Creditor.net

Yesterday I got the book Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse. I read it from cover to cover in a single sitting, as it is a short 158 page book. The book looks at money, bubbles, and the business cycle through the eyes of an Austrian school economist.

I rate the book 9 out of 10…would have liked a few more pages, but it is a great book. Here are my notes from it…

Government spending often mis-directs capital flow (and thus resources) from effective portions of the economy toward wasteful ineffective business interests, in many cases creating bubbles. But the government rarely, if ever, blames itself for its errors (unless it is passing the blame to competing political parties).

Political ideology is irrelevant: both political parties in the United States claim to be for the betterment of different groups (or, all of us, through different ways), but both take money from the same special interests, and promote the same programs.

Forced lending expansion generally occurs though lending to loan candidates that were generally seen as unworthy in prior evaluations. Much of the housing price bubble came from pushing “affordable housing” and after the home price bubble popped now the government wants to waste capital on propping up the prices of those same assets, promoting losing trading positions on both sides of the same trade!

Interest rates, when not controlled by a central body, help provide a signal to business owners to help coordinate production over time. But when they are controlled by a central body they create artificial demand and signal resources beyond the scope of available. A central body artificially lowering interest rates shifts capital toward long-term capital intensive projects. In many cases these projects never get completed as the cost of credit changes abruptly in the middle of the project due not to market forces, but through the judgement of the federal reserve. Monetary policy manipulation creates the business cycles, and recessions are a necessary part of them.

Businesses that are the most capital intensive are most heavily influenced by interest rate changes. Mining > Manufacturing > Wholesale > Retail > Services

Artificial booms/bubbles increase costs for both legitimate and illigitimate businesses, as the legitimate businesses must compete against the illigitimate businesses for resources in an environment with higher costs inputs in complementary factors of production.

Pushing for deregulation while insuring losses via taxpayers is not actually pushing for deregulation. The Federal Reserve bailing out huge screw ups encourages moral hazard, and mis-allocates resources from the competent to the incompetent. The Greenspan put is a popular economic phrase used to describe the Fed’s repeated loosening of monetary policy to artificially hold up asset prices.

Tax payers were lied to in order to ram through sleazy and unjust banking bailouts. Research from a Federal Reserve study proves this. To this day tax payers do not know where all the money is going…just that it is going somewhere. Gerald O’Driscoll, a former vice president at the Federal Reserve Bank of Dallas, said “Nontransparency in government programs is always associated with corruption in other countries, so I don’t see why it wouldn’t be here.”

Scattered (unpredictable) bailouts make businesses hold back on large investments AND liquidation of toxic assets due to uncertainty.

Many larger businesses actually like the additional of new marketplace regulations like Sarbanes Oxley if they make it prohibitively expensive for newer and smaller competitors to compete.

“Government intervention in banking does not mean a more sensible, more responsible approach to lending will replace the wild risks of recent years. Wild risks will still be taken, except with the beneficiaries being selected more deliberately from amongst the ranks of politicians’ friends and various favored constituencies.”

Short sellers help set market floor values, separate the good from the bad, and thus help regulate markets. James Chanos had the financial self-interest to dig into Enron’s books and find the fraud.

Consumer prices can stay flat during inflation if there is an increase in goods and services available…in many cases inflation will first show up within a specific asset bubble. Even if prices are flat, inflation can still rob us of quality of life that would have been gained through lower prices (and increased purchasing power). Deflation is not a bad thing, especially since it helps retain the value of currency and encourage savings. Many past periods of deflation, like the 1870’s, were economically prosperous.

WWII economics data in the US is mostly smoke and mirrors. Ludwig Von Mises said “war prosperity is like the prosperity that an earthquake or a plague brings.”

School children are lied to and told that Hoover was a laissez faire capitalist, when FDR’s running mate said that Hoover was “running the country down the path to socialism.”

Describing the creation of the Federal Reserve: “Now we can either believe that this is the first and only time in history in which an interest group drafted legislation aimed more at the public good than their own benefit, or we can consider the possibility that its intent was to entrench special privileges for one particular industry at the expense of the rest of society.”

Fiat money is parasitic to an existing currency based on a commodity (or collection of commodities), used to confiscate wealth and pass it on to friends of the government. Commodity based money increases personal freedom by limiting the government’s ability to confiscate wealth.

When the government increases the money supply it goes to the politically connected organization first, whereas the average consumer sees the inflation before seeing any additional income through a raise. You or I have to offer something of value to have money to spend, but the politically connected organization waters down the currency value because they are given fresh new money without first providing any goods or services.

Production, not consumption, drives real wealth creation and lasting economic growth.

Like the side effects of many recreational drugs, the long-term effects of central monetary policy are often the opposite of the acute effects they are trying to promote.

The book ends off with a killer quote from Mencken “The truth, indeed, is something that mankind, for some mysterious reason, instinctively dislikes. Every man who tries to tell it is unpopular, and even when, by the sheer strength of his case, he prevails, he is put down as a scoundrel.”

We paint recessions as being a bad thing, but rarely do we talk negatively about credit expansion. Market Ticker explains why recessions are a mathematically necessity in any banking system that uses fractional reserve lending:

As the “spread” between production and net interest expense rises, the economy falters. A higher and higher percentage of the loans ultimately cannot be paid back, even productive loans, because the net interest expense over time exceeds the productive gain of the person who takes them out. The presence of this ever-widening spread, which is inherently part and parcel of fractional reserve banking, means that recessions are necessary and more importantly, some people who have taken out loans and some people who made loans must, during those recessions, go bankrupt.

That is the purpose of a recession – to clear out the excess indebtedness along with excess capacity, resetting downward the “spread” between net interest expense and gross output (GDP).

While many unfit enterprises go bankrupt, forced entrepreneurs create the next wave of innovation that will rebuild the economic system, but failure and time are needed to clear out the underbrush before the next forest is built. If we prevent failure we prevent success by debauching currency and stealing from the winners to pay for the continued failure of the losers.

I just got done reading Howard Lindzon’s The Wallstrip Advantage book on my new Amazon Kindle 2. His basic philosophy of investing is to reduce clutter and noise and to ride trends you find on the all time highs list.

He reminds that most news outlets are selling old news (with the bias toward being newsworthy) which clouds your vision and judgement, over-representing trends that already exist or are on their down slope.

Major news and events create trends that shift capital flows and thus underlying stock prices, but you have to think beyond the obvious (everyone already knows the obvious and the market is trying to price that in).

Stocks at or near all time highs are more likely to outperform the markets than beaten down stocks…

• stocks are a game of supply and demand and price appreciation occurs in part due to underlying value, but also in part to an imbalance of supply and demand
• the stock market exhibits power law characteristics where the few top performers significantly beat the average
• growth stocks are the hardest to value (so have a great likelihood of being undervalued, especially if you feel you understand and resonate with the growth story)
• they have momentum behind them
• they are what smart money is betting on (giving you free access to their work)
• the longer they have been trading sideways before breaking out the more upside potential there may be in the trend

Set personal boundaries to minimize risk (ie: give an IPO 6 months before investing in it and only invest in stocks that are at or near all time highs). Take profits as a stock appreciates to lower your risk profile and allow you to ride out the remaining portion longer.

Set a stop limit like a 10 average true range (ATR) to force yourself out of losing trades early, and winning trades that start heading south. you can also set a trailing stop limit of something like 10% on stocks.

Look at macrotrends worth investing in

• information – market makers and web native companies have excellent growth prospects
• sins/vice
• war
• health/wellness/vanity

In down markets buy brands at a discount that exist in strong lasting growth trends, but avoid spending too much on them in up markets.

Some killer quotes from the book

• “Never let trades turn into investments, but be willing to let investments become trades.”
• “The best thing about this information trend is how difficult it is to value. Information leads to knowledge, which leads to wealth. This leads to new power structures.”
• “While it has never been cheaper to produce content or distribute content, it has never been more difficult to build an audience.”

Some recommended sites from the book

• Wallstrip
• Howard Lindzon
• Investor’s Business Daily
• Jeff Matthews
• IPO Home
• MyTrade
• Fred Wilson
• Brad Feld

Overall I think this book was pretty good stuff…it helped explain why the winning stocks tend to keep winning while losing stocks tend not to be a great value, despite the psychological trap of looking for a deal.

centralize and bankrupt
here there is nothing left to corrupt
grand ambitions and broken dreams
but we must serve our master

born into it
time to get a loan that pays
bigger faster better
I need more

McMansions and happy meals make not a man rich
in health or spirits or wealth
someday somebody is going to pay for this
but who?

print enough to get through the day
kick the can
call it a plan
and who could have saw any harm in saving the day

trade away the future
just keep borrowing, consuming
one day it will all be ok
everyone will get ahead

except that raghead
we dropped a bomb on his head
mass murder beats socialism
in a democratic free capital society

regulate and subsidize
surprise surpirse
the math works out
move some digits and say its free

ignore inflation
we will tax the rich
they will fix the systemic risk
financial terrorists are our friends

if I can borrow a moment and a dollar, please let me pledge a trillion
have full faith, I have bought my way, and I will make you pay
not for service or goods or value
but simply for existing in perpetual serfdom

One of the biggest things that separates amateur investors from professional investors is the idea that money always needs to be at work or you risk missing out and losing to inflation. Most every organization in the financial and investing community benefits from ignorant money coming to the table and betting against them. But fewer and wiser trades built off from greater confidence are a better strategy for the average investor.

It’s a luscious mix of words and tricks
That let us bet when you know we should fold
– The Shins

Another big thing that separates amateurs from professionals is stop losses. Nobody is right 100% of the time, and a big part of growing wealth is minimizing losses. Tight stop-losses help you maintain gains and prevent losses.

Rule No.1: Never lose money. Rule No.2: Never forget rule No.1. – Warren Buffett

Banks scammed consumers buying homes through predatory lending and illegal appraisals, artificially boosting home prices. Those who were smart enough to stay out of that game lost financial power to inflation caused by the creation of trillions of dollars in false wealth.

The real estate bubble burst. Banks essentially stopped lending to each other because they no longer trusted each other’s books. So the banks needed bailed out for engaging in risky bets. To stop the financial melt down US taxpayers were fleeced of hundreds of billions of dollars to bail out those same banks. Such a move is/was cause for concern, causing many investors to want to diversify out of U.S. Dollars and invest in commodities like gold (one friend said he was buying dry food and has a gun!)

Some banks, like J.P. Morgan, used the fleeced taxpayer money to short hot commodities like gold, cratering the price of gold.

With many central governments having budget shortfalls and fast declining economies (even with record low interest rates) many may need to sell their gold stakes.

No matter where you put capital, your money is being used against you – unless you are a bank. 🙂

This reminds me of how the US government gave defense contractors classified information so long as they would go on TV and lie to the US public, selling the Iraq war.

The mortgage market is such a mess that it is being covered on 60 minutes.

Some of the mortgage loan modification “fix” programs are pretty crappy, trying to turn underwater homeowners into indentured slaves:

Home owners! Accepting this ’solution’ means you:

• acknowledge the full debt regardless of the value of the home;
• waive all rights to fraudulent or predatory lending claims in the future;
• turn your loan into a full recourse loan that could follow you for life even if you choose foreclosure down the road;
• remain underwater, full-leveraged, renter for the rest of your life (in most cases);
• will save no money at 38% housing debt-to-income ratio plus all other debts;
• may not discharge any of this mortgage debt through any bankruptcy even after foreclosure;

If widely accepted by home owners, this will ruin the American consumer and make housing a dead asset class for decades. If you are in a serious negative equity position when signing these forms, as most are, remember that you will:

• never be able to sell your home
• never be able to buy a new home
• never be able to rent your home due to owner occupant provisions
• be responsible for the full loan amount even if the value of your home keeps dropping for the next 10-years.

The 38% debt-to-income ratio on top of all of your other debt means you will save no money and live hand to mouth to keep this underwater roof over your head.

The alternative to the never-ending mortgage loan would be to cram down the mortgage principals to an amount that could actually be paid back. The blog post linked to had a couple great comments about why cram downs would be just in this case. Not only were many home buyers duped into these loans by criminals, but cram downs exist on virtually every type of loan except for primary residence loans:

Currently, in bankruptcy, every other type of property which is used as collateral for a loan, other than a primary residence, was subject to a “cram- down.” The only reason I can figure that primary residences were recently excluded from cram-down was so that average Americans could be taken advantage of by creditors. (This proves once again that our Congress is owned by the finance industry.)

If you don’t like cram-downs for primary residences because contracts are sacred, then why are cram-downs allowed for every other type of property. You name it, private jets, vacation homes, luxury yachts, machine tools, ect. are all CURRENTLY subject to the cram-down. Its absurd that only home mortgage contracts are sacred. Simply put, screwing the little guy is what the cram-down exception on primary residences is all about. There is simply no reason to allow primary residences to be treated differently than every other type of property.

and

Well, a contract is as good as your legal team. Chapter 11 is pretty cool with contracts: Shred it. Thought you had a deal, a labor agreement, a pension — well you did. Management gets a bonus as they enter the market again, cleansed of all their sins. The government encouraged commercial banks to hold preferred in F and F, and what happens?

And as far as “mark of a free society”, maybe you’ll be able to appreciate your situation . I’m one of those conservatives that figures all societies are feudal — despite disguises. Notice the King has opened the grain stores for the chosen.

Your pension can suffer from cram down, and nearly every type of asset qualifies for them – except primary residence. The bankers can get a multi-trillion dollar bailout for engaging in massive fraud, but you are a pile of crap if you don’t pay all your debts. At least your tax dollars are hard at work, working against you to prop up our Ponzi scheme banking system. Further proof that the American dream of owning your own home is one with a high price tag attached.

Eric Oberg ran a 2 part series explaining why the returns on many double leveraged EFTs are less than one might expect.

The leveraged trades against the S&P 500 represent a small amount of volume compared to the EFT volume short financials or real estate (like SRS)..thus the trades against more liquid indexes do a better job of tracking their goal (of providing a leveraged mirror of what happened in the marketplace). In the smaller markets the derivative leveraged trades create a lot of marketplace volume that can overshadow the market and dislocate capital.

If someone buys that short-sided ETF from a market maker, the market maker does not really have “the other side” to mitigate his risk, thus he either waits for someone to unwind a pre-existing position or he goes out and shorts the underlier. This puts pressure on the underlier, which creates more interest in being short. This, magnified by the leverage, magnifies the volatility, which magnifies the negative convexity, which eats into returns. Thus the “savvy trader” who thinks he or she is doing a “smart trade” is contributing to his or her own underperformance while still having the right idea — the wrong execution of the right concept.

Education is Ignorance

Everybody reads the first paragraph of The Wealth of Nations where he talks about how wonderful the division of labor is. But not many people get to the point hundreds of pages later, where he says that division of labor will destroy human beings and turn people into creatures as stupid and ignorant as it is possible for a human being to be. And therefore in any civilized society the government is going to have to take some measures to prevent division of labor from proceeding to its limits.

…

There’s a side current here which is rarely looked at but which is also quite fascinating. That’s the working class literature of the nineteenth century. They didn’t read Adam Smith and Wilhelm von Humboldt, but they’re saying the same things. Read journals put out by the people called the “factory girls of Lowell,” young women in the factories, mechanics, and other working people who were running their own newspapers. It’s the same kind of critique. There was a real battle fought by working people in England and the U.S. to defend themselves against what they called the degradation and oppression and violence of the industrial capitalist system, which was not only dehumanizing them but was even radically reducing their intellectual level. So, you go back to the mid-nineteenth century and these so-called “factory girls,” young girls working in the Lowell [Massachusetts] mills, were reading serious contemporary literature. They recognized that the point of the system was to turn them into tools who would be manipulated, degraded, kicked around, and so on. And they fought against it bitterly for a long period. That’s the history of the rise of capitalism.

Comment on the $3.3 billion in TARP money given to Amex

Another theory not heavily subscibed to (but growing now that it is more obvious) is that large corporations are actually Antimarket, meaning they don’t fit the idealized free market that is stated as the moral driver of our economy….they actually are in the business of restricting competition and teaming with governent to command the economy at the expense of the consumer. Autos, Big Pharma, the Weapons industry…

A Highly Evolved Propensity for Deceit

Deceitful behavior has a long and storied history in the evolution of social life, and the more sophisticated the animal, it seems, the more commonplace the con games, the more cunning their contours.

Don’t Regulate the Free Markets!

Here’s one of the simple truisms that gets lost in the political (i.e., bumper sticker) discussions.

Don’t regulate the free markets! Don’t interfere with innovation! Don’t stifle incentives!

What bullshit.

One of the best ways to win a debate is to control the language used. This was one of the elements George Orwell was discussing in 1984, and why the language in the novel was degraded to phrases like “double plus good.” All nuance was dismissed. He who controls the language controls the political economy is what Orwell was saying. In modern times, its done not with boot-jacks and guns, but with catchphrases and clever marketing. Its not as heavy handed, its just more insidious.