Steve Forbes has been one of the high priests of free-market capitalism for as long as I can remember. Recently he teamed up with Elizabeth Ames to write How Capitalism Will Save Us which can be summarized as a modern manifesto for the Austrian School of economics which, quite frankly, surprised me. I knew that Mr. Forbes was conservative, but I didn't realize how far out to the right he stood until reading his most recent publication. The book covers an array of current economic topics which include: cap and trade, the gold standard, flat tax rates, universal health care, executive pay, globalization and outsourcing. Because The Ithaca Experiment is an investing blog, I'm not going to cover most of the authors' arguments, just the ones that make the most sense from an economic viewpoint. I'd like to stay within the realm of my expertise and some of these topics are beyond the scope of the speciality of this Web site.
How Capitalism Will Save Us states: "Thirty years ago, only about 13 percent of Americans owned stock. At least 50 percent of American households do today.". This can only mean that more people have skin in the game with their IRAs and 401Ks and individual holdings whether it be in securities or mutual funds or ETFs. That's why there is such an outrage over the 2008 market collapse - over half the country lost significant amounts of retirement income. People want to tar and feather these bankers who were partly responsible for those losses. According to the book, it wasn't the bankers fault, but government intrusion that caused the financial system to to implode. Forbes and Ames believe that "the financial crisis was a by-product of not one but three government-created disasters.": monetary policy, a succession of regulatory failures like mark-to-market accounting and GSEs like Fannie and Freddie helped inflate the bubble.
I'm from the school that ascribes to the theory it was lack of government intervention that enabled the bankers, insurers and mortgage lenders to run wild, sometimes being leveraged debt to equity as much as 40:1. It all started with the repeal of the Glass-Steagall Act in the early 1990's. The Glass-Steagall Act went into law in 1933 to help ease speculation by bankers and once repealed, gave the bankers a licence to do whatever they wanted. Give these financiers an inch, and they'll take a yard. It's just the name of the game on Wall Street and they need to be under someone's thumb because left on their own accord, they'll gum up the works. What is troublesome about How Capitalism Will Save Us, is that throughout the book they keep saying that we need less and less government in all aspects of the economy, but they admit that if the government hadn't interceded with the bail-out program, "the impact on the world-wide economy, on billions of people, would have been cataclysmic.". I think the operative word here is cataclysmic. It seems that Mr. Forbes and Ms. Ames want it both ways.
The authors of How Capitalism Will Save Us admit that: "Several of the nation's financial institutions were nationalized in all but name.". They also concede: "The financial sector is not just another industry. It is the lifeblood of our system. Without banks and other credit providers you don't have an economy.". And yet, when it comes to executive compensation, they seem to feel that the nefarious impresarios that ran the banks into the ground should be paid top-shelf dollars despite the awful jobs they did. No wonder the nation is hot under the collar when it comes to the bonuses being paid with TARP money. It's a good idea President Obama imposed a $500,000 cap on the pay of top executives of banks that received bail-out funds. They are government employees now and should be paid accordingly. They had their chance in the free-market system and failed miserably. A palace revolt is under way.
I agree with some of the tenets of supply side economics, like the theory of creative destruction. How Capitalism Will Save Us describes it very well: "Joseph Schumpeter, the great twentieth-century Austrian economist, recognized the disruptive power of innovation. He understood that advances wrought by entrepreneurs and others are not only beneficial, they also shatter the old order. Schumpeter called this process 'creative destruction' and explained that it is essential to a healthy economy.". Hyman Minsky believed this, too, as we have covered in earlier posts, but Minsky also believed that the financial industry should be regulated by the government. Forbes and Ames should unlock the chains of 20th Century thinking and come on into the new era. They may be stuck in a time warp.
Thursday, January 7, 2010
Monday, January 4, 2010
Urge Overkill
In the arena of financial writing Burton Malkiel and Charles Ellis are considered two of the heavyweights. Malkiel is famous for writing A Random Walk Down Wall Street and Ellis is the bestselling author of Winning the Loser's Game. Now the two have teamed up together and co-authored The Elements of Investing. I first saw The Elements of Investing in an ad in Barron's a few weeks ago and then Money magazine just printed an excerpt from the book in their January issue. I thought I'd take a flier on it because the article in Money was interesting, but that's about as far as it goes because a little advertising and some decent PR work suckered me in for what was a very disappointing book. I knew when I bought it that it was a beginning investor's book, but there are a lot of investing primers out there that even an experienced investor can get a few pointers from - this is not one of them.
The first thing that struck me about the book is how puny it is. It's a sparse 150 pages about the size of a paperback with very large page margins which translates into not very much in print. I bought it sight unseen on Amazon and assumed it would be full of all sorts of facts and figures, but there is very little of the sort. What the authors give you is some common sense advice about saving for your future and an endorsement of investing in index funds. That's the essence of the entire book and Burton Malkiel and Charles Ellis keep repeating their investing principals throughout the entire tome. A big problem here is that both subjects have been done much more effectively by Suze Orman with her books on personal finance and John Bogle with his texts about index funds. For the same price as The Elements of Investing you can pick up a copy of John Bogle's The Little Book of Common Sense Investing and come away much more the wiser.
Both John Bogle and The Elements of Investing caution investors about the evils of trading too frequently and the benefits of diversification. That's why they champion index funds. I've talked about index funds at length in other posts, so I won't rehash old material, but they are the best way to go for investors with a long-term time horizon and the need for a hands off approach to wealth creation. If you are a new investor and wish to broaden your horizons with some reading then you can not go wrong with "The Little Book" series which has been published over the past year and a half. Along with John Bogle's The Little Book of Common Sense Investing, Joel Greenblatt, Louis Navellier, Christopher Browne, Peter Schiff, Jason Zweig and Pat Dorsey have all contributed very good books in the series. You can buy them on Amazon for about $11 each.
If you are a beginning investor and are on a budget and can only afford to purchase one investing book, I would highly recommend Jim Cramer's Real Money by James Cramer. No matter what you think about Jim Cramer the television personality, Jim Cramer the writer is very good and he is an experienced investor and hedge fund manager. The book isn't as kinetic as his show Mad Money on CNBC and he explains how to value stocks. He even gives a plug for index funds if you are leaning towards the laissez-faire approach. Jim Cramer's Real Money was originally published in 2005 so it is relatively new and has recently been reissued as a mass market paperback. Although I would caution you about watching his show because perhaps he trades too much, his book puts things in perspective so anybody can understand it in clear concise language. You can't go wrong with this one.
The first thing that struck me about the book is how puny it is. It's a sparse 150 pages about the size of a paperback with very large page margins which translates into not very much in print. I bought it sight unseen on Amazon and assumed it would be full of all sorts of facts and figures, but there is very little of the sort. What the authors give you is some common sense advice about saving for your future and an endorsement of investing in index funds. That's the essence of the entire book and Burton Malkiel and Charles Ellis keep repeating their investing principals throughout the entire tome. A big problem here is that both subjects have been done much more effectively by Suze Orman with her books on personal finance and John Bogle with his texts about index funds. For the same price as The Elements of Investing you can pick up a copy of John Bogle's The Little Book of Common Sense Investing and come away much more the wiser.
Both John Bogle and The Elements of Investing caution investors about the evils of trading too frequently and the benefits of diversification. That's why they champion index funds. I've talked about index funds at length in other posts, so I won't rehash old material, but they are the best way to go for investors with a long-term time horizon and the need for a hands off approach to wealth creation. If you are a new investor and wish to broaden your horizons with some reading then you can not go wrong with "The Little Book" series which has been published over the past year and a half. Along with John Bogle's The Little Book of Common Sense Investing, Joel Greenblatt, Louis Navellier, Christopher Browne, Peter Schiff, Jason Zweig and Pat Dorsey have all contributed very good books in the series. You can buy them on Amazon for about $11 each.
If you are a beginning investor and are on a budget and can only afford to purchase one investing book, I would highly recommend Jim Cramer's Real Money by James Cramer. No matter what you think about Jim Cramer the television personality, Jim Cramer the writer is very good and he is an experienced investor and hedge fund manager. The book isn't as kinetic as his show Mad Money on CNBC and he explains how to value stocks. He even gives a plug for index funds if you are leaning towards the laissez-faire approach. Jim Cramer's Real Money was originally published in 2005 so it is relatively new and has recently been reissued as a mass market paperback. Although I would caution you about watching his show because perhaps he trades too much, his book puts things in perspective so anybody can understand it in clear concise language. You can't go wrong with this one.
Friday, January 1, 2010
Up Against It
Death by 1,000 cuts. That's what it's been like the past six months since I started the Ithaca Experiment. Almost every day the downward spiral of my holdings has been amplified by being leveraged to the short side and the steady drip, drip , drip of a Chinese water torture has slowly eroded my confidence. However, we are not talking about a postmortem scenario here, just down for the count on a temporary basis. I still find flaws in the logic that we are in a new bull market and that the lows last March was a generational buying opportunity. I'm of the belief that we will retest those lows and go further down to a P/E of around 8 in the S&P 500 once the government subsidies run out. Right now we are experiencing a resiliency in price action while downbeat consensus forecasts permeate the economic landscape. Sure, there are those that think we've still got another leg up, but by only 10% for all of 2010 if you listen to the bullish pundits. I try to stay focused and listen to both sides of the argument, but I'm just not buying what the bulls have to sell. Eventually a correction has to come and I'm willing to sit on my holdings until that time arrives.
On December 29th on Bloomberg there was an article about a hedge fund manager from Canada, Mr. Eric Sprott, whose fund has returned 496% the past nine years compared to the S&P 500 which has lost 32% over that same time period. Sprott is saying that the S&P 500 will retest the lows and then some so I am not alone in my stance. In fact, there is a dichotomy right now in the investing world so my projections aren't as far flung as you may be led to believe. I just got in too early, which certainly hurts my wallet, but let's not forget where we were last March - falling deeper and deeper into a black hole. This black hole is depicted in Andrew Ross Sorkin's Too Big To Fail which might be too big to read since it runs 550 pages. The book is not for everybody because quite frankly, it's just too long, but it did galvanize my convictions that we are still not out of the woods as far as the financial crisis is concerned. It may seem that way because the market has rallied significantly the past nine months, but we are still teetering on the edge of catastrophe.
Too Big To Fail is about the collapse of an investment banking system run by "fat cats", but they more accurately can be called vultures or sharks. They eat what they kill and Mr. Sorkin makes this very clear in his book. It's a take no prisoners world on Wall Street and these bankers can smell blood and take a carcass to the bone like a school of piranhas when one of their competitors is wounded. When the world-wide economic system was on the brink of collapse, these investment bankers zeroed in on the wounded and cherry-picked the assets they could salvage which during normal times would be the prudent thing to do, but not when they are getting bailed out with a trillion dollar TARP program. Is there any wonder why we are on the verge of class warfare in this country with the bonuses and golden parachutes that are being offered on the tax payer's dime?
The implosion of the investment banking system was a worst-case scenario with no regard for moral hazard as these pariahs used leverage and financial engineering to commandeer whatever profits were available. When the government implements its "exit strategy" somewhere down the road, heads will roll once more as the system just can't accommodate all of the toxic debt. Should the government have stepped in and bailed them out? Yes. It would have been a lot worse if things would have been left to decline on their own accord, but maybe we are avoiding the inevitable. In whatever case may ensue in the upcoming year it will be interesting and I'm looking forward to it. I've done my due diligence.
On December 29th on Bloomberg there was an article about a hedge fund manager from Canada, Mr. Eric Sprott, whose fund has returned 496% the past nine years compared to the S&P 500 which has lost 32% over that same time period. Sprott is saying that the S&P 500 will retest the lows and then some so I am not alone in my stance. In fact, there is a dichotomy right now in the investing world so my projections aren't as far flung as you may be led to believe. I just got in too early, which certainly hurts my wallet, but let's not forget where we were last March - falling deeper and deeper into a black hole. This black hole is depicted in Andrew Ross Sorkin's Too Big To Fail which might be too big to read since it runs 550 pages. The book is not for everybody because quite frankly, it's just too long, but it did galvanize my convictions that we are still not out of the woods as far as the financial crisis is concerned. It may seem that way because the market has rallied significantly the past nine months, but we are still teetering on the edge of catastrophe.
Too Big To Fail is about the collapse of an investment banking system run by "fat cats", but they more accurately can be called vultures or sharks. They eat what they kill and Mr. Sorkin makes this very clear in his book. It's a take no prisoners world on Wall Street and these bankers can smell blood and take a carcass to the bone like a school of piranhas when one of their competitors is wounded. When the world-wide economic system was on the brink of collapse, these investment bankers zeroed in on the wounded and cherry-picked the assets they could salvage which during normal times would be the prudent thing to do, but not when they are getting bailed out with a trillion dollar TARP program. Is there any wonder why we are on the verge of class warfare in this country with the bonuses and golden parachutes that are being offered on the tax payer's dime?
The implosion of the investment banking system was a worst-case scenario with no regard for moral hazard as these pariahs used leverage and financial engineering to commandeer whatever profits were available. When the government implements its "exit strategy" somewhere down the road, heads will roll once more as the system just can't accommodate all of the toxic debt. Should the government have stepped in and bailed them out? Yes. It would have been a lot worse if things would have been left to decline on their own accord, but maybe we are avoiding the inevitable. In whatever case may ensue in the upcoming year it will be interesting and I'm looking forward to it. I've done my due diligence.
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