Category Archives: Economics

Last Post

In the second half of last year I started thinking about potentially leaving my current employer and starting my own investment firm.  There were many reasons for this, not the least of which is complete disillusionment with company management.  For a number of months now I have been exploring this possibility, researching regulatory requirements, interviewing financial service providers, developing a business plan, etc.

I started this blog as part of this research.  The concept was to incorporate it into a more traditional business web site and use it as a way of effectively communicating updates to clients and prospective clients.

The blog has turned out to the the easy part.  Creating one and filling it with content has been simple compared to the other tasks.  And, after a very detailed examination of the alternatives, I have decided to shelve the idea of launching own firm for now.  The rate of change and amount of uncertainty in the financial services industry is at extreme levels, and I may end up elsewhere, but for now it will not be of my own volition.

So, this is the last entry for the Durable Investor.  I will turn my efforts back to concentrating solely on success in my current role.  Yes, management at my company remains questionable, and perhaps has even been borderline criminal in the past, but I have the ability to work independently to a very large extent and protect my clients from my own company as well as the overall markets.

To close, here’s a final thought: while the future does not look appealing right now, it does not look as bad as many think.  We may be in a “Great Recession”, but it remains highly unlikely that we are in Great Depression II.

Look at this entry from Calculated Risk.  CR was one of the very early voices warning about the bubble economy.  Behavioral investing is all about being aware of crowd dynamics and irrational actors.  We are currently in a pessimism bubble; try to keep things in perspective.


“Financial Equivalent of Snake Oil”

Today’s Financial Times has a second great column to go with Martin Wolf’s, mentioned in the prior post.  This column is from Robert Shiller, again talking about Keynes, his concepts of capitalism, the need to balance it with government, and the chaos of human emotion or “animal spirits” that adds a wild card to what classically trained economists wish would be a rational and easily modeled social science.

The column is an excellent read.  The best sound bite is calling modern investment products the “financial equivalent of snake oil”. Continue reading

The Future of Capitalism

Martin Wolf is the influential chief economics commentator at the Financial Times.  His most recent column, titled Seeds of its own destruction, is a lengthy contemplation of the future of modern capitalism in the face of what appears to be systemic weakness.  It begins, “Another ideological god has failed. The assumptions that ruled policy and politics over three decades suddenly look as outdated as revolutionary socialism.”

Wolf provides a brief history of key inflection points in capitalism over the past few decades, states that we are at another one, but admits that “it is impossible at such a turning point to know where we are going”.  That being said, according to Wolf the most likely outcomes are discouraging over the short term.  Wolf also reminds us that the way out of the Great Depression was via WWII.

Echoing my earlier post about the real roots of the current problem, Wolf asks “if the financial system has proved dysfunctional, how far can we rely on the maximisation of shareholder value as the way to guide business?”  A very interesting question coming from the pages of the Financial Times.


You’ve seen the report that the unemployment rate is now officially 8.1%, the worst since 1983.  You may not have heard that the rate of job losses is the highest since 1949 and appears to be accelerating.  CalculatedRisk has a good chart showing how the current recession compares with prior ones since WWII.

The WSJ’s Real Time Economics blog reports that the U-6, the broader measure of unemployment (it counts people who have stopped looking as well), is now at 14.8%.  Think of it as 1 out of 7 Americans out of work.  Some economists believe that this measure will get to 20%, 1 out of 5, before this recession is over.  Ouch. Peak unemployment in the Great Depression was around 25%.

“Errors of Undue Pessimism”

In at least parts of the investor class there is certainly a brewing crisis of confidence with Obama’s economic policies.  I believe it’s too soon to pass judgment, but the cries of alarm are on the right (“socialism!”) and left (“nationalize the banks now!”).

Getting back to my favorite topic of behavioral economics / investing, here’s a relevant post via Economist’s View.  An excerpt:

However, Keynes can be our savior only to a very partial extent, and there is a need to look beyond him in understanding the present crisis. One economist whose current relevance has been far less recognized is Keynes’s rival Arthur Cecil Pigou… Pigou was much more concerned than Keynes with economic psychology and the ways it could influence business cycles and sharpen and harden an economic recession that could take us toward a depression (as indeed we are seeing now). Pigou attributed economic fluctuations partly to “psychological causes”…

It is hard to ignore the fact that today, in addition to the Keynesian effects of mutually reinforced decline, we are strongly in the presence of “errors of…undue pessimism.” Pigou focused particularly on the need to unfreeze the credit market when the economy is in the grip of excessive pessimism… One of the problems that the Obama administration has to deal with is that the real crisis … has become many times magnified by a psychological collapse. …

Positive Sign in the Gloom?

Obama has described his plan for economic recovery as a stool with 3 legs.  One of those legs is the banking system.  And as we all know, the banking system will not be healthy until the “toxic assets” are purged from the system.  Geithner’s plan for doing this was intentionally vague at first, but details are emerging.

More clarity came today, although the plan is far from complete.  The crux of the plan is an embryonic “private-public partnership” that will buy the questionable mortgages (the “toxic assets”) from the bank.

Many commentators have been taking potshots at the plan, for good reason.  Until the details are known and some reasonable consensus for success forms, Geithner is just whistling in the dark.

But, this story in the NY Times is hopeful.  A group of investors have formed specifically to buy toxic assets.

(This group has) been buying up delinquent home mortgages that the government took over from other failed banks, sometimes for pennies on the dollar. They get a piece of what they can collect.

“It has been very successful – very strong…In fact, it’s off-the-charts good,” … even as the financial markets in New York were plunging.

So, the good news is that private entities are forming to do exactly what Geithner said they would, even without government assistance.

But, part of this story makes me somewhat ill.  It turns out that this group has been formed by execs from Countrywide Financial.  So, the same “entrepreneurs” who made themselves rich by getting us all into this mess are now figuring out how to make another fortune off our collective misfortune.

Who says crime does not pay?

How Low Will We Go?

I’m not sure what to make of the market today.  On the one hand, the S&P dropped 2.36% to set a new cycle low, closing at 735.09, with an intraday low of 734.52.  Clearly, closing at the lowest level in 12 years is not good news.

But, the economic news today was horrible.  Q4 GDP numbers were massively revised down, GE slashed its dividend by 68%, Citi had another massive infusion of taxpayer dollars, GM is truly on the precipice of bankruptcy, etc.  The S&P could easily have dropped more.  And 735 is just 2% below my approximate “fair value” number of 750.  Signs of resilience?

On the other hand I’m reminded of this quote that I posted earlier:

The singular feature of the great crash of 1929 was that the worst continued to worsen. What looked one day like the end proved on the next day to have been only the beginning. Nothing could have been more ingeniously designed to maximize the suffering, and also to ensure that as few as possible escaped the common misfortune.

– John Kenneth Galbraith, “The Great Crash”

And, it’s time to look at the Four Bad Bears chart again.  It looks a lot like 1929.