Randian Confusion

"Bernanke took over the Fed when Greenspan was considered a rock star, inhaling his libertarian, free-market, Ayn Rand inspired philosophy in great giant gulps."
- madhedgefundtrader

It always confuses me when I read about how "Randian", free-market, and libertarian Greenspan was. I don't recall anywhere that she commented extensively about how the Federal Reserve should let banks borrow money from the people at extraordinarily low rates to be used for the creation of proprietary speculative derivatives markets. In fact, most Rand followers seem to be in favor of the abolition of the Fed and allowing the market to set interest rates.

Ideas on Econ- an evolving set

Prices reflect opinions.

Buying assets from others with the intention of selling them later for more money is fundamentally weird. Buying a share of a company's profits makes sense- you are buying the dividend stream. Buying existing shares of a growth stock doesn't really benefit anyone- you are basically betting that you can predict better than the seller what the future value of the company should be. Buying new issuance, investing in ventures results is money that does something.  So does selling bonds.

Think about buying a home as an investment (versus as a place to live). You buy an investment home for the income stream it can provide. Let's say you put $50k down on a $350k property. It has an annual payment to the bank of $24k and a rental value of $20k. Is this a good deal? If the price of the home does not rise at faster than 8% per year, it is not a good deal, on the face of it. However, you are leveraged at 6:1, so it only needs to rise 2% per year.

Policy results - low tax on dividends and bond interest? I guess we have that, but people still invest in the lottery.

The Education Bubble

The education bubble is the number of people willing to borrow nearly $200,000 for a BA (or PhD) in Anthropology or whatever subject that exceeds the number of positions available that require that degree at that price. I read an article yesterday that mentioned a detective with a PhD in Anthropology. While it seems to be working for him, I just don't see it as economically efficient. If we look at the causes of this inefficiency and bubble, we see similar government incentives and payouts to those that drive up the price of houses and medical care.  

At some point, maybe soon, all of that money being borrowed to pay for college education is going to be hard to get.  If we keep expanding grants and loan programs supported by the taxpayer, the government will distort the market and prevent costs from dropping to match demand.

So how should the government spend its money? If public universities were run in a lean fashion, with a passion for getting rid of wasteful spending, without a distasteful focus on athletics and other distractions, they would provide more than adequate competition for private universities at fair prices. By focusing on subjects that are in demand in the economy, they could support the progress of humanity.  By virtue of selective admissions, they could continue to avoid the fate of bland ineffectiveness that has befallen public primary and secondary education. 

Low interest rates

It seems that a fundamental problem with our economy is the Federal Reserve driving the interest rate environment.

The current interest rate on Bank of America savings accounts is... 0.20%. I just don't get it. If I am a bank, I make fundamentally make money by loaning people money at a rate higher than what I pay other people for giving it to me (and charging a few fees). But who's going to give me their money at 0.2%?

This rate is extraordinarily low, but interest rates have been really low for years now. The fiscal policy behind this was pushed by Greenspan. We know now it had some weird side effects, like most government fiscal policy, that have basically crushed our economy.

On 60 Minutes last night they had a piece about people "losing" half of their 401k balance. This would mean they were 100% in equities, with maybe some in corporate bonds. Why were they 100% in equities? Especially when they were approaching retirement age?

Maybe it had something to do with the low interest rates. Even with a CD yielding 2%, your money is growing slower than the inflation rate. So, people poured their money into equities, creating a bubble. To make it worse, a lot of prominent companies haven't been paying dividends lately, so they weren't even getting any income from these investments. Stock price to earnings ratios still seem high when you look at all of the companies where the investors don't see any of the earnings, and have to speculate by selling the stock to take advantage of the price.

Lower interest rates drove the price of houses up. Government backed loans drove the price of houses up. Since the price of houses were so high, the government started buying risky loans from banks so that people could keep buying houses.

So, low interest rates may help companies grow, but most large companies sell bonds, they don't borrow from banks like I do. Who exactly are these low interest rates helping? Is there someone out there who just loves bubbles?

Quick portfolio update

I think the market has dropped to the point that I can start looking for dividends again.

I don't know what's going on with TNP, but I might be getting a greater than 10% dividend off of that stock. They are trading well below book value, and I don't know why. I guess no one is going to be shipping oil? Come on, there is some inelasticity of demand there.

Looking at the financials, there is probably no reason to go there. They should move the trading desk of these stocks down to Atlantic City. That said, I jumped into TD Bank. They're Canadian, but they are running a tight operation and took over Commerce Bank, which was a really good acquisition. I am hoping for a steady value and a 7% dividend.

As far as the macroeconomy goes, we are completely screwed. I wish we could let housing prices drop faster without a total disaster.

Economics.

First day that Obama's in charge and it sucks about the economy. I liked Obama especially for his foreign policy approach, aka get the heck out of Iraq. I am not such of big fan of his Keynesian madness. It may get us out of this hole, but it's a huge risk. If it doesn't work, we are going to have a crushing debt that is only going to be solved by inflation. A lot of people that don't save money don't care about inflation. I want people to save more money so that they do care about it. I don't even think this recession is a bad thing. If I were spending twice as much money as I had, and then I stopped, I think that would be a good thing. Yeah, it's less than I was spending before, but all of that spending I was doing before was deficit spending, so it was hurting my future ability to spend. People get too focused on the metrics, like the GDP, which is a total bullshit number anyway. Our job is not to protect the GDP number that counts things like me borrowing money. The government needs to be creating the climate for jobs to be created and the country to actually produce things.

I remember when Walmart became the largest company in the US. My uncle cried. He worked for Walmart (as a contractor), but he said there is something incredibly wrong with the economy when the largest company is just a distributor of stuff that isn't made here. Wealth is just flowing out of the country. Now the Keynesians want to borrow more money from overseas (where people still save money) so that all of that interest we pay (currently a huge part of the taxes we pay) will continue to float overseas. This is insane.

I hope the one thing that this recession brings is the fall of Keynesianism. People still think that massive government spending got us out of the great depression. It didn't. It made it longer, because it took longer for the market to correct itself. All Keynesianism is good for is for preventing social unrest when the economy is weak. That is a worthwhile goal, to add some buffer to the drops, so that we don't get shocked into a revolution. However, to think that it actually has some positive effect on the economy as a whole is wrong. If you want to invest in the economy, you should spend the stimulus money on things that are going to make money. Factories, research, education, etc.

The simple fact of the economy is that real wages in the US and Europe have to drop to get closer to those in the rest of the world. We can't artificially pay people here more by borrowing money from overseas to drive up asset prices. It just doesn't work. That the solution to it is somehow to borrow more money from overseas...no way.

I'm wondering if I'll all be more productive after I read the new David Allen book.


I have to finish that one before "What Would Google Do?" is delivered.


I wonder how many more blogs I need to start making money? :-)

$15B down the oil drain

Warren Buffet put $230M in for 10% of BYD (leading cell phone battery manufacturer rolling out electric cars.) For $25B you could start 10 of those companies in the US (and invest the remainder in Tesla). The govt could get warrant coverage on the investments so we could convert to stock if anyone ever IPOs again. We could use the profits to pay a portion of the lost pension benefits. The government already operates several venture funds for military purposes, so it's legally sound. These 3 Detroit behemoths aren't going to be competing on the world stage.

Too Rad

Radiation medicine sucks: CT scans are killing us! We're an over-medicated lot.

I think this bit neatly sums up a lot of what's wrong with health care in the USA:
"Some say part of the blame lies with physicians who have financial interests in imaging facilities. "There is statistical evidence that indicates that more scans are ordered when a physician has a financial interest than when he doesn't," said Moore.

Defensive medicine also plays a role, with some doctors ordering the tests to stave off accusations that they withheld the most cutting-edge technology from their patients.

In other cases, overuse results from worried patients and from parents demanding CT scans that may not be needed. "

So we have:
1) Doctors increasing income by ordering more care
2) Doctors lowering lawsuit risk by ordering more care
3) Patients demanding care they don't need

Resulting in: more Americans being killed by their healthcare providers (see graph). It sounds utterly cynical, until we change those three things, maybe people should get less care than they do.

I know my grandmother was more or less sent on a path to death by her doctor, who misdiagnosed her broken rib as a heart condition and gave her more pills to take- that sent her on a downward spiral. Ironically, to my argument, perhaps an x-ray would have done some good there, as she didn't have that much time left to develop a cancer.

Overall though, people need to be a little less optimistic about medicine and doctors. Those bright colored commercials for prescription drugs really do make people think there's a magical cure out there for everything. Even diseases that might not exist, like fibromylagia. It reminds me of Irritable Bowel Syndrome, which is a fancy way of saying your stomach hurts and you have constipation or the opposite, and your doctor doesn't know why. Except, in fibromylagia, all of you hurts, and your doctor doesn't know why. It sounds very very similar to arthritis to me- except that the (mainly) women that get it fight the arthritis diagnosis because they don't want to feel old. Of course, now Pfizer is marketing a painkiller called "Lyrica" (sounds like the name of a girly folk music concert?) to treat it. It doesn't actually cure anything (reminds me of the old Chris Rock bit on AIDS) it just alleviates a symptom.

And please don't get me started on the "Restless Leg Syndrome".

I'm 34 and I'm already achy- it ain't f-ing fibromylagia- I'm just getting old. Get used to it, ladies. It doesn't get any better.

And just because you name a symptom- it doesn't make it a disease. For example- depression is the symptom, serotonin deficit is a cause. We can't have people walking the streets saying they have headachitis. It just doesn't make any sense.

Anyway- that's phase one of my health plan- educate the people of the old USA so they aren't so overconfident in their medical science. That should save enough money to fund phase two...

If Texas can...

How to drive down health care costs, the Texas way (courtesy NY Times):
Four years after Texas voters approved a constitutional amendment limiting awards in medical malpractice lawsuits, doctors are responding as supporters predicted, arriving from all parts of the country to swell the ranks of specialists at Texas hospitals and bring professional health care to some long-underserved rural areas.

The influx, raising the state’s abysmally low ranking in physicians per capita, has flooded the medical board’s offices in Austin with applications for licenses, close to 2,500 at last count.

Now, have the applications for the bar decreased? :-)

Why does this drive down costs? 1. Supply and Demand: More doctors = More supply, demand is somewhat inelastic (doesn't increase too much as a result of cost) 2. Lower costs (malpractice insurance) for doctors passed on to customers via market competition.

Now how do we get more doctors in total? How do we increase supply? Maybe if there is less money to be made in the lawsuit industry there are some smart people that will want to be doctors....

Now, if we combine this with lower drug costs via negotiation and a reduction in prescriptions- maybe there is enough money to start extending health care to more people across the world.

Africa- We're Making it Worse

via Spiegel via Marc Andressen
The Kenyan economics expert James Shikwati, 35, says that aid to Africa does more harm than good.
Shikwati: Why do we get these mountains of clothes? No one is freezing here. Instead, our tailors lose their livelihoods. They're in the same position as our farmers. No one in the low-wage world of Africa can be cost-efficient enough to keep pace with donated products. In 1997, 137,000 workers were employed in Nigeria's textile industry. By 2003, the figure had dropped to 57,000. The results are the same in all other areas where overwhelming helpfulness and fragile African markets collide.

This hit me like a pound of diamonds. We're destroying African markets with free crap. Let's build factories there instead- and then the people get the benefits of the infrastructure the factories require. Again, it's not that aid to Africa is bad, it's just that what we give them makes their economies worse. Ooops.

The World is not Flat

I've been listening to the "World is Flat" by Friedman. There are some interesting anecdotes in the text, but the whole metaphor really bothers me. He does such a build up for it and then repeats it over and over again, but it never really makes sense. Perhaps I am just being overly literal?

In any case, the point is really that location is not as important as it used to be. Many things can be made anywhere. It always boggled my mind that it was cheaper to make something overseas and ship it here than to make it here, simply because of cheaper labor. The new outsourcing, where "knowledge work" can be done anywhere, actually seems to make much more sense, as knowledge can be shipped for a very low cost...culture appears to be shipped easily as well, as "Creative Destruction: Globalization Changing Cultures" by Tyler Cowen points out. There is definitely a trend for individuals to belong to global cultural movements and less to local/regional movements.

So why is labor cheaper elsewhere? Supply and demand is the obvious cause, more supply elsewhere. Cost of living is a big factor as well though, as is standard of living. It's clear that a person considered poor in the US is generally satisfied at the basic level, with shelter, running water and food. The more surprising part is that they also often have electricity, appliances, and televisions. It is clear that poverty is merely a relative term. Would an unemployed person be better off moving to a country with a lower cost of living? Probably yes from a raw numbers perspective and from a perspective of increasing their relative status.

So given all of this, wouldn't it be best to move somewhere cheap and live a rich life? Apparently not, as this survey points out: http://money.cnn.com/2007/06/15/pf/most_expensive_cities/
"A luxury two-bedroom in Moscow now rents for $4,000 a month; a CD costs $24.83, and an international newspaper, $6.30, according to Mercer. By comparison, a fast food meal with a burger is a steal at $4.80."
There is still a lot of local culture and the experience of place to soak up.

Some places are better than others...I want to be location independent, but where would I go? Everywhere better than "here" costs even more, and location independent work goes to the lowest cost of living places with adequate labor supply. A conundrum.

Striking article on cause of the USSR's demise

Their economic collapse was largely brought on by the mid 80s drop in oil prices. Thanks Saudi Arabia! It's kinda funny, but I was living in Texas at the time, and the drop in oil prices caused all kinds of problems there. There were so many strip malls constructed near me that were completely without occupants. Houses wouldn't sell. Fortunately, we had plenty of grain.

Anyway, this puts in perspective a lot of the ridiculous claims that Ronald Reagan somehow brought down the USSR by running up our debt.