Peter Yastrow's Blog

ECONOMICS EXPLAINED

Everyone is part of the economy, but most people have no idea how the thing works. I have talked with hundreds, maybe even thousands of college educated professionals who studied economics. They have no idea what they are talking about. When we look at the recently released transcripts from the Federal Reserve Board, just prior to the bubble bursting in 2007, it is obvious that the Fed Governors are relatively ignorant about economics. These people have all studied theories, and learned them well. Unfortunately, those theories may or may not be applicable anymore. Economists must be able to not only draw parallels to the past, but more importantly must be able to understand the differences between the past and the present. Economists must be able to see beyond the statistics and the formulas, and really comprehend what is happening in our society.

The key points to understanding what is going on now are as follows:

1. When our tools get better, our lives get better.

2. Over time, everyone copies one another, so the relative advantage of new tools is always diminishing.

3. The physical world that we live in has limits. We live in a 3 dimensional world, where the senses of sight and sound are key to our comprehension and understanding and communicating.

That Is It ! If you can understand these 3 points then you too can be a great economist.

The first point tends to lose people, until they realize that cars, computers, and cell phones are modern tools. Along with air conditioning, heat, microwave ovens and every other labor saving device that we use in our lives. These things are all ‘tools” and we can’t imagine our life without them. These tools raise our productivity, and along with it the standard of living for all of humanity.

Then we must understand that once everybody has a computer, you are no longer better than the next guy. You have to have a computer just to be in the game. Somebody gets ahead, and soon that is where the average is. There is a upward move in the productivity of the labor force. This helps to pay for the increased standard of living that we would be enjoying ( see point 1 )

Last Point ! We can already see and hear each other around the entire planet ! We are running out of ideas for new tools. This fact astonishes the masses who see science as some sort of romanticized version of Nasa where nerds in short sleeves with thick glasses are always running out of the lab shouting “eureka !” but the truth is that we can communicate the whole world over instantaneously. The next step would be to actually move matter around the planet- not gonna happen. Sorry Kirk, no transporter beams.

We have seen the world move quickly from farming to industrial life. Men started farming about 6000 years ago. They hunted and gathered for about 140,000 years before that. As of the most recent data released in China, more than half of the population there is living in an industrial community, as opposed to an agricultural community. The world is very very quickly adopting to the industrial way of life that propelled our country’s awesome economic success.

I hope this helps.
peter

transparency is for wimps

Do we need more transparency ?

During Greenspan’s Tenure we were bamboozled with “FED SPEAK” by the “Maestro”. Yet, the market had the Fed Funds levels and the LIBOR rates pegged during Greenspan’s enitre easing and tightening cycles which were over 400 basis points.

Transparency is only helpful when trying to defend one’s decision making process. Consider the student who shows all their work on an exam- in the hopes that in spite of a wrong answer or an incorrect response, the student will still get some credit.

The markets clearly do not need more transparency. Bernanke and company want it !

Statistics: the Liar’s Weapon of Choice

In 1983, the average graduate from the speech dept. of University of Virginia made over $100,000.
There were 11 graduates that year. 10 of them could not get jobs at all, but Ralph Sampson was drafted by the Houston Rockets for over $1 million. Averages can be very misleading. Unfortunately, as we try to process more and more information, and keep up on more and more issues, we often rely on shoddy statistics, and pathetic methods.
Consider our retirement accounts. Most people have been told that they can expect returns going forward of 8%. This is the average return over the last 40-50 years. They are literally banking on this statistic. This average that was compiled during the golden ages of the United States, and is nothing more. It is not a guarantee, or a promise. There are hundreds of millions of people who are assuming that this number will hold up going forward for the next 40 more years.
Our politicians on both sides of the aisle repeatedly site past examples when making a point. Under Reagan we cut taxes, and the economy grew.
The Berlin Wall fell, we were overdue for growth, because things had been slow prior, the computer age was born, maybe some of these factors also had a part ? Under Clinton, the economy roared. Maybe because of the Internet ? or maybe his awesome rhetoric ? or his exploitation of a young intern?
Suppose we wanted to lose weight. We diet, exercise and take some pills from the doctor. 3 months later, when we are in fact thinner, it will be impossible to determine whether it was the diet, or the pills or the exercise that is responsible for the drop. Likewise we do not know which factors are responsible for our economic good times and our economic bad times. There is only economic theory, and logic. Economists argue everyday about the macroeconomic factors that are always changing and reshaping our society. Some say tax cuts are helpful, and cause growth. Others will argue the opposite. This is what happens when we have millions of different factors in a problem.
We can measure our economy, and we can discuss our economy, but I dont want any politicians trying to “fix’ the economy. It sounds scary, like a quack doctor saying lets remove an organ or two, it worked before. The truth is that our elected officials are not interested in getting it right. They are interested in winning. It takes that type of person to run for office, and we fill our political ranks with ego centric lawyers who only want to win. They are given a cause and they fight. Hence our congress senate and president are unable to forge any plan, or shape any policy. They are to consumed with trying to win their argument, for their party. These are the worst form of people, they have checked their own sense of right and wrong at the door, and have become hired guns. Let’s not elect anyone who thinks they have it all figured out- clearly they are lying.

peter

Why U.S. Equities

The markets are more efficient now than ever before. New information is priced into the market almost immediately. Everyone knows everything. That makes it almost impossible to make large profits, because people are too smart. One man’s profit is another man’s loss. Every dollar that we make in investing must come from somewhere. So to make a “call” or “pick” a stock means either, you know something no one else in this whole connected world does not know, ( which may be illegal ) or you’ re a fool.

However, thanks to non-organic market forces,situations do arise where we can take advantage. Non-organic market forces refers to any factor that impacts prices, that arises from something other than supply and demand. Usually it is laws or rules that government officials enact that cause the anomaly and allow us to make larger profits than would be allowed if the situation had remained unchanged in an original organic state.

Right now, our Fed has a dual mandate. The Fed is supposed to use its power to keep prices steady, and to keep job growth healthy. The Fed must keep interest rates low in an effort to get more people working. It is their job. They must do everything in their power to keep rates down in order to create more job growth. Bernanke is doing all he can to follow the rules, and keep the employment ranks filled.

The resulting business environment is one that is flush with money. The Fed has turned on the spigots full force and corporations are seeing interest rates at all time lows. These corporations can use this cheap money to repair balance sheets, retire bad debt, and engage in any other capital-intensive activities. Money is cheap. Companies are starting to us it.

BUT NOT TO HIRE. Here is the Fed’s conundrum. They can give companies money at zero, and companies will be much better off, but they are not going to hire people. People are permanent, and low rates are not. Corporations will hire when labor gets cheaper. Obama and company actually have made labor more expensive when we look at health care obligations, at the time when the Fed was trying to stimulate hiring with cheaper money. Cheaper money makes companies use more money. Cheaper workers makes companies use more workers. It is not rocket science.

To summarize. Rates are at all time lows to stimulate hiring. Corporations are taking advantage of the low rates. They are not hiring, but are making more money in this low rate environment. Presently our stock market is very low on all historic metrics. Price to Earnings ratios are extremely low. In addition these companies pay dividends that help us to monetize our investment.

The world is scared, and our stocks still have a huge amount of discount priced in for any global systemic issues. Europe has problems that are going to dissolve the euro currency eventually, and there is huge structural risk to our financial institutions in the form of CDS and counter party risk. The disaster at MF Global was a canary in the coal mine. Trades are only good if the other side is still in business.

So buy US equities, and hedge the systemic risk out of Europe. It’s as easy as buying calls on stocks and buying puts on the euro currency.

Hope this helps.

j.o.y. to the world

Peter

Yastrow on Credit Markets and European Currency

Yastrow on CNBC: “While Rome Burns, US Fiddles” – Gold, Currencies & Futures.

Yastrow on Fox Business

Healthy Growth

There is a famous fat guy from Omaha who says,” everyone is buying, then sell. Everyone is selling, then buy!” This famous sage who provided an example for all of us to live by, is of course Al Czervik the character Rodney Dangerfield played in Caddyshack.

This movie also gave us the famous quote, “ the world needs ditch diggers too! “ Which might be a rather cold reality for many of the generation Xers out there who thought that all they needed to do was attend classes most of the time at a major university, get a degree, and then wait for a job to fall out of the sky.

The country is at a defining moment. The time for decisive leaders to provide a vision and a plan for a better and more productive society is at hand. But who is there really to listen to now?

Obama has proven that he is playing small ball, and already missed his chance. He has had 2 bites at the apple. A stimulus plan and a jobs bill together provide all the evidence we need that Team Obama just doesn’t get it.

The Republicans running for president seem terribly under qualified to lead our nation through uncharted waters. The two frontrunners seem to be mired in the belief that changing tax rates and cutting spending will lead to economic recovery. None of them have talked about a larger, longer-term vision for the country. None of the candidates have the charisma and strength of character to help us change our society.

The country needs a leader who can unite the people behind a common goal. JFK electrified the nation when he spoke of sending a man to the moon. The vision invigorated the aerospace industry, and filled the dreams of kids like me. We dreamt of space stations and flying cars, and worked even harder in school. Goals help countries to align their efforts and unite their people. People work together to solve a problem, and more gets accomplished.

We must grow our way out of our problems. Growth must be orchestrated. Growth without a plan, uncoordinated and random is cancer. Growth without order and without an organized plan leads to death. The Federal Reserve has cut rates to zero, to foster growth. Like steroids to a body, these lower rates stimulate all types of growth. Yet we have no plan, no leadership, and no direction. The growth is not even and orderly, we are not any healthier.

Lets get a plan together. A big plan. A plan that will raise our standard of living and give us dreams to pursue. It doesn’t matter who is in charge. Democrat, Republican, or Libertarian. They just have to give us something to shoot for. Maybe we hit the target, maybe we miss. But if we aim for the stars and miss, we still go somewhere.
Joy to the world

peter

GENIUS + GENIUS = MORON

My brother used to torment me a a child. ( now he torments me as an adult ) When we played games when we were kids, he used to always win. This was because he was 4 years older, and was very adept at cheating. One particular scheme was employed during the game “Battleship”. For those who may not recall, Battleship involved placing a “fleet” of toy boats on a grid. Each opponent would take turns “firing” torpedoes at specific grid points. Hits and misses were called out, and the first player to sink the entire opponent’s fleet was the winner. My brother would move his boats, and turn his boats, and sometimes even hold a tug or destroyer in his hand, only to be placed after he knew were it would be missed. The obvious lesson is don’t play with cheaters. However, there are some hidden lessons that should also be heeded.

Modern Investment theory stresses diversification. The old wisdom of ” don’t place all your eggs in one basket” does not sell well in investment strategy sessions, so portfolio managers stress asset diversification so they sound important. Only Abbey Joseph Cohen with her chicken soup insight could get away with saying, “let’s not put all your eggs in one basket”. Most others are expected to espouse the wisdom of buying different asset classes which allow investors to enjoy a blended return. This blended return will be less volatile, and less risky, as opposed to buying one asset class and either doing well or poorly. So we all agree that we can use diversification to reduce the risk in our savings, and that clearly diversification is a sound and wise investment practice.

Leverage comes from the word lever. We use levers when we want to move huge objects with small amounts of force. Similarly, in finance, leverage involves controlling huge sums of money with only a small amount of money being used originally. Leverage cannot exist without credit. Creditors must be willing to lend managers funds in excess of the managers total portfolio. This is often referred to as MARGIN money. The manager puts a million dollars into a fund at a bank, they can the control as much as 10 to 20 million dollars ! The assumption of the bank, or clearing house is that as the account starts to change value, they will be able to either, liquidate before you lose a million, or make you come up with more money. By levering up their funds, managers are able to take an asset class that normally only makes a boring low return, and turbocharge the cash flow. This became a common practice. Borrow money at 3%, and buy bonds that yield 5%. Rinse and repeat.

So now we have two great investment practices. Diversification, and Leverage. Let’s combine them. Lets lever up our funds, and buy a diversified portfolio of different assets. This no longer assures us of victory, but rather assures us of failure. The benefit of diversification is completely lost, for no longer are we protected against any one asset class imploding, we are now going to be wiped out if one asset class implodes.

It is like Battleship, except now rather than it taking 4 torpedoes to take you out, it only requires one. We are vulnerable all over the grid. Any hit in any sector, and we start taking on water. If any sector has trouble, we will need to come up with more funds, or sell winners to make up for the magnified loss. This is the opposite of what we had tried to accomplish. Our portfolio is no longer a robust and balanced one, but rather a collection of targets all over the world, and if any gets hit- we are sunk.

It is time for a new game- and not RISK

peter

WHO WE BLAME

Our economy is struggling. We hear people say that we have exported our jobs, and that we are losing jobs to foreign competitors. The truth is that our standard of living is dropping, and has been for 40 years. The fact that we could buy our clothes, and our electronics and our machinery and our cars from foreign producers however was not a bad thing. REPEAT: BUYING ALL OF OUR CLOTHES, ELECTRONICS, MACHINES AND CARS FROM FOREIGN MANUFACTURERS IS NOT THE PROBLEM. IT HAS BEEN OUR SALVATION.
The prices of the goods we consume have not gone up at all over the last decade- in fact over the last 20 years many prices have gone down in not only adjusted dollars, but in absolute terms. The fact that we could buy the tools we needed at low prices from our foreign trading partners was good for our society.
The problem obviously is on the other side of the coin. Once we realized that it is cheaper to make everything outside of the country, we lost our manufacturing sector. The Ying and Yan. The cheaper imports allowed us to consume more, but cost us our jobs.
If we could come up with something to do with all of these computers and college educated generation X-ers boy watch out !!
If the young people can learn to harness all of the computing power and technological capabilities we have and propel our society to a new and higher level of existence- then we will be able to take all of the inexpensive tools that they are making in other lands and realize our full potential.
Or if our scientists could find new ways of moving atoms, or if we explored the galaxy- even remotely.
Unfortunately, there is no need at all for any of this computing power. We cannot imagine reasons why we would need to make millions of calculations in nano seconds. The fact is that we are the technological equivalent to a guy in a tuxedo on Monday night. ALL DRESSED UP, BUT NOWHERE TO GO.
So that is the reason why are economy is so bad. We are the front of the train, the locomotive of the world, and we re out of track. We do not know what to do next, or in which direction to proceed. The last several administrations were blessed with a technologic eruption that allowed them to sit back and lead from behind. Now the path is not so well marked. Should we go solar, or natural gas. Do we need to rethink our roads, our energy, our urban planning.
Our leaders need to think much larger, and longer term if they want to have our country even survive. it is that bad.

peter