SanjayJohn.com

Investing in Commodities

noreply@blogger.com (Sanjay "John" Gandhi) — Wed, 17 Dec 2008 05:53:00 +0000

The abundance of commodities like crude oil, coal, copper, iron-ore, aluminum, potash, phosphate, wheat, soybeans, maize, is the real cause of prosperity of humans. Economic progress for humans is defined by super abundance of these basic goods from which all other goods are derived by the application of human labor. You can think of a car as a finished good which is a product of the various metals, coal (electricity) and the human labor component. The finished goods/basic goods concept was popularized by Hayek, but the real idea was from the Master, Adam Smith. Hayek just reinterpreted it and the world started believing that it was his idea-it wasn't. You can find it in "The wealth of Nations" or online at adamsmith.org here. It is hard to find original ideas in Economics which can't be traced back to Adam Smith. In many cases his ideas have been distorted and misrepresented by Economists with PhD degrees and Nobel prizes. Even David Ricardo's theory of rent and comparative advantage originates with Adam Smith, notwithstanding his manner of writing "Principles of Political Economy.." as a challenge to Smith's ideas.

A world where farmers don't produce surplus food for sending to the city can't survive for long. The cities will die of starvation. Clearly food is a basic necessity-division of labor, etc. in a city can proceed only when the city population is well fed.

Let's imagine a world where all miners stop producing the metals and coal and oil they extract (I put oil and coal in mining-they are closely related). Such a society can't survive for long-the city folk need all these basic necessities, or commodities, to carry on their division of labor and improvements in their jobs. If you think of it in reverse-it is the abundance of these commodities from the mines which results in real progress in the city.

Have you seen a supermarket in a developed world vs. a supermarket in a developing country vs. a supermarket in a poor country? The first thing which strikes you is how abundant food is in a developed country. The abundance of food is the real cause of value for all other products. This idea is again from Adam Smith, and can be found here.

This is the reason that my investments in the stock market are heavily in mining (including energy) stocks. Their real production needs to go up in time for the world to progress-and it is amusing that the most stable sector of the economy, the mining industry, is the most volatile. The volatility in the mining sector is caused by the momentum players-banks and hedge funds are the major ones-who are attracted to the rising prices in a bull market for commodities and are try to make a quick buck in a month. When prices fall, they get out in a hurry and their "stop loss" gets executed to minimize their losses, or because of their overleverage they are taken out by their broker's margin call. Since this is hot money wanted to make a quick buck-it tends to exacerbate market swings and increase volatility. Economics and Finance people who believe that putting more participants in a market decreases it's volatility (Greenspan is one of these people) are wrong because that happens only when they play the market maker-buy low, sell high. However, if everyone comes with a momentum trading idea in their head, buy high-sell higher-then it increases volatililty and the real market makers show losses. But those losses are temporary-eventually the mining sector comes back and sets new highs, and makes money for all in it.

Sanjay

Consumption doesnt help economy, savings do!

noreply@blogger.com (Sanjay "John" Gandhi) — Tue, 09 Dec 2008 15:32:00 +0000

Now the trend in the world is to cut taxes and put more money in the hands of the consumer. Then they are encouraging the citizens to spend more, to buy more, to consume more, to help the other guy, to help stimulate the economy. Here are news items from Australia and Canada on this. The Australian prime minister is saying "Go out and spend the money"!

This is nonsense. Just like consumption by me doesn't help my financial situation, I will be poorer if I consume today, so it goes for the whole society or country. Consumption doesn't help; I need to find productive uses of my capital, so I produce more. For example, if for $1000 which the Government gives me in Tax rebates, if I go and buy a plastic dinosaur, that hardly helps in me producing more bread (I am a baker by profession). However, if that $1000 goes towards buying a new storage box for the bread, I can produce more bread. More importantly, if I hold on to the $1000 in the bank and do nothing at all; my efficiency of making bread doesn't go down.

Consumption is not necessary to increase production or productivity. That is the mistake Keynes made, and everyone seems to not understand this simple thing. Division of labor, increase in efficiency and dexterity of workers, increase without any consumption. In fact, when people are less likely to buy and consume your products, you work harder to lower the costs of the goods so they do buy them.

A prosperous society is a society which consumes nothing but produces everything in large kquantities. Think of Uber robots who dont even need energy to run---they keep producing bread, steel, jewelery, houses, cars, airplanes, etc. in extremely large quantities at 0 cost. That is a rich society. Whenever you consume something, you take away from this ideal rich society.

Just as a man who doesn't spend anything at all, I mean 0, from his salary assures that he will be rich; so does a society or country which spends nothing assures that it will be rich.

So next time someone talks to you about stimulating the economy, providing jobs for the country, etc. by increasing consumption, you need to walk away from them.

Sanjay

Auto Industry bailouts vs. Financial Industry bailouts in the US

noreply@blogger.com (Sanjay "John" Gandhi) — Tue, 18 Nov 2008 00:00:00 +0000

Now they are voting about bailing out Ford, GM and Chrysler.
The Democrats want to loan $25 Billion on the condition that the US car companies will make more fuel efficient cars. Executive pay will be limited and dividends suspended. Here's more on the plan proposed by the Democrats.

Let's analyze the US car industry first. They were kings of the world until the 70's, when Japanese started making cars. Then the Koreans (a large country of 50M people) also decided to make cars-climbing up the capitalism ladder (the private car companies had enough capital to compete head on with the Japanese and US car companies) to take market share away from the Japanese and US Car makers. Toyota and Honda were the jokes of the 70's, they became the top companies of the 90's. Hyundai was the joke of 1993, and it became a top seller in this decade, around 2005. The Japanese moved up the value chain of cars, then the Koreans did. And the US car industry really is a lifeless organ making metal boxes.

Will Government putting their money in make the GM and F employees and management work harder to make more fuel efficient cars, or generally improve the efficiency of the companies? That is the key question here. If you know examples of socialist car making companies in Russia, China and India-you know that Government ownership will REDUCE the efficiency of operation of these companies. The employees are less likely to work hard if they don't have the profit incentive, if you cut their pays, etc. Government ownership of pretty much everything lowers efficiency of the workplace. If the profit motive, of beating Toyota and Honda, of making and keeping multimillion dollar salaries could'nt keep these companies afloat-Government ownership will not help-even if some senator believe that it can be done but the "will" is not there. What is "will" anyway? Do I have the will power to rule the world? Unscientific terms like "will power" and "motivation" are modern day analogues of religious terms used in the 16th century. My "will power" has about the same bearing on the results of my actions as my prospects in an afterlife. These are not causes-"will power" is not a cause of anything. In scientific, which means biological or physical terms, not psychological or sociological terms (Psychology and Sociology are modern versions of Metaphysics and Ontology) if you explain to me what "will power" is, I might accept your causality.

The conditions of the bailout of $25B is like giving money to a cripple on the condition that they run faster in the future. It is bizarre.

Financial Industry bailouts are another animal. There you don't have the Japanese and Koreans competing head on in selling a tangible, hard to make product. You have a bunch of finance people in the business of buying and selling money-a product which can be generated in unlimited quantities, very easily, by a central bank by changing the interest rate.

It is comparing apples to oranges.

Financial bailout is okay-with severe pay restrictions. The Government could even completely take over the banking industry-after all, they buy and sell the main product of the Government-money! Nothing wrong with that. But bailing out a car company is another beast in it's entirety.

Sanjay

An ETF for everything

noreply@blogger.com (Sanjay "John" Gandhi) — Tue, 04 Nov 2008 11:43:00 +0000

2008 has been the year of the ETFs. They started out in 2007, and now there's an ETF for everything. Commodities, currencies, short, double short, financial short, real estate short, 2x financial short, short international, you name it-there's the right ETF "product" for you.

Invesco came out with a release today-Actively managed ETF.

What crap is Actively managed ETF anyway? The whole idea of an ETF is that some stupid manager doesn't tinker with it-so I know what it has-and changes are made slowly, announced. How is an actively managed different from an mutual fund? Oh oh, you can trade it intraday-is that it? But do we need this?

Let's see what the news release says.

They are "combining established active managers" (read-losers who have been losing money) and this is creating a "compelling new investment vehicle" (haven't we learned to stay away from compelling investment opportunities, compelling new products?).

The release says that Invesco is going to give the public "market-leading ideas" and the fund will invest "using quantitative and statistical metrics". What are they? There are no quantitative and statistical metrics in modern finance (there's no such thing as modern finance, just like there isn't any modern astrology). These high sounding words are designed to fool the public into thinking that these guys know something-but they dont. These sare slick salesman pretending to be scientisists, mathematicians, etc.

But you can't blame a salesman for selling a $2 item for $2000. The question is: Who buys this shit? The pension funds, mutual funds, corporate treasurers, wealthy investors, how many fools are there?

Sanjay

Non-existent hedge fund "strategies"

noreply@blogger.com (Sanjay "John" Gandhi) — Sun, 02 Nov 2008 19:32:00 +0000

Pension funds, private investors etc. are fooled by the snake oil salesmen of finance-hedge funds, offering them newer and cooler strategies to beat the market, to hedge, to diversify, etc. Most of these are not strategies at all-they are crap being sold in colorful packages.

The basic stuff for capital markets is:
1. Common Stocks
2. Bonds of companies
3. Government bonds

All the rest can be derived from or are strongly correlated with these-and all other "strategies" to capture extra returns are garbage.

Have you seen Volkswagen stock lately? The Volks Porsche saga is great to put to test what you think is normal isn't so in the financial markets. Here's the chart. At one point Volks become the biggest market cap company in the world-even overtaking Exxon Mobil! The stock went from 200 Euros to 1000 Euros in 2 days, on massive volume-showing that this stuff can happen to large companies with good stock volume as well. I won't go into the details-nor do I pretend to know what they are-but it was something to do with betting on convergence of preferred to common. The chart says it all-if you were short Volks common your broker covered it at 4x before you even knowing what was going on.

Merger Arbitrage is a strategy they sell; it is strongly correlated to the stock market. No amout of previous experience in mergers tells you the probability of a new merger going through. There are way too many unknowns, and these are strategies which will give you a small profit if you are right, but a very large loss, possibly bankrupcy, if you are wrong. Think LTCM. Other phony strategies are Convertible bond strategies, pairs trading.

Here's a good paper by bridgewater on how all the hedge fund strategies are really no strategies at all.

And don't even talk about Volatility funds, Currency strategies (buying high yielding currencies, or buying other currencies for diversification-see this 5 year chart of the AUD vs USD. The same this happened back in 1992-1994 also) etc. They even sell volatility (yes, there are volatility funds!) and currency as an asset class! Please sell my used underwear as an asset class also-because it should have some value anyway-and it probably is less correlated to the stock or bond markets!

Taleb also reviewed a book-which mentions the dangers of all these strategies, especially when you are selling options and are shorting something.

Sanjay

The crap called Financial Engineering and Private Equity

noreply@blogger.com (Sanjay "John" Gandhi) — Tue, 28 Oct 2008 01:01:00 +0000

I have two Engineering degrees-in Metallurgical Engineering, and Electrical Engineering.
I tried to understand Financial stuff these last few years-came across words like Financial Engineering. This is crap. There's no such thing-otherwise lets invent one called "Predict the football game Engineering" or "Read your Future Astrological Engineering".

Financial Engineering is a sham. It is people using complex mathematics to confuse people into believing they know something. They don't. They sell "products"---currencies, volatility swaps, u name it. All bullshit wrapped in different bright colored packages.

Private equity is the abyss of Finance. The whole idea of capitalism and stock markets-where you loan your money to a company who you don't know personally via a stock market and a financial regulator is dumped by these groups called Private Equity who take public companies private and apply Financial Engineering to them to turn them around. Private Equity investors are probably the dumbest investors of the world. How can you take out the owners of a company and expect to improve the company? See this example of Kerry's media empire in Australia being taken over by Private Equity jokers here.

Here in South Chile there's some fund called Southern Cross, who took over a supermarket chain for $80M. This supermarket chain is owned by a family, and I know the owner personally. He was pretty happy with the offer-seemed like a nice deal. Now he is out of the company's day to day operations and these bozos from Southern Cross plan to run the company....do you think bozos trained in Financial Engineering can run a supermarket better than people who have owned it for 30 years?

Since voodoo people only respect the art of other voodoo people, that's why you have banks, central banks, etc. all in bed with these people called Private Equity. These are buyers and sellers of money; a business they don't understand much at all. They seem to buy high and sell low. That's why China invested in BX and you have these poor taxpayers in China paying for stupid investments by their Government.

Private Equity firms like Blackstone and Fortress are the highest examples of investor stupidity. They are Public! The whole idea of a Private Equity firm with Public shares is bizarre-they take out public companies and engineer them financially and then dump them back on the stock market, and for this financial engineering they can command a premium??? Investors are paying for a non-existent ability called financial engineering, just like millions of people worldwide pay for astrologers...who do use very interesting charts and complicated diagrams, by the way, to read your future (sounds like complex math of finance???).

Will tell you another time about the biggest speculators in currencies-the central banks and the treasury departments. Hint-they "defend" their currencies ---buying them when they go down.... This is not volatility reduction or market making, this is pure speculation.

Sanjay

The cause of the present financial crisis-not US subprime loans-it is unknown

noreply@blogger.com (Sanjay "John" Gandhi) — Mon, 27 Oct 2008 11:09:00 +0000

The press and Governments worldwide, especially the US Government, has blamed the present financial crisis as originating from US sub prime housing loans and then "snowballing" into a bigger problem.

Just because two things are happening together doesn't mean that one is causing the other. There is no proof anywhere that the malaise in financial markets today was caused by the US sub-prime bets going bad (on part of investors and banks).

To attribute the cause to a liquidity problem doesn't say anything. Any financial crisis is a liquidity problem at heart, duh.

Nobody knows why the markets fell part this year; and more importantly, for the policy makers etc. around the world who are trying to "fix" this problem---you can't. Bailing out Bear Stearns seemed to have done it, then increasing credit to banks, then bailing out AIG, then selling Washington Mutual to Citibank...the list goes on. The end result is that the liquidity problem still continues---ergo---you aren't doing much at all to solve the problem.

They should all come out with hands up in the air one of these days and say 'WE HAVE NO CLUE WHY THE MARKETS ARE BEHAVING THE WAY THEY DO'.

A group of monkeys could get together to solve the present crisis-and it would have the same effect-none. This is no disrespect for my own species-but simply a fact that we don't know is a very good answer often times in our lives.

Long live Taleb.

Sanjay

Dallas Fed's Fisher on capitalism and banks

noreply@blogger.com (Sanjay "John" Gandhi) — Sun, 12 Oct 2008 17:41:00 +0000

Here's what Dallas Fed''s President Fisher says about the banking system and capitalism:

"Paulson, the Congress and other officials will ``will engineer an appropriate recapitalization of the banking system in a manner that does not kill the goose that lays the golden eggs of the practice of capitalism,'' See full story here at bloomberg.

To think that banks are the most important part of capitalism is false. This is a snake oil salesman telling me that the most important oil in the world is snake oil.

Capitalism will do just fine without banks. It worked before banks, it will work even if banks completely disappear. I hope that at least 50% of them will-they are useless entities to scam savers of their money.

Mr. Fisher would do well to visit a Texas Instrument's Fab right under his nose in Dallas; that's capitalism. If Adam Smith were alive today he would be proud to see division of labor and capital being employed so well as in a semiconductor manufacturing facility. And I would bet that he would be aghast at how little the banking industry has progressed-and probably even has gotten worse since his times.

Banks were designed to put capital of savers to productive uses-not to loan for houses (a consumption expense, see Adam Smith-houses are not investments, they are consumption loans), real estate or play with derivatives.

Markets will be back-but I hope that the pension funds, the corporate treasurers, and the mom and pop savers of the world will come out smarter not to trust the banks as much as they did before. This will be very good for capitalism-capital will fall into better hands, hands which will allocate it better for the benefit of all. And it will eliminate more of these useless overpaid middlemen called banks.

But to see an important guy in the Federal Reserve talk about the importance of his own profession or of his cousins is funny-you see now that astrologers (they do have Economics and Finance degrees, two disciplines closely related to Astrology. To be fair and not to sound like I am picking on them, Psychology, Sociology, Political Science, etc. fall in the same camp) have risen to the highest levels of Government-and central banks and their staff seem to have quite a few of them.

Sanjay

The present credit crisis, and some advice to banks

noreply@blogger.com (Sanjay "John" Gandhi) — Thu, 09 Oct 2008 17:23:00 +0000

At this stage in the credit crisis in the US and the developed world, even farmers are finding it difficult to find credit. This is a banking system gone completely stupid. Here's some advice to the central bankers and the banks of the world.

The most basic human needs are food and electricity. People spend money first on food and on keeping their houses warm/cold, and a good government should also make sure that the prices of these commodities are low-not by artificially controlling prices, but by increasing their production.

Credit must flow freely to farmers-the worst thing is if they cut down on food production. Chicago grain prices are at levels where it is not making sense for farmers to plant more. These prices are set by ponzi hedge funds who are trend followers-they buy high and sell low, causing increases in volatility. They are going bankrupt now, and selling wheat and soybeans at production costs. These prices will go up soon; however, the longer they stay lower, the more hesitant farmers in the US will become to plant in the next season.

Because central banks and banks are based often in big cities like NYC and Washington DC, they seem to be happy loaning funds around where they are-in big cities. To bail out housing in suburbs of Washington DC by putting capital of banks or tax payers in mortgages, or to help farmers plant more food? The answer is obvious. Even commercial paper of corporations should rank lower than helping finance farmers to plant more food.

Sanjay

Great buying opportunity

noreply@blogger.com (Sanjay "John" Gandhi) — Sat, 04 Oct 2008 15:37:00 +0000

The fear of credit crisis has them throwing stocks out like toilet paper. Mosaic fell 40% the other day-it now has a P/E ratio of 4. Same holds for pretty much the coal sector (ACI, BTU, MEE, CNX) and the iron ore sector (RTP, CLF, FMG.AX) They large miners (RTP, BHP) are down to P/E's of 8-10, with their stocks trading at half their highs. Energy stocks (XLE) are down also to the same P/E's.

Do you think that even if the banking industry of the USA was to totally disappear-that these companies mentioned above will stop selling their extremely useful products? Maybe people will resort to a barter system-exchanging oil for software-but the world will go on. That the financial crisis can cause a long term downturn in the US economy is absolutely false-a fall in the economy for a couple of quarters, as happened in Argentina, or in Korea and South Asia in the Asian crisis of 1998, can happen. But long term-financial crisis DO NOT have the ability to take down the whole economy. Of course the merchants of that sector (banks) will tell you to believe otherwise.

If you witnessed the crisis in Argentina-you saw the big down on that market-eventually for it to rally back up. Goverments come and ago, but companies stay. The stock market stays. The world economy and the US ecoonomy is much larger than the US financial sector, and life goes on.

Buy on margin and in a couple of years from now these prices will look like the sale of a lifetime.

Sanjay

Bizarre repercussions of Lehman bankrupcy

noreply@blogger.com (Sanjay "John" Gandhi) — Thu, 02 Oct 2008 06:17:00 +0000

The only word which describes what is going on right now in the markets is "Bizarre".
Take a look at this story-this sums it up really well. Great job by Tom Cahill at Bloomberg.

To tell about assets of hedge funds being inaccessible, being stranded in Lehman accounts. To tell about a stake in UBS worth $1.3 Billion being stuck.
Words like inaccessible, stranded and stuck are not used for assets of a third party. This is truly bizarre.

It is understandable that assets of the firm itself are seized, but the Government should make sure that assets of third parties are available fast for trading. This is nothing to do with Lehman-this is a Government's responsibility to honor that assets held even at a failed firm-as long as the assets are simple in form like stocks, bonds, simple call and put options trading on exchanges, etc or cash be completely accessible to the clients of the bankrupt firm.
There is a limit of course-like the $100K guarantee by FDIC, but still-stocks and bonds held at a firm should be monitored by the Government and such a thing is absolutely a loss of faith in the Government's ability to do basic stuff-respect right to property and assets.

If this goes on longer and assets of third parties are frozen in Lehman, you can bet that the Governments (US, UK) will be sued and they will pay through their noses for this strange, bizarre development.

Maybe allowing Lehman to fail was not a good idea after all-the Government should have taken over as it did Fannie and Freddie. Because they now have a very very difficult situation to deal with.

Sanjay

Consumer confidence and other surveys-meaningless

noreply@blogger.com (Sanjay "John" Gandhi) — Wed, 24 Sep 2008 03:53:00 +0000

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

noreply@blogger.com (Sanjay "John" Gandhi) — Sun, 14 Sep 2008 16:00:00 +0000

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???

noreply@blogger.com (Sanjay "John" Gandhi) — Thu, 04 Sep 2008 17:31:00 +0000

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

noreply@blogger.com (Sanjay "John" Gandhi) — Tue, 02 Sep 2008 05:44:00 +0000

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

noreply@blogger.com (Sanjay "John" Gandhi) — Tue, 02 Sep 2008 04:50:00 +0000

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

noreply@blogger.com (Sanjay "John" Gandhi) — Tue, 02 Sep 2008 02:57:00 +0000

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

Foreign Reserve Accumulation by China, Russia, Korea, etc. is a disservice to their countries

noreply@blogger.com (Sanjay "John" Gandhi) — Mon, 18 Aug 2008 01:59:00 +0000

China leads the world in the total amount of foreign reserves. It also is the fastest accumulator of them. The biggest beneficiary of this is the US. The Chinese buy US Government backed bonds (treasuries and mortgage bonds issued by Fannie and Freddie) with those reserves.

What would Adam Smith say to this?

As we are all well aware-China has become the manufacturing hub of the world. China sells the world loads of finished goods-toys, machinery, auto parts, computer parts, digital cameras, home furnishings...well, just about all finished goods which we spend our money on. The complexity of these goods is increasing as well. There are Chinese made cars in Chile nowadays.

What China gets for selling all these goods? It accumulates US Government bonds. Smith clearly explained that capital at home is the best use for a nation-it employs the maximum number of they country's citizens. Capital is sent abroad by private individuals to increase returns-but a Government doing this is silly from a job generation perspective. Another way to look at this is that China effectively subsidizes all these finished goods it sells to the US. It exchanges the hard work and labor of it's own citizens for useless paper currency paying some small interest. It keeps Americans employed-giving a nice gift of manufactured items for free use.

All emerging market nations do this-they could generate far more employment at home if they didn't keep these massive piles of monies in the US, UK, European Union etc.

The emerging markets justify their FX holdings for defending their currency, and their high liquidity. They actually keep their own countries poorer.

What should they do? Market based currency rates are a first step-but capital already accumulated by these nations should move into buying things which their countries need. Raw materials or machinery to improve productivity of their citizens. They should buy iron-ore, coal, nuclear energy plants, etc. That is not the same as investing in resource stocks in Australia---that will again employ Australians. They should keep buying the commodities produced by Australian producers and bringing them home so the home market has no shortage of basic materials like coal, iron-ore, copper, etc. They should spend that money in buying more aircraft and other techologies which will make production smoother. Then the labor of China can work on those materials and generate the finished goods it is so capable of doing in even larger amounts.

Smith also mentioned about the uselessness of controlling the amount of money supply in the country by changing interest rates. The amount of money necessary to circulate goods in a country is an unimportant part of the country's economy. Imagine a world without paper dollars or yuans-will we not trade things-goods and services, anyway? Sure we would. It just wont be that convenient, but we still would trade goods.

Chinese finished goods should be traded for raw materials and other things which Chinese citizens need---not paper US dollars and Euros. That doesn't help China-it actually hurts it-because precious capital is kept outside, preventing better division of labor. The least they can do is to flood China with raw materials.

A small export based economy justifies some foreign reserve holdings to prevent excessive currency fluctuations-but nothing more than that.

Any Government which holds foreign reserves as "investments" does it at the expense of it's own country. Adam Smith would be amused if he saw how national Governments exchange the hard labor of their citizens for paper emitted by foreign governments, in the name of liquidity. Smith also explained how you never buy money for it's own sake-money (or Government bonds) has no use, but to be sold again for buying other goods--goods for consumption, goods for increasing productiving, raw materials. A paper wealth increase in China's foreign reserves because the US Government pays interest on them doesn't do squat for China-unless that interest and capital is spent to bring something useful back home.
Eventually these emerging market economies need to stop accumulating reserves so they can become developed countries faster.

Sanjay

Basics of Economics -1 (not understood well by most people)

noreply@blogger.com (Sanjay "John" Gandhi) — Mon, 11 Aug 2008 05:43:00 +0000

The basics of economics, as laid out by Adam Smith in The Wealth of Nations (seems like the only book worth reading in economics to me) are missed by most people-including many well known economists and financial planners and bankers.

Here's my understanding of some key points of Economics, thanks to Adam Smith.

1. Society progressed by increased division of labor-specialization leads to more efficient production.
2. For division of labor to come about, you need capital (think tools-workers need tools to work on to produce more). As capital in a society progresses, division of labor also progresses alongside it. More capital in a society leads to more efficient division of labor.
3. Efforts of Government should be directed to increase production of things. This brings down their costs (increases surplus production)-leading to more exchanges.
4. Parsimony and savings result in accumulation of capital and should be encouraged. Consumption of goods should be discouraged. Consumption should only be a percentage of net capital gained-so that there is continual accumulation of capital in the society. This is well understood when considering a single individual-a man who saves comes out ahead-someone who consumes only a small portion of their capital has a brighter future.

There's more to The Wealth of Nations than this-but these are some of the most important points.

Consumption can be looked at as the return of goods to their basic forms which have no resale value-carbon and CO2 for coal and oil, wood and glass turning into living room decorations with little resale value, etc. This is similar to the treatment of Hayek in his order of goods-higher order goods being the more basic commodities, and lower order goods being the more finished products. I like to think of the order of goods in reverse-because the "evolution" of goods is easier for me to understand that way-lower order goods being turned to higher order goods by the work of man, using capital (tools) and labor ( man hours).

An example of how everyone has got it all wrong with the $168 billion stimulus package in the US earlier in the year.

The package is often said to boost consumption and therefore economic growth. See News release here today, for example. That is not right. Why?

If you give me money to buy more apples, does that increase automatically the amount of apple production or the net production of society? No. Consumption is a drain on capital. It leads to destruction of capital. You don't want a society to consume more---you want it to produce more and save more. That $168 Billion should be used by judicious people to invest more in improving their specializations, getting better jobs, etc-in other words, improving division of labor to increase net production (goods and services is an arbitrary distinction-services can be looked at as intangible goods). Consumption does not increase economic growth-it is economic growth which increases consumption. They have it backwards there. As the net production of a society grows, assuming a fixed percentage is being consumed-the consumed portion keeps on increasing in time.

-Sanjay

"Economy slowing due to high oil and commodity prices" is a strange statement

noreply@blogger.com (Sanjay "John" Gandhi) — Wed, 06 Aug 2008 04:39:00 +0000

When economists and central banks and finance ministers say that the economy, global or their local, is slowing because of higher oil and commodity prices-they show that they understand economics very very little.

Are oil and commodities like wheat, rice and copper not produced by humans? It is not like some extra terrestrials have been giving us our raw materials. The energy sector has the biggest weighting in the SP 500, and many commodity and energy producing nations are quite happy to see higher energy and metal and agricultural product prices. What is called economy here is the economy of the the finished good sectors, of entertainment, of expensive real estate in NYC and London and Mumbai, which suffer when there's not enough raw materials to work on.

Economy includes all sectors-including oil, wheat, copper, everything produced by humans. Keep that in mind when you analyze meaning of financial news-and u will realize how most of it is plain crap.

Sanjay

A word on Fannie and Freddie Mac

noreply@blogger.com (Sanjay "John" Gandhi) — Mon, 14 Jul 2008 17:35:00 +0000

Just a quick note on Freddie and Fannie. That there are people who think there's an "implicit" guarantee by the US Government on those bonds-they are wrong.
There's no such thing as an implicit guarantee. It is a guarantee, or not. And no matter what the Government says-e.g. by the announcement yesterday of helping Fannie and Freddie-they have not guaranteed those bonds.
Sanjay

The US strong dollar policy amuses me

noreply@blogger.com (Sanjay "John" Gandhi) — Thu, 10 Jul 2008 18:02:00 +0000

Every few days some Government official in the US, most often Paulson, comes out with the arbitrary statement that the US has a strong dollar policy-that they want the dollar to strengthen, to stay up, etc. Here's what came out today.
A strong dollar policy sounds funny to me. That is like me saying I want to have $100 Million, I have a get richer and stay rich policy. Everyone wants to stay rich-what's the big deal? Obviously rich groups (tribes or countries) like their currency to be worth a lot-just as an individual wants to be worth a lot of money (or corn), so to hear a Government official say something like this amuses me.

Sanjay

Energy and Oil, Oil Stocks, Hand Dryer and Hybrid Car Economics and Crap called Global Warming

noreply@blogger.com (Sanjay "John" Gandhi) — Wed, 02 Jul 2008 06:22:00 +0000

Oil markets and oil stocks. Oil is up t0 $140 a barrel. Oil stocks in the US (good proxy is XLE) is up only 10% for the year, price sensitivity of oil producers to oil price is very high-markets seem to be significantly undervaluing oil stocks, especially because futures are in contango. But the general malaise in the stock market probably is pushing the oil stocks where they are-once the selloff of financials is done they will lead the market higher.

They say Oil is up by speculators. Need to get the basics of economics right--speculators make profits if the price of oil rises more in the future-they supply oil in the future at higher prices-and thereby add value to society. See Adam Smith's Wealth of Nations on "Digression on Corn Trade" for more on this. If price of oil falls they lose money. They help in controlling consumption of today and transferring it tomorrow, so oil wont rise as much tomorrow.

That someone who trades Oil futures is called a speculator while Exxon and Aramco are not (what's the difference-each is buying something-labor and capital for cheap, and selling the final product at a profit). Just because someone really "produces" something doesn't make them any less a speculator. Isn't Walmart a speculator-buying all this chinese stuff for cheap, hoarding it and then selling it to America for dear? Shouldn't they be shut down and we get all the Chinese stuff for cheap? Eliminate the middle man, and we will get everything from the farmer and the raw producers-take division of labor and expertise to cave men era. Then I will make my own bread, make my own clothes, build my own house, build my own tools-to eliminate all the speculators etc. who make money off me-and live happily ever after? Or die very very soon? They want to reverse human development and division of labor when they talk about eliminating speculators in oil.

It is irritating to see electric hand dryers in bathrooms. They dont save trees-we can't say that for sure-do a calculation of how much energy is spend in producing all that steel which the dryer is made of, how much coal is used to produce the electricity the hand dryer consumes-and u will see that it ain't that simple. I would rather chop a few trees down and get the simple paper towel. Just because I dont sin in using the final end product of trees doesn't mean that less trees are actually being cut. Steel industry and coal mining eliminate a lot of forest, and consume lots of energy, which is itself destroying the environment, which destroys, life, etc. etc.

Hybrid cars for cleaner environment make me laugh. They are expensive than oil using cars-and will remain so for 30 years. And the coal released in electricity production is harmful to the environment, people forget that. Yes, nuclear, wind and solar are energy options-but they are 3-20x more expensive to produce a unit of energy than coal, the cheap king. Chinese and Indians are for the first time seeing the dream of 24 hour electricity-and they can't be bothered a bit about destroying the environment to have 24 hour electricity. This is like going into a poor neighborhood in Chicago and ask everyone to hire a gardener to mow their lawn so the neighborhood looks pretty.

Global warming leads to madness from Bono and Al Gore. Granted that there is global warming-wont dispute the science on that-but that it causes any harm is doubtful. Sure ice is melting and species in the arctic and cold regions are being destroyed-but thousands more are being generated in the tropics, where it is on average warmer. Life is always more abundant in heat-read the master in "The Origin of Species". A warmer earth supports more species, more life. Global warming and green earth talk is not much different from Eugenics by Galton 100 years ago-this was a very respected scientist who was talking complete crap in one field-Eugenics (he discovered finger printing as identification technique). Intelligence is domain specific-but most people are too dumb to realize that. Therefore Galton got famous selling "improving the human stock of England" ideas to the world. There was even a Fellowship of Eugenics in the Univ of London. So many good anthropologists and good scientists fell for it. Same with global warming talk right now-it is alarmist, the earth will be fine with a few degrees of temperature rise-true penguins and polar bears might go-but these are the big species-thousands more of the small ones are being generated in the warmer parts of the ocean and the land thanks to global warming. And the mammals in the warmer parts will multiply more and lead to more varieties and species of mammals in the future.

Sanjay

Coal stocks

noreply@blogger.com (Sanjay "John" Gandhi) — Tue, 24 Jun 2008 00:28:00 +0000

Here's my reasoning for the long position in Coal stocks I got in my portfolio.

Prices of Met coal have tripled, and prices of thermal coal are up 100% in the last year, or in fact, since the beginning of this year. Again, details are not important-the key element is, met coal has approximately tripled to $300 per ton, and thermal coal to $160 per ton.

Imagine a company selling just one product, sells $100 of this product, and it earns $10 in 1 year. With a p/e of 10, the market cap of that company is $100. i.e. you will pay $100 for this company today. The profit margin is 10% (profit/revenue---costs are $90, profit is $10).

If the price of the product it sells goes up 2x, i.e. $200, and if the costs remain the same, then the profit of the company will be $110! If you wanted to give the same price/earning ratio, of $10, you would actually bid up the price of the company to $1100. That is an 11 times increase.

However, that's too good to be true. The risks in this simple model are 1) price falls back down, and 2) costs go up.

So when a commodity like met coal goes 3x in price, and another like thermal coal goes 2x in price, the stocks of the producers of coal react positively, to say the least. But what is a fair price ---it can be anywhere between 1x to 11x, depending on what you feel the cost structure will be in the future, and what the price will be in the future. Note that the price can come down---as long as demand volume goes up with that-u still will make a very good profit-it makes sense to bring up more coal mines. In fact, price is a leading indicator of demand in this case-and stock price will follow the price of coal.

Some US listed coal companies shares have goes up 2-3x in this year, but depending on your outlook for prices-you can make a case that this is going much much higher.

And I for one believe that this is a sea change in the coal market-and demand is here to stay. Look at statements of MEE, ANR and JOYG-and you will get an idea. Earnings expectation keep going up every week on these names.

My favorite one is FDG-it is a Canadian trust which holds 60% of Elk Valley-the biggest producer of Met coal. If Met coal holds anywhere near $300 per ton, you are talking about a price of FDG close to $500! Granted that a lot of coal is advanced sold at lower prices, etc. but you have plenty of margin of error-the stock trades at $90 today.

The ETF KOL is also an okay play--but has too much of Chinese Government owned coal companies. They dont let them raise prices-profit making is still a shameful act for Government owned companies in China and India. Which leaves massive room for the private coal suppliers worldwide to make $$$, because the populations will need the steel and the energy regardless of whether the coal comes from domestic companies or foreign.

The rally in Coal in the next few years will look the rally of the last two years in fertilizer stocks look like defensive plays, IMO. I think Ferts still go higher-but the potential of making very large returns in Coal is great. Following the Kelley criterion-my portfolio is heavy on Coal stocks and has some Fertilizer stocks as well.

Sanjay

Obama, Racism, Religion, Discrimination against Women, South America and The World

noreply@blogger.com (Sanjay "John" Gandhi) — Thu, 05 Jun 2008 04:01:00 +0000

The title of this post tells u that there's going to be quite a bit of stuff said in it. I don't claim to be right or accurate in what I say; but these ideas are from my own personal experience, and experience of close friends whose data I can trust. They are not from the books or "what they say about.."

Obama winning the Democratic Nomination in the USA is great for the blacks and minorities of that country. Finally USA can become more like Brazil-one of the least racist nations of the world. I have found from my personal experiences that South America is by far the least racist continent of the world. Racism, religion based discrimination, and status of women--all go hand in hand in my opinion. And South America is the most civilized continent of the world in these things.

Why?

A German, a black guy from Zimbabwe, a chinese from Shanghai can travel in this continent in a small town without knowing Spanish/Portugese---and they will not be harmed. They will not be attacked racially (again, nothing is absolute-the probability that that happens is low is what I am saying). I cannot imagine a Mexican Jose traveling in Sweden or China or the USA not speaking the local language and not being harassed/beaten up. The world outside South America needs to learn a lot from this continent where people live the most free.

It is nice to see another nation, USA, following the leadership of Brazil in this. Remember that Brazil was the first to abolish slavery, give equal rights to blacks-and today 51% of the population declares themselves as Mulatto. That is the human race of the future, the mulatto, mixed with some oriental blood (a race absent in Brazil. Most Red Indian/Aboriginal tribes of the region were murdered by the European conquerers-they are racially the same as orientals). A true intermingling of the four different types of human varieties.

Religion is a big problem in the world still-and religion based discrimination is rampant in many places, especially in Asia, Africa and the Middle East. Since all religions were founded and controlled by men; there is widespread abuse of women's rights in almost all highly religious societies. This all hopefully will go away in the decades to come.

A world free of racism, religion and a truly equal status for women would be a much better and fun world. By the way-you can measure this with this experiment.

The day when a woman can go out alone in a bar, pickup some guy, and have a wild night with him without being looked down upon by society, that day we know we are treating women as equal as men (we normally call her a slut-whereas give a pat in the back of a guy who picks up some girl in a bar and has a wild fling). She needs to be able to do this with a man of any color or religion, without that guy being at any risk of physical harm from other guys in the bar, and that is then a true test for a free society.

Even in South America we are not there yet-but we are getting there fast. The European and American worlds which pride in their economic development are culturally quite backward in terms of racism and discrimination against women---even though they are pretty much low religion societies-which is good. Asians and Africans are even lower down the human development scale-but in general, there seems to be improvement in all these societies on the key elements of eliminating racism, discrimination against women and eliminating the power of organized religion.

Sanjay