Monday, November 26, 2012

Reinhart & Rogoff in Barron's

The new Barron's interview with Carmen Reinhart and Ken Rogoff is well worth reading. No registration is required, at least for now.

The title is "Top Culprit in the Financial Crisis: Human Nature." They do their homework. Rogoff sees GDP growth being depressed by 1% for a decade or more (probably counting from the onset of the crisis), and advocates higher inflation.

Tuesday, November 20, 2012

There is Hope

A cluttered desk is not uncommon among money managers, even with digital formats reducing the need for everything to be on paper. There is a lot of material on public companies to try to keep up with.

So I was cheered to see this photo of Einstein's office, taken on the day he died.

Monday, November 19, 2012

Investment versus Speculation; Keynes

A good quote from J.M. Keynes: "Investing is an activity of forecasting the yield over the life of the asset; speculation is the activity of forecasting the psychology of the market."

Lots of good Keynes material at this site. This chronology of his life is particularly worthwhile.

Friday, November 16, 2012


Breaking news: TNInvestco was a bad idea.

It was basically a give-away by Tennessee's former governor, Phil Bredesen, to some politically-connected venture capital investors. It is awfully hard to take this program seriously, and I don't. In essence, it amounts to the government saying, to some very plugged-in investors, "Here's $20 million for each of you. See how you do investing for a few years, in Tennessee companies. At the end of it, give the taxpayers back half, and you keep the rest. But pay yourself a fee from the corpus in the meanwhile, of course."

Not only was the concept very poor, but the oversight is giving cause for some concern, too. This is according to a piece by Ken White in the Nashville Post, and another from Brian Reisinger at the Nashville Business Journal.

[Edited 12/10/12]

Thursday, November 15, 2012

An Athenian Dialogue

A conversation I had in Athens this past summer is posted online here by Paul Solman.

The dialogue was with a native of the city, Georgios Michalopoulos. He is a few months from finishing his Ph.D. in modern Greek history. Georgios gave me a little perspective on the culture and economy of Greece. You will need to click the link to see exactly how.

Wednesday, November 14, 2012

A Modest Proposal from Mr. May

My friend Josh May suggests that the capital gains tax rate on stocks be set at time of purchase, and that it vary according to the price-earnings ratio of what you buy.

His idea is that if you buy a very cheap stock, you get a low tax rate. A 5 P/E would get you a 5% long-term capital gains rate. If, on the other hand, you buy a nosebleed IPO stock at a 70 P/E, 70% of your profits (if you make any, which is not likely) would eventually go to the IRS. We should encourage sound investment and discourage speculation, and this is Josh's way of doing it.

I like this idea! Though it is not exactly practical -- and Josh is proposing it with tongue pretty firmly in cheek. One problem is that some companies are losing money, and their stocks have no meaningful P/E.

He has a point, though. Could the tax rate vary based on the 10-year Shiller P/E of the whole U.S. market on the day of purchase?

I have one other version, more workable, of the May Plan. It may catch the spirit even as it abandons details: simply have the capital gains rate go down over time. Current law does this, but only with a single bump down (from the ordinary income rate to the lower capital gain rate, at the one-year mark). We could do more. The longer you hold, the lower should be your rate. Pay a 40% tax on your gains at one year, 39% at two, 38% at three, and so on. We could stop the discounting with a rate of, say, 21% when an investment is held for 20 years. (Keep going, if you think that would be better policy.)

This would help get people to think with a longer time horizon.

I guess this is a variant of a Tobin tax -- tax as a way of dampening too-frequent trading, i.e. speculation.

[Edited 11/14/12.]

Monday, November 12, 2012

James Mackintosh on Stock Market Valuation

Good piece by Jame Mackintosh in the FT this weekend on the valuation of the U.S. stock market. (Registration required.)

Saturday, November 10, 2012

Fiscal Bluff

Calculated Risk has suggested that the fiscal cliff could more accurately be called a fiscal hillock, or, given the gamesmanship taking place, a fiscal bluff.

I mentioned this to my ever-insightful friend Josh May. He replied, "yeah, but you can still fall off a bluff."

Thursday, November 8, 2012

Vampires and Zombies

I think I know why vampires and zombies have been especially popular in fiction lately: bankers are vampires, and their bailed-out institutions are zombies.

In 1950s science fiction, a repeated theme was invasion by Martians. This likely reflected, to a degree, the public's fear of Soviet expansion during the Cold War.

OK, so, I am just joking, for the most part, about why zombies and vampires are popular, but when it comes to what is going on deep in our collective unconscious, you never really know. This piece by Yves Smith, on Japan's experience creating financial zombies, is what got me thinking about the businesses that walk dead among us.

Wednesday, November 7, 2012

And the Winner is...

...Nate Silver. Good piece by Barry Ritholtz on him. I recommend Silver's book, The Signal and the Noise, regardless of your politics.

Thursday, November 1, 2012

Trouble for the Fed?

I would imagine that articles like this recent one about dividend recapitalizations (registration at WSJ required) will give doves inside the Federal Reserve some pause. They have got to be worried about blowing air into yet another bubble. The market for leveraged loans is in the process of getting bubbly again; with yield on safer instruments held artificially low by the Fed, investors and banks seem to be getting sloppy again.

In my imagination, at least, the hawks within the Fed's walls, like Jeffrey Lacker of the Richmond Fed, are passing out copies of this article, saying "I told you so." Are the doves thinking twice, at least privately, and beginning to consider more seriously the idea that, as bad as doing less might be, it might be preferable to doing more?

The Fed will lose a lot of credibility if its fingerprints appear on another financial market debacle.

This is speculation on my part. I wish I could peek into those discussions now. Preventing another debt bubble is not the only thing that matters to the Fed's board members, but I'm sure they must be sensitive to signs of one growing.

Of course, part of the demand (not the supply) for dividend recap loans could stem from a desire to get ahead of tax increases on dividends that will hit at the start of the year. It will be interesting to see if the pace of dividend recaps changes next year.