Freedom's just another word for nothin' left to lose
Nothin', AND that's all that Bobby left me, yeah
But, feelin' good was easy, Lord, when he sang the blues
Hey, feelin' good was good enough for me, Mm-hmm
Good enough for me and my Bobby McGee
But, feelin' good was easy, Lord, when he sang the blues
Hey, feelin' good was good enough for me, Mm-hmm
Good enough for me and my Bobby McGee
One of the things I value most in life is freedom...the freedom to do as I choose (as long as it doesn't infringe on others freedoms) and the freedom to think independently. In the year-and-a-half since I left PNC, I've been asked several times why I haven't joined another financial institution. My reply is simple, freedom. As soon as I would walk through those doors, I would be relinquishing my freedom. Been there, done that,
I've been restricted and conflicted for most of my career. Now I'm free. Free to write about what interests me. Free to invest in what I feel is most appropriate for myself and my clients.
I trade real money, my money and my clients money. Every trade I do for myself I do for my clients, there are no conflicts. Hey, fellin' good is good enough for me, Mm-hmm.
Sorry, just needed to get that off my chest.
Being Right or Making Money?:
Many, many years ago I started using Ned Davis Market Research, and over the years I have learned the answer to a very important question...Do you want to be right, or do you want to make money?
Now most of you probably think that's a stupid question, of course we want to make money, isn't that why we invest. While I totally agree with you, the fact of the matter is that in the world of professional investment managers you have entire corporations that are focused on selling products, they make their money by taking away a fraction of yours. Many of these professionals are paid for their opinions, so for them being right is far more important than making money.
The crux of this question is really about how you make money. You see many people develop opinions about what they think the markets will or should do over the next day, week, year, etc, and then they invest accordingly. They let their very educated (and some less than educated) opinions drive their investment process. For them to make money they need to be right.
Well, in 1991 Ned Davis wrote one of the best investment books of our time, "Being Right or Making Money" ( Being Right or Making Money ), in it Davis tells countless stories of missing trades and rallies because they did not fit into his expectations for the economy, valuations, or other factors. In fact he was more concerned with being right than making money. He then goes on to explain how he finally put his opinions on the back burner and began his process of being in harmony with the markets. None of us can possibly be smarter than the markets for any extended period of time, so we should remain flexible and open-minded. Opinions are dangerous, strong opinions can be fatal.
This open-mindedness brings me to todays Fed induced bull market. While some see the Fed's open promise to reignite inflation akin to throwing gasoline on the fire, I see it as a sign to grab the marshmallows, chocolate, and graham crackers and make some smores. I don't have time for right or wrong, I want to enjoy this fire while it lasts, and make some money.
Of course I have opinions of what I think the right or wrong economic policy should be, or the right or wrong fiscal policy, but these are just my opinions...I don't know what will happen! For all I know the Fed's attempt to reflate our economy may be wildly successful, and may cause the mother of all equity rallies over the next several years, before it all collapses. Then again, maybe not.
Ask yourself; Would you rather be right, or make money?
Germany's Hyperinflation Revisited:
The following are Art Cashin's comments on the anniversary of Germany's hyperinflation. For those of you who watch CNBC you are probably aware of Art, he is the gray-haired man of reason speaking from the floor of the NYSE. He has 43 years of experience and is currently the Director of Floor Operations for UBS Financial Services. He is one of those canaries in the coal mine that is worth listening too. "Busted flat in Baton Rouge...or is it Berlin?"
AN ENCORE PRESENTATION
(Today we will revisit one of the most devastating economic events in recorded history.It all began with the efforts of a few, well-intentioned government officials.)
Originally, on this day (-2) in 1922, the German Central Bank and the German Treasury took an inevitable step in a process which had begun with their previous effort to "jump start" a stagnant economy. Many months earlier they had decided that what was needed was easier money. Their initial efforts brought little response. So, using the governmental "more is better" theory they simply created more and more money.
But economic stagnation continued and so did the money growth. They kept making money more available. No reaction. Then, suddenly prices began to explode unbelievably (but, perversely, not business activity).
So, on this day government officials decided to bring figures in line with market realities. They devalued the mark. The new value would be 2 billion marks to a dollar. At the start of World War I the exchange rate had been a mere 4.2 marks to the dollar. In simple terms you needed 4.2 marks in order to get one dollar. Now it was 2 billion marks to get one dollar. And thirteen months from this date (late November 1923) you would need 4.2 trillion marks to get one dollar. In ten years the amount of money had increased a trillion fold.
Numbers like billions and trillions tend to numb the mind. They are too large to grasp in any “real” sense. Thirty years ago an older member of the NYSE (there were some then) gave me a graphic and memorable (at least for me) example. “Young man,” he said, “would you like a million dollars?” “I sure would, sir!”, I replied anxiously. “Then just put aside $500 every week for the next 40 years.” I have never forgotten that a million dollars is enough to pay you $500 per week for 40 years (and that’s without benefit of interest). To get a billion dollars you would have to set aside $500,000 dollars per week for 40 years. And a…..trillion that would require $500 million every week for 40 years. Even with these examples, the enormity is difficult to grasp.
Let’s take a different tack. To understand the incomprehensible scope of the German inflation maybe it’s best to start with something basic….like a loaf of bread. (To keep things simple we’ll substitute dollars and cents in place of marks and pfennigs. You’ll get the picture.) In the middle of 1914, just before the war, a one pound loaf of bread cost 13 cents. Two years later it was 19 cents. Two years more and it sold for 22 cents. By 1919 it was 26 cents. Now the fun begins.
In 1920, a loaf of bread soared to $1.20, and then in 1921 it hit $1.35. By the middle of 1922 it was $3.50. At the start of 1923 it rocketed to $700 a loaf. Five months later a loaf went for $1200. By September it was $2 million. A month later it was $670 million (wide spread rioting broke out). The next month it hit $3 billion. By mid month it was $100 billion. Then it all collapsed.
Let’s go back to “marks”. In 1913, the total currency of Germany was a grand total of 6 billion marks. In November of 1923 that loaf of bread we just talked about cost 428 billion marks. A kilo of fresh butter cost 6000 billion marks (as you will note that kilo of butter cost 1000 times more than the entire money supply of the nations just 10 years earlier).
How Could This All Happen? – In 1913 Germany had a solid, prosperous, advanced culture and population. Like much of Europe it was a monarchy (under the Kaiser). Then, following the assassination of the Archduke Franz Ferdinand in Sarajevo in 1914, the world moved toward war. Each side was convinced the other would not dare go to war. So, in a global game of chicken they stumbled into the Great War.
The German General Staff thought the war would be short and sweet and that they could finance the costs with the post war reparations that they, as victors, would exact. The war was long. The flower of their manhood was killed or injured. They lost and, thus, it was they who had to pay reparations rather than receive them.
Things did not go badly instantly. Yes, the deficit soared but much of it was borne by foreign and domestic bond buyers. As had been noted by scholars…..“The foreign and domestic public willingly purchased new debt issues when it believed that the government could run future surpluses to offset contemporaneous deficits.” In layman’s English that means foreign bond buyers said – “Hey this is a great nation and this is probably just a speed bump in the economy.” (Can you imagine such a thing happening again?)
When things began to disintegrate, no one dared to take away the punchbowl. They feared shutting off the monetary heroin would lead to riots, civil war, and, worst of all communism. So, realizing that what they were doing was destructive, they kept doing it out of fear that stopping would be even more destructive.
Currencies, Culture And Chaos – If it is difficult to grasp the enormity of the numbers in this tale of hyper-inflation, it is far more difficult to grasp how it destroyed a culture, a nation and, almost, the world.
People’s savings were suddenly worthless. Pensions were meaningless. If you had a 400 mark monthly pension, you went from comfortable to penniless in a matter of months. People demanded to be paid daily so they would not have their wages devalued by a few days passing. Ultimately, they demanded their pay twice daily just to cover changes in trolley fare. People heated their homes by burning money instead of coal. (It was more plentiful and cheaper to get.)
The middle class was destroyed. It was an age of renters, not of home ownership, so thousands became homeless.
But the cultural collapse may have had other more pernicious effects.
Some sociologists note that it was still an era of arranged marriages. Families scrimped and saved for years to build a dowry so that their daughter might marry well. Suddenly, the dowry was worthless – wiped out. And with it was gone all hope of marriage. Girls who had stayed prim and proper awaiting some future Prince Charming now had no hope at all. Social morality began to collapse. The roar of the roaring twenties began to rumble.
All hope and belief in systems, governmental or otherwise, collapsed. With its culture and its economy disintegrating, Germany saw a guy named Hitler begin a ten year effort to come to power by trading on the chaos and street rioting. And then came World War II.
We think it’s best to close this review with a statement from a man whom many consider (probably incorrectly) the father of modern inflation with his endorsement of deficit spending. Here’s what John Maynard Keynes said on the topic:
By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some…..Those to whom the system brings windfalls….become profiteers.
To convert the business man into a profiteer is to strike a blow at capitalism, because it destroys the psychological equilibrium which permits the perpetuance of unequal rewards.
Lenin was certainly right. There is no subtler, no surer means of over-turning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose….By combining a popular hatred of the class of entrepreneurs with the blow already given to social security by the violent and arbitrary disturbance of contract….governments are fast rendering impossible a continuance of the social and economic order of the nineteenth century.
To celebrate have a jagermeister or two at the Pre Fuhrer Lounge and try to explain that for over half a century America's trauma has been depression-era unemployment and deflation while Germany's trauma has been runaway inflation. But drink fast, prices change radically after happy hour. And, tell Fed Chairman Ben Bernanke that it was the “German Experience” that caused many folks to raise an eyebrow when he alluded to the power of the “printing press” a few years ago. But, rest assured that no one would let it happen again. "Nothin', AND that's all that Benny left me".
Higher Taxes Lead to Less Work:
Here is a great article from Harvard Professor Gregory Mankiw, that he was somehow able to convince the editors at the New York Times to let him print. Enjoy:
The Recession May Be Over, But This Chart Shows Just How Far We Have To Go:
I Know, I Know, they've said that the recession is over and all that stimulus that went to make the banks solvent was a huge success, but it still seems that we have a ways to go..."Feelin' near as faded as my jeans."
Be careful out there, and keep the light's on,
Chris Wiles, CFA
For prior Rockhaven Views visit:
This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management. The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
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