Wage cuts and inflation

July 22nd, 2009 Comments »

I’ve been reading Greenspan’s “The Age of Turbulance” for a while now and it has been a very pleasant read. I especially love the way that the book both gives me a historical perspective on things before I was born and a clear picture of what really was going on and how little I knew (read: how stupid investments I made) earlier. I also have another hidden agenda with the book: I like reading something that I know is written by a ghostwriter, just to see how “personal” books it is possible to create for one self. I will write my autobiography in the same way… first I just need to invent something or do something that people will be interested in…

An example of something that woke me up once again from oblivion was Greenspan’s take on wage cuts, which has been a recent topic for obvious reasons around the world.

The FED (with Greenspan) had in 2004 raised the Federal funds rate in hopes of decreasing the amount of loans and through that prevent pressures on price inflation. The normal mumbo jumbo that all central banks do. Well, that didn’t happen this time and nobody really understood why it seemed to have the opposite effect.

The first hint on what the real reason for this was, he says, was from Siemens in Germany when it started pressing on wage cuts for their union workers in order to secure jobs in Germany. Their second alternative was to move the jobs abroad. At the same time wage increases had been really modest in the past 10-15 years so the wages should not have been too high in comparison. But, the issue here was outside of Germany’s borders. Since the fall of the Berlin Wall and the Soviet Union, China, India and the ex-soviet states had consciously or subconsciously moved to a market economy and thus released highly-educated, low-wage persons to the global market, from what before was a centrally planned market. These persons did not exist in the global market before but suddenly they did. The IMF estimates that 500 million more people were involved in export-related tasks in 2005 since the collapse of the Berlin wall. These people in their turn helped push prices and inflation down and as more and more companies moved over their production to cheaper-labor countries it naturally affected even work that was not done in these countries. So all else was rendered expensive, real interest rates were low and world economic growth continued, although central banks tried to raise interest rates. Everything naturally again, simplified and viewed with naïve-goggles on both eyes, but still the point.

Sadly, the press still today talks about the main reason for wage cuts being wage raises during the past bull market (and without any doubt it does play a big role), however it is nothing compared to what has happened outside the borders of these countries. I am not taking parts on how this has affected peoples lives here or there, I am just saying it will be interesting to see what will happen when even more people form e.g. China and India are released to the global resource pool.

Everything is of course very natural once you think of it. I’m even starting to regret that I wrote about something so self evident, but when you think about something that happened five years ago in 2004, at least I didn’t understand why rising prime rates for some reason didn’t tackle inflation or the fact that the reason for wage cuts was something else than high wages (indirectly at least).

But that is economics and life for you. Everything is actually quite easy and it is very seldom rocket surgery.

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Posted in Finance, Investment

Random thoughts on buying stock…

February 8th, 2009 Comments »

cow

We have a strange way of thinking of stock as something different from everything else you can put your money on. We think of homes and cars as something physical, but when we talk about stock we don’t see how they are something physical as well. I’m talking about company stock – not livestock although in general they should be thought of in the same way, sans the ethical aspect of livestock being alive.


Rule 1: Stock is nothing different from anything else you waste money on.


Company stock is no different from milk, or at least it should not be any different. It is an investment that you get something out of – be it then a potential to get money, to quench your thirst or to put a roof over your head. When you buy milk, you probably have a barrier price that you wouldn’t go over. Say if the milk cost you $500 per bottle you probably wouldn’t buy it. But how about if the milk yesterday cost $500 but today it only costs $300 – would you buy it? Perhaps, if you reeeeaally needed milk, but in general it would still be way too expensive for most of us. Why do people then look at historical values for stock when making their decision? I know you as an intelligent reader wouldn’t do this – but most people who invest in stock look more at historical value than what could affect the company, not to mention not even try to understand what the company really does.

Warren Buffett once said

“There are all kinds of businesses that Charlie and I don’t understand, but that doesn’t cause us to stay up at night. It just means we go on to the next one, and that’s what the individual investor should do. “

and I think that is the most fundamental thing people forget – if you don’t understand how milk is made into yogurt, then look into dairy firms that only do Milk and see if you find something worth investing in that you understand. Don’t put your foot into a bucket of yogurt.


Rule 2: Don’t buy things in a black box wrapped inside a shiny bag. If you don’t understand what you are about to buy – don’t buy it!


Sadly, rule number 2 not only applies to stock but more and more to housing as well. You would think that people would think more when they invest 20+ years of their lives (i.e. take a mortgage) and make the biggest investment decision they will ever make in their lives. Instead this investment decision is made sometimes in 15 minutes on the spot without going through the merchandise in detail. I know, because I made my decision in 15 minutes. There is a historical reason this. Before everybody built their own houses or at least had to know how to build a house – nowadays we don’t need to understand that anymore, so instead we rely on beauty issues such as decoration and the colors on the walls instead of looking at what repairs are required, where the house is located or what the life cycle cost of the house is (e.g. energy consumption). Of course beauty issues matter but there is more. See the “Stand up economist” below for a short summary so you understand how people and money don’t mix:




The thing that separates stock from other investment objects, such as apartments or milk is that, they are more complicated (or so we tend to think). People don’t mind not understanding stock or think stock is something difficult that they should not understand so they don’t. And because of that, market fluctuation is more volatile than anywhere else. This explains that some stock is worth more than what the company could potentially make when selling their products to the world’s entire population (Y2K anyone?) or that some stock is worth less than all the assets the company owns.

The latter is called Graham’s Net-Net rule and is one of a handful of golden rules that Benjamin Graham has given a name to (BTW Grahams is the person Buffett refers to more than often). The idea is that if the stock is worth less than the liquidation value of the company then it is worth buying because the risk is nearly null that you lose your money. Remember rule number 1: Stock is nothing different from anything else you waste money on. So a company stock is also only an ownership of a company and its assets. More concretely Graham’s Net-net value states that you should compare the current assets of a company minus its total liabilities to the value of the stock. Say for instance that the company has current assets (assets that are easily converted into cash) that are worth $20M and its total liabilities are $8M then its net-net value is $12M ($20M-$8M). If its stock is worth $10M then you are basically paying $10 for every $12 that you buy! These stocks are more seldom in modern days – but especially in the situation we’re living today, there are and will be more companies that fall into the category – all thanks to market sentiment and fluctuation.


Rule 3: If somebody gives you money for free with no risk or obligation – take it! (If money is what you’re into…)



To put it all in more simple terms, Buffett has summed it up (at the age of 21) in one often quoted sentence:

Be fearful when others are greedy. Be greedy when others are fearful.

This all comes down to market stupidity (see the video above). People do what others are doing so nobody every wins. The only way to win is to do the opposite of what people are doing and not listen to others. Especially not banks – because the only thing they are after is your money. Never listen to people that give you advice (which by the way goes for me as well! ;) )

To summarize it all: Be smart and think for yourself – don’t let others make decisions about your life.



To read more on the subject or see what the real experts think follow the links below:
The Intelligent Investor by Benjamin Graham.

Tim Ferris’ questions to Warren Buffett

A mortgage Excel  to play around with

Quotes by Warren Buffett

Graham’s net-net explained

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Posted in Investment

Financial crisis, huh?

February 1st, 2009 Comments »

buynsell

We are being told every day by the media that we are in a crisis but what exactly does that mean? Except for the obvious fact that bad news feeds more bad news. But by saying we are in a crisis we are also denying reality by saying that we are worse of than we ought to be. But, who says we ought to be better of? Is it just because we had something that we are meant to have it forever? Was it written in the skies or did some divinity mean for us to always be well of but then something “bad” happened? Something that now has to be fixed so we can get back to how it was just a year ago?

No. We don’t ought to be anything!

A year ago most of us were living in a bubble, a bubble created by a non-regulated financial world and an excess of money. The latter being a product of the former. As time goes and the situation unravels to us bulk-people as well, this is starting to be the accepted truth. Take for instance the Maddoff scandal (or any other world-wide Ponzi scam) which was a result of lack in regulation, too much money and a vicious circle of greed.

What was the reason for this? It’s quite simple – there is too much money in the world. Banks were creating more money by lending it out to complete strangers which as we know resulted in the sub-prime crisis. When there was too much money, people didn’t know what to do with it so they bought iPhones, expensive clothes and big houses. Things they knew they couldn’t afford if they thought about it, but still did so because money was free and seemed to be so for ever and ever. It was a roller coaster ride that wasn’t going to end. Ever.

Then, one sunny day, the banks slapped everyone with a shovel in the head and suddenly everybody was grabbing a shovel and slapping each other and his cousin in the face. Suddenly the world wasn’t so happy anymore and here we are.

The market overreacts. It always does and that is in a way its function. When one grabs a shovel and starts hitting himself in the head – suddenly everybody seems to think this is a good idea, which just shows how everything is driven by sentiment. We are neither now nor were we a year ago at a level “we are supposed to be at”. Everything changes all the time and the market always tries to follow but it never gets there. Like Gretzky, the market always tries to skate to where the puck is going to be, except that here the puck can go in a hundred different dimensions, and not only two.

For a short, funny and educational video on what the subprime crisis is about see on the video below.

Currently it looks like there are going to be more layoffs and most of us are going to have to put on hold buying that iPhone 4G for a while, but just wait and see – there will be a time again when we forget about being wise and get all excited again. And then, you get to spend spend spend ;)

Just relax and take the world as it comes and don’t dance too fast.

For some great links for real market news see the following ones below:

Immobilienblasen

Paul Krugman’s blog

Safehaven

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Posted in Finance, Investment