Hi I am a clown and perpetually locked in to spending currency on special interests.

 

Now in all fairness DEBT to GDP has been higher.  But it was because of WWII.  There is no major war now.  I would hate to see what happens if/when Obama invades Iran.

 

Here is a listing of GDP to debt via wiki

Year	Gross Debt in Billions undeflated[10]	as % of GDP	Debt Held By Public ($Billions)	as % of GDP
1910	2.6	unk.	2.6	unk.
1920	25.9	unk.	25.9	unk.
1930	16.2	unk.	16.2	unk.
1940	60.6	52.4	42.8	44.2
1950	256.8	94.0	219.0	80.2
1960	290.5	56.0	236.8	45.6
1970	380.9	37.6	283.2	28.0
1980	909.0	33.4	711.9	26.1
1990	3,206.3	55.9	2,411.6	42.0
2000	5,628.7	58.0	3,409.8	35.1
2001	5,769.9	57.4	3,319.6	33.0
2002	6,198.4	59.7	3,540.4	34.1
2003	6,760.0	62.6	3,913.4	35.1
2004	7,354.7	63.9	4,295.5	37.3
2005	7,905.3	64.6	4,592.2	37.5
2006	8,451.4	65.0	4,829.0	37.1
2007	8,950.7	65.6	5,035.1	36.9
2008	9,985.8	70.2	5,802.7	40.8
2009 (est.)	12,867.5	90.4	8,531.4	59.9
2010 (est.)	14,456.3	98.1	9,881.9	67.1
2011 (est.)	15,673.9	101.0 (PIPE DREAM)	10,873.1	70.1
2012 (est.)	16,565.7	100.6	11,468.4	69.6
2013 (est.)	17,440.2	99.7	12,027.1	68.7
2014 (est.)	18,350.0	99.8	12,594.8	68.5

As we have talked about before, when countries start spending 30-70& of budget as finance thats when they collapse.  More on this later.  Enjoy your debt SLAVE.

        

Fundamental change is must come.

 

Companies go out of business for a myriad of reasons. The same as why an organism perishes. There can be a lack of food. The eco-system turns hostile and rends the internals.  New organisms out compete others for resources.  Many things contribute to the destruction of life and organizations.

 

Technology and innovation creates mutations in companies.  This allows horrible monstrosities such as Pets.com, Overstock.com Golden West Mortgage Bankers & Aol-Time Warner. It also allows beautiful organisms such as Apple, Google, and Salesforce.com. 

 

A free market system allows company mutations and life creation (start-ups) to occur.  The fertile soil, instead of carbon, nitrogen and a light smattering of heaver elements are clear contractual law, enforceable contracts, established property rights, equal treatment under the criminal system, governmental transparency and peaceful transition of governmental power (elections).

 

Some argue that economic prosperity is heavily correlated with natural resources.  They would argue that it is man exploiting those energies and resources in place that allow one group to have dominance over an other.  At a certain level they are correct, however in this day in age having a stable economic system depends more on the afore mentioned attributes.  It matters not how much oil or gold you have under the ground but can you attract capital investment to exploit it.   Even more importantly those economic rules create much more value add then just gold or timber.  Any Dow Jones Industrial company creates more economic value then most countries in Africa by creating ideas.

 

Our economic fertility has created a vast jungle of millions companies.  Each consumes and sells something, product and/or service for a profit.  If it does not do this then it dies.  Profit is the measure of success, value difference between what the company consumes and its output.  It is sad to see a company die, just as it is to see a deer die by the teeth of a lion.  It is sad to see on television an old elephant pass away in the dense Indian forest.  But as it passes on it frees up another animal of its ilk, not completely the same which is more suited to its eco-system.

 

Technologies and innovations have begotten more technologies and innovations since the printing press allowed others to easily convey ideas to others and writing before it which was re-discovered in the West after the first Greek dark age in 800 BC. 

 

Change

These technologies cause the tiny mutations in the processes and DNA of companies that create fundamental shifts in their operations, some better and some worse.  In the last twenty years we have seen more change in business then the previous several centuries.  There has been an explosion in business change. On a human scale there has become a near infinite availability of relevant information; societal, economic, inventive, political, technological… everything.  It arrives instantaneously.

 

Lifespan have doubled.  Diseases that ravaged populations have been irradiated.  People can fly inexpensively.  We can do and have more.  Billions have been lifted out of grinding poverty and millions are now economically productive.  Today the poorest have better health care then the richest people in the world two generations ago. 

 

Moore’s law states that processor speed will double every two years while costs may stay the same or go down. Electronics and technology power is not increasing at a linear rate.  It’s increasing at an exponential rate.  This is causing great changes in our business and social eco-system.

 

This is coming to a head as perhaps the most disruptive technology to-date, is just starting permeate through the fabric of the business eco-system; the internet.  The internet will have a hyperbolic effect on our society, as the printing press effected us before and writing before that. 

 

This simply means; “more change faster and more company startups and deaths, faster.”  More dislocation, faster.  More employment and unemployment, faster. More great monopolies will fail, faster.

 

The most vulnerable to paradigm shifts in technology are monopolies and oligopolies. The reason why disruptive technology is called disruptive is that they displace currently ways of doing business rapidly, over the course of a few years.  Disruptive technology such as computers has brought change to media, finance, retail, logistics, telephony, defense and many other grand industries.

 

Media

Let’s take media for example.   There has been a long train of innovation in the music industry over the last several hundred years. They have also caused dislocation and opportunity. The innovation of sheeted music allowed others to learn songs across distance and time.  The greatest composers were played and local innovators and not sponsored as much.  But with out that innovation the world would have never known Bach, Mozart or Beethoven.

 

When RCA created the recording device, people could not listen to their favorite music with out going to the theater, or paying to large orchestras to perform.  Now a common man could listen to that same Mozart in the comfort of his own parlor.

 

Records were produced, then 8tracks cassettes and CDs.  Each technology allowed a better quality of reproduction, at a lower cost.  Many manufactories went out of business. While new companies took their place.

 

Movies supplanted plays and operas.  It used to be you would attend with your wife out to a night at the theater, now you have 1000 channels of entertainment for a month the for the same price as that night out.

 

An older revolution is going on with music, the move to digital download.  CD sales have fallen 70% while such companies as Apple have come on line to take their place.  And where revenue has not kept of with the fall, it is because people are generating their own content as creative expression and are distributing it for free, like this blog.

 

Newspapers

Other monopolies are going thru trouble.  The main ones are the, big banks, big investment banks and newspapers.  I have been writing about the follies of the investment banks for a year and a half now so let us first examine the news papers.

 

News papers are a near obsolete technology.  Content of course is not obsolete.  Why people haven’t seen this coming for years is beyond me.  The paper is a value subtract.  I can read the news on my phone, cut, paste, email and save.  Why haven’t they moved to a near digital distribution is beyond me.

 

What people want is good content that convenient to consume.  The net has allowed the distribution of said content for nearly free.   People are going to where they get the content that they want.  Increasing that is the web and television.   The web, because of its nominal distribution costs allows for long tail survival.  Or the idea that esoteric goods and services can now find a home and prosper with those rare consumers.

 

Local news papers must get back to their roots.  They must become the center of the community.  They must report on local politics and local events.  There is no point in duplicating news that consumers can get more timely on the net.

 

Banks

Banks also must evolve.  Banks are inherently unstable.  They take in flexible deposits that can be yanked at any time and lone it out for periods of 5 years to 30 years.  Not only that but they have interest rate risk.  That is that their short term money can become more expensive then what they have loaned it out for.  Banks are so unstable that the federal government now regulates them and insures them.  They are effectively regulated private equity funds.

 

The financial system has collapsed under its own weight.  These private equity funds, due to a poor understanding of risk management, flawed business model and absent shareholders have allowed most of these institutions to run amuck.  With out a complete over-hall of the three mentioned changes banks will forever be prone to quick and certain collapse. 

 

Banks did not understand how correlated their real-estate holdings were.  They loaned to much to value of property.  They under wrote loans on the assumption that real-estate would never go dramatically down.  They also got to big because people knew that the federal government would not let them fail.  Now if a company gets big enough.  It can establish enough political pressure and receive funds. 

 

Finally, the structure of the non activist money manager must change.  Most money managers of mutual funds, pension funds and hedge funds do not participate in management.  They are just random equity pickers.  There needs to be more activism to keep pressure on the boards.

 

Symptoms being treated, not cause

These are flaws inherent in the system and are not being addressed by the current political leaders.  They keep trying to pump and shock the organisms (companies) back to life.  GM has been losing market share for 30 years.  People thought they would go under years ago and the board did nothing. Management could not or would not nimbly respond to change.  The entire structure of large companies must change.

 

Banks should be recognized as private equity funds that take huge risks when making “vanilla loans”.  How can anyone in bank management know the full exposure of their balance sheet when they have billions and trillions on it?  Many banks have become to big to manage.  The artificial constructs and illusion of transparency has been placed on these large public companies.

 

Investment banks have learned that you can’t leverage 80 to 1 anymore.  They had just become hedge funds with banking services attached.  We need to let the companies fail and have the surviving organisms that are more fit take their place.

 

What is sad is that Democrats, who are supposed to before the proletariat are handing billions of dollars to big corporations and talking about regulation.  The big corporations are happy to take regulation because that is better then bankruptcy to them! They are taking the toxic paper that is worthless and putting on the back of the proletariat and raising their taxes, and deflating their assets by printing billions in dollars and hurting the small business man.  The small business man is catching no break.  By treating the system our leaders betray the natural order of our eco-system and keep alive organizations that need to pass on.

 

Treating the cause

We got into this mess by over-leverage, overspending and having companies that should not exist. People who enabled corporations and individuals to engage in such behavior must lose, always.  People who took the risks must lose assets invested.  People who loaned money to out of control, unsupervised bankers with out doing due diligence have to lose.  These companies and their stakeholders must be allowed to bow out so new, responsible and innovate companies can take their place.

 

We can try to regulate banks or autos or a hundred other industries but who is wise enough to say how they should run their business?  Who knows what kind of cars GM should produce, where they should put the gear shift and what kind of horse power should be included.  Who is to say that one particular kind of loan is more risky than an other or what a bank’s capital structure has to be? 

 

Why is it that the middle class is dependent on the stock market’s fortune?  Millions of people’s fortunes are dependent on what someone will pay them for stock certificates that trade like baseball cards.  Stock certificates that usually don’t even pay regular dividends!  The state promotes 401ks and IRA to self perpetuate one kind of asset class, the public company?  Why isn’t it easier to invest in local businesses, down the street where one can much more easily gage character management and transparency of balance sheets?

 

Why is it that the consumer is reward for taking on debt in the form of mortgages?  Labor must be free to relocate.  By having our citizenry locked in to one place we limit their potential for growth and thereby wealth of society.  Instead of people starting new businesses or investing in invention or innovation, they buy more house.  How does that help the world?  Isn’t that only encouraging materialism and separating our people into the bland sprawling suburbs?

 

We need to let the companies fail and stop interfering with the growth of new ideas and innovations.  Only then will our recovery take place.  Taking capital from the middle class and giving it to inept bankers will only cause inflation, disrespect for the system and make us more vulnerable for the next time this happens.

        

Today in the Wall Street Journal: an article about the power grab going on with the federal governement.  It is truly a shame.  The people make these decisions have no idea what they are doing.  Heck hedge fund managers and investment bankers don't either.  But worse, these loans, grants and equity injections are being done at the political level?

Washington is now the center of finance.

About the on going power grab by the state:


http://online.wsj.com/article/SB123879833094588163.html

        

After reading the bonds have outperformed stocks for the last 30 years... why don't we take a look at diversified close end funds such as Nuveen's California Muni Value fund.  Paying 4 cents a share, per month yielding 5.5% and nearly 9% tax equivalent.

Remember what Saul says, "Securities that don't pay cash flow are baseball cards."

Nuveen California Municipal Value Fund, Inc. (the Fund) is a closed-end, diversified management investment company. The Fund seeks to provide current income exempt from both regular federal and California state income taxes by investing primarily in a diversified portfolio of municipal obligations issued by state and local government authorities within the state of California or certain United States territories. The Fund invests at least 80% of its net assets in investment-grade quality municipal bonds (Baa/BBB or better). It may invest up to 20% of its net assets in municipal bonds that are rated Ba/BB or B, or that are unrated but judged to be of comparable quality by the Fund's investment advisor. The Fund is authorized to invest in inverse floating-rate securities, forward interest rate swap transactions and zero-coupon securities. The Fund’s investment advisor is Nuveen Asset Management, a wholly owned subsidiary of Nuveen Investments,

        

Obama Portfolio

(Like Obama)
[SPY] Fortune 500
[IJH] iShares S&P MidCap 400 Index
[IJR] iShares S&P SmallCap 600 Index

(Don't like Obama)
[SH]  ProShares Short S&P500
[MYY] ProShares Short MidCap400
[SBB] ProShares Short SmallCap600

[AGG] Lehman Brother Aggregate Bond Index
[IBB] NASDAQ Biotechnology Index.
[TLT] iShares Barclays 20+ Year Treas Bond
[IGOV]iShares S&P/Citi Intl Treasury Bond
[GLD] SPDR Gold Trust

[TAN] Claymore Global Solar Energy ETF
[PBW] PowerShares WilderHill Clean Energy ETF
[FAN] First Trust ISE Global Wind Energy Index Fund

[EFA] iShares MSCI EAFE Index Fund (ETF)
[EEM] iShares MSCI Emerging Markets Indx 
[FXI] Shares FTSE/Xinhua China 25 Index 

Cash -
Alternative Oil Drilling & Natural Gas (See Saul)

-Saul Albom

        

My brain is on fire and has been for the last few days.  I have just re-re-re discovered the Jungian personality test and hit has crumbled my entire edifice of … almost everything.  All must change with additional knowledge?  Epistemology, values, morals, government policy, social policy, nature v nurture, my ultimate purpose, my values everything is now under review.

What have I have come across is the realization that we, genetically are very close to 16 species with miner random variations about that mean (and sometimes massive).   It seems that these personalities are largely formed when we are very young, if not at birth and really, becomes our fate.

Our fate is our character and character our fate.

One of the most powerful lessons of philosophy is that once you know a few axiom’s of other’s beliefs you can surmise whether other premises or what logics they will follow, adhere to and support. You can also speak to their believes and communicate with them better… or manipulate them better.

For example; if people believe in truth and that others can explain it then they will believe others when they are told how to live, i.e. religion.  If they believe in mercy over justice then they will not believe in the death penalty.

Many socialists and blank slate’ proponents will say that success depends on values and those values are taught via community and families thus the poor have nearly no chance of success.  So … axioms or philosophy is then dependent on nurture.  But what if it is dependent on genetics or locked in at age 12?

What if either by chance or genetically I am an ENFP. Being an ENFP means I am predisposed to have certain values, thus my values are dependent upon that?  We do know that success and happiness is dependent on right living so then my success and happiness is dependent on chance.  Our fate is our character.

What does this mean for social policy?  Jefferson argued that all man are equal under the law.  Nietzsche said equality was an illusion and a falsehood.  Plato, in the republic recounted how society should be lead by the guardians… the ones with gold in them to lead.  Maybe there is more truth to our ancient logic. 

I do not argue for the abolishment of those with less mental capacity at all.  If anything I do not conceder myself high enough up the latter to be a judger.  If that policy came to pass certainly I would be stripped of my influence too.

The entire edifice of my policy thinking was that man is most happy when he is free to pursue his destiny. But what if many segments of our population are genetically disposed to be told what to do, what if they need to be lead.  What if they are not happy unless they are marginally committed to a kind of serfdom.  Certainly, they are not comfortable with others being very free. 

It seems to me that “SJ” and “SP” personality types are so alien, so foreign to me that I can’t even stand being in the same room with them.  I have come to find out that I have segregating myself from them for years. I’ve been going to professional events, lawyer events, art events and never to bars.  Maybe that is why school is such torture for many children? 

Please don’t get me wrong, I know we need SPs & SJs.  Who would do repetitive tasks?  Who would get things done?  Who would consume movies, music and go to concerts? 

It appears that history is a long chain of these 16 types of personalities vying for control and expansion.  Each imprinting and enforcing values that make it easier for each to succeed.  Certainly in this society, “N”s have dominance.

Caesar, Jefferson, Reagan, Chavez, Obama et al come to power by promising the disenfranchised “S” and lower class “N”s more wealth out of the established “Ns”.  Caesar promised farm redistribution; Jefferson; equal protection under the law and voting rights; Reagan promised tax cuts, Chavez gave land reform and Obama health care redistribution.

All preached taking from those to give who had not, and rose to power.  Socialists will view this as class struggle but then what if this is genetic struggle?  Does it make it just? I argue yes, because even if we are all different species we still should not suffer and the goal of public policy should be to curtail the public’s suffering.

On a personal didactic note I encourage you to take the MBIT exam and post what you are.  I will get back to finance soon and will start posting more.  As and ENFP it is hard to focus on repetitive tasks…

-Saul Albom

        

Aristotle and Plato both knew he who controls the educational system controls the society. Finance professors and risk managers still teach students that human events occur in normal distributions.  They teach that through the past we can predict the future with great accuracy.  Students are taught mathematical tools such as linear analysis, correlation and beta to analyze the past and plot the future.  Many phenomena can be predicted via normal distributions but NOT human interactions. 

Often financial experts visualize risk or events a sign wave, reasonable normal and predictable.  Events get worse, things get better, prices (phenomena) fluctuate about their mean and always revert towards it.

One of the massive fallacies of normal event distributions is the mitigated chances of extreme events.  Before this year one could have asked what was the probability of our major financial system crashing?  What were the chances of the major investment banks with the most brilliant financial professionals in the world going under? What were the chances of real estate crashing, globally?  (The second fallacy of normal distribution is that extreme events are more severe then could possibly be predicted often to the order of thousands or millions greater then a normal observation)

What is ironic is blindness and faith that the highly unlikely can not happen only serves hasten them and make these extreme events more probable and worse.  Take the billions of credit derivative swaps that were written on sub prime debt. 

Sub prime means that the borrower could not afford the mortgage.  These loans were only made because it was assumed that housing prices would continue to go up 10% a year into infinity.  The loans then would eventually be re-financed and every one would be happy.  The invester got paid.  Hard working people who could not afford nice houses would now have one.  This was win-.  However it was inevitable that there would be a correction, people can only afford housing up to a certain portion of their wages.  Finance professionals are taught linear analysis or other mathematical tools of a similar brand that pre-suppose that the future will behave like the past.

We must humble ourselves and realize we can not predict complicated phenomena such as stock price, earnings, geo-politics, heck even the weather!  The mind may be master of the world but not the future. 

Lehman brothers had the largest bankruptcy in history with 640 billion in debt.  In their hubris they sought to leverage up to 40x and greater.  Long Term Capital had in excess of 100x leverage! In their minds they could borrow and invest safely.  They could know. If one can know the truth about something and know the truth about a system, then you can predict the future of that system.  If a finance guy can know the future then he can make money, he can make a lot of money. So investment banks thinking they could know and control leveraged up magnifying their gains. In the end they did not know the truth and were crushed.

Let me state that their gambles were good for a long time and printed money.  However, their understanding of  financial phenomena was a very close approximation, but not the real thing.  As they made more and more money they leveraged more and more and made an other linear mistake: because we never lost big before, we wont lose big in the future. We know what we are doing.

Before this week truth was: of course Lehman, Bear Sterns and Merrel can leverage 40x, they are brilliant, they have statistics and risk managers that can protect them.  But they were unable to predict extreme events such as the real-estate crash.  Now we look at a company with 40x leverage and think they are insane. Today Goldman has 20x leverage.  Are they insane, have hubris or brilliant?

There needs to be a complete revolution in risk management.  Something needs to happen like "efficient market theory".  It is our lack of understanding of risk when it comes to human events that lead to this financial catastrophe. Even in statistics it is normal to throw out "outliers". One extreme event can destroy an entire portfolio or company.  It is unknown how this works.  There needs to be more studies of extreme events, not normalcy. 

Again, the major reason why we are having the worse financial crisis since the great depression is because major players thought they understood the nature of risk and extreme events, that they could predict and know the future thus giving them the confidence to massively leverage.  Until the idea of control is broken then we will not learn from our mistake.

        

Off Balance Sheet Finance
Freddie and Fannie are (were) an off balance sheet shelters for the federal government.  Just like Enron, which created special twits, turns and special units off its books, our government did the same.

Call it a subsidized PUT option on the US housing market. Washington wrote this PUT 30 years ago and took a larger position earlier this year by allowing FRE and FNM to increase their buying.  They wrote this put to create a more liquid and orderly market for the citizenry to purchase houses.  Can we say politicians giving handouts? But this is worse.  The politicians did not understand what risks they were accepting, all they saw was an asset class that nationally almost never went down.  They were lowering the cost for a mortgage for no money out of the treasury.  This sounds perfect for a congressman, a they get to give their constituents a handout for accepting a massive liability that someone else will have to pay some day. What is worse they accepted the risk of an entire asset class without a modicum of hedging or setting aside a reserve for when they may have to make good on that risk. They handed a 16 year old they keys to the car and didn't take out insurance.

What would cause housing prices to go down, only some unforeseen catastrophe which would simultaneously put strain on our economic system and treasury making it more imperative that congress set aside a lock box. Does this sound familiar?  Does this sound like other federal liabilities? What other blackswans are out there like a credit crush (credibility crunch).  Every observation said housing prices would not never decline, until it did.  What other impossibilities are very possible?

Instead of letting the creative energies of the citizenry solve this problem they created artificially low risk/reward ratio for residential real estate.  Mortgages, for the last 30 years have not been priced efficiently.  And since the government wrote the largest PUT ever, we are on the hook.  Thank god they didn't back autos.  Just think if they guaranteed SUVs.  The bubble popped in that asset class this year too.  GMAC took massive billion dollar write downs as leased SUVs became worth 40% over 6 months thanks to $140 barrels of oil.

By backing the debt of FRE and FNM it allowed the entities to borrow and leverage to the hilt.  The problem is what is possible is inevitable.  When one takes risk, on a long enough time line there will be collapse.  FRE and FNM leveraged up even higher so that even smaller shock waves of housing prices going down 10% nationally spells doom.  Think about it. Can you imagine a 50% drop?  Didn't oil just drop 40% in a few weeks?

They created Frankenstein's monster, a federal subsidy to every home owner that is now to big to fail. It has come full circle as those same home owners will have to pay for every risk assumed.

Again, credibility, trust and transparency are trigger points for all crises.  FRE and FNM were not transparent to the risk of catastrophic problem.  The federal government was not transparent to the risks of backing all of these GSEs. 

LEH
Lehman Brothers [LEH] is also in its death throws with a massive real estate portfolio, 1/3 of its portfolio in residential real estate and tons of Teir 3 (hard to value) assets.  Not so much of because they leveraged so much and took to much losses.  If that was the case they would have no problem taking on additional capital.  They can't raise capital because no one knows how to value the assets on their books.  It is not transparent.  The number one rule of investing: Only invest in what you understand.  Since their balance sheet is intelligible, no one can know. 

Investment banks have become hedge funds that perform banking services. If I wanted a hedge fund I'd get a prospectus and have limits to my exposure.  What are your limits with LEH's traders & bankers?  I have no idea. If I wanted a hedge fund I'd invest in one.  The ibanks should return capital back to shareholders.  Performing banking services comes with enough risk.

Lessons, Potential Areas to Invest. 

This problem is transparency.  Goldman Sachs [GS] receives well over half of its revenues from proprietary trading.  What is in its black box?  No one knows.  Other hedge funds that do not disclose.  How about arbitrage funds?  Long Term Capital was brought down by a shift in liquidly of their assets.  Companies that have written to many puts for income.  Admittedly this is a tough area because its trying to predict blackswans.  However, let us learn that where ever we have lack of transparency (sunshine) there will be problems. 

I still don't see the worst behind us in financials.  Many traditional banks are already in trouble and their failure will cause systemic failure (ie market risk) via panic and general distrust.  All finance is based upon trust.  For that matter all business is based on trust.  With panic and fear there is no trust and no business.

Also, most of the profits of ibanks were cause by leveraged investing.  Even if ibanks return to some kind of normalcy they will not leverage up to produce the same kind of profits they had before. Therefore, do not expect them to return to their old highs (diluted per share basis).

        

Here are two nice growth pics for DIVs

Feel free to call me at 214.432.8002 for Oil and Gas income.

PAYX Paychex...



and ADP



Saul Albom

        

Buy into the South African Exchange and set up an SRO..




Saul albom