Thursday, April 26, 2012


"Education is the path from cocky ignorance to miserable uncertainty." -- attributed to Mark Twain (HT Jack Ciesielski)

Thursday, April 19, 2012

Choice Quotes from Leucadia

The annual shareholder letter from Leucadia National Corporation is always stimulating. A few passages I liked from the latest one, which I just got in the mail:

It is ironic that the financial shenanigans that begat the financial crisis in the first place are being treated and ostensibly cured by financial shenanigans of our own government.

We have read a lot about the ongoing deleveraging of America. In case you don't start and end your day with your nose in the Wall Street Journal, deleveraging is the newly rediscovered concept of paying your debts without reborrowing.

Jon here: I think they are correct. People seem to have come to see refinancing their debts as something almost like a political right attached to being a citizen. The idea that you actually have to pay them off is...un-American!

The debt elephants in the room are national and state governments. 

The Federal Reserve has said it will continue to suppress interest rates for the foreseeable future, postponing the pain for the overleveraged as well as postponing the inevitable witching hour when governments are forced to take the bitter medicine of raising taxes, cutting expenditures, or both. 

The full letter is in the new annual report, which is here. To be clear, I make no recommendation on the stock either way. The guys who write the letter -- Ian Cumming, Chairman, and Joseph Steinberg, President -- are very smart and there is much to be learned from their point of view and their business history.

By the way, I do think that if we tried to bring our budget into balance or near-balance immediately, either through raising taxes or cutting spending, it would cause more political pain than our system can handle. But we do need a clear and credible path to doing that, else we risk losing the faith of the creditors who buy our bonds.

Wednesday, April 18, 2012

Generational Shift, as seen by Seth Klarman

Much wisdom in this passage from last year by Seth Klarman, a money manager:
Most of us learned about the Great Depression from our parents or grandparents who developed a "Depression mentality," by which for decades people shunned leverage, embraced thrift, and thought twice before quitting their secure jobs to join risky ventures. By bailing out the economy rather than allowing the pain of the economic and market collapses to be felt, the government has endowed our generation with a "really-bad-couple-of-weeks-mentality": no lasting lessons are learned; the government endlessly intervenes in the economy, and, ironically, the first thing to strongly rebound from the 2008 collapse isn't jobs or economic activity but speculation.
This quote is from an annual letter of his that came out about a year ago. Klarman manages money in Boston, through Baupost Group, which he founded.

During the crisis, facing the very real threat of the payment system collapsing, the federal government had little choice but to do big bailouts of one kind or another. That said, side effects have to follow when risk-taking gets subsidized so heavily. More could have been done to minimize them. For example, managers and directors of banks who needed TARP money should have been sent forcibly into retirement, to vindicate the principle that public funds are not supposed to be used to support under-capitalized private businesses. Politically, this is easier said than done, of course, but it should have happened.

And while we are on the topic of financial culture: a client of mine commented yesterday that her children are learning that putting money away in the bank earns you only pennies per year. That is not a good for the culture, either.

Wednesday, April 4, 2012

Inflation is a Risk, Even if Not Inevitable

Latest from Martin Feldstein, here. A well-balanced view of the possible outcomes that will flow from quantitative easing in the U.S.

Monday, April 2, 2012

Profit Margins and Wages (Email to a Friend)

A friend emailed last week, asking for updated figures on U.S. corporate profit margins and wages. This is an edited and modestly improved version of what I sent him:

With the caveat that I’m crunching numbers that other people who work regularly with these stats know more about than I do, my observation is that based on Dept. of Commerce data (NIPA table 1.14), corporate profits remain well above the long-term average, and employee comp is well below.

Specifically, in 2011, compared to the total gross value added by corporate businesses, total compensation to employees was 58.7%. This was well below the long-term average (1929 – 2011) of 64.2%.

The flip side of this is that corporate profits, as a percentage of gross value added, were 9.6% in 2011. This was well above the long-term (1929-2011) average of 7.1%.  (The profits are after interest payments and taxes, and include adjustments this series makes for inventory valuation and consumption of capital, i.e. depreciation.)

The cause of this higher profitability and lower comp to workers? Up for debate. Things I suspect are reduced bargaining power of workers (weaker unions, greater global competition); deficit governmental spending (spending must go down from here, or taxes up, or both); low interest rates; and less competition by businesses (weaker antitrust enforcement). These aren’t mutually exclusive. The last factor, less competition and weaker antitrust enforcement, might be hard to quantify. Also, are there governmental benefits that act as compensation to workers, but are not captured by these stats? I don’t know, but that’s a question it would be nice to have insight into.

Increasing financialization of the economy might also be a factor. You could think of that as a somewhat unproductive finance sector siphoning off profit, and I think that is true to a degree, or, less polemically and more accurately I think, the fact that more and more work is done by machines and the owners of those machines get paid something for their capital. However, labor's share dropped sharply over the past decade, and that is in part what makes me suspect that it may well head back up. Even in 2003, for example, the percentage was 64.5%, which was entirely in line with the multi-decade average, and well above the current 58.7% figure.