Book Reviews – Page 6 – The Aleph Blog

Book Review: Financial Blogging

Posted on 24 January 201424 January 2014 by David Merkel

This is a practical book that is a very good book.? Do you want to write things that people want to read?? This book will help you do it.

Coming out of US public schools, not everyone is prepared to write for a broad audience because:

They aren’t good with spelling and grammar.
They can’t make it interesting.
They don’t know what to write about.

This book can help with many of the deficiencies, aiding writers, to write and rewrite tight prose.

This book will help you source ideas.? It will help you refine ideas, as you write and rewrite ideas.

It will help you map out ideas before you write, so that you have a visual outline of what you want to say, which will aid you in expressing your ideas.

Now if you read this book does it mean that it will guarantee that you write great stuff? No.

You have to have some edge that you want to express.? Most investment commentary is garbage.? Those the have a differential insight might be able to create value.? But that is not generally true, unless we are at Lake Wobegon, where all of the children are above average.? Lake Wobegon is fictitious, easy excess returns are hard.

The main idea is start blogging, and start improving.? Start with a good idea that would have broad interest. Then write, revise, revise, revise.? Writing gets better with effort and editing.

Beyond that, you will have to think of compliance.? Disclose all relevant interests that you the writer might have.? If you own or short a stock that you write about, disclose it.

This book will improve your blogging.? It will sharpen what you write about, the frequency at which you write, and how you write.? This is a great book for financial bloggers.

Quibbles

None

Who would benefit from this book: Almost all financial blogger could benefit from the book.? Though I am experienced, there are many places where I learned more.? If you want to, you can buy it here: Financial Blogging: How to Write Powerful Posts That Attract Clients.

Full disclosure: I asked the author for a review copy, because I respect her to a high degree.

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.

Book Review: Banking and Financial Institutions

Posted on 4 January 2014 by David Merkel

Many readers ask me for a good book on financial institutions, and this is a good one, if limited to depositary financials, not including insurance companies and asset managers.

This is a comprehensive book for depositary financials, even covering Islamic finance, which I will admit I learned from it.? It is a good thing to understand in depth those with whom you you disagree. Islamic finance imbibes the errors of Aristotle, who deemed money to be sterile.? Why force everyone into a mold where there can’t be loans at interest?? Why restrict that freedom?

But that is a small part of the book.? Most of the book deals with how banks operate.? It is very good at describing how banks create profitable lending, and how they act within regulatory boundaries.

It’s a good book, and I recommend it to all.

Quibbles

That said, there were many small errors in the book, which if the author had been an intelligent bond trader, the errors would not have been in the book.

As an example, on page 32, he called an MBS to be a CDO.? Yes, in an attenuated way that might be so, but for professionals that know the market, we would never phrase it that way.

Who would benefit from this book: Almost anyone will benefit from this book, but those who will benefit most are those who analyze banks.? If you want to, you can buy it here: Banking and Financial Institutions: A Guide for Directors, Investors, and Borrowers (Wiley Finance).

Full disclosure: The publisher sent me the book after he offered me a review copy.

Book Review: Rule Based Investing

Posted on 3 January 2014 by David Merkel

Everyone would like a “money machine.”? Follow simple rules, and “Wow, this makes money.”? This is that kind of book but it has better foundations than most in its class.

The book examines three types of investing, most of which are foreign to average investors.? Most investors don’t invest in equity by shorting it, and most investors are not currency traders.

But that is what the book encourages.? I’m going to digress here, because I have to explain some salient matters, and say what I think, so that my later critique makes sense.

Volatility and credit are cousins.? After all when markets go nuts, and everything is in disarray, those that have been trying to borrow at low interest in one currency, and invest at higher interest in another currency get hosed.? Why?? Because in volatile times, the riskier currencies face capital flight versus safer currencies that have the confidence of the markets.

All of the methods mentioned in this book as a result are making bets on volatility/credit, and try to control the bet by monitoring implied volatility, credit spreads, and momentum.? They limit when they are in the market and when they are out.

I don’t have a problem with the theory here, but with the ability of average people to carry it out.? This book would be good for quantitative hedge fund managers; I am less certain about individuals here.

As an aside, what the book describes is how PIMCO has done so well at bond investing over its history — shorting volatility to pick up yield.

But the main criticism is this: the author optimized the book to fit her full data set.? When you read the last chapter, and see that you could have earned 30%+/year for 13 years, if you were as clever as the author, you should think, “Yes, if I had 20/20 foresight.”? The methods will not do as well in prospect as in retrospect.

Quibbles

There is little that I disagree with in the book on a theoretical basis.? Where I differ comes in two areas: individual investors will not have the fortitude to carry out what is a complex method of investment.? Secondly, when enough hedge fund money adopts these strategies, the pricing in the market will shift, and the hedge funds will no longer have easy money.

Who would benefit from this book:?If you are willing to do the work of a volatility-selling hedge fund manager, this is the book for you. ?If you want to, you can buy it here: Rule Based Investing.

Full disclosure: The publisher sent me the book after he offered me a review copy.

Book Review: Kentucky Fried Pensions

Posted on 17 December 2013 by David Merkel

This book takes you through the corruption in the Kentucky Retirement System. ?It has the dubious distinction of being the worst-funded municipal pension system in the US, leaving aside Puerto Rico.

This book is very well-researched for three?reasons:

1) The author served one four-year term on the board of the Kentucky Retirement System, so he has insider knowledge.

2) The author is an expert on pensions — he has worked in this area for over 25 years. ?He also holds a CFA Charter, which demonstrates his knowledge in investments, and his commitment to ethics in investing.

3) The author extensively cites his findings, giving nearly 600 endnotes in an otherwise 256-page book.

The Kentucky Retirement System is not a victim of incompetence alone, but of fraud, political favoritism, and structured neglect. ?The structured neglect is probably the most serious matter.

For years, Kentucky would not pay its full actuarially required contribution to the retirement system. ?Now, you can’t argue with the math, though you can argue with assumptions. ?Not making the full payment persistently will leave a pension plan weakly funded. ? As the author points out, it is a quiet means of borrowing against the future, and at a far higher rate than Kentucky could borrow in the municipal bond market.

This is the product of a broken political culture that only cared about the present:

1) Keeping current taxes low

2) Spending more than taxes

3) Politicians accepting ~~bribes~~ campaign contributions from those gaining pension business from the State of Kentucky.

4) Board members that would not enforce thorough audits.

5) Board members that would not seek out investment experts for their board.

6) Politicians that would appoint weak board members that were political cronies.

7) Awarding investment mandates to political cronies, where placement agents would earn disproportionate sums.

8 ) And more…

If you read this, you will wonder how a municipal pension plan could get screwed up so badly. ?My answer is this — the political culture of the state tolerates corruption, so it grows like a weed in obscure places like the Kentucky Retirement System.

On the Rating Agencies, Etc.

The book asks the question as to why the rating agencies were complicit on municipal pensions, waking up late to the problems. ?My answer is simple. ?The rating agencies have never hired many actuaries, and as such did not consider what is obvious to any actuary that I know. ?They came to the game late, and that is normal for the rating agencies — if there has not been a failure from a given factor, their models will not have that factor. ?That’s normal for most of us, because few of us can envision failures that have never happened before.

Few are like Buffett, who said, “We’re paid to think about things that can’t happen.” ?That is the sound of one hand clapping, and few can hear it.

Never allege conspiracy, when mere incompetence will do. ?Few saw the housing bubble, and many denied it, including the present and incoming Fed Chairmen. ?Incompetence is pervasive; we should be surprised when things go well.

On Pension Obligation Bonds, we should note that they are a dumb idea, and that every municipality that has tried it ended up regretting it. ?It is hard enough to fund pensions without borrowing money; it is much harder to do after borrowing money.

Quibbles

The main problem with the book is that it needed a better editor. ?It reads like a series of essays that are self-contained, because much material is repeated that could have been eliminated.

Secondarily, the book takes a position that pension benefits can’t be cut. ?That is not true. ?It may take constitutional changes to do so, but in a democracy, anything can be done. ?We could repeal the prohibition against ex post facto laws on a basis limited to pensions.

I say this because many municipal unions pressed for pensions far beyond what was warranted, in exchange for lower salary increases. ?It appealed to venal politicians, because increasing pensions usually had no current cash cost.

Eventually, municipalities will be forced to cut pensions, even for those that have retired. ?There will be no other choice.

Who would benefit from this book:?If you want to know the depths of depravity in municipal pensions, this is the book for you. ?If you want to, you can buy it here:?Kentucky Fried Pensions: Worse Than Detroit Edition.

Full disclosure: The author sent me the book after I asked for a review copy.

Book Review: The Dao of Capital

Posted on 11 December 2013 by David Merkel

Have I said this before: this is a tough book to review.? Much as I am in sympathy with Austrian Economics, I am not in sympathy with Daoism.

When I came to Christ at age 16, the major rival for my heart was Daoism, not the Catholicism that I grew up with.? My main difficulty was that Catholicism did not speak with a single voice on critical matters — one priest would say this, another that.

Daoism has an advantage in some ways because it seems to describe the world; the world is cyclical, and often a condition gives way to its opposite.

But Daoism, though descriptive of what happens, is amoral, as is much of radical libertarian thought.? A system without rules is no system.? There have to be rules for a good nation to exist.? On economics, there have to be ways to prosecute fraud.? There have to be ways to protect property rights.? That can’t happen without a strong, if limited, government.

Capitalism does not derive from Daoism, but from the laws of Moses, and the words of Jesus.? “Thou shalt not steal.” has impact, because it implies property rights.? 70% of the parables of Jesus involved money, and assumed that people were free to do with their resources as they saw fit.

Daoism did not develop capitalism.? It was a creation of the Christian West.? Was everything perfect in the way it was worked out?? No.? There were many mistakes, and much dispropriation of cultures that had no concept of private property.

Other Problems

The book would have been better without the constant repetition of foreign words.? It is pretentious to make readers learn a bevy of foreign words.

Minsky is better than the author makes him out to be.? At least Minsky sees how financing gets warped through the boom-bust cycle.

I believe that most financial crises occur because of government interference, but not all of them.? Men are greedy/envious/fearful enough to create self reinforcing cycles in the absence of government interference.? Look at the Creation more generally.? There are many species that ceased to exist long before Mankind became dominant.? In the same way, there have been many crises that have occurred in the absence of government interference.? “Man is born to trouble, as the sparks fly upward.”

Practical Upshot

In the last two chapters, he comes out in favor of the Q-ratio and the price-to-book style of value investing, plus quality.?? Both good ideas, but both require patience, which is in short supply among aging baby boomers.? The question to the reader is how long you are willing to wait.? That is the big question of much investing, and how to answer the question — the book says wait.? I agree, but it is tough to hold a lot in cash in a bull market.

Who would benefit from this book: It is a good book, though I doubt that many can follow the advice.? If you want to, you can buy it here: The Dao of Capital: Austrian Investing in a Distorted World.

Full disclosure: The publisher sent me the book after asking me if I wanted it.

Book Review: Bonds are not Forever

Posted on 8 December 2013 by David Merkel

This is a good book, it is not a great book like The Hedge Fund Mirage.? Why?

There are a few reasons.?? First, the book on hedge funds contradicted the conventional wisdom.? This book confirms the conventional wisdom that interest rates have to rise.

We all have to be wary of the conventional wisdom in economics.? Economics is a social science, but I mean it not in the sense that we study society, but that economists toe the line as to what is acceptable to publish.? This is guarded by peer review, which ensures that no new idea that might be correct gets published.? (This is true of most of the “sciences” because many “scientists” are not neutral observers — they have axes to grind.)

This book assumes that the US will inflate its way out of this crisis.? In the? Great Depression, it did not work that way, though many thought it would.

The book correctly calls out all of the ways that Wall Street cheats individual bondholders, particularly structured notes, and the illiquidity of muni bonds.

He does not get how muni bond ladders are durable investments, being a good compromise on how to avoid interest rate risk.? Further, he never mentions how the TRACE system of FINRA reports all trades.? The system is not that opaque.

This is a good book, but not a great book.? Yes, I think inflation is more likely than deflation, but I don’t think inflation is a slam-dunk.? We haven’t had it yet amid many predictions for it.

Quibbles

Already expressed.

Who would benefit from this book: It is a good book, though I doubt that the theory is certain.? If you want to, you can buy it here: Bonds Are Not Forever: The Crisis Facing Fixed Income Investors.

Full disclosure: The publisher sent me the book after asking me if I wanted it.

Book Review: Retirement GPS

Posted on 4 December 2013 by David Merkel

This book encourages you to invest most of your savings abroad, away from the imperfect but good protections offered by US law.? I wrote a piece on this idea a few years ago that pointed out the problems with this idea.? (Note to those reading this at Amazon.com, Google “Aleph In Defense of Home Bias” and you will find my article.)

Now don’t get me wrong — I invest in foreign companies.? One-third of the assets that I run are invested abroad, in both developed and emerging markets.? International investment is good, but it is not a panacea.? There is no inherent advantage to investing abroad versus investing in the US.? Even if emerging markets are growing more rapidly, that doesn’t mean they are better to buy. because valuations are higher, and government policies are more fickle.

This book is rather facile about problems in emerging markets.? Problems with Brazil led me to sell my stocks when Dilma Rousseff was elected President.? Lula promoted markets, Dilma did not.

I found this book to be long on cliches, and short on sharp ideas.? If you try to take the advice as an amateur, you will have a hard time doing it.? If you decide to hire an advisor other then the authors, you won’t get what the book offers.? Thus I can tell you that the book is merely a marketing pitch for their services, and so I tell you to avoid it.

Quibbles

Already expressed, though I would also add that the book didn’t feel right.? Too casual in the way that it treated topics.

Who would benefit from this book: Few would benefit from the book; the theory is flawed.? If you want to, you can buy it here: Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing.

Full disclosure: The publisher sent me the book after asking me if I wanted it.

Book Review: Why Stocks Go Up and Down, Fourth Edition

Posted on 3 December 20133 December 2013 by David Merkel

This is a good book to help the inexperienced learn about investing.? It begins by teaching the rudiments of accounting through the adventures of a man and his company who have built a better mousetrap.

He starts the business on his own, but needs more capital.? In the process of growing, he taps bank loans, private investors, public investors, bonded debt, and preferred stock.? All of this is done with simple explanations in a step-by-step manner.

The book then explains bonds and preferred stocks.? At first I was a little skeptical, because this is supposed to be a book about stocks, and the authors made a small initial error in that section.? That was the last error they made.? I became impressed with their ability to explain corporate bonds and preferred stocks, even some arcane structures like trust preferred securities, and other types of hybrid debt.

Now, if I were trying to shorten the book, a lot of those sections would have been cut.? For those that do want to learn about bonds in the midst of a stock book, you get a free bonus.? If you don’t want to spend the time on bonds, you can skip those sections with little effect on your ability to understand the rest of the book.

Then the book turns to trickier aspects of accounting, explaining cash flow from operations, and free cash flow.? It’s all good stuff, but here is my first problem with the book: what is the most common way of giving a distorted picture of earnings?? Revenue recognition policies.? The book does not talk about revenue recognition, and the most basic idea of Generally Accepted Accounting Principles [GAAP], which is revenue gets taken into earnings proportionate to the delivery of goods and services.? With financial companies, revenues are earned proportionate to release from risk.

That brings up another point.? The book is very good for describing the analysis of an industrial company, but does little to describe how to deal with financial companies.? Financial companies are different, because most of the cash flow statement has no meaning.

Then the book moves on to valuation of common stocks, and that is where I have my biggest problem with the book.? Though they mention other means of valuing stocks, their main valuation method is earnings.? The book does not mention price-to-book as a metric, which is a considerable fault.? Price-to-book is the main way to value financials versus ROE, while price-to-sales is a very good way to measure industrials relative to relative to profit margins.

Further, it suggests that P/E multiples should remain constant as a company grows.? I’m sorry, but P/E multiples tend to shrink as a company grows.? This is because the highest margin opportunities are exploited first, and then lesser opportunities.? For the P/E to remain constant, or even expand means that new opportunities are being exploited that have higher margins.? Investors should not count on that.

These mistakes are minor, though, compared to the good that the book does for an inexperienced investor.

Quibbles

Already expressed.

Who would benefit from this book: This is a classic book that will aid inexperienced investors to learn the basics.? Just remember, it is only the basics, and it covers most things, but not all things. It would be an excellent book for one of your relatives or friends that think they know what they are talking about in investing, but really doesn’t know.? If you want to, you can buy it here: Why Stocks Go Up and Down.

Full disclosure: The publisher sent me the book after asking me if I wanted it.

Book Review: Code Red

Posted on 30 November 20131 December 2013 by David Merkel

This is a tough book to review.? It is correct in analysis of what went wrong, but overpromises in what its main goal is — protecting assets before the next financial crisis.

Let me take a step back, and describe the structure of the book.? A major goal of neoclassical macroeconomics is to try to eliminate the business cycle, and end up with smooth growth that minimizes unemployment.

As a result, central bankers, since they have a freer hand than politicians, as they are appointed, not elected, act to try to stimulate demand by lower interest rates.? They did that from 1982 to 2008, until they came to the bottom rung of their ladder, and realized they could go no further.

Thus “Code Red” — a situation that is an emergency.? Many central banks felt they needed to act in an emergency to create liquidity to pump up economies with significant financial bankruptcies.

Would it work?? When the central bankers started, all they had was theory, and? Japan.? Japan had tried out their theory, and it did them no good.

The academics argued that Japan did not do it right, and sadly, one was the Chairman of the Fed.? Would that Bernanke had done his Ph.D. dissertation on another unrelated topic.? Some historical accidents are real killers, and this was one.? (As an aside: always be wary of academic researchers that have a lot invested in an idea.? They cease to be neutral, and cause contrary data to be ignored, because you can always find a method to twist the data.)

Anyway, that is the first and longer part of the book explaining how bankrupt. untested theories led us to a situation where debt levels are high with governments, and central banks are ultra-loose.? In such a situation, nations will try to weaken their currencies to gain a nominal advantage over other nations, so that they can export more.? Eventually, it could lead to a currency war of competitive devaluations, or worse, a trade war of competing tariffs.

If central banks cooperate with their governments, they can repress people financially, making the rate that they can invest in with safety to be lower than the inflation rate.? The authors believe that governments will try to do that and eventually fail, because credit creation will eventually lead to significant inflation.

One virtue of the book is that it shows that economists with influence over policy don’t know what they are doing, but make a bold show of it.? Particularly telling is Bernanke on page 135 saying the Fed can mop up excess liquidity at the right time, and he is 100% confident of that.? The Fed has never succeeded at that before, so who is he kidding?

The second half of the book deals with how to protect your assets — half is generous here, because it is 25% of the book.? It goes over the permanent portfolio idea of Harry Browne, and then a series of non-solutions in Chapter 10, essentially arguing that diversification is called for.

Chapter 11 argues for inflation protection through buying shares of companies that have moats, such as:

Valuable Intellectual Property
Benefit from strong network effects
Are low cost producers
Have lock-in, and customers can’t switch easily
Natural monopolies and monopolies of market niches

These are good ideas, in my opinion, but difficult to continually implement.? The book gives companies that presently fit the ideas of the authors, but updating it, and knowing how to trade it is tough.? We’ve been through eras like the early ’70s, where companies like this have cratered, so this strategy does not come without the possibility where it becomes too popular, and gets abandoned.

Chapter 12 goes through commodities and gold, and is bearish on them, arguing that the commodities supercycle is dead, and that gold is tied to real interest rates.

In short, the second half of the book is thin.? If you are looking for protection, maybe the book should have said, there aren’t a lot of great ways to seek protection against the monstrous economic policies of the developed world and China, but that wouldn’t have sold many books.

Quibbles

I disagree with the first chapter that we had to have bailouts.? The government could have protected regulated subsidiaries of the banks, and derivative counterparties, and let the holding companies fail.? I also disagree that we had to have abnormal monetary policy to stem the crisis — so long as there is a positive yield curve, there is stimulus, but once you get down near zero, perverse effects kick in.

The rest of my disagreements are already expressed.? To summarize: the first half of the book is good, but the second half is thin gruel if you want to protect your assets.

Who would benefit from this book: If you want to understand the causes of the crisis this is a great book to buy.? For protection of your assets, it will give you a few ideas, but no solution.? If you want to, you can buy it here: Code Red: How to Protect Your Savings From the Coming Crisis.

Full disclosure: I asked the publisher for a copy of the book, and he sent one.

Book Review: Currencies after the Crash

Posted on 5 November 2013 by David Merkel

Sara Eisen is smart.? How smart is Sara Eisen?? She can write twelve pages on currencies, invite some clever and opinionated people to write articles for her, and serve as editor of the book, and thus get top billing for a moderate amount of work.

There are other reasons why I think she is smart — she is an able interviewer, and maybe there is not a lot of difference between choosing people to write articles for you, and knowing what to ask someone that you choose to interview.? Both require understanding the views of the person in question.

Be that as it may, the ten writing the represent different points of view.? Let me briefly describe each one:

1) Gary Shilling — The US Dollar has its weaknesses, but is stronger than all of the alternatives, because the US possesses a lot of strengths not found in the rest of the world.

2) Stephen L. Jen — The Chinese Yuan will become a reserve currency, but it is highly unlikely that it will significantly replace the US Dollar in the intermediate term.

3) Jorg Asmussen — The Euro can be an alternative to the US Dollar if it overcomes integration issues, and continues to deepen economic integration.

4) John Taylor — Assuming the Euro survives its imbalances, a shrinking population and sclerotic economic policies will make the Eurozone less important by 2050.

5) Megan Greene — The Eurozone will be better off if weaker nations leave.

6) Anoop Singh & Papa N’Diaye — Even though rebalancing to internal growth through increased domestic consumption will slow down Chinese growth, in the long run it will lead to a better, healthier Chinese economy and currency.

7) James Rickards — Competitive devaluation is leading to currency wars, but embracing deflation and austerity as the Euro has is the right path.? We can do the same thing globally through the IMF with their SDRs.

8 ) Peter Boockvar — We need to tie the hands of the Central Bankers, because they overshoot and make economic volatility worse.? One way to do so is through a gold or other commodity standard.

9) Robert Johnson — Much like the authors in Chapter six, except more pessimistic about whether it will happen.

Do You Want a Conclusion or Not?

This? book offers no unified point of view or conclusion, and that is a strength, because it mirrors the debate that exists in the world today.? If you are not confused, you don’t get it.? That said, the book could have been much stronger if the ten authors were allowed to respond to the other authors briefly, with a brief rebuttal from the original author.? The weakness of the book is that there is no interaction, no attempt to see how the views fight or agree with each other.? This could have been a better book, but I recommend it as it is.

Quibbles

Already expressed.

Who would benefit from this book: If you want to learn nine different views on currencies and global macroeconomics, this could be the book for you.? If you want to, you can buy it here: Currencies After the Crash: The Uncertain Future of the Global Paper-Based Currency System.

Full disclosure: The publisher sent me the book after asking me if I wanted it.