China's Middle Class could grow to the size of the entire US

This is a blogger that I look forward to every week for his post. He is hilarious and informative. Check out his older posts they are all Gems.


Lately, I have been hinting to my boss that I need a raise to do my job, and she has been hinting that she needs an employee to competently do my job, so you can see how we are temporarily at an impasse in negotiations.

Not so in China, however! The Economist magazine notes that in China, “Wages have been rising at 10-15% annually, but recently workers have begun to demand even heftier increases.”

Well, I am already astonished at this increase in incomes, and to impress you with my facility with the Rule of 72, I calculate with simple division that a 10% increase in wages will double wages in 7.2 years, which you gotta agree is a lot of extra spending power, unless inflation in prices eats it all away, which, unfortunately, it probably will.

And this is compounded by the Chinese economy itself growing by at least 10% a year, too, meaning that the Chinese economy will double in size in that selfsame 7.2 years! Wow!
An economy that is twice as big, and wages that doubled? My Inner Mogambo Economist (IME) immediately sees that this means a lot more consumption!

And turning that interesting fact to our advantage, so that we can hopefully make a lot of money without working, let me ask an instructive question; “Do you honestly think that commodities will go down in price when there is such growing demand, even when you can see by the look on my face and the tone of my voice that I am going to laugh at you and heap Rude Mogambo Scorn (RMS) on your stupid head if you say yes?”
And the boom may be bigger and sooner than that, as we read on Bloomberg.com that “At least nine Chinese provinces and cities raised minimum wages by as much as a third after Premier Wen Jiabao called for measures to head off growing worker unrest in the world’s third-largest economy.”

And it gets more delicious when Gary Gibson from Whiskey & Gunpowder interviewed Chris Mayer, who said that in “the next five years or so,” that China will gain “almost 400 million middle class consumers.”
The Really, Really Important Thing (RRIT) about this particular statistic is that 400 million new middle class Chinese people is more people than the entire population of the United States!

Perhaps now you are beginning to understand why the 21st century is going to be about the Chinese and what the Chinese want to consume in prodigious amounts, especially when the yuan starts gaining strength to make imports cheaper.

To put it in perspective, Mr. Mayer says, “when you think about China, they’re the largest incremental buyer of just about any commodity you’d care to name, so a stronger renminbi means that they have more purchasing power to buy iron ore and coal and oil and all the other things they need. That could be an extra little fire under commodity prices.”

Commodities? China? It is here that I began to think of Chinese food, and the next thing I knew, I went out to get some, hoping to get a seat before 400 new middle-class Chinese consumers started getting in line ahead of me at the restaurant.

As soon as I thought about it, of course, I realized that this won’t happen, says Chris, for 5 years, so since I had an extra few minutes, I whirled the Mogambo-Mobile around (“screech!”) and stopped (“screech!”) to buy more gold, silver and oil as both a guaranteed reaction from my wife (“screech!”) and as a guaranteed play on commodities, as gold, silver and oil are a Big Bold Bet (BBB) against the government and the Federal Reserve succeeding at creating, borrowing and spending more money to “fix” the massive, bankrupting problems caused by creating, borrowing and spending too much money, a hopeless task so daunting that no other dirtbag government has ever succeeded, at least none in the last 4,500 years of dirtbag governments borrowing and spending themselves into bankruptcy while twisting their economies into huge, distorted, malignant, parasitical nightmares of government domination and funding.

In other words, “Whee! This investing stuff is easy!”
And, I am happy to report, it goes well with Chinese food, too!

The Mogambo Guru
for The Daily Reckoning

Another Great Cartoon

Deleveraging in the Housing Market? Hardly....

Has there been significant deleveraging in the US housing market? Not really. Instead, with already $7 trillion in home equity lost, mortgages have come down only $270 billion. It’s a significant discrepancy that’s going to have to come into alignment somehow.

Jesse’s Café Américain explains:

“This debt must be resolved. There are two major ways to do it: repayment and default.

“Repayment is probably a fantasy, if not beating a dead horse. The homeowners do not have the money with which to pay the loans given the current state of employment and wage stagnation, and the mortgages are for the most part on houses whose value is significantly under water compared to the debt, as in ‘ just mail in the keys.’

“Straight up default, writing off the debt even through foreclosure, is also probably out of the question, because it would essentially vaporize the balance sheet of the US banking system which is also insolvent, to a greater degree than most understand, and if they understand it, would admit.”

This is while of “986 bank holding companies in the US, 980 [banks] lost money last year. The lucky six were the TBTF banks on major government subsidy.” To support his thinking, Jesse goes on to cite an Automatic Earth piece, Is It Time to Storm the Bastille Again:

“That is, what Americans’ homes are worth, their equity, decreased by $7 trillion — from $20 trillion to $13 trillion, from spring 2006 to spring 2010. In the same period, mortgage debt, what Americans owe on their homes, went down by only $270 billion. Yes, that’s right: US homeowners lost more, by a factor of 26, than they ‘gained’ through clearing mortgage debt. Thus, if we estimate that there are 75 million homeowners in America, they all, each and every one of them, lost $93,333.”

The government bailouts, already a failed experiment, didn’t help the vast majority of banks get profitable and also aren’t going to help homeowners pay mortgages. This debt isn’t looking to be liquidated without a prolonged period of tough times. You can read more details in Jesse’s Café Américain’s coverage of unresolved debt in the US financial system.

Great Cartoon

Weekend Picture of Awesomeness

The weather in Antelope Valley in southern California was completely manic today when a rainbow glowed through a thunderstorm. Image via AP

 

An Interesting Point On Survivorship Bias

Thought this was particularly interesting. From David Rosenberg:

"Everyone complains about government manipulation of the data -- how "hedonics" skew the numbers (like GDP and CPI). But what about the stock market? I'm not saying it's "manipulated" but it does have substantial "survivorship bias" -- especially after a gut wrenching recession. Just cleaning the failures out of the system and erasing them from the S&P 500, from WaMu, to Wachovia, to Bear Stearns, to Lehman, to Fannie and Freddie, and replacing them with companies that survived, was responsible for nearly 40% of the rally in the market off the 2009 lows. Think about that, if those firms who went under were still in the index, according to some help from a strategy friend at an aforementioned bank, the S&P 500 would be trading closer to 900 today than 1,100."

Jim Grant Strikes again

 I love this guy he cracks me up!



Notable quotes for those who don't want to watch the video


Grant's thoughts on new Fed additions:
"I think the first order of business will be to try once more to print enough dollars to make something happen in the U.S. economy.”

On San Francisco Fed President Janet Yellen:
“Janet Yellen has had 36 opportunities to vote on monetary policy at the Federal Open Market Committee and she has voted ‘Aye, yes’ 36 times. 36 for 36 times. Now, has the Fed been right 36 consecutive times? No. I think that Janet Yellen is a well credentialed, consensus-hugging economist straight out of the Fed HR department. She is ideal from the point of view of the Fed bureaucracy. She will make not one ripple.”

On MIT economist Steve Diamond and Maryland state banking regulator Sarah Bloom Raskin:
“I’ve never met them but I suppose they are charming. They certainly are well credentialed. They may well have an avocation in monetary theory, but that is not their vocation. Their vocation, in the case of Professor Diamond, is fiscal policy, pensions, social security, he is an authority.  He's mentor of Ben Bernanke so he’s a formidable academic.”

"Sarah Bloom Raskin is a formidable regulator. But neither is a formidable thinker about the nature of money or about the history of money or about how the Fed might paradoxically make things worse by doing what it does trying to make things better, which I think is the great question. These are people who, I think, are unlikely to oppose novel solutions to our fundamental monetary dilemma which is that the U.S. dollar is a faith-based currency of no intrinsic value that is manipulated by the Fed and the consequences of the manipulation are often quite different from what was intended. That’s the problem.”

On Fed monetary policy:
"Deflation is a funny thing. It's a word that is much in the news, much in the markets, but is all too infrequently to find. So the Fed says that deflation is broadly declining prices. But could not also be progress?  In other words, if the world produces more at lower prices, is that so bad? Americans spend half of their weekends, it seems, looking for bargains.”

"So the Fed is telling us that bargains galore is something that the Fed must resist with radical volumes of credit creation… I guess what I would ask the Fed is would it please stop and help us understand why this is bad?  So in 2002 and 2003, Alan Greenspan, then chairman, and Ben Bernanke, then a newly fledged governor, were out giving speeches saying that deflation is a clear and present danger, and we must - they said at the Fed - must cut rates dramatically, which they did to 1 percent."
"But the price indices today are much weaker than they were in 2003. So where is the Fed? Why not broach the topic of deflation again?"
"So what I blame the Fed for, among other things, is a lack of intellectual rigor and forthrightness."

On Federal Reserve Chairman Ben Bernanke:
"I think this is not being forthcoming with us, the people, about the nature of his concerns."
"In 2003, he was all deflation all the time. Well now the Cleveland Fed's median CPI was like 1.7 percent year-over-year, now it's 0.5 percent year-over-year. So where is the concern?"
"I think the concern will surface. We'll see more on Friday when the CPI comes out. But I think something ahead of the markets is a likelihood of the Fed stepping on the gas once more, so called quantitative easing - I think that's likely to happen…The Fed is already clearing its throat. You can see this in the newspaper leaks."

From Lifehacker:

What Caffeine Actually Does to Your Brain

For all of its wild popularity, caffeine is one seriously misunderstood substance. It's not a simple upper, and it works differently on different people with different tolerances—even in different menstrual cycles. But you can make it work better for you.
Photo by rbrwr.
We've covered all kinds of caffeine "hacks" here at Lifehacker, from taking "caffeine naps" to getting "optimally wired." And, of course, we're obsessed with the perfect cup of coffee. But when it comes to why so many of us love our coffee, tea, soda, or energy drink fixes, and what they actually do to our busy brains, we've never really dug in.
While there's a whole lot one can read on caffeine, most of it falls in the realm of highly specific medical research, or often conflicting anecdotal evidence. Luckily, one intrepid reader and writer has actually done that reading, and weighed that evidence, and put together a highly readable treatise on the subject. Buzz: The Science and Lore of Alcohol and Caffeine, by Stephen R. Braun, is well worth the short 224-page read. It was released in 1997, but remains the most accessible treatise on what is and isn't understood about what caffeine and alcohol do to the brain. It's not a social history of coffee, or a lecture on the evils of mass-market soda—it's condensed but clean science.
What follows is a brief explainer on how caffeine affects productivity, drawn from Buzz and other sources noted at bottom. We also sent Braun a few of the questions that arose while reading, and he graciously agreed to answer them.

Caffeine Doesn't Actually Get You Wired

Right off the bat, it's worth stating again: the human brain, and caffeine, are nowhere near totally understood and easily explained by modern science. That said, there is a consensus on how a compound found all over nature, caffeine, affects the mind.
Every moment that you're awake, the neurons in your brain are firing away. As those neurons fire, they produce adenosine as a byproduct, but adenosine is far from excrement. Your nervous system is actively monitoring adenosine levels through receptors. Normally, when adenosine levels reached a certain point in your brain and spinal cord, your body will start nudging you toward sleep, or at least taking it easy. There are actually a few different adenosine receptors throughout the body, but the one caffeine seems to interact with most directly is the A1 receptor. More on that later.
Enter caffeine. It occurs in all kinds of plants, and chemical relatives of caffeine are found in your own body. But taken in substantial amounts—the semi-standard 100mg that comes from a strong eight-ounce coffee, for instance—it functions as a supremely talented adenosine impersonator. It heads right for the adenosine receptors in your system and, because of its similarities to adenosine, it's accepted by your body as the real thing and gets into the receptors.
Update: Commenter dangermou5e reminds us of web comic The Oatmeal's take on adenosine and caffeine. It's concise:

More important than just fitting in, though, caffeine actually binds to those receptors in efficient fashion, but doesn't activate them—they're plugged up by caffeine's unique shape and chemical makeup. With those receptors blocked, the brain's own stimulants, dopamine and glutamate, can do their work more freely—"Like taking the chaperones out of a high school dance," Braun writes in an email. In the book, he ultimately likens caffeine's powers to "putting a block of wood under one of the brain's primary brake pedals."
It's an apt metaphor, because it spells out that caffeine very clearly doesn't press the "gas" on your brain, and that it only blocks a "primary" brake. There are other compounds and receptors that have an effect on what your energy levels feel like—GABA, for example—but caffeine is a crude way of preventing your brain from bringing things to a halt. "You can," Braun writes, "get wired only to the extent that your natural excitatory neurotransmitters support it." In other words, you can't use caffeine to completely wipe out an entire week's worth of very late nights of studying, but you can use it to make yourself feel less bogged down by sleepy feelings in the morning.
These effects will vary, in length and strength of effect, from person to person, depending on genetics, other physiology factors, and tolerance. But more on that in a bit. What's important to take away is that caffeine is not as simple in effect as a direct stimulant, such as amphetamines or cocaine; its effect on your alertness is far more subtle.

It Boosts Your Speed, But Not Your Skill—Depending on Your Skill Set

Johann Sebastian Bach loved him some coffee. So did Voltaire, Balzac, and many other great minds. But the type of work they did didn't necessarily get a boost from their prodigious coffee consumption—unless their work was so second-nature to them that it felt like data entry.
The general consensus on caffeine studies shows that it can enhance work output, but mainly in certain types of work. For tired people who are doing work that's relatively straightforward, that doesn't require lots of subtle or abstract thinking, coffee has been shown to help increase output and quality. Caffeine has also been seen to improve memory creation and retention when it comes to "declarative memory," the kind students use to remember lists or answers to exam questions.
(In a semi-crazy side note we couldn't resist, researchers have implied this memory boost may be tied to caffeine's effect on adrenaline production. You have, presumably, sharper memories of terrifying or exhilarating moments in life, due in part to your body's fight-or-flight juice. Everyone has their "Where I was when I heard that X died" story, plugging in John F. Kennedy, John Lennon, or Kurt Cobain, depending on generational relatability).
Then again, one study in which subjects proofread text showed that a measurable boost was mainly seen by those who could be considered "impulsive," or willing to sacrifice accuracy and quality for speed. And the effect was only seen in morning tests, indicating the subjects may have either become lightly dependent on caffeine, or were more disposed to such tasks at that time of day.
So when it comes to caffeine's effects on your work, think speed, not power. Or consider it an unresolved question. If we're only part of the way to understanding how caffeine affects the brain, we're a long way to knowing exactly what kind of chemicals or processes are affected when, say, one writes a post about caffeine science one highly caffeinated afternoon.
For a more direct look at what happens to your brain when there's caffeine in your system, we turn to the the crew at Current. They hooked up one of their reporters to a brain monitor while taking on some new caffeine habits, and share their brains on caffeine:

Effectiveness, Tolerance, and Headaches

Why do so many patients coming out of anesthesia after major surgery feel a headache? It's because, in most cases, they're not used to going so long without coffee. The good news? If they wait a few more days, they can start saving coffee again for when they really need it.
The effectiveness of caffeine varies significantly from person to person, due to genetics and other factors in play. The average half-life of caffeine—that is, how long it takes for half of an ingested dose to wear off—is about five to six hours in a human body. Women taking oral birth control require about twice as long to process caffeine. Women between the ovulation and beginning of menstruation see a similar, if less severe, extended half-life. For regular smokers, caffeine takes half as long to process—which, in some ways, explains why smokers often drink more coffee and feel more agitated and anxious, because they're unaware of how their bodies work without cigarettes.
As one starts to regularly take in caffeine, the body and mind build up a tolerance to it, so getting the same kind of boost as one's first-ever sip takes more caffeine—this, researcher can agree on. Exactly how that tolerance develops is not so clear. Many studies have suggested that, just as with any drug addiction, the brain strives to return to its normal function while under "attack" from caffeine by up-regulating, or creating more adenosine receptors. But regular caffeine use has also been shown to decrease receptors for norepinephrine, a hormone akin to adrenaline, along with serotonin, a mood enhancer. At the same time, your body can see a 65 percent increase in receptors for GABA, a compound that does many things, including regulate muscle tone and neuron firing. Some studies have also seen changes in different adenosine receptors when caffeine becomes a regular thing.
Caffeine, it's been suggested, is probably not directly responsible for all these changes. By keeping your brain from using its normal "I'm tired" sensors, though, your caffeine may be causing the brain to change the way all of its generally excitable things are regulated. Your next venti double shot goes a little less far each time, in any case. Photo by zoghal.
A 1995 study suggests that humans become tolerant to their daily dose of caffeine—whether a single soda or a serious espresso habit—somewhere between a week and 12 days. And that tolerance is pretty strong. One test of regular caffeine pill use had some participants getting an astronomical 900 milligrams per day, others placebos—found that the two groups were nearly identical in mood, energy, and alertness after 18 days. The folks taking the equivalent of nine stiff coffee pours every day weren't really feeling it anymore. They would feel it, though, when they stopped.
You start to feel caffeine withdrawal very quickly, anywhere from 12 to 24 hours after your last use. That's a big part of why that first cup or can in the morning is so important—it's staving off the early effects of withdrawal. The reasons for the withdrawal are the same as with any substance dependency: your brain was used to operating one way with caffeine, and now it's suddenly working under completely different circumstances, but all those receptor changes are still in place. Headaches are the nearly universal effect of cutting off caffeine, but depression, fatigue, lethargy, irritability, nausea, and vomiting can be part of your cut-off, too, along with more specific issues, like eye muscle spasms. Generally, though, you'll be over it in around 10 days—again, depending on your own physiology and other factors.
Update: Commenter microinjectionist offers his own summary of more recent caffeine studies, which offers expanded reasons why caffeine users feel a "morning crash," as well as why your whole body, not just your brain, might feel so bad when you withdraw.

Getting Out of the Habit and Learning to Tame Caffeine

Beyond the equivalent of four cups of coffee in your system at once, caffeine isn't giving you much more boost—in fact, at around the ten-cup level, you're probably less alert than non-drinkers. So what if you want to start getting a real boost from caffeine once again, in a newly-learned, less-dependent way?
Our own Jason Fitzpatrick has both intentionally "quit" caffeine, as well as just plain run out of coffee. Being the kind of guy who measures his own headaches and discomfort, he suggests measuring your caffeine intake, using caffeine amounts in all your drinks, chocolate, and other "boosting" foods. Wise Bread has a good roundup of caffeine amounts, and the Buzz Vs. The Bulge chart also shows how many calories you'll be cutting if you start scaling back. Once you know your levels, map out a multi-week process of scaling down, and stick to it. Jason also suggests that dependency kicking is a good time to start taking walks, doing breathing exercises, or other mind-clearing things, because, in his experience, their effects are much greater when caffeine is not so much a part of your make-up.
Braun, author of Buzz, sees it the same way, but still uses coffee—strategically, according to our email exchange:

In practical terms, this means that if you'd like to be able to turn to caffeine when you need it for a quick, effective jolt, it's best to let your brain "dry out" for at least several days prior to administration. This is actually my current mode of consumption. I don't regularly drink coffee anymore (gasp).
This from a man who loved (and wore out) his home espresso maker. I love coffee in all its guises. But after 30+ years it wasn't working for me. For one thing, the problem with caffeine is that there are adenosine receptors all over the body, including muscles. For me, that meant that caffeine made me vaguely stiff and sore, and it aggravated a tender lower back that was prone to spasm. But I also just wasn't getting a clean, clear buzz from coffee...I drank so much, so regularly, that drinking an extra cup or two didn't do a helluva lot except, perhaps, make me a little more irritable.
So about a year ago I slowly tapered down, and now I have, if anything, a cup of tea (half black, half peppermint) in the morning. (The amount of caffeine from the black tea isn't enough to wire a gnat.) Not only does my body feel better now, my brain is clean of caffeine, so I really want (or need) a good neural jump-start, I will freely...nay, ecstatically...indulge. Then I stop and let the brain settle again.
That's the theory, anyway...and it's basically true, although I'll freely admit that sometimes I have an espresso or coffee just because it tastes so damned good.

If you'd like Braun's extended takes on caffeine tolerance and withdrawal, along with the advent of energy drinks and caffeine's impact on creativity, you can read our full email interview.

Herding Mentality? Or Computer Programs?

The Wall Street Journal notes that stocks are trading in lock-step more than at any time since the 1987 crash. Please consider The Herd Instinct Takes Over. Which has some very interesting data but the conclusion is a little off......

In recent weeks, stocks in the Standard & Poor's 500-stock index have shown an increasing tendency to move in the same direction at the same time. Last week, those stocks' tendency to move in the same direction as the index hit an extreme not seen since October 1987, according to research by investment group Birinyi Associates in Westport, Conn.

The average correlation since 1980 has been 44%. But by mid-June, the correlation had jumped back above 70%, as investors stopped looking for winners and just sold broadly. Last week it surpassed its 2008 high of 79% and hit 81%, the highest level since the 1987 crash, when it touched 83% for one day. That means that on most days recently, the great majority of stocks in the S&P 500 were moving in the same direction, up or down.

Correlation typically goes up during volatile periods, reflecting investors' tendency to dump stocks wholesale rather than try to pick out stocks that once were viewed as refuges, such as those that pay dividends.

Volume has been anemic during this rise, with little individual participation. So did "herding" take over or did black-box futures and flash-trading take over? I'm thinking its the latter

I do not consider this a good omen for equities.

Cross Post From Adventures in Capitalism

This article, combined with Grantham's 1Q commentary on the Graham and Dodd Style investing has really confirmed my feelings on how this stock market has been acting and how it will continue to act in the future. Too much meddling by the government has ruined tried and true value investing.

The Macro Trumps All Else

July 2, 2010 8:57 AM

---

When I read Security Analysis, the investment bible by Graham and Dodd, I am transported to a past era when investment life was easier. You could focus your energies on finding companies trading at less than fair value. You focused on the balance sheet and the income statement. The economy was static. It grew a few percent a year and economic life was rather uneventful. There were panics and crashes, but these were usually confined to certain industries like railroads where there had been overexpansion. Most companies were immune to these economic disturbances.

Graham and Dodd could look at the Dollars on the balance sheet and feel confident that they would not be marginalized by the next round of quantitative easing. They didn’t have to worry about the fiscal sanity of their government. It was just taken for granted that the US government finances were solvent. Governments always enacted arbitrary laws, but no one had to worry about wholesale regulatory change every time congress was in session. Regulatory regimes changed gradually—if at all. Liabilities were what showed up on your balance sheet. An investor did not have to worry about wolf-packs of ambitious lawyers descending on every company in crisis and exacting an extra pound of flesh. Tax rates were constant enough to allow for long term economic planning.
Prudent investors demanded a margin of safety before investing in a company. That margin of safety protected you from all of the above and still left plenty of room for upside. That is because most of the risks to a corporation were quantifiable. This let investors focus on their companies and ignore the newspapers. The macro world was largely irrelevant. You bought great companies at reasonable prices and waited until the share prices appreciated. World events simply didn’t matter. The business cycle only barely mattered. Buy cheap and let compounding work in your favor.

Now, investing seems to revolve around just one factor. What will the government do next? Which businesses will they clamp down on? Which will be subsidized? Who will get the next bailout? Will various tax subsidies be increased or eliminated? What new laws are in the mix? How can you anticipate all these changes?
There are no constants any longer. You cannot rely on anything. Everything seems perpetually in flux. The world economy is once again imploding. Will it be allowed to collapse? Unlikely. When will the next bailout be announced? What shape will it take? Who will the winners be? That really is the question that everyone demands an answer to. When is the next bailout? Bigger, Badder, More Corrupt—that’s our country’s new mantra. Which companies will lobby the right congressmen and be included? Which will be destroyed?
How do you invest in an environment like this? Say you look at a company. Do you want a business that’s economically sensitive—or one that has a strong and liquid balance sheet? Are you betting on them printing just a little money—or a full out Weimar style debasement? What’s the expected tax rate? It’s going up. That’s for sure. Will carbon taxes impact my businesses? What about changes in health care legislation? There are dozens of issues currently debated in congress. They all impact businesses.
Then there’s the whole wide world outside of the US. A generation ago, most businesses were regional. You could ignore what happened in China. Now China is the lynchpin of global economic growth. How can you decipher China? It’s monolithic. Will the Euro survive? Will it be debased or discarded as the component nations go their own separate way? Imagine the world’s largest economic bloc simply repudiating their currency? How do you invest for that? The whole investment climate is a daisy-chain of binary outcomes that are mutually exclusive. The middle ground seems vanquished.
These are the issues that I tango with daily. I invest in small businesses. Over the past decade, I’ve made a lot of money doing this. However, it continues to become more difficult. The rules change every day. A decade ago, I mostly ignored the macro—now I spend most of my time analyzing it. Small companies are illiquid and volatile. That has never bothered me before. Now I increasingly want more liquidity. I want the ability to react to the newest crisis. I am not a trader—now I have no choice. Every morning, I have to throw out all the old rules and start again. The macro events rule—businessmen are impotent.

I want to buy great businesses and put them away for years at a time. No longer can you trust that a dominant business will remain dominant. It won’t be a competitor that destroys the business. It will be an errant politician or a bad hedge on their Euro exposure. Volatility is destroying real businesses. Is every company now expected to hire whole trading desks to manage various exposures? How can you expect the most basic elements of a business to remain stable when the currency itself is increasingly detached from reality?
I have no problem navigating economic booms and collapses. That’s part of investing. What I strongly object to is the government increasingly inserting itself into the economy. You cannot manage an economy based on the applause meter of 24-hour news programs. You cannot manage an economy. Period. It is not debatable. Unfortunately, our government continues to corral the various market forces and lead them towards whatever myopic utopia politicians think will be needed for reelection. This creates economic anarchy. If you could run an economy based on erratic rules and crony capitalism, Argentina would be a world power. If you could print your way to prosperity, Zimbabwe would be a world banking hub. If you could command the economy to heed you, the USSR would still exist. I’m scared that world leaders have taken all the worst lessons of the last generation of economic thought and bundled them together into some sort of economic doomsday machine.

I apologize for this stream of consciousness. I’m frustrated. For my whole career, I believed that a great business with a strong return on capital would outperform all other asset classes. What if that isn’t true? For the past three years, only the macro has mattered. Going forward, what if the macro is ALL that matters? What if you have to rapidly jump from asset class to asset class as the rules change weekly? I hope this isn’t the case. However, it is time to consider that possibility.
In an age of increasing uncertainty, market multiples will collapse. Investors will demand an even larger margin of safety. Earnings will become increasingly volatile. Investors will focus more and more on the balance sheet. Unfortunately, most companies trade at many times book value. Some of the largest companies in the US have negative tangible book value. I expect to see market multiples continue to decline. Why would you risk your capital in uncertain times when you can just buy gold and ignore all the chaos around us? That’s really what I wrestle with the most. Gold will continue to go higher over time—if only because world governments seem determined to act foolish. Can you find companies that will outpace the price increase of gold? It will be difficult. The macro forces arrayed against business are just that extreme. You can no longer ignore the macro. The macro outweighs all else now. 

Head over and read more of Kuppy's stuff at Adventures in Capitalism it is a fantastic blog.

Don't Worry Everything is Fine! Here is why....

 
#50) In 2010 the U.S. government is projected to issue almost as much new debt as the rest of the governments of the world combined.

#49) It is being projected that the U.S. government will have a budget deficit of approximately 1.6 trillion dollars in 2010.

#48) If you went out and spent one dollar every single second, it would take you more than 31,000 years to spend a trillion dollars.

#47) In fact, if you spent one million dollars every single day since the birth of Christ, you still would not have spent one trillion dollars by now.

#46) Total U.S. government debt is now up to 90 percent of gross domestic product.

#45) Total credit market debt in the United States, including government, corporate and personal debt, has reached 360 percent of GDP.

#44) U.S. corporate income tax receipts were down 55% (to $138 billion) for the year ending September 30th, 2009.

#43) There are now 8 counties in the state of California that have unemployment rates of over 20 percent.

#42) In the area around Sacramento, California there is one closed business for every six that are still open.

#41) In February, there were 5.5 unemployed Americans for every job opening.

#40) According to a Pew Research Center study, approximately 37% of all Americans between the ages of 18 and 29 have either been unemployed or underemployed at some point during the recession.

#39) More than 40% of those employed in the United States are now working in low-wage service jobs.

#38) According to one new survey, 24% of American workers say that they have postponed their planned retirement age in the past year.

#37) Over 1.4 million Americans filed for personal bankruptcy in 2009, which represented a 32 percent increase over 2008.  Not only that, more Americans filed for bankruptcy in March 2010 than during any month since U.S. bankruptcy law was tightened in October 2005.

#36) Mortgage purchase applications in the United States are down nearly 40 percent from a month ago to their lowest level since April of 1997.

#35) RealtyTrac has announced that foreclosure filings in the U.S. established an all time record for the second consecutive year in 2009.

#34) According to RealtyTrac, foreclosure filings were reported on 367,056 properties in March 2010, an increase of nearly 19 percent from February, an increase of nearly 8 percent from March 2009 and the highest monthly total since RealtyTrac began issuing its report in January 2005.

#33) In Pinellas and Pasco counties, which include St. Petersburg, Florida and the suburbs to the north, there are 34,000 open foreclosure cases.  Ten years ago, there were only about 4,000.

#32) In California’s Central Valley, 1 out of every 16 homes is in some phase of foreclosure.

#31) The Mortgage Bankers Association recently announced that more than 10 percent of all U.S. homeowners with a mortgage had missed at least one payment during the January to March time period.  That was a record high and up from 9.1 percent a year ago.

#30) U.S. banks repossessed nearly 258,000 homes nationwide in the first quarter of 2010, a 35 percent jump from the first quarter of 2009.

#29) For the first time in U.S. history, banks own a greater share of residential housing net worth in the United States than all individual Americans put together.

#28) More than 24% of all homes with mortgages in the United States were underwater as of the end of 2009.

#27) U.S. commercial property values are down approximately 40 percent since 2007 and currently 18 percent of all office space in the United States is sitting vacant.

#26) Defaults on apartment building mortgages held by U.S. banks climbed to a record 4.6 percent in the first quarter of 2010.  That was almost twice the level of a year earlier.

#25) In 2009, U.S. banks posted their sharpest decline in private lending since 1942.

#24) New York state has delayed paying bills totalling $2.5 billion as a short-term way of staying solvent but officials are warning that its cash crunch could soon get even worse.

#23) To make up for a projected 2010 budget shortfall of $280 million, Detroit issued $250 million of 20-year municipal notes in March. The bond issuance followed on the heels of a warning from Detroit officials that if its financial state didn’t improve, it could be forced to declare bankruptcy.

#22) The National League of Cities says that municipal governments will probably come up between $56 billion and $83 billion short between now and 2012.

#21) Half a dozen cash-poor U.S. states have announced that they are delaying their tax refund checks.

#20) Two university professors recently calculated that the combined unfunded pension liability for all 50 U.S. states is 3.2 trillion dollars.

#19) According to EconomicPolicyJournal.com, 32 U.S. states have already run out of funds to make unemployment benefit payments and so the federal government has been supplying these states with funds so that they can make their  payments to the unemployed.

#18) This most recession has erased 8 million private sector jobs in the United States.

#17) Paychecks from private business shrank to their smallest share of personal income in U.S. history during the first quarter of 2010.

#16) U.S. government-provided benefits (including Social Security, unemployment insurance, food stamps and other programs) rose to a record high during the first three months of 2010.

#15) 39.68 million Americans are now on food stamps, which represents a new all-time record.  But things look like they are going to get even worse.  The U.S. Department of Agriculture is forecasting that enrollment in the food stamp program will exceed 43 million Americans in 2011.

#14) Phoenix, Arizona features an astounding annual car theft rate of 57,000 vehicles and has become the new “Car Theft Capital of the World”.

#13) U.S. law enforcement authorities claim that there are now over 1 million members of criminal gangs inside the country. These 1 million gang members are responsible for up to 80% of the crimes committed in the United States each year.

#12) The U.S. health care system was already facing a shortage of approximately 150,000 doctors in the next decade or so, but thanks to the health care “reform” bill passed by Congress, that number could swell by several hundred thousand more.

#11) According to an analysis by the Congressional Joint Committee on Taxation the health care “reform” bill will generate $409.2 billion in additional taxes on the American people by 2019.

#10) The Dow Jones Industrial Average just experienced the worst May it has seen since 1940.

#9) In 1950, the ratio of the average executive’s paycheck to the average worker’s paycheck was about 30 to 1.  Since the year 2000, that ratio has exploded to between 300 to 500 to one.

#8) Approximately 40% of all retail spending currently comes from the 20% of American households that have the highest incomes.

#7) According to economists Thomas Piketty and Emmanuel Saez, two-thirds of income increases in the U.S. between 2002 and 2007 went to the wealthiest 1% of all Americans.

#6) The bottom 40 percent of income earners in the United States now collectively own less than 1 percent of the nation’s wealth.

#5) If you only make the minimum payment each and every time, a $6,000 credit card bill can end up costing you over $30,000 (depending on the interest rate).

#4) According to a new report based on U.S. Census Bureau data, only 26 percent of American teens between the ages of 16 and 19 had jobs in late 2009 which represents a record low since statistics began to be kept back in 1948.

#3) According to a National Foundation for Credit Counseling survey, only 58% of those in “Generation Y” pay their monthly bills on time.

#2) During the first quarter of 2010, the total number of loans that are at least three months past due in the United States increased for the 16th consecutive quarter.

#1) According to the Tax Foundation’s Microsimulation Model, to erase the 2010 U.S. budget deficit, the U.S. Congress would have to multiply each tax rate by 2.4.  Thus, the 10 percent rate would be 24 percent, the 15 percent rate would be 36 percent, and the 35 percent rate would have to be 85 percent.

Quotes of the Day

Any health care funding plan that is just equitable civilized and humane must, must redistribute wealth from the richer among us to the poorer and the less fortunate. Excellent health care is by definition re-distributional.

Donald Berwick in 2008 while speaking on the British health care system in the UK

There was also this nugget during his speech

Please don’t put your faith in market forces. It is a popular idea that Adam Smith’s invisible hand will do a better job at designing care than leaders with plans can do. I do not agree. I find little evidence anywhere that market forces bluntly used that is just consumer choice among a ray of products with competitors fighting it out, leads to the health care system you want and need.

President Barack Obama bypassed the Senate Wednesday and appointed Dr. Donald Berwick, a Harvard professor and patient care specialist, to run Medicare and Medicaid. The decision to use a so-called recess appointment to install Berwick as administrator of the Centers for Medicare and Medicaid Services drew immediate fire from the GOP .