Archive for November, 2008

Expert v. Pretty Good

Given enough effort – the whole 10,000 hours thing – most people can perform most tasks fairly competently.  Excellence?  Well, that’s a bit different.  Here is Paul Krugman showing Amity Shlaes how many places there are to run:

[W]ith short-term interest rates near zero, there’s no reason to think that lower wages for all workers — as opposed to lower wages for a particular group of workers — would lead to higher employment.

Suppose that wages across the US economy had been, say, 20 percent lower than they actually were. You might be tempted to say that this would make hiring workers more attractive. But to a first approximation, prices would also have been 20 percent lower — so the real wage would not have been reduced. So how would lower wages lead to higher demand for labor?


Andrew Mellon’s advice to Hoover during the Depression – “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate . . . purge the rottenness out of the system” – has intuitive appeal.  That doesn’t make it right, however.

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Somewhere along the way it seemed it would never end:

And, in some sense, it might not have – there were nine attacks, but not enough militants seem to have been killed.  My guess is there is a reasonable chance some of them melted back into the Bombay chaos.

I am not sure whether to be surprised how long it took the Indians to bring the crisis to an unsuccessful end, or how amazing it is that other counterterrorist teams have actually succeeded:


Suppose the moral of the story is that if you have to be taken hostage, pray it happens somewhere that the folks coming after you are smarter and better-motivated than the guys holding you.  And that they care about bringing you home alive; one group, after all, is famous for a Keyser Soze approach (“he showed those men of will what will really was”):


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This guy kind of sounds like a jerk.  Hopefully people will listen to him (he has more credibility than I do):


Leaves out the one tax the government should be imposing to fund the various bailout/stimulus needs:

$2/gallon gasoline tax.

It would provide $280bn/year on current gasoline use, enough to pay off much of the bailout money within the course of the Obama Administration.  But of course, current gasoline use would not continue; it would fall, dragging with it the global price of crude oil and the key source of income for many if not most of our adversaries.  It would jump-start the market for fuel cell/plug-in/CNG vehicles much more effectively than a purchase credit.  And it would address environmental concerns about sprawl more effectively than a host of zoning regulations.

Years ago most oil producing countries nationalized their oil companies.  Saudi Aramco, Pemex, Gazprom – pretty much every country that was able to convince itself it could extract its oil seized its companies.  Think of a high retail gas tax as a way of fighting back; it effectively nationalizes downstream.  Of the, say, $4.50 per gallon, $2.50 or so would go to Federal, state and local taxes, $0.50 to the refiner and the marketer, and $1.50 to the upstream guy.  The $1.50 is a tax imposed on Americans by the good people of Saudi Arabia’s royal family; no reason not to make them share.  And they will share out of every barrel of oil that isn’t bought, or whose price declines.

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What a shock:

For what it’s worth, $7bn of preferred stock paying 8% (not sure if it’s PIK or cash, and really not sure it matters) is an awfully modest fee for guaranteeing the worst $306bn of assets Citi can find, especially since the loan itself is only at 300bps and will, by design, be impaired.

We obviously had to do something, but I would have much rather the government strong-arm an ally like Norway into investing $20bn in voting preferred on commercially reasonable terms than for us to take on such a contingent liability.  I would also point out that the taxpayer would be much better off if the second $350bn of the TARP were used not to inject capital into existing banks but rather to set up ten new banks, each able to go out in the market and lend without the drag of historic liabilities.  Would dilute the existing banking system as a proportion of the total banking system and make us less vulnerable to what comes next.

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1.50 Cable

Interesting article:

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Hedge Funds

November hasn’t been that much better than October – at what point do we start to see major shutdowns?  Almost any levered fund has to be near the event horizon, and many of their individual investors, who took on personal debt to buy into more of them, have to be completely tapped out.  I am less surprised by the selloff to S&P 750 than by the fact that you don’t hear of funds closing up left and right.


Also, after all of my emails about peak oil, it was with some interest that I watched it cross below $50/bbl today.  Strange thing: I still believe the peak oil guys.  Demand may have dropped significantly – auto miles are down, aviation demand is down, winter has not kicked in – but I have to believe that the production levels we saw in the spring were about all the planet has to offer.  The expensive stuff – the oil sands, some deepwater exploration – might come in and out of the market, but it seems to me that people have short memories and will soon be back to wasting the oil we have.  Not sure what that means for an investment – the oil stocks are actually still up a bit from early October – but I hope our various policy nerds don’t lose sight of this as the Michigan congressional delegation stomps its feet to buy everyone an Escalade Hybrid.

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Chinese Democracy

Can’t believe the album beat the real thing.  I was sure there would be free elections in Beijing before Axl ever got his act together…


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Why on earth would the Democrats leave him in position?  I really cannot understand this – if only to prove a point, why not toss him from all committees?  He isn’t going to become a Republican – that would be tantamount to retiring in four years.  Every congressman in CT is a Democrat, and only by creating a three-horse race can Joe try to stay in DC.  And the filibuster stuff in completely moot – if you cannot keep him in line now, how are you going to keep him in line when it comes to a tight vote?

At some point the Democrats are going to have a tough vote.  When they do, they are going to want to enforce convince wavering members to toe the line.  How does this help?  It’s a bit like the debate in the primaries about how to count Michigan and Florida – if you even acknowledge the chance of reversing your decision, how can you ever be taken seriously when you try to force states to get in line in the future?


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Every time you think Paulson has been about as corrupt as can be, he goes and does something even more amazing.  Perhaps the most amazing part of the last two months is that he has somehow improved his reputation while doing stuff like this:


I was a bit distracted by the election and while I may have picked up on the supplemental investment in AIG, I had no idea that the original facility was recut so astonishingly in AIG’s favor.  Is there any remotely plausible good faith explanation for this move (eg “If I let these guys fail, the world ends, so I am stuck waiting for them to get around to selling assets, and the original rate I push them into Chapter 11 myself”)?  Or does Paulson simply not care about the taxpayer and feel it perfectly justified to use the government’s money to prop up GS’ share price?

When Palin was nominated she said it would position her well to do things for Alaska.  That sounded awful, but on the bright side it was clear that (a) every other Alaskan politician goes to DC to loot the place for Alaska’s benefit; (b) she had absolutely no idea what the VP is supposed to do.  Paulson is not dumb.  Where is the bright side?

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Investment question – at what price do you buy Goldman stock?  I suppose the general investment theory would be not to buy something you cannot understand, and GS has a lot of specific problems:

  • Huge CDS exposure to AIG and everyone else
  • Conversion to bank holding company structure (with no deposit base), which dramatically reduces the amount of leverage it can take and, consequently, its steady-state ROE
  • Prop trading losses all over the place
  • Lousy timing on the private equity fund
  • A preferred slug to the government, Berkshire, and whoever comes next to bail them out
  • Risk of secondaries
  • On January 20, Paulson will no longer be able to divert the full faith and credit of the US government to look out for them.

Still, I wonder if the company isn’t somewhat oversold.  Negative earnings gets in the way of multiples, so there isn’t an effective valuation mechanism, but $28bn of market cap?  If the company went Chapter 11 and you were able to restructure the business with the current employee base (now, apparently, 10% fewer in Japan), network, relationships, brand name, etc, would you inject $28bn to start that company off?  Is it really likely that the company will have a liquidity interruption between now and the date they unwind the toxic waste that forces the current shareholders to give up?

Is this even the right way to think about the company?  Seems to me that most of the credit crisis is over, we are now on to the actual recession/depression, which means that credit card debt and and consumer durables (especially the cars) should be in the eye of the storm.

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