Rereading old articles is bittersweet.  I get a variety of internal reactions:

  • You wrote about that again?! Who cared about that?
  • Boy, you really blew that one!
  • Another news post?! How many links can you cram into a post?  Anyone who reads all of that will learn a lot, but who has that much time?  (At least you summarized it, so some could avoid reading it…)
  • Nice job!

Well, onto the fifth quarter of the Aleph Blog, February through April 2008:

All or Nothing at All

I had some “down time” today (taking my third child to junior college), when I could sit and think about some of the issues in the markets, when all of a sudden, a weird correlation hit me.  Similarities between:

  • The near bankruptcy of the Equitable back in the early 90s.
  • Neomercantilism
  • The relationship of Moody’s and S&P to MBIA and Ambac.

This was a creative post that connected the dangers of the overextension of credit — debts growing at an unsustainable rate.  It doesn’t end well for the creditor and debtor, but the creditor typically gets the worst of it.

The Boom-Bust Cycle, Applied to Many Markets

The funny story of making money by resisting trends.  Main point: use your head and look through the windshield, not the rear-view mirror.

That’s my thought for the evening.  Analyze the motives of other players in your markets, and don’t assume that the current state of the market is an equilibrium.  Equilibria in economics are phantoms.  They exist in theory, but not reality.  Better to ask where new entrants or exits will come from.

Split the Financial Guarantors in Two? You Can’t Do That.

This was the first of many pieces arguing against fraudulent conveyance, which was attempted, but thwarted in the courts.  Someone send Sean Dilweg to a course in contract law.

In Some Ways, The Municipal Bond Market Was Asking For It

This was another case of asset-liability mismatch.  Lenders want to lend short, and borrowers want to borrow long. In this case, auction rate preferreds internalized the mismatch, subject to auction failure, which never happens, right?  There were also hedge funds that tried to exploit the yield differential, borrowing short and lending long.

A disaster waiting to happen…

A Small Victory Lap on CPDOs

I fought these since their initial issuance.  They did not make economic sense, and the rating agencies had never previously allowed for a martingale strategy to be a safety factor.  Oh, and things got much worse from here.  Losses were large.

Is the PEG Ratio a Valid Concept?

I expected the answer to be no, but it was yes.  I learned a lot in the process; encourages me to be more open-minded.

The Problem of Publishing in the Social Sciences

There are many reasons research in social science tends to be skewed and this article hits many of them.

Micro-stability versus Macro-instability

Greenspan was famous for suggesting that derivatives made the markets safer.  He missed that most derivatives are risk-shifters, not risk-eliminators.  Derivatives stabilized companies at a price of adding basis ans counterparty risks.

Buy Muni Bonds

Great call, when the market was dislocated.

What Should the Spread on a Corporate Bond Be?

Humorous piece on bond pricing, with six blind men analyzing the elephant, and one sighted guy reluctant to explain why they are right sometimes, but wrong most of the time.

The Value of a Balance Sheet

Humiliation, but I turn it into an opportunity to learn, and avoid future errors.

Investment Banks Are Priced Like Bermuda Reinsurers

A quick comparison between an industry that is usually admired, and one that is always despised.  The similarities will surprise!

A Social View of the FOMC

This piece took a lot of work, and got a lot of attention.  Someday, I’d like to put out another.  Enjoy the easy comparisons from one large table that explains in detail the accomplishments and foibles of FOMC members.

Dissent at the FOMC

After a rare double dissent, I analyzed how common dissents are at the FOMC.  Note to Bernanke: your power has grown since then.

Federal Office for Oversight of Leverage [FOOL]

Well, what could you expect from a post on April 1st? The sad thing is, it came into being, and is staffed with people who really don’t get the concept of systemic risk, or where it comes from.  Worst yet, they don’t control the Fed, which creates most of our systemic risk.

The Financings of Last Resort

Your firm needs money, but conditions for financing are unappealing.  What can you do?

Nerds and Barbarians

Understanding two stereotypes for hedge fund managers.

Problems with Tax Reform

A really important piece that argues that tax rates aren’t the important factor, it is the definition of income.

Book Reviews: Manias, Panics, and Crashes, and Devil Take the Hindmost

Two excellent books that everyone should read.


That’s all for now.  Hope you enjoy a few of the articles.

The period from November 2007 through January 2008 was challenging, but I did say a lot of good things.  Here’s a sample of the best:

Contemplating Life Without the Guarantors

Markets always beat governments, unless governments get so determined as to subvert markets.  Guarantors provide “thought insurance” so you don’t have to analyze the bond that they guarantee.  But what if the solvency of the guarantor is questioned?

The US Dollar and the Five Stages of Grieving

An important article that explains why currency interventions almost never work.  Required reading for Treasury Departments and Central Banks.

Why Did I Name This Site “The Aleph Blog?”

Cogent explanation for the odd name.  But I have gotten the question a few times as to whether I named my site after Jorge Luis Borges short story, “The Aleph.”  The answer is no, but after reading “The Aleph,” I would say that it folds into reason number four for why this is called The Aleph Blog.  Aleph is big.  Very, very big.

On the Value of Secondary and Primary Markets

They are valuable for different reasons, but they are related.

In Defense of the Ratings Agencies

The original piece, pointing out how the regulators have abandoned their responsibility, having outsourced it to the rating agencies.

Personal Finance, Part 6 — The First Question

How much are you willing to learn, and how much work do you want to do? For people who ask my advice, that is usually the first question that I ask.

Booyah for Brainy Buybacks! (But not Brain-dead Buybacks.)

There is no simple answer to whether a buyback is the right strategy or not.  It depends on the price of the stock versus its value.

Options as an Asset Class

You can own/short options, but you can’t own/short volatility per se, at least not back in 2007.

Municipal Tensions

We are experiencing the front end of the woes now.  This won’t be over for 20 years.

How to Read the Whole Bible, and Survive the Experience

A simple way to read the whole of the Bible, and avoid getting bored, as so many do who try to read it straight through, and give up when 10-50% done.

In Defense of the Rating Agencies — II

Anyone can criticize, but who can offer a system that is better than the present one on a comprehensive basis?

The Beauty of Broken Moats

Berky had an opportunity with almost all of the financial guarantors kicked to the curb.  It never worked out because Berky would not take modest risks.  In foresight today, those modest risks don’t seem so modest, so salute Mr. Buffett, who has forgotten more than most of us will ever know.

What Did Buffett Know about the Gen Re Finite Reinsurance Deal with AIG?

Odds are, Buffett knew a lot more than he confessed to know.  Buffett is a maven on insurance issues.

On Benchmarking

Benchmarking enforces conformity on managers, and the shorter-term the horizon, the more it makes them closet indexers.

Pandora and the Fair Value Accounting Rules

There are really tough issues here.  Everyone wants to be accurate, but over what time horizon, and how to adjust over time?  Bright investors will build in provisions for adverse deviation, and be conservative.

Unstable Value Funds?

This didn’t prove to be an issue, in this credit cycle, though form what I heard from insiders, it got close.  If the Fed hadn’t done 0% and QE, my dire predictions might have come true.  They still might in the future.  Be wary.

Meet Some of my Friends

Though the videos have disappeared, the story of how President George W. Bush, Jr. came to visit the factory of a friend of mine (of which I own 1.4%) is an interesting tale.  I was proud of my friend, who is a humble, but a great guy.

A Bonus from MoneySense Magazine

A free version of what Canadian magazine buyers had to pay for. How to earn more while taking less risk.

Personal Finance, Part 11 — Your Personal Required Investment Earnings Rate

The intuitive explanation of what you need to earn in order to achieve all of your life goals.  It’s probably higher than you think.

With 401(k)s and Other Defined Contribution Plans, Watch Your Wallet

An important article — from the article:

If you are paying more than 1% of assets per year, then something is wrong, unless the asset classes are esoteric, which should not be the case for DC plans.  Remember, you have to be your own guardian with defined contribution plans.  No one will do it for you.  And, if a few of your colleagues complain at the same time, you will be amazed at how quickly it will be taken seriously, because the administrative staff of the plan sponsor usually doesn’t get that much feedback.

In general, high costs are closely correlated with low performance.  Keep a close hand on your wallet, and leave those who are charging you more than 1%, unless they are doing something special for you.


I think I gave good advice in that era.  As the bubble deflated, investors needed to be more careful, and I highlighted that.  Not that I will always get it right…

With this book review, I put a knife to my throat.  Alas, I have been investing in individual stocks for over 23 years, and have done well the whole way.  Is it time to abandon my craft?

No, and I think the author would agree.  He is making a relative argument but the title phrases it in absolute terms.  On average, the advantage of investing in stocks is smaller than commonly believed, and for investors that can’t keep their wits about them when all is going wrong, the results are worse still.

This book attempts to infuse common sense (ordinarily sorely lacking in investments) into readers who are retail investors.

One nice feature of the book is that the author recapitulates everything in each chapter in a closing section entitled “Boiling It Down.”

Another nice feature of the book is that the author went and interviewed clever asset managers to flesh out his own understanding of the topic.  That helped produce a much richer book.


I don’t go in for using stop losses.  I analyze risk, and there will be a tiny number that really hurt, but the cost of using stop losses is missing the frequent snapback rallies, which on average in my experience more than pay for the losses.

Also, in this environment, where everything is so correlated, because of ETFs, he recognizes the difficulty of achieving real diversification.  But in his asset allocation advice, it is as if he forgot this.  If I were rewriting his asset allocation chapter, I would have introduced the concept of the credit cycle, and why good asset allocators vary their positions based on the opportunity offered, rather than a more static view of asset allocation.

I also would have given a little more credit to value investing.  If you are going to be anything but a trader, you may as well focus on value.

But on the whole, this was a very good book, and these are quibbles.  He writes very well, far better than me.

Who would benefit from this book:

Most inexperienced to moderate investors would benefit from this book.  It would help them to avoid common mistakes in investing, as well as make them aware of modern problems in investing that classic texts would not have been aware.

If you want to, you can buy it here: Never Buy Another Stock Again: The Investing Portfolio that Will Preserve Your Wealth and Your Sanity.

Full disclosure: This book was sent to me, because I asked for it, after the publishers offered me a copy.

If you enter Amazon through my site, and you buy anything, I get a small commission.  This is my main source of blog revenue.  I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip.  Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book.  Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.  Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.  Whether you buy at Amazon directly or enter via my site, your prices don’t change.

It is really easy to compare growth rates of emerging and developed markets and the developed markets feel inferior.  But imagine this practical example: a toddler could say to a teenager, “Percentagewise, I am growing faster than you.”  The teenager would respond, “Percentagewise? You don’t know what it means, kid, and I am growing faster than you inch-by-inch.  Your day will come, kid, but cool your jets for now.”

So it is for the developed versus emerging markets, with the premier matchup being the US versus China.  There is an undeserved inferiority complex in the US over China at present.  China has a lot of people, but the US is far more productive per person.  The Chinese may have a variety of show projects that evidence technical brilliance in copying Western technology, but it is all a thin veneer over a society that is much poorer, particularly in rural areas.

The concentration of power in the hands of the Chinese government makes everything look more impressive, but it also distorts the reality, because investments flow into GDP whether they are good investments or not.  GDP can grow very rapidly, and be an illusion, because productive capacity can be built up in areas no one wants, like Japan in the late 1980s.  Remember how bright Japanese bureaucrats were relative to US businessmen?  After 20 years of decline with no end in sight, we should be able to lay to rest the idea that state capitalism is effective.  After all, the Japanese are considerably more productive than the Chinese.  If Japan couldn’t do it, why should we think that China can?

Yes, the emerging markets will grow as a percentage of global “GDP”.  But there are a lot of structural changes that have to occur before they can become even close to the productivity of the developed nations, particularly the US.

What’s that you say?  The US owes China, not vice-versa.  True enough, but China will get paid back in cheaper dollars, one way or another.  Their neo-mercantilism will fail as it did for the mercantilists.  Those that try to force the world to do their bidding, like China, tend to lose.  The US will find a wayto give China the short end of the stick — possession is nine-tenths of the law, and the debts are denominated in US dollars.  China will get back less than they gave, which is their reward for forced industrialization.  Add to that forcing their banks to lend in dodgy situations, and industrialization that misestimates global demand.

Now, the author’s book is far more polished and nuanced than my screed here.  It is a very readable 340 pages of text, with few graphs, from which I learned a lot.

The main point is that the development of soft institutions that allow for greater societal flexibility and growth are no small things.   The willingness to give people freedom to develop their businesses as they like is no small freedom.  Property rights are a major part of human rights.  The emerging markets, particularly China, don’t have that yet.  As the Third Way failed, and Japan, Inc. failed, so will China, unless it allows for freedom, but that will require cultural change that would eliminate the dominance of the Communist Party; can’t see that happening soon.



Who would benefit from this book:

Almost any investor would benefit from this book.  Those that think the US or the West are being out-competed, and will lose to the Chinese, will benefit from this book.  Everyone should read this book.

If you want to, you can buy it here: Uprising: Will Emerging Markets Shape or Shake the World Economy.

Full disclosure: This book was sent to me, because I asked for it, after the publishers offered me a copy.

If you enter Amazon through my site, and you buy anything, I get a small commission.  This is my main source of blog revenue.  I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip.  Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book.  Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.  Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.  Whether you buy at Amazon directly or enter via my site, your prices don’t change.