Full disclosure. I run a hedge fund. I am not evil, and I do think I offer value for my investors. I will admit that there are many in the alternative investment universe that are just an embarrassment.
Much of the commentary I see around hedge funds these days includes the need for greater regulation, lower fees, and smaller funds. Often in the same breadth. This will not end well. Regulation is expensive, and with lower fees and less funds under management, something will have to give. Maybe the fund under staffs on execution, or administration, or research, but the management fees that a fund accrues is a limited and shrinking pie. If you increase the size of the slice going to regulation, less will go to other areas. And that will have an impact.
Also, I really don’t think you can honestly be sure that the hedge fund industry in particular, or the financial services industry in general needs more and new rules. What does need to happen is more vigorous application of the rules already on the books, and the enforcement agencies need both more and better staff.
For example, take a stretch of highway where there are a lot of accidents and lots of speeders, but no traffic cops enforcing the speed limit. Does this stretch of highway need new rules requiring the use of helmets and 3 point seatbelts to reduce highway fatalities or should we first try enforcing the speed limit? First put a bunch of police who are knowledgeable about enforcing the speed limit and see what happens.
And putting new rules in place can have horrible unintended consequences. In the above example, new seat belts are expensive but the helmets reduce visibility. New regulations will create many unknowns which are likely to be very expensive to explore. Investors and managers do tend to learn from the past (sometimes they give way too much weight to the recent past), but regardless I doubt we will see the same type of mistakes that allowed Madoff to run wild, and banks to pay huge bonuses for assets still held on their books. But new rules, will create new troubles which we can’t anticipate.
Does anyone else find it ironic that the institutions that seem to have gotten into the most trouble are those that are the most heavily regulated? In reality this regulation was a lot of rules, but not a lot of knowledgeable enforcement. Being Mr. Simple Sense I would bet that fewer simpler rules might even result in better enforcement, and a safer investment environment.
But since new rules seem to be coming I will grudgingly makes a couple of suggestions (which I would rather see as best practices than rules).
1. Match up investor liquidity with asset liquidity. If you invest in highly liquid instruments then provide monthly liquidity to your investors (like I do). If you invest in illiquid instruments use the private equity model of raising money for a fund, invest it and then 3-10 years down the road you liquidate it with no fund raising or redemptions allowed in between. And Fund of funds (if they survive) should also match the liquidity they provide investors with the liquidity the managers provide them—across the board.
2. Change the fee structure of hedge funds so that everyone in a fund pays the same fees and those fees are adjusted as the AUM change. Specifically management fees start high (like 2%), and performance fees are a bit lower (like 15%) and as the AUM grows the management fee everyone pays goes down and the performance fee goes up. This will allow smaller or newer managers to generate enough management fees to properly resource their business, and will encourage larger managers to focus more on performance and less on growing and retaining assets. Since newer-smaller managers know performance will drive AUM growth, the lower performance fee at the start should not prove to be a disincentive. This should help to optimize fund AUM for both investors and managers.
Please post your comments (esp. on the fee structure—I am dying to hear your thoughts).
Tuesday, December 30, 2008
Tuesday, December 16, 2008
Hedge Funds, Health Care and Investment Advice
Investment Advice
1. If it looks to good to be true it is (the Madoff law)
2. Ask your manager how they lose money
3. If you are invested in a hedge fund remember the high water mark has value—if you go to cash and then go back in to the same strategy you have given up 20%
Hedge Funds
1. In the future hedge funds will be (or should be) smaller and focused on single strategies
2. As funds get smaller and regulation increases maintaining a reasonable management fee will be vital to support a viable well run business, but ironically downward pressure on fees will increase
3. Hedge funds should either be invested in highly liquid products and provide high liquidity to their investors at all times or should be locked up like private equity with a start date and an end date when all funds are returned. There should be no middle ground—the mismatch is a not well rewarded risk
4. The FOF (fund of funds) business model will die
And back to Health Care
The business of health care is all wrong (I am coming at this from an economic point of view). Pricing is both too high and too complex.
Why do I insist that pricing is too high? If there was no health insurance and everyone had to pay the full list price for procedures not more than 1% of the population could afford it. And comparison shopping forgetaboutit.
Let me provide an example which illustrates both points. I recently had shoulder surgery to relieve chronic pain. The procedure was subacromial decompression (SAD) and labrum debrement, and included a hospital stay of longer 6 hours. The total list price including 7PT visits and doctor follow up was about $25k. That is close to the equivalent of the after tax median income of a fulltime male worker in the US. If people had to pay full list price for all procedures almost no could afford the current pricing. In short averaged American if you want to get rid of that pain in your shoulder give us your total after tax comp for the year. You are not going to sell a lot of SADs at that price.
Let’s say you wanted to shop around and compare to try to find a less costly place to have the procedure performed. You would need to call different surgeons and ask them how much they charge (I can tell you my doctor had no clue but he made a guess which was 66% too low). Then you would have to get the same information from the various different hospitals, anesthesiologists, and laboratories. Honestly without being a patient of the other prospective doctors I don’t think it would be possible to get the information to compare pricing. But even if you could, it would take hours over many days to dig up all the different prices.
And of course one of the reasons my surgeon didn’t know how much the procedure cost was because there is no transparency in pricing. There is the list price which you only pay if you don’t have health insurance (in the case of my anesthesiologist 72% higher than what my health insurance company had negotiated—does anyone think it makes good economic sense to charge the most to those who are least likely to be able to pay) then there is the multiple negotiated rates that doctors have agreed too. It is quite possible that the same doctor performing the same procedure could get paid more than 10 different rates. This is bad business. Consumers can’t make informed smart decisions. Billing is complex, complicated and convoluted. And bad business results in a more costly and less efficient health care system.
How to improve the health care system in our country in 2 easy steps:
1. Separate health care from employment and make everyone part of the pool
2. Require doctors to set one price for procedures—that doesn’t mean all doctors agree to the same price, just that my pediatrician agrees to get paid $125 dollars for my 5 year old son’s annual check up, not $250 if you self insure, $175 if you have Humana plan a, $150 if you have Blue Cross, $120 if you have United, $90 if you have Medicare etc.
Pretty simple ain’t it?
Love to hear your comments.
1. If it looks to good to be true it is (the Madoff law)
2. Ask your manager how they lose money
3. If you are invested in a hedge fund remember the high water mark has value—if you go to cash and then go back in to the same strategy you have given up 20%
Hedge Funds
1. In the future hedge funds will be (or should be) smaller and focused on single strategies
2. As funds get smaller and regulation increases maintaining a reasonable management fee will be vital to support a viable well run business, but ironically downward pressure on fees will increase
3. Hedge funds should either be invested in highly liquid products and provide high liquidity to their investors at all times or should be locked up like private equity with a start date and an end date when all funds are returned. There should be no middle ground—the mismatch is a not well rewarded risk
4. The FOF (fund of funds) business model will die
And back to Health Care
The business of health care is all wrong (I am coming at this from an economic point of view). Pricing is both too high and too complex.
Why do I insist that pricing is too high? If there was no health insurance and everyone had to pay the full list price for procedures not more than 1% of the population could afford it. And comparison shopping forgetaboutit.
Let me provide an example which illustrates both points. I recently had shoulder surgery to relieve chronic pain. The procedure was subacromial decompression (SAD) and labrum debrement, and included a hospital stay of longer 6 hours. The total list price including 7PT visits and doctor follow up was about $25k. That is close to the equivalent of the after tax median income of a fulltime male worker in the US. If people had to pay full list price for all procedures almost no could afford the current pricing. In short averaged American if you want to get rid of that pain in your shoulder give us your total after tax comp for the year. You are not going to sell a lot of SADs at that price.
Let’s say you wanted to shop around and compare to try to find a less costly place to have the procedure performed. You would need to call different surgeons and ask them how much they charge (I can tell you my doctor had no clue but he made a guess which was 66% too low). Then you would have to get the same information from the various different hospitals, anesthesiologists, and laboratories. Honestly without being a patient of the other prospective doctors I don’t think it would be possible to get the information to compare pricing. But even if you could, it would take hours over many days to dig up all the different prices.
And of course one of the reasons my surgeon didn’t know how much the procedure cost was because there is no transparency in pricing. There is the list price which you only pay if you don’t have health insurance (in the case of my anesthesiologist 72% higher than what my health insurance company had negotiated—does anyone think it makes good economic sense to charge the most to those who are least likely to be able to pay) then there is the multiple negotiated rates that doctors have agreed too. It is quite possible that the same doctor performing the same procedure could get paid more than 10 different rates. This is bad business. Consumers can’t make informed smart decisions. Billing is complex, complicated and convoluted. And bad business results in a more costly and less efficient health care system.
How to improve the health care system in our country in 2 easy steps:
1. Separate health care from employment and make everyone part of the pool
2. Require doctors to set one price for procedures—that doesn’t mean all doctors agree to the same price, just that my pediatrician agrees to get paid $125 dollars for my 5 year old son’s annual check up, not $250 if you self insure, $175 if you have Humana plan a, $150 if you have Blue Cross, $120 if you have United, $90 if you have Medicare etc.
Pretty simple ain’t it?
Love to hear your comments.
Thursday, December 11, 2008
Observations on health insurance
Why would I enter this horrific hell hole? Why would I blog about such a thing?
First I think folks often become so wrapped up or blinded by details they lose sight of some over arching problems.
Second I fear that folks don’t realize how common and the problems are so I will share a bit of my own personal health insurance hell (in a couple of days—I’ve got to work up to it).
Mr. Simple Sense asks the question—Why is health insurance tied to our employment? The answer is that it snuck in as part of benefits packages post the Great War and then the tax code started to provide incentives around employers providing it and next thing you know the only way to get health insurance is through your employer. What started out as one or two companies searching for a competitive advantage (both in terms of hiring and in terms of cost), became imbedded via the tax code and now has become the only realistic way to get health insurance.
Just cause that’s the way it is doesn’t mean it’s a good idea. In fact it’s a horrible idea.
Employment decisions should revolve around how well your skills fit, how well the job pays, how well you fit into the culture, job security, etc. How good the health insurance plan is, how well it is funded, how it is structured, etc should not be part of that decision matrix.
It also makes our businesses less competitive. Part of the reason the BIG 3 are in so much trouble is the costs of employee benefits and one main reason they are getting bailed out is because they provide benefits to millions of people. But at the end of the day US employment costs are going to be much higher than in other countries where employers are not providers of health insurance. Also this practice means that small businesses don’t provide health insurance and independent contractors or self employed people don’t have health insurance.
Tying the two together just makes no sense. It’s like linking your housing choice to the clothes you get to wear. If you live on 2nd street you have to wear pink clothes, if you live on 3rd street you have to wear black clothes. IF you want to wear pink clothes you better find a house on 2nd street. And if you live on 1st street you get no clothes. (To change that back, if you work for company 2 you get HMO insurance, if you work for company 3 you get to choose between HMO and PPO, and if you work for small business company 1 you get no health insurance).
Mr. Simple Sense thinks this is stupid. It results in bad economics and limited to no choice in health insurance, and has the potential to create a nasty negative feedback loop. When is the worst time to lose your health insurance (or any type of insurance for that matter)? When you lose your job, of course. And low and behold that’s exactly what happens when you get your health insurance via your employer. And of course the worse it is the worse it is. If you get laid off but your employer survives well you got a shot a COBRA—it can be very expensive but at least you have the right to buy health insurance. And you might get some severance when you get laid off. If you company goes bankrupt, well all bets are off. No severance, no benefits, no right to buy into health insurance. And just like that you become uninsured and uninsurable.
More tomorrow.
First I think folks often become so wrapped up or blinded by details they lose sight of some over arching problems.
Second I fear that folks don’t realize how common and the problems are so I will share a bit of my own personal health insurance hell (in a couple of days—I’ve got to work up to it).
Mr. Simple Sense asks the question—Why is health insurance tied to our employment? The answer is that it snuck in as part of benefits packages post the Great War and then the tax code started to provide incentives around employers providing it and next thing you know the only way to get health insurance is through your employer. What started out as one or two companies searching for a competitive advantage (both in terms of hiring and in terms of cost), became imbedded via the tax code and now has become the only realistic way to get health insurance.
Just cause that’s the way it is doesn’t mean it’s a good idea. In fact it’s a horrible idea.
Employment decisions should revolve around how well your skills fit, how well the job pays, how well you fit into the culture, job security, etc. How good the health insurance plan is, how well it is funded, how it is structured, etc should not be part of that decision matrix.
It also makes our businesses less competitive. Part of the reason the BIG 3 are in so much trouble is the costs of employee benefits and one main reason they are getting bailed out is because they provide benefits to millions of people. But at the end of the day US employment costs are going to be much higher than in other countries where employers are not providers of health insurance. Also this practice means that small businesses don’t provide health insurance and independent contractors or self employed people don’t have health insurance.
Tying the two together just makes no sense. It’s like linking your housing choice to the clothes you get to wear. If you live on 2nd street you have to wear pink clothes, if you live on 3rd street you have to wear black clothes. IF you want to wear pink clothes you better find a house on 2nd street. And if you live on 1st street you get no clothes. (To change that back, if you work for company 2 you get HMO insurance, if you work for company 3 you get to choose between HMO and PPO, and if you work for small business company 1 you get no health insurance).
Mr. Simple Sense thinks this is stupid. It results in bad economics and limited to no choice in health insurance, and has the potential to create a nasty negative feedback loop. When is the worst time to lose your health insurance (or any type of insurance for that matter)? When you lose your job, of course. And low and behold that’s exactly what happens when you get your health insurance via your employer. And of course the worse it is the worse it is. If you get laid off but your employer survives well you got a shot a COBRA—it can be very expensive but at least you have the right to buy health insurance. And you might get some severance when you get laid off. If you company goes bankrupt, well all bets are off. No severance, no benefits, no right to buy into health insurance. And just like that you become uninsured and uninsurable.
More tomorrow.
Wednesday, December 10, 2008
A Christmas Carol
Mr. and Mrs. Simple Sense where snuggling around the fire with care,
When a knock at the door disturbed our reverie
With a groan and a grunt I walked to the door
And who should I find but Blagojevich there
He said I know you’ve got money to spare,
And since you have given to the campaign I took extra care
To pay you a personal visit to just let you know
That if you pay to play to DC you might go
He mentioned that the hedge fund times are in trouble
So why not go to DC and make a bundle
He held out his sack and shook it at me
And I tossed in 20 grand you see
Cause going to DC might be some fun
But having the Gov on your ass is absolutely none
I wanted my streets cleaned and garbage picked up
So I gave him his bribe and wished him good luck
He said he would be back for some more
Once the second round of bidding got off with a roar
Seems it’s the season of giving in our Windy City
And giving and giving to our Pols without pity
For governors, mayors and Stronger take their due
In Chicago giving lucre is how business gets waved through
Sleep tight my children the grease is in place
To run and win the 2016 Olympic race
But alas it seems our trip to DC
Has been deep 6ed by Fitzgerald’s investigating glee
When a knock at the door disturbed our reverie
With a groan and a grunt I walked to the door
And who should I find but Blagojevich there
He said I know you’ve got money to spare,
And since you have given to the campaign I took extra care
To pay you a personal visit to just let you know
That if you pay to play to DC you might go
He mentioned that the hedge fund times are in trouble
So why not go to DC and make a bundle
He held out his sack and shook it at me
And I tossed in 20 grand you see
Cause going to DC might be some fun
But having the Gov on your ass is absolutely none
I wanted my streets cleaned and garbage picked up
So I gave him his bribe and wished him good luck
He said he would be back for some more
Once the second round of bidding got off with a roar
Seems it’s the season of giving in our Windy City
And giving and giving to our Pols without pity
For governors, mayors and Stronger take their due
In Chicago giving lucre is how business gets waved through
Sleep tight my children the grease is in place
To run and win the 2016 Olympic race
But alas it seems our trip to DC
Has been deep 6ed by Fitzgerald’s investigating glee
Tuesday, December 9, 2008
Mrs. Claus sends me to the Bermuda Triangle of Big Box Hell
Last night after feeding the little elves and the reindeer, brushing their teeth (elves not reindeer), and doing the dishes I noticed Mrs. Claus had kindly left me a to do list.
Santa please buy the following:
thingy to connect i-pod to stereo
2 strands of white tree lights
1 exterior extension cord
3 interior extension cords
1 pharmacy bulb
A quick look at the list told me all I need to know—I would be taking the sled to Big Box Hell. The first item was clearly a Best Buy purchase, the lighting would be a trip to the Orange nightmare of Home Depot, and in between I would hit Whole Foods for some frozen yogurt for Santa because Mrs. Claus has thrown out all sugar in an attempt to help Mr. Claus keep his weight down in his old age.
So on Dasser on Subru into the ice storm we drive. A quick trip took me to the Best Buy-Whole Foods parking lot. First I went into Best Buy where I discovered almost no shoppers but many sales people. I grabbed the first one I saw and asked where I could buy an RCA-MP3 connector cable. I got a perplexed look. I tried again with Mrs. Claus’s more technical spec—“ya gotta thingy that connects an ipod to a stereo”. That got a “yea I think so.” We turned around to the rack behind us which after 5 minutes of searching did not have the connector thingy. We then went to a different section of the store and looked at some more thingys but did not find the right thingy. We then called two other employees and went to the TV area where we also did not find the right thingy. Finally a 4th employee was able to lead us back to the second location of my trip through Best Buy hell and found the correct thingy –labeled RCA-MP3 connector by the way.
Crossing off the first item on my list cost $15 dollars, took 15 minutes of time, a ¼ mile stroll around the store and the help (??) of 4 employees. Thank Santa they were not busy.
Next a short walk to Whole Foods to buy some frozen yogurt to have as a reward post shopping. I found the frozen yogurt no problem. Went to the check out line. Very long line but the manger was checking folks out at her desk. Snuck over and got in line behind one person who was even mindful enough to reuse a Whole Foods bag for a 10 cent credit. Then came the question—do you want the credit applied to your bill or should we give the money to Pancreatic cancer research? Why should Whole Foods get to determine which charities I support? Just give me the 10 cents and let me decide which charities I want to support. And while you are at it if you really want to support being green don’t give 10 cent credits per bag. Make it a buck. Bet everyone would bring in their own bags. So any how then it was my turn and the manager asked if the frozen yogurt was any good. I said it was. She said maybe she would have to try it, but in general she doesn’t like to eat the healthy food that Whole Foods sells because it doesn’t taste good. In particular she doesn’t like all those fruits and veggies. I wished her good night and promised her Santa would deliver nothing but transfats to her for x-mas. She was relieved.
Ok. I had my reward for successful shopping in hand. Now I just had to survive the deepest darkest corner of the Bermuda Triangle of Big Box Hell—Home Depot.
List in hand I strode in with confidence and went to the lighting area. After much searching I found that they did indeed sell pharmacy bulbs. They only had one choice, but as luck would have it, it was the right one.
Next after searching for 10 minutes I found someone to direct me to X-mas lighting hell. In 1,000 square feet they had everything you could want to light your house. Except for white bulbs. “Sorry sir, sold out of those”. And the smallest outside extension cord they had was 50 feet for 24 dollars. And the smallest inside one was 12 feet for 10 bucks. I took a pass. I almost dropped the pharmacy light bulb and fled but figured checking off one item is better than nothing. So I went to the check out area and waited in line to self check out.
I fled the store $5 and 20 minutes poorer. And upon getting home discovered the bulb didn’t work.
There is another Home Depot about 2 miles away which typically has a poorer selection, but I didn’t want to face Mrs. Claus with an incomplete list. At this point the ice was building up pretty bad on the sleigh, but in a moment of brilliance I remember that the local grocery store had a pretty good hardware isle and carried seasonal stuff. So off I went to Lincoln Park Market. This is not a chain, just a mom and pop grocery store. And there where all the extension cords I could ask for, 4 types of pharmacy lights, and white x-mas lights. All easy to find. And all prices 20—50% less than Home Depot.
Total cost $29 and 6 minutes.
List complete I skidded home in the freezing rain. Chowed some Cookies and Cream frozen yogurt under the disapproving stare of Mrs. Claus and thought---
Big Box stores you wonder why you are in trouble (aside from the economy of course)—maybe you need to employee better people, train people better, price competitively and manage your supply chain better. How can my local grocer charge less than Home Depot? How can it take 4 employees 10 minutes to find an ipod connector thingy? How can a manger at Whole Foods be so honest as to say she doesn’t like healthy food? Why would anyone go to these stores to pay what turns out to be a premium price for crap service from clueless staff, in a cavernous store which likely doesn’t have or can’t locate the item you want? Santa is gonna stick with the Internet and mom and pop stores for any more items that Mrs. Claus sneaks on his list.
Tomorrow Sam Zell gets coal in his stocking (yea he took the Tribune to bankruptcy).
Santa please buy the following:
thingy to connect i-pod to stereo
2 strands of white tree lights
1 exterior extension cord
3 interior extension cords
1 pharmacy bulb
A quick look at the list told me all I need to know—I would be taking the sled to Big Box Hell. The first item was clearly a Best Buy purchase, the lighting would be a trip to the Orange nightmare of Home Depot, and in between I would hit Whole Foods for some frozen yogurt for Santa because Mrs. Claus has thrown out all sugar in an attempt to help Mr. Claus keep his weight down in his old age.
So on Dasser on Subru into the ice storm we drive. A quick trip took me to the Best Buy-Whole Foods parking lot. First I went into Best Buy where I discovered almost no shoppers but many sales people. I grabbed the first one I saw and asked where I could buy an RCA-MP3 connector cable. I got a perplexed look. I tried again with Mrs. Claus’s more technical spec—“ya gotta thingy that connects an ipod to a stereo”. That got a “yea I think so.” We turned around to the rack behind us which after 5 minutes of searching did not have the connector thingy. We then went to a different section of the store and looked at some more thingys but did not find the right thingy. We then called two other employees and went to the TV area where we also did not find the right thingy. Finally a 4th employee was able to lead us back to the second location of my trip through Best Buy hell and found the correct thingy –labeled RCA-MP3 connector by the way.
Crossing off the first item on my list cost $15 dollars, took 15 minutes of time, a ¼ mile stroll around the store and the help (??) of 4 employees. Thank Santa they were not busy.
Next a short walk to Whole Foods to buy some frozen yogurt to have as a reward post shopping. I found the frozen yogurt no problem. Went to the check out line. Very long line but the manger was checking folks out at her desk. Snuck over and got in line behind one person who was even mindful enough to reuse a Whole Foods bag for a 10 cent credit. Then came the question—do you want the credit applied to your bill or should we give the money to Pancreatic cancer research? Why should Whole Foods get to determine which charities I support? Just give me the 10 cents and let me decide which charities I want to support. And while you are at it if you really want to support being green don’t give 10 cent credits per bag. Make it a buck. Bet everyone would bring in their own bags. So any how then it was my turn and the manager asked if the frozen yogurt was any good. I said it was. She said maybe she would have to try it, but in general she doesn’t like to eat the healthy food that Whole Foods sells because it doesn’t taste good. In particular she doesn’t like all those fruits and veggies. I wished her good night and promised her Santa would deliver nothing but transfats to her for x-mas. She was relieved.
Ok. I had my reward for successful shopping in hand. Now I just had to survive the deepest darkest corner of the Bermuda Triangle of Big Box Hell—Home Depot.
List in hand I strode in with confidence and went to the lighting area. After much searching I found that they did indeed sell pharmacy bulbs. They only had one choice, but as luck would have it, it was the right one.
Next after searching for 10 minutes I found someone to direct me to X-mas lighting hell. In 1,000 square feet they had everything you could want to light your house. Except for white bulbs. “Sorry sir, sold out of those”. And the smallest outside extension cord they had was 50 feet for 24 dollars. And the smallest inside one was 12 feet for 10 bucks. I took a pass. I almost dropped the pharmacy light bulb and fled but figured checking off one item is better than nothing. So I went to the check out area and waited in line to self check out.
I fled the store $5 and 20 minutes poorer. And upon getting home discovered the bulb didn’t work.
There is another Home Depot about 2 miles away which typically has a poorer selection, but I didn’t want to face Mrs. Claus with an incomplete list. At this point the ice was building up pretty bad on the sleigh, but in a moment of brilliance I remember that the local grocery store had a pretty good hardware isle and carried seasonal stuff. So off I went to Lincoln Park Market. This is not a chain, just a mom and pop grocery store. And there where all the extension cords I could ask for, 4 types of pharmacy lights, and white x-mas lights. All easy to find. And all prices 20—50% less than Home Depot.
Total cost $29 and 6 minutes.
List complete I skidded home in the freezing rain. Chowed some Cookies and Cream frozen yogurt under the disapproving stare of Mrs. Claus and thought---
Big Box stores you wonder why you are in trouble (aside from the economy of course)—maybe you need to employee better people, train people better, price competitively and manage your supply chain better. How can my local grocer charge less than Home Depot? How can it take 4 employees 10 minutes to find an ipod connector thingy? How can a manger at Whole Foods be so honest as to say she doesn’t like healthy food? Why would anyone go to these stores to pay what turns out to be a premium price for crap service from clueless staff, in a cavernous store which likely doesn’t have or can’t locate the item you want? Santa is gonna stick with the Internet and mom and pop stores for any more items that Mrs. Claus sneaks on his list.
Tomorrow Sam Zell gets coal in his stocking (yea he took the Tribune to bankruptcy).
Friday, December 5, 2008
Do 2 Wrongs make a Right?
Do 2 Stupids make a Smart?
I don’t think so.
Stupid—Big 3 CEOs flying on separate private jets to plead to Congress for taxpayer aid.
Stupider—Congress making a big deal out of how the big 3 CEOs get around. Does Congress have no more value to add than to pick on how CEOs get to a meeting.
Stupiderer—Big 3 CEOs driving to Congress for next meeting. Did these guys education stop at Animal House? Things get bad-- road trip (I hope they stopped at a road house for a little Shama lama ding dong on the way). Really with your business in crisis getting in a car for 10 hours should not be the best use of time.
Stupidererer—Congress demanding that they approve a plan for the auto industry. Aside from telling the auto industry to get rid of their jets I have not seen Congress offer any useful insight which would make me think they could tell a good plan from a turd.
Stupiderererer—Paulsons use of Tarp. Totally ham-fisted. Reactive not proactive.
And Stupidest—Dodd and Frank warning Paulson that they may not approve the next $350 billion for Tarp. Yea that’s a good idea. Let’s make sure we have to be totally reactive—let a big bank or two fail, let FDIC become insolvent then approve the money.
Congress if you want to have value, figure out how to add value. Last check you guys make the laws and control the purse strings. That is pretty powerful. Why don’t you try to do something with all that power? Its very easy to sit in the cheap seats and fault everyone else, and its very risky to try to do something proactive; but it should be obvious right now that the only way things are going to get better any time soon is if you take a risk and do something proactive. Yea it might be a failure, but who knows you might actually do some good. Witch hunts only catch witches and aside from reading Harry Potter to my kid I don’t know many witches.
Ironic moment—Car industry retooling all their plants to go green as oil falls to 5 year lows and $1.00 a gallon gasoline is on the horizon.
I don’t think so.
Stupid—Big 3 CEOs flying on separate private jets to plead to Congress for taxpayer aid.
Stupider—Congress making a big deal out of how the big 3 CEOs get around. Does Congress have no more value to add than to pick on how CEOs get to a meeting.
Stupiderer—Big 3 CEOs driving to Congress for next meeting. Did these guys education stop at Animal House? Things get bad-- road trip (I hope they stopped at a road house for a little Shama lama ding dong on the way). Really with your business in crisis getting in a car for 10 hours should not be the best use of time.
Stupidererer—Congress demanding that they approve a plan for the auto industry. Aside from telling the auto industry to get rid of their jets I have not seen Congress offer any useful insight which would make me think they could tell a good plan from a turd.
Stupiderererer—Paulsons use of Tarp. Totally ham-fisted. Reactive not proactive.
And Stupidest—Dodd and Frank warning Paulson that they may not approve the next $350 billion for Tarp. Yea that’s a good idea. Let’s make sure we have to be totally reactive—let a big bank or two fail, let FDIC become insolvent then approve the money.
Congress if you want to have value, figure out how to add value. Last check you guys make the laws and control the purse strings. That is pretty powerful. Why don’t you try to do something with all that power? Its very easy to sit in the cheap seats and fault everyone else, and its very risky to try to do something proactive; but it should be obvious right now that the only way things are going to get better any time soon is if you take a risk and do something proactive. Yea it might be a failure, but who knows you might actually do some good. Witch hunts only catch witches and aside from reading Harry Potter to my kid I don’t know many witches.
Ironic moment—Car industry retooling all their plants to go green as oil falls to 5 year lows and $1.00 a gallon gasoline is on the horizon.
Thursday, December 4, 2008
Fire Prevention
First a disclaimer:
Preparing to fight the past has a long history of failure. Just ask the French at the Maginot Line how well WWI strategy applied to WWII. Still we study history so we can learn from our past mistakes, and making the same mistake over and over again is truly asinine. Still what I propose will only help to avoid the mistakes of the past, not provide a cure for all future troubles and is more than likely to result in other horrible unintended consequences.
How do you prevent financial excess when the human condition naturally causes self reinforcing trends of greed and fear? Automatic stabilizers.
For monetary policy this means the Fed takes the punch bowl away when the party gets going, and turns on the lights and sends everyone home when the party is really rocking. And the next morning when the hangover hits they take you out for Bloody Marys to start your day. I would suggest that the Fed move away from targeting inflation and GDP and focus only on purchasing power. Purchasing power should be based on income and asset growth (savings, and assets including the value of housing) adjusted for inflation of course. While I will leave the exact calculation to those econometrically minded folks I will point out that such a policy means the Fed would not just fight inflation in goods and services but also asset price inflation (i.e. they would raise rates if home prices or stock prices went up too fast). That would obviously be very unpopular.
Below is a chart with the Fed Funds rate in orange and a simple version of purchasing power in white. You will note that if the Fed was focusing on keeping purchasing power growth stable interest rates should have been higher and should have been raised much more in 2001-2003 and cut in Dec 2006. Humm that might have helped.
Monetary policy shouldn’t bear the full burden though. Fiscal policy should also have built in automatic stabilizers. That means when GDP grows above a certain rate government spending should be cut and or taxes raised and visa versa when GDP declines.
One reason for our current mess is that in the past the Fed and the US government have been quick to cut interest rates and taxes when growth and asset prices fall but are slow or unwilling to raise rates and taxes when asset prices rise and GDP growth increases significantly.
Building in serious automatic stabilizers will often mean lower growth, but it will also mean less risk of a deep recession or depression. Slow and steady may win the game, but my bipolar friends tell me they hate taking their meds because they really like the manic times and don’t want to give them up. Of course during the down times they just might jump (course right now joe six pack might just push you).
Preparing to fight the past has a long history of failure. Just ask the French at the Maginot Line how well WWI strategy applied to WWII. Still we study history so we can learn from our past mistakes, and making the same mistake over and over again is truly asinine. Still what I propose will only help to avoid the mistakes of the past, not provide a cure for all future troubles and is more than likely to result in other horrible unintended consequences.
How do you prevent financial excess when the human condition naturally causes self reinforcing trends of greed and fear? Automatic stabilizers.
For monetary policy this means the Fed takes the punch bowl away when the party gets going, and turns on the lights and sends everyone home when the party is really rocking. And the next morning when the hangover hits they take you out for Bloody Marys to start your day. I would suggest that the Fed move away from targeting inflation and GDP and focus only on purchasing power. Purchasing power should be based on income and asset growth (savings, and assets including the value of housing) adjusted for inflation of course. While I will leave the exact calculation to those econometrically minded folks I will point out that such a policy means the Fed would not just fight inflation in goods and services but also asset price inflation (i.e. they would raise rates if home prices or stock prices went up too fast). That would obviously be very unpopular.
Below is a chart with the Fed Funds rate in orange and a simple version of purchasing power in white. You will note that if the Fed was focusing on keeping purchasing power growth stable interest rates should have been higher and should have been raised much more in 2001-2003 and cut in Dec 2006. Humm that might have helped.
Monetary policy shouldn’t bear the full burden though. Fiscal policy should also have built in automatic stabilizers. That means when GDP grows above a certain rate government spending should be cut and or taxes raised and visa versa when GDP declines.
One reason for our current mess is that in the past the Fed and the US government have been quick to cut interest rates and taxes when growth and asset prices fall but are slow or unwilling to raise rates and taxes when asset prices rise and GDP growth increases significantly.
Building in serious automatic stabilizers will often mean lower growth, but it will also mean less risk of a deep recession or depression. Slow and steady may win the game, but my bipolar friends tell me they hate taking their meds because they really like the manic times and don’t want to give them up. Of course during the down times they just might jump (course right now joe six pack might just push you).
Wednesday, December 3, 2008
Who is to blame for the Financial Crisis
The short answer is humanity.
The longer answer is human emotions and group think which run in trends (today we will make good use of my simple sense analysis program by both reducing to the absurd and noticing the power of trends). We have all heard that fear and greed drive investment decisions. Those emotions and others drive silly trends including the high and low fashion of leisure suits http://www.shaunsayre.com/70s/fads/leisuresuit.jpg to 5 button suits (or women’s hemlines up and down).
Why on earth would anyone wear a leisure suit (please see link above)? Well because some famous actors are wearing them, and all the good looking girls at the bar are hanging out with guys wearing them and next thing you know you got a closet full of leisure suits and a pet rock on your dresser.
Why on earth would anyone make a NINJA (no income, no job, no assets) loan? Why would someone agree to take on a monthly mortgage payment that they had no chance of paying off? Same reason; and it’s all totally rational.
Imagine you are CEO of a big financial institution. All your peers are making lots of money making loans to slightly more risky borrowers. If you choose not to pursue a similar strategy your stock price will go down and you with either lose your job and or your company will be bought by someone who is making these loans. Basically it is career and company suicide not to make these loans.
Imagine you live in a world where the stock market goes up 100% a year every year. All your friends are heavily invested in the stock market and making a ton of money, but you think the stock market is overvalued or you don’t have the risk tolerance to join in. With all their profits they are driving up the price of everything (food, education, housing, heath care etc). If you aren’t heavily invested in the stock market you find you can’t buy as much stuff as you used to. You are becoming much poorer relative to everyone else. You can either choose to become poor, or join in with everyone else.
So being human and functioning in a society sometimes results in powerful self reinforcing trends which sometimes result in closets full of leisure suits and other times results in silly lending. For sure other things aid and abet these trends like securitization or P Diddy pimping leisure suits, but let’s call this an ugly aspect of the human condition. So if you want to know who is at fault—we all are. If you want to waste time finding someone to blame—we all are. (And while I am at it Congress please stop with the blame game—if you are telling me you would have loaned the Big 3 money if they had flown to DC on Southwest using rapid reward points but won’t because they flew on their corporate jets (VERY STUPID but still) then you are not really thinking about how best to spend our money or solve a problem you are just looking for a scapegoat). We are humans—we will have good times and bad, accept it.
Tomorrow how to prevent this from happening again—and if you didn’t like today’s post you are really gonna hate how you cure the human economic condition.
The longer answer is human emotions and group think which run in trends (today we will make good use of my simple sense analysis program by both reducing to the absurd and noticing the power of trends). We have all heard that fear and greed drive investment decisions. Those emotions and others drive silly trends including the high and low fashion of leisure suits http://www.shaunsayre.com/70s/fads/leisuresuit.jpg to 5 button suits (or women’s hemlines up and down).
Why on earth would anyone wear a leisure suit (please see link above)? Well because some famous actors are wearing them, and all the good looking girls at the bar are hanging out with guys wearing them and next thing you know you got a closet full of leisure suits and a pet rock on your dresser.
Why on earth would anyone make a NINJA (no income, no job, no assets) loan? Why would someone agree to take on a monthly mortgage payment that they had no chance of paying off? Same reason; and it’s all totally rational.
Imagine you are CEO of a big financial institution. All your peers are making lots of money making loans to slightly more risky borrowers. If you choose not to pursue a similar strategy your stock price will go down and you with either lose your job and or your company will be bought by someone who is making these loans. Basically it is career and company suicide not to make these loans.
Imagine you live in a world where the stock market goes up 100% a year every year. All your friends are heavily invested in the stock market and making a ton of money, but you think the stock market is overvalued or you don’t have the risk tolerance to join in. With all their profits they are driving up the price of everything (food, education, housing, heath care etc). If you aren’t heavily invested in the stock market you find you can’t buy as much stuff as you used to. You are becoming much poorer relative to everyone else. You can either choose to become poor, or join in with everyone else.
So being human and functioning in a society sometimes results in powerful self reinforcing trends which sometimes result in closets full of leisure suits and other times results in silly lending. For sure other things aid and abet these trends like securitization or P Diddy pimping leisure suits, but let’s call this an ugly aspect of the human condition. So if you want to know who is at fault—we all are. If you want to waste time finding someone to blame—we all are. (And while I am at it Congress please stop with the blame game—if you are telling me you would have loaned the Big 3 money if they had flown to DC on Southwest using rapid reward points but won’t because they flew on their corporate jets (VERY STUPID but still) then you are not really thinking about how best to spend our money or solve a problem you are just looking for a scapegoat). We are humans—we will have good times and bad, accept it.
Tomorrow how to prevent this from happening again—and if you didn’t like today’s post you are really gonna hate how you cure the human economic condition.
Tuesday, December 2, 2008
Financial Fires
Well figured I might as well start with the Big Question I keep getting. How do we stop the financial crisis?
Its pretty simple actually. Go Big and Go early. What the heck does that mean. Well in general it means when a house is on fire (either yours or your neighbors) you want the fire department to show up fast, you want them to put the fire out fast, and you want them to use more than enough water to get the job done. You don’t want the fire department to tell you they can’t come right now because they are waiting on a new boss, you don’t want them to show up and try to figure out what started the fire, you don’t want to have a conference about how to prevent future fires, and you won’t give them bonus points for using just enough water. You want the fire put out FAST. NOW.
The same thing applies to the current financial crisis. Go Big and Go Early. In the simplest terms that means governments should offer to buy toxic assets 10% above current prices (by sticking a bid in the market for 100s of billions of these assets) and provide massive fiscal stimulus ( tax cuts, aid to states, and infrastructure). One-off reactive measures like saving Citibank help to staunch the obvious flames but they don’t put out the fire hidden between the walls. Successful firefighting is proactive and as a result very messy. And open to second guessing the day after the fire is out, but a minimal, reactive policy risks having the whole neighborhood burn down. (As a Chicagoan I cite The Great Chicago Fire http://en.wikipedia.org/wiki/Great_Chicago_Fire
What’s the risk? Governments either can’t borrow the money or borrow it at a reasonable rate. But given the lowest interest rates on record, it’s a risk worth taking. And only after this fire is put out, can we have a post mortem to figure out how to try to prevent this kind of fire in the future and mop up the extra water. But first things first, all resources must focus on putting the fire out. Nothing fancy. Nothing cute. Just massive monetary and fiscal stimulus globally. Right now. And then wait 2-3 quarters to see the results.
Tomorrow causes and solutions.
Its pretty simple actually. Go Big and Go early. What the heck does that mean. Well in general it means when a house is on fire (either yours or your neighbors) you want the fire department to show up fast, you want them to put the fire out fast, and you want them to use more than enough water to get the job done. You don’t want the fire department to tell you they can’t come right now because they are waiting on a new boss, you don’t want them to show up and try to figure out what started the fire, you don’t want to have a conference about how to prevent future fires, and you won’t give them bonus points for using just enough water. You want the fire put out FAST. NOW.
The same thing applies to the current financial crisis. Go Big and Go Early. In the simplest terms that means governments should offer to buy toxic assets 10% above current prices (by sticking a bid in the market for 100s of billions of these assets) and provide massive fiscal stimulus ( tax cuts, aid to states, and infrastructure). One-off reactive measures like saving Citibank help to staunch the obvious flames but they don’t put out the fire hidden between the walls. Successful firefighting is proactive and as a result very messy. And open to second guessing the day after the fire is out, but a minimal, reactive policy risks having the whole neighborhood burn down. (As a Chicagoan I cite The Great Chicago Fire http://en.wikipedia.org/wiki/Great_Chicago_Fire
What’s the risk? Governments either can’t borrow the money or borrow it at a reasonable rate. But given the lowest interest rates on record, it’s a risk worth taking. And only after this fire is put out, can we have a post mortem to figure out how to try to prevent this kind of fire in the future and mop up the extra water. But first things first, all resources must focus on putting the fire out. Nothing fancy. Nothing cute. Just massive monetary and fiscal stimulus globally. Right now. And then wait 2-3 quarters to see the results.
Tomorrow causes and solutions.
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