economy

[JohnRoberts]

Agreed. Too easy, but an important aspect. Add the hedging game, fast trading possibilities through computers, computer-based automatic trading and, also highly important, the massive surge in derivatives since the turn of the millenium.

In my judgement the proximate cause was bundling and reselling of tranches of sub-prime mortgages. Since price discovery did not accurately reflect the low quality of the underlying loans, money was made hand over fist creating huge demand for even more crap loans to bundle and resell.  This became a positive feedback loop until somebody finally realized that the mortgages underneath these derivative investments weren't sound and the house of cards collapsed. Obvious in hindsight but very few saw the problem in time to prevent it. I still think shutting down/rolling back Fannie and Freddie could have helped, but that's all hypothetical.

Well, no free lunch then any more. About higher risks, I am not so sure. Strangely enough, stocks are widely thought of and promoted as involving a significantly high risk. Anyone who believes this has fallen victim to a grand lie. Personally, I think the opposite is true, depending on what stocks you pick of course.

Individual stocks can go to zero... (I've owned a few that did), so there is indeed significant risk,,, but over time you can learn from your mistakes, and with disciplined approaches reduce the outright risk. In general there is a continuum of risk/reward with more volatile stocks delivering more return and/or loss.

To my understanding, a fond is riskier because of anonymous management staff, running costs and generally lower ROI --

mutual fund? Indeed management fees or "load" will skim off profit from the funds income reducing return.

basically subsidizing your bank with skimmed off (read: free) constant revenue.

Some retirement accts do well from the regular investment flow.

Trackers are also risky (issuer risk) and they don't count as property but are basically like lending out cash (private persons have significantly low priority in the case of issuer bankruptcy).

Tracking stocks?  Over the years I've invested in a few US versions of foreign securities. Maybe I was just lucky but didn't lose money in them.  At the moment I am 100% in domestic companies but growth for the US is predicted to underperform international markets.

Bitcoins are what I'd call very risky (actually the turbo capitalist's wet dream),

yup...

while taking a second mortgage on the house just because its value is rising is what I'd almost call taking a stupid risk (paying off the morgage as quickly as possible is what I'd call smart).

The mindset during the housing bubble was that home prices would continue going up forever. So it felt like a sure thing that the house would sell for a huge profit later.

I paid off my mortgage back in the early '90s and was the best return I ever made on my cash.  8) IIRC it was an adjustable rate mortgage that was transferred to me when I bought the house and in the mid teens interest rate.  I'd love to made >10% that easily today.

BTW, have you ever tried trading options, futures, puts, calls, well, any leverage product of any kind?

yes years ago I dabbled in "leaps"... long term call options 3 years out or so...  I figured it was a no-brainer since the market surely always goes up in three years.  :'(  Several of my long term calls expired worthless and I lost my enthusiasm for them.

Now that is indeed pretty much like betting on horses and it involves significantly (read: extremely) high risk. It's fast-paced, there's a knock-out (total loss) and the spread is always working against you.

generally there is smart money taking the other side of such investments (unless you are the smart money). I have no desire to day trade, or trade at all... I am not smart enough to predict the future price of anything. Instead I favor long term investments companies that benefit from significant trends (like fedex and UPS) benefitting from internet sales, or banks benefiting from a rising interest rate environment (might be almost finished), or just really smart businesses like berkshire hathaway...  That said I'm almost 50% in cash waiting for a correction so I can pick up some bargains on the cheap.

Actually I do occasionally trade... but not in significant amounts. I have a small position in Twitter, not based on them becoming a cash cow, but speculating that somebody will buy them for their iconic franchise. 

Derivates are responsible for much if not most market movements these days. So -- and this is just an idea off the top of my head -- why not change the rules and decide that you can only hedge a position that you actually own. Read: you can trade up to 100 leverage units of a product based on a given stock if you can proove that you actually hold 100 stocks by said company. If you don't have those stocks, you can't buy the derivative. I am well aware that this would be the death blow to 90% or more of so-called investment companies. But then again, it's just a quick shot. 

I'm not sure I follow... to sell a stock short, you have to borrow shares from somebody who owns them.

There is a lot of group think among hedge funds and mutual funds with them often buying and selling the same companies.  When everybody ends up using the exact same software to choose trades, we will see perfect correlation.    (I am pleased that high speed traders are making less money these days as exchanges add speed bumps and other remedies).

There you go. Lock in the rates while they are still low.

yup

Then fuel inflation by allowing banks to give out more money again, floddding the markets with the very same money that the banks have been flooded with. Said differently, have inflation mimick growth (the Japanese approach), hoping that more money circulating will unleash whatever they wishfully think there is.

we are aware of the Japanese deflation and trying to avoid that... coincidentally the cheap offshore manufacturing and increased productivity of automation and soon AI will continue to induce deflationary pressure on prices.

#Never did. I think it's a total waste of valuable time  8)

Some are completely consumed by it... sounding like tourette's syndrome cases every time he tweets.

JR

 

[dmp]

A dangerous percentage of auto loans are subprime (15% maybe more?) and we have the dangerous scenario of decreasing used car values and higher interest rates. Not sure how this will be headed off. It will be interesting to see how it is spun the next time though.  Many conservatives blamed the Gov. housing initiatives for the mortgage bubble instead of Wall street greed & confidence in the Fed put.
The bigger storm cloud on the horizon is 20 Trillion in US debt in a normal interest rate environment. And we have a Republican President calling for a large tax cut for the wealthy.
More people need to realize that the current adult generation (primarily baby boomers but also gen x) is leaving the children of this country a massive amount of debt and a future outlook that is worse than they themselves had. It is shameful.

The idea that Trump's tweets should be ignored is fine if that is your preference, but we will see what happens when he actually does something significant. Last week he was supposedly close to exiting NAFTA, and this week he called a Gov. shutdown a good thing to break gridlock. Trump can veto a budget and shutdown the Gov.

 

[JohnRoberts]

A dangerous percentage of auto loans are subprime (15% maybe more?)

I believe I've talked about this before "deep sub-prime" auto loan securitization more like 32% (per Bloomberg).

[edit] I read the wsj article this morning... their 16% number may just be a timing issue as sub prime car loans are drying up. [/edit]

and we have the dangerous scenario of decreasing used car values and higher interest rates.

yup... tons of cars coming off lease (over next two years) and new cars being heavily discounted (with cash incentives) to move them off the lots. Detroit needs desperately to reduce factory capacity.

Another elephant in the room is China. They are rapidly increasing their auto manufacturing capability far beyond what their local market can absorb. China rather export cars than throttle back their domestic manufacturing. So expect more price pressure from Chinese imports.

Not sure how this will be headed off.

The usual way is to offer longer loan durations, but that is already a little tangled up as some new car buyers trade in cars that still have loans outstanding that are underwater... The car dealers/companies to keep the music playing, capitalize or roll the outstanding loan balance from the old car into the new car loan. As long as the buyer can meet monthly loan payments they don't bother to do the math.... : This can not continue indefinitely, a bit of a shell game already. 

It will be interesting to see how it is spun the next time though. 

Car debt is just one of several consumer debt piles in the $1T range (along with student loan debt and credit card debt also nice round $1T numbers each give or take).

[edit] interesting thing about the sub prime car loans is that they were bundled and sold to investors as substitutes for bonds in this low interest rate environment... another distortion from fed low interest rate monkey business.. [/edit]

Many conservatives blamed the Gov. housing initiatives for the mortgage bubble instead of Wall street greed & confidence in the Fed put.

um yes... they did not light the fire but put gas instead of water on it when everything looked rosy.

[edit] just read today there could be congressional hearings in May to address reform of Fannie and Freddie... we'll see [/edit]

The bigger storm cloud on the horizon is 20 Trillion in US debt in a normal interest rate environment.

It is estimated to reach $20T by the end of this year (now $19T+).  Indications are that we will not return to normal (a lot higher than now) interest rates any time soon. But yes I agree this is a concern and have said so many times.

And we have a Republican President calling for a large tax cut for the wealthy.

I suspect it is a little more complicated than that...  We need to increase economic growth and tax reform is required for that.  Raising taxes on the wealthy will just make less people wealthy. We already have a very progressive tax rate structure. 

IMO One of the more interesting policy bombs dropped surrounding tax policy proposals was cancelling the state tax deduction. This will be a huge hit to both high tax coasts (who coincidentally didn't support Trump). I consider this another trial balloon that won't survive tax committees in congress, but an interesting shot across the bow.

More people need to realize that the current adult generation (primarily baby boomers but also gen x) is leaving the children of this country a massive amount of debt and a future outlook that is worse than they themselves had. It is shameful.

We desperately need entitlement reform... We need to increase the retirement age sensibly.. This is the third rail of politics and even republicans are fearful to touch it.

The idea that Trump's tweets should be ignored is fine if that is your preference, but we will see what happens when he actually does something significant. Last week he was supposedly close to exiting NAFTA, and this week he called a Gov. shutdown a good thing to break gridlock. Trump can veto a budget and shutdown the Gov.

Taking his tweets literally is not good for your blood pressure. He has surrounded himself with some competent staff and I prefer to listen to their thoughts about issues... 

I am relieved that Trump has already reversed multiple of his more hyperbolic campaign positions after becoming engaged and informed.  I expect (hope for) more of the same (review and more thoughtful revised positions).

Of course I have always been an optimist... and no I don't pay attention to his tweets.

JR

 

[Script]

Individual stocks can go to zero...

Yes, they can go to zero. But take Berkshire Heatherway* or P&G or McD or CC. Unlikely that these will go to zero. Sure, buying and holding stocks is also time consuming (personal time that is), as any privately held portfolio needs service and maintenance (call it work time that is not ‘sold’ on the employment market but used exclusively for oneself). Anyway, there’s never a free lunch.
_
*BH investing into Apple was a true surprise, don’t you think? I guess they are speculating on the upcoming tax deal promoted by Trump, since products lately are not so exciting I’ve read.

I'm not sure I follow... to sell a stock short, you have to borrow shares from somebody who owns them.

Let say that borrowing does not equal owning, although it implies responsibility.

No, I meant derivatives (futures, options, swaps etc), as the third financial product alongside stocks and debts (bonds). You don’t have to own XYZ stocks to buy and speculate with a factor 25 (or whatever) leveraged put option based on the development of XYZ as the underlying entity. In the US you do?

Hedging and some derivatives (futures, swaps, forwards etc) do serve a purpose for corporate businesses just like currency trading does for cross-border operating businesses (let’s say: for an iron ore harvesting and selling company). Maybe it also serves a purpose for managers of a pension fund, say hedging against falling markets for instance if unwise to sell part of or an entire position. But then again, most pension funds can’t invest wildly across the board anyway. Recently, pension funds and insurance companies across Europe have been calling for deregulation allowing them to invest more in stocks rather than low-risk, low interest rate bonds (esp. state bonds).

As for Japanese deflation: that’s of the past. Japan has hit inflation of a bit below target value of 2% (in reality and on paper!!). Problem is that income does not rise accordingly (‘artificially’ induced inflation calls for wealth redistribution to uphold consumer spending as biggest contributor to GDP), nor has there been any substantial growth. So far this experiment has only boosted the accounts of really big corporations like Nissan, Toyota etc (well, at least on paper in total numbers). Effect on mid-sized companies and middle-class population is near zero (well, going abroad has become very expensive and so have imported goods), while the effect on low-income families is truly worrisome. Japan dearly needs social reforms -- implosion is pending. Next generation of the ‘very poor’ has already been identified: they are aged below 5 (five!) right now -- two among ten kinds on average. I truly hope that similar things won’t happen in Britain.

Optimism? Yeah, me too. Life's too short for drooling.

 

[tands]

What Is Rehypothecation?

When the person or institution to whom or which you have pledged collateral - most often securities - turns around and borrows money, using the collateral you gave him, her, or it as their own collateral, this is rehypothecation.

In other words, imagine you borrow money and hand over collateral.  The original lender then turns around and borrows money, repledging your collateral as their own collateral.  Your lender no longer enjoys ultimate control over the collateral or what can be done with it; their lender does.  This is made possible by something known as "Federal Reserve Board Regulation T", or 12 CFR §220 - Code of Federal Regulations, Title 12, Chapter II, Subchapter A, Part 220 (Credit by Brokers and Dealers).

The arrangement can result in substantial problems if things go wrong, especially because of something known as "regulatory arbitrage" where a brokerage house plays the rules of the United States of the rules of the United Kingdom and can effectively remove any and all limits to a number of rehypothecated assets it can use to borrow money, funding its own risky bets on stocks, bonds, commodities, options, or derivatives.

When this happens, it has been dubbed hyper-hypothecation.

https://www.thebalance.com/rehypothecation-investment-disaster-357232

 

[Script]

Tracking stocks?

Or indexes. Basically debt terrain, not property.

At the moment I am 100% in domestic companies but growth for the US is predicted to underperform international markets.

Yes, generally higher P/BV ratio in US than across Europe right now. However, markets have gone up considerably already in US versus somewhat unpredictable economic and political prospects in EU. Tech seems to be doing well in the US though. But then again, Twitter would be quite daring an investment in my books. Not really tangible. So how do we assess the value? FB is the same, not much tangible stuff there to assess. Domestic bias is good, cos it’s products/businesses that we ‘know’ from daily life. In general I avoid businesses that I don’t understand or like -- such as Starbucks: I don’t like their coffee or what they call that, but I am a smoker and like beer. See what I mean?

The mindset during the housing bubble was that home prices would continue going up forever. So it felt like a sure thing that the house would sell for a huge profit later.

Clear case of insatiability.

I favor long term investments companies that benefit from significant trends (like fedex and UPS) benefitting from internet sales, or banks benefiting from a rising interest rate environment (might be almost finished), or just really smart businesses like berkshire hathaway...  That said I'm almost 50% in cash waiting for a correction

I see where you are. Pretty solid strategy, I’d say. Although 50% in cash strikes me as being high. Banks are rather out of the question across Europe (too many banks in the EU), but maybe add any kind of consumer goods businesses. Personally I favour really long-term positions and am willing to accept dips. Sure I could sell with good return right now and probably get good returns in future if I bought back the same positions (I do that with more recent investments). However, the next position will most probably be higher risk and therefore would needs more intensive monitoring. Not willing to sacrifice even more of my time.

 

[JohnRoberts]

Yes, they can go to zero. But take Berkshire Heatherway* or P&G or McD or CC. Unlikely that these will go to zero. Sure, buying and holding stocks is also time consuming (personal time that is), as any privately held portfolio needs service and maintenance (call it work time that is not ‘sold’ on the employment market but used exclusively for oneself). Anyway, there’s never a free lunch.

I have owned some big name stocks that went to zero... (like enron where my brother used to work), others didn't go all the way to zero but dropped to a fraction of their former price.  In fact I get an ugly reminder in my statements that my portfolio was worth 3x the current value back in 2000. If I was as smart as I pretend I would have sold back then... :-[

_
*BH investing into Apple was a true surprise, don’t you think?

It is an about time.... I have been long BRK/B a long time and IMO they are selling at a discount because of the age of the top management.  Most people expect lower performance after they die, but they are smart enough to manage that too. The apple investment is evidence of a changing of the guard to new younger investment managers. A bigger questions is why haven't they sold IBM? I guess they still have faith in their AI technology.

I guess they are speculating on the upcoming tax deal promoted by Trump, since products lately are not so exciting I’ve read.

I doubt that berkshire makes short term (one time only) trades... Apple has a strong services revenue stream that will likely get larger. Their P/E is actually reasonable.  I don't own apple but am tempted to buy even more Berkshire while I expect it to go on sale at a deep discount briefly after Warren Buffet dies. Assuming he dies before I do.  8)

Let say that borrowing does not equal owning, although it implies responsibility.

No, I meant derivatives (futures, options, swaps etc), as the third financial product alongside stocks and debts (bonds). You don’t have to own XYZ stocks to buy and speculate with a factor 25 (or whatever) leveraged put option based on the development of XYZ as the underlying entity. In the US you do?

I do not believe in using margin debt (buying stocks with borrowed money), or highly leveraged investment vehicles. Short term trading is little more than gambling unless you have inside information, then it is cheating.

Amusing anecdote from todays paper... they compared currency moves for two different countries coincident with major economic news announcements. IIRC they compared UK to Sweden... The Swedish financial data is only known by 2 or 3 top government leaders in the whole country. In the UK some 100 people including legislators know about the data in advance of publication. The UK currency moved before the data was published, the Swedish currency didn't (somebody obviously leaked the UK data to traders). I suspect it's just a matter of inspecting trades to find the guilty traders. 

Hedging and some derivatives (futures, swaps, forwards etc) do serve a purpose for corporate businesses just like currency trading does for cross-border operating businesses (let’s say: for an iron ore harvesting and selling company). Maybe it also serves a purpose for managers of a pension fund, say hedging against falling markets for instance if unwise to sell part of or an entire position. But then again, most pension funds can’t invest wildly across the board anyway. Recently, pension funds and insurance companies across Europe have been calling for deregulation allowing them to invest more in stocks rather than low-risk, low interest rate bonds (esp. state bonds).

Yup... I recall back at Peavey last century, our controller hedged European currencies with futures contracts to protect against out-sized currency moves. The president of the company didn't really understand and complained about the cost, when the futures contracts were not needed so expired worthless.  ;D ;D... Speaking of enron the controller there was supposed to use futures to hedge future energy costs, but instead he gambled on energy price moves and made a profit. The president of that company when advised that the controller was gambling on futures and making money, he encouraged him to continue, until that crashed too.  Classic use of hedging is practiced by some in the airline industry (like southwest) to lock in future fuel costs. One airline did even better by buying their own refinery.  8)

As for Japanese deflation: that’s of the past. Japan has hit inflation of a bit below target value of 2% (in reality and on paper!!). Problem is that income does not rise accordingly (‘artificially’ induced inflation calls for wealth redistribution to uphold consumer spending as biggest contributor to GDP), nor has there been any substantial growth. So far this experiment has only boosted the accounts of really big corporations like Nissan, Toyota etc (well, at least on paper in total numbers). Effect on mid-sized companies and middle-class population is near zero (well, going abroad has become very expensive and so have imported goods), while the effect on low-income families is truly worrisome. Japan dearly needs social reforms -- implosion is pending. Next generation of the ‘very poor’ has already been identified: they are aged below 5 (five!) right now -- two among ten kinds on average. I truly hope that similar things won’t happen in Britain.

Optimism? Yeah, me too. Life's too short for drooling.

+1 the future better be better or why bother?

JR

 

[dmp]

The usual way is to offer longer loan durations, but that is already a little tangled up as some new car buyers trade in cars that still have loans outstanding that are underwater...

Cars are different than houses since they are depreciating asset. Trading in a car that is underwater requires paying cash for the trade in as well as signing up for a new car loan. I read an article in the WSJ the other day that said lenders are taking big losses (50%-60%) when there isn't money. It was a article within the last few days so you could probably find it.

BH investing into Apple was a true surprise, don’t you think?

I think it is machine learning / AI particularly towards autonomous driving systems. Not only apple but google, tesla, etc.
This might be the next big tech revolution and people want to be in on it.

I do not believe in using margin debt (buying stocks with borrowed money), or highly leveraged investment vehicles.

Margin trading is a good way to lose your shirt or win big, not a risk I'm willing to take either.
I think I've posted before housing is a margin investment if you are borrowing to buy more than you can afford. Things will get really ugly if values start going down again and the gov can't stop it like they did in 2008 (remember the $8000 tax credit for 1st time homebuyers?).  I expect demographics to be a challenge over the next 10-20 yrs as boomers retire and try to downsize (and try to extract money from their homes) but find the next generation doesn't have the money to buy, due to high debt already. 
The USD is a fiat currency with a fractional reserve banking system (banks lend out more money than they have) - so basically the whole USD is a margin system. It stopped being tied to something of value 40ish years  ago (gold).
I read the other day that the average lifespan of a fiat currency is 27 yrs (haven't personally checked that but thought it was interesting).
I expect a future big revolution to be alternative crypto currencies.  Especially if we see USD issues with gov debt. It's already been significant internationally.

About optimism - it serves one well to be optimistic but also cautious. I have a longer timeline and my daughter has an even longer timeline. I don't see putting off the debt issue looking 20-40 yrs ahead. It will have to hit (I expect within the next few years), and I don't know if it will be a soft or hard landing. 

 

[JohnRoberts]

Cars are different than houses since they are depreciating asset.

indeed... huge loss the minute you drive it off the new car lot.

Trading in a car that is underwater requires paying cash for the trade in as well as signing up for a new car loan. I read an article in the WSJ the other day that said lenders are taking big losses (50%-60%) when there isn't money. It was a article within the last few days so you could probably find it.

OK that is a recent change...  per this article http://www.bankrate.com/loans/auto-loans/rebates-bail-out-underwater-car-loans/  up until recently they routinely capitalized underwater trade ins, but the weakening car market has made them more cautious now. (some 6 million underwater car owners are now postponing new car purchases). So these owners are more underwater than the new car cash bonuses.

I think it is machine learning / AI particularly towards autonomous driving systems. Not only apple but google, tesla, etc.
This might be the next big tech revolution and people want to be in on it.

Pretty much all the dogs are chasing that same one fox... 8) 

Self driving technology will obsolete the vast majority of truck driver jobs, displacing a huge number of respectable jobs. Any repetitive physical occupation is at risk, and machine learning and AI is challenging white collar jobs. One business executive even offered that CEOs could be replaced by machine intelligence.

This is a far bigger problem than wealth inequality that some try to leverage for political gain.... there will be massive displacements to the workforce, with future jobs that we can't even visualize now. Hard to image gainful employment for everybody. Paying people not to work doesn't seem very healthy for Saudi Arabia, but even worse as oil prices drop they can't afford to pay them not to work much longer. Oh-oh 

Margin trading is a good way to lose your shirt or win big, not a risk I'm willing to take either.
I think I've posted before housing is a margin investment if you are borrowing to buy more than you can afford. Things will get really ugly if values start going down again and the gov can't stop it like they did in 2008 (remember the $8000 tax credit for 1st time homebuyers?). 

I recall back in the 70's when I tried to buy my first house and couldn't get a mortgage to save my life... :'(

buying more house than you can afford, is a modern affliction caused by the economic distortion of too easy credit, it wasn't a problem when mortgage lenders were more disciplined, but I'm repeating myself..

I expect demographics to be a challenge over the next 10-20 yrs as boomers retire and try to downsize (and try to extract money from their homes) but find the next generation doesn't have the money to buy, due to high debt already. 

I am almost embarrassed to say how little my house cost, but selling it is not a major concern. After living in it 30+ years I can just about walk away and not feel bad (30+ years worth of free rent).  A three bedroom brick house with one acre of land, would be worth real money, if it wasn't located in nowhere MS. 

The USD is a fiat currency with a fractional reserve banking system (banks lend out more money than they have) - so basically the whole USD is a margin system.

the whole world...

It stopped being tied to something of value 40ish years  ago (gold).

Nixon took us off the gold standard in the 70s' ...  IIRC it was worth $35 an oz back then... I was tempted to buy some in Canada (I didn't). It was illegal for US citizens to buy gold in the US back then .

I read the other day that the average lifespan of a fiat currency is 27 yrs (haven't personally checked that but thought it was interesting).
I expect a future big revolution to be alternative crypto currencies.  Especially if we see USD issues with gov debt. It's already been significant internationally.

Look at Europe to see what massive sovereign debt can look like. Surprisingly they are still open for business.

India has done away with paper money to discourage criminal activity... the slack is being picked up by mobile payments based on smart phones. Bitcoin is not being well supported by major banks, unlikely to take over the world anytime soon. While the block chain technology is being adapted for use by several industries.

About optimism - it serves one well to be optimistic but also cautious. I have a longer timeline and my daughter has an even longer timeline. I don't see putting off the debt issue looking 20-40 yrs ahead. It will have to hit (I expect within the next few years), and I don't know if it will be a soft or hard landing.

It looks like we are slowly emerging from the massive central bank experiment (I hope).  :

Long term we still need to grow a pair and honestly deal with entitlement spending. Not happening yet.  The drama around the ACA fix suggests this won't be easy.

JR

 

[Script]

(1)
Article is from 2012, so already historic. But still interesting. Debts were and continue to be politicised.

http://www.nytimes.com/2012/01/02/opinion/krugman-nobody-understands-debt.html?_r=1&ref=paulkrugman

A sovereign state can't go bankrupt.
If sovereign state is big enough, they simply declare a default.
If sovereign state is small, they ask for debt cancellation or deferral.

Could also look at mutual debts as a peace keeper or leverage (I.O.U & U.O.M) that keeps the world together.

Ever heard anything dramatic coming out of Greece recently? Not that the situation has changed much, but it's hardly being reported on.

(2)
I'm too dumb to say whether climate change is real. But it's good for the economy: it keeps people busy building things and taking measures. Ever wondered why Japan has grown to such a big economy? It's in part also due to the many  natural catastrophies (earthquakes, tsunamis, typhoons) devastating parts of the land -- it keeps people busy.

 

[Script]

Just read that BRK/B actually sold 1/3 of their stake in IBM. Wow, you are well informed 

 

[JohnRoberts]

Just read that BRK/B actually sold 1/3 of their stake in IBM. Wow, you are well informed 

In this morning's news. He bought it a long time ago so didn't lose money... ironic he may be selling it too soon, or not. I would have dumped it years ago.

IBM's bet on the future (Watson) is still accumulating data. The intelligence in machine intelligence comes from having lots of data to analyze... So Watson will get more powerful and valuable over time., or not.

The ding against IBM is that they have been manipulating P/E ratios using massive share buy backs, for years. 

JR

PS: Just another guy reading my mind... 8)

 

[JohnRoberts]

A sovereign state can't go bankrupt.
If sovereign state is big enough, they simply declare a default.
If sovereign state is small, they ask for debt cancellation or deferral.

Could also look at mutual debts as a peace keeper or leverage (I.O.U & U.O.M) that keeps the world together.

Ever heard anything dramatic coming out of Greece recently? Not that the situation has changed much, but it's hardly being reported on.

(2)
I'm too dumb to say whether climate change is real. But it's good for the economy: it keeps people busy building things and taking measures. Ever wondered why Japan has grown to such a big economy? It's in part also due to the many  natural catastrophies (earthquakes, tsunamis, typhoons) devastating parts of the land -- it keeps people busy.

Greece seems relatively out of the spotlight.

France election was in the headlines as a risk to EU...but it appears they dodged that bullet (if polls are correct and they're never wrong). 

  Italy is next on worry list due to poor bank capitalization.

German election (sept) could get interesting if Merkel loses support due to inviting in too much immigration.

Interesting times.

JR

 

[dmp]

A sovereign state can't go bankrupt.
If sovereign state is big enough, they simply declare a default.
If sovereign state is small, they ask for debt cancellation or deferral.

A sovereign state is not like a household with debt- as the article claims. The important distinction is a sovereign state with control of it's own currency. Read about the hyper inflation of the Mark in Germany in the early 1920s. They owned debt for war repercussions that economy had no hope of repaying, so the gov printed money and fell into a debilitating hyper inflation cycle.
The issue Greece faced was it didn't have control of the Euro and the ECB would only negotiate with them for their debt problem - no one else in the EU wanted to print money or erase Greece's debt. They just made another agreement recently and my impression is the Greek economy is doing fairly well..
A sovereign state with unmanageable debt can melt down though. Refusing to pay your debts means no one will lend to you in the future; printing money to erase your debts loses the faith of future creditors.

Typically once debt reaches 100% of GDP a economy starts to face headwinds to further growth.
The era of low interest rates we've been living in (declining interest rates for decades) cannot go on forever. I certainly don't know how it is going to end.

It's an era of imbalance between capital and labor.
The world is awash with capital looking for returns so interest rates are low (wealth is hoarded in the hands of a few, a historical level not seen since just before the great depression).
Inflation is low because wages have been stagnant.
Wages have been kept low by corporate power (even the philip's curve is weakened: low unemployment has led to little wage growth).
The QE (money printing) of major governments has not led to 'measured' inflation (yet) because the money has been retained by capital and not 'trickled down' to the working population
Overall inflation is low because areas of high inflation (housing, medical, stocks/capital investments) balance out with low or negative (deflation) of discretionary items that do not attract rich people's money.
Unless the world can get back to a healthy balance between capital and labor, reasonable use of debt, and functional politics, I see it ending badly. I guess I'm the only pessimist here

Bitcoin is not being well supported by major banks, unlikely to take over the world anytime soon.

Certainly not soon - I think it will meander along with ups and downs for a couple decades. At some point Governments may see it as a threat and try squash it. China already cracked down as they tried to control capital outflows.  SpaceX announced recently that they plan to have world wide satellites providing internet within 5 yrs. Once Governments lose control of censoring / blocking the internet, it will make it more difficult to stop.

 

[Script]

Inflation is low because wages have been stagnant.

Absolutely the same in the EU and Japan.

The QE (money printing) of major governments has not led to 'measured' inflation (yet) because the money has been retained by capital and not 'trickled down' to the working population

Yes. 'Pinted' money is mainly floating 'internally'. Draghi had introduced negative interest rates for banks parking money with the ECB for a good reason. Only way to get it out to the population is through cheap loans* or helicopter money, which the Japanese had tried some years ago to no effect (some say the equivalent of US$100 per taxpayer wasn't enough money), while the ECB has rejected the idea of helicopter money (i.e., others say it's the wrong approach altogether).

Low interest rates on savings accounts across the EU (basically a 'side effect') had also been introduced with the idea that people would rather prefer spending their money than seeing purchasing power decrease when money is stacked (i.e., fuel consumer spending, which worked to some extent). The idea is not bad as such, but it turned out it's the wrong people (i.e., not the affluent) who started spending their money. Bad!

*Across the EU less affluent people seem to refrain from loans (although comparatively cheap) probably because they are constantly being told that we are living through one crisis after the next one, with the next one and yet another one looming in the near distance. And BTW the biggest evil of all is money/capital we are being told.

The 1billion ReichSSmark stamp. Yes, German economy was shattered under the Versaille treaty load, but that wasn't the main reason for WWII. Read 'Mein K(r)ampf'. Although: Socialists=Jews=Capital (a typical pattern of fundamentalist thinking alongside lumping together) -- and severely twisted on every single page.

Unless the world can get back to a healthy balance between capital and labor, reasonable use of debt, and functional politics, I see it ending badly. I guess I'm the only pessimist here

No you are not, but I am not that pessimistic, just deeply worried, cos you are absolutely right.

 

[JohnRoberts]

The fact that we are thinking and writing about it means we don't accept it as a fait accompli...  but we need to get at least a little  lucky, the politicians are not disciplined enough.

JR

 

[JohnRoberts]

I know that people don't like it when I bring up these examples, but anyone paying attention to what has been happening in Venezuela has to be concerned. Venezuela used to be one of the wealthiest nations in South America, with huge oil reserves (still there) and were a net exporter of food to other countries....  Now they can't feed themselves or find basic medical care.

Obviously the drop in he world price of oil has hurt them, (and they charged an excess profits tax on prices above $70/brl not an issue now)  but this downward spiral started well before that. Chavez the socialist leader for almost two decades (dead now) nationalized multiple oil projects... The exxon claim says they owe that one company >$900M.  Most western oil companies pulled out and the infrastructure maintenance has suffered due to mismanagement.  One could say they killed the cash cow that was making them rich, but they didn't stop there.  in 2009 they nationalized a rice mill owned by Cargill. In 2010 they nationalized Fertinitro one of the world's biggest fertilizer companies, and Agroislena a major agricultural supply company. They seized almost 500,000 acres from British meat company Vestay foods.  In 2005 Chavez started to seize "unproductive" land without proper title and redistributed millions of acres to boost food production an ease rural poverty.  Now that socialist paradise can not even feed themselves, where the private farmers were net food exporters before.

This is just a partial list of the businesses that have been socialized.  Inflation of Venezuela currency hit 800% in dec 2106. 

Maduro, Chavez' hand picked successor has delayed recall elections and used his control of the judiciary to thwart opposition and the legislature.  Maduro has recently started arming his political supporters (not a good thing) to control demonstrations from a mostly unarmed populace, but they are desperate so keep demonstrating..

I'm not sure how Venezuela can get any worse but they are doing everything they can to make it even worse.

JR

PS: GM just pulled out of Venezuela when the government seized their car plant.  So the beat (down) goes on.

 

[Script]

Warren Buffet criticizes Trump's healthcare plans. Had it been already in place last year, says Buffet, he would have had to pay 17% less...

Maybe Buffet is not the typical case (although the fourth richest man in the world), but it's good to hear such things coming from him yet again. Hmm...

 

[JohnRoberts]

Warren Buffet criticizes Trump's healthcare plans. Had it been already in place last year, says Buffet, he would have had to pay 17% less...

Maybe Buffet is not the typical case (although the fourth richest man in the world), but it's good to hear such things coming from him yet again. Hmm...

Perhaps ironic in light of Buffets massive insurance investments (or not), but AFAIK he doesn't do health insurance.

Buffett is an active supporter for democratic causes sometimes a little disingenuously.  The super wealthy do not oppose higher income taxes because it makes it harder for not yet wealthy individuals to catch up to them. It is worth observing that Buffett has already sheltered his massive personal wealth in private charitable foundations.  If he believed the government was that good at spending his money, he'd just transfer his wealth to them.

Watch what people do, not just what they say.

JR

PS: He only sold 1/3 of his IBM position so still a major shareholder.

 

[Script]

Ha ha. I hear you But I don't see his statement and action as being mutually exclusive. I don't think that Mr Buffet (or Mr Gates for that matter) would really care how much tax they have to pay. As you say, most of their dough is parked in charitable foundations already anyway, which is high-level tax avoidance strategy (see Mr Zuckerberg). And I also don't really believe that these people care any more whether up-and-coming richies can or actually do catch up with them. That's not what drives them in the first place. But maybe I'm wrong