Consumer confidence and other surveys-meaningless

They tout the consumer confidence from Michigan or wherever and tell you that people are in a dour mood. They survey CEOs about their outlook ("feelings") for the year and months to come and tell you how to interpret it to invest money in bonds, stocks, etc. All these surveys are sold as financial news.

These surveys are meaningless. They don't tell you anything.

Humans talk and act. Their actions many times have not much to do with their talk--they will keep saying they wont smoke or eat more or buy a Gucci bag but will keep doing those activities anyway. It is a fundamental problem with all surveys (including pseudo subjects like psychology, sociology, etc. which are heavily survey dependent)-a human animal just because of it's ability to talk is assumed to know what it wants to do-and this is a wrong assumption. Look at the number of smokers and dieters around you who are addicted to cigarettes and are fat to convince yourself that what we say is very often not followed through. Actions speak louder than words, someone has said---and that is the right view from a biologist/scientist-animals which don't speak also show their preferences by their actions. This is also true for savage people with rudimentary language skills living in the Amazonian jungles, the aborigines in Australia, NZ and many parts of Africa and Asia, and numerous other "uncivilized" human beings which still live today. They may not talk much---but they are still humans, at least in the present classification of species. And you trust their actions for finding out about their preferences, not what they say. This also holds for kids-who talk a lot of things but you can tell what they really want much better by watching what they do.

Sanjay

S&P downgrades-confusing cause and effect

The S&P (Standard and Poor) analysts are another bunch who always confuse the cause with the effect.
They downgraded (or are threatening to downgrade) Lehman and AIG last week. See stories here and here.

In both cases they are saying the reason for the downgrade is the low share price and the increasing credit spreads on the companies' bonds making it difficult for them to raise capital.

The cause is said to be the low share price and the increasing credit spread. The effect is supposedly the increased difficulty to get more funds and capital.

This is misplaced causality.

The stock price is down (and credit spreads are up) because investors see fundamental problems for these companies. The fundamental problems (mortgage loans, real estate investments, Alt-A loans) are also the reason why capital raises for these companies are difficult.

Weakening of share price, increase in credit spreads, and difficulty to raise capital-all are effects of fundamentals problems with these companies. The S&P guys are attributing an effect as the cause of another effect....go figure.

A weak share price for a good business (fundamentally good business) makes it easier for the company to raise capital, because an investor would love to loan money to a thriving business whose share price has been pushed down artificially for some reason. In the present market-coal, fertilizer, iron-ore, copper, and oil stocks are good examples of this-I have been adding to them in this massive sell-off. A good way to play them all is buying BHP and RTP-u get to play the whole commodities sector in a way.

But these analysts of S&P amused me.


Sanjay

PIMCO, Bill Gross, Bond Funds???

Today PIMCO's co-chief investment officer Bill Gross came out with these statements:

"The U.S. government needs to start using more of its money to support markets to stem a burgeoning ``financial tsunami,'' "Banks, securities firms and hedge funds are dumping assets, driving down prices of bonds, real estate, stocks and commodities".

``Unchecked, it can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami,'' "If we are to prevent a continuing asset and debt liquidation of near historic proportions, we will require policies that open up the balance sheet of the U.S. Treasury.''

See Bloomberg story here, excerpted from the garbage he published on his website.

Does this sound like an adult bond fund manager of apparently the biggest bond fund in the world??? What a whiner-he wants the US Government to help. Since when have Governments made money for private individuals??? Any time they interfere in the markets-it is always for the bad of private individuals. Now Mr. Gross wants the Government to save the leveraged bets. He makes me laugh-he is at the top of the heap of people who know very little, do nothing, and are paid by the foolish public millions of dollars to "manage" a bond fund.

Who the heck created this idea anyway-of actively managing a bond fund? Bond funds are low risk-why pay a manager??? Sounds bizarre. Much like municipal bond insurance salespeople like MBI and ABK, bond funds are another scam of Wall Street. They charge 1% fees for making you 5-8%!!!! At least in a stock fund you can understand paying a manager 2% if you make 20-30%, but a bond fund is a completely silly way to pay someone to do nothing at all.

Any time assets are not very volatile-bonds, developed world currencies against each other---one should not "invest" in funds of those. Manager/Trader skill is in managing volatility to make money for you-and low volatility or low risk markets are not a skill game. Better to buy any random collection of bonds-some AAA, some junk---u know how much we trust those rating agencies....:-). As I mentioned in a post earlier- I dont trust Government bonds-trust corporate bonds more. The academic crap called risk free rates is all backwards-it is written by Nobel Laureates in the US and Developed worlds-Governments who haven't defaulted on their debt in the last few hundred years. That makes them think that Government bonds are "safer" than corporate bonds---that is not true. A diversified portfolio of corporate bonds is less risky, in my opinion, than holding some Government bonds of the USA or a developed country. Of course it is even less risky, relatively speaking, for a developing country-where Government defaults are quite common.
Think of how many bogus Nobel prizes have been awarded in Economics on the concept of risk free rate being equated to Government bonds.


Sanjay

Jeremy Siegel, PhD in Economics

Adam Smith's ideas, which laid the foundation for a career in economics, is mocked at by people like Jeremy Siegel.
See this post of his which appeared a couple of days ago
What a joke-He is observing two things at random (party in power and stock market returns), and is trying to give a causality argument when even a correlation can be called completely accidental.
This man is an astrologer. Do they have a PhD in Astrology somewhere still?

Sanjay

What is arbitrage-the uselessness of cash

Just a quick word on Arbitrage.
There are all these strategies about pairs trading, relative value, etc involving two different securities. They forget that buying anything with "cash" is also arbitrage.

One must remember that cash is nothing but a bet on a Government. The US, Japanese or Western European Governments keep your money safe and give you an interest-but when you move cash out into buying some stock you are arbitraging the cash for the security-because u see better value there. Instead of the Government giving you 4% per annum you play the gamble and want to get more than that-that's when you trade your "cash" for the security.

Cash is much worse than stocks for non-developed world Governments. Governments will default and currencies will devalue-but stocks and companies will stay often. Take Russia and Argentina as examples. Pull up charts of ROS and YPF to see what I mean-they stayed even when people holding cash in Argentine Peso and Russian Rouble lost loads of money because of devaluation.

All trades are arbitrage between "cash" and the securities bought or shorted with the "cash".

Sanjay

Books/Authors I like-and why biology and economics are difficult

I live off three books/authors when it comes to biology and economics.

Adam Smith's "The Wealth of Nations"
Charles Darwin's "The Origin of Species"
and Nassim Taleb in "The Black Swan" and "Fooled by Randomness".

What's the connection between biology and economics?

Both deal with life, living species.

That's why they are harder that physical sciences-Physics, Chemistry, Engineering.

As long as we deal with inanimate objects are have great laws of motion, of thermodynamics, of Quantum Mech and of Relativity-to make us really understand mother nature and use that knowledge to our advantage.

Biology is difficult-because it deals with life. But we are progressing. And economics deals with behavior of humans-living objects-making it much "harder" than Thermodynamics or Quantum Mechanics.

But with all these problems-Adam Smith and Darwin stand out. They have a lot of empirically provable stuff to say in The Wealth and The Origin.

Unfortunately most other authors I have read make lots of errors-especially in economics. They are not scientists.
That's where Taleb comes in. He tells you to not revere the suits and the ties, the high positions (the apprenticeships-in Smith's language). That most people don't understand much-that we tell elegant stories, but they are unscientific, unempirical, unprovable. They are very logical-but that is not enough (the earth is flat is a logical statement for all humans-but it is false).

Taleb gives us courage to stand up against the false knowledge in humans. He is often right-in questioning the validity of all this apparent knowledge around us.

Taleb's website is here.

The Wealth of Nations and The Origin of Species are 10 dollar books on Amazon.com. Taleb's are pretty cheap too. Pure knowledge is quite inexpensive!

Sanjay