Wealth International, Limited

Finance Digest for Week of March 7, 2005

Note:  This week’s Offshore News Digest may be found here.


Previously covered: 1.) Get a method, 2.) Be disciplined, 3.) Get experience part 1 and part 2, 4 and 5.) Accept responsibility and accommodate losses

No. 6 -- Accept Gains

This one does not sound like a problem. When I advocate having the mental fortitude to accept huge gains, the comment usually gets a hearty laugh -- which merely goes to show how little most people think it is actually a problem. But to win the game, you have to understand why you are in it. I have seen this problem stymie lifelong traders, people who have gained or lost one point for a living for so long that they cannot make the big money when it comes, even when they say they know what is happening.

The big moves in markets come only once or twice a year. Those are the ones that will pay you for all the work, fear, sweat and aggravation of the previous 11 months or even 11 years. Do not miss them for reasons other than those required by your objectively defined method. Stay with a position during those rare times when it is hugely successful. Most people cannot do it. Even though their method is telling them, “Don’t sell yet,” they cannot stand it. If they get double their usual profit, they get out, and they are thankful. What is wrong with a 100% return? It is that it may not make up for all your 15% losses.

If you allow yourself unconsciously to define your “normal” range of profit and loss, you will looked at a job requiring the services of a Paul Bunyan and decide that your are just a Wee Willie Winkie. Who were you to shoot for such huge gains? Why should you deserve more than your best trade of the year? You then abandon both method and discipline. It may come down to a question of self-esteem and personal limits, but, perhaps more often, it is simply that you substitute an unconscious, undisciplined observation -- that the market had some kind of permanent “normal range” of fluctuation -- and then supersede your method with that false idea. This is requirement No. 1 reasserting itself, but it is such a common method of failing that I include it explicitly.

Some people -- probably even a lot of people -- are simply unable to accept the fact that they can earn a windfall just sitting around watching a monitor and guessing that a line on the screen is headed up instead of down. But it is NOT a windfall. There is no easy money on Wall Street. You earned it. By taking all those losses correctly and with the required discipline, you earned the big trade. The IRS categorizes capital gains as “unearned income”, but that is baloney. It is hard to make money in the market. You deserve your losses, so do not forget that you richly deserve every dime you can make, too.

Link here.


This week, I thought I might bloviate about the bubble in real estate -- the catalyst being a spectacular article in the March 2 edition of the New York Times titled “Speculators See Gold in a Boom in Home Prices”. About two years ago, I began writing on my Web site about the lunacy in the financing of housing, something I called the “housing hot potato”. The evolution of this has allowed folks to use their homes as ATMs to live beyond their means. Now, as always happens near the end of bubbles, madness (in real estate) is on display nearly everywhere.

You need not get far into the article to realize how magical real estate is perceived to be these days. (Remember, they are not making more of it.) To quote one of its subjects, Carlos Lidsky, who with his wife has been wheeling and dealing by trading real estate, “It is much better than the stock market. This is an extraordinary, phenomenally good result.”

The Times writer has filled the story with psychological insights and anecdotes that could have been lifted from the peak of the stock-market mania. For example: “Like the day traders of the 1990’s dot-com boom, people are investing in a market that seems to just go up. Promoters use Web sites to attract investors, promising quick profits. One site, GetPreConstructionProfits.com, is run by a pair of investors who offer online training for $197. On their home page, they say people can earn over $100,000 in six months investing in ‘un-built real estate.’”

An intrepid friend told me that a friend of his knew the location of one of the site’s listed “properties”. From him, my friend learned of a sign posted there. It advised people that if they put down a deposit now, it would give them the right to buy whatever happens to be developed on this land. There is no mention of what type of property will be developed. ... You put your money up, and you have no idea what it is going to be invested in. Take my word for it -- you only see that mindset at the height of a craze, after it has gone on quite some time. That does not necessarily mean this is the last minute of it, but it is certainly very late in the game of real-estate speculation. Other bubble-like symptoms are present as well: “In Miami, the speculative craze is promoted in part by developers and brokers who help buyers to resell quickly. Brokers in Miami work overtime to get their clients into V.I.P. sales events before developers start pitching buildings to the public." So, there are flippers in real estate who get in on the ground floor and then sell to the public. It is very reminiscent of the IPO mania.

What is different -- and far more dangerous -- about the real-estate mania than the stock-market mania is that anyone with a pulse can get 100%-plus financing for housing -- a fact made quite clear by the story (and one that many folks have learned firsthand). Many people can control multiple properties via lax lending standards. It has been cheap and easy financing that has enabled the mania, in turn promoting even looser lending standards as the whole process has fed on itself. And, when the housing bubble does pop, folks will find out about the downside of leverage. The fact that our financial system is so larded up with bank assets (in the form of loans collateralized by real estate) means that the implosion will impact the economy. Then, as soon as lenders start taking hits on real estate, they will tighten up lending standards, exacerbating the problem.

I think it is safe to say that this mania in real estate cannot get too much crazier. Yet, it is not possible to say how much longer it will last. What is 100% knowable: Given all the speculation financed by borrowed money, this will end in tears, and the ramifications will be far-reaching. In case you are wondering what it might look like, there is a group of islands where there isn not enough real estate for everyone -- and where real- estate prices have declined for 10 years now. It is also home to the world’s second-largest economy. It’s called “Japan”.

Link here.

House sales, prices keep up frantic pace.

How much longer can this madness continue? That is surely what buyers must be asking themselves as home sales continue to sizzle, sending prices skyward as buyers compete for too few properties in almost every Puget Sound, Washington-area county, according to monthly statistics released yesterday by the Northwest Multiple Listing Service.

This fast-paced, high-priced market could continue for some time, said Bill Riss, chief executive of Coldwell Banker Bain. “If interest rates stay down, I’d say indefinitely,” Riss said. But as he and others explained, mortgage rates are not the only factor fueling market intensity. “It’s like an alignment of the planets,” said economist Matthew Gardner of Gardner Johnson, a Seattle-based land-use economics firm. “If you look at the bigger picture, the dynamics are a fact of supply and demand.”

Link here.

Put nothing down and don’t worry much about monthly payments -- what’s the worst that can happen?

Gone are the days of saving a hefty down payment and striving to pay off your house in 30 years. Today, the typical first-time home buyer or vacation-home buyer might finance the entire cost of the house and pay only the interest owed on the loan for the first several years. The latest option? A monthly “minimum payment” that does not even cover the interest. Such innovations have, no doubt, been a boon to buyers who might have otherwise spent years socking away a down payment or paid a premium for a 30-year fixed-rate loan on a house they planned to own less than five years. And judging by historically low default rates, homeowners have been able to handle their growing debt burdens.

Then again, buyers have been experimenting with more aggressive financing in the best of all times, when interest rates remain low and home prices continue to appreciate. “Mortgage markets have been so flush with cash that home buyers are able to layer one risk on top of the other,” said Keith Gumbinger, vice president of HSH Associates. “It’s possible to borrow more than the value of the home, put in no money of your own and pay a minimum monthly payment.” What is the worst that can happen, you ask? Consider the danger with three increasingly popular loan structures: “Piggyback” loans, interest-only loans, and the “minimum payment” option.

Link here.

California Dreamin’

Whenever and wherever you travel, you notice that there are a lot more rich people than you may have thought. Americans consider themselves rich. But there are actually far more rich people outside the U.S. than inside. China, Russia, and India, for example, are creating millions of newly rich people. Europe, too, is full of people with money. Here in London, you can scarcely swing a cat without hitting a millionaire.

At a certain point in their lives, these people often have both the means and the desire to leave their homes and go out on the town. What they tend to do is to take up residence -- usually part time -- in one of the world’s leading brand-name cities: London, Paris, Rome, New York, Las Angeles, etc. Cities have become like cars and watches. They are status symbols. Major cities have cachet. Class. Style. This has always been the case, to some extent. But until recently, people who inhabited most cities were living there for mostly economic reasons. Now brand-name cities are becoming home to the rich, the hip, the footloose and fancy free -- as well as fashionable, up-market, good-paying industries such as media, banking and finance. And now people can hardly wait to get away from the suburbs and small-towns in order to take advantage of city life. Is it any wonder prices have been soaring?

The other major trend in property is the movement of baby-boomers to the beach. The boomers grew up on the Beach Boys, spring break at Ft. Lauderdale, and family holidays to the ocean. They now dream of retirement and Hallmark moments -- walking hand-in-hand along the beach at sunset. Florida and California are two of the hottest real estate markets in the country. And the boomers are still coming in. There are millions more of them. And many of them share the same retirement dream -- to sell the house in the suburbs and move to the beach. Beachfront property, too, should out-perform other real estate.

Link here.


Frederick Gillis grew up in a big city, and the most he had heard about farming came from stories his father told of working on a cousin’s South Dakota land during the Depression. But the prospect of a good return on farmland investments lured the 37-year-old money manager into buying 320 acres in western Nebraska to help balance his investment portfolio, which was largely in stocks and bonds. Despite a drought, Gillis estimated he made $16,000 with his first harvest of irrigated corn and dry land wheat, or a 6.5% return on his $246,000 investment. The income came after making payments on his $150,000 mortgage and a $96,000 equity line on his home that he used to buy the land, and paying 10% of gross profit to Farmers National, which helps work the land. At the same time, the value of Gillis’s land increased by at least 8%.

Investing in farmland is not a new trend, but it is a steady business, with many people trying it after seeing listings on the Internet or advertisements in magazines and newspapers. More than 40% of U.S. farmland is owned by people who do not actually work the land, and that has been the case since at least 1988, according to the U.S. Department of Agriculture. A disappointing stock market performance and low interest rates on mortgage loans have raised interest in owning farmland. Those selling their land have been getting good returns, too. Across the country, the value of land and buildings on farms has grown from an average of $599 an acre in 1987 to $1,360 an acre in 2004, a 52% increase when adjusting for inflation.

But agricultural land as an investment does have a downside, cautioned Bruce Johnson, an agricultural economist at the University of Nebraska-Lincoln. The farm crisis of the 1980s dropped land to the point that by 1987 it was worth about 40 cents on the dollar in Nebraska, Johnson said. Real estate values have climbed steadily since. “We will have booms and busts in real estate,” Johnson said. “That’s just a fact of life.”

Link here.


Which European country has the most ferocious house-price inflation? You may think it was the U.K., where the Bank of England has been raising interest rates in a bid to tame the housing market. Not so. The three hottest property markets in Europe recently have been France, Spain and Ireland. That poses an acute policy dilemma for the guardians of monetary policy at the European Central Bank, which sets interest rates for the 12 countries that share the euro. Asset-price bubbles are appearing in some countries, yet not in others. Monetary policy that is appropriate for one country is wrong for another. Property prices are becoming the fault line for the euro.

Three countries recorded house-price increases of at least 10% in 2004: France, Spain and Ireland. Several others showed appreciation that could be described as robust by any historical standards: In Belgium, Denmark, Sweden, Finland, Portugal and Italy, property prices rose 5 to 8%. In contrast, countries such as Germany, Austria and the Netherlands had property markets that barely moved.

There is no mystery about what is driving house prices up across most of Europe: the lowest interest rates in six decades. To make the deal even more tempting, there is little risk of any significant increase in euro-area interest rates because policy makers are concerned that already weak economic growth in the region would be stifled. Free money like that makes everyone want to jump on the bandwagon. Yet the massive divergence in house-price inflation from about zero in Germany to 15% in France is posing a policy dilemma for the ECB. The euro was meant to bring the European economy closer together. Right now, there is little sign of that happening. Instead, the region is becoming increasingly unmanageable -- and nowhere is that clearer than in Europe’s property market.

Link here.


In his closely read letter to shareholders in the 2004 annual report (PDF file) released over the weekend, the CEO of Berkshire Hathaway said the nation’s growing trade and fiscal deficits will continue to exert downward pressure on the dollar. “Our country’s trade practices are weighing down the dollar,” Buffett wrote. “The decline in its value has already been substantial, but is nevertheless likely to continue.” Buffett, nicknamed the “Oracle of Omaha” for his financial acumen, warned that currency markets could “become disorderly” unless the U.S. makes policy changes.

Mr Buffett stepped up his warning about the U.S. trade deficit and the need to finance it with foreign investment. “This force-feeding of American wealth to the rest of the world is now proceeding at the rate of $1.8 billion daily, an increase of 20 per cent since I wrote you last year,” he said. “Consequently, other countries and their citizens now own a net of about $3,000 billion of the U.S.” In particular, he warned that this meant a sizeable portion of what U.S. citizens earned in future would have to be paid to foreign landlords. “A country that is now aspiring to an ‘Ownership Society’ will not find happiness in -- and I’ll use hyperbole here for emphasis -- a “Sharecropper’s Society,” added Mr. Buffett. “But that’s precisely where our trade policies, supported by Republicans and Democrats alike, are taking us.”

In his annual missive to shareholders, which is considered a must-read for investors due to its honesty and insights, Buffett said Berkshire Hathaway was sitting on the equivalent of $43 billion in cash because he “struck out” in his attempt to make a handful of multibillion-dollar acquisitions in 2004. Citing a dearth of “attractive securities to buy”, Buffett said he and Berkshire Vice Chairman Charlie Munger are in search of “a little action” this year.

Berkshire Hathaway posted a gain in book value of $8.3 billion, a per-share increase of 10.5%. That return was lower than the 10.9% gain, including dividends, of the Standard & Poor’s 500 index. To capitalize on the weak U.S. dollar, Buffett reported $21.4 billion in holdings of foreign currencies. He said those holdings in no way “rest on doubts about America”.

As usual, Buffett offered homespun investment advice. To improve returns, he said, investors must seek out investments with low expenses, refrain from investing on “tips and fads”, and avoid a “start-and-stop” approach to investing, characterized by buying at tops and selling after declines. “Investors should remember that excitement and expenses are their enemies,” Buffett said. “If they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy when others are fearful.”

Links here and here.


Fully 39 months since the last recession ended in November 2001 and the American job machine finally seems to be back in gear. Hiring gains are still not spectacular when judged against earlier cycles, but as underscored by the 262,000 gain in nonfarm business payrolls in February, they have certainly been on the upswing over the past year. Unfortunately, the quality of hiring remains decidedly subpar -- dominated by those toiling at the low end of the pay spectrum. Moreover, an even bigger hole remains in the U.S. labor market: Despite generally sharp increases in productivity since 1995, there has been no discernible pick-up in real wages. The character of America’s recovery has shifted from jobless to wageless -- with profound implications for both the economy and financial markets.

In contrast with the real wage stagnation 39 months into the current recovery, real wages have normally risen 1-2% by this point in the past four business cycles. The most likely explanation, in my view, is a new strain of globalization. The global labor arbitrage has a rich and long history, but for some time I have argued that it has entered an entirely different realm in the Internet age. Courtesy of e-based connectivity, both tradable goods and an increasingly broad array of once non-tradable services can now be sourced anywhere around the world. That has turned low-labor-cost platforms in places such as China (goods) and India (services) into both wage- and price-setters at the margin. Interestingly enough, a detailed breakdown of recent wage trends, as seen through the lens of the ECI, suggests that the recent intensification of downward real wage pressures has been concentrated in the white-collar services segment of the U.S. workforce.

A new globalization of the U.S. wage-setting mechanism could well become an integral part of such cost-cutting strategies -- suggesting that real wage stagnation could endure for the foreseeable future. If that is the case, there are profound implications for the macro climate. For starters, real wage stagnation keeps American consumers under considerable pressure. Such an outcome leaves hard-pressed consumers with little choice other than to keep relying on asset-based spending strategies and going further into debt to fund such tactics. As a result, real wage stagnation is a recipe for persistently low income-based personal saving. For financial markets, the impacts of real wage stagnation are equally profound. The good news is that real wage stagnation limits labor cost and inflationary pressures -- helping to boost profit margins and constrain any back-up in long-term U.S. interest rates. The bad news is that the resulting shortfall of labor income keeps pressure on the U.S. current account deficit as the principal means to compensate for a shortfall in domestic saving.

The hope all along has been that the sustenance of growth would shift away from the artificial support of policy stimulus and asset appreciation back to the organic support of labor income generation. But as the character of America’s recovery now morphs from jobless to wageless, the likelihood of such a “handover” looks exceedingly dubious. That raises serious questions about the hopes and dreams in financial markets of a benign rebalancing of the U.S. and the U.S.-centric global economy.

Link here.


For anyone who does not think the stock and bond markets are currently hopelessly distorted, I recommend taking a long cold look at the hedge fund industry. It is a sobering spectacle. Hedge funds, originally intended as unregulated investment pools for the very wealthy, have existed for decades but have increased rapidly in size since the bubble stock market of 1996-2000, with assets under management rising from $500 billion to $1 trillion since 2000, according to the Economist. The growth of hedge funds is primarily a result of the enormous computing power now devoted to arbitrage between different instruments, and the deep markets for derivatives contracts, that enable traders to take any risk position they deem appropriate. Access to hedge funds has been made easier for the only moderately well off through legally clever pooling schemes; thus the SEC dividing line, separating regulated mutual funds from unregulated hedge funds, sold only to large sophisticated investors, has become thoroughly blurred.

Apart from their lack of regulation, hedge funds have three characteristics that differentiate them from conventional mutual funds. First they can go both long and short in an asset, thus being able to “hedge” the risks in the portfolio. Second, investors’ money is frequently locked into the fund for a period of several years -- nominally because the funds take illiquid positions, but in reality providing additional protection for hedge fund managers. Finally, the fees hedge funds charge are much higher than those on mutual funds; generally including a payout for the managers of 20% or even more of all profits made by the fund.

It is very clear why ambitious hot-shot traders and speculators want to run hedge funds, what is not so clear is why anyone would invest in them. The rush into hedge funds, perhaps more than any other investment feature of recent years, is a clear sign that the market remains in a bubble state, and that the huge wave of cheap money injected into the U.S. economy since 1996 continues to have a distorting effect. Investors, including a large number of institutions, are so convinced that hedge fund managers can be magically superior to managers in other sectors that they are prepared to pay them a large percentage of any possible profits, in a completely unregulated murky sector. Such investors are not merely lacking in normal risk aversion, they are actively risk-seeking. Pension fund managers, in particular, are asking for a fiduciary class action lawsuit if they make a large investment in a hedge fund that goes wrong.

Hedge funds do not have to report their performance, so in general they do not do so unless it is good. One particular feature of the genre is that, unlike a regular mutual fund, when things go wrong they go very wrong indeed and very quickly. Only one quarter of the 600 funds that reported results in 1996 still exist; you can bet your bottom dollar that almost none of the disappearances represented a successful wind-up with a good profit for investors.

The real importance and danger of hedge funds is their size, and the nature of their investment portfolios. While hedge funds like to brag about their ability to spot unexploited arbitrage opportunities, in reality there are no unexploited, unknown markets that can provide a home for anything like $1 trillion. The true profitability of hedge funds arises from the ability to leverage; if, as has been the case for the last 4 years, short term interest rates are lower than long term interest rates, then a hedge fund can lock in a guaranteed profit by borrowing short term money and investing in long term Treasury securities or, more likely, mortgage backed debt securities. Provided interest rates do not rise, a hedge fund can thereby make a profit in today’s market of 2% per annum, multiplied by the number of times it wishes to leverage its portfolio. The $1 trillion of investment in hedge funds is not like an equivalent amount in mutual funds, because it is leveraged; their true distortion of the markets is thus several times that amount.

Given the amount of money involved it is likely that this investment, and not Asian central bank purchases, is the true support for the extraordinarily low yields in the Treasury bond market, now close to or even below the anticipated rate of inflation. Like the margin traders of the 1920s, but on a hugely larger scale, their activities prop up fashionable, hugely overpriced stocks. Unlike the margin traders of the 1920s, they are also further inflating the housing bubble and depressing the dollar by keeping long term interest rates artificially low.

If Satan wanted to destroy the U.S. economy, and ultimately the capitalist system, he would devise an enormous mechanism whereby money would be poured into long bonds and speculative stocks, distorting both markets, causing a huge misallocation of capital, and leading to a crash that made 1929 look like a picnic. In the unlikely event that Satan exists, hedge funds are thus unquestionably His instruments.

Link here.

Hedge funds? What in the world do they mean?

The Wall Street Journal, New York Times, et al can be a little off-putting to a reader trying to catch up with the hedge fund industry or even understand the basics. They either deliberate on lawsuits, major crashes, managerial miscalculations or just Mr. Elliot Splitzer’s renegades in the investment industry. I decided to Google the word “hedge funds” and research their background and put it in a series of articles. These articles attempt to briefly outline the background of these investment vehicles. Progressively, it will detail the complex arbitrage opportunities as well as the general relationship of hedge fund with the rest of the market in the later articles.

Link here.


We have arrived at the summit of “Hubbert’s Peak”, the oil geologist who in 1956 correctly prophesized that U.S. petroleum production would peak in the early 1970s, then irreversibly decline. In 1974 he likewise predicted that world oil fields would achieve their maximum output in 2000; a figure later revised by some of his acolytes to anywhere between 2006-2010. If high oil prices are here to stay, it clearly has epochal implications for the global economy. Indeed, even if the recent oil price rise puts paid to the notion that Middle Eastern political risk premiums in and of themselves bear tangential relationship to underlying movements in the oil market, the very lack of new supply will almost invariably lead to an increasing militarization of global energy policy, although perhaps not in the Middle East-centric manner in which this has been occasionally manifested in the past.

For Iraq is hardly the only country where American troops are risking their lives on a daily basis to protect the flow of petroleum. In Colombia, Saudi Arabia, and the Republic of Georgia, U.S. personnel are also spending their days and nights protecting pipelines and refineries, or supervising the local forces assigned to this mission. American sailors are now on oil-protection patrol in the Persian Gulf, the Arabian Sea, the South China Sea, and along other sea routes that deliver oil to the United States and its allies. In fact, as Michael Klare has noted, in Blood and Oil: The Dangers and Consequences of America’s Growing Dependency on Imported Petroleum, the American military is increasingly being converted into a global oil-protection service.

Other countries are responding in kind, notably China. More expensive oil will undercut China’s energy-intensive boom. The country is already experiencing sporadic power shortages against a backdrop of growing car ownership and air travel across the country. Pressure is already mounting on Beijing to access energy resources on the world stage, and energy security has become an area of vital importance to China’s stability and security. To be sure, China’s drive for energy security has no where come close to reaching the militarization of America’s current energy policy. To the extent that it has engaged in competition, this has so far been limited to the economic sphere through state-owned oil and gas companies, all of which are actively seeking to accumulate overseas subsidiaries or offshore exploration rights. Chinese acquisitions are also extending closer to Washington’s traditional sphere of influence in the Americas. However, as oil prices rise and China imports an increasing amount of its energy needs, the competition is beginning to spill over into the political and military spheres. Tensions have been rising between China and Japan, exacerbated by Japan’s shift from its post-war pacifist and defensive posture towards a more active military role in the region.

Growing U.S.-Chinese tensions (fuelled in large part by this ongoing competition for global energy resources) also help to explain China’s less than enthusiastic support of U.S. aims to discourage North Korea from developing its nuclear weapons program further. If the U.S. insists on playing the “Taiwan card”, Beijing seems equally happy to play the “North Korea card”. Oil, and the corresponding drive for energy security, therefore, is becoming an increasingly common, yet disruptive, thread driving policy in Washington, Beijing and Tokyo. With these 3 global behemoths engaged in an increasingly fraught competition over an increasingly scarce resource, it is clear that the global economy will pay a higher price for oil, not only in dollar terms, but also in blood for every additional gallon of oil which we seek to consume. The great game has truly begun.

Link here.

More Oil For The Lamps of China

The title above is a play on an old advertising slogan of the Standard Oil Trust, first used in the 1890s. The business logic a century ago was “What if we could sell our oil to every person in China?” Today we wonder...what if they bought it?

The world has not “run out” of oil, but the rate of production growth has stalled, and informed speculation is that worldwide production is about to begin a slow, irreversible decline. The Chinese know this. They are seeking the oil for the lamps of their nation. We live in interesting times.

Link here.


For the big multinationals, investing in China is a schizophrenic enterprise. Dreams of huge profits are balanced against piracy nightmares, profit-crushing competition and razor-thin margins. This is exactly how China likes it. Foreign multinationals are prized for their technology and expertise: If they stay and succeed, Beijing leans on them to share the wealth with local partners. For those who leave with their tail between their legs, odds are good they were picked clean en route to the nearest exit. China has practically made an art form of bringing in outsiders to develop a market or industry, transferring said outsiders’ knowledge and technology to local imitators and then brutalizing profit margins with local competition once the transfer is complete. Most companies are offered a Faustian bargain: To gain access to the kingdom, you must partner up ... we share our markets, you share your expertise. The bit about intellectual asset stripping is conveniently left out of the deal.

China will take a harder line on intellectual property rights when one of two things happens: Either multinationals will demand intellectual property enforcement and stop acting like sheep to be sheared, or China will build up enough proprietary knowledge and technical expertise of its own to warrant the standard legal protections. On a more ominous note, China’s hunger for knowledge extends to military technology.

Who are the winners and losers in China’s quest for knowledge and technology? Naive multinationals who do not understand the Chinese way are clear losers; Chinese firms that get a leg up on their foreign partners are clear winners. Avoid investments in companies that view China as a typical market with typical rules; instead, look to companies that understand exactly what they are getting into and have means to protect their intellectual assets. Also consider exchange-listed Chinese firms that are in a good position to upgrade themselves with the help of “borrowed” multinational expertise. Once intellectual property rights start taking hold in China, look for new opportunities in standards-dependent industries that were previously unfeasible in a lawless environment. Watch closely as China transitions from basketballs and sneakers to pharmaceuticals and computer chips.

On the military front, watch the drama unfold between Europe, America and China. If the ban is lifted, expect America to consider an across-the-board withdrawal of cooperation with Europe on sensitive technology projects. Will the transatlantic alliance be placed in doubt? It is going to be an interesting century.

Link here (scroll down to piece by Justice Litle).

China’s foreign exchange chief warns against “hot money”.

China’s foreign exchange chief Guo Shuqing has issued a rare warning against “hot money” flowing into China, telling local governments not to attract foreign investment “haphazardly”. Regulators have been playing down the amount and impact of speculative money inflows but Guo warned of “no end of trouble for the future” unless local governments were made aware of the risks of soaking up foreign funds.

China’s foreign reserves in 2004 soared to a record $609.9 billion from $403.3 billion in 2003, with China now second only to Japan in the amount held. Observers believe that part of the inflow could be speculative money betting that China will have to raise the value of its currency, the yuan. These theories were boosted last month when China published balance of payments statistics for 2004, showing a net errors and omissions entry worth a positive $20 billion. No explanation for the errors and omissions figure was given but in the past some analysts have said they may indicate irregular capital flows, which up until recently had been largely negative.

Guo insisted the overall inflow of capital was “normal and legal” and reflected the “market scenario” but noted there were also some “worrisome” problems. “Fake foreign investment” was being used to purchase yuan-denominated assets and commercial housing for speculative purposes, he said. As an example, he said the State Administration of Foreign Exchange (SAFE) had found some foreigners have bought dozens, and in some cases more than 100, apartments in China’s coastal cities. This has driven up housing prices to levels which Guo said posed risks to local financial institutions, enterprises and individuals. “When the real estate bubble bursts, they will suffer huge losses,” he said.

Link here.


“The stock market is literally a drawing of how the scales of mass mood are tipping, but the same social psychology that is reflected in the stock market shows up in other areas. We just don’t have charts of their activities.” ~~ Robert Prechter

This observation has led to many fascinating insights from Bob Prechter, though others have also seen major stock trends at work in the social realm. An MBA from Harvard first publicized the “hemline indicator”, which observes that skirts tend to move up the leg in bull markets, and back down in bear markets. The hemline indictor reflects the positive/negative collective mood in fashion trends, yet there is an ironic contrast when it comes to sex. Bull markets emphasize romance & relationships, which explains rising birth rates. But sex gets raunchy in bear markets.

It is no coincidence that R-rated movie content and pornography became cultural staples as the Dow Industrials went sideways/down in the late 1960s and into the 1970s. Now this period is actually being celebrated with a documentary titled Inside Deep Throat. In fact the porn business is exploding on the Internet, among cable subscribers, and beyond; Jenna Jameson’s tell-all about her time in the industry topped the best-seller charts for six weeks last year. All this came to mind as I read a Boston Globe article titled, “What happened to the anti-porn feminists?”

Good question, yet it is one which this otherwise engaging article never truly answers. It correctly recites the role of many feminists who tried and sometimes succeeded in getting anti-porn legislation passed during the 1980s-1990s; but as for why their influence has vanished in recent years, the closest the story gets is this quote from anti-porn feminist Catharine MacKinnon: “The data just show that pornography sets community standards, so the more pornography there is, the less will be seen to be wrong with it. It’s just its own intrinsic dynamic.” Of course, this only begs the question of why the spreading pornography trend is so strong. It would never occur to most people that the answer starts with the bear market in stocks that began in 2000 ... yet it does.

Link here.


When it comes to the business issues of the day, the media often creates a perception that is far detached from reality. This gap has grown especially wide in recent months when it comes to the coverage of corporate America’s chief executives.

The Perception: Boardrooms are under siege. The very public ouster of Hewlett-Packard CEO Carly Fiorina last month produced an extravagant amount of news and commentary. Likewise this week’s revelations of the Boeing CEO’s confessed extra-marital affair. These and other stories are put in a supposed “context” that includes the burdensome Sarbanes-Oxley legislation, along with the trials and convictions and confessions of corporate villains from Ken Lay to Bernie Ebbers to Martha Stewart.

The Reality For the vast majority of CEOs at large companies, the most “publicity” they get are two-minute interviews on CNBC, or 200-word profiles in one of the business weeklies. What is more, here is a big-picture statistic that you almost certainly have not read about in the press lately: The average bonus for CEOs in 2004 rose to $1.14 million -- a new high, and a 46% increase over 2003.

How have CEOs remain relatively unscathed by the bear market in stocks that began in 2000? Interesting question, but here is a far more relevant query: How long will they remain unscathed? The real “context” of the small number of CEO shenanigans is “a preview of coming attractions”.

Link here.

The 6-inch tall CEO.

Having fun with action figures is not just for adolescents anymore -- not since one Toronto-based toy company introduced the adults to a trio of six-inch tall “capeless corporate crusaders” last December. “Geek Man” is a palm-sized, plastic embodiment of Silicon Valley armed with laptop, pencil-protector, and black-rimmed spectacles. “Boss Man” is clad in a dark, three-piece suit and fancy red tie whose main superpower is “schmoozing”. As the toy’s creators observe: We came across “dozens of visual inspirations for Boss Man while sifting through the hundreds of corporate snapshots [err, mug-shots] of late.” And then we have “Bank Man”: with a briefcase, calculator, and bundle of cash strapped to his belt loops, this financial accountant has a Herculean ability for “figure fudging and fuzzy math.”

Obviously, these toys are meant to put the “fun” back in the increasingly dysfunctional corporate offices around the country. Truth be told, these class-action heroes could not have come at a better time. As we expressed last year: “We see the emergence of a large wave of social satire -- and spoofs seem to express, in a light-hearted way, the public’s increasing animosity toward corporations. The time is right for taking expectations and imaginations into new and frequently derogatory or comic directions.”

Now a new wave of attacks are visible across the breadth of corporate America, as executives from Fannie Mae to Bally Total Fitness are under fire for “ethics lapses” of some kind. In January 2005, 92 top CEO’s got the boot or retired, the highest figure in four years. The scandal mills are heating up. When this happens, it is a surefire sign that the spark to one kind of market in stocks is also being lit. When that phase unfolds, you will know whether these plastic parodies of corporate corruption are really something to laugh about.

Elliott Wave International March 8 lead article.


Since the start of 2005, the silver market has totally rocked with prices soaring 17% from their January 4 low. An awesome advance by any standard, even by Barclays Global Investor -- in early February, the company publicly announced plans to develop an exchange-traded fund backed by the white metal to complement the highly “successful” bullion-based ETF. And, after silver prices hit a three-month high on March 8, the speculative frenzy went wild. A Reuters article captured the enthusiasm with this “expert” forecast: “The purchase of silver call options in recent months could help drive prices above $8 again.”

Now if you turn the station to WALL -- Street that is -- you will hear the same bullish tune playing with regards to the U.S. stock market and economy at large. Drumroll please: The rally in silver prices has moved in concert with a rash of good news about the economy, as it should. Meaning -- where the white metal goes next, the U.S. economy will likely follow. And for whom this bell-wether tolls (for bear or bull) might just rock your entire world.

Elliott Wave International March 9 lead article.

Surging prices for commodities reflect global growth.

Commodity prices are nearing record highs -- but there may be less to worry about than investors think. While higher commodity prices have often been a worrisome portent of inflation, those concerns have been overshadowed by the other significance of the rise - that economic growth is picking up in areas around the world. The rise “reflects booming activity in the Asian developing world and on balance, that means the global economy is doing better than we thought,” said Robert J. Barbera, chief economist at ITG/Hoenig.

For investors, the rise in commodity prices, especially for industrial materials, is positive right now because it is a sign that the global economy is healthy, which is good for the American economic recovery. As for their inflationary impact, Mr. Barbera argues that it should be much weaker than in the past. One reason for this, he said, is that the industrial commodities are being used in low-wage countries, like China and others in Asia, to make products that can sell for less elsewhere in the world, mitigating the inflationary pressure.

Link here.


The Dow rose again, breaching 11,000 for the first time since June 13 2001. It is now just 900 points from an all-time high. This positive price action made us question our belief in a secular bear market. But that is what Mr. Market does. He will aim to sweep you up in his latest trend and then cast you to the heap. So periodically, we delve into some of the books on historical market valuations to sooth our concerns. ... We grabbed A Modern Approach to Graham and Dodd Investing by Thomas P. Au.

It is not hard to argue that equities are fundamentally overvalued. On almost any measure -- dividend yield, p/e ratio, discounted cash flow valuations -- the major indices are massively overvalued in relation to historical precedents. Au uses a different measure of value -- he calls it Underlying Investment Value (calculated as book value plus 10-times dividends). Ben Graham developed this measure, and operated under the theory that a price of one half of investment value represented a bargain. “The Dow actually traded at close to investment value through the early 1970s, until the 1973 oil shock caused a plunge that pushed the Dow below investment value, a condition that lasted until 1985,” Au shows. However, with the Dow at 10,787 in 2000, the author calculated IV to be 3,036, valuing the Dow at a 255% premium to its underlying investment value. Some said it was a new era, but not Graham and Dodd investors.

The message when applied to current numbers is simple. A simple reversion to fair value would cut the Dow in half, and then some. It may seem unlikely, but who are we to argue with history ...?

Link here.


It has been almost five years since the collapse of the Nasdaq stock market, once the showcase for the equity excesses of the late 1990s. If not forgotten, all, it seems, is at least nearly forgiven. As if to mark the occasion, Ken and Linda Lay showed up at a swanky United Way gala last week for contributors who gave $10,000 or more. They even had their picture taken with a former president. In New York, Bernie Ebbers, once a rock star of the white-hot telecom market, took the stand in his own defense and professed an ignorance so profound that fence posts everywhere must be swelling with pride.

The economy is finally showing some signs of real improvement, and while it may be modest for now, things will someday boom again. Before they do, I would like for all of us as employees, as investors, and yes, even as executives, to make a little pact. Can we all agree to do better this time around? Can we all please keep our heads on straight and remember what we went through?

As investors, let us remember to retain enough skepticism to question claims that seem too good to be true. As employees, let us be cautious enough not to put all our investments in our own companies’ stock. And let us remind ourselves every day that complacency is the first step toward complicity. Can we stifle our lust for fast gains so it does not overtake solid, steady growth? Can the managers among us please keep one eye on the horizon and the other on operations? Maintain enough long-term vision that you do not destroy your companies trying to fulfill short-term forecasts. And don’t insult us by pleading ignorance when things go wrong. We pay you well -- too well, in most cases -- so take some responsibility. Can directors remember their job is to question, to function as the agents of shareholders? And accountants, can you please remember the public trust we all place in you?

The market has always been quick to bury the lessons of the past and wallow in the hype of the future. There has been much talk that 2005 may be the year of the Goldilocks economy, one that is neither too hot nor too cold, but just right for steady growth. A Goldilocks expansion, though, is a fragile balance. The three bears of this economy remain the record budget deficit, the widening trade imbalance and $55 a barrel oil.

The biggest threat to a Goldilocks economy, though, lies in our own selective memories. If we taste moderate growth, will we then hunger for another boom? Will we again suspend caution in pursuit of instant wealth? Will we convince ourselves that the Internet bubble was not a fluke, that companies with no profit, scant revenue and a dot-com name really could be worth billions? Will we again assign a dollar value to hot air? We may long for an economy that is just right, but we don’t need a fairy tale.

Link here.


On March 10, 2000 the Nasdaq composite index hit its high, marking the peak of the dot-com bubble (see chart). It is fitting to commemorate this anniversary with a column about what financial economists have learned from this episode. Perhaps the most fundamental question one can ask about the bubble is how it could have happened in the first place. How could stock prices be pushed up to such irrational and unsustainable levels? Few economists would deny that fools and gamblers participate in the stock market. But the participation of such irrational traders does not necessarily imply that stock prices themselves should be irrational.

In principle, irrational exuberance should be self-correcting. If overly optimistic investors bid up the price of a stock, rational investors should step in and sell shares, moving the price back down to a realistic level. This adjustment process does not even require that sellers own shares of the overpriced stock. Someone who thinks that the price of a stock will fall but does not own any shares can borrow shares to sell, a practice known as selling short. But, in the case of the Internet boom, short selling was apparently not strong enough to damp the stock price increases during the Internet bubble. Why not?

According to Owen A. Lamont, a professor of finance at the Yale School of Management, and his co-author on one paper, Richard H. Thaler, a big part of the problem is that the market for borrowing shares is not a centralized market with quoted prices, but rather a highly disaggregated market, so it can take time to find shares to sell short. Typically, there is no problem in finding shares of large companies that are traded frequently. But shares of small companies, whose stock is lightly traded, may be hard to find.

One might expect that short selling would be a good predictor of stock market movements in general. Somewhat surprisingly, this turns out not to be true. In fact, during the bubble years, the aggregate amount of short selling declined as stock prices were bid up. But again one must ask, why not. One suggested answer is that short selling arbitrage has more risk than appears at first glance. For example, the owner of the shares can force the borrower to return them under certain conditions. Hence, the short seller might find his position unwound at an inconvenient time. This risk factor means that short sellers may want to take smaller positions than they would otherwise prefer. It appears that at least on some occasions, short selling constraints can disrupt the normal operation of supply and demand: when supply is constrained, stock prices end up being determined by those who are overly optimistic.

Link here.

“What have investors learned” since March 2000? How about “nothing”?

The Nasdaq stock index closed at its all-time high on this date five years ago, so this week’s financial news has included a lot of cud-chewing reflections on “what investors have learned” in the time since. I believe “Nothing” is an accurate comment on the matter, if by “learned” one means more rational behavior and less appetite for risk. The stock market includes many examples of how little investors have learned since 2000, yet one especially powerful case in point comes from the bond market -- specifically, the junk bond market.

These bond issues receive a rating (Caa-C) that does of course designate them as “junk”. And like other bonds, the default rate on junk securities is a matter of record: at the end of three years, half of junk bonds are typically in default. From there the rate climbs to an average 80% default rate after 11 years. The highest percentage of issuers with an initial Caa-C rating came in 1998, when about 9% of new bonds were initially rated as junk ... until 2004, that is, when the initial Caa-C rating for new bonds exploded to nearly 16%, by far the highest ever. The interest rate “spread” between 10-year junk bonds and 10-year Treasuries fell to a record low.

By this measure, investors are less rational today and have more of an appetite for risk than they did at the peak of the stock market mania five years ago. Pontifications about “lessons learned” aside, these are the facts. The evidence of a new round of psychological extremes is on record. Examples like the one above were likewise ignored or underreported in early 2000, until the damage was done and the storyline changed to “everyone knew”. The truth is that most people did not know then, and fewer still acted to protect themselves. That is the lesson.

Link here.

Five years after the bubble, have its lessons been forgotten?

Five years later, the great bubble of 2000 does not look so bad. The conventional wisdom now is that it was not all that important, certainly nothing like the great bubbles of 20th-century stock market history, those of the U.S. in 1929 and Japan in 1989. But there are similarities indicating that it could be a very long time before technology stocks as a group become good long-term investments again. First, look at the differences. In 1929, the world economy entered the Great Depression. In 1990, Japan began a long period of poor economic performance. It was not a depression, but there has yet to be a period of sustained growth there since the end of the bubble.

The U.S. bubble in 2000 was different both in breadth and in economic impact. That bubble did not infect the entire stock market, but instead was concentrated in technology stocks, with a lesser bubble in the largest stocks, the ones that dominated the S&P 500. The economic aftermath included only a mild recession and a slow recovery. When the bubble was at its peak, Alan Greenspan turned aside advice -- some of it from this column -- that he should do something to restrain the speculation. He confidently forecast that if and when the bubble did burst, he could minimize the damage. And he seems to have been right, even if some fear that superlow interest rates simply created another bubble, this one in home prices.

The image of a bubble bursting is not a perfect one. Soap bubbles blown into the air seem to float along, and then suddenly vanish -- they do not shrink, and they do not reinflate. But the history of stock market bubbles is different. Charles P. Kindleberger, the late, great M.I.T. economist whose book Manias, Panics and Crashes remains the best work on the subject, notes that the path down from a peak is neither sudden nor straight. Instead, investors come back to be disappointed time and again. When all are dismayed, prices can be low enough to prompt another great bull market. But that can take a very long time.

How long? Adjusted for inflation, the DJIA was below its 1929 peak in the early 1990’s. (That calculation uses the CPI and is not adjusted to reflect dividend payments. But it provides a rough approximation of the purchasing power of a basket of stocks in different eras.) While many American stocks are higher than they were in 2000, the area where the frenzy was greatest remains low. Adjusted for inflation, the Nasdaq 100 is off about 70% from its peak. That performance is quite similar to the one turned in by the Dow industrials in the first five years after 1929, and worse than the performance of the Nikkei 225 after 1989.

When the stock market fell to its post-bubble lows in late 2002, there was much talk that the lesson was that even if a technology is revolutionizing the world, the profits are more likely to go to those who use the technology than to those who develop it. Now investors are back buying hot technology stocks, and that lesson appears to be forgotten. That is perfectly consistent with the history of previous bubbles. Technology investing in the next five years may be more exciting than profitable.

Link here.

Nasdaq faces a long and uncomfortable road.

Five years ago today, the Nasdaq kissed an all-time high of 5,048.62. The optimistic buyers of that era would certainly never have imagined that they were “top-ticking” one of the most magnificent financial bubbles of all time. Five years hence, today’s optimistic stock buyers cannot seem to imagine that the Nasdaq’s bear market might not yet have run its course. ... Sometimes, it is worth thinking about the unthinkable. The buyers of Intel Corp and Cisco Systems on March 10, 2000 certainly never would have imagined that their beloved Nasdaq Composite was less than 24-hours away from the start of an epic bust. And these investors certainly would never have imagined -- even if they had given the matter any thought -- that the U.S. economy of 2005 would be straining against the considerable adverse forces of soaring fiscal imbalances and runaway energy prices, while also waging an economically and politically expensive war in Iraq.

But the almost unthinkable has occurred and continues to occur. The Nasdaq skidded 78% before bottoming at 1,114 on Oct. 9, 2002. Cisco, likewise, lost more than three quarters of its market value. The computer-networking giant “and former tech-stock icon” once boasted the world’s biggest market capitalization. Today its $120 billion market cap trails well behind the new number one: ExxonMobil’s $400 billion market cap. In 2003, the Nasdaq rebounded 50%, while adding another 8% last year. But that does not mean that the worst is over. Despite mustering impressive periodic rallies, the Nasdaq continues to stair-step its way lower into a protracted bear market. We have seen this picture before.

The Nasdaq is tracing out an ominous price trajectory that closely resembles that of Japan’s Nikkei Index. A chart compares the price histories of the Nikkei from 1979 to present and the Nasdaq from 1989 to present. The similarity is hard to miss. If this similarity persists, the Nasdaq will continue foundering in a kind of bear market purgatory for another 10 years ... at least. The Nasdaqafs slide also resembles the epic bear-market patterns traced out by U.S. stocks from 1929 to 1954 and gold from 1980 to present. If past is anything like prologue, the Nasdaq faces a long and uncomfortable road ahead.

Link here.

Five years later and still floating.

Thursday marks the 5th anniversary of the peak of the great millennial stock market. What were you doing when the lights began to dim? Were you a bull or a bear? Rich or otherwise? What about today? Are you inoculated against the new alleged sure things? Or perhaps you believe in the permanent hegemony of the dollar in the world’s currency markets? In the inevitability of rising house prices? Or of falling interest rates? Answer true or false: the chairman of the Federal Reserve Board is clairvoyant. From the March 2000 top to the October 2002 trough, the U.S. stock market gave up more than half of its quoted value, some $9.2 trillion.

Americans hate to lose, especially when it comes to money, and they have demanded an accounting of the misdeeds of the bubble era. A certain number of former chief executives, like Bernard Ebbers of WorldCom, have had to answer the charges against them in court. And Congress, in 2002, overhauled and stiffened the nation’s securities laws. But the chairman, governors and staff of the Federal Reserve have yet to be called to account.

Booms and busts are recurrent in history and in nations. In not every episode was there a culpable central bank. But in virtually every case, there was a clever neighbor. The unbearable sight of a neighbor getting rich in the stock market in the late 1990’s made millions of Americans bipolar. Shopping at Wal-Mart, they would pay any price except full retail. Investing in the stock market, however, they would pay nothing but. By the late 1990’s, stocks had lost any connection to the value of the businesses in which they represented partial ownership. Picture an artful consumer settling into a discounted hotel room for the night. Now try to imagine this savvy individual formulating a calculated financial decision to make a meal of the $10 cashews and the $6 candy bars on sale in the hotel minibar. That was Wall Street a half decade ago.

And, to a lesser but still striking degree, it is still Wall Street today -- and Main Street, too. Alan Greenspan, the chairman of the Fed, had worried about a stock market bubble as early as 1995, had warned against “irrational exuberance” in 1996, and batted around the possibility that there might, indeed, be a stock-market bubble in discussions with his Federal Reserve colleagues as late as 1999. But he was not the man to stick a pin in the bubble. Indeed, he himself became a vociferous booster of the “New Economy”. In a speech he gave only four days before the Nasdaq touched its high, he sounded as if he were working for Merrill Lynch. Under the Fed’s bubble recovery program, the proliferation of dollars helped to lift the stock market out of its doldrums -- though the doldrums of 2002 were singularly shallow ones. In comparison to earlier bear market lows, bargains were scarce on the ground.

In the new Berkshire Hathaway annual report, Warren Buffett writes, “We don’t enjoy sitting on $43 billion of cash equivalents that are earning paltry returns. Instead, we yearn to buy more fractional interests similar to those we now own or -- better still -- more large businesses outright. We will do either, however, only when purchases can be made at prices that offer us the prospect of a reasonable return on our investment.” Five years later, the bubble is still unpopped.

Link here.


In 1906, Harold Hurst, who was a young civil servant at the time, came to the ancient city of Cairo, Egypt, which was then under British rule. While there, he solved one of the mysteries that had bedeviled the pharaohs for ages -- and also provided a sign for how financial markets worked, a connection that was later uncovered in the 1960s by an ambitious Harvard economist and mathematician. Hurst’s problem was to solve the riddle of the Nile’s great floods. He was not interested necessarily in why it flooded; he was interested in predicting how much the Nile flooded from year to year. It was a very important question, in which the lives and wealth of millions hung in the balance. Hurst studied these patterns and noticed how they tended to cluster. Hurst abandoned many of the methods prior mathematicians used and started to work out his own formula to describe their behavior. He also looked at data from other rivers and discharges all over the world. More than that, he looked at thousands of nature’s patterns, a menagerie of natural phenomena.

To all these he worked out a formula, describing the patterns as functions of a unique power law, a fundamental number that seemed to be a fact of nature. Hurst’s findings basically described the Nile’s flood cycles and showed that they did follow a pattern. From 1951 to 1956, Hurst, then in his seventies, published a series of papers describing his findings. These findings roiled the scientific community and invited both criticism and praise. But, the things was, Hurst’s formula worked. Other hydrologists working on other rivers soon confirmed his findings.

Benoit Mandelbrot made the connection with finance in 1960s, while he was a teacher of economics at Harvard. Mandelbrot was working on a study of cotton prices and worked out a power law to describe their behavior. He published his paper and a colleague of his noticed the similarity of his work with Hurst’s. Mandelbrot studied the work of Hurst and connected it with his own work. He thought that Hurst’s floods were like big price jumps, and that the droughts were like market crashes. He found that cotton prices were similar to the Nile’s pattern, that there existed what mathematicians call “dependence” -- which simply means that what is going to happen next depends on what happened before. Cotton prices trend. This view was in opposition to the idea that price changes mimicked a random process, or a “random walk” as economists described it.

Mandelbrot measured the tendency of prices to trend and called his number “H” in honor of Hurst. If the H factor was 0.5, then the prices exhibited a random pattern. But, if the H factor was greater than 0.5, say 0.75, then the prices had trends and that they did not fluctuate randomly. Prices tended to persist in one direction much longer than would be predicted by a random process. If the H were less than 0.5, say 0.2, then this meant that prices tended to hew closely to some mean; it meant that they did not roam very far.

Other researchers plowed into price data and found varying H factors for different financial assets -- more evidence that prices exhibited some trend. Interest rates and inflation had high H factors, indicating persistent moves in one direction Apple Computer, Xerox and IBM were found to have H factors of 0.7 or better, again indicating trends. This was a radical idea. All of orthodox finance had been operating under the assumption that prices behaved randomly, that they had followed a random walk. The thinkers and theorists of finance had created elaborate mathematical models and intricate theories that depended on the assumption of randomness. Their works were celebrated and the star theorists with feted with Nobel Prizes and prestigious tenured chairs at the nation’s finest universities.

If Mandelbrot’s findings were correct, then all of the models of modern orthodox finance -- the Efficient Market Hypothesis, the Capital Asset Pricing Model, the Black Scholes Option Pricing Formula, and more -- were wrong! Not surprisingly, Mandelbrot’s ideas have not yet gained widespread acceptance. Too many professors continue to try and patch up the existing theories, like Ptolemaic astronomers trying to resist Copernican theory. The evidence sits there right in front of them, but they choose not to see it.

Link here (scroll down to piece by Chris Mayer).


For many reasons, the dollar will almost certainly fall rapidly during the next few years and could even crash suddenly -- with little or no warning -- at any time. That will have severe consequences for stocks, real estate, pensions, gold, and even U.S. foreign policy, which runs on dollars. Thousands of companies and millions of families could even be financially wiped out. The recession that followed the dot.com and telecom crash and 9/11, was just a warm-up. The crash following a dollar collapse, would be much more severe, and could cause stock and real estate prices to fall by 50% to 80%.

At the same time, everything we import -- from oil to computers to fruit -- would go up in price two- to five-fold. That means the 32” TV you can now buy for $500, would cost $1,000 to $2,500; and a gallon of gasoline would cost $5 to $10 a gallon. We will cover how we got in the situation where a dollar crash (fast or slow) now seems inevitable, and what that crash will mean for your investments, savings, and real estate. Most important: We will also show you how to protect yourself from a dollar crash and even turn it into a personal financial windfall.

Link here.


The collective net worth of the 691 billionaires Forbes found was $2.2 trillion, up $300 billion from the combined worth of the 587 people listed last year. Every region saw gains. The world’s richest moguls now hail from 45 countries, including, for the first time, Kazakhstan, Poland, Ukraine and even Iceland. The newcomers include 69 Americans and 38 Europeans. More than half of them are entirely self-made.

The most conspicuous new entrant: Martha Stewart, who was freed from jail earlier this month. Seventeen people found their way back onto the list, including Home Depot shareholder Kenneth Langone, who returns following a rebound in the retailer’s stock. The gap between the world’s two richest people, Bill Gates and Warren Buffett, narrowed further this year, though Gates hung on to his superlative title for the 11th year. The 3rd-richest person in the world, steel baron Lakshmi Mittal, is this year’s biggest gainer in dollars, adding $18.8 billion to his net worth.But Mikhail Khodorkovsky, imprisoned for 18 months and counting, saw his fortune fall $12.8 billion, making him the biggest loser. (Five of his former partners dropped off the list entirely.) Controversy surrounds several billionaires, including Poland’s Jan Kulczyk, who is alleged to have ties with a Russian spy.

30 people fell off the list, either because their net worth dropped below the minimum or because their fortunes were reclassified as belonging to families. Another 14 died, including Canada’s french fry king Harrison McCain and Lebanon’s former prime minister Rafik Hariri. The rankings represent a snapshot of wealth taken on Feb. 11, the pricing date for publicly held stocks. For bios on all billionaires,go here.

Link here.

Do you have what it takes to be a billionaire?

Want to be a billionaire? It is going to take more than brilliance and elbow grease. Over the 19 years that Forbes has been tracking the world’s richest people, it has become clear than certain personality types are much more likely to make the list than others. Take the interactive quiz and see if you belong on the 2005 list -- or in the welfare line. Scores are based on statistics gleaned from the extensive Forbes billionaire databases.

Link here.


Milton Haynes has been struggling for more than a decade. In recent months, Mr. Haynes, 72, a widower and a retired machinist from Chatham, Illinois, had started to make a small dent in repaying tens of thousands of dollars in debts. But faced with the prospect of new bankruptcy rules -- approved by the Senate late yesterday in a 74-to-25 vote -- that would make it harder for someone in his situation to erase debts, Mr. Haynes met with a lawyer to consider a bankruptcy filing. “The news panicked me,” he said. “I keep trying to pay my bills, but I keep getting deeper into debt.” After meeting with his lawyer, Mr. Haynes decided to hold off. But bankruptcy lawyers around the country say they are hearing from lots of people like Mr. Haynes, and expect to hear from many more.

Final passage of the legislation by the House, set for April, is drawing near. The measure, which has the support of President Bush, could take effect as soon as this fall. The rules would make it harder for individuals to walk away from their obligations if they can pay off at least some of their credit card bills or other debts. “I will be sending out letters to clients saying if you have relatives or friends who are struggling, tell them not to wait,” said Norma Hammes, a consumer bankruptcy lawyer in San Jose, California. Supporters of the legislation, which include credit unions, banks and retailers, say that the tougher qualifying rules will curb abusive bankruptcy filings. Consumer bankruptcy filings have been falling since the end of 2003, with a total of 1.5 million in 2004, according to the Administrative Office of the U.S. Courts. A bankruptcy filing can leave consumers with a tarnished credit record for up to 10 years.

The most popular route for personal bankruptcy has been through Chapter 7 of the Federal Bankruptcy Code, which allows individuals and businesses to shed most unsecured debts not backed by assets, like their cars or homes. The new legislation would make it difficult for individuals to file for Chapter 7 if their household income is greater than the median for their state. As a result, more individuals are expected to file for Chapter 13, which under the new law will require debtors to pay off at least a portion of their debts over at least five years, making it more difficult to get a fresh start. “Trying to snag debtors who really can pay is not what this bill was about,” said Elizabeth Warren, a Harvard Law School professor who is among the loudest critics of the legislation. “This bill was about driving up costs for every family in financial trouble.”

“Many people could actually be forced to make an immoral decision and file for divorce," said Barbara May, a lawyer in Arden Hills, Minnesota. By doing so, she said, each partner would be assessed based on his or her individual income rather than as a couple. Still, the bill leaves some room for wealthier individuals to qualify for Chapter 7. For example, certain expenses will still be exempt under Chapter 7 from the minimum income threshold. These include contractual payments secured by a home or car. “If I am paying for a Mercedes, a vacation home, or a home ... that has a high-cost mortgage, those are deducted” from the means test, said a court-appointed bankruptcy trustee. An older car that works fine but is already paid off, he said, does not qualify. The legislation does not address some existing exemptions, like those for homes and “asset protection trusts” in a handful of states.

Link here.


After decades working in financial and real estate management, 61-year-old Bill Copeland retired to his version of the American dream: not full-time leisure but a less-taxing job. He is hardly alone. Close to two-thirds of Americans who have not yet retired say that when the time comes they will work for pay after retiring. The reason given most often has nothing to do with money: They simply want to stay busy. For Copeland, after years of 60- and 80-hour workweeks, that means “only” 40 hours a week at a job selling power tools and advising people on how to use them. “I’m doing something I want to do, that I know about and I can help people,” said Copeland, who works in Falls Church, Virginia, at a Home Depot -- a company that makes a special effort to attract older workers.

The political debate on the future of Social Security has focused fresh attention on retirement and how older Americans make ends meet. As they live longer, healthier lives, work is an option for an increasing number. In a recent Associated Press-Ipsos poll, 63% of those who have not retired said they thought they would work for pay after they retired. The reason given most often was “to stay busy”, followed by “to make ends meet” and “to have enough money for extras”. People find various ways to stay in the workforce -- working past retirement age, cutting back to part-time, or retiring and then taking a new job -- often with less stress, fewer hours and less money.

Joseph Quinn, a professor of economics and dean of the college of arts and sciences at Boston College, has extensively studied retirement patterns and believes people “tend to retire in stages, which I think is a healthy thing. For many people, retirement is not an event but a process,” he said.

Link here.


Since the Depression, General Motors has reigned as the world’s largest automaker and a pillar of American economic might. But now the company is broadly struggling and facing the humbling possibility that it will be displaced by Toyota at the top of the auto industry within a few years. General Motors, which controlled nearly half the American market as recently as the late 1970’s, held about one-quarter in February. Last week, the company said that it would produce 300,000 fewer cars and trucks in North America in the first half of this year, a 10% drop from a year ago.

Its European operations have lost money for five consecutive years and rising interest rates are expected to cool its lending division. With its shrinking profits dwarfed by those of Nissan and Toyota, G.M.’s debt is threatened with a downgrade to a junk bond rating, a move that could force it to pay more to borrow money. The company’s financial health is no trivial matter. With 7,600 dealers across the country, its eight brands, from Chevrolet to Cadillac, have long been American icons. The company has operations in 32 states. G.M. is also the nation’s largest private health care payer, giving coverage to 1.1 million Americans. Hundreds of thousands of retirees depend on the company’s pension checks.

G.M. might be in better shape than it was when it lost $23 billion in 1992 and was on the brink of bankruptcy, but many analysts say it will be treading water for years to come and extending economic distress across the industrial heartland around the Great Lakes.

Five years ago, at 47, Rick Wagoner became G.M.’s youngest chief executive. He was a protégé of John F. Smith Jr., who became chief executive after a boardroom coup in 1992. Mr. Smith pulled the company from record losses to a record profit by 1999. Mr. Wagoner did not promise to reinvent G.M. “The state of business at General Motors Corporation is strong,” he told shareholders in 2000, adding later that the company’s success “gives us a great chance to build off what we’re doing.” Today, however, many analysts say G.M. is still unable to solve some of the problems it had in 1992, namely the seemingly unstoppable surge of efficient foreign competitors like Toyota.

Link here.


TV sitcoms, especially the good-humored and good-natured ones like Friends, are a dying breed. By now, they have been all but squeezed out of prime time by reality shows that are tirelessly inventing new, and increasingly bizarre, ways to vote people “off the island”. A brand-new shocker comes from London. In the never-ending pursuit of producing “the ultimate reality TV show”, British Channel 4, famous for its scandalous Big Brother, is launching The Guantanamo Guidebook, where participants are subjected to interrogation methods allegedly used in Guantanamo Bay, including “religious and sexual humiliation, forced nudity, sleep deprivation and extreme temperatures”(BBC).

It is now “cool to degrade others and yourself on camera”, say media analysts, and the trend is catching on. Reality TV is relatively simple and cheap to make: unsteady camera shots and scandalous dialogues are often all it takes The mainstream reality shows are not far behind. While they do not necessarily encourage physical cruelty (for now), they do not want participants to be shy, either. Scenes where contestants “wash, use the toilet, or bicker with fellow housemates” are not just common -- they are the backbone of many mainstream reality shows.

One British media analyst says that, “the rise in reality humiliation at home and snapshots of torture overseas are part of the same process”. He is definitely on to something. Trends in popular culture reflect the overall social mood. That same mood governs the stock prices, so this “new wave” in reality TV has more to do with the health of the stock market than most people realize.

Link here.


On this 5th anniversary of NASDAQ 5000, there is an eerie sense of déjà vu. Unlike the excesses in equities five years ago, today’s bubble is more of an interest-rate and currency phenomenon -- complete with extraordinary compressions of interest-rate spreads in notoriously risky asset classes such as emerging-market debt, high-yield securities, and a broad array of credit instruments. In my view, these bubbles are joined at the hip, with today’s excesses very much an outgrowth of the post-equity-bubble defense tactics of America’s Federal Reserve. Excess liquidity and extraordinarily low real interest rates are indeed the “candy” of the current profusion of carry trades.

There is another important similarity with the heady days of early 2000 -- one that pertains more to the psyche of the markets. Emboldened by a recent outbreak of Goldilocks-type conditions in the macro space -- namely, new hopes of inflationless growth -- investors are becoming more and more combative at my rebalancing presentations. “You don’t get it,” they increasingly lecture me, “we live in a newly symbiotic world.” After all, they go on to say, as long as Asian central banks and their infinitely potent printing presses keep financing the excesses of the American consumer, why worry? “It is in everyone’s best interest that this continues,” is the punch line I hear all too often these days. And, of course, that is pretty much the way it has worked out so far, with the major nations of the world having managed to cope just fine with all the stresses and strains I seem so concerned about. I am getting challenged more and more these days as to why I believe imbalances will ever come to a head. Motive is not my concern. I certainly concede that it is in everyone’s best interests to put off the day of reckoning. The big question is, Can they?

The answer lies in what can be called the “paradox of stability” -- the possibility that a seemingly tranquil status quo is, in fact, masking a dangerous build-up of tensions. That is a clear risk today, in my view. While it is possible and, for some, even easy to draw comfort from the appearance of a new symbiosis between debtor (America) and creditor nations (mainly in Asia), there is a worrisome undercurrent of tensions now building. Such signs are evident on the real side of the global economy, its financial underpinnings, and also in the political arena. Ironically, this confluence of forces could well be reaching a critical mass just when investors have mistakenly concluded that this new symbiosis -- code words for yet another New Paradigm -- is rewriting time-honored macro rules.

For a world economy that looks stable on the surface, it is tempting to ignore the undercurrent of mounting tensions. Sadly, this is human nature -- seemingly destined to lapse back into denial at precisely the point when the unintended consequences of global imbalances have increased. Graham and Dodd said it best back in 1934 when describing the excesses of the late 1920s: “that new theories have been developed and later discredited, that unlimited optimism should have been succeeded by the deepest despair are all in strict accord with the age-old tradition.” That is a lesson well worth pondering on this 5th anniversary of the bursting of the Great Bubble.

Link here.
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