The Consumer Financial Protection Bureau (CFPB) was created in 2011 to, according to the US Treasury Department, "promote fairness and transparency for mortgages, credit cards, and other consumer financial products and services." If you look at the underlying motivation for the CFPB's creation, however, its origin lies in the perceived deception of consumers by financial companies. Finance is really psychology, and the most successful finance companies understand the psychological pitfalls that consumer don't. Consumers make the same mistakes over and over, and the CFPB now exists in the hopes of preventing finance companies from allowing consumers to fall into those traps.
A great example of this is use of credit cards. Because there is no physically representative counter involved, spending money with a credit card tends to be too easy; there is no feedback, such as a diminished weight in your pocket, or thinness of your wallet, that would signal to you that you might be spending too much money. Even relatively sophisticated consumers spend more money when they use a credit card instead of cash. This is exactly the kind of "trick" that consumers fall prey to every day.
So if the CFPB exists to help consumers avoid such tricks, then they really need to go after retail pricing. For decades retailers have discovered that they can sell more products if they mark the price down by a penny or two. Instead of charging two dollars, they charge $1.99, and sales magically rise. Although you might argue that sales rise because the customer is getting a one penny discount, most of the rest of us would think you were pretty stupid to buy that line. No. Instead, when a product is priced at $1.99, a huge majority of consumers think, on some level, that it costs one dollar, not two dollars, even though simple third-grade math tells you that you really ought to round it up to two dollars.
The proof is in the prevalence of the practice. When JCPenney recently decided to price goods "honestly" in whole dollar amounts, investment analysts roundly criticized their new strategy as naive. Perhaps 99% of all retailers use this pricing strategy.
Clearly, using prices based on nines (.99, .98, .97, .95) works, and it is tricky. It is a psychological trick designed to make consumers think that things cost less than they do, and as a result, consumers overspend.
The CFPB is starting in the wrong place. They really need to be out there setting rules for pricing of retail goods. The rule to be imposed is simple: Goods must be priced so that when rounded to the nearest five percent, there is no change in the price. With this formula in play, items could cost $1.90 or $2.00, but not in between. No consumer is going to lose any sleep over the difference. The retailer, faces a much tougher choice. If they price at $1.90, they keep most of the "trick", but at a loss of 9 cents (4.5%) on every sale. Or they can post the "honest price" of $2.00, and stop tricking the customer into spending money they don't really have.
Monday, November 19, 2012
Wednesday, September 26, 2012
Go to School, Get a Loan, Risk Enslavement
I've written twice before about how Government student aid raises tuition rates and increases the debt carried by students. Those articles didn't cover some of the more pernicious dangers of such government help, which was made vivid by a recent movie (Default: The Student Loan Documentary) and Business Insider article about Nick Keith (This Bright-Eyed Young Man Was Utterly Demolished By Student Loans). In short, kids like Nick Keith have been promised a bright future if they spend heavily on education, are loaned the money to fund their tuition, then find that the jobs that result from their education don't cover the bills. Hence, the students are tricked into spending too much money on classes that have no effect on their employability. The schools have an incentive to lie about the effect of their classes, with little downside when they are caught.
Even worse, the funding for the overpriced classes comes from government-sponsored student loans, with high interest rates. Because the government is involved, these loans cannot be discharged in bankruptcy. The combination of high rates and lack of forgiveness means that students that get ripped off by schools that lie can find themselves permanently enslaved to their creditors and to the U.S. Government. Said Kieth: "My life has become a daily swim in a tar pit with very little hope of ever getting out."
Most types of consumer loans are far less risky. Credit card loans, auto loans, home mortgages, and even payday loans can be discharged by bankruptcy. You can get a second chance, and a clean start. It is not painless, but it does end and let's you try again. In contrast, education loans that are entangled by government involvement are permanent. A loan from a loanshark is permanent too. Same thing.
I keep seeing more and more articles about this problem. Here's another: Indentured Students Rise as Loans Corrode College Ticket
Obviously, education is an investment in yourself, not to be taken lightly as it commits a great deal of time and capital. Now that the government is involved, you risk your liberty as well. Here's how to make education investment decisions the vorpal way.
First, insist that all promises the school makes about your education are in writing. If you cannot get it in writing, then assume that the claim is false. If you can make audio or video recordings legally in your state, do so when the school salesman makes his or her pitch. Let them know that you are making the recording, and that you consider the claims they are making part of a contract.
Second, turn down all government offers of assistance. This means voting against laws, policies, and politicians that make offers of government assistance with tuition. These measures tend to cause huge increases in tuition prices that erase the effect of the supposed financial assistance. Also, if the tuition isn't affordable without assistance, you should be leery that the price is already too steep to be a prudent investment.
Third, if the school has made documented claims about your education that turn out to be false or are substantially misrepresented, file a tort lawsuit alleging that the school committed fraud. You may also file a criminal complaint with your state, as fraud is both a crime and a civil tort.
Fourth, look around and investigate other methods of getting the same education and training. There are very few fields where the only way to learn is via schoolroom training. This is especially true of skilled trades. Our forefathers tended to pass knowledge to junior workers via apprenticeships. If you have a good work ethic, are truly eager and committed to learning a profession, and have even a moderate amount of aptitude for a field, you will be able to find a similar type of paid apprenticeship or entry level training position that will be a much better use of your time and will actually pay you for it.
Even worse, the funding for the overpriced classes comes from government-sponsored student loans, with high interest rates. Because the government is involved, these loans cannot be discharged in bankruptcy. The combination of high rates and lack of forgiveness means that students that get ripped off by schools that lie can find themselves permanently enslaved to their creditors and to the U.S. Government. Said Kieth: "My life has become a daily swim in a tar pit with very little hope of ever getting out."
Most types of consumer loans are far less risky. Credit card loans, auto loans, home mortgages, and even payday loans can be discharged by bankruptcy. You can get a second chance, and a clean start. It is not painless, but it does end and let's you try again. In contrast, education loans that are entangled by government involvement are permanent. A loan from a loanshark is permanent too. Same thing.
I keep seeing more and more articles about this problem. Here's another: Indentured Students Rise as Loans Corrode College Ticket
Obviously, education is an investment in yourself, not to be taken lightly as it commits a great deal of time and capital. Now that the government is involved, you risk your liberty as well. Here's how to make education investment decisions the vorpal way.
First, insist that all promises the school makes about your education are in writing. If you cannot get it in writing, then assume that the claim is false. If you can make audio or video recordings legally in your state, do so when the school salesman makes his or her pitch. Let them know that you are making the recording, and that you consider the claims they are making part of a contract.
Second, turn down all government offers of assistance. This means voting against laws, policies, and politicians that make offers of government assistance with tuition. These measures tend to cause huge increases in tuition prices that erase the effect of the supposed financial assistance. Also, if the tuition isn't affordable without assistance, you should be leery that the price is already too steep to be a prudent investment.
Third, if the school has made documented claims about your education that turn out to be false or are substantially misrepresented, file a tort lawsuit alleging that the school committed fraud. You may also file a criminal complaint with your state, as fraud is both a crime and a civil tort.
Fourth, look around and investigate other methods of getting the same education and training. There are very few fields where the only way to learn is via schoolroom training. This is especially true of skilled trades. Our forefathers tended to pass knowledge to junior workers via apprenticeships. If you have a good work ethic, are truly eager and committed to learning a profession, and have even a moderate amount of aptitude for a field, you will be able to find a similar type of paid apprenticeship or entry level training position that will be a much better use of your time and will actually pay you for it.
Thursday, August 23, 2012
National Overspending Policy
Why does the U.S. overspend? It is domestic fiscal and tax policy to over-tax the young and give the proceeds to the old. Although Laurence Kotlikoff's article "Economists Risk Labeling as Political Hacks" is in the opinion section at Bloomberg, it contains an excellent overview of the last 60 years of U.S. economic policies and incentives. Try to read it without applying any political filters, if you can. Ultimately, the point is that the country has been overspending for the last 60 years under all administrations, and that real growth in GDP won't come back unless the country as a whole stops overspending. Although he doesn't say it directly, some of the reduction of that overspending would have to come from entitlements, which now consume well over half of the federal budget, and will soon consume 80% if current trends continue.
Tuesday, August 7, 2012
Digging Down to the Roots
(or Bill Gross's Wednesday Morning, 3 A.M.
Moment)
However bold an investor might be when committing to purchase of an investment, every morning he must experience 3:00 a.m. He may sleep through most days, and on approximately half of the remaining days his investments will be showing a recent, happy gain. Eventually, though, there will come a time, a market decline, a very bad day, a sleepless night, and that investor may find himself at 3 a.m. facing a confluence of events without sleep. At such times his mettle is tested. If he bought his investments for the wrong reason, the morning may find that they are all sold, dispensed to reduce the heavy load on his mind and digestion.
"If wealth or real GDP was only being created at an annual rate of 3.5% over the same period of time, then somehow stockholders must be skimming 3% off the top each and every year. If an economy’s GDP could only provide 3.5% more goods and services per year, then how could one segment (stockholders) so consistently profit at the expense of the others (lenders, laborers and government)?"
This might reflect a thinking pattern that results from failing to perform analysis on individual companies. There is also a dissonance here: He asks a question about a long-standing "skimming" that would seemingly imply an inefficient market, that has lasted for over 60 years! I would have to conclude that an irrationality has crept up and bitten him, causing him to write from envy, not thought.
Can stocks, starting from current prices, return as they have in the past? First we need a benchmark. Roger Ibbotson was gifted with a pile of data at just the right time in history, in 1973, a pile of stock and debt security prices that he and Rex Sinquefield used to calculate the long-term real returns of asset classes. Their results:
Consider the psychology of the stock market at most times in history. The fundamental idea is to spread the risk of owning a large asset over a large number of people. Stock shares are good for this; they accomplish that job fairly well. But then follows a major problem: What are the shares worth? Stock shares are worth whatever the market will bear, or what they will earn for their owners in the future, or what a rich investor will pay for a collector's item, or somewhere in between. None of these valuations are stable. They depend on psychology. So when a secondary market for shares opens (a bourse), is it any surprise that the resulting crowd behavior causes stocks to seem like lottery tickets? Although they ought to know better, sometimes even the managers of the business think of their shares as lottery tickets.
But that is crowd psychology. It isn't necessarily real. Business valuation is real. Gross' point seems to be that stocks will likely disappoint, returning far less than their historical long-term rates of return. I think this is a mistake. The reason he is wrong is that he is making a argument based on aggregation of a huge market and a vague sense of "fairness", when real companies don't work that way.
Consider a single company in isolation. Suppose that its book value is $10, and it earns $1 per share each year, and we haven't yet determined whether or by how much its future earnings will grow. Taken all itself, this stock returns 10%, assuming that it sells at book value. It doesn't matter whether the market is high or low, or it has outperformed for the last 26.4 years, or Bill Gross is unhappy. If you buy that entire company, you get a 10% return on your money, and Gross and others can grump all they want to, but it won't reduce the company's return on your investment to match that of 2-year Treasury bills.
Let's suppose that you buy it at $10, then the price drops to $5. The company still earns $1 per share, because earnings aren't driven by stock prices. So, it buys back half its shares. Now every share has a book value of $20, and earnings of $2 per share. If the price hasn't risen to $10, should our intrepid investor sell? Of course not! He buys more!
So we see Gross' Mistake #1: Stock prices can gain while overall company values do not. Profits are not affected by share prices. Share buybacks produce gains for shareholders while trimming total market capitalization. If stock PE ratios drop in the future because of weak top-line growth, then share repurchases can still supply the out-sized gains that have traditionally been accorded to stocks.
Switching gears, let's look at the relative prospects of stocks and bonds, right now, at current valuations and yields. Bonds have had an amazing 30-year run, with diminishing inflation and unrelenting drops in yields and interest rates over that time. Anyone holding long-term bonds through that period has enjoyed unusually strong capital gains and real yields. Consider the mortgage market, for example. 30-year mortgage rates are about as low as they have ever been, throughout the history of the U.S. The bond market is presently sitting at the very topmost peak of an enormous, long-running bull market for bonds. There is nowhere to go but down for bonds.
Imagine for a second that you were a bond manager. Imagine that you made your living investing in bonds for other people. Imagine that your income goes up when bonds do well, and it drops when they go down. Wouldn't you be concerned at this moment? When just a little bit of inflation, just a small up-slope in yields could wreck the whole thing?
This is exactly what PIMCO is facing. Having ridden the bond wave to become a titanic money manager, they face the possibility of a huge bear market in their primary business. Wouldn't that scare you?
So perhaps this is Gross's Mistake #2: PIMCO, having little appreciable corporate history or practice in equity investing, fears that it is about to be locked out of the investing party. Gross was writing from his real feelings, which is a minor panic. If you are driven by the Efficient Market Theory, then you might be trying to convince yourself that bonds and stocks have equal prospects going forward, however bleak that might seem to you.
That does seem to be Gross' conclusion. It is almost an "if I can't have it then no one can" moment in which his prediction is that no investment classes will do well in the future.
In summary, the returns supplied by bonds depend on the macro economy, especially inflation and expectations for future growth, but stock returns do not. They depend on return on equity. A stock earning 10% on its book value and selling at book value will supply a 10% rate of return, even if its top line grows at 0%. Although revenue growth is welcome, it is not absolutely necessary. An excellent manager can manage high profits even in a revenue-constrained business, and savvy investors will track the real generation of value, not market maniacs who trade on emotion and feeling.
Moment)However bold an investor might be when committing to purchase of an investment, every morning he must experience 3:00 a.m. He may sleep through most days, and on approximately half of the remaining days his investments will be showing a recent, happy gain. Eventually, though, there will come a time, a market decline, a very bad day, a sleepless night, and that investor may find himself at 3 a.m. facing a confluence of events without sleep. At such times his mettle is tested. If he bought his investments for the wrong reason, the morning may find that they are all sold, dispensed to reduce the heavy load on his mind and digestion.
Hence, it is a useful investment skill to prepare for such confluences of events. When the market goes against your position, and it seems that all sentiment is against continuing to hold it, and that any bystander would implore you to get rid of that bad investment before you lose any more money, that is when you really discover whether you should be in the investment business at all. In such circumstances, the intelligent investor will glide through because they will have prepared in advance for just such an eventuality.
Of all the "trading" and "speculation" skills, there are none I know of that are quite as powerful as knowing the underlying value of your investments. If you can calculate the value, now and in the future, if you can have high confidence about the future earnings potential, then you win. The market may be mostly efficient, but it is not always efficient, and the market price is frequently wrong. When you know the value of a company, and the market is undervaluing it by offering to sell shares of it for less than what the company is worth, then it is not only prudent to refuse to sell, but to buy more. This is right at the core of the value investment philosophy, and if you want to know more, read The Intelligent Investor
or read any of the Berkshire Hathaway annual reports.
or read any of the Berkshire Hathaway annual reports.
It has been fashionable for several decades among the academic community that follows the equity markets to use a much different model of stock prices, one that insists that the price reflects all information presently available to participants. Under this "random walk" model, the individual investor cannot, on average, exceed the performance of the equity market. Many professional investors subscribe to this philosophy to some degree.
One of the hazards of subscribing to the efficient market theory is that it removes the impetus to perform company valuation. If you believe that stocks are efficiently priced, then why read any balance sheets or income statements or perform any analysis of the company's prospects? The more you believe this, the less it is rational to perform any analysis at all, because that would consume time that could be devoted to some other pursuit.
Without knowing PIMCO's Bill Gross personally, I would venture that he might be suffering from some of this malady at the current time. In his recent column Cult Figures he says that
This might reflect a thinking pattern that results from failing to perform analysis on individual companies. There is also a dissonance here: He asks a question about a long-standing "skimming" that would seemingly imply an inefficient market, that has lasted for over 60 years! I would have to conclude that an irrationality has crept up and bitten him, causing him to write from envy, not thought.
small stocks 12.1%
large stocks 9.9%
long-term government bonds 5.5%
Treasury Bills 3.6%
inflation 3.0%
He then founded a company, later sold to Morningstar, that published the numbers annually as "Stocks, Bonds, Bills, and Inflation." You can see a descendant of this study for yourself at Morningstar's web site. (The results above are actually generated by Morningstar for the period ended 2011.) The influence of such a report on the sleep for those investors who are awakened at 3:00 a.m. cannot be underestimated. When you see that stocks have returned 10% annually from 1926 to 1973, even with the Great Depression intervening, it gives you a different sort of confidence.
Consider the psychology of the stock market at most times in history. The fundamental idea is to spread the risk of owning a large asset over a large number of people. Stock shares are good for this; they accomplish that job fairly well. But then follows a major problem: What are the shares worth? Stock shares are worth whatever the market will bear, or what they will earn for their owners in the future, or what a rich investor will pay for a collector's item, or somewhere in between. None of these valuations are stable. They depend on psychology. So when a secondary market for shares opens (a bourse), is it any surprise that the resulting crowd behavior causes stocks to seem like lottery tickets? Although they ought to know better, sometimes even the managers of the business think of their shares as lottery tickets.
But that is crowd psychology. It isn't necessarily real. Business valuation is real. Gross' point seems to be that stocks will likely disappoint, returning far less than their historical long-term rates of return. I think this is a mistake. The reason he is wrong is that he is making a argument based on aggregation of a huge market and a vague sense of "fairness", when real companies don't work that way.
Consider a single company in isolation. Suppose that its book value is $10, and it earns $1 per share each year, and we haven't yet determined whether or by how much its future earnings will grow. Taken all itself, this stock returns 10%, assuming that it sells at book value. It doesn't matter whether the market is high or low, or it has outperformed for the last 26.4 years, or Bill Gross is unhappy. If you buy that entire company, you get a 10% return on your money, and Gross and others can grump all they want to, but it won't reduce the company's return on your investment to match that of 2-year Treasury bills.
Let's suppose that you buy it at $10, then the price drops to $5. The company still earns $1 per share, because earnings aren't driven by stock prices. So, it buys back half its shares. Now every share has a book value of $20, and earnings of $2 per share. If the price hasn't risen to $10, should our intrepid investor sell? Of course not! He buys more!
So we see Gross' Mistake #1: Stock prices can gain while overall company values do not. Profits are not affected by share prices. Share buybacks produce gains for shareholders while trimming total market capitalization. If stock PE ratios drop in the future because of weak top-line growth, then share repurchases can still supply the out-sized gains that have traditionally been accorded to stocks.
Switching gears, let's look at the relative prospects of stocks and bonds, right now, at current valuations and yields. Bonds have had an amazing 30-year run, with diminishing inflation and unrelenting drops in yields and interest rates over that time. Anyone holding long-term bonds through that period has enjoyed unusually strong capital gains and real yields. Consider the mortgage market, for example. 30-year mortgage rates are about as low as they have ever been, throughout the history of the U.S. The bond market is presently sitting at the very topmost peak of an enormous, long-running bull market for bonds. There is nowhere to go but down for bonds.
Imagine for a second that you were a bond manager. Imagine that you made your living investing in bonds for other people. Imagine that your income goes up when bonds do well, and it drops when they go down. Wouldn't you be concerned at this moment? When just a little bit of inflation, just a small up-slope in yields could wreck the whole thing?
This is exactly what PIMCO is facing. Having ridden the bond wave to become a titanic money manager, they face the possibility of a huge bear market in their primary business. Wouldn't that scare you?
So perhaps this is Gross's Mistake #2: PIMCO, having little appreciable corporate history or practice in equity investing, fears that it is about to be locked out of the investing party. Gross was writing from his real feelings, which is a minor panic. If you are driven by the Efficient Market Theory, then you might be trying to convince yourself that bonds and stocks have equal prospects going forward, however bleak that might seem to you.
That does seem to be Gross' conclusion. It is almost an "if I can't have it then no one can" moment in which his prediction is that no investment classes will do well in the future.
In summary, the returns supplied by bonds depend on the macro economy, especially inflation and expectations for future growth, but stock returns do not. They depend on return on equity. A stock earning 10% on its book value and selling at book value will supply a 10% rate of return, even if its top line grows at 0%. Although revenue growth is welcome, it is not absolutely necessary. An excellent manager can manage high profits even in a revenue-constrained business, and savvy investors will track the real generation of value, not market maniacs who trade on emotion and feeling.
Friday, August 3, 2012
Capitalism is Pro-Market and Pro-Consumer, All at Once
Every once in a while I learn something new. Actually, I try to learn something new every day, but I am talking about learning something unexpectedly. Today I noticed in an opinion piece by Stephen L. Carter that he used a phrase in an unexpected way:
"...I wrote in praise of Luigi Zingales’s book, “A Capitalism for the People.” At that time, I examined his call for elevating pro-market values over pro- business values."
What caught me off-guard was his use of "pro-market" and "pro-business" in a way that indicated they were completely different.
Being born an American, having read John Locke and Adam Smith, Stewart Brand, "The Discipline of Market Leaders", several Warren Buffett biographies, several textbooks on economics, Ayn Rand, and many, many newspapers over the years, among other sources, I was sure that I understood what the phrase "pro-business" meant. Clearly, it means "favoring open markets and open competition by reducing barriers to trade and facilitating information flow by marketplace mechanisms." Right?
Then what does "pro-market" mean? Doesn't it mean "favoring open markets and open competition by reducing barriers to trade and facilitating information flow by marketplace mechanisms?"
You can see my dilemma. If "pro-market" and "pro-business" mean exactly the same thing, then how could you "elevate" one over the other?
The solution to the mystery is strictly perception. When Carter (and Zingale?) use the phrase "pro-business", they don't mean "open markets." They literally mean, "favoring business over consumers." This is a quite a surprise, as few hardcore capitalists would ever have considered that meaning. No true capitalist thinks that government should favor business over consumers. It is all about the markets. This is an absolute, with no room for negotiation on the meaning.
It looks like there is a cultural divide over the use of an economics term. Pro-consumer groups use the phrase "pro-business" in a way that makes them look Marxist from the perspective of the capitalists. When a pro-consumer person like Carter says "pro-market is better" the response of the capitalist is "now you are finally starting to be correct in your thinking"(!). Which I am sure would shock Carter, though he shouldn't be.
So if both capitalists and pro-consumer advocates believe in pro-market policies, what the heck does "pro-business" mean? I have to conclude that a pro-business government, which chooses to support businesses over consumers, is either fascist or communist, but it is certainly authoritarian or a corrupt oligarchy. (If you squint, you might just see modern China in that definition, though that would be too harsh a judgment.) It is a very short stride from "pro-business" to state-controlled businesses that are held as sancrosanct because their output serves the people as a whole, not some little individual "consumer brat."
"...I wrote in praise of Luigi Zingales’s book, “A Capitalism for the People.” At that time, I examined his call for elevating pro-market values over pro- business values."
What caught me off-guard was his use of "pro-market" and "pro-business" in a way that indicated they were completely different.
Being born an American, having read John Locke and Adam Smith, Stewart Brand, "The Discipline of Market Leaders", several Warren Buffett biographies, several textbooks on economics, Ayn Rand, and many, many newspapers over the years, among other sources, I was sure that I understood what the phrase "pro-business" meant. Clearly, it means "favoring open markets and open competition by reducing barriers to trade and facilitating information flow by marketplace mechanisms." Right?
Then what does "pro-market" mean? Doesn't it mean "favoring open markets and open competition by reducing barriers to trade and facilitating information flow by marketplace mechanisms?"
You can see my dilemma. If "pro-market" and "pro-business" mean exactly the same thing, then how could you "elevate" one over the other?
The solution to the mystery is strictly perception. When Carter (and Zingale?) use the phrase "pro-business", they don't mean "open markets." They literally mean, "favoring business over consumers." This is a quite a surprise, as few hardcore capitalists would ever have considered that meaning. No true capitalist thinks that government should favor business over consumers. It is all about the markets. This is an absolute, with no room for negotiation on the meaning.
It looks like there is a cultural divide over the use of an economics term. Pro-consumer groups use the phrase "pro-business" in a way that makes them look Marxist from the perspective of the capitalists. When a pro-consumer person like Carter says "pro-market is better" the response of the capitalist is "now you are finally starting to be correct in your thinking"(!). Which I am sure would shock Carter, though he shouldn't be.
So if both capitalists and pro-consumer advocates believe in pro-market policies, what the heck does "pro-business" mean? I have to conclude that a pro-business government, which chooses to support businesses over consumers, is either fascist or communist, but it is certainly authoritarian or a corrupt oligarchy. (If you squint, you might just see modern China in that definition, though that would be too harsh a judgment.) It is a very short stride from "pro-business" to state-controlled businesses that are held as sancrosanct because their output serves the people as a whole, not some little individual "consumer brat."
Monday, July 23, 2012
Author uses Colorado Massacre to Promote Her Book
Believe it or not, she does. The link to an Amazon.com entry is right there in the article.
In the Aurora Theater the Men Protected the Women. What Does that Mean?
http://www.slate.com/blogs/xx_factor/2012/07/23/aurora_dark_knight_shooting_the_men_protected_the_women.html
In the Aurora Theater the Men Protected the Women. What Does that Mean?
http://www.slate.com/blogs/xx_factor/2012/07/23/aurora_dark_knight_shooting_the_men_protected_the_women.html
Shorting Best Buy
Recently, Best Buys' (BBY-NYSE) compensation consultant quit after the company granted bonuses to a large proportion of management without any performance basis. The bonuses were granted without any ties to performance, past, present, or future.
This speculation follows immediately: Perhaps BBY did this because management believes that if it tied the bonuses to performance that it would be very difficult for their managers to meet those performance targets. Hence, the environment is so difficult that even management believes future results will be very poor. Even worse, it might be that bonuses are being given out as a kind of pre-bankruptcy severance to their hard-working employees, because management is so concerned about future earnings they can't count on cash flow to cover future bonuses. In their estimation, it is best to tap the cash reserves now, to give employees a chance to plan ahead, hunker down, build savings, just in case the business explodes over the next several years.
This is not a move that sends out signals of confidence. BBY is under assault from web-based commerce, especially Amazon.com. Most electronics, computer, music, video, and technology goods are black box products. They either work or they don't, and there is often little need for after-sales service.
I will say this about BBY employees: I usually find that they are well-informed and helpful. I've never been pressured to buy something I didn't want. Still, it doesn't take a showroom to put your name on a pre-release sales list, and 2-day shipping at no cost (Amazon Prime) beats the 8 mile drive to the nearest store any day. Unless I need it immediately. Which I rarely do.
This speculation follows immediately: Perhaps BBY did this because management believes that if it tied the bonuses to performance that it would be very difficult for their managers to meet those performance targets. Hence, the environment is so difficult that even management believes future results will be very poor. Even worse, it might be that bonuses are being given out as a kind of pre-bankruptcy severance to their hard-working employees, because management is so concerned about future earnings they can't count on cash flow to cover future bonuses. In their estimation, it is best to tap the cash reserves now, to give employees a chance to plan ahead, hunker down, build savings, just in case the business explodes over the next several years.
This is not a move that sends out signals of confidence. BBY is under assault from web-based commerce, especially Amazon.com. Most electronics, computer, music, video, and technology goods are black box products. They either work or they don't, and there is often little need for after-sales service.
I will say this about BBY employees: I usually find that they are well-informed and helpful. I've never been pressured to buy something I didn't want. Still, it doesn't take a showroom to put your name on a pre-release sales list, and 2-day shipping at no cost (Amazon Prime) beats the 8 mile drive to the nearest store any day. Unless I need it immediately. Which I rarely do.
LIBOR is not a free lunch
The latest banking scandal has some people yawning, some yapping, some yelling. Overall, there seems to be a clear lack of outrage except among those who have an incentive to find a reason to be outraged. What to think? Frankly, this case smells. All the telltales indicate that this is a false scandal. LIBOR is an interest rate derived from information volunteered by various banks periodically. What do the banks get for their effort? Nothing, really. The information they supply costs them time and effort, and they get nothing in return.
LIBOR is a free lunch, an attempt to concoct an important benchmark interest rate from voluntary statements of a few banks. What incentive do they have to tell the truth? Apparently, the incentive is jail time if they lie, and nothing if they don't. So for the bankers, it is a negative sum game. Is it any wonder that Libor Case Documents Show Timid Regulators? The regulators must have been wondering whether it was an April Fools joke. You can imagine them talking to the walls, as though the pranksters were hidden nearby: "Okay, okay, come on out guys! What's the catch? Tell me what the joke is!"
Since there is no way to predict the outcome of the investigations underway, and there is little reason for those of us who are not LIBOR experts to suddenly learn a bunch about what it is and how it works, our net investment thesis is something between short everything having to do with banks and governments and I don't care and I am going to ignore the whole thing. You could make a case that random and capricious prosecution of impolite behavior (certainly Barclay's attempted "manipulation" of LIBOR at least qualifies as impoliteness) indicates that those in the know among regulators of the financial industry are short the banks and intend for other investors to sell out at the bottom.
It could be foolish to expect that LIBOR will last much longer. Do we need a benchmark rate built on the assumption of a free handout of information?
Eliot Spitzer writes in Larry Kudlow Says the Libor Conspiracy Has No Victims. That’s Grotesquely Wrong (sorry, I misplaced the URL) that there is massive harm done in this case. People are quite astute at perceiving damage to themselves done by others. Some are astoundingly good at it, spotting eleven out of every three cases of negligence or inconvenience that occur. The remedy will be an unexpected consequence: LIBOR will go away, and we all--Spitzer, you, me, and all the other people who have mortgages and car loans--will have to rely on much fuzzier (and more expensive) estimates of short-term borrowing costs.
LIBOR is a free lunch, an attempt to concoct an important benchmark interest rate from voluntary statements of a few banks. What incentive do they have to tell the truth? Apparently, the incentive is jail time if they lie, and nothing if they don't. So for the bankers, it is a negative sum game. Is it any wonder that Libor Case Documents Show Timid Regulators? The regulators must have been wondering whether it was an April Fools joke. You can imagine them talking to the walls, as though the pranksters were hidden nearby: "Okay, okay, come on out guys! What's the catch? Tell me what the joke is!"
Since there is no way to predict the outcome of the investigations underway, and there is little reason for those of us who are not LIBOR experts to suddenly learn a bunch about what it is and how it works, our net investment thesis is something between short everything having to do with banks and governments and I don't care and I am going to ignore the whole thing. You could make a case that random and capricious prosecution of impolite behavior (certainly Barclay's attempted "manipulation" of LIBOR at least qualifies as impoliteness) indicates that those in the know among regulators of the financial industry are short the banks and intend for other investors to sell out at the bottom.
It could be foolish to expect that LIBOR will last much longer. Do we need a benchmark rate built on the assumption of a free handout of information?
Eliot Spitzer writes in Larry Kudlow Says the Libor Conspiracy Has No Victims. That’s Grotesquely Wrong (sorry, I misplaced the URL) that there is massive harm done in this case. People are quite astute at perceiving damage to themselves done by others. Some are astoundingly good at it, spotting eleven out of every three cases of negligence or inconvenience that occur. The remedy will be an unexpected consequence: LIBOR will go away, and we all--Spitzer, you, me, and all the other people who have mortgages and car loans--will have to rely on much fuzzier (and more expensive) estimates of short-term borrowing costs.
Tuesday, July 17, 2012
Government didn't build that
There are a lot of Government employees and elected officials who draw paychecks. Many of them attribute their positions of privilege and power to their own intelligence and correct political beliefs. But their seemingly justifiable perches over the people is an illusion. There are a lot of smart citizens out there. Let me tell you something, there are a whole bunch of hard working entrepreneurs and skilled workers in America.
If you were elected to office, a lot of people along the line gave you a lot of help. There was a businessman or inventor somewhere in your life. Somebody helped to create this unbelievable American engine of production and commerce that thrived despite Government intervention. All of the money that Government spent on roads and bridges, that came from hard working people and entreprenuers. Contractors with expertise and skills built them, the Government didn't. If you are in a local, or state, or the national Government, you didn't build that. The PEOPLE and BUSINESS made that happen.
If you were elected to office, a lot of people along the line gave you a lot of help. There was a businessman or inventor somewhere in your life. Somebody helped to create this unbelievable American engine of production and commerce that thrived despite Government intervention. All of the money that Government spent on roads and bridges, that came from hard working people and entreprenuers. Contractors with expertise and skills built them, the Government didn't. If you are in a local, or state, or the national Government, you didn't build that. The PEOPLE and BUSINESS made that happen.
Friday, June 15, 2012
The Utility of Commentary on Business News Articles
Take your pick of news supplier, and odds are that they allow comments on their articles where readers can write their responses. Whatever value this might have had in theory, in practice it has shown to be pretty much worthless as a source of additional factual information. Nearly 100% of all comments offer nothing in terms of new information; no anecdotes, no statistics, no interpretations of data, nothing on the actual factual information revealed in the article, if indeed there was any.
Instead, readers are opinionated, rash, pig-headed, and abusive. They are politically-motivated, writing extremely slanted opinions that have only the remotest connection to the article.
The net effect of maintaining comments, in many cases, is a dead loss to society. Writing the comments drains the time of the writer. Such comments certainly waste the time of the reader, who is better off ignoring all of the comments because they do not inform. Overall, news organizations would benefit their readers by eliminating their comment sections on articles.
Instead, readers are opinionated, rash, pig-headed, and abusive. They are politically-motivated, writing extremely slanted opinions that have only the remotest connection to the article.
The net effect of maintaining comments, in many cases, is a dead loss to society. Writing the comments drains the time of the writer. Such comments certainly waste the time of the reader, who is better off ignoring all of the comments because they do not inform. Overall, news organizations would benefit their readers by eliminating their comment sections on articles.
Thursday, May 17, 2012
Austerity to End With No Investment Plan in Place
Now that the elections in France are over, it is clear that the voters want an end to austerity. Assuming that governments in France and elsewhere agree to increase spending, deficits will increase. A significant portion of the increased spending will go to transfer payments, not investments. Growth rates will move only slightly. Inflation will increase. The Euro will decline in value relative to the dollar and remnibi.
European inflation may influence U.S. inflation. Therefore, it is prudent to shift into inflation-resistant investments, especially income-producing real estate, consumer goods stocks, railroads, and other companies that have big moats around their business model.
---
Some older news related to the ending of austerity in Europe:
Bundesbank’s Weidmann Says What No Politician Wants to Hear
http://www.bloomberg.com/news/2012-04-22/bundesbank-s-weidmann-says-what-no-eu-politician-wants-to-hear.html
Hollande Vows Not to Ratify Euro Pact, Auguring Merkel Clash
http://www.bloomberg.com/news/2012-04-25/hollande-says-france-won-t-ratify-euro-fiscal-pact-as-it-stands.html
Europe awaiting France to temper austerity: Hollande
http://www.reuters.com/article/2012/04/25/us-france-election-idUSBRE83I0EZ20120425
European inflation may influence U.S. inflation. Therefore, it is prudent to shift into inflation-resistant investments, especially income-producing real estate, consumer goods stocks, railroads, and other companies that have big moats around their business model.
---
Some older news related to the ending of austerity in Europe:
Bundesbank’s Weidmann Says What No Politician Wants to Hear
http://www.bloomberg.com/news/2012-04-22/bundesbank-s-weidmann-says-what-no-eu-politician-wants-to-hear.html
Hollande Vows Not to Ratify Euro Pact, Auguring Merkel Clash
http://www.bloomberg.com/news/2012-04-25/hollande-says-france-won-t-ratify-euro-fiscal-pact-as-it-stands.html
Europe awaiting France to temper austerity: Hollande
http://www.reuters.com/article/2012/04/25/us-france-election-idUSBRE83I0EZ20120425
Will Greece Be Ejected from the EU?
(As usual, I am looking for the objective observation. This is not a prescription for what I think should happen, it is observation of what is likely to happen. Failing to stay objective is a mistake that costs money.)
Voters in Greece are rejecting austerity. The newly-elected government failed to coalesce this week, so there will be new elections in June. Predictions are that more seats will go to left-leaning parties which will, of course, deliver policies requested by the Greek people.
Greece would like to remain within the euro zone. It benefits from the stability of the Euro. By comparison, returning to the drachma would likely result in inflation, and most Greeks believe that returning to the drachma would be a disaster.
If you are a Greek citizen, why would you vote for austerity? It causes a loss of Government jobs. And why would you vote to lose the Euro and switch to the drachma? You wouldn't. That would result in inflation. If you were in their shoes, you too would want to have your cake and eat it.
Therefore, Greece will ask the euro zone countries to continue supplying money while it suspends interest payments. Voters in other countries will reject this scenario. They will reject the additional taxes required to maintain this state, by voting out politicians if necessary. The politicians in these other countries will then need to make a choice: Leave the euro zone themselves, or request that the EU act as a unit to prevent Greece from using the Euro. This will lead to the EU pushing Greece out.
Germany will get 99% of the blame, even if the vote to expel is unanimous.
Stocks in U.S. markets are in a correction at present in anticipation of these events. The greatest part of the discount is from uncertainty over the method of Greece's exit and the ramifications for the rest of the euro zone. I have no way of calculating the correct discount. The greatest turbulence and discount in prices of stocks will be now, when there is a lot of uncertainty. Once the news of the separation occurs, stocks will rise as uncertainty recedes.
It has already been reported by various news services that banks in Greece have been preparing for several years for a possible return to the drachma. Greece's central bank owns the necessary printing presses for printing new drachmas, if it has to.
Over the past week Greeks have pulled nearly a trillion Euros from banks in Greece. This is capital flight, a run on the banks, confirming that the common expectation among voters themselves is that Greece will be departing from the euro zone.
Voters in Greece are rejecting austerity. The newly-elected government failed to coalesce this week, so there will be new elections in June. Predictions are that more seats will go to left-leaning parties which will, of course, deliver policies requested by the Greek people.
Greece would like to remain within the euro zone. It benefits from the stability of the Euro. By comparison, returning to the drachma would likely result in inflation, and most Greeks believe that returning to the drachma would be a disaster.
If you are a Greek citizen, why would you vote for austerity? It causes a loss of Government jobs. And why would you vote to lose the Euro and switch to the drachma? You wouldn't. That would result in inflation. If you were in their shoes, you too would want to have your cake and eat it.
Therefore, Greece will ask the euro zone countries to continue supplying money while it suspends interest payments. Voters in other countries will reject this scenario. They will reject the additional taxes required to maintain this state, by voting out politicians if necessary. The politicians in these other countries will then need to make a choice: Leave the euro zone themselves, or request that the EU act as a unit to prevent Greece from using the Euro. This will lead to the EU pushing Greece out.
Germany will get 99% of the blame, even if the vote to expel is unanimous.
Stocks in U.S. markets are in a correction at present in anticipation of these events. The greatest part of the discount is from uncertainty over the method of Greece's exit and the ramifications for the rest of the euro zone. I have no way of calculating the correct discount. The greatest turbulence and discount in prices of stocks will be now, when there is a lot of uncertainty. Once the news of the separation occurs, stocks will rise as uncertainty recedes.
It has already been reported by various news services that banks in Greece have been preparing for several years for a possible return to the drachma. Greece's central bank owns the necessary printing presses for printing new drachmas, if it has to.
Over the past week Greeks have pulled nearly a trillion Euros from banks in Greece. This is capital flight, a run on the banks, confirming that the common expectation among voters themselves is that Greece will be departing from the euro zone.
Tuesday, May 15, 2012
Family Vacation or Budget Deficit?
In the Wall Street Journal Demetria Gallegos writes about taking a vacation with her four daughters without her husband. She wrote about differences of opinion over affordability and location (Los Angeles and Disney), but appears to have skipped many other issues. Issues like control (did he have any input into planning?), frequency of their Los Angeles trips (is this the fifth trip there?), proximity to relatives (hers?), style (shopping and Disney trinkets vs. history and culture), trip efficiency ($ per day), and budget (was money saved for this trip, or is it coming from credit cards?). The responses tended to be polarized, with perhaps half of the commentators castigating the husband, and the others supporting him. Several were quite harsh, suggesting the wife divorce the husband.
One of the dangers of frugality is that other people attack it. It is difficult enough for some of us to refrain from spending money we shouldn't spend. When we do, we are being sensible. Ben Franklin would be proud. A penny saved is a penny earned. When other people attack that frugality, it is much easier to give in to the criticism and resume overspending.
Something more than "good parenting" was at stake in this article. Most of us know that a good shared experience can pay dividends for the family for many years. Time passes, and you cannot get it back. Children grow up, and if you don't seize the initiative to travel with them, you won't get that opportunity later. It evaporates.
What was missing from the article, though the author implied that her husband did understand all of that, was any discussion about whether this trip would be a memorable trip. It is possible that the husband calculated that circumstances would result in a poor "memory" payoff for the cost involved. Certainly those commentators eager to attack him gave no consideration at all to this payoff calculation.
The bigger issue is the people dynamics. It is possible to be sensible and do the right thing about your finances, to be great at getting high returns from both expenses and investments, and still someone will come along and berate you for reasons that are emotional. You were happy, but now they are doing all they can to make you believe that you were wrong for being happy.
I have to wonder about some of those commentators. Did they really have other motives in making those comments? An over-spender may be anxious to force others to also overspend, as a way of justifying their behavior. Or it may be simple competitiveness: They want the husband to be as miserable and broke as they are. How dare he escape the vacation dilemma with money left over! Something tells me, however, that there is something even more sinister than that afoot.
One of the dangers of frugality is that other people attack it. It is difficult enough for some of us to refrain from spending money we shouldn't spend. When we do, we are being sensible. Ben Franklin would be proud. A penny saved is a penny earned. When other people attack that frugality, it is much easier to give in to the criticism and resume overspending.
Something more than "good parenting" was at stake in this article. Most of us know that a good shared experience can pay dividends for the family for many years. Time passes, and you cannot get it back. Children grow up, and if you don't seize the initiative to travel with them, you won't get that opportunity later. It evaporates.
What was missing from the article, though the author implied that her husband did understand all of that, was any discussion about whether this trip would be a memorable trip. It is possible that the husband calculated that circumstances would result in a poor "memory" payoff for the cost involved. Certainly those commentators eager to attack him gave no consideration at all to this payoff calculation.
The bigger issue is the people dynamics. It is possible to be sensible and do the right thing about your finances, to be great at getting high returns from both expenses and investments, and still someone will come along and berate you for reasons that are emotional. You were happy, but now they are doing all they can to make you believe that you were wrong for being happy.
I have to wonder about some of those commentators. Did they really have other motives in making those comments? An over-spender may be anxious to force others to also overspend, as a way of justifying their behavior. Or it may be simple competitiveness: They want the husband to be as miserable and broke as they are. How dare he escape the vacation dilemma with money left over! Something tells me, however, that there is something even more sinister than that afoot.
Corruption Perception Indices in the Eurozone
I was wondering about correlations between the country scores in the Corruption Perception Index compiled by Transparency International (http://cpi.transparency.org/cpi2011/results/#CountryResults) and national budget deficits. Here are the Corruption Perception numbers for members of the Eurozone, with 1.0 indicating very high corruption and 10.0 indicating zero corruption:
Austria 7.8
Belgium 7.5
Cyprus 6.3
Estonia 6.4
Finland 9.4
France 7.0
Germany 8.0
Greece 3.4
Ireland 7.5
Italy 3.9
Luxembourg 8.5
Malta 5.6
Netherlands 8.9
Portugal 6.1
Slovakia 4.0
Slovenia 5.9
Spain 6.2
Three Nordic countries not in the Eurozone have very high scores:
Denmark 9.4
Sweden 9.3
Norway 9.0
For comparison, the United States scores a 7.1 on this scale, just slightly ahead of France, but well behind Germany, Finland, and the Netherlands.
Greece has the lowest score among all Eurozone countries. The only other countries that are close are Italy and Slovakia.
Austria 7.8
Belgium 7.5
Cyprus 6.3
Estonia 6.4
Finland 9.4
France 7.0
Germany 8.0
Greece 3.4
Ireland 7.5
Italy 3.9
Luxembourg 8.5
Malta 5.6
Netherlands 8.9
Portugal 6.1
Slovakia 4.0
Slovenia 5.9
Spain 6.2
Three Nordic countries not in the Eurozone have very high scores:
Denmark 9.4
Sweden 9.3
Norway 9.0
For comparison, the United States scores a 7.1 on this scale, just slightly ahead of France, but well behind Germany, Finland, and the Netherlands.
Greece has the lowest score among all Eurozone countries. The only other countries that are close are Italy and Slovakia.
Wednesday, May 2, 2012
Trading Psychology Revealed by Share Buybacks
Share buybacks by companies stir up the emotions of some traders. It is a telling sign. Why would something as mundane as a change in the denominator get traders so stirred up? Perhaps this is one way to tell the difference between an investor and a trader: The investor looks at the relative price to value, while the trader looks for various technical factors surrounding the transaction. As to whether share buybacks are good or bad, the trader will almost always label them as "bad," while the investor will ask about the price relative to book value or enterprise value.
The pseudonymous "Jaded Consumer" writing at Seeking Alpha seems to have caught Motley Fool's Rick Smith thinking like a trader:
http://seekingalpha.com/article/549621-why-american-capital-is-buying-american-capital
For reference, here is the original Fool article, which doesn't really make a valuation-based case for criticizing an American Capital Strategies share buyback:
http://www.fool.com/investing/general/2012/04/12/2-stocks-that-are-wasting-your-money.aspx
In this situation, we have what might look like a turnabout: The supposedly sensible Motley Fool writer has been found to be trading, while the pseudonymous "Jaded Consumer" is offering much clearer thinking, and better writing as well.
It is worth mentioning that none of my comments here are intended to reflect on the relative merits of investing in AAPL or ACAS.
The pseudonymous "Jaded Consumer" writing at Seeking Alpha seems to have caught Motley Fool's Rick Smith thinking like a trader:
http://seekingalpha.com/article/549621-why-american-capital-is-buying-american-capital
For reference, here is the original Fool article, which doesn't really make a valuation-based case for criticizing an American Capital Strategies share buyback:
http://www.fool.com/investing/general/2012/04/12/2-stocks-that-are-wasting-your-money.aspx
In this situation, we have what might look like a turnabout: The supposedly sensible Motley Fool writer has been found to be trading, while the pseudonymous "Jaded Consumer" is offering much clearer thinking, and better writing as well.
It is worth mentioning that none of my comments here are intended to reflect on the relative merits of investing in AAPL or ACAS.
Wednesday, April 25, 2012
The Coming French Credit Default
It was only about six weeks ago that the long, slow Greek credit default came to its tiny, whimpering conclusion. Recent prices of Spanish credit default swaps, and the clear French political posturing as a run-up to a "stand up to big bad Germany" meeting indicates that things are definitely not solved in the euro zone. If anything, tensions are as high as they have ever been.
The euro zone is headed for a dramatic, catastrophic dissolution.
When the EU was first announced, some wondered how such an entity, a collectivist agreement among individual, independent nations, would last. National norms vary enormously from EU state to EU state. The approaches to saving, spending, and investing, as cultural elements, are very different. Since the basis of a currency are the nation's collective ability to spend, save, and invest, as a unit, the prognosis, at least as I saw it, was for continual and enormous tensions that would tend to pull the union apart.
The creation of a monetary union and the lowering of tariffs created some growth that ameliorated the underlying tensions. But when that palliative is removed, the forces of dissolution are unchecked, except for diplomacy and time.
It seems that the euro zone is running out of both at this moment. Germany is seen as the evil, successful, mean daddy with all the money, who pushes around and bullies all of the less successful little states, like Paul Krugman, whose head believes it is a state all to itself. Germany, as always a stickler for the rule of law, points out the requirements of the union, while the other governments, one by one find that they cannot get re-elected if they follow the austerity policies they agreed to in their "weaker" moments.
A side comment in an April 23 article on CNBC:
"The problem is that governments across the euro zone are finding it very difficult to live up to commitments on austerity and stay elected."
http://finance.yahoo.com/news/happens-plan-usterity-fails-132827914.html
Exactly. Let's work out the conclusions that naturally follow.
The people don't want austerity, hence they soon will get lack of austerity. Governments will begin to spend on infrastructure, unemployment, and other benefits. The resulting pressure on the Euro will be to cause inflation, but only if Germany allows it. Germany, with a cultural abhorrence of inflation borne from a very real portion of its history not so long ago, will logically resist the inflation at first. Of course, events of the past two years could very well be said to already have been Germany's resistance to inflation, so Germany may itself not have much patience left for tolerating the blows it will need to absorb to preserve monetary stability.
What happens next is entirely up to Germany. For decades later, people in Spain, Greece, France, and many other euro zone countries will find fault, scapegoat, and lie in order to convince themselves that someone else (Germany) is to blame, and not themselves. But what will happen is this:
Germany will leave the euro zone and go back to the Deutsche-mark.
It will do this strictly from a sense of self-preservation. The alternative is to "donate" through inflation and other corrosion of its finances 20%, 30%, or even 70% of its annual GDP to the union as the other members spend far, far ahead of their ability to actually produce goods and services. After all of the years of a divided Germany, the trials of reunification, and the sacrifices made on behalf of the EU the past several years, Germany will not be able to withstand the thousand cuts of all the favors and supports asked of it by its neighbors.
I have picked on Germany here only because it is the obvious country to break from the union in order to avoid its own death, but there are other countries that could leave the monetary union first, as they would be less visible and suffer fewer consequences from their actions.
The Euro will lose value against other currencies, especially the dollar. Expect high inflation in Italy, Spain, Greece, and France. Expect rates of inflation high enough that current sovereign debt and bonds of companies are eroded significantly in value over the next three to five years. In short, this is a very poor time to be buying European debt, and an excellent time to sell. U.S. Treasury bonds are not a good investment either, but not for the same reason. With European inflation raging, expect a new avalanche of imports into the U.S. from euro zone countries, with prices for European luxury goods dropping, in some cases. No doubt there will be a certain amount of price gouging of American consumers, so watch Euro-dollar exchange rates closely and negotiate hard with your local wine and cheese shop for better rates on Bordeaux and Manchego. Want a BMW or Mercedes? No need to wait, as if Germany drops the Euro, you would be exchanging dollars for Deutsche-marks, and that exchange rate is not going to suffer like the Euro will, so you won't be getting any discounts there.
[updated 4/30/12]
The euro zone is headed for a dramatic, catastrophic dissolution.
When the EU was first announced, some wondered how such an entity, a collectivist agreement among individual, independent nations, would last. National norms vary enormously from EU state to EU state. The approaches to saving, spending, and investing, as cultural elements, are very different. Since the basis of a currency are the nation's collective ability to spend, save, and invest, as a unit, the prognosis, at least as I saw it, was for continual and enormous tensions that would tend to pull the union apart.
The creation of a monetary union and the lowering of tariffs created some growth that ameliorated the underlying tensions. But when that palliative is removed, the forces of dissolution are unchecked, except for diplomacy and time.
It seems that the euro zone is running out of both at this moment. Germany is seen as the evil, successful, mean daddy with all the money, who pushes around and bullies all of the less successful little states, like Paul Krugman, whose head believes it is a state all to itself. Germany, as always a stickler for the rule of law, points out the requirements of the union, while the other governments, one by one find that they cannot get re-elected if they follow the austerity policies they agreed to in their "weaker" moments.
A side comment in an April 23 article on CNBC:
"The problem is that governments across the euro zone are finding it very difficult to live up to commitments on austerity and stay elected."
http://finance.yahoo.com/news/happens-plan-usterity-fails-132827914.html
Exactly. Let's work out the conclusions that naturally follow.
The people don't want austerity, hence they soon will get lack of austerity. Governments will begin to spend on infrastructure, unemployment, and other benefits. The resulting pressure on the Euro will be to cause inflation, but only if Germany allows it. Germany, with a cultural abhorrence of inflation borne from a very real portion of its history not so long ago, will logically resist the inflation at first. Of course, events of the past two years could very well be said to already have been Germany's resistance to inflation, so Germany may itself not have much patience left for tolerating the blows it will need to absorb to preserve monetary stability.
What happens next is entirely up to Germany. For decades later, people in Spain, Greece, France, and many other euro zone countries will find fault, scapegoat, and lie in order to convince themselves that someone else (Germany) is to blame, and not themselves. But what will happen is this:
Germany will leave the euro zone and go back to the Deutsche-mark.
It will do this strictly from a sense of self-preservation. The alternative is to "donate" through inflation and other corrosion of its finances 20%, 30%, or even 70% of its annual GDP to the union as the other members spend far, far ahead of their ability to actually produce goods and services. After all of the years of a divided Germany, the trials of reunification, and the sacrifices made on behalf of the EU the past several years, Germany will not be able to withstand the thousand cuts of all the favors and supports asked of it by its neighbors.
I have picked on Germany here only because it is the obvious country to break from the union in order to avoid its own death, but there are other countries that could leave the monetary union first, as they would be less visible and suffer fewer consequences from their actions.
The Euro will lose value against other currencies, especially the dollar. Expect high inflation in Italy, Spain, Greece, and France. Expect rates of inflation high enough that current sovereign debt and bonds of companies are eroded significantly in value over the next three to five years. In short, this is a very poor time to be buying European debt, and an excellent time to sell. U.S. Treasury bonds are not a good investment either, but not for the same reason. With European inflation raging, expect a new avalanche of imports into the U.S. from euro zone countries, with prices for European luxury goods dropping, in some cases. No doubt there will be a certain amount of price gouging of American consumers, so watch Euro-dollar exchange rates closely and negotiate hard with your local wine and cheese shop for better rates on Bordeaux and Manchego. Want a BMW or Mercedes? No need to wait, as if Germany drops the Euro, you would be exchanging dollars for Deutsche-marks, and that exchange rate is not going to suffer like the Euro will, so you won't be getting any discounts there.
[updated 4/30/12]
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