March 2008 Archives

Before I begin my book review, you should know that I have a strong positive bias toward smart money managers that rely on fundamentals to formulate their investment theses. I enjoy reading the intellectual rigor of Doug Kass, general partner of Seabreeze Partners Management, Inc. and commentator for The Edge Column on RealMoney Silver (subscription required—part of TheStreet.com family), Jim Rogers (see his The Millennium Adventure website), and Bill Fleckenstein. While these managers will not always voice the same opinions, I know that when I read their opinions, they have been well thought out. Having stated my bias, I will now move on to the book review.

I heartily and enthusiastically recommend Bill Fleckenstein's book Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve. Those of you who read Bill Fleckenstein's articles know that he was critical of the Fed for having created the excessive high technology bubble and is critical of the Fed for having created the housing bubble. In his book, Bill chronicles, by reviewing Greenspan's speeches and FOMC transcripts, how the Fed created both bubbles. FOMC (Federal Open Market Committee) transcripts are released after a five year lag, so not all of the relevant transcripts are yet available. Bill Fleckenstein's comprehensive analysis provides an interesting examination of Greenspan's record as Fed Chairman.

Some might be inclined to believe that it is always easy to find fault in hindsight when everything is laid bare. However, as Bill and others demonstrated by their articles throughout the period, astute observers could and did recognize the problems in real time.

Once again Greenspan was able to rationalize the maniacal behavior that took place daily. Productivity explained it all. Companies felt good, analysts felt good—all was well because productivity was powering a new era. His predecessor at the Fed, Paul Volker, the man who had successfully broken the back of inflation in the early 1980s, didn't quite see it that way. He had too much respect for his former office and was too much of a gentleman to be direct, yet on May 14, 1979, he made the following point in a commencement address to the American University, School of Public Affairs/Kogod School of Business: "The fate of the world economy is now totally dependent on the growth of the U.S. economy, which is dependent on the stock market, whose growth is dependent on about 50 stocks, half of which have never reported any earnings."

Obviously the prior quote relates back to the dot com era. Just after the dot com era passed, Bill Fleckenstein and others chronicled in real time the problems with the housing market, all of which leads us to today. The housing and mortgage situation is dire with the final outcome yet to be determined.

Throughout both periods, Greenspan's overwhelming belief in technological and productivity gains led him astray. He often confused cause and effect. It was not the technological and productivity gains in the technology as well as housing and mortgages industries that led to super rich valuations. Rather, it was the low cost of money that encouraged averaged citizens to reach beyond their means, both intellectually and financially, that created the super rich valuations. Because of a proliferation of media sources, both cable networks and internet sites, citizens became overly confident of their abilities to judge the worthiness of securities. With everyone else enjoying the party and no one even threatening to remove the punch bowl, people were enjoying themselves then and were content to worry about the hangover tomorrow.

During Greenspan's tenure, the creative destruction component of capitalism was routinely suppressed. The main consequence of this suppression was a loss of fear. Thus, the normal risk reduction response to periodic financial pain never occurred, as Greenspan wouldn't even allow small crises to run their course. Instead, as people lost respect for the idea that they might lose money, risk taking continually escalated until the situation reached a point where it is now: the United States, individually and collectively, is swimming in an ocean of debt that has been rapidly ratcheting higher. At the same time, the country is experiencing a declining real estate market that supports much of that debt, a sinking economy that has been dependent on an unsustainable real estate bubble, and a weak currency. Plus, there are over $500 trillion worth of derivatives that Warren Buffett has described as "financial instruments of mass destruction." You couldn't have created a more precarious environment if had tried.

Many people today are having to contend with their financial hangover. Tomorrow has finally arrived. Bill Fleckenstein's book provides an excellent chronicle of the events that led to our current difficulties. We are perhaps right in the midst of the housing troubles. After reading Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve, you will have a better appreciation as to why and how we got here.

Today, I do not have much new to report with regard to the markets. Of course, everyone is talking about The Bear Stearns Companies, Inc. (BSC). Obviously, the troubles running through some investment banks and mortgage related companies are severe. Are we near the bottom or a turning point? I have no idea, and I am not sure that anyone else does either. I watched Bill Fleckenstein on CNBC's Fast Money show. He made an excellent point that not only are we experiencing a meltdown in the mortgage markets, but we are also about to experience an employment correction because many of the jobs created over the past few years were housing related.

Speaking of Fast Money, it is one of my favorite television shows. Unfortunately, it is going downhill. Dylan Ratigan seems to feel the need to cut off his featured guests who are providing insightful and helpful information. Today's show with Bill Fleckenstein served as a good example where Ratigan cut Bill off before Bill could complete his thoughts. And Jeff Macke, a guy who I like and admire, seems intent on cranking up the volume, theatrics, and hysterics with every show. Soon, he will be throwing chairs across the stage and biting off the heads of puppets and other props. The camera and production crew must be on drugs because they keep switching away from the person that is talking and animated to one of the panelists who is caught not paying attention. Guy Adami raises his eyebrows to signal that yes, he is awake and paying attention, but the others often look like deer caught in the headlights. Why the camera and production folks just do not stay focused on the person speaking is beyond me. The production folks also keep bringing in television viewers using webcams. I got a news flash for them. Webcams on television do not work well. The last thing I want after a long day is to hear somebody with a muffled and chaotic voice with a blurry and erratic picture. And Dylan Ratigan seems intent on providing cool sound bites. My question is, why Dylan? You already have a cool show—do not screw it up by trying to be ultra cool and hip. Just provide some great insights to the markets by using your access to some of Wall Street's best talents and your show will continue to be a raging success.

Although the markets are turbulent and difficult to manage, I find these times interesting and exciting. I hold a diversified portfolio with a strong bias toward commodities. I am comfortable with my positions. Occasionally, I will make some small trades, but for the most part, I am taking in all the great action.

On 11 September 2005, I shot the above picture of Chateau Lake Louise in Banff National Park, Alberta. If you click on picture above, you will be taken to my Flickr site. Incidentally, a new interesting photography site worth investigating is ShotCritic. It is a site where photographers can post photographs and receive feedback. And for those who enjoy using Photoshop, I highly recommend Chromasia Photoshop Tutorials.

My current overweight in gold through StreetTRACKS Gold Shares (GLD), Pan American Silver Corp. (PAAS), and various oil stocks continue to do well. The natural question is, should I bail out while the getting is good?

Although I have no clue as to how much further the commodities will continue to rise, I am happy to continue owning commodity related securities. Because the U.S. economy continues to limp along, I am not excited about most consumer related stocks. And many industrial stocks are suffering because of a drop off in demand. Thus, commodities remain a safe haven as commodities remain in short supply, even during the slowdown in the U.S.

In summary, at present I am content to be overweighted in commodities.

Disclosure: I am long StreetTracks Gold Shares, Pan American Silver stock, and various oil stocks.

The picture above is near the Bow Falls in Banff National Park, Alberta. The Bow Falls are very near The Fairmont Banff Springs. If you click on picture above, you will be taken to my Flickr site.