Sunday, December 11, 2016 0 comments

Sunday Spectacle CCIV

Spending Trend over a Century


In rich countries like America, one of the big changes over the century has been the amount of money spent on food & clothing has declined significantly. In contrast, in many poor countries, the average person still spends a huge chunk of their income on food & clothing. The amount spent on housing/shelter has increased slightly in America to 25% (as of 2002, based on a select sample).

Overall, it's amazing that food, clothing and housing, which was about 80% of a typical household's budget in 1901 has declined to about 50% (in 2002 but probably same now). I don't think anyone living in 1900 could have imagined such a thing. The increased savings on food & clothing has generally gone to leisure activities (such as travel and entertainment). The big beneficiary in rich countries have been the leisure sector. Only the wealthy used to travel in the early 1900's but now almost anyone can.

From a business and investment perspective, one of the biggest opportunities in developing countries is the leisure sector. Industries such as airlines, tourism, media, and so forth will likely grow spectacularly.

For developed countries, I wonder what the future holds? Living in Canada, I feel like we are already "maxed out" on tangible "stuff." People just have too much of the basics. In contrast, healthcare is one area where developed countries are spending a fortune and I am almost certain we will spend less (as a % of total income) in 50 years than now. I also wonder what new societal developments await that we can't even imagine...


(source: "100 years of Family Spending in the US," Visualizing Economics, Dec 5 2013.)

Tags: ,
Sunday, December 4, 2016 0 comments

Sunday Spectacle CCIII

Bitcoin You Say?


Still not sure what to think of Bitcoin (for those not familiar, it is the original and most popular cryptocurrency). It has the potential to change financial transactions as we know it. Numerous authorities are against it and have been trying to regulate it for years. Some private investors are bullish--most notable are the Winklevoss twins from Facebook lore who suggest it is the gold for the modern age. Wall Street and some Main Street banks have been trying to get into the action. Matt Levine of Bloomberg, one of the top business journalists I have come across (that is freely accessible), isn't sold on the idea yet. Whatever it is, you definitely need stronger, more secure, and more professional Bitcoin financial institutions before the public will get involved to any large degree (the $400M+ loss at Mt Gox a few years ago probably set back Bitcoin by years--who the hell would want to get involved in such an amateurish operation (and that was the top Bitcoin exchange too)).

Bitcoin in US$
(source: Bitcoincharts.com. Downloaded Dec 3 2016.)

Tags: , ,

Articles for Week Ending December 3, 2016

Not in any order, here are some articles I ran across recently that you may find interesting... I often link to old articles so if there are stock suggestions or macro speculations, pay attention to the date (thesis may have changed by now).

  • The Oscars of Paper Currency (James Tarmy for Bloomberg Businessweek, Dec 1, 2016): Didn't know some entity actually gave out award for best currency design. Kind of fun to see the artistic style of various currencies.
  • Horizon Kinetics presentation on indexation and ETF problems (Steven Bregman, Horizon Kinetics, for Grant's Fall 2016 Conference - Oct 4 2016): Pretty good presentation on some issues with ETFs and indexation. If you invest in ETFs, check it out.
  • Bear case presentation on Home Capital Group (Marc Cohodes for Grant's Fall 2016 Conference - Oct 4 2016): Bearish thesis on Canadian mortgage lender. If the Canadian housing market falls, HCG might be one of the first ones to get hit badly.
  • Contender for the worst trade of all time? Snowball interest rates swaps (Matt Levine for Bloomberg, Mar 7, 2016): I have been working my way through Matt Levine's articles on Bloomberg. He is one of the top financial journalists that is freely accessible, with his background and focus being legal issues. All of his articles are excellent and often presents some contrarian views on various corporate activities. You probably won't improve your investing by reading him but if you are interested in knowing how Wall Street operates, they are great reading. I don't agree with everything he says but he makes me think... The linked article refers to a swap deal that Portuguese train companies entered into with Banco Santander, a mega-European bank. The companies have lost $1.43 billion and decided to take legal action to get out of the trade. It's a fascinating look at the notion of risk and how improbable events can materialize and end up threatening your existence (incompetence also played a role but let's leave that aside for now). On top of the idiotic cumulative spread feature (where spreads are added to prior quarter's), what seems to have killed the company is the fact that Euribor floating rate dropped below 2% after the financial crisis whereas the companies probably assumed it never would (it has never been below 2% in its history). If you are a macro-oriented investor, you should always think about what happens at the extremes that seem impossible.
  • (Recommended) Underwriters and the IPO process (Matt Levine for Bloomberg, Nov 25, 2016): I didn't care so much for the article itself, but found this piece insightful in regards to the description of the whole IPO process. I certainly didn't know about the mechanics of 'stabilization' or how the underwriters are short the stock for a period of time. I would recommend reading the first 5 or 6 paragraphs to learn what happens in an IPO.
  • (Highly Recommended) "Michael Dell Bought His Company Too Cheaply" (Matt Levine for Bloomberg, Jun 1, 2016): Unlike the prior two Levine articles, this one is relevant to small investors. This article deals with the lawsuit against Michael Dell for his management buy-out of Dell, a large computer company famous for pioneering mail-order build-to-order computer sales. Some argued it was a take-under. I liked the almost-philosophical question raised about the true price or value of a company. I liked how the article provided some insight into how parties with differing interests approach things.
  • Subprime auto loan delinquencies rise (Rachel Beals for Marketwatch, Dec 3, 2016): Looks like subprime auto loans are starting to concern some. However, higher quality auto loans seem to be doing ok. Recent economic numbers indicate stronger employment and wages so it remains to be seen if this means anything.
  • "The 2016 Daily Journal Meetings Notes: February 10, 2016" (The Charlieton): Can't remember if I linked to this already but anyway, it is Charlie Munger at his greatest.
  • China's attempt at mass control via online tracking (Josh Chin and Gillian Wong for The Wall Street Journal, Nov 28, 2016): Although in the early stages and success uncertain, it's amazingly scary how close to Orwell's 1982 we are. China is attempting to build a social profile for each citizen (somewhat akin to a credit rating but for social activities) and to reward or penalize citizens based on their social profile. I wonder if, in a few decades, companies like Facebook and Google and their future counterparts, who have huge amounts of data on people, will succumb to their temptations and government strong-arming and enable such a thing to take place in the West--I really hope the people running these companies don't roll over every time the government tells them to. (article requires registration; can paste title in Google and click on link for free access)
  • Trump picks Bill Walton (Max Abelson for Bloomberg, Nov 29, 2016): Cited this in a prior post but amazing how Trump administration is surrounding itself with some shady characters. In this case, Bill Walton was the CEO of Allied Capital, the company profiled by David Einhorn in his book.
  • (Highly Recommended) "How Should We Read Investor Letters? Considering the correspondence between C.E.O.s and shareholders as a literary genre." (John Lanchester for The New Yorker, Sept 5, 2016; Book review of "Dear Chairman: Boardroom Battles and the Rise of Shareholder Activism"): Essay that looks at shareholder activist letters as an art form. The book "Dear Chairman..." looks interesting and I'm going to put it on my list of books to buy at some point.
  • "World Chess Has a Big Problem" (Carol Matlack for Bloomberg, Nov 28, 2016): Pretty good profile of the current state of the major chess federation, including some insight into the dark side it is entangled in.
  • (Recommended) "The Amazon Tax" (Stratechery, Mar 15, 2016): Ben Thompson talks about the toll-road-like web services business that Amazon is developing.

Tags: , , , ,
Saturday, December 3, 2016 0 comments

Opinion: You Can't Build a Society with Flat Taxes

Libertarians, classic conservatives and many on the right* love flat taxes and always seem to be in favour of flat taxes but I have never seen it ever last. I thought I would comment on it after reading that Estonia has started to abandon its flat tax. Apparently the first country to introduce flat tax in Europe, Estonia is starting to back off the flat tax.

In my opinion, you just can't build a society with flat taxes. If anything, history seems to indicate that as societies advance, their taxes become more progressive.

The flat tax helped a lot of ex-Communist states after they gained independence when no one was paying taxes and the system was completely dysfunctional, but it is hard to build a society with such a system. Wealth grows exponentially and hence accrues to the top few disproportionately--most investors probably know that 80% of the American stock market is owned by around 10% of the population--and it's hard to do anything at the societal level if most of the wealth in society only pays a small amount of it in tax.

Having said that, what Estonia is doing to implement a progressive tax system is the wrong way to do it: it appears to be simply introducing credits. This just complicates the taxes and creates inefficient tax collection authority. Simplest is to have practically no credits (except possibly to those that society determines shouldn't be burdened (those with serious health issues, etc)) and just have an escalating rate based on income or something. Introducing credits is the dumb way to build a bullet-proof system. It is that way because lawyers are the ones who run politics but if it were up to a more rational person (ie. scientific-thinking), you wouldn't have so many credits and special clauses, with so many potential line items on a tax form.

I think the only time flat taxes make sense for a large society--it may be ok for small islands, city-states, etc--is if it is undeveloped/developing or the government is dysfunctional. It made sense for the ex-Communist states after the collapse of their societies, as Estonia was in the 90's. Similarly, I think it makes sense in most of Africa and South Asia. It will probably work better than what they have right now in countries like South Africa, Congo, India, Pakistan, and so forth. Countries with high tax avoidance and a general distrust of government, such as Greece, might be better off with a more flat tax as well.


To sum up, natural state of human affairs is probably towards more progressive tax as societies advance. Of course, I can't prove it and you can't disprove it, so humans will probably argue about the ideal taxation system for another hundread years.


(* Some on the right support flat taxes but not because they want a simple one-tax system or want to improve the efficiency of the tax system, but rather because they want to shrink the government. They will argue the opposite but the reality is that flat taxes result in less government tax income and consequently less government services. This will result in a smaller government in the long run. [I'm a typical liberal in that I support progressive taxes and "high taxes" but I do think governments are too big and should be shrunk. Governments should not be engaged in some activities they are presently involved in and spend a lot of money overseeing.])

Tags: , ,
Wednesday, November 30, 2016 0 comments

Opinion: Potential Consequences of Trump Presidency

Given the unpredictable nature of Donald Trump and the lack of a well-articulated platform and ideology that he adheres to, it has become a cottage industry to predict how the US government over the next several years--at least until mid-term elections in 2 years--will behave. I don't like Donald Trump, his policies or the people he surrounds himself with--Steve Bannon, the ex-Goldman Sachs banker/ex-film producer and almost-far-right proponent, and Bill Walton, the former Allied Capital CEO who some of you may recall being profiled by David Einhorn over a decade ago with some employees eventually being convicted of fraud come to mind (it's almost farcical that Trump would put Walton in a role to influence the policies of the SEC and SBA when those two agencies contributed to the conviction of wrongdoing by Walton's firms)--but as I have mentioned in the past, unlike most other countries, the US President has far less power than many imagine. Having said that, since  the Republican Party controls the House and the Senate, and will likely pick key justices for the Supreme Court, Trump will likely get through quite a number of his policies (unlike the Obama presidency where he couldn't get the Republican House to agree to anything substantive (except foreign wars)).

If you are a pure value investor then you should just ignore what is happening in econopolitics and focus on companies. Otherwise, if you are more macro-oriented like I am, it's worth contemplating some scenarios.

The market has rallied strongly over the last couple of weeks but I see all sorts of conflicting behaviour. For instance, I think the movement in the US$, equity prices and inflation expectations are contradictory with each other to a large degree. I think one of these elements will overpower the others.

Some have suggested the market is starting to price in high inflation. It's not clear to me that this is the case. There is definitely more inflation being priced in but not "high" inflation. If you look at the TIPS breakevens (10yr here; 30yr here), it doesn't look like a drastic change. The chart below of the 10yr breakeven:

(source: St Louis Fed Res FRED, downloaded Nov 29 2016)

Tags: , ,
Sunday, November 27, 2016 0 comments

Sunday Spectacle CCII

Interesting Facts about the US Currency


I ran across a good Dallas Federal Reserve publication ("Money" from 2013) that explained the basics of money. It is one of those government propaganda-type publications aimed at the general population but, surprisingly, it does a good job of going over almost all the major concepts related to money including inflation, expansion of the money supply due to multiplier effect of reserve banking, and even highlights the major events (such as Bretton Woods, FDR banning ownership of gold, etc).

Anyway, it had some interesting historical facts that very few, including Americans, know about the US currency and I thought I would post it here. I certainly didn't know about them. For instance, I knew about the era when banks issued their currencies but didn't know there were 30,000(!) distinct currencies in USA at one point. This implies that there were maybe 20,000 banks (another 10k could be other entities) and that surprises me given how America wasn't that big in the 1800's. Also didn't know that a $10,000 bill existed.

Finally, the most interesting fact I learned--I doubt even 1% of anyone who visited this blog since inception know this--had to do with overprinted US currency issued in some areas in case those areas fell under foreign ownership during WWII. Seems like a draconian move to punish citizens in those regions if they went over to the foreign side (imagine if most of your net worth, at least whatever is in currency form and in banking accounts*, became worthless if your region was taken over by a foreign country during war.)

(* This is another reason why it is preferable to hold your wealth in physical assets or even securities like company shares. Governments could easily alter currencies. Incidentally, in India, within the last month, the government has undertaken some draconian measures by banning two of the most popular bills, which apparently represent 86% of currency in circulation. Apparently it was to combat corruption but the most impacted are the poor who don't even have bank accounts--some stats indicate that 50% of Indians don't have bank accounts--and it will only weaken the confidence in the country's currency--what's to stop the government from doing something similar again in a few years?)


I can't upload it properly as one large image so I have broken it up into 3 pieces. Click on each one for larger image.





(source: "Money" by Federal Reserve Bank of Dallas, 2013. Only portions of the document are extracted above and graphic layout altered from original document.)

Tags: ,