At The Periphery of Investing

I have a friend who works for the Williams Inference Service.  Those who work for WIS spend their time looking for deep trends in our world that are underappreciated.  I dedicate a little of my time to that as well, and try to draw investable conclusions from odd bits of data that come across my radar.  But even without explicit conclusions, it richens my knowledge of our world, and perhaps with other data, will yield some return for me.  If nothing else, I love reading and writing, so join with me on this tour of articles around the web.

  1. I’m not sure if pollution problems in China are any worse than the problems faced by the US or the UK at similar points in their development.  That said, one major constraint on their ability to grow is pollution.  These articles from the Wall Street Journal are an excellent example of that: heavy metals in the food supply, and lead in jewelry that they sell domestically and export, with the lead coming from US scrap metal.  These practices may allow businesses to survive in the short run, but soon enough, jewelry will get tested in the US, and importers sued for liability.  In China, there will be increasing pressure for change, perhaps even violent change.  In Chinese history, there is a tendency for change not happen, or to happen rapidly when troubles for average people become too great.
  2. Demographics is a favorite topic of mine, particularly as the world slowly heads into a shrinking population.  For the most part, national economies don’t work so well when population levels shrink, which leads to pressure to import low skilled laborers from nations with surplus workers.  One nation that is at the front of the problem is Japan, where the population is shrinking pretty rapidly today.  Japan is now seeing that its pension system will be hard to sustain because of the lack of children being born.  Europe will face this problem as well.  The US less so, because of the higher birth and immigration rates; for us, the foreign debt will be our problem.
  3. Is war with Iran a done deal in a few years?  I hope not.  Given the mismanagement of the Iranian economy in the hands of the cronyist mullahs that run the joint, and the genuine difficulty of producing effective nuclear weapons without a strong academic/technical/manufacturing base, my guess is that there will be another revolution there before a significant bomb gets made.  (We’re still waiting on North Korea; what a joke.)  Economically, Iran is a basket case.  As I have mentioned before, they have mismanaged their oil resources.  What is less noticed is their coming demographic troubles.  Not all Muslims are fanatics, and many are having small families, which will generate it’s own old age crisis thirty years out.  That said, if Iran is provoked, it’s leaders will not give in; they iwill fight, as the second article i cited points out.  Better to quietly hem the current Iranian leadership in by supporting their enemies, than to risk another war that the US does not have the resources to fight.  Iran is weaker and more divided than it looks; its government will fall soon enough.
  4. Memo to all quantitative investors: are you ready for IFRS?  IFRS, the European accounting standard, particularly for financials will change enough things that older formulas of calculating value and safety may need to be severely modified.  The larger the importance of accrual items to an industry, the worse the adjustment will be.  All I say is, watch this.  If it changes, it will affect the way that we numerically analyze investments.  We are definitely losing foreign economies on our exchanges, mainly due to Sarbox, not accounting rules, but I think we are rushing through a compromise with IFRS to protect the interests of our exchanges, and I think that is a mistake.
  5. Then again, maybe we don’t need the Europeans to mess up our accounting rules; we can do just fine ourselves.  Our accounting standards are a hodgepodge between amortized cost and fair value standards… we keep moving more and more toward fair value, but will the auditors be able to keep up?  Auditing amortized cost is one thing; there are different skills required when fungible but not liquid assets can be written up on a balance sheet. (Think about real estate or mortgage derivatives.)  Accounting will become less reliable in my opinion.
  6. I wish we had a harder currency; why else do I buy foreign bonds?  Anyway, I appreciated this short partial monetary history of the US, from the Civil War onward, from Elaine Meinel Supkis.
  7. When you can’t deliver the underlying, typically futures markets don’t work well.  It is no surprise then that a derivatives market on economic indicators closed.  Futures markets exist to allow commercial interests to hedge.  Where there is nothing to hedge, it is akin to mere betting, and without the extra thrill of a sports contest, that rarely attracts enough interest to be economic.  That said, aren’t the VIX futures and options contracts catching on?
  8. Not sure what the second order effects will be here, but a rule is finally coming that will require the trade execution occur at the best price.  It will be extra work for the exchanges, but it will probably centralize exchanges in the intermediate term.  If you have to share data, why not merge?
  9. One reason that Buffett was/is that best was his ability to learn from mistakes.  He kept his mistakes small and eventually found ways out of many of them.  US Air?  Salomon Brothers?  He eventually gets cashed out.  General Re?  The earnings from investing float bails him out. The “Shoe Group” and World Book?  Small, and you can’t win them all.
  10. What do you do when the market has passed you by?  You got burned 2000-2002, and moved to a more conservative posture, only to find that the market ran like wild while you weren’t there.  What do you do now?  My advice: do half of what you would do if the market hadn’t run.  If you are at 20% equities, and you know that in normal times you should be at 60% equities, raise your investment level to 40% equities.  If the market rallies, you have more on, if it falls, you will have the chance to reinvest another 20% into equities at more attractive prices.
  11. I usually agree with Eddy Elfenbein; he’s very common sense.  But here I do not.  Get me right here, Eddy is correct in all that he says.  I frame the problem differently.  You have someone sitting on cash, and the market has appreciated to where valuations are high-ish.  You can  1) invest it all now, 2) dollar cost average, or 3) do nothing.  Eddy doesn’t consider that many will choose 3.  On average, 1 beats 2 by a small margin, but 2 beats 3 by a wide margin.  Dollar cost averaging is a way to get psychologically unprepared people into the market who would never risk putting it all in at once.  We use DCA to get inexperienced investors from a bad place to a “pretty good” place, because the best place is unimaginable to them.
  12. Desalination is the wave of the future, even in the US.  Potable water is scarce globally (think of India and China), and the cost of potable water justifies the energy and other costs associated with desalination.  The article that I cited does not capture the environmental costs of desalination, in my opinion, but it gives a good taste of what the future will hold.

And, with that, that completes my tour of the periphery.  Next week, I hope to provide more color for you on our changing risk environment.