Bill Gross quote

I read this quote from super-investor Bill Gross on Forbes' website today:
"The whales of our current economic society swim mainly in financial market oceans. Innovators such as [Steve] Jobs and [Bill] Gates are as rare within the privileged one percent as giant squid are to sharks, because the one percent feed primarily off of money, not invention."

Here's the full story: What Investors Can Learn From Apple, McDonald's And Wall Street's Blunders.

This quote encapsulates much of what I've come to believe about how the financial industry has become a parasite on the economy.

Dichotomy of Small Jobs

Here's an important observation I was unaware of. I'd always seen statistics showing that almost all the job creation in the country is via small business - footing the idea of creative destruction, that as part of economic growth the old companies die and are replaced by the new.

Interestingly, it's easy to slide into an overly broad generalization that that small business creates jobs -which is true - but the deeper truth is that NEW STARTUP small business creates jobs, not existing longer-term small business.

This AP article gets a little politicky - but if you just ignore that part and read the economic references inside an interesting fresh observation is in there regarding new startups that I hadn't heard before:

"Haltiwanger and two other economists showed, in a study of millions of companies over 30 years, that small businesses no more than five years old — that's about 40 percent of them — are the only ones that create more jobs each year than they cut.

In 2005, for instance, more than 99 percent of the 2.5 million net new private-sector jobs in the United States came from these startups, according to the U.S. Census Bureau.

But the 60 percent of small businesses that have been around more than five years act as a slight drag on the number of jobs available in the United States. They have cut about 0.5 percent more staff than they have added in a typical year, according to Haltiwanger.

By contrast, big businesses, the ones that get all the headlines for layoffs, have hired more than they have cut — about 0.1 percent in a typical year."

Summary/Key Takeway: If we want job creation create incentives targeted not to small business broadly, but to NEW small business formation specifically.

Anyhow - I found that portion very interesting and not often discussed.

Quote: Paul Tudor Jones

I was re-reading Paul Tudor Jones' interview in Jack Schwager's book "Market Wizards" and came back across this quote which I remember from the first time I read it. He pretty much called the 2008 financial collapse more than a decade in advance.

"Everything gets destroyed a hundred times faster than it is built up. It takes one day to tear down something that might have taken ten years to build. If the economy starts to go with the kind of leverage that is in it, it will deteriorate so fast that people's heads will spin. I hate to believe it, but in my gut that is what I think is going to happen."

"I know from studying history that credit eventually kills all great societies. We have essentially taken out our American Express card and said we are going to have a great time.... (snip) We borrowed against the future, and soon we will have to pay."

- master trader Paul Tudor Jones - interviewed approx 1989-1990.

My new hero: Peter Schiff

Whoa, I just saw a link to video from Peter Schiff on seekingalpha.com, an investing website with alot of great articles.

I'm going to have to read more about Peter Schiff but this guy called the economic mess we are in - and he put the other talking heads to shame. Watch this video of him on various news shows as he's literally laughed at by commentators and other guests when he warns about the coming mortgage crisis, banking collapse, and economic recession.

Peter Schiff is my new hero! Prepare to see who was clueless (utterly) - and consider whether you should listen to these guys ever again. They couldn't even imagine Peter Schiff's argument being accurate - to the degree that they dismissed him with laughs and giggles. It's scary how right Peter Schiff was and few others could see it.

Confusopoly

I saw the word Confusopoly today for the first time. It's a brilliant concept and word coined by Douglas Adams of Dilbert Fame.

Confusopoly "a group of companies with similar products who intentionally confuse customers instead of competing on price."

Here's a little more info.

We were talking at lunch about how confusing cell phone plans are and that it's nearly impossible to compare what should be a fairly similar product across carriers given all the differences in plans. Our thought was it's intentional complexity designed to confuse shoppers. Confusopoly sums up this business strategy perfectly.

BTW, the term is said also to apply to insurance - the business I'm in too - so don't trust a word I say. And don't pay attention to any new financial products which bundle:
- life insurance,
- an accident benefit,
- savings plan,
- investment plan,
- annuity,
- cash return at retirement,
- free airline miles, and
- a free 12 month subscription to your favorite magazine
in a single product that you couldn't possibly hope to understand without taking a night class.

Tip to the Blog of Diminishing Returns for the reference.

Developing World

A good editorial by Nick Kristof today in the Times. Not politically correct, but good. There's probably lots of ways to interpret it and it's probably too easy to just be critical and dismissive, but I just wanted to the it out there as I found it a very interesting read about spending decisions and priorities of the very poor in the third world. Moonshine or the Kids?

parts from Hong Kong

I've recently been doing some repair work on guitars, and in the process of buying parts I've often found that I'm buying parts on ebay directly from Hong Kong. This surprises me because I'd think it shouldn't make economic sense.

- 6 insulated lead clips (alligator) for multimeter (2.50 +free shipping)
- guitar tremelo springs (10 springs for 5.46 + 3.00 shipping)
- a couple string trees (to help hold guitar strings firmly down on the fretboard (1.63 + 2.00 shipping)

Now on one level this isn't totally surprising since so much stuff gets made in Asia already, but on another level it is quite surprising because to me how should someone in Hong Kong be able to sell me such small quantities and ship them clean across the ocean and still make money on them? Why should these types of micro-orders exist so that I can order something for a couple bucks in china and in 7-10 have it arrive at my front door for only a couple bucks shipping? Granted these are small items, but still - it doesn't make sense.

Too many scientists?

I love articles like this that challenge the conventional wisdom. In this case the article argues that the perception that there is a shortage of science, math, engineering and research talent in the U.S is entirely incorrect. In fact it argues the opposite: That large numbers of PHD grads in scientific fields have great difficulty finding work related to their field of study.

Here's the story from Scientific American. It's well worth a read.

excerpt:

many observers believe that the existing system of research by professors who constantly produce large numbers of scientists unlikely to achieve their career aspirations is near collapse. The real crisis in American science education is not young Americans’ inability to learn, or the schools’ inability to teach, but a distorted job market’s inability to provide them careers worthy of their abilities.

Job Creation Stats

I saw a link to this over at the Marginal Revolution Blog. It's an interesting discussion of the government "job created" statistics by Felix Salmon - and how the stats can be highly misleading - talking about some highly creative accounting:

Yes, for the purposes of this report, the government has calculated the number of jobs created by taking the number of hours worked and dividing by 173. If you pay a man to wield a shovel for one year, working 40 hours a week, then hey, you’ve created 12 jobs! If you pay him overtime, and he works 60 hours a week, then you’ve created 18 jobs! If he keeps on working at that pace for three years, then you’re up to 54 jobs! All from one man earning one paycheck.

Here's the full blog post - very cool reading. I think the post tends to downplay/overlook the multiplier effect of one job creating income that in turn gets spent to create other jobs, but it does seem a bit of a stretch to get to the math above if 1 job created is expected to create 11 others.

Nitty Gritty of credit and debit cards

Here's an interesting piece on the behind-the-scenes costs to retailers and to you of using credit and debit cards.

- @0.7% of purchase price is a fee
- 1% to 3% interchange fee that goes to banks

the National Retail Federation says the interchange fees cost households an average of $427 in 2008.

- amount varies depending on credit or debit
- amount varies depending on whether you sign your debit/ or punch in your debit card PIN

Retailers say they inevitably have to pass along costs. Is the convenience worth it? Would you pay differently if your bill was different based on how you paid? Do the agreements that prevent vendors from charging different cash/debit/credit prices distort consumer habits (rhetorical)?

Poverty and potential role of savings accounts

Nick Kristof has an interesting view reducing global poverty in today's NYTimes. Provide the people a way to save.

I'm a fan of microlender Kiva, and am often amazed at the loan shark-like market lending rates in third world countries (often 50-100%+ interest), but it turns out in many places that even with a savings account you have to pay the bank to simply hold your money!

In West Africa, money collectors called susus operate informal banks but charge an annualized rate of 40 percent on deposits. Yes, you read that right. You pay a 40 percent interest rate on your savings!

In Kenya, two economists conducted an experiment by paying the fees to open bank accounts for small peddlers. They found that the peddlers who took up the accounts, especially women, enjoyed remarkable gains. Within six months, they were investing 40 percent more in their businesses, typically by buying more goods to be resold.

Anyhow, this is an interesting market-based piece of the puzzle. Read more here.

Healthcare: A failure to communicate

I'm probably talking out of school here - but I find the national debate on heathcare to be pathetic. We've become a nation so tied up in ideology - so hardwired into pre-conceived notions of what should be, that our debates increasingly tend to start and end with the way we think things should be rather than how they are. We're increasingly becoming a nation of ideologues rather than practical thinkers.

I'm so disappointed with the national healthcare debate because I don't think even the most fundamental issue of cost is even understood at the simplest level by the voters. At it's core I think we are seeing a massive failure to communicate.

At it's core is the issue of cost I pointed to a short while back. Why do we spend twice as much as most other comparable countries on healthcare? I can't get past this graph showing national healthcare expenditure vs. life expectancy (yes, click the link and digest the graph - it's important) for countries around the world. Why is it so hard for us to admit that the system we have is the most expensive system in the world - by far - without producing a noticeably healthier outcome?

Some datapoints from just eyeballing the graph:

Healthcare - - - -
Spending - - - - -life
per/capita - - - -expectancy

$6200 - - - - - - 77.9 yrs United States
$3200 - - - - - - 79.0 yrs Canada
$3300 - - - - - - 81.0 Australia
$3400 - - - - - - 80.5 France
$3300 - - - - - - 79.0 Germany
$1500 - - - - - - 78.5 South Korea
$2300 - - - - - - 82.0 Japan


And here's the thing... I don't have a clue why I have to pay so much for my health insurance. I have no idea. Why is healthcare so much cheaper everywhere except in America? And if the care is really that much better, I need to understand what our extra $3000 per year per person is buying and why it's worth it.

Conspiracy theory - natural gas

I read this article on seeking alpha this morning about some pretty startling and prohibitive licensing requirements for shops that want to do gas to natural gas fuel conversions for automobiles. Apparently due due to the conversion costs conversions only appeal to large fleets that drive very high miles.

I read enough of the comments to this article to convince me that there's at least a nugget of truth in here. I don't know that conversions vs. original manufacture is the way to go for proponents (see example from AT&T fleet here), but it does seem serious economic barriers have been put in place to keep consumers on gasoline even if you wanted to change.

Some other articles:
Who even know they exist? It's a pretty good summary article that discusses some of the vehicles on the road today - and indicates there are about 150,000 on the road currently in the U.S. and about 5 million worldwide. The article indicates many feel Natural Gas could have the largest impact if treated as a premium fuel for the most polluting and heavy duty vehicles if possible. Article also indicates there's not much consumer demand for natural gas vehicles.

Cash for Clunkers

Here's an interesting perspective on the cash for clunkers program. The clunkers are just piling up on dealer lots.

It turns out the salvage folks really aren't that interested in salvaging vehicles because the program essentially requires the engine and transmission to be destroyed via chemical. That significantly lowers the salvage value to the point where they really have little incentive to bother with them. Salvage yards say they can't make much money off of things like wheels and alternators - it's the used engines/parts that have value.

Anyhow, I thought this Behind the Scenes story was pretty interesting.

Rationing in public health care

This article in the NYTimes was thought provoking - basically arguing that we are all in favor of rationing of health care unless we've got the cash to pay for everything ourselves.

This question illustrates the basic argument:
"Public Health Insurance should pay up to $__________ for a treatment that would extend a patient's life by 1 year."

Is the answer $10,000? $50,000, $100,000, $500,000, $1,000,000, $10,000,000, $100,000,000? .... I get the point. We already ration health care - there is a limit to what we spend on it - we just don't think about it explicitly. The question is how much value do we place on extending life?

An interesting corollary - it makes more sense to spend more on health care for younger people (who might live 40 yrs if they survive a crisis) than older people who are likely to have shorter expected life spans. (the same treatment extends the life of a younger person longer than the life of an older person).

Graph of the Day: Healthcare Spending

Graph of the day.

Per capita health care spending vs. average life expectancy.

Now you know. The U.S. tends to spend about twice as much on healthcare as the average country shown, and we don't live as long.

This one little fact made my day and is worth more than all the blathering about healthcare ideologies I've heard in a long time.

Tips to Marginal Revolution for the link.

Happiness Project

I was visiting some economics blogs I hadn't visited in a long time - I changed computers and lost alot of links - and came across a link to this post on The Happiness Project:

"If I’ve learned one thing from my happiness project, it’s that if I want my life to be a certain way, I must be that way myself."

What's this got to do with economics? There's this idea out there that despite all the stuff we've got and our "high standard of living," most studies indicate we aren't any happier than we ever were. Something in economic theories and efforts of maximizing utility are at a disconnect with overall happiness created in society.

Ayn Rand - Atlas Shrugged

OK. I'm watching C-Span and they're interviewing a guy from the Ayn Rand Institute and he's arguing (my interpretation) about how the government intervention into the current economic crisis is a huge problem and that free market is instead the solution to the current economic crisis. Since I think too much free market activity combined with leverage is the root of the problem, I obviously disagree. (Some will argue that what produced the crisis is not sufficient to meet their defintion of a free market - all I can say there is that on the continuum of free to controlled economies, I think we've seen the result of swinging too far toward the free end of the spectrum).

Now, I liked Ayn Rand's book "Atlas Shrugged", and even though I read it aobut 20 years ago I think I still recall the free market principles it's built upon - that we all own our own productivity and the government is a parasite that takes what it doesn't deserve.

Here are some observations where I have problems though:
- in the book the most entrepreneurs are all honorable, noble, highly productive, smart. I don't think that applies to those in business who caused the economic problems of today. The bad actors were overstimulated by greed and were rewarded for excess risk taking. End result: If things go right they cash in big on their bets with huge bonuses. If things go wrong the entire economic system suffers. While self-interest tends to produce desirable results and positive spill-over effects in an economy, we've seen that over-leveraged self interest works the opposite way and produces negative spill-over effects. In Ayn Rand's books the heroes by definition would never place the bad bets that bring down not only their companies, but negatively impact the lives of thousands. What does it say about or free market that this appears to have happened with regularity?

- government actors in the book are portrayed as inept and only seeking ways to leach off of the productivity of others. The book sees very little role for government - a very Darwinian outlook of let the strong survive and let the weak die. I'm on board with that idea to point, but I do think there is a role for the government to protect the citizens from predatory activities like we've seen - if for no other reason than no other entity can.

With economic interdependence, our interests grow increasingly interconnected, and it does appear that the actions of a few bad players in the free market today can produce very bad outcomes for the many. To me it seems a form of highly leveraged economic terrorism at work when bad bets placed by corporations, banks or hedge funds can create domino effects that can topple economies. In warfare I've heard analysts use the term "asymmetric" warfare - where a small # of actors can create a large impact.

I see that there is a place for government to step in and prevent the kind of predatory activity we've seen recently. I clearly think the government is the only institution that is able to step in and stabilize the economy currently. Since the free market created the current collapse, I obviously do not trust it to prevent or self-correct the problem that it created. In fact, I think Ayn Rand would despise many of the actions of free market risk takers in creating this mess.

I think there's the danger uniformly interpreting pro-business as free market as the "good guys", and interpreting government as "bad guys." It sees to me business has the potential to create a system where it becomes a parasite (just like the government has the same potential). I think knee-jerk pro-business stances need to be tempered. There's something to be learned here, and an honest evaluation I feel will only make the resulting business climate more sound and stable going forward.

Conspiracy theories, the financial crisis, and Goldman Sachs

I've seen the author of this op-ed piece, William Cohan, on C-Span's Booknotes TV program. He's a very interesting speaker. In this piece he discusses Goldman's connections in the Government and how they've maneuvered their way through the crisis, and used many connections to their benefit. The general conspiracy thesis here is that the government lets Goldman's competitors fail or forces buyouts/mergers, leaves Goldman in a stronger competitive position than before, and sees that taxpayer funds get to AIG which in turns pays off Goldman's bad bets.

I kindof like conspiracy theories anyhow, but this one has a particularly resonant ring to it.

Quote from the article:

Goldman has since received some $13 billion in cash, collateral and other payouts from A.I.G. — that is, from taxpayers.

Goldman recently reported an "unexpected first-quarter profit of $1.8 billion."

...and we're upset about bonuses in the millions of dollars at AIG?

Here's a link to a review on his book about the collapse of Bear Sterns called House of Cards.

It's not just abandoned homes....

It's not just foreclosed and abandoned homes on the rise. This article from the NYTimes highlights the growing trend in abandoned boats.

They are expensive-to-maintain toys that have lost their appeal. The owners cannot sell them, because the secondhand market is overwhelmed. They cannot afford to spend hundreds of dollars a month mooring and maintaining them. And they do not have the thousands of dollars required to properly dispose of them.