Business & Economics: September 2007 Archives

This has been a hard lesson to learn, but as an investor with a long time-horizon I'm beginning to love the bear.

If you're like most investors, you cheer for the bull. This makes sense if you need to cash out your stock investments in the next 3-5 years. Table: Windows of OpportunityBut otherwise, you've got it all wrong—you need to start pulling for the bear.

Why? Because during the investing phase of your life, you're going to be a net buyer of stocks for many years to come. You want your monthly investing dollars to stretch as far as possible, acquiring as many stock and stock fund shares as you possibly can. And that happens when prices are down. ...

You like it when you can get bargains on clothes, electronics, furnishings, cars, vacations, and houses. Nobody cheers when those things cost more. Similarly, you should also like it when you can get bargains on stocks.

So, learn to love the bear! The truly long-term investor realizes we need more of them. There have been only ten in the past 40 years. ...

In fact, that's what we may be experiencing right now, but it's too soon to say for sure. At its lowest point to date, the drop has been only 9.4% from the July high. The selloff may already be over and the bull market about ready to resume (drat), or perhaps the market will yet fall -10% to -19% into that mini-bear territory and present a fine window of opportunity for buyers (yes!).

If it's the latter, don't fret and moan along with your friends (who thus reveal their short-term way of thinking despite protestations to the contrary). Enjoy the fact that bargains will continue to be available in the coming months. Eventually you'll be the richer for it!

I was buying into the latest correction and have made more than 6% gains on those purchases just over the past few weeks.

It is my decidedly non-expert opinion that the United Auto Workers union leaders called a strike to pave the way for future concessions to General Motors. The UAW knows that they're going to have to help GM cut costs, but the union leaders don't want to look weak; the strike is just a show for the benefit of union members who wouldn't be willing to compromise if they didn't see it as their only option.

I think Peggy Noonan's "now he tells us!" criticism of Alan Greenspan is right on the nose. The money-graphs:

The book has merits--it is blessedly lucid on how the Fed works and how Fed-heads think--but there is within it a great disconnect. I was thinking about this when I got a note from a former U.S. senator who groused about "the phenomena of high-level public officials 'bravely speaking out' after they have left office." He scored Mr. Greenspan as "perfectly free to have spoken out about the need for the President to veto more spending bills on numerous occasions when he was testifying in public." My correspondent says Mr. Greenspan's "total silence" while in office does not exactly qualify as "bravely speaking out."

The former senator has a point. It can be summed up as: Now you tell us? It doesn't take courage to speak clearly when no one can hurt you. It takes guts to be candid when candor can earn powerful enemies.

U.S. government officials owe the people who pay them, and who have raised them high--that would be the American taxpayer--real-time wisdom. They owe us their best thinking. Sometimes this is uncomfortable. But that's the price you pay for the car and the honors and the security detail and the special U.S. Army jet that flies you home, alone, across the Atlantic, on the day after 9/11.

Mr. Greenspan was reappointed for a three-year term by President Clinton in 2000. He allowed himself to be painted as a supporter of the Bush tax cuts in 2001. He was reappointed by President Bush in 2003. Mr. Bush is now deeply unpopular. Mr. Greenspan, retired and selling a book, has discovered Mr. Bush's deep flaws. The timing is all so convenient.

I'm less qualified to comment on Jim Cramer's accusations of poor interest rate manipulation, but they sound reasonable when you like up the facts like he does.

What was Bernanke saving us from? What caused the mess that forced him to take drastic action, not one of those itty-bitty quarter-point interest-rate jobs? How about a chaotic, frozen, dysfunctional economy fueled by defaulting mortgages based on irresponsible teaser rates that his predecessor pushed hard and often for every prospective home buyer to take, including those who could ill afford them? Where’s that in the book? And then, after hooking millions of unqualified buyers to take low-interest teasers that would reset in two years, Greenspan gaffed the borrowers with fourteen straight interest-rate hikes that put the reset mortgage rates out of reach for all but the wealthiest. Those vicious and, I believe, foreseeable resets—foreseeable if you are going to set the rates, as Greenspan did—are causing a national wave of defaults the likes of which haven’t been seen since the Great Depression. And why did Mr. Prudent champion these reckless teasers almost as heavily as the endless Ditech and Countrywide television pitchmen who buried us in these adjustable-rate nooses did? Because he needed to work his way out of the dot-com crash by stoking the housing market. And what had caused the dot-com bubble? That would be the low margin rates that fueled ridiculous speculation in junk stocks—rates controlled by, you guessed it, our lovable hero, Alan Greenspan. At any given time the author of The Age of Turbulence could have prevented, well, the Age of Turbulence, by simply raising margin rates, by discouraging the use of exotic teaser mortgages, and by encouraging regulations that would have ended the travesty of giving money to speculators to flip houses. But Greenspan, an acolyte of libertarian Ayn Rand, disdains regulations. Instead, he seemed to like the power and mystery of endlessly taking rates up and down, disrupting the whole economy instead of managing discrete stock-market or house-speculation bubbles. Just a little regulation could have avoided both of those bubbles, with no need to overstimulate and then wreck the overall economy with crushing rate increases like the ones with which Greenspan stuck Bernanke.

Hindsight is 20/20 and all that; I think Ms. Noonan's observation that our public servants aren't willing to share their honest opinions in real-time is more important than dissecting specific policy decisions from the past.

For the past couple of months there has been a deluge of "pay off your loans early!" ads on the radio and television. Maybe I missed them, but I don't remember such a strong push in this direction even a year ago. My theory is that lenders are behind the movement and are eager for borrowers to pay of low interest rate loans from several years ago so that the money can be reloaned at higher rates to new borrowers.

Citibank is offering a new Citi CashReturns credit card that offers 5% cash-back on all purchases for the first three months. That's a huge amount of money. If you charge $2000 per month and normally get 1% back, you could get $240 extra in your pocket during the promotional period. I'm getting one.

(HT: My Money Blog.)

Here's a rather pessimistic view of the prospects for software engineers/programmers in America over the next decade or so. I personally don't buy it.

In their latest Occupational Outlook Handbook, the US Bureau of Labor Statistics says that employment of software engineers and system analysts is expected to increase 'much faster than the average' through 2014 (here, and here). In contrast, employment of programmers is expected to increase 'more slowly than the average,' with outsourcing given as one of the major reasons why (http://www.bls.gov/oco/ocos110.htm#outlook). However, from the stories I read from American programmers on the Net, the profession is lost. Is the government wrong, or lying, then, when it implies that software engineers and system analysts can expect to have a good future? As an American, am I a fool if I decide to undertake this for a living?

Maybe I'm naive, but everyone I talk to seems to agree that outsourcing software appeared more promising than it actually was. Outsourcing to another country can be useful in some circumstances, but neither India nor China is a bottomless pit of brilliant engineers. Their costs are rising, and their available talent pools are drying up.

What's more, as these countries get wealthier they'll begin to consume more of the products that engineers create. Demand might be trailing behind supply at the moment, but the percentage of potential engineers is no higher in India or China than in America -- and it's probably much lower due to nutrition, education, disease, and poverty. The potential consumers of engineering products, however, are vast.

Finally, engineering products tend to increase quality-of-life in a scalable way. Life will get both better and cheaper... and eventually we humans will earn very little money and need even less because robots will do all the work!

(HT: Nick.)

Northrop Grumman has released a comic book to illustrate the use of its various unmanned aerial vehicles. Seems somewhat childish on first-glance, but I've read through countless use case documents and this is by far the easiest one I've ever seen to comprehend.

(HT: Bernardo.)

Based on Michael Lewis' definition I most certainly am "poor", but I can't help but feel that there's a nugget of truth in his tongue-in-cheek complaints about how poor people ruined the housing market.

So right after the Bear Stearns funds blew up, I had a thought: This is what happens when you lend money to poor people.

Don't get me wrong: I have nothing personally against the poor. To my knowledge, I have nothing personally to do with the poor at all. It's not personal when a guy cuts your grass: that's business. He does what you say, you pay him. But you don't pay him in advance: That would be finance. And finance is one thing you should never engage in with the poor. (By poor, I mean anyone who the SEC wouldn't allow to invest in my hedge fund.) ...

Call me a romantic: I want everyone to have a shot at the American dream. Even people who haven't earned it. I did everything I could so that these schlubs could at least own their own place. The media is now making my generosity out to be some kind of scandal. Teaser rates weren't a scandal. Teaser rates were a sign of misplaced trust: I trusted these people to get their teams of lawyers to vet anything before they signed it. Turns out, if you're poor, you don't need to pay lawyers. You don't like the deal you just wave your hands in the air and moan about how poor you are. Then you default.

I think the central thesis of his comedy is correct: both the lenders and the borrowers were foolish to expand the sub-prime mortgage market. Credit scores mean something, and both borrowers and lenders ignore them at their peril.

(HT: Instapundit.)