble burst, before the cracks in the financial system started to appear for all to see, the Olympic was still in the future, and Michael Phelps and Bernard Madoff were yet to become household names .  Yes, that time.  Do you remember what dominated the headlines then?

The global food crisis.

That, along with a general global resource shortage, seemed to be what was on most people’s mind.  It was hard not to notice.  All around the world, the grocery bill, along with the gasoline prices, seem to follow an unwavering upward trajectory.

The media loved the story.  Theories of “the perfect storm” emerged to explain the rise: population growth, change in diets, irregular weather affecting harvest, higher transportation costs, and the drive towards bio-fuels.

Then the global financial crisis hit, and we suddenly had bigger problems to worry about, i.e., our pension plans and investment portfolio cut by half.  Commodity prices started to fall, including agricultural food prices, the grocery bill’s upward march is temporarily stalled.

Then just like that, the food crisis front went quiet.

Has the global food crisis gone away? Has the hand of the market somehow corrected the excessive rise of grain prices, and we no longer have a supply problem?

No, of course not. The fundamental factors that drove prices up last year has changed little.  The demand from the increasingly hungry consumers from the emerging markets still remains, albeit the growth of demand may have slowed slightly as a result of the financial sector snafu.

Yet with tight money all over, we are faced with an increasingly dire supply situation.  Reduced international aids and banking lending could cause farmers to cut back on their plantings, which may lead to reduced harvests in some major exporting countries.  Lower food prices on the international market can make farming a losing proposition in certain parts of the world, further reducing the crop output.  And the sheer volatility of food prices, as demonstrated in the last two years, are making it increasingly difficult for farmers to plan and invest.

expert predictions 2009

Thank you to The Penny Daily for including this article as its “Editor’s Pick” in Carnival of Everything Money #5.

We set out to see what the experts are saying about 2009.  What we didn’t realize was how the art of providing financial outlook has become a game of “one down-manship.“  How else would you explain the boom in competition for the title of Dr Doom?

So it would seem that the Rapture is upon us, are you ready?  Yeah, we feel the same way.

Here’s our survey of what some of the bigwigs in the investment industry have said about 2009 in recent months.  In our mock* roster, we have Warren Buffet the sage; Nouriel Roubini aka Dr Boom/perma-bear, or our favourite, the playboy Professor; Nassim Taleb aka Black Swan; Peter Schiff who’s-laughing-now; Jim Rogers my-kids-speak-Chinese-and-that-is-my-investment-hedge; Marc Faber the original-Dr-Doom; Don Coxe via Basic Points; and John Embry the Canadian goldbug.

Outlook for 2009

Investoralist: So how bad is 2009 looking?  Don’t hold back now, give it to us straight-up!

Warren Buffet: We have lived in one way in one type of economy. And we’re now deleveraging that economy. We’re gonna have to live without the same impetus from credit expansion that really helped propel the economic engine for a long period of time. That wind will not be at our back.

The economy will be in shambles throughout 2009, and, for that matter, probably well beyond, but that conclusion does not tell us whether the stock market will rise or fall.

Nouriel Roubini: The worst is yet to come.  I don’t want to name names, but many [banks], given the housing bust, will become insolvent. Their losses are mounting because they have written down only their subprime loans so far. They haven’t started writing down most of their consumer-credit losses, and reserves for losses are much less than they should have been. The banks are playing all sorts of accounting gimmicks not to recognize them. There are hundreds of millions of dollars outstanding in home-equity loans that eventually could be worth zero, too.