Pir Sahib on Wall Street (Part –1)

#31 by sac [“… reason why America has done so well economically is because the politicians have always been inept and busy fighting each other. The more polarized they are, the better the country will do...”]

The reason ``why America has done so well`` is because of its unique history…

The US of the early 1800s was, in an economic growth sense, like the China of today. Starting with a clean slate it was not burdened with old cultural and economic structures. It had vast natural resources and a hardy and hungry population, willing and able to work. And above all it had a small and hands-off government that, unlike today, did not strangle the economy. The American productivity skyrocketted and economic growth was unprecedented. America sent a deflationary shock wave throughout the world economy much the same way as China is exporting deflation today.

Today (particularly post Vietnam), those advantages have been lost but the huge positive momentum has been carrying the economy for the last few decades. These things take time. After all, it took the Roman empire eight hundred years of decline to get wiped out. The over bloated US government is now a lethal parasite like most governments.

Living in hundred years of prosperous isolation, Americans have become the spoilt children of modern history. Today’s consumer lives luxuriously on the fertile slopes of a sleeping volcano. Now begin the rumblings, the exhalations and the tremors that presage a coming calamity.

Let me say, parenthetically, that these are overarching macro comments, and should only be viewed in the larger historical context. It has little bearing on our short lives as today’s market participants. Of course, I am not going to short the S&P based on my historical perspective.

[“…Weren`t you bemoaning the out of control government spending ? … Republican victories in the elections is frightening … consider the state politics of Massachussettes-a democratic state …”]

I was lamenting government size and it’s interference. Of course, spending is a part of it.

Heaven forbid, are you accusing me of being a democrap – I mean, democrat…?

The US has a sophisticated one-party political “selection system” that is thinly disguised as a democracy. Make no mistakes, there is only one political party in America that has two right wings. An extreme right wing and a right-off-center wing. Today’s R’s and D’s are just like the Victorian Whigs and Tories. They are the two-faced Janus of the imperial political system. Thy are today’s Roman patricians and knights.

Let me end this and get back to something productive. Just forget about all this market related nonsense, get rid of all paper assets and buy gold and silver. I am just rambling.

…SR

#29 by Urstruly
[“… what is happening in the automotive sector. … finally the market forces (meaning consumers) are dictating an interest free market..... automotive manufacturers are pushing and lobbying further to lower interst rates. .. other maufacturing sectors will start demanding interest free financing...

Are we headed for the collapse of interest-based financing and thus the collapse of an interest-based economy? Ultimately. …”]


“Collapse of interest-based economy?” No, not at all. In fact quite the opposite. Inflation and eventually ultra-high interest rates. There is no such thing as a free lunch.

Your observation is correct but you draw the opposite conclusion. I’ll try to explain.

When someone goes out on a drinking binge and has a wild party all night, they pay a price for it the next day. If we drink twenty shots of vodka while having wild fun at the party, we are going to get a hangover headache the next day. Nothing can stop that hangover. All the aspirin and yogurt in the world are not going to prevent the headache and the nausea. However, experienced drunks have discovered that if they take a little more alcohol in the morning, it will give them a temporary relief from the hangover, but later on the situation will get even worse. Similarly, heroin addicts also need a new infusion of the drug to keep from having stomach cramps and other withdrawal pains. All they can do is delay the inevitable.

Likewise, if we tell a big lie, we have to tell more lies to keep from getting caught, but all we do is make it worse and delay the inevitable. Also, if we borrow more than we can afford, then for some time longer we may be able to borrow more to partially repay the first lender, but our total debt keeps growing and all we do is delay the inevitable. No one can escape the consequences of committing excess in anything. This is the law of nature. It applies to individuals, to huge corporations and to national economies.

The automotive industry in America has been borrowing from the future. There is only so much demand for new cars. There is some elasticity in that demand and it can be increased at the margins by providing greater incentives such as zero percent financing and price discounts. But the result is not going to be prosperity. The profits have collapsed and without profits you can not keep being in business forever. All they have accomplished is to make people buy now instead of next quarter or next year.

Two facts need to be considered. (1) The average age of the vehicles on the road has become newer, meaning that fewer will need replacement sooner than would otherwise have been the case. And (2) more people (98% plus) already own a vehicle. Both of these facts are not good harbingers for future demand.

So why did they do it? I personally suspect that there may have been a hidden motive to make the economy look better so that the Republicans can do well in the elections. Detroit has not had a better friend in Washington than Baby Bush. This is just my conjecture, we’ll see if they keep up with similar extra ordinary sales gimmicks now that Baby Bush has his toadies controlling Capital Hill. Maybe Detroit will get some kick-back in the disguise of tax cuts or something. We shall see.

Now, the interest rates.

Money, ultimately, is a commodity. Admittedly, money is a special kind of commodity. It is not “consumed” per se, but has the special function of being a medium of exchange, or a storehouse of value, against which all the other goods and services in an economy can be “valued”.

However, like any other commodity, the “value” of money is determined by supply and demand. Have too much of it, relative to other things, and its relative value will go down, and vice versa. But as the total of goods and services expands, the supply of money has to keep pace with it so as to facilitate the smooth exchange of goods and services. This is a delicate balance. You cannot simply create wealth by increasing money supply. Money supply has to follow, not lead, the creation of wealth often referred to as growth in the economy. (The ‘elementary particles’ of the complex phenomenon called ‘wealth’ are labor, raw material, land and enterprise, not more paper. But I digress.)

Historically, the money function was performed by gold. Until the 1700’s (with an exception of a period in China a thousand years ago) paper money was not known. John Law, during the Mississippi bubble (more on that another time), was the first successful innovator of paper money in pre-revolution France. From there the concept took off. For a while the supply of this paper money was kept in check by a measure that was actual gold deposits, but then it started getting out of hand. Governments, the most corrupt and incompetent of all human institutions, could not resist the temptation of disregarding the limits imposed by their gold reserves and started printing more and more paper money to meet their ever expanding expenses. Basically, governments got in the business of forgery, or counterfeiting. With the advent of electronics, the situation has gotten much worse. Now it does not even take a printing press, paper and ink to create money. Its just a few keystrokes. The binge has exceeded all rational limits. As an anecdote, the US money supply in its broadest measure (M3), in recent years, has grown eight times faster than the GDP. (Not that the GDP a meaningful or true measure of the “economy”, but that’s altogether another chapter we should get into sometime later. Let’s get back to money and interest rates.)

The function of interest rates, more than anything else, is to keep some kind of a check on the supply of money. The federal reserve can do one of two things, BUT NOT BOTH. It can either fix the short-term interest rates and let the supply of money grow to its equilibrium level OR it can control the supply of money in the system and let the capital markets determine the (floating) interest rate that is commensurate with the available supply. Uncle Greenie`s Fed, over the last several years, has chosen to do the former. This ever lowering of interest rates (and consequent monerary expansion) will inevitably lead to the effective devaluation of the US dollar and ultimately to the rise of gold prices.

Governments and legislatures cannot change the economic forces any more than they can change time or temperature. Yes, they change time and call it “day light savings time” and its off by one hour. Tomorrow they may decide to call the freezing point of water as 25 degrees Celsius instead of zero and we can then all pretend to ourselves that its not zero degrees outside in January. But if we sleep outdoors we shall still freeze to death no matter what the new government approved thermometer reads. The Fed and the Congress cannot legislate away concrete economic reality, so don`t be counting on it. They can, however, give the drunk one more shot of vodka to delay the inevitable.

...SR

re SR (and rsaxena):

Markets are never in a state of equilibrium. Like a pendulum they are always oscillating between extremes. We had almost a decade of `irrational exuberance` and the now the pendulum is unduly tilted in the bearish domain. It will take sometime before it swings the other way.

The general population fell hook line and sinker for the `buy and hold` mantra trotted out by the mutual fund industry and it will take a long time for the psychological damage the present downturn has caused to be repaired.

At the same time, schemes like reverting to the gold standard or taxing foreign exchange transactions are not the solution to what is essentially a human weakness. Almost every other day there are stories in Pakistani newspapers about swindlers who take away people`s gold with promises of doubling them, never to return......Ponzi schemes are alive and well in slums of Lyari.....why blame the Hermes guys for their con jobs? Nobody wants to admit their stupidity, everyone wants to sue!!

SR:

I disagree with your bleak assessment about political life in America. The major reason why America has done so well economically is because the politicians have always been inept and busy fighting each other. The more polarized they are, the better the country will do. Republican victories in the elections is a frightening trend that will hopefully be reversed. Weren`t you bemoaning the out of control government spending in one of your earlier posts? As an illustration, consider the state politics of Massachussettes-a democratic state if there ever was one but for the past few decades, it has always had a Republican mayor!! Just perfect :)

later
-sac

re: sr

{Still, I’d like to add, and it seems we already agree, that the markets are neither efficient, nor random. The dice in this casino are loaded. One needs to be a card counter and play black jack. That is the only chance of coming out of this casino with some money. }

...thanks...that`s what i`ve always believed...it has to be...how else can one explain why so many people with huge egos and perfectly knotted hermes ties but little intelligence became so rich as bankers...

Mr. Rabbani,

Thanks for an honest and straightforward reply. I am anxiously waiting for the part-II now. Meanwhile, if you have time, would you like to comment on what is happening in the automotive sector. I have a feeling that finally the market forces (meaning consumers) are dictating an interest free market.....and the interesting thing is that so far automotive industry has survived this market demand; an immediate effect of this phenomenon is that automotive manufacturers are pushing and lobbying further to lower interst rates. I think the domino effect is just about to happen when consumers in other maufacturing sectors will start demanding interest free financing, thus the lobby that pushes legislators to lower interst rates will get even stronger. Are we headed for the collapse of interest-based financing and thus the collapse of an interest-based economy? Ultimately.

I would request you not to bring in religion in this argument, please.

#13 by HN [“…Arn`t you hamidm? Have a strong feeling you might just be...:) “]

No, I am not that character. Though, if the darkest secrets be revealed, it comes to light that our grandfather was the same man. He was a debauch philanderer and while he was plugging nani huzoor, he was also a regular visitor at nani hamdid’s havali.

#14 by Urstruly [“… how 2/3rd of the congress … on take from crooks… how the current crisis has effected foriegn investment (into US). …”]

First, let me thank you for your kind words. If any of my readers become aware of the perils faced by the hard working and honest people who do not understand the nature of this game my primary purpose will have been achieved. The average “investor” is simply a victim (or future victim) of the world’s biggest racket if he is blindly “investing” the fruits of their labor in the many scams (e.g., stock mutual funds) that go around Wall Street. Though I make my living in this arena, the naked truth remains that the stock market, at large, is basically organized theft. If one understands this simple truism, I have told my close friends and family for years, then there is a possibility to keep from getting ripped off. The commodities market, on the other hand, though many people will argue otherwise, is a much better and a more level playing field.

As far as the foreign investment in the US equity markets is concerned, the money inflow is drying up. This is a very involved subject and one that is inextricably intertwined with the exchange rate of the US dollar, and interest rates etc, I’d like to elaborate on it in one of the upcoming columns. In short, I just want to say that the US has gotten away with what, we were told in childhood, cannot be done. The saying was that you cannot fool all the people all the time. Well, the US almost managed to do that from 1995 to 2000. The whole bloody world was fooled by, what history will judge, as the greatest ponzy scheme of all times ever (so far). But the cat is crawling out of the bag and even though the process is slow, it is going to be a thorough cleaning job. What we have seen so far, I believe, was just the pre-soak cycle of the great washing machine called The Market. In the process of washing of the dirt on Wall Street the 2000 till 2002 was just the pre-soak cycle. Now we shall see, over the next couple of years, a thorough wash-with-soap-and-bleach cycle.

As for Congress, they are all corrupt politicians. Almost ALL government, as an invention of man is one of the worst forms of criminal enterprise. (Back in college days my religious friends thought of me as a liberal, my liberal friends called me a capitalist cronie, my capitalist friends called me a marxist and my Marxist frineds used to accuse me of being an anarchist)

#15 by sac [“…Laurence Tisch the CEO of Loews (LTR) put huge bets on market moving lower in 1997 and 1998. The company lost close to $1.5 billion dollars in less than five quarters…”]

I am no fan of Mr. Tisch. He was speaking at a gathering a year or two ago and was justifying their company’s insurance rate hikes (in addition to selling lumber and hammers, they also have a sizable insurance racket – I mean ``business`` – going on). Besides other nonsense, he also had the gall to claim that for every one dollar received in premiums, they had been paying out $1.08 in claims. So, as a curious member of the audience, during question time, I asked him how come he could claim that their earnings had been getting better and why had their stock been going up (at the time it was doing better)? In response, Tisch said, with a straight face, that they had made some good investments in the market and that is where their gains came from. So lets not even talk about the man. Besides, I don’t like his face.

[“…Julian Robertson one of the most venerated names in the hedge fund world had to dissolve his fund for severely underperforming the market in the late 90s while holding onto companies like UAL and a generally bearish stance on the market. …”]

That is an unfortunate example, but I don’t know what he did wrong? Surely, missing out could not be the only reason. Warren Buffet also “missed out” the whole tech mania, but it didn’t kill him. I recall that at the annual Berkshire stockholders’ meeting in 1999, for the first time ever many questioned his judgement, but Buffet stuck to his guns.

[“...you are aware of the maxim `don`t fight the tape`. Time horizon is the main element the trader is fighting all the time. Raise `em or fold `em. … Damned if you do, damned if you don`t. Right and wrong are dependant on the time horizon they are decided in. …”]

Very true. And that is why I am eternally damning Rubin and Greenspan for having the expanded the vast excess of credit and money glut environment which lead to the creation of the bubble. Not everyone was responsible for creating those conditions, but unfortunately, everyone is living through, and will have to continue to live with, pay for, and suffer through the aftermath of the bubble.

[“…I don`t think there is a credible alternative to US assets… The mighty dollar is the only currency the world trusts. … If we have indeed reached an inflection point in history … it doesn`t matter what commodity you put your savings in. Its Game over and we`ve run out of additional coins to play any longer…”]

This is another subject that I would like to write about when I get time. It’s a very involved issue, but I’ll say a few sentences here.

History is never linear. As the Roman and British empires have come and gone, so has the pre-eminence of their coinage. America is going to be no different. It just so happens, that in my humble opinion, we are at the same juncture in the history of the American financial supremacy as was Rome in later second century (before the great coin defacings) and Britain was just before, or perhaps during, second world war. The analogy does not quite hold, but my contention is that its at about the point which can be called the beginning of the end. By the end of the decade, or maybe in fifteen or so years, the US dollar should be worth a third of what it is today, if not less. The only thing that could save not only the US dollar but indeed the entire world monetary system is to rein in the fiat money with imposed monetary discipline that comes from some kind of a return to the gold standard. They will have to insert an “L” in the phrase printed on the US currency that could eventually replace the greenback after they are forced to demonetize it. IN GOLD WE TRUST, shall become the money slogan. This, as any PhD in modern economics will tell you, is heresy and I shall be accused of believing in witchcraft, but like I wrote in the Chowk FOMC introduction, I am only a quack.

#16 by tvarad [“…I trained with a major Wall Street Firm … I quit realizing it wasn`t my cup of tea…”]

You were probably training to be a Series 7 broker. That’s a sales job and those people are not required to know zilch. I felt the same way about sales and thus never made it past a first-glance when I flirted with Drexel. As for your theory on what goes on in the great casino world of Wall Street, I couldn’t agree more.

#17 by rsaxena [“...a theoretical question: if the market was truly efficient, investors were truly rational..”]

Your question seems rhetorical. Still, I’d like to add, and it seems we already agree, that the markets are neither efficient, nor random. The dice in this casino are loaded. One needs to be a card counter and play black jack. That is the only chance of coming out of this casino with some money.

#20 by Studebaker [“…He is in this business, can a car salesman advice you not to drive car? …”]

The more appropriate analogy would have been if you had called me a “sports car hobbyist” instead of a car salesman. Yes, I am in this business, but as I’ve stated in the Chowk FOMC –confession, history, structure, bias and philosophy- section, I do not sell anything to anyone. I have only one client and that is me.

…SR

fellow citizens of pakistan, rejoice! salvation is finally upon us. millions of citizens of our godforsaken land are on the verge of finding employment in the m.e. our kindly neighbor to the east is now the fourth richest country on earth and millions of its citizens slaving away in the gulf are about to give up their jobs and return back to the promised land to work as computer programmers for infy and mot. all we have to do is to insure that those indians don’t get scared by reading an article on the coming aids crises in india published in saturdays nyt. the article has special significance because it is published by the prophet of start tv watching india. we can use the e-terrorism skills taught to us during our compulsory stints at the local madarsah to crash the nyt website.

please do terrorism as soon as you land in the m.e. it should be obvious to us by reading the comments of all the rssniks on chowk that we cannot match the intellect of hindus and thus we will be fired by our arab masters. terrorism will be our sweet revenge besides enabling us to meet 70 virgins in jannat.

re: 12-head #21

...great...[deleted]

{Motorola to set up one of India`s largest captive R&D Campuses
14.45 IST 09th Nov 2002

By IndiaExpress Bureau

Motorola, Inc. has announced its plans to setup one of India`s largest captive R&D facility in Bangalore.

The 280,000 square feet campus is being setup for the Motorola Global Software Group (GSG) to integrate its two existing centers in Bangalore under one roof and address its expansion plans over the next few years. The new facility will require an investment of US $ 13 million and will be ready by January 2004. The unveiling of the symbolic stone for the new campus is being done by Mr. S.M. Krishna, Chief Minister of Karnataka today.

Speaking at the occasion, Terrence Heng, Senior Vice President & GM, Motorola Global Software Group said, ``Motorola prides itself on innovation which is a result of its astute focus on R&D. We were among the first telecom companies to realize India`s software potential and invest in establishing a development center here. Today, the India development center is an integral part of GSG operations and is developing cutting edge solutions in software and applications for Motorola products and on future technologies such as 2.5/3G mobile handsets, and networks, consumer electronics & others.`` }

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Ref # 21 & 22
China will always attract big-ticket investment dollars to build huge factories that churn out low price consumer goods. It gives poor villagers jobs at $.30/hour, the kind of investments that account for most of the $40B investment that the article mentioned. China will always be preferred over India for those huge factory investments because no one in Chine can disrupt utilities/power and other supply/delivery chains. Labor better not strike. Government will make sure that paper work proceeds rapidly after the senior most leaders have taken their cuts.
India will always attract high intellectual contribution oriented investments like software, medical research etc. $13 Million for example will provide enough space, computers, network connections etc. for say 200 programmers. If conditions in one city deteriorate, programmers can be moved to another city. The companies have ample supply of talented Indians who are happy there and foreign investors do not give a damn if rest of the infrastructure works or not.
Two different models – Indians can always show off big name companies, with low investments dollars, that will gladly give credit to Indians for any major contributions while poor folks may starve 20 miles outside these magnificent structures. We can also keep hoping that economic benefits will trickle down.
Chinese on the other hand, use their cheap labor under the gun. Only the top leadership gets the big cuts. Lowest level people work hard, get sufficient to eat and not allowed to complain. Population is under control. They do not have IITs but that can probably wait in their model.
Time will tell which model is better. We will perhaps get more Noble prizes and credits for research articles. Chinese (the masses) will always be better fed, look healthier, have higher per capita income and keep getting many Olympic medals.

re: snow

{Sound investment decisions are primarily made on the basis of a company`s future/long-term outlook or unique situation. }

...agreed...but the theory bothers me...here`s why:

...a valuation is just the present value of expected future performance, right?...if all information needed to assess future performance is available to all investors, and if all investors are equally rational, then at any given moment the stock should be priced accurately...that means, as per information known at this moment, there is no upside....unless some new information comes about - and the fractions of seconds i refer to is the time it would take the market to price the stock fairly again...with technology, that time should not be very long...

rsaxena,

Sound investment decisions are primarily made on the basis of a company`s future/long-term outlook or unique situation. Fractions of a second reaction to analyst`s under or overvaluing a stock would not make it a zero-sum game, since individual and institutional investors will continue to invest for the long-run and in accordance with their opinions and interests.

cheers

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{Countless well-managed and well-capitalized firms were gobbled up by the likes of Enron. }

...as an aside, good times or bad, well-run acquirers or scammy acquirers, M&A is a destructive habit best avoided (with the exception of cisco)...bankers do the dance and talk a big talk about ``synergies`` and run off with the booty...a few years down the road the shareholders of the acquiring company (paid the big premium) are left counting the money they`ve lost...most marriages of couples end up in divorce...to think that marriages of corporate behemoths with egos larger than shaq`s shoe will end any better is downright foolish...but hey, at least the bankers get a new loft in SoHo upon completing a few big deals...so it ain`t all bad... :)

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re: sac

{1The risk in `inaction` being greater than in action is best illustrated by 2 examples. Laurence Tisch the CEO of Loews(LTR) put huge bets on market moving lower in 1997 and 1998. The company lost close to $1.5 billion dollars in less than five quarters. Julian Robertson one of the most venerated names in the hedge fund world had to dissolve his fund for severely underperforming the market in the late 90s while holding onto companies like UAL and a generally bearish stance on the market. }

...sad...that`s what happens when too many short-term investors barge into the market...they even make the long-term investors not so long-term anymore...

...a theoretical question: if the market was truly efficient, investors were truly rational, and the same information was available to all, would anyone ever make money in the market?...seems not...the stock would be undervalued or overvalued for fractions of a second, hardly enough time for anyone but the fastest corporate mainframes to act on...and that too can be argued as unfair and done away with by regulators...