Back in 1985 the Securities and Exchange Commission lost a legal case against a newsletter publisher. The SEC insisted that the publisher was a financial advisor. The publisher insisted that they were exercising their First Amendment rights. The U.S. courts ruled in favor of the publisher against the SEC.
I don't know whether that seems unfair to you not, but consider another situation: A publisher of information doesn't know what the reader will do with it. The reader could invest $1000, nothing, or $100,000,000. Suppose the reader invests $100 million, loses half of it, and sues the publisher to make them whole, even though they paid the publisher just $100 for an annual subscription. Do you think the publisher is liable for the losses? Let's suppose you do, and take the tentative position that the publisher really does owe the reader some compensation for the bad advice.
So let's back up, then, to the moment just before the reader placed their subscription order. These thoughts occurred to them:
1. "If I invest $100 million, and lose half, then I'm out a bunch of money, and its my fault."
2. "But if I can invest $100 million, lose half, and sue the publisher, then maybe I won't lose anything because the publisher has to reimburse me!"
3. "On the other hand, if I invest $100 million and my investment goes up by $50 million, then I keep the whole thing and don't have to share the profits. I keep the whole thing."
4. "There's no way to lose! If I make money, I keep it, and if I lose money, I blame it on the publisher and I break even. Yahoo!"
5. "Boy, that newsletter publisher sure is stupid!"
In other words, if you assign strict liability to the publisher for bad calls, then they take on unlimited liability for trillions of dollars of losses, without any possible sharing of gains. Were this to become legal precedent, then no advice would ever be given to anyone ever again. And that would include medical and legal advice, not just financial advice, or even just a few comments in a blog about financial matters.
So, in response, we have posted our legal page with our terms and conditions for reading Vorpal Trade. We think it highlights just how absurd, in an artistic sort of way, many legal contracts can be when they are trying to remove obstacles from the path of truth.
(P.S.: There is no resemblance whatsoever between the DOJ legal case against S&P and our contract. None whatsoever.)
2/9/13 Update:
Various materials regarding the First Amendment and the SEC's regulatory operations that have come into opposition with the Constitution:
Wall Street Journal, 9/5/12: The SEC and the First Amendment
The New Capitalist, 3/11/11: The SEC’s Problem With the First Amendment
Forbes (warning: many advertisements), 9/18/12: Under Congressional Mandate, SEC Slowly Moves Towards Recognition of First Amendment
Restrictions on securities solicitations are a response to abuses of the 1920s and 1930s. SEC rules about solicitations are intended to curtail activity that could result in the sale of inappropriate securities to unsophisticated investors. Forbes' Glenn G. Lammi: "SEC Chairman Schapiro seems sympathetic to the concerns voiced in letters from various activist groups that freer speech will unleash a flood of fraudulent activity."
Wednesday, February 6, 2013
Monday, November 19, 2012
The One Thing that CFPB Must Do
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.
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.
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.
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