http://opinionator.blogs.nytimes.com/2012/10/08/dangerous-in...Dangerous IntersectionBy STEVEN STROGATZA field known as catastrophe theory explores how slow continuous changes in the force applied to a system (like the gradually increasing load on a camel’s back) can trigger rapid discontinuous jumps in its response.... ...intersections [between a line and a curve] often represent answers. Solutions. States of equilibrium. In mathematical models of economies, or ecosystems, or other kinds of dynamical systems, intersections are where variables come to rest and settle down. In economic models, for example, the equilibrium price of an item is set by the intersection of supply and demand curves. If that intersection suddenly vanishes, the price has to jump.What’s especially worrisome is that the jump occurs without warning. An intersection, by its very nature, doesn’t fade away. It exists until it doesn’t.......the “fold catastrophe” is the most basic scenario in catastrophe theory. It’s important because in its aftermath there are no other intersections in sight. Whatever the system is going to do next, it’s going to be something radically different. It has to leap to a different state.... [end quote]This article reminds me of the striking, memorable 2006 article by John Mauldin:http://www.mauldineconomics.com/frontlinethoughts/fingers-of...Fingers of InstabilityBy John MauldinAugust 25, 2006This week we revisit some ideas on how change occurs. We are in a transition in the world economy, and it sometimes helps to think about how these transitions take place. What is the mechanism for change? Can we see it coming soon enough to avoid the problems and take advantage of them? ...http://www.mauldineconomics.com/frontlinethoughts/how-change...How Change HappensBy John MauldinAugust 17, 2012Imagine, Buchanan says, dropping one grain of sand after another onto a table. A pile soon develops. Eventually, just one grain starts an avalanche. Most of the time it is a small one, but sometimes it builds on itself and it seems like one whole side of the pile slides down to the bottom.They learned some interesting things [about nonequilibrium systems]. What is the typical size of an avalanche? After a huge number of tests with millions of grains of sand, they found that there is no typical number. "Some involved a single grain; others, ten, a hundred or a thousand. Still others were pile-wide cataclysms involving millions that brought nearly the whole mountain down. At any time, literally anything, it seemed, might be just about to occur."The piles were indeed completely chaotic in their unpredictability. Imagine peering down on the pile from above, and coloring it in according to its steepness. Where it is relatively flat and stable, color it green; where steep and, in avalanche terms, ‘ready to go,’ color it red. What do you see? They found that at the outset the pile looked mostly green, but that, as the pile grew, the green became infiltrated with ever more red. With more grains, the scattering of red danger spots grew until a dense skeleton of instability ran through the pile. Here then was a clue to its peculiar behavior: a grain falling on a red spot can, by domino-like action, cause sliding at other nearby red spots. If the red network was sparse, and all trouble spots were well isolated one from the other, then a single grain could have only limited repercussions. But when the red spots come to riddle the pile, the consequences of the next grain become fiendishly unpredictable. It might trigger only a few tumblings, or it might instead set off a cataclysmic chain reaction involving millions. The sandpile seemed to have configured itself into a hypersensitive and peculiarly unstable condition in which the next falling grain could trigger a response of any size whatsoever."Scientists refer to this as a critical state....…after the pile evolves into a critical state, many grains rest just on the verge of tumbling, and these grains link up into ‘fingers of instability’ of all possible lengths. While many are short, others slice through the pile from one end to the other. So the chain reaction triggered by a single grain might lead to an avalanche of any size whatsoever, depending on whether that grain fell on a short, intermediate or long finger of instability....The problem with long term macroeconomic stability is that it tends to produce unstable financial arrangements.... [end quote]I remembered John Mauldin's 2006 insight when the financial crisis hit in 2008. Seldom has a financial analyst's insight been so right-on as Mauldin. Mike Shedlock (Mish) also traced the roots of the 2008 financial crisis daily, starting in 2004.Today's Control Panel shows a pattern of complacency that implies stability and low risk. Borrowers are accepting low risk premiums (though not as low as 2005 -- assuming that sovereign debt is actually risk-free, a dangerous assumption). Stock investors are greedily following the trend to ever-higher valuations, reminiscent of the familiar bubbles of the past 15 years, as if the real economy was actually growing fast enough to justify the share price growth.http://research.stlouisfed.org/fred2/series/SP500http://research.stlouisfed.org/fred2/series/GDPC1In fact, the "Fingers of Instability" permeate the world Macro economy even more today than they did in 2008, when Europe appeared to be stable. Despite the summer vacation, Europe is slipping into recession, the numbers don't add up and the crisis is bound to continue.http://www.nytimes.com/2012/10/10/world/europe/angela-merkel...Greeks are rioting as Andrea Merkel visits Greece ahead of a potential default in late November. The IMF reported that Greece was likely to miss its goals.The U.S. "fiscal cliff" is looming in only 2 months. I would be astonished if Congress smoothly resolved the issues.Macro fundamentals from money supply to demographics are so out of balance that it's scary. The "Minsky moment" of sudden debt unwinding and financial collapse may transfer from the private sector to the central banks, which have taken on immense debts backed by fiat currencies since the last crisis. Could the market suddenly reject these fiat debts, refusing to buy long-term bonds so yields suddenly rise -- devastating the balance sheets of the central banks? Catastrophe theory reminds us that instability can lead to sudden crises, as we saw just 4 years ago. Be careful out there. The U.S. economy is at stall speed, barely holding its own (and possibly already in recession).Fingers of instability permeate the international financial system. The risk is high of a sudden crisis.Wendy
"...Catastrophe theory reminds us that instability can lead to sudden crises, as we saw just 4 years ago..."Dear Wendy :Thanks for posting 'Mauldin's sand pile' example! It's just beautiful and describes the process from stability to instability back to stability again, like, off the charts terrific!! I've read a bit about the Minsky's "The Modeling of Financial Instability" and indeed, it uses Catastrophe theory to describe that seemingly unavoidable process. (and it was central to, er... 12 October, 1492, A Sojourn:^) I'd like to mention a very thorough overview of this very new area of mathematics. The text was compiled by Manfred Schroeder and titled "Fractals, Chaos, Power Laws Minutes from an Infinite Paradise". It's sprinkled with puns, does not go in depth, but covers all major topics and then some. It's like a 'Catasthrophe handbook'.That sandpile describes it all so well!Your discovering Fool,FM(As prerequisite it is well worth going over the laws of exponents and logarithms. And there's a humorous and really interesting section on "Fibonacci's rabbits")
Well, since I've found an excuse to link the "Flaws of Finance" by James Montier at virtually everywhere else I post I might as well do it here too. I think it exposes a potential problem with financial models, and relates to what you posted too. I too LOVED the grains of sand analogy. https://www.gmo.com/America/CMSAttachmentDownload.aspx?targe...Hockeypop
Without snipping from multiple eamails and pasting together a "ransom note" post, my Australian banker with close contacts in China is very concerned about the affects of a slowdown in the growth of the mioning business down under. The question we have been banying about is how much of the Chinese "slowdown" is a negotiating ploy to get better prices out of Rio Tinto, BHP, et al and how much reflects a real slowdown in Chinese growth. While this will have accelerated (negative) effects on the Australian economy if it is, indeed, a Chinese slowdown (won't bore you with the local macro implications), it will also impact Hohumm's boats, rail, firms like Alcoa as well as US jobs.On a related note, in thery, about 25% of the componant cost of the Chinese networking outfits that made the 6PM news yeaterday is of US manufacture (probably a few billion bucks). A tip for tat trade war on tin boxes would probably convince China to open their own foundries regardless of the cost (not to mention impacting our labor force in the US).Jeff
A tip for tat trade war on tin boxes would probably convince China to open their own foundries regardless of the cost (not to mention impacting our labor force in the US).An international trade war consists of various nations gathering around and each glaring at one or more of the others, pulling out the biggest gun it can find, and shooting itself in the foot.
...if it is, indeed, a Chinese slowdown (won't bore you with the local macro implications), it will also impact Hohumm's boats, rail, firms like Alcoa as well as US jobs.A couple more data points:Caterpillar Cuts 2015 Outlook as Mining Spending Fallshttp://www.bloomberg.com/news/2012-09-24/caterpillar-cuts-20...Caterpillar plans late-year shutdown in DecaturDECATUR, Ill. (AP) - Days after saying it is worried about the slow pace of the global economy Caterpillar Inc. says it will shut down parts of its operations in Decatur for a week in November and all of December as demand for some products drops.http://money.msn.com/business-news/article.aspx?symbol=US:CA...And, if you're cynical, add the fact that Seeking Alpha has been pumping the daylights out of CAT ever since the warning two weeks ago.Steve
Wendy said: The risk is high of a sudden crisis.Wendy, I will postulate that things MIGHT be different this time around.The consensus view back in March 2009 was that the financial outlook was somewhere between bad and hopeless. The SP 500 hit a low of 666. The Dow Jones hit a low of 6516. Both the SP and Dow have more than doubled since then. The US was losing ~800k jobs per month at the time.So what changed? What turned the SP upward?I suggest two main contributors to the turning point:1) Treasury/Fed decided that the largest US banks were Too Big to Fail aka TBTF. Back then, there was widespread debate as to whether Citi and BofA in particular should be "nationalized" or not. Secretary Geithner prevailed in his view that the TBTF should remain independent, but NOT be allowed to fail. Recall also that the first "stress test" results also were released. Yoda's personal opinion is that this helped turn the markets around, but was NOT the main driver.2) Many investors, including me, believe that the Treasury/Fed directly intervened in the US equity markets by having a “primary dealer” buy SP 500 futures. A few points:a) Ben Bernanke has widely talked about the importance of positive feedback. Strong and rising equity markets mean more spending and job creation in their mind. Ben wrote an editorial in the Wall Street Journal that talked about this when they did QE1.b) Ben talked about this in a theoretical context in his famous 2002 “Helicopter Speech.” It was listed as one of the “tools” that the Fed could use to increase job growth.c) There is near universal agreement that confidence plays a major part in economic growth. If everyone believes the economic outlook is better, their animal spirits will lead them to take more financial risks and buy more things. Conversely, if everyone thinks the financial world is coming to an end, they will NOT spend with reckless abandon.d) There is also near universal agreement that it IS possible to dictate stock prices in this manner. The only question is how much money it takes. Consider a single stock of say a $10 billion market cap company. If the market price starts falling, a buyer at the margin could purchase all of the additional shares offered and literally set the floor price. This concept gets stretched a little when you talk about the overall US equity market with its multi trillion dollar market cap. Luckily the Fed has a slightly higher credit limit than most of use) My OPINION and it is NOT provable one way or the other is that this was the primary mechanism that put a floor under equity prices back in March 2009.Fast forward to today. If equity markets “fell off a cliff” do you think Ben and the Fed would sit by idly and let that happen? Recall in Ben’s QE to infinity speech he talked about the positive feedback between equity prices and improved job growth. If the equity markets declined precipitously, it would have the potential to undo the literally trillions of dollars of work the Fed has done to boost confidence. Let’s stipulate the SP drops 50% for illustration purposes only. What choices does the Fed have?a) Sit back. Watch it drop. Watch confidence drop. Watch unemployment rise. Watch companies shut down all hiring. LISTEN TO EVERY TOM, DICK AND HARRY TELL THE FED HOW STUPID THEY ARE for letting this all occur.Orb) Direct one or more of their primary dealers to “buy the market” in size. If it keeps falling, up the size. There is literally NO limit on how high the credit card tab can run to. Unemployment will be stable plus or minus a little. Confidence will be stable plus or minus a little. Some companies MIGHT increase their hiring. The Fed will still be criticized, but it will be a lot less than if they allow another equity meltdown.BOTTOM LINE IMO is “Don’t Fight the Fed”, particularly when they want the equity markets to appear robust. I should point out one other item. Ben and the majority of the FOMC, REALLY, REALLY believe they have the best strategy for increasing job growth. They are "all in" for QE to infinity. They believe in the econometric models they use. Thanks,Yodaorange
BOTTOM LINE IMO is “Don’t Fight the Fed”, particularly when they want the equity markets to appear robust. While I agree that what you say "may" be true, how do you "unwind" it, and how easy is it to "bump" the fed off it's course? Unwind slowly I'm sure is the intent, with an improving economy providing the "fuel" to pay off that debt. But, as Wendy suggests, one calamity from someone without our deep pockets and influencing our international sales, or even a pinch too much budget cutting or tax increasing here, can push over this fragile attempt to help.Somewhere, someday, someone has to treat causes not symptoms. After about five years our states seem to be unwinding their problems. But I don't think we have begun that at the federal level.Hockeypop
Wendy: "Stock investors are greedily following the trend to ever-higher valuations, reminiscent of the familiar bubbles of the past 15 years, as if the real economy was actually growing fast enough to justify the share price growth."Yoda:"a) Ben Bernanke has widely talked about the importance of positive feedback. Strong and rising equity markets mean more spending and job creation in their mind...."c) There is near universal agreement that confidence plays a major part in economic growth.....OK....Let's pretend that our entire national economy has turned into a confidence scheme on a gigantic scale. Just like Bernie Madoff who started out with a legitimate investment company, started spending more than he was bringing in, paid for it by bringing in more and bigger customers, eventually bringing in billions and losing it, so go we as a nation. We started out with taxes roughly covering expenses, started spending more than we we brought in and paying for it all with a series of bubbles all bursting one after the other (our version of more and bigger customers to dupe) followed by more and bigger customers in the form of Infinite QE.....Bernie kept it going for decades.How long can we? Do I care whether it will produce massive deflation vs. worthless money if I come to the point that I do not trust the system either way? Is it not possible that both outcomes will force me, the collective consumer, to try to gather up assets like land or gardens or gold or silver or copper or ...?
a) Sit back. Watch it drop. Watch confidence drop. Watch unemployment rise. Watch companies shut down all hiring. LISTEN TO EVERY TOM, DICK AND HARRY TELL THE FED HOW STUPID THEY ARE for letting this all occur.Yoda,This has next to nothing to do with Ben Bernanke......a big zero.....It has to do with how stupid Tom, Dick and Harry truly are......IT is the Tax code.....blood simple......it has to become much more progressive to recreate the American consumer and saver......out of what could be the working middle classes.......Bloody simple!!! The fiscal policy of waiting for unemployment checks so the rich can enjoy tax breaks is crap.....Dave
<BOTTOM LINE IMO is “Don’t Fight the Fed”, particularly when they want the equity markets to appear robust. I should point out one other item. Ben and the majority of the FOMC, REALLY, REALLY believe they have the best strategy for increasing job growth. They are "all in" for QE to infinity. They believe in the econometric models they use. >Does this mean that you are now a bull?Do you believe that the Fed's QE infinity forever will control the business cycle, overleverage, malinvestment bubbles?The question isn't what the Fed believes, because all the central banks are far into unknown territory.Do you believe that the world economy will languish for decades, like Japan's? Because otherwise the immense increase in the money supply will lead to inflation.Is it safe to get into the water?Wendy (dubiously eyeing my bathing suit)
Is it safe to get into the water?http://stockcharts.com/freecharts/historical/spx1960.html1600. The SPX will make 1600. Then it turn. Of course if I am wrong, then the down turn will not be as bad.It is what it is.CheersQazulight
Do you believe that the world economy will languish for decades, like Japan's?Yes.We will not have the monetary velocity to create inflation so long as the vast majority of the money is being sopped up by the banksters and the plutocrats.
"Many investors, including me, believe that the Treasury/Fed directly intervened in the US equity markets by having a “primary dealer” buy SP 500 futures"The sad thing is that we may never know. While I can see the value of Fed actions not being subject to exact audit at the time they are done there is no excuse for full details not being released after a few years lag. There is no reason for secrecy at that point except to protect Fed officials at the expense of the public. I agree that Benanke and crew have belief in their models. But Rationality is what is needed, not Faith. How many econometric models have fully succeeded over long periods?
I have added my answers to Wendy’s excellent questions. My apologies for not better explaining my position in the first post.Does this mean that you are now a bull?No, I certainly am not a bull. I try to always consider a range of outcomes. My median expectation is a broadly flat market for the next 5 to 10 years. Jeremy Grantham published his latest 7 year market forecast yesterday (10/9/12).  He is forecasting the SP 500 to return 0.0% real assuming 2.2% inflation. I agree with his forecast.Do you believe that the Fed's QE infinity forever will control the business cycle, over leverage, malinvestment bubbles? I would not use the work control, but given 5 to 10 years, the Fed’s goal is to “moderate” the business cycle, over leverage and malinvestment. Instead of forcing an immediate, painful resolution, the Fed’s goal is given enough time, the excesses can be worked out slowly. “Soft landing” is a fair description.The question isn't what the Fed believes, because all the central banks are far into unknown territory. Yes, the central banks are in unknown territory. Let’s assume the Fed wakes up one day and says “We were wrong. Our models didn’t work. The job growth we planned for did not materialize.” If that day arrives, they know they have at least one silver bullet left.The Fed and Treasury absolutely, positively CAN raise GDP. Recall that one of the components of GDP is government spending. I am going to use an absurd example to make the point. The Fed and Treasury decide to give $ 1 million to every man, woman and child in the US tomorrow. GDP will increase. People will spend a lot of that money, matter of fact, most of the money. Inflation will pick up which is what the Fed wants. Voila! More jobs will flow! This is Ben’s “Helicopter Drop” which he picked up from Milton Friedman. If $1 million is too absurd, how about $100k or $10k . . . It is just a question of how many dollars it takes to get the desired GDP and job growth. But you say, “these onetime money drops create no lasting effect.” No problem, we will make everyone into lottery winners with annuity payouts. Why don’t we pre-announce 10 years of $ 1 million per year? Do you believe that the world economy will languish for decades, like Japan's? Yes, based on the excellent work of Reinhart and Rogoff, we can expect MANY more years of low growth and deleveraging. One decade plus is reasonable. Yes, the US is Japan IMO. Because otherwise the immense increase in the money supply will lead to inflation. Everyone that has predicted high inflation has so far been proven early at best and wrong at the worst. I still think we will see higher inflation, but it might take literally decades to materialize.Is it safe to get into the water? I am NOT in the water and do NOT plan to re-enter the water any time soon. I would NOT enter the water with a median 7 year equity forecast of 0.0% real return. I estimate the beta of all of the widows and orphan portfolios is in the range of 0.1 to 0.3. So we are mostly, but not totally immune to large changes in the equity markets. And yes, I am at the extreme end of the risk spectrum. Obviously my views of the Fed and equity markets might be 100% off base. Most other investors have a higher allocation to equities. I can NOT prove that Grantham, Hussman, Ed Easterling and Andrew Smithers will be correct. However, I am going to bet with them instead of against them.Thanks,Yoda Jeremy Grantham 7 year market forecastshttps://www.gmo.com/America/CMSAttachmentDownload.aspx?targe...
Thanks for the book rec! I was looking for something new.
Ben and the majority of the FOMC, REALLY, REALLY believe they have the best strategy for increasing job growth. They are "all in" for QE to infinity. They believe in the econometric models they use. Ben's term as Chairman ends in January, 2014, approximately one year after the next President is sworn in. The Vice Chairman's term also ends within the year.Three of the seven voting members' terms expire before 2016, two of them within 12 months of the administration.Don't count chickens.
Obviously my views of the Fed and equity markets might be 100% off base. Most other investors have a higher allocation to equities. I can NOT prove that Grantham, Hussman, Ed Easterling and Andrew Smithers will be correct. However, I am going to bet with them instead of against them. You will be betting against Warren Buffett. I would not.
FWIW,Equity allocation is down by 25% over the past couple of weeks. I suspect that selling is not over. Tis better to pay low taxes this year than pay high taxes next year (or worse, take a loss). I happen to be in favor of ALL of the Bush tax cuts expiring (for all classes of investors) and if Congress is logiocal for once, I'd prefer not being hoist by my own petard.Think Yoda is correct in the projection of low growth and, in that context, feel the equity market is ahead of itself. Since no one ever sells at a loss when they make a profit, I figure I can always buy 'em back (maybe at a cheaper price). In the meantime, a higher US dollar would dictate US cash may be the best asset group to hold for a while (only time will tell).Jeff
From the NYT blog: A field known as catastrophe theory explores how slow continuous changes in the force applied to a system (like the gradually increasing load on a camel’s back) can trigger rapid discontinuous jumps in its response... What’s especially worrisome is that the jump occurs without warning. An intersection, by its very nature, doesn’t fade away. It exists until it doesn’t...opinionator.blogs.nytimes.com/2012/10/08/dangerous-intersect...Yep. Some of us have been working on statistical means for detecting the potential for catastrophic behavior for decades. Here is one of my early papers on this very subject, from 1980:www.aetheling.com/docs/Cusp1980.pdfMy 1980 paper doesn't say so, but in fact it is not true that the jump occurs without warning. There are subtle changes in behavior that are detectable during the run-up to the catastrophic state transition. This is also true -- but harder to see -- in the "sandpile" instability described elsewhere in Wendy's post. The two types of instability are not at all the same, mathematically, but both are surpassingly fascinating from many points of view. As Wendy points out, catastrophe theory reminds us to be careful of unexpected behavior arising from nonlinear dynamics.Loren
< in fact it is not true that the jump occurs without warning. There are subtle changes in behavior that are detectable during the run-up to the catastrophic state transition.>Loren, thank you for joining the discussion. I was hoping that you would.Your input would be incredibly valuable to METARs if you were to notice and inform us of subtle changes in behavior before the next catastrophic state transition. METAR is a "weather reporting" board for economic and financial conditions. The longer-range our "radar," the more useful our predictions can be.http://en.wikipedia.org/wiki/METARWendy
You will be betting against Warren Buffett. I would not. I think most investors, if not all, perhaps except warren himself, everyone bets against warren. That's how the market works.Unless your holding absolutely matches to warren you are bettering against him. Plain and simple.This doesn't mean you have to short the companies that he is long. But consider for ex: he owns Wells Fargo and you don't, then you are betting against Warren! Because you think Wells Fargo is not the best place for your money and Warren thinks that is the best place.I think it is silly to make these kind of statements. Everyone's situation, investment horizon, needs, philoshophy are different. Sometimes you all may be traveling in the same direction not necessarily to the same spot.
At the center of the Federal Reserve structure is the Board of Governors in Washington, D.C. The seven-member Board and its staff constitute an independent government agency charged with overseeing the Federal Reserve System. Board members are appointed by the President and confirmed by the Senate, serving staggered 14-year terms that expire in every even-numbered year. Board members are appointed for long terms in order to shield them from political pressures. The President designates a chairman and vice chairman of the Board, each of whom serve four-year terms. These appointments are subject to Senate approval and may be renewed. http://www.frbsf.org/what-is-the-fed/structure.html Making the assumption that Obama wins, and the Senate still is in control of the Dems, Benanke is assured of a second term. If he wants it.The Chairman of the Fed has more power than one might think. He sets the agenda, and he has the power of distributing perks and research staff. I'm always a bit surprised about how seldom other members of the FOMC go against the Chairman. Perhaps there is less diversity in their base economic theory than in their educational and work backgrounds. The Fed has made a lot of mistakes (and a lot of good moves) in the past but with each case there was surprisingly little disagreement. To me this indicates there may a dangerous degree of groupthink in the FOMC. I think that there is a good chance Bernanke will step down at the end of his term.Politically it seems like Bernanke and Obama are joined at the hip. Or at least that is how some perceive it, and such linkage does not bode well for consensus in the budget process. He looks very tired, his programs are not working all that well, and he has become a divisive political figure. By 2014 the President will be even more of a lame duck, an election is coming up later in the year and it may be time for new blood, new ideas. He can leave in 2014 with his reputation more or less intact. Somehow it looks like he is finding the job to be less fun with each appearance before a hostile Congress.
Agreed - Loren is an incredibly valuable addition to ANY of these boards. I doubt he will have as much time for the climate-change board if he works on stuff here... and whether you all believe it or not, that IS the more important question for our civilization... ...but I don't spend all MY time there either.
I think most investors, if not all, perhaps except warren himself, everyone bets against warren. That's how the market works.Unless your holding absolutely matches to warren you are bettering against him. Plain and simple. That's plain silly. I can hold different opinions than WEB and yet not bet AGAINST him. For example, he has said he doesn't understand tech stocks. I claim that I do and I buy INTC and DELL. Or: WEB buys BNSF, I have no opinion on railroads and don't buy any. How the heck is this betting against WEB? Stop talking like Bush. Because you think Wells Fargo is not the best place for your money and Warren thinks that is the best place. You just contradicted yourself. WEB thinks (as an example) Wells Fargo should be 20% of his portfolio, I am more comfortable with 5%. Sure I could be wrong but it's not betting against WEB.OTOH, shorting SPY or getting out of US stocks (like investors did last year, to the tune of $138 billion I believe) is directly opposite of what WEB is saying and doing, which is to invest more and more in US businesses and converting his personal portfolio from US bonds to US stocks, 100%.
For example, he has said he doesn't understand tech stocks.Actually, what he said was that he didn't understand how a lot of tech companies were supposed to make money.That was while the tech bubble was inflating. It turned out quite a lot of tech companies couldn't make money.Something similar happened in telecom. A bunch of accountants said "we don't know how MCI and Worldcom can be making that much money in this industry" and a bunch of big-company bigwigs said that if they couldn't make the same kind of money, they didn't want to try to compete, because in the long run they'd be flushed out. Then it turned out that MCI and Worldcom *couldn't* make that much money.
For example, he has said he doesn't understand tech stocks. Actually, what he said was that he didn't understand how a lot of tech companies were supposed to make money. Here is the exact quote. Both of us are (almost) right. He understands technology but not the long-term implications for tech stock prices.Warren Buffett: We understand technology products and what they do for people. But we don't understand the economics ten years out -- the predictability of it. Is it comprehensible? We do think about it, but we don't get anyplace. We would be skeptical of anyone who says they can. Even my friend Bill Gates would agree.
I am more comfortable with 5%. ... OTOH, shorting SPY or getting out of US stocksMy entire point was about your comment "you are betting against Warren" is silly and everyone including you in someways betting against him. That's how the market works. You want to think you are betting along with to the tune of 5% in WFC and I view the same thing as you are not betting 15% in WFC thus betting WEB is overly optimistic in allocating 20% to WFC and you disagreed with him and thus bettring against him!Again the important point is, it doesnt' matter what WEB does, because he is different than you in skills, experience, and the size of capital. You should do what you are comfortable with and not worry about what he does.
That's plain silly. I can hold different opinions than WEB and yet not bet AGAINST him. For example, he has said he doesn't understand tech stocks. I claim that I do and I buy INTC and DELL.Actually, that's not quite accurate. It is a common misunderstanding of Buffett. When Buffett says that he doesn't understand technology, he means that he can't make reliable predictions of the economics of the industry.“Sometimes our own intellectual shortcomings would stand in the way of understanding, and in other cases the nature of the industry would be the roadblock. For example, a business that must deal with fast-moving technology is not going to lend itself to reliable evaluations of its long-term economics. Did we foresee thirty years ago what would transpire in the television-manufacturing or computer industries? Of course not. (Nor did most of the investors and corporate managers who enthusiastically entered those industries.) Why, then, should Charlie and I now think we can predict the future of other rapidly-evolving businesses? We'll stick instead with the easy cases. Why search for a needle buried in a haystack when one is sitting in plain sight?”1993 Letter to Berkshire Hathaway shareholdershttp://www.berkshirehathaway.com/letters/1993.html“Obviously many companies in high-tech businesses or embryonic industries will grow much faster in percentage terms than will The Inevitables. But I would rather be certain of a good result than hopeful of a great one.”1996 Letter to Berkshire Hathaway shareholdershttp://www.berkshirehathaway.com/letters/1996.html“We made few portfolio changes in 1999. As I mentioned earlier, several of the companies in which we have large investments had disappointing business results last year. Nevertheless, we believe these companies have important competitive advantages that will endure over time. This attribute, which makes for good long-term investment results, is one Charlie and I occasionally believe we can identify. More often, however, we can’t — not at least with a high degree of conviction. This explains, by the way, why we don’t own stocks of tech companies, even though we share the general view that our society will be transformed by their products and services. Our problem — which we can’t solve by studying up — is that we have no insights into which participants in the tech field possess a truly durable competitive advantage.Our lack of tech insights, we should add, does not distress us. After all, there are a great many business areas in which Charlie and I have no special capital-allocation expertise. For instance, we bring nothing to the table when it comes to evaluating patents, manufacturing processes or geological prospects. So we simply don’t get into judgments in those fields.If we have a strength, it is in recognizing when we are operating well within our circle of competence and when we are approaching the perimeter. Predicting the long-term economics of companies that operate in fast-changing industries is simply far beyond our perimeter. If others claim predictive skill in those industries — and seem to have their claims validated by the behavior of the stock market — we neither envy nor emulate them. Instead, we just stick with what we understand. If we stray, we will have done so inadvertently, not because we got restless and substituted hope for rationality. Fortunately, it’s almost certain there will be opportunities from time to time for Berkshire to do well within the circle we’ve staked out.”1999 Letter to Berkshire Hathaway Shareholdershttp://www.berkshirehathaway.com/letters/1999htm.html
YodaI agree with most of what you have said, but have a few thoughts about helicopter drops:The Fed and Treasury absolutely, positively CAN raise GDP. Recall that one of the components of GDP is government spending. I am going to use an absurd example to make the point. The Fed and Treasury decide to give $ 1 million to every man, woman and child in the US tomorrow. GDP will increase. People will spend a lot of that money, matter of fact, most of the money. Inflation will pick up which is what the Fed wants. Voila! More jobs will flow! This is Ben’s “Helicopter Drop” which he picked up from Milton Friedman. If $1 million is too absurd, how about $100k or $10k . . . It is just a question of how many dollars it takes to get the desired GDP and job growth. But you say, “these onetime money drops create no lasting effect.” No problem, we will make everyone into lottery winners with annuity payouts. Why don’t we pre-announce 10 years of $ 1 million per year? There was a helicopter drop of $250 to all people who had paid into SS and CSRS. the problem is that this was too small. The less wealthy used it to pay down debt and the wealthy just threw it into their pot to buy Treasuries and other bonds. This used up something like 30% of the Stimulus. If instead it had been put more in infrastructure, we at least would have ended up with some improvements even if the employment was temporary.So the drop has to be big enough that the less wealthy can pay off their debts and start buying plus the wealthy to be sated in buying "safe" investments like Treasuries, existing stocks (After the IPO trading in stocks does not benefit the company), and buying more chalets in Switzerland and put some money into productive things like startups (either venture capital or IPOs and possibly some commercial bonds that are used to increase a business). I suspect that the helicopter drop would have to be at least $10,000 to start such a movement but probably more would be needed.I guess what I am trying to say is that while all government spending increases GDP, all government spending does not result in increased buying or increasing of productive business. If all the government helicopter drop was reinvested in Treasuries, would there be a "real" increase in GDP? though my suggestion is not realistic, I think that I have made the point.brucedoe
So the drop has to be big enough that the less wealthy can pay off their debts and start buying plus the wealthy to be sated in buying "safe" investments like Treasuries, existing stocks (After the IPO trading in stocks does not benefit the company), and buying more chalets in Switzerland and put some money into productive things like startups (either venture capital or IPOs and possibly some commercial bonds that are used to increase a business). I suspect that the helicopter drop would have to be at least $10,000 to start such a movement but probably more would be needed.At this point I doubt that a helicopter drop of money can significantly inspire genuine business investment, period.What is needed there is the ability to make reasonably confident and positive predictions about the overall economic future, including but not limited to tax rates and inflation. We won't get to that state without a massive reduction in government deficit spending. Higher taxes also would be directly harmful, so the overwhelming majority of this reduction in deficit spending must come in the form of reduced spending. We will also need reform of Social Security and Medicare/Medicaid to either limit their expansion or phase them out (I favor the latter - there can't be a "light at the end of the tunnel" when the tunnel has no end).
There has been endless discussion on this board and everywhere else as to what the federal govt. should do to expedite recovery. Why? Firstly, the Constitution does not allow the govt. to control the economy in any way. It is only allowed to facilitate commerce by performing the regulatory functions that are hard for States to carry out individually. Don't Americans think the Constitution is a good thing? Also, since this downturn was just a return to the trendline from above-trend growth that was caused by the debt bubble, the recovery is already complete. There is no more recovery to be had, folks. As to further growth from here, it will all depend on how fast the economy can compensate for the withdrawal of all the stimulus, which is composed of the federal deficit (about 8% of the conomy) plus the federal reserve balance sheet. If the federal deficit is reduced by some miracle to say 3% of GDP before the bond market rebels, then that will reduce GDP by 5% and more, and would absorb the first 5% of economic growth from here. If the budget were balanced (fat chance the way things are going politically), that would subtract a cumulative 8% and more from growth. Trying to extend the recovery to the point where GDP resumes its debt-fuelled trajectory from pre-2008 is just economic suicide. The nation is in a Greece-like pre-crash never-never land. Stimulus has already provided a complete recovery to trend. Now it is up to the economy to pay for that recovery. Ed.
One decade plus is reasonable.And what magic event do you expect to occur after a decade that will fix it? Maybe QE26? :-)
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