On Financial Antigravity Machines

I like my son Peter.  He works hard, but is occasionally overconfident.  (Where does he get that from? 😉 )  A typical example:

Peter: No, Dad, I am right on this Precalculus problem.  The book is wrong.

Me: Peter, don’t sell me an antigravity machine.  I had one once, but it floated away.  The book is right, and I will show you.

After which, I would write out the answer longhand, and show him that the book was right.  And at the end of the year, when he took the final, I scored his test, and found a wrong answer, so I wrote out the right answer to show it to him, but I got his answer, not the book’s answer.  So I did it another way. Same answer.  I solved it numerically, not analytically — same answer.  The book was wrong. But I never told him, because I did not want to reinforce the overconfidence.

But often, people trust in antigravity machines in the economic arena: ideas that sound good, but have no basis in fact.

1) Start with Japan intervening on the yen.  This is but stage three on the five stages of grieving.  Why does Japan think that it can successfully intervene by itself in the currency markets?  The history of such actions supports the idea that Japan will lose the battle without help.  Also, they were working against momentum, and without economic news that would support a stronger yen.  The intervention should not work, and what will the BoJ do with all the new Dollar bonds that they bought?

2) Or think of Cisco Systems.  They are going to pay a dividend.  Hooray, maturity has come!  Okay, it has come 10+ years too late.  The question is not whether Cisco has excess cash, but whether its management is good at allocating capital, and the answer is no.  Cisco has spent years buying up marginal firms and buying back stock, with no sense for what their company is really worth.  I might have interest at a price near $15.

What most investors don’t get is that earnings matter, but what firms do with retained earnings / free cash is even more important, because that directs the path of future profits.

3) Then there is Social Security Disability — what a foolish program.  If you can’t control the benefits, don’t start the program.  Yet here are three articles:

I’ve seen able bodied people on SS disability.  I’m not saying that all of it is a scam, but some of it is, and the government should make many requalify for aid.

4) One casualty of quantitative easing is DB plans.  The value of their liabilities rises as high quality interest rates fall.  And that drives investment in alternative assets, because it is that much tougher to earn the needed returns in a low nominal rate environment.


This environment is particularly fertile for financial “antigravity,” because many hope against hope in a time of scarcity, and believe that they will do well, even if they have done nothing truly defensive in their investing.

Hope is not a solution.  You may as well believe in antigravity.