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:
- Jobless are straining Social Security’s disability benefits program
- America’s Hidden Welfare Program
- Obstacle to Deficit Cutting: A Nation on Entitlements
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.
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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.
THE SSD thing is sad. I know three young women on the program:
One of them has a mild case of schizophrenia, which is only a problem for her because she has no discipline regrading her medication. She is a very capable woman, and when she is medicated, there is no reason why she couldn’t work; she has a lot to offer.
The second young woman has carpal tunnel problems, although sometimes I wonder how much of an impediment it is seeing as she has a masters in psychology. You mean to tell me she managed to take all those notes and write all those papers, and take all those tests, but can’t manage jotting down some patient notes?
The third young woman is just a spoiled rich girl that was cut-off after trying everything. I don’t know what she is faking, but I’m almost positive it’s fake. My guess is she just doesn’t want to get a job and her monthly check from her trust doesn’t provide as much income as she wishes.
I really think the problem with this economy lies in that “e” word, entitlement. People feel entitled to “free money” from housing speculation, to walk away from their debts when it goes sour, to complain about taxes when they are employed, but also to demand money from the government when they aren’t.
My guess is that a good chunk of this country could use a lesson on what it really means to earn your living. Only then could we be humble enough to stop complaining about how so-and-so has X and we don’t, and get back to building a better future.
I remember that last time the BOJ/MOF intervened vis-a-vis the yen, it coincided with the beginning of a massive global credit boom. At the time, I think they “printed” an amount equal to 1 or 2 percent of global GDP. It may have been gasoline on a nascent fire.
This is just conjecture, but my expectation is that they will have to intervene multiple times and the program will end up being much larger than initially intended. I wonder if this will have the same global stimulative effect on the global economy (as last time), given the private sector credit contraction.