Have you thought about DIY learning lately?

DIY Education

I’ve felt ambiguous and conflicted about education for a long time, because it inspires while it stifles. But here are two ways it has always resonated with me.

One is learning for learning’s sake. Now looking back, and without sounding nauseatingly cheesy, there is something pure and unadulterated in the joy of soaking in the world.  I was never a science person. But I still remember in Grade 11, the excitement I felt bubbling from my belly, when trying to explain to my mom the idea of atmospheric pressure and rain formation and somehow likening it to the pan on the stove that was steaming our vegetables for dinner.

But I am also diabolically practical. So this form of learning left me feeling somewhat indulgent. Coming from a family where money was never something to be taken for granted, I always felt slightly guilty if what I was putting in my brains was somehow not contributing to the process of attainment that would eventually be responsible for putting food on the table.

The second source of turn-on is the sometimes masochistic pleasure of having to perform under pressure. Yes, I am perfectly aware of what that sentence sounded like. But the truth is, when overwhelmed to just the right degree, education has contributed greatly in honing my “getting-things-done” skills.

For me, education hit the right spot in high school. It was broad enough to sample from, yet challenging in its particularities to stimulate quite a bit of brain activities. But university, not unlike technical colleges, tends to churn out specialists, whether in the fields of art history, chemical engineering, or accountants.

The often repetitive and dogmatic field of business studies made me more cautious, practical, and cynical about the institutional delivery of education. It also iterated the value of an education by continually flashing dollars signs in front of students in the forms of sponsored conferences, prized internships, and the ultimate plushy fruit – a prestigious, high-paying job.

After a couple of years of manipulating spreadsheets, I returned to school and picked up, then subsequently dropped, the utopian study of politics. Slightly disillusioned over the ivory tower dissection of some irksome subjects, I turned to the idea of educating myself.

Needless to say, we live in a time when knowledge dissemination could not be greater and more easily accessible. The only thing required of us is our time and attention. After divesting myself of school, I had all the time in the world. I can safely report that, if you have the time and patience to learn, then there’s someone out there willing to teach you how to do it, most likely for free.

My point here? Learning does not always need to take place in school, nor does the departure from a particular time in our lives signal the end of learning. Unbeknownst to us, when we put our heads down at jobs, our exposure to the world narrows significantly. But learning need not stop there – if not for the selfish reason of keeping ourselves relevant in this ever-changing world.

Believe it or not, the recession has perks

Recession has benefits for Gen X and Y

Thanks to the Skilled Investor for including us in its Carnival of Financial Planning for Mar 7.

Really?  Yes.  And I’m not talking about the less stress, better health, more me and my family-time kind of perks.

Let’s rewind.

For months, we have been pounded in the head over and over again on the evils brought on by the recession.  Let’s recount the havoc wreaked.

  • Retirees have seen their savings significantly reduced or wiped out, some even going back to work to alleviate the cash problem.
  • Baby boomers see their expected retirement date stretched indefinitely into the horizon, investments portfolio reduced, housing worth shattered.
  • Gen X are getting squeezed in the workplace in more ways than one, and feels more insecure in the job market.
  • Gen Y, having just gotten their feet wet in the workplace, feels betrayed by the many promises dangled in front of them.  Demographers have predicted speedy career advancements as a result of baby boomer exits. So much for that.

There has been considerable faults placed on the baby boomers, in their relative easy paths to success in America since the 1950s.  There were no major war nor catastrophic financial turmoil, jobs were easy to come by, properties were cheap, and the infrastructures were there to service their every need.  Many Gen Y and Gen X blame the “selfish” generation for their over-the-top consumption, excessive debts, degradation of the environment, mis-management of the social security and health care systems that will be defunct as soon as they have benefited from it, and falling asleep at the helm when it comes to financial regulation that plunged the nation, and perhaps the world, into the perilous position that we are in now.

Simplistic and over-dramatic? Indeed it is.  But there is no denying that for the younger generations, the foreseeable future is an uphill battle.  The workplace will only become more competitive, property prices are still steep in many parts of the country, health care and social security is broken, and country is bankrupt. Ouch.

But is this recession really the be-all and end-all that a lot of people make it out to be? Of course not.  Is there a silver lining under all these stories of misery? Of course there is, as there always is, during times of unjustifiable pessimism.

Times are bad, and things are difficult.  But as Warren Buffet said, and I’m paraphrasing him here, that in the last a hundred years, the US has seen a flu epidemic, two world wars, a great depression, a dozen recessions and panics, and by the end of the century, an average American was living seven times as well as they did beginning of the century.

Granted, many people lament that this will be the first generation that will not live as well as their parents.  And surely, we have no reason to expect the past to repeat itself indefinitely into the future.  But perhaps this recession will even out the playing ground just a little bit for the disgruntled X and Ys.

Paging common sense, integrity, and accountability?

Accountability and Integrity Needed

Does the name Abby Cohen ring a bell? It does for me, and it broils my blood. Chances are, if you were at all invested during the tech bubble in the early 2000s, you would recognize the name too. Dubbed “perpetual bull“, she championed the rise of tech and telecom stocks all the way to the stratosphere.

At that time, she was the star analyst at Goldman Sachs. The companies she covered loved her (which should’ve been a warning sigh all by itself), the market loved her, as wave after wave of heart-stopping rises made her outrageous bullish calls nothing but prophetic. In fact, in the midst of the March 2000 sell-off, she was still lauding for another bullish run.

So it bugs me to no end that a few weeks ago, the name Abby Cohen popped up on my screen again. It seems like over the last few years, Ms Cohen was back to her old tricks, spreading her never-ending cheery outlook throughout 2007 and 2008 on any media outlet that would have her. Her standing at Goldman was seemingly undiminished till mid-2008 when she was finally replaced (or self-demoted) in her role as the chief strategist. Yet her name still pops up, ready to hypnotize another generation of ill-informed investors, eager for a quick buck in the casino of stock trading.

My question now is this. How could this happen? How can individuals like Abby Cohen not only survive, but thrive as an analyst, with consistently bad calls on the market? If a supermarket stocker routinely make mistakes while stocking, fail to input the right information into the computer and create nothing but inconvenience for the customers, he would be fired, right? So why can’t the same accountability be applied to a stock market analyst when it is her job to be, at least, be more right than wrong?

It might be negligence, ignorance, or outright incompetence. But the media, so keen on scrutinizing every piece of breaking news on its 24-hour network, seems to lack both the will and the ability to call out the inconsistencies.

And I can hardly imagine the conversations that would go on behind closed doors at Goldman (and undoubtedly many others) when it comes to dealing with puppet analysts such as Cohen. The thing is, the stock market can only go two ways, up, or down. So whichever way you call it, you are going to be 50% correct. I wonder if these advisory outfits divide their analysts into two groups, the uppers and the downers, each inextricably bound to their roles as surely as they are to their bonuses. And just like a traveling puppeteer workshop, they would whip one or the other out when the occasion calls.

Perhaps with the impending restructuring of the entire investment/banking industry, some level of scrutiny, accountability and integrity will be injected into the system. These basic human decencies should be demanded of our bankers as much as any service providers we pay for.

Believe this, and you’ll sleep better at night

Market Inefficient Sleep Better at Night

Modern finance has three perspectives on the workings of the stock market. Inefficient, semi-efficient, and perfectly efficient. For the most part, market observers nowadays believe in a semi to perfectly efficient market. That is to say, information regarding a company is priced into its stock almost instantaneously.

Financial statisticians devote years churning out data to prove that the market, for the most part, is extremely efficient in factoring in new information. And stock prices: barring insider information and uncouth accounting manipulation, is an accurate barometer of the intrinsic value of the company.

Except this is hardly the case. The assumption of market rationality can only be taken so far. We have all seen what happened to the market during the tech bubble and the now real estate bubble. Waves of market decline we are witnessing now may very well signal irrational pessimism: there are many businesses now trading well below their intrinsic value.

Now we need to separate the true investors from the speculators.

Most market experts are behind the notion that buying low and selling high is the right approach to investing. In other words, a successful investor should consistently buy at the lowest point in the market and sell at the point of irrational exuberance. Considering nobody has a crystal ball and thus very few can consistently “time” the market successfully, the industry of technical trading sneaks its way into the investing world. Jargon like resistance, support, and moving average enter the popular vocabulary.  Many people go for it hook, line, and sinker, then get burned attempting the impossible. The impossible being trying to outsmart everybody by applying the gambling mentality to investing.

And then there’s Warren Buffet and his disciples. First, they separate the notion of using stock prices to measure the value of a business. They distrust the oscillatory swings of the market and the speculative herd that drive it. Buffet views buying stocks or bonds akin to owning a slice of the business. If the business is sound, why worry about fluctuations in price? Secondly, the timing issue is eliminated. Berkshire Hathaway does not seek to enter the market at the lowest price, nor exist at the top. Instead, BH makes a point of exiting the market as soon as the stocks are thought to be overvalued, thus providing its shareholders a fair return on their investment regardless of their chosen time of exit.

What a relief, to take back control instead of beholden to a schizophrenic market.

Which brings us back to you as an individual investor. Sure, it would be hard to own a piece of the business you invest in without Buffet’s capital base. But it does bring the point home that you don’t need, nor want to be an opportunist when it comes to investing. If you do bring the gambling mentality into the investment game, then be prepared to lose it all.

Breaking out of holding pattern and taking steps towards change

Change can happen

Time and time again, I hear tales of friends getting stuck in their lives because there are too many factors outside of their control. There are student loans to pay off, financial responsibilities to meet, expectation from parents to placate. It is a lot to take on. And in the midst of all these, it’s all too easy to feel like a hamster on a wheel, spinning constantly without getting ahead. Right?

Bullshit.

If you are in your twenties and early thirties, and yet to be saddled with the responsibilities of children, then what are you whining about? If there is something you don’t like about your life, this is the time to say screw-it, move on, and try something else.

Figure out what you’re unhappy about

Nobody is perfectly happy with their current situation, whatever it may be. But if you feel there is something fundamentally wrong, or missing, then work on it. Many people that I speak with suffer from this form of anxiety that gives off these jittery and fidgety vibes. They all tell me that they are anxious for change, but most can’t not pin down exactly what it is that they want changed in their lives.

I usually rattle off a list of potentially irksome areas:

  • Change in city/country
  • Change of job
  • Change of career
  • Change of friends
  • Change of scenery altogether (all of the above)

The last option is easy to fix. Usually the person packs their bags and the next thing you know, there are pictures of Romania on their Facebook. But travelling does not automatically lead to a gotcha moment, nor does it raise you to a higher level of awareness. For the most part, backpacking trips do not offer many moments to meditate on the meaning of life. It’s always action-packed and thoroughly exhausting for both the physical body and mental faculties.

So then the question begs, what do you need to fix in your life to be happy? It is notoriously difficult to figure out what truly makes us happy, but investing some time to figure out whether your are happy with the 3 Ps: People, Place, and Profession, might be a step in the right direction.

Changes is always difficult and never difficult

Anything that seems challenging now, will only become even more insurmountable as we age. Our cognitive processes witness a steady decline around our thirties, our physical body bump against a similarly plateau. Many also formally cross into adulthood by getting married and starting families. All these added responsibilities and limitations will unfortunately constrain our choices in life further. If change seems an impossible feat now, then it might never come for you.

Who would you trust with your investments, Lindsay Lohan or Meryl Streep?

Streep or Lohan to advice you on investmentPuzzling?

Let me explain.

I am a huge gossip hound, I don’t read People or US Weekly, but I do follow a number of gossip bloggers almost religiously. I love one in particular, not only because she’s highly entertaining AND introduced me to Fight Night Lights, but because her insights allowed an outsider like me glimpse into the cynical workings of the entertainment industry. How else could I have come to understand the dire consequences of plastic surgery addiction, passive-aggressive diatribes of an insecure diva, and the many layers of hidden media manipulation that’s unbeknownst to most of us?

Time and time again, the lesson that I take away from the smut is this. The IT boys and girls come and go, but the Meryl Streeps of the world do their jobs, go home, and wake up to see another decade or two of good works ahead of them.

Now, this is not a gossip blog, and there is a point to be made here, I promise. The thing is, just like an actor, an economist or analyst has a very long working life ahead of them (if they are lucky). And like Hollywood, the waters of Wall Street and the investment industry is just as treacherous. It’s hard to get ahead or get noticed in those ultra-competitive and dog-eat-dog kind of environment.

So when an analyst suddenly gets exposure by mastering some new trading anomaly or has a part of his or her research predictions come true, their status is swiftly elevated. It’s not unlike a starving actor in LA, rejected after years of unsuccessful auditions.  His luck turns, he unexpectedly lands a starring part in some Josh Schwartz hit show. And just like that, he becomes household name in a desirable demographic.

But Wall Street, just like Hollywood, is fickle. The media is always looking for a fresh perspective, much the same way Hollywood paparazzi are always on the look-out for fresh faces to sell pictures. The end motivations are the same: getting people’s attention, whether it comes in the form of a contrarian opinion or drunken debauchery on Rodeo Drive. Media looks for controversy, and there are always willing participants.

They are usually always too happy to be typecast in a role. Whether it’s the perpetual bull, perma-bear, or the new party boys and girls frequenting Il Sole. What they don’t realize yet, is the limited shelf life of their newly minted status, and how quickly the media will tire of them and hold auditions for the next cast when the time comes. It may be a new kind of show the audiences turn to, or it might be the market taking an unexpected turn for the better or worse.

Then, as quick as it came, fame departs, and the IT stars of yesterday will be forgotten. Squeezed dry of their appeal by their handlers, pigeon-holed in their respective niche, they are left fending for their careers by groveling on their knees for scrappy roles, or occasionally getting exposure by pulling stunts that capitalize on their fading fame.

Are you seeing the whole picture when it comes to investing?

See the Whole Picture

Thank you to Penny Daily for including us in its Carnival of Investing Strategies #5.

What makes a successful long-term investor? Is it an exceptional understanding of the market? Is it a Blackberry full of Wall Street contacts that tip you on every insiders’ move? Is it a PhD in quantum-physics or mathematics?

No. Because if that was the case, then most investment funds with their well-paid, well-educated, and well-connected managers would not be walking around with their portfolios 50% lighter.

So what is it about the market that suckers in so many people? How is it that some investors are ruthlessly spit out, and others remain relatively unscathed in the long-run?

Knowledge.

But not just business knowledge. What has been taught in business school and other rudimentary business classes do little to improve one’s chances when it comes to investing. Why? Because the knowledge presented in those accounting and finance classes only give you a myopic look at the whole picture.

For example, say you are an accounting maven but know nothing of what’s going on in the mortgage market in 2006. You look at the balance sheet of banks, match up the debit and credit sides, check off the triple-A rated loans, and marvel at how the bank has managed to grow so quickly in the last few years. But any economists looking at the picture would be alarmed at the rate of growth, probe deeper into the loan ratings, gasp at the poor judgment exercised on part of the bankers, and issue a warning. Someone who is schooled in politics would take a hard look at the political contributions made to head of committees that signed off on the predatory lending policies and yell foul! And any Tom, Dick, and Harry, who’s been canvassed by sketchy pseudo-lending institutions would tell you that if it walks like a scam, and quacks like a scam, it is a scam.

So there, it only takes someone who is in touch with reality to smell the foul. If confined to an academic or industry-conformed bubble, it will take someone who is willing to see the whole picture and dare to ask questions to reach the same, sane conclusion.

Here’s another more direct investing example, taken real-time off the happenings of the current market bloodbath.

When the market started going off the deep end beginning of the year, many respectable economists and analysts called for a sharp decline in the US dollar.

Not that the dollar didn’t deserve it. The stock market was abysmal, debts were piling up, inflation was fuelled by the astronomical rise in crude prices, and the gold bugs went nuts.

But the dollar didn’t fall, at least, not in 2008. Contrary to what many expected, the greenback went from strength to strength against the pound, the euro, the Aussie and Canadian dollars. How could they have been wrong? Their analysis made so much sense.

Why cable business news will drive your investments into the ground

Cable News Bad for InvestmentWhere I used to work, we rotated MSNBC, CNBC and CNN Business in the background non-stop. Every market movement relevant to the energy market was followed, analyzed, and regurgitated on those channels. For the oil trading desk I worked next to, every threat of Iranian oil embargo, every possible hijacking off the Somalian coast, every Nigerian riot, would send the trading guys off in a flurry of activities.

Back in 2007, oil was trending up into infinity and beyond, and everyone was in a great mood. I don’t know about now. But my point here is, these kinds of reporting are great and useful.

For a trader.

But you are not a trader, are you? You don’t trade Forex or options for a living, do you? Because if you are an investor – and I define an investor as someone that holds investing instruments for the medium to long-term, then SHUT OFF the TV. They are worse than useless. They are downright detrimental to your investment portfolio.

The business reporting business, much like the regular media outlet, is like a stage. There is a cast of characters. They play their roles to the T, and they do not improvise. The networks themselves are self-serving media machines that get turned on for one reason and one reason only: to make a profit. Next time you see Maria Bartiromo, Erin Bennett or Becky Quick, you need to realize who’s paying their bills. It’s the advertisers, usually financial service companies that fill up these 10-20 second slots right after they tell you they’ll be “right back”. And who do they return with after the commercial breaks? Oh don’t you know it, it’s the in-house economist/strategist/analyst from those very firms.

Do you see what I see here? I see irreconcilable conflict of interest. I see many of those guests coming on the show with a very clear agenda in promoting a certain investment style, a sector which they are experts (and happen to do business) in. The intentions are not always malicious, but it does place a bit of a gag order on the interviews themselves. After all, should a disagreement arise, how far can an anchor go on challenging their guests’ positions, knowing fully well their counterpart is partially footing her salary.

And then there are those anchors that leave you scratching your head. These are the personalities that would be better off working in the pits of the Chicago Options Exchange. Because they seem to confuse their responsibility in covering useful business and economic analysis, with pulling hourly trading tricks out of the hat. Watch this (especially towards the end) and tell me there’s any integrity in what they are doing here. What’s the obsession with actionable items, are they trying to cure a rash? I don’t know if what they are selling is going to show up on some late-night infomercials, but I ain’t buying.

Why smartness and education do nothing for your investments

Education and smartness do not help investingIt is little exaggeration to say that many people are losing their shirts (if not worse) through the ongoing financial turmoils. A few got caught up in some truly heinous swindles, but for the most of us, the losses came through our previous-thought conservative investments.

What happened? What happened to the smart experts that put out money into hyper drive for a fee, but came back with losses? Are all these letters behind their names truly worth their weight in paper?

In all fairness, in a year where even Warren Buffet’s having a tough time, we can ask for little more than a mere preservation of capital. But for millions of ready-for-retirement boomers, this is no consolation. The S&P Index is back to 1997 lows, the bloodbath continues on Wall Street and Main Street.

Troubled started brewing by the end of 2006, as many forecasted low growth for 2007. Yet the market defied expectations, and the naked emperor marched on.

Now in retrospect, the picture is so clear. The US and a number of European countries were experiencing massive real-estate led credit bubbles. Many banks were leveraged to the hilt on their sub-prime lending. Debts were piling up (residential, commercial and credit cards). But the general consensus, or should we call it wishful thinking, was that there would be a soft landing at worst.

Instead of heeding to a minority of economists and analysts’ pleas to exit the market, more individual and institutional investors poured money in, hoping to ride the ever-rising wave to riches.

The media outlets were of no help. The 24-hour squawk box provided little insights and meaningful discussion to the issue. Eager to fill out its screen time, so-called experts and analysts were brought in, each with their own agendas. The stage was set up for them to further confuse the public and fan the flame of speculation.

At a time when the only thing left to say should have been: we’re in trouble, how do we get out, and by the way, get the hell out of the market right now; the discussion on short-term profiteering and trading opportunities raged on.

As much as on-line discussion over the true state of the economy becomes increasingly evolved, timely, and trustworthy, it pales in comparison to the media machines dominating the airwaves. Is it any surprise that on a day of epic market decline, McCain, a respected political veteran and what we would expect, an informed citizen representative, could utter that he believed that the economy was “fundamentally strong”? I’ll bet I know what show they had on TV while he was waiting backstage for his campaign rally.

On that note, let me address the titular issue of why being smart and educated does nothing for your investment portfolio. This may come across rather old-fashioned, but the basic human virtues of integrity, patience, self-awareness and self-understanding are the qualities that will make you a winner in the game of investing. And the sooner we recognize it, the sooner we start making smart and wise decisions in our investment lives.

Japanese finance minister our hero of the week

Japanese finance minister snores off during press conference

The Investoralist has found itself a new hero in the (soon to be former) Japanese finance minister.

This is one tough week for Japan.  First it declares that it’s in worse shape than anyone else by getting double-whammied with zip domestic consumption, and falling exports.

Kaoru Yosano, Japan’s economic and fiscal policy minister, said the economy which relies heavily on exports of automobiles, machinery, and IT equipment for growth had been “literally battered” by the global downturn.

“This is the worst ever crisis in the post-war era,” he told a news conference on Monday. “There is no doubt about it.”

Then this shit splashes all over the web, and before the Japanese know it, they are short a finance minister!

Hero of the day Japanese finance minister Shoichi Nakagawa tried getting through his hangover with some shut-eye during a press conference.  But it’s just so hard to nap when those reporters can’t stop asking you damn questions!

Unlike other world leaders that reserve their distain by barking at questions, Nakagawa decides to upstage the kid and cute animals by slurring his speech and nodding off while doing his JOB!  There’s nothing that screams Dismissed! louder than that precious yawn of indifference (0.31).  Oh snap!

If your country’s been in a two-decade recession, and now your largest export partners, the US and China, are clawing their ways to dominate the underworld, what would you do? But more importantly, What Would Shoichi Nakagawa Do (WWSND) ?

Get hammered, and passive-agressively tell the rest of the world to fuck-off, because he knows that no amount of talking will bring back the export-bonanza of shiny Japanese gadgets.  Suck on that G7, with your emasculated economies and sobriety!

picture source: kitsuneRagdoll

Inflation or Deflation? Let’s settle this once and for all

Recession means inflation or deflation?

Once the economists ascertained that the economy has in fact been contracting since November 2007, heated discussion started brewing as to whether we are heading towards a deflationary period akin to the 1930s and current-day Japan, or whether the over-eager Fed and other Central Banks around the world will over-simulate the money supply, leading us towards a potential inflationary period similar to the 1980s.

There are generally three camps. There’s the camp of deflation, headed by big names like Nouriel Roubini and bloggers like the “Mish”, coining new vocabulary by predicting an economic decent into stag-deflation. An overwhelming number of vocal critics head the inflation camp, claiming that even if deflationary pressures are present in the current economic climate, large injections of money into the banking system will devalue our money. Then there’s the hyperinflation group that extrapolate the size of money injection into the economy to signal potentially explosive inflation, thus scaring the crap out of everyone by throwing terms like “Weimar Republic” and “Zimbabwe” around.

So who’s right?

Solid evidence of deflationary pressure on economy

There are no shortages of signs pointing to a deflationary period in the economy.  For the sake of consistency, we will define deflation as a contraction in the money supply and credit.  While others may look upon deflation as decline in the general pricing index of goods, this is incorrect.  Falling prices are merely a consequence of deflation, and not the phenomenon itself.

What are some arguments for deflation?

1. The short-term credit market is frozen. Banks around the world are still assessing damages brought on by the sub-prime mortgage crisis.  Many of them, especially in Europe, still have a lot of work to do in making an accurate assessment as to the extent of their losses. Some have been effectively nationalized, while others are in limbo awaiting some form of government bailout. This in turn, implies banks are still reluctant to resume business with each other. Without a credible guarantee that the counterpart’s balance sheet is clean enough, this cannot happen.

The same scenario plagues regional banks all around the US.  After sweeps of residential mortgage defaults, many banks are now beset with mass commercial property defaults. Regardless of the low rates and cash injections from the Fed, many banks are hoarding the cash in anticipation of more bad news and write-offs. This means low levels of lending to the consumers and businesses that need it, and low levels of inter-bank businesses conducted. Liquidity is frozen.

2. Falling fuel prices, along with massive liquidation of merchandise are construed by some as signs of falling price levels. This is misleading, since sales and bankruptcy liquidations are signs of ridding the market of excessive supply, in light of fallen demands.  This is merely a symptom of the liquidity crisis that may very well be the very remedy for deflation, and does not serve as a long-term indicator of whether such trend is present.

Five-banks Sweden: You and your Lego-sized economic model are dismissed!

Obama dismisses Swedish banking rescue modelOn an ABC interview aired February 10th, President Obama acknowledges that America has a thing or two to learn from two previous sufferers of financial crisis brought on by housing bubbles.

TERRY MORAN: There are a lot of economists who look at these banks and they say all that garbage that’s in them renders them essentially insolvent. Why not just nationalize the banks?

PRESIDENT OBAMA: Well, you know, it’s interesting. There are two countries who have gone through some big financial crises over the last decade or two. One was Japan, which never really acknowledged the scale and magnitude of the problems in their banking system and that resulted in what’s called “The Lost Decade.” They kept on trying to paper over the problems. The markets sort of stayed up because the Japanese government kept on pumping money in. But, eventually, nothing happened and they didn’t see any growth whatsoever.

Sweden, on the other hand, had a problem like this. They took over the banks, nationalized them, got rid of the bad assets, resold the banks and, a couple years later, they were going again. So you’d think looking at it, Sweden looks like a good model. Here’s the problem; Sweden had like five banks. [LAUGHS] We’ve got thousands of banks. You know, the scale of the U.S. economy and the capital markets are so vast and the problems in terms of managing and overseeing anything of that scale, I think, would — our assessment was that it wouldn’t make sense. And we also have different traditions in this country.

Obviously, Sweden has a different set of cultures in terms of how the government relates to markets and America’s different. And we want to retain a strong sense of that private capital fulfilling the core — core investment needs of this country.

And so, what we’ve tried to do is to apply some of the tough love that’s going to be necessary, but do it in a way that’s also recognizing we’ve got big private capital markets and ultimately that’s going to be the key to getting credit flowing again.

Oh, Mr. President, it’s comforting to know that even in times of economic crisis, you find time to piss on miniature economies over in Europe that tried to upstage us in creating economic upheavals.  That strategically placed laugh in there?  Amazingness.

I mean, Sweden had, like, five banks? That’s, like, so inconsequential, that’s like, child play. And America has, like, thousands?  You wanna see a crisis driven by speculation and greed, you want to see real suffering, you want to see the real economic apocalypse?  This is how it’s done!  Five-banks Sweden?  Get off the friggin podium.

Your wicked sense of humour did not stop there.  You really put those European socialists in their place by rejecting the semantics of nationalization.  Those guys other side of the Atlantic all but gave it up on the idea of the open market hundreds of years ago, but over here, we are the last defenders of capitalism.

Nouriel Roubini: Bad boy doomsday economic genius

Roubini goes nuts on Nick Denton

Nouriel Roubini has quite the reputation.  A Turkish-born Iranian-Jew that was educated in Italy and the US, Roubini’s name recognition shot through the roof after his stubbornly bearish outlook on the US economy turned out to be true.

Since 2008, the head of RBE Monitor has made countless appearances on most of the network business news channels, pushing his gloomy views of the US, and the world economy in general.

But this self-proclaimed Dr Doom (not to be confused with the original Dr Doom) has quite another side to him.

It all started when a leaked email which Roubini invited his friends to one of his parties, boasting Scarlett Johansson had moved in upstairs to him having paid more than he had for his.  Details of the artwork in his loft were rumoured to resemble some aspect of the female genitalia, literally baiting Gawker for some smut.

Hilarity ensued when the Gawker started referring to Roubini as the “playboy professor” who inhabited a “vulva” and “vagina-encrusted Tribeca loft”.

Roubini went apeshit, and posted a series of late night rants on Nick Denton’s Facebook page.  Calling him names ranging from “little loser antisemitic jerk”, a “Nazi” and a “McCarthist bigot”, and portentously defended what he called his “loft cultural events”.

Those lunatic rants are now public records.  Gawker media has since then dubbed him the “Joe Franciss of pessimism porn”, and gleefully tracks his “partying” chronicled on Twitter, Facebook, and emails.

Gawker mocked Roubini’s Twitter sent while at Davos with the following.

Roubin's gleeful twitter on partying with his intellectual peers.

The New York University economist made his bones by predicting the mortgage meltdown and the ensuing recession. He will surely not want to softpedal his doom-mongering for airy talk of the future. But at home in Manhattan, he’s better known for the louche soirées he throws for young women in his vulva-studded TriBeCa loft. (Which, by the way, we applaud!) Roubini embodies the true spirit of Davos: wild partying in the face of the world’s doom.

Party pictures of Professor Playboy after this last piece of gem, sent to one of his Facebook friends.

Ciao bella. How are you fashionista glitterata glamorata?

I am in decadent St Trop now vacationing with Arab Sheiks, Russian oligarchs and assorted aristocratic Euro trash. More silicon here than in Silicon Valley…lol

I had to escape NYC as my Barron’s interview (http://www.rgemonitor.com/roubini-monitor/253240/) on $2 trillion of losses made the markets swoon last week and angry mobs of investors were chasing me.

So life is a beach here and am studying Beach Economics and the IELs (International Elites of Leisure) with a grant from the Institute for Advanced Vacations; hard job but somebody gotta do it.

This coming Sunday August 17th the New York Times Magazine (http://www.nytimes.com/pages/magazine/index.html) will publish a long profile article (4 pages and 3000 words) about me. So beware of markets shivering the next day.

Want to come visit here in St Trop? I would be too lucky.

Explaining the Swedish bailout model

Explaining the Swedish banking model

There’s a been a lot of talk of the Swedish bail-out models by the economic big-wigs lately.  Here are some facts to get you up to snuff.

What brought it on?

In the early 90s, Sweden suffered from an economic crunch brought on by the property bubble.  From 91 to 93, the economy went into the reverse gear.

According to the Swedish central bank, “a tidal wave of bankruptcies” between 1990 and 1994 left Sweden’s seven largest banks, which accounted for 90 percent of the market, with loan losses totaling the equivalent of 12 percent of Sweden’s annual gross domestic product.

The Swedish bailout

Sweden set up an agency to recapitalize the banks.  Contrary to what the US is proposing – taking over the bad debts of the near-insolvent banks, the Swedish government became owners of those banks in exchange for help.

Step 1:

Provide blanket guarantee on all bank liabilities.

Outcome: Restore depositor and creditor confidence, prevent run on banks that would’ve made restructuring impossible.

Step 2:

Parliament passes emergency legislation to take over and nationalize any bank on the verge of failing.

Outcome: Good enough banks would gain enough time and credibility from the blanket guarantee that no take-out/nationalization is needed.

The threat of government control scared most banks away from seeking bail-outs.  Most of the large institutions found ways to get through the problems without any government help.

For example, large Swedish banks such as SEB and Swedbank obtained new capital from private investors, and established their own bad banks with the help of outside investors.

Step 3:

Liquidity test on banks.  If the model indicates the bank  can become profitable again in the near term, then it is given support to survive.  If the model indicates the bank will never become profitable again, then it is closed or merged.

Outcome: Avoids the Japanese problem, where illiquid or semi-liquid banks were given a lifeline despite its profit outlook.

Step 4:

Nationalize insolvent banks once they write down their losses.

Outcome: In the end, Sweden only had to nationalize two – Nordbanken and Gota Bank, that were on the verge of failure.

Step 5:

Set up a bad bank for each new nationalized bank to dispose of bad loans.

Outcome: Removing bad assets allows management team to resume its rightful role as a lender.  A separate entity is better equipped to dispose of the loans or underlying collateral since it is its mandate to do so.

Furthermore, no more write-offs to undermine the morale and confidence of the banking sector.

Step 6:

Price assets of bad banks to reflect market value with help of outside consultants.

Outcome: Government gets accurate assessment on the amount put into the banks.  It then waits for market to rebound.   As an equity investor, it’s able to recoup its original investment plus potential gains.