Daily Investment Interpretations

November 7, 2010

2010-11-7 (Sunday Night):   I want to talk a bit about The Big Picture, and then offer a few speculations regarding what it might mean for our investments. 
    Maybe I should mention again that I've made relative fortunes three times, and largely (though fortunately, not entirely) lost them each time: How to Make a Fortune in the Stock market by Watching Me and Then Doing the Opposite, Chasing the Golden Bull, Failing to Catch the Golden Bull. 
    "Relative" refers to the fact that investing won't make you money, but will multiply (or divide) the money you have.
    The first time, I quintupled most of my wife's-and-my money. I indirectly lost my gains because I was persuaded to sell out one day in the fall of 1980 and then was persuaded to buy it all back the next day, breaking up our capital gains holding period. When the markets began to retreat, we couldn't afford to sell. 
    The second time, I was loaded for bear, and I six-and-one-half-folded my money. Again, capital gains locked us in. I didn't expect the 13-month bear market that hit after the 9-month run-up from the 1982 lows. Even so, we would have hung on until the markets came back if a couple of local stock market gurus hadn't talked us into selling a week before the markets took off on the second leg of the great secular bull market of the 1980's. ("Gee, sorry!")
    (My wife and I made quite a bit of money during the dot.com bubble, and then lost part of it again during the dot.com bust. But this was a case of "a rising tide lifts all boats".)
    The third time, I nearly doubled my money (and this time, it was strictly my money) between July, 2007, and the market peak in October, 2007. I wasn't expecting the markets to reach new highs and then to plunge into the worst market meltdown in 80 years. Even so, if I had known the rules that I know now for selling in the face of market downturns, I would have come out better than I did.
    Another factor this last time was the fact that every trusted source of financial information was advising us that the markets were about to turn up. Even Warren Buffett was emitting soothing messages during the fall of 2007 and the spring of 2008. But this Great Recession took just about everyone by storm.
    The point of all this isn't that I'm such a clever investor. I've made many costly mistakes. Over and over again, I'll buy something only to sell it again at a slight loss a few hours later. I'm abysmally ignorant when it comes to investing expertise. Nevertheless, in spite of this, somehow I've been able to multiply my money several times, and I'm hoping to do it again, and maybe, help others also, at least to the extent of providing information.   
    Another point to all of this is that there are probably investors who can reliably make money--viz., Warren Buffett and George Soros--but they're few and far between. Virtually everything authoritative claim that we read is pure hot air. The rare investors who can make large quantities of money are either investing for themselves or are being paid megabucks to exercise their capabilities to invest for their clientele... e. g. hedge fund managers.
    I should also mention that all three times I was able to make money it was because the recessions with which we were dealing were controlled by the Fed. This last time, the Fed lost control, which has made me more wary than I usually am. (When I set up this "investment interpretations" sub-site, I never imagined that we'd be dealing with such an earth-shaking financial earthquake as the one we've been experiencing.)
    One of the epiphanies I've just gotten is that Wall Street isn't about investing. It's about selling, with investing as the bait. I'm reading/re-reading Wall Street books... books that I think every investor needs to read... such as "Liar's Poker", "Wall Street Meat", and "The Wolf of Wall Street". (You can find used copies for a few dollars each at Bookfinder.com.) ("Take on the Street", by the former Chairman of the Securities and Exchange Commission, Arthur Levitt, gives you a taste of this, although it doesn't get into the gritty details that the above autobiographies recount.) These autobiographies are shocking. They tell a consistent story of a drug-drenched, utterly debauched (We're depraved. ha!, ha!) culture with psychopathic values. They have only one goal: to make money for their masters, and of course, ultimately for themselves. 
    One of the reasons I think everybody needs to read one or more of these books is the picture they give of how the very rich--or really, their trophy wives--squander their ill-gotten gains. (The husbands tend too busy making the money to have time to enjoy spending it.) The wives compete with each other with lavish parties and ultra-expensive possessions. "The Wolf of Wall Street" is probably the most descriptive among these three books regarding the kind of conspicuous consumption that's taking place.
    The bottom line is that Wall Street doesn't make it's money through expert trading and investment. It makes its money by getting you to trade and invest. And what's equally important is that the inability of the rest of us to stop or even slow down a financial juggernaut that's running out of control is, maybe, threatening our country with wrack and ruin.
    Paul Farrell has put the breakdown year at 2012. Maybe, maybe not, but I think it may be important to us as investors to keep in mind the possibility of turmoil in America over the next few years. Todd Harrison has been warning about this "have/have-not" rumble for more than a year.
    The Big Picture I want to talk about is the alleged takeover of the United States by a coalition of its ultra-rich and its multinational corporations. My epiphany in this area started on Tuesday, October 19th, with this article written by Marketwatch' columnist Brett Arends: Death of a democracy. That same night, the article, Income Inequality: Too Big to Ignore, appeared in the New York Times. 
    Brett Arend's Marketwatch article observed that the Supreme Court decision early this year that gave corporations a legal conduit for giving as much as they wished to the political parties of their choice, made it legal to buy government. Mr. Arends points out that the CEO of EXXON could, with a stroke of his pen, endow the candidate of his choice with more campaign money than Barack Obama was able to raise from 200,000 small donors with Obama's 2008 grassroots funding efforts. A coalition of large multi-nationals--can you say, "British Petroleum" or "Royal Dutch Shell"?--could install their puppets with impunity and control what has been the most powerful country in the world to serve their own parochial interests  (Note the "has been".)
    The New York Times article argues that the CIA... not the ACLU but the CIA... has placed the inequality of income in the United States at par with Zimbabwe and with one or two of the most flagrant Latin American countries!
    The richest 300,000 people receive 30% of U. S. income, while 13.5% is spread out among the less-affluent think single mothers?) 180 million of us. 
    As one reviewer puts it,
    "Between 1947 and 1973, real family median income essentially doubled, and the growth percentage was virtually the same for all income levels. In the mid-1970s, however, economic inequality began to increase sharply and middle-incomes lagged. Increased female workforce participation rates and more overtime helped cushion the stagnation or decline for many (they also increased the risk of layoffs/family), then growing credit card debt shielded many families from reality. Unfortunately, expectations of stable full-time employment also began shrinking, part-time, temporary, and economic risk-bearing (eg. taxi drivers leasing vehicles and paying the fuel costs; deliverymen 'buying' routes and trucks) work increased, workers covered by employer-sponsored health insurance fell from 69% in 1979 to 56% in 2004, and retirement coverage was either been dropped entirely or mostly converted to much less valuable fix-contribution plans for private sector employees. Some exceptions have occurred that benefit the middle and lower-income segments - Earned Income Tax Credit (EITC), Medicaid, and Medicare were initiated or expanded, but these have not blunted the overall trend. Conversely, welfare reform, incarceration rates rising 6X between 1970 and 2000, bankruptcy reform, and increased tax audits for EITC recipients have also added to their burden, Social Security is being challenged again (despite stock market declines, enormous transition costs, and vastly increased overhead costs and fraud opportunity), and 2009's universal health care reform will be aggressively challenged both in the courts and Washington.
    "Authors Hacker and Pierson contend that growing inequality is not the 'natural' product of market rewards, but mostly the artificial result of deliberate government policies, strongly influenced by industry lobbyists and donations, new and expanded conservative 'think tanks,' and inadequate media coverage that focused more on the 'horse race' aspects of various initiatives than their content and impact. First came the capital gains tax cuts under President Carter, then deregulation of the financial industry under Clinton, the Bush tax cuts of 2001 and 2003, and the financial bailouts in 2008-09. The authors contend that if the 1970 tax structure remained today, the top gains would be considerably less.
    "Bottom-Line: It is a sad commentary on the American political system that growing and record levels of inequality are being met by populist backlash against income redistribution and expanding trust in government, currently evidenced by those supporting extending tax cuts for the rich and railing against reforming health care to reduce expenditures from 17.3+% of GDP to more internationally competitive levels (4-6%) while improving patient outcomes. "Winner-Take-All Politics" is interesting reading, provides some essential data, and point out some evidence of the inadequacy of many voters. However, the authors miss the 'elephant in the room' - American-style democracy is not viable when at most 10% of citizens are 'proficient' per functional literacy tests ([...]), and only a small proportion of them have the time and access required to sift through the flood of half-truths, lies, and irrelevancies to objectively evaluate 2,000+ page bills and other political activity. (Ideology-dominated economic professionals and short-term thinking human rights advocates are two others.)
    The next article came a week later, on Tuesday, October 26th, and it was also written by Brett Arends: 
Tracking America’s economic decline. That same night came: US slips to historic low in global corruption index. (The U. S. slipped from 19th place to 22nd place.)
    Then came the corker: Fast Track to Inequality, written by the New York Times' Bob Herbert. It cites a book just published by two political scientists at Yale and Berkeley, that makes the case that a coalition of billionaires and multinational corporations got together in the mid-1970's to establish what Citicorp has called a "plutonomy"... "which describes an economic system where the privileged few make sure the rich get richer and that government helps them do it." The idea was to reinstate the age of the robber barons--to steal and disenfranchise the wealth of America's citizens... as in "our possessions"... our houses, our investments, our savings accounts.
    Whether or not the transfer of wealth from you to greedy pigs who want what you've got is a plot or just an unintended consequence, the fact is that this transfer is taking place, and. it seems to me, is taking place faster and faster.
    "David von Drehle wrote (“Washington Post, July 24, 1999) that 'as a tenacious student of political history, Rove had dug so deeply into the McKinley era that he had become 'the swami of McKinley mania.' Rove denied it to the writer Ron Susskind, who then went on to talk to old colleagues of Rove “dating back 25 years, one of whom said: 'Some kids want to grow up to be president, Karl wanted to grow up to be Mark Hanna. We’d talk about it all the time. We’d say, ‘Jesus,Karl, what kind of kid wants to grow up to be Mark Hanna?'”
    "Karl Rove would have learned from his study of Hanna the principles of plutonomy. For Hanna believed 'the state of Ohio existed for property. It had no other function…Great wealth was to be gained through monopoly, through using the State for private ends; it was axiomatic therefore that businessmen should run the government and run it for personal profit.'
    I've quoted more excerpts from the following (long) article than usual because it's so important.
    Bill Moyers: "Welcome to the Plutocracy!"  " ...And what about the country? Between 2001 and 2008, about 40,000 US manufacturing plants closed. Six million factory jobs have disappeared over the past dozen years, representing one in three manufacturing jobs. Natalie Ford said to the Times what many of us are wondering: “I don’t know how without any good-paying jobs here in the United States people are going to pay for their health care, put their children through school.
Now, if Connie Brasel and Natalie Ford lived in South Carolina, they might have been lucky enough to get a job with the new BMW plant that recently opened there and advertised that the company would hire one thousand workers. Among the applicants? According to the Washington Post; “a former manager of a major distribution center for Target; a consultant who oversaw construction projects in four western states; a supervisor at a plastics recycling firm. Some held college degrees and resumes in other fields where they made more money.” They will be paid $15 an hour – about half of what BMW workers earn in Germany
   "In polite circles, among our political and financial classes, this is known as “the free market at work.” No, it’s “wage repression,” and it’s been happening in our country since around 1980. I must invoke some statistics here, knowing that statistics can glaze the eyes; but if indeed it’s the mark of a truly educated person to be deeply moved by statistics, as I once read, surely this truly educated audience will be moved by the recent analysis of tax data by the economists Thomas Piketty and Emmanuel Saez. They found that from 1950 through 1980, the share of all income in America going to everyone but the rich increased from 64 percent to 65 percent. Because the nation’s economy was growing handsomely, the average income for 9 out of l0 Americans was growing, too – from $17,719 to $30,941. That’s a 75 percent increase in income in constant 2008 dollars.
    "But then it stopped. Since 1980 the economy has also continued to grow handsomely, but only a fraction at the top have benefitted. The line flattens for the bottom 90% of Americans. Average income went from that $30,941 in 1980 to $31,244 in 2008. Think about that: the average income of Americans increased just $303 dollars in 28 years.
    "That’s wage repression.
    "Hear the chief economist at Bank of America Merrill Lynch, Ethan Harris, who told the Times: “There’s no question that there is an income shift going on in the economy. Companies are squeezing their labor costs to build profits.”
    "Yes, Virginia, there is a Santa Claus. But he’s run off with all the toys.
    "Late in August I clipped another story from the Wall Street Journal. Above an op-ed piece by Robert Frank the headline asked: 'Do the Rich Need the Rest of America?' The author didn’t seem ambivalent about the answer. He wrote that as stocks have boomed, 'the wealthy bounced back. And while the Main Street economy' [where the Connie Brasels and Natalie Fords and most Americans live] “was wracked by high unemployment and the real-estate crash, the wealthy – whose financial fates were more tied to capital markets than jobs and houses – picked themselves up, brushed themselves off, and started buying luxury goods again.'
    "Citing the work of Michael Lind, at the Economic Growth Program of the New American Foundation, the article went on to describe how the super-rich earn their fortunes with overseas labor, selling to overseas consumers and managing financial transactions that have little to do with the rest of America, 'while relying entirely or almost entirely on immigrant servants at one of several homes around the country.'”
    "You would think the rich might care, if not from empathy, then from reading history. Ultimately gross inequality can be fatal to civilization. In his book Collapse: How Societies Choose to Fail or Succeed, the Pulitzer Prize-winning anthropologist Jared Diamond writes about how governing elites throughout history isolate and delude themselves until it is too late. He reminds us that the change people inflict on their environment is one of the main factors in the decline of earlier societies. For example: the Mayan natives on the Yucatan peninsula who suffered as their forest disappeared, their soil eroded, and their water supply deteriorated. Chronic warfare further exhausted dwindling resources. Although Mayan kings could see their forests vanishing and their hills eroding, they were able to insulate themselves from the rest of society. By extracting wealth from commoners, they could remain well-fed while everyone else was slowly starving. Realizing too late that they could not reverse their deteriorating environment, they became casualties of their own privilege. Any society contains a built-in blueprint for failure, Diamond warns, if elites insulate themselves from the consequences of their decisions, separated from the common life of the country.
    "Five years ago Citigroup decided the time had come to 'bang the drum on plutonomy.'

"And bang they did. Here are some excerpts from the document 'Revisiting Plutonomy;'”

“Asset booms, a rising profit share and favorable treatment by
market-friendly governments have allowed the rich to prosper… [and] take an increasing share of income and wealth over the last 20 years.”

“…the top 10%, particularly the top 1% of the United States –
the plutonomists in our parlance – have benefitted disproportionately from the recent productivity surged in the US… [and] from globalization and the productivity boom, at the relative expense of labor.”

“… [and they] are likely to get even wealthier in the coming years. Because the dynamics of plutonomy are still intact.”

    "Socrates said to understand a thing, you must first name it. The name for what’s happening to our political system is corruption – a deep, systemic corruption. I urge you to seek out the recent edition of Harper’s Magazine. The former editor Roger D. Hodge brilliantly dissects how democracy has gone on sale in America. Ideally, he writes, our ballots purport to be expressions of political will, which we hope and pray will be translated into legislative and executive action by our pretended representatives. But voting is the beginning of civil virtue, not its end, and the focus of real power is elsewhere. Voters still “matter” of course, but only as raw material to be shaped by the actual form of political influence – money.
    "Socrates said to understand a thing, you must first name it. The name for what’s happening to our political system is corruption – a deep, systemic corruption. I urge you to seek out the recent edition of Harper’s Magazine. The former editor Roger D. Hodge brilliantly dissects how democracy has gone on sale in America. Ideally, he writes, our ballots purport to be expressions of political will, which we hope and pray will be translated into legislative and executive action by our pretended representatives. But voting is the beginning of civil virtue, not its end, and the focus of real power is elsewhere. Voters still “matter” of course, but only as raw material to be shaped by the actual form of political influence – money.
    "The article is excerpted from Hodge’s new book, The Mendacity of Hope. In it he describes how America’s founding generation especially feared the kind of corruption that occurs when the private ends of a narrow faction succeed in capturing the engines of government. James Madison and many of his contemporaries knew this kind of corruption could consume the republic. Looking at history a tragic lens, they thought the life cycle of republics – their degeneration into anarchy, monarchy, or oligarchy – was inescapable. And they attempted to erect safeguards against it, hoping to prevent private and narrow personal interests from overriding those of the general public.
    "They failed. Hardly a century passed after the ringing propositions of 1776 than America was engulfed in the gross materialism and political corruption of the First Gilded Age, when Big Money bought the government right out from under the voters. In their magisterial work on The Growth of the American Republic, the historians Morrison, Commager, and Leuchtenberg describe how in that era “privilege controlled politics,” and “the purchase of votes, the corruption of election officials, the bribing of legislatures, the lobbying of special bills, and the flagrant disregard of laws” threatened the very foundations of the country.”
    "Looking back, it all seems so clear that we wonder how we could have ignored the warning signs at the time. One of the few journalists who did see it coming – Thomas Edsall of the Washington Post – reported that “business refined its ability to act as a class, submerging competitive instincts in favour of joint, cooperative action in the legislative arena.” Big business political action committees flooded the political arena with a deluge of dollars. They funded think tanks that churned out study after study with results skewed to their ideology and interests. And their political allies in the conservative movement cleverly built alliances with the religious right – Jerry Falwell’s Moral Majority and Pat Robertson’s Christian Coalition – who zealously waged a cultural holy war that camouflaged the economic assault on working people and the middle class.
    "Here we are now, on the verge of the biggest commercial transaction in the history of American elections. Once again the plutocracy is buying off the system. Nearly $4 billion is being spent on the congressional races that will be decided next week, including multi millions coming from independent tax-exempt organizations that can collect unlimited amounts without revealing the sources. The organization Public Citizen reports that just 10 groups are responsible for the bulk of the spending by independent groups: “A tiny number of organizations, relying on a tiny number of corporate and fat cat contributors, are spending most of the money on the vicious attack ads dominating the airwaves” – those are the words of Public Citizen’s president, Robert Wiessman. The Federal Election Commission says that two years ago 97% of groups paying for election ads disclosed the names of their donors. This year it’s only 32%.
    "Socrates again: To remember a thing, you must first name it. We’re talking about slush funds. Donors are laundering their cash through front groups with high-falutin’ names like American Crossroads. That’s one of the two slush funds controlled by Karl Rove in his ambition to revive the era of the robber barons. Promise me you won’t laugh when I tell you that although Rove and the powerful Washington lobbyist who is his accomplice described the first organization as “grassroots”, 97% of its initial contributions came from four billionaires. Yes: The grass grows mighty high when the roots are fertilized with gold.
    "That’s because early this year the five reactionary members of the Supreme Court ruled that corporations are “persons” with the right to speak during elections by funding ads like those now flooding the airwaves. It was the work of legal fabulists. Corporations are not people; they are legal fictions, creatures of the state, born not of the womb, not of flesh and blood. They’re not permitted to vote. They don’t bear arms (except for the nuclear bombs they can now drop on a congressional race without anyone knowing where it came from.) Yet thanks to five activist conservative judges they have the privilege of “personhood” to “speak” – and not in their own voice, mind you, but as ventriloquists, through hired puppets.
    "Ask Alan Grayson. He’s a member of Congress. Here’s what he says: “We’re now in a situation where a lobbyist can walk into my office…and say, ‘I’ve got five million dollars to spend and I can spend it for you or against it.’”
The one white hope in Bill Moyers' article is that this takeover of the U. S. by its plutocrats has happened twice in the past: shortly after the founding of the country, and in the "Gilded Age" of the latter 19th-century. Both times, the country recovered. Will it happen again? Will the American public again wake up in time, and if it does, will it be able once again to turn the tide and pull out of its nosedive? One point that Jared Diamond  make is that societies in which a thin layer of scum on top skims off all the cream self-destructs.
    finger-pointing and choosing of sides
    keeps attention off the guys who are looting our larders.
    This video, Index funds will be called to task to play a larger role in corporate governance as they gather more assets, says the Vanguard founder, in addition to comments about corporate governance, also warns about the impact of January's Supreme Court decision that opens the floodgates for corporations to "buy" politicians.
    OK. Suppose this is true. What does it mean to us as investors?
    First, our wealth is being eroded through depreciation of the dollar, and perhaps, in another year or two, through inflation. So far, problems haven't shown up in getting investors to buy our U. S. Treasury debt. Of course, a falling dollar boosts the value of foreign investments and foreign income, so part of the gains in international funds have come through the falling dollar.
    On the flip side, we'll see our overseas holdings shrink if the dollar starts to consistently rise.
    The counterweight to inflation is to own certain kinds of assets. Bonds wouldn't seem to me to be a good investment if interest rates are likely to rise, or even to stabilize. Stocks... especially dividend-paying stocks... might be a good bet since they'll rise with inflation. Real estate, commodities, and collectibles are all investments favored during times of inflation.
    Actual property ownership carries expenses with it.
    Gold and other precious metals have had very volatile price histories, and you tend to lose money buying and selling them. However, they're also inflation hedges.
    It probably needs to be noted that the Fed is seeking a little inflation rather than a lot
   The depressed state of real estate makes it an attractive investment candidate I should think. The following two funds are at  or near the top among real estate investment trusts. 

     FRIFX - Fidelity Real Estate Income Fund
Shows growth of a hypothetical $10,000 investment in Fidelity Real Estate Income Fund over the selected time period.

     FRESX - Fidelity Real Estate Investment Portfolio
Shows growth of a hypothetical $10,000 investment in Fidelity Real Estate Investment Portfolio over the selected time period.

    Tomorrow (if time permits), I'll list a few of my own ideas about how one might play what appears to be a global market recovery.