Monday, July 28, 2008

Good post

I wonder if Lee Smith will ever get his book out. At any rate, I liked this post on the Middle East. My favorite paragraph
Muslims in the Muslim Middle East are religious because they believe in God, the perfection of his final revelation in the Quran, and his prophet Muhammad. And Islamism, which Pollack is at pains to distinguish from Islam, is a vital force in the region precisely because it represents the progressive and rational current of Islam that sought to reconcile a society marked by fatalism and backwardness with "the forces of modernity" embodied by the West.
Having lived there I have to agree: Muslims in the Middle East are religious because they believe in (the Muslim) God.

Sunday, July 20, 2008

The Great Depression

An interesting look at the covers of Time magazine from 1929-1933. Long on sports, short on bread queues.

Wednesday, July 16, 2008

Against Darwin

One of the concerns with Darwin's theory of evolution was that by erasing the difference between men and animals, it would result in animals being given the same rights as people. Oops.

Tuesday, July 15, 2008

Daniel Gross is an idiot

I don't know why I even bother reading his pieces any more, as each one infuriates me with something even stupider than the last. Are good economics/finance writers so hard to find that Slate can't do better than Daniel Gross? His latest, on why bailing out Freddie and Fannie are a good idea:
But as it turns out, under almost any circumstances, the bailout will be a bargain for American taxpayers, because any cost of it will be overwhelmingly offset by the tangible and quantifiable economic benefits that taxpayers have collectively received over the years from the market's expectations that such a bailout would materialize if needed.
And what are these benefits?
"[M]ortgage rates are 25 – 50 basis points lower because Fannie Mae and Freddie Mac exist in the form and size they do." (Twenty-five to 50 basis points is one-quarter to one-half a point, in layman's terms.) Freddie goes on to say that "because the secondary mortgage market saves homebuyers up to one half percent on their mortgage, borrowers nationwide save an average of nearly $23.5 billion annually." That may be overstating the case. Economist Lawrence J. White of New York University's Stern School of Business says the consensus among economists holds that the implied guarantee allows Fannie and Freddie to borrow at rates between 35 and 40 basis points lower than rates available to analogous companies that don't have an implicit government backing. If Bank X pays 5.35 percent to borrow, Fannie Mae pays only 5. The government-sponsored enterprises pass on most—but not all—of those savings to consumers in the form of lower interest rates on mortgages.
But those lower interest rates simply drive up home prices to the point where it no longer helps borrowers. The last 8 years was defined by ever lower interest rates and borrowing requirements, and ever higher home prices. One truly needs the Devil's Dictionary to define a "liar loan" as an "affordability product" in a world where home prices have gone from 3x income to 9x income.

But, the GSE's ability to borrow cheap and lend high has benefitted someone: its shareholders, bondholders, and executives. The tax payer footing the bill for all of this, not so much.

There is a good reason for the government nationalizing the GSEs, it would be honest and formalize a relationship that is currently, ruinously, informal. If off-balance sheet accounting is illegal for Enron, it ought to be for the US government as well.

Saturday, July 12, 2008

25% of China's GDP invested in US Bonds

Fantastic post by Brad Setser about how much Chinese money is invested in US bonds (both treasuries, and Fannie Mae/Freddie Mac paper). The Chinese central bank has been taking money from Chinese taxpayers and giving it to Americans so they can 1) build houses, and 2) buy Chinese goods. They now want the US Government to take money from US taxpayers and give it to the Chinese central bank by honoring Fannie and Freddie's debt obligations. Chinese taxpayers have no say over what happens to their money. US taxpayers do (kind of).
In some sense, it is remarkable that the system for channeling the emerging world’s savings into the US housing market - a system that relied on governments every step of the way, whether the state banks in China, that took in RMB deposits from Chinese savers and lent those funds to China’s central bank which then bought dollars and dollar-denominated Agency bonds, or the Agencies ability to use their implicit guarantee to turn US mortgages into a fairly liquid reserve assets — hasn’t broken down after the “subprime” crisis. The expectation that the US government would stand behind the Agencies is a big reason why.

That allowed the US government to turn to the Agencies to backstop the mortgage market once the “private” market for securitized mortgages dried up, as emerging market governments continued to buy huge quantities of Agencies.

And it now seems that this game will break down on the US end before it breaks on the emerging market end. The Agencies will run out of equity before central banks lose their willingness to buy Agency paper.
In general, I've been impressed by how China's been governed over the past 10 years or so -- they've made smart decisions and genuinely become wealthier and more productive. But I wonder how they will feel if they have to take a 5% haircut on their bonds and take a 1% loss to their GDP on top of their dramatic currency losses to date.

Friday, July 11, 2008

The damage is already done

The headlines in the papers make it seems as if the sky is falling. It isn't. The sky fell from ~2000-2008 when homeprices shot up 300% in the US, making them unaffordable, having consumers take on enormous loans they could not afford, and reallocating resources from useful things to building tracts of crappy housing no one wants, in crappy areas no one wants to live in.

The question now is: "who bears the losses"? Many people are rooting to put it on the taxpayer and saver, and if the US does experience another lost decade (or longer) it will be because everyone's playing musical chairs and the government refuses to turn the music off. So instead of getting back to, you know, doing useful things we dance in circles.

Thursday, July 10, 2008

Short-term contrarian strategies don't work

Perma-equity bulls ThinkEquity (who recently changed their name, rather appropriately, to ThinkPanmure) are finding it tough to be bullish on stocks these days.
With the Dow reaching a 20% decline from its October peak and officially entering "Bear Market" territory, it's natural to feel beaten and broken. More depressing, globally, stocks had their worse first six months in 26 years and with direct correlation, there wasn't a venture backed IPO for the entire quarter for the first time in 30 years. General Motors, which was once and maybe again the proxy for the welfare of America ("how GM goes so goes the country"), fell to a market cap level it hadn't seen since Gerald Ford was passing out W.I.N. (whip inflation now) buttons and at one point on Thursday, was at a price it hadn't seen since Dwight Eisenhower was President....

While seemingly EVERYBODY is in the camp that we are heading into the bear infested woods, I'm much more optimistic. Two truisms come to mind; "if it's in the papers, it's in the prices" and "the time to be fearful is when everybody is greedy, and greedy when others are fearful"—these have provided an accurate compass in the past that I'm counting on today.
I'm not sure if they were around in ten years ago, but the S&P has been flat over a decade, losing to a 3% money market account by about 40%. Note that this is before the US enters a recession, which it has not technically done yet, and which historically have been lousy for stocks. If we see lower earnings plus flatter PE multiples, equity still has a long way down to go.

At any rate, I put the two truisms to the test by running a simple contrarian portfolio on I'd check out the front page of the Financial Times and so the opposite of what it said.

This strategy did not work. FT said Lehman was on the verge of bankruptcy, so I bought. Stock went down another 20%. FT said Circuit City was on the verge of closing down, so I bought. Stock went down another 20%. FT said oil was overvalued so I shorted. Enough said.

Being contrarian based on what's in the papers gets you in too early, and too early is indistinguishable from wrong. Reflexive contrarians beware.

Tuesday, July 08, 2008

Sprint's travails

Maybe you've seen the ads as Sprint's new CEO, Daniel Hess, talks about how the cell carrier is improving it's service. At any rate, somehow Sprint's customer service woes have made the NYTimes (never a good thing). I actually know a fair amount about Sprint's customer service woes back in 2004, and I'm guessing they have not changed that much. The article fails to communicate they key elements to understand about customer service in general, and certainly at Sprint.

1) Customer service reveals problems elsewhere in the company.

If you're getting a lot of complaints, or the complaints are not being resolved quickly, it points to something being broken elsewhere in the company. Maybe you have an activation process that people don't understand, or maybe you have a product that's simply too broken, or too complicated, to exist without high support costs. Either way, lots of the problems in the call center were being created by broken products and services elsewhere, and getting different parts of a company to work together is very difficult.

2) Focus on the basics.

People leave their cell carriers because they are unhappy with poor coverage, poor network availability, and poor call quality. While Sprint originally ran on its call quality (the "all digital" pin drop campaign) it's network coverage was lousy and it lost on that basic battle to Verizon, even though Verizon is more expensive and has worse phones. Actually, I think the iPhone is the first device that has actually driven consumer switching, which shows how remarkable it is.

3) Quality is free.

Every time a call comes in it should generate two actions: 1) fix the problem in that one instance, 2) fix the problem forever. You do these things, and the cost of higher quality more than pays for itself in lower support costs, higher customer satisfaction etc. Embracing this is a leap of faith though, and either leadership has the quality religion, or it does not.

4) Management matters.

Nextel was the smartest cell phone carrier. They were the only one who had carved out a niche, who has a position of strategic competitive advantage, and they dominated that. The customers were unique, their market was unique, and their financials were unique. The final, smart move that that smart cell phone company did was to sell itself to Sprint for $. Sprint did not get value from that deal, and I don't see how it could have. Another bad move by bad management.

5) Sometimes things just don't work.

Sprint's fair and flexible plan really was fantastic. It would be my recommended plan choice for most people, as it accurately deals with the problem of underestimated usage volatility (and the customer pain point of usurious overage). But it just didn't seem to take off. Sigh.

Thursday, July 03, 2008

The Great Moderation

Currently, the Central Bank of China lends money to American consumers so they can buy Chinese goods -- think of it as vendor financing courtesy of China, Inc. Unfortunately the American consumer is overdrawn, and so has to reduce his consumption (and work out some of his debt). China is preventing this from happening by buying US treasury bills at an incredible rate and the US is politically and financially incapable of handling reduced consumption. Nonetheless, dollars spent eventually have to equal dollars spent, and Mark Thoma/Tim Duy has an excellent post detailing how the runup in commodity prices could be the mechanism for that adjustment.
But wait – that capital is gaining traction, but in such a way that forces the inherit overconsumption of the US economy to light. Pick a channel, speculative investment, portfolio rebalancing, or fundamental demand, and you find financial markets trying to drive a rebalancing by forcing up the cost of key commodities. What US policymakers are unwilling to allow directly, the markets are forcing indirectly.

Consider that the current account deficit will need to correct by some mixture of import compression and export expansion. The weaker Dollar encourages that correction, but Dollar-pegs prevent the full adjustment. But where currency adjustment fails, commodity price adjustment steps in as, for example, higher transportation costs support import competing industries. Indeed, we are learning that cheap oil, not just cheap wages abroad, was the critical force supporting offshoring of US production.
Worth reading in full.

Tuesday, July 01, 2008

True story

Honestly, you cannot make this stuff up.
(06-30) 19:49 PDT San Francisco -- An effort by San Francisco to shield eight young Honduran crack dealers from federal immigration officials backfired when the youths escaped from Southern California group homes within days of their arrival, officials said Monday.
Open borders by 2028?