Tuesday, October 25, 2016

Caterpillar needed the Austrian business-cycle theory

Caterpillar is facing its fourth year of declining sales, the longest in its history. It expects total revenue this year to be 39% below its peak in 2012 and profits will be down 68%. Its stock is now 25% below its peak. Through the first six months of 2016, the company’s overall revenue was down 21% from the same period in last year.

CEO Doug Oberhelman is stepping down, but when he took the reins in 2010 the world, especially China, couldn’t get enough metals. Prices were soaring and everyone thought the good times would last. That’s the first mistake most investors and businessmen make – linear forecasting instead of thinking in terms of cycles. Oberhelman should have understood cycles after working for Caterpillar for 35 years. The capital goods sector is the most volatile in the business cycle. But he didn’t understand them. Caterpillar’s problems began when it invested heavily at the peak of a cycle according to an article in the Wall Street Journal:

Thursday, October 13, 2016

How over confidence destroys earnings

“The curious task of economics,"  wrote Nobel Prize winner in economics Friedrich Hayek "is to demonstrate to men how little they really know about what they imagine they can design."

In other words, good economists are humble and that shows how few good economists live in the US.

Investors should be humble, too, and researchers have provided the proof. Two professors at the University of Maastrict published a paper at the beginning of this year on the question of “How Does Investor Confidence Lead to Trading?” The problem is not that initial successes spur investors to greater confidence.
Hence, we find evidence that our measure of investor confidence refers to a certain type of individual, as it is stable over time...Moreover, there is no evidence that any of the small fluctuations in investor confidence are driven by past returns, that is, that high returns lead investors to learn to be overconfident...That is, confident investors generally have lower returns (because of their higher turnover, see Section 5.1), but variation in those lower returns does not change their confidence.
In other words, the overly confident investor is always confident whether winning or losing. And men don’t have a monopoly on excessive confidence:

Sunday, October 9, 2016

China inflates its real estate

I have a Chinese friend who used to teach in a university in China. He reads news from home that doesn’t make it into the US media and tells me the more interesting stories. 

Lately he has been reading about real estate. He is a frustrated that many of his family members in China have become wealthy through real estate speculation while he missed out. They had tried to get him to invest with them years ago but he was certain at the time that prices would never rise as they have.

He told me recently the Chinese media reported that total value of real estate in the top three cities, Beijing, Shanghai and Shenzhen, is priced more than all of the real estate in the US. Apartments with a thousand square feet in those cities sell for several million dollars.

My friend told me that China doesn’t have a property tax and just recently added a deduction for mortgage interest in order to encourage more speculation. He said the government wants prices to continue to rise because the state owns most of the land, so it reaps huge rewards when prices rise.

Sunday, October 2, 2016

Deutsche Bank - the snowflake that could trigger an avalance

Avalanches build up one special snowflake at a time. The last snowflake launches the avalanche. Financial avalanche specialists are wondering if the troubled Deutsche Bank will earn the honor of being that last special snowflake, the Lehman Brothers of the latest recession.

After Brexit, the IMF warned that the bank was the most significant contributor to systemic risks. Experts have expressed fears about its undercapitalized state for several years. Alt-M’s Keven Dowd confirmed that those fears are justified in his post “Is Deutsche Bank Kaputt?” He wrote that the bank claimed a leverage ratio of 3.5 percent in its 2015 annual report:

Sunday, September 25, 2016

What’s an investor to do when the market won’t cooperate?

What is an investor who follows the Austrian school of economics supposed to do with a market that has traded in a narrow range for almost two years and refuses to bend to the reality of falling profits and a slow economy? After all, we may already be in a recession, as Peter Schiff thinks, but the market is clueless.

A couple of posts ago I wrote about the fetish with randomness that afflicts mainstream economics and finance. One result of that fetish is the dogma that no one should try to time the market; just pick good stocks and stay with them. The high priests ridicule those of us who make any effort at looking into the future.

Monday, September 19, 2016

The left's long lingering history of racism

Listen to the news about the immigration of Syrians to Europe and you think free marketeers are racists because the media labels opponents of immigration the “extreme right.” After all, promoters of freedom are positioned to the right while socialists are on the left, right? But the historical facts tell a different story.

Economists of the mid-nineteenth century opposed slavery. The greatest, David Ricardo, was a Jew and knew something about racism and oppression. The advocates of slavery opposed the economists. Thomas Carlyle, a socialist, dubbed economics the “dismal science” because the freedom that economists demanded would create a “dismal” world in which white people were equal with the “inferior” races, such as the people of Africa.

Leftist regressives, who called themselves Progressives, invented the truly dismal science of eugenics in order to suppress the population of minorities in the UK and US and force them to reduce their birthrates. They introduced the minimum wage in the US to prevent minorities such as Jews, Africans, Chinese, Mexicans and Native Americans from getting jobs. Regressives assumed that if those minorities couldn’t get jobs then they wouldn’t marry and have children. For details check out Princeton scholar Thomas C. Leonard's book Illiberal Reformers: Race, Eugenics and American Economics in the Progressive Era. 

Friday, September 9, 2016

Socialists stuck on luck

In May of this year The Atlantic offered another hymn to the goddess of luck. Not only is worshiping the goddess a good thing according to the author, but agnostics are stingy and selfish:
Seeing ourselves as self-made leads us to be less generous and public-spirited...
A recent study by the political scientists Benjamin Page, Larry Bartels, and Jason Seawright found that the top 1 percent of U.S. wealth-holders are “extremely active politically” and are much more likely than the rest of the American public to resist taxation, regulation, and government spending. Given that the wealthiest Americans believe their prosperity is due, above all else, to their own talent and hard work, is this any wonder? Surely it’s a short hop from overlooking luck’s role in success to feeling entitled to keep the lion’s share of your income—and to being reluctant to sustain the public investments that let you succeed in the first place.
Traditionally, religion explained what we couldn’t understand. Today, it’s randomness. Choosing randomness, or luck, is a description, not an explanation of a phenomenon, and an admission of ignorance. There are quite a few books promoting the goddess of luck. Keynes blamed recession on the “animal spirits” of businessmen, an allusion to randomness and not pagan beliefs. Nassim Taleb’s books on black swans was my first introduction to her. Then I read Burton Malkiel’s A Random Walk Down Wall Street: A Time-Tested Strategy for Successful Investing. Recently, The Drunkard’s Walk: How Randomness Rules Our Lives by Leonard Mlodinow came out.