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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.”

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.