Interview with Jim Grant

Jim Rogers on Bloomberg

Volker on the Economy

New Ideas in Graphical User Interface Design

10/GUI from C. Miller on Vimeo.

Could this be the future look of your desktop?

Forstmann on Future of Wall Street

Buyout king and Wall Street legend Teddy Forstmann discusses the future of Wall Street with CNBC's Charlie Gasparino.

Steve Wynn on the Economy, Jobs & Hotels

Steve Wynn talks common sense on deficits and job creation.

How do Harvard Economists Invest?

This article is summarized from the University newspaper The Harvard Crimson.

Greg Mankiw

Mankiw, professor of the largest economics course at Harvard and author of the textbook "Principles of Economics," is a long-term buy-and-hold investor, but does not think he is smart enough to time the markets. His portfolio consists of 2/3 stocks and 1/3 bonds, balancing the higher risk of equities with the steadiness of fixed income. When his portfolio took a hit in the financial crisis, he rebalanced by adding more cash to his equity position. His investments are widely diversified, including international holdings and mainly consist of low-cost index funds. He is invested not only in the US, but in Europe, Asia and the emerging markets.

John Campbell

Campbell, chair of the Economics Department, is an asset pricing specialist and no stranger to active investing, lending his expertise to the hedge fund Arrow Street Capital, and helping to oversee the Harvard endowment fund. With his own money, Campbell avoids stocks and focuses on less risky assets. The article doesn't detail what those assets are, but implies that Campbell may be active in the real estate market. Campbell believes stocks are looking more attractive with the recent rebound in the economy and believes this is a great time for young people to invest.

Claudia Goldin

Goldin, an economic historian specializing in labor economics, comes "from a family of people who are not risk takers," and is well-schooled in the history of hard times. Her approach to investing is very conservative and consists mainly of conservative retirement funds.

All in all, this brief look at three investment styles of Harvard economists left me mildly surprised with their conservativeness when it comes to their own money. My style is most similar to Mankiw, but they all seemed to place an emphasis on balancing capital preservation with growth. No one was a go-go investor, riding the wild swings of the market, hoping to hit a home run. They all seemed to be patient, methodical, almost boring in their investment approaches, which is how investing should be.

Frontline: The Warning

Must see TV on the financial crisis..... the failure to regulate and create a market for derivatives, or WMDs as Warren Buffett calls them.

Budget Deficits for Dummies

Warren Buffett on the Economy

The "Oracle from Omaha" weighs in on what's next in the payment industry and the economy at large. Business Wire CEO Cathy Baron Tamraz sits down with Mr. Buffett in an exclusive PYMNTS.com interview.

Jonathan Zittrain: The Web as random acts of kindness

Feeling like the world is becoming less friendly? Social theorist Jonathan Zittrain begs to differ. The Internet, he suggests, is made up of millions of disinterested acts of kindness, curiosity and trust.

Lord Monckton on Climate Change

Feeling like climate change is a scam and the world's leaders are selling out their citizens? Lord Monckton agrees with you and minces no words in making his point.

The State of the Union

These charts taken from Calafia Beach Pundit show the current Federal Budget situation.  By many measures this is the worst situation in the post WWII period, with tax collections as a % of GDP as low as they have ever been, and spending spiraling out of control.  The current year's deficit now exceed 11 % of GDP.

If these figures weren't bad enough, just examine the budget projections.

Chilling projections, absolutely chilling that anyone with a conscience would saddle their their constituents with this level of debt or the taxes to fund this debt.

The country needs some smart politicians to put these charts in front of the TV cameras, much like Ross Perot did as candidate for President with his infomercials, and help we the people see the country is on an unsustainable course, and a major reevaluation of the role of government in managing the economy is required. Entitlement programs are already the biggest budget problems, and it is irresponsible for the politicians to push forward with a major new entitlement program that would fundamentally expand the role of government in healthcare and put the taxpayers on the hook for trillions more in expenditures when spending is so far out of control.   In addition, embarking on a new set of energy taxes in the form of cap & trade, based on the dubious science of global warming, would only continue to weaken an already weak economy.  What's left of the Pokulus Bill should be shifted away from make-work projects, boondoggles, growing state and federal governments, and large scale income redistribution schemes to increased incentives for businesses to hire and invest.

The #1 message all citizens should send to Washington is that it is time to get our fiscal house in order and stop these insane levels of spending.  The country simply can't afford it.  We need the private sector to help us grow our way out of this mess; continued growth in government will only act like a boat anchor on the economy.

Portfolio Allocation

One of the most neglected topics on the personal finance blogsphere is asset allocation, and if you believe modern portfolio theory asset allocation this could be one of the most important determinates in portfolio performance. So today I'd thought I'd share with you my personal portfolio allocation. My goals are simply to own most major asset class, be diversified internationally as well as across market caps, and have the traditional 60/40 balanced portfolio split between stocks and bonds. It is designed to help weather downturns in the market, currency risk, country risk and individual security risk, and emphasizes value, small cap, and emerging markets, areas that have historically over long periods of time outperformed the total market.

Fund Name	Symbol	Asset Class	Target
Vanguard Total Stock Market	VTI	LCB	6.75%
Vanguard Value VIPERs	VTV	LCV	6.75%
Vanguard Small-Cap	VB	SCB	6.75%
Vanguard Small Cap Value VIPERs	VBR	SCV	6.75%
Vanguard REIT Index ETF	VNQ	REIT	3.00%
Vanguard FTSE All-World ex-US	EUV	INT'L LCB	5.40%
iShares MSCI EAFE Value Index	EFV	INT'L LCV	5.40%
Vanguard FTSE All-World ex-US Small-Cap Index	VSS	INT'L SCB	5.40%
WisdomTree Int'l Small Cap Div Fund	DLS	INT'L SCV	5.40%
Vanguard Emerging Markets Fund	VWO	EM	5.40%
iShares S&P World ex-US Property Index	WPS	INT'L REIT	3.00%
Vanguard Intermediate Bond Market ETF	BIV	INTER BOND	10.00%
Vanguard Short-Term Bond Market ETF	BSV	SHORT-TERM BOND	5.00%
Nuveen Select Tax Free Fund	NXQ	MUNI BOND	10.00%
iShares S&P/Citi Intl Treasury Bond	IGOV	INT'L BOND	10.00%
SPDR Barclays Cap S/T Intl Treasury Bond	BWZ	INT'L BOND	5.00%

Is it perfect? I don't think anything is perfect when it comes to investing. But it is something I where can sleep at night and provides returns that are competitive. The shortcomings are that I wish I could find a more broadly diversified international small cap value ETF, and I wish there were more broadly diversified international bond offerings available. As the financial marketplace changes, I'll keep searching for new offerings that better fit my needs and will adjust the portfolio accordingly. Do I have any investments outside of this portfolio? A few... primarily a small position in a commodities ETN that I don't consider a core holding, and some physical gold as a hedge against worse case scenarios.

Occam's Razor

Developed by William of Occam in 14th century England, Occam's razor reads entia non sunt multiplicanda praeter necessitatem, or in near literal translation entities must not be multiplied beyond necessity.  The principle can be more popularly stated as "when you have two competing theories that make exactly the same predictions, the simpler one is the better."  How does this apply to investing?  Let's attempt to formulate an investment portfolio that provides maximum diversity and covers the major classes of investments in the simplest way.  Asset classes I'm interested in include large, mid and small cap domestic stocks, large, mid and small cap foreign stocks, emerging markets, domestic bonds, and foreign bonds.  It includes a classic 60/40 split between stocks and bonds, and a 60/40 split between domestic and international.

My sample portfolio looks like:

Fund Name	Symbol	Asset Class	Target
Vanguard Total Stock Market	VTI	LCB	36.00%
Vanguard FTSE All-World ex-US	EUV	INT'L LCB	24.00%
Vanguard Intermediate Bond Market	BIV	INTER BOND	24.00%
iShares S&P International Treasury Bond Fund	IGOV	INT'L BOND	16.00%

This simple portfolio is merely an example, not a recommendation, but illustrates how easy it is to achieve diversity by investing in worldwide economic growth, hedging currency risk, individual security risk and individual country risk.  Each individual will have to determine the optimum mix of assets for their portfolio.  But the simpler the portfolio, the more likely to investor is to stick with the investment program through both good and bad times.

Quote of the Day: Marcus Tullius Cicero

Do not blame Caesar, blame the people of Rome who have so enthusiastically acclaimed and adored him and rejoiced in their loss of freedom and danced in his path and gave him triumphal processions.... Blame the people who hail him when he speaks in the Forum of the "new, wonderful good society" which shall now be Rome’s, interpreted to mean "more money, more ease, more security, more living fatly at the expense of the industrious."

~ Marcus Tullius Cicero (106-43 B.C.)

HT (Maggie's Farm) 

Investing Using the Principle of Maximum Pessimism/Optimism

Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.
~ Sir John Templeton

This famous quote from John Templeton outlines an investment strategy in broad terms that is counter intuitive to the way most people invest, but if applied properly can reward the patient investor with handsome returns over the years. The difficulty in applying the strategy is controlling investor emotions to not get caught up in the euphoria of a rising stock market and having the discipline to wait for those moments of maximum pessimism or optimism. But one important thing to keep in mind in looking for these opportunities in maximum pessimism is that we are not talking about individual companies, but entire industries or countries where a broad basket of stocks can be purchased to control individual security risk and we are looking for a catalyst to drive these stocks higher.

Let's examine some of the moves that Templeton made during his lifetime applying this principle:

1. WWII. In 1939 as the Great Depression was ending, WWII beginning, and much of the US was fearful the Depression would deepen, Templeton foresaw the wartime economy would drive up the demand for commodities and industrial materials.  As a result he invested $10,000 in104 stocks on the US exchanges trading under $1, 37 of which were already in bankruptcy.  As these positions were gradually sold off over the years, Templeton earned a 4 fold return.
2. The Rising Sun. In the late 1950's Japan was viewed as a low-wage manufacturer of cheap, shoddy goods.  Templeton believed that Japan was committed to growth and quality improvements, and as a result of their improved position in the world economy would have to open up their capital markets to foreigners.  In the early 1960's, when Templeton bought in, the Japanese markets traded at a PE of 4 compared to 19.5 for the US with twice the growth rate, 10% verses 4%.  From 1960 to 1990 the Japanese index increased 36 times its original value.  Templeton sold most of his positions before the market peak when he thought they were fully priced and found better values elsewhere.
3. The Regan Revolution and the Return of Optimism. In the early 1980's following the malaise and stagflation of the Carter years, the US was in recession with interest rates raised artificially high to break the back of inflation.  At this time many stocks in the US had fallen to single digit PEs, many people thought the US was in decline, and magazines were running headlines like The Death of Equities (a great contrarian indicator).  In 1979, the PE on the Dow stood at 6.8, book values around one or less, and almost everyone had given up on the market.  With inflation running at double digits, he reasoned the replacement value of assets was much higher than what was carried on the books, and that if corporate profits returned to their historic growth rate of 7% and inflation was reduced to around 5 - 7% that compounded corporate profits could double in 5 years.  
4. The Internet Bubble.  In the go-go 1990's anything associated with the .com revolution commanded astonishing PEs, whether the companies had any sale as assets to back up those stock prices. This was a bubble of historic proportions, similar to the tulip bulb bubble in Holland or the South Sea bubble in England.  Maximum optimism is an understatement in describing the valuations of many of these companies.  The PE of the NASDAQ had climbed to 151 by 1999.  The IPO market for Internet companies was going crazy.  Templeton sold these technology companies short, concentrating on the stocks that had risen at least 3x above their offer price and timing his short position days prior to the lockups expiring, giving insiders the right to sell their shares.  His reasoning was simple: with little behind these companies other than hype, when the last buyer has bought and no more buyers are left there is only one way prices can go-- down.
5. 9/11. Following the horrific attacks on the World Trade Center and the Pentagon, the stock markets were closed for close to a week.  Looking to capitalize on the initial panic and subsequent recovery, Templeton did something few would have expected.  Believing the government would not let the airlines fail, he placed limit orders on the 8 major airlines at 50% below their pre 9/11 closing price, not as long term trades but short term speculations.  Three of these orders triggered and when he sold these stocks in February of 2002, he pocketed gains of 61%, 72% and 24%.
6. The Asian Currency Crisis. Triggered by the devaluation of the Thai currency, a chain reaction of selling ran through countries like Thailand, Malaysia, Indonesia, the Philippines, Singapore, and finally South Korea.  South Korea caught Templeton's attention, having one of the world fasted GDP growth rates, a high domestic savings rate, and a trade surplus.  At the end of 1997, when the country could no longer afford to defend the won, the currency collapsed along with asset values and its stock market.  South Korea was forced to go to the lender of last resort, the IMF, who imposed reforms on the country to open up its markets and change many of its traditional labor practices.  South Korea also raised interest rates to protect its currency.  Templeton began to buy into the Mathews Korea Fund in late 1997, whose 64% decline made it one of the worst perform mutual funds of 1997, viewing that stock market as seriously depressed.  The PE of the South Korean market had fallen from 20 to less than 10 because of its poor outlook.  In two years, as the country and its markets recovered, and the Mathews fund became one of the best performing mutual funds of 1999, Templeton earned a 267% return on his original investment.

Recent opportunities to participate in moments of maximum pessimism occurred in the March of 2009.  At that time almost every market in the world was a bargain and it would have been hard to go wrong buying anything.  But three opportunities especially stood out at this time: financials, REITs, and homebuilders.  Opportunities abounded in the common, preferred and debt securities of each sector.  The common could have been purchased using ETFs to obtain diversity and would have paid off more handsomely than the market as a whole during the recent recovery, while the debt and preferred, with their handsome yields in the teens and twenties, would have to be purchased individually.

But the question each investor should continuously ask themselves is: do any opportunities exist in the market where maximum pessimism or optimism exist.  Today's opportunity may be in shorting bonds.  With the Fed discount rate near zero, the weak dollar and steep federal deficits interest rates will at some point in time have to be raising to protect the dollar, combat inflation and keep foreign investors interested in purchasing government debt.

WSJ: The Baucus Bill Is a Tax Bill

From yesterday's Wall Street Journal:

To avoid the fate of the House bill and achieve a veneer of fiscal sensibility, the Senate did three things: It omitted inconvenient truths, it promised that future Congresses will make tough choices to slow entitlement spending, and it dropped the hammer on the middle class.

One inconvenient truth is the fact that Congress will not allow doctors to suffer a 24% cut in their Medicare reimbursements. Senate Democrats chose to ignore this reality and rely on the promise of a cut to make their bill add up. Taking note of this fact pushes the total cost of the bill well over $1 trillion and destroys any pretense of budget balance.

It is beyond fantastic to promise that future Congresses, for 10 straight years, will allow planned cuts in reimbursements to hospitals, other providers, and Medicare Advantage (thereby reducing the benefits of 25% of seniors in Medicare). The 1997 Balanced Budget Act pursued this strategy and successive Congresses steadily unwound its provisions. The very fact that this Congress is pursuing an expensive new entitlement belies the notion that members would be willing to cut existing ones.

Most astounding of all is what this Congress is willing to do to struggling middle-class families. The bill would impose nearly $400 billion in new taxes and fees. Nearly 90% of that burden will be shouldered by those making $200,000 or less.

It might not appear that way at first, because the dollars are collected via a 40% tax on sales by insurers of "Cadillac" policies, fees on health insurers, drug companies and device manufacturers, and an assortment of odds and ends.

But the economics are clear. These costs will be passed on to consumers by either directly raising insurance premiums, or by fueling higher health-care costs that inevitably lead to higher premiums. Consumers will pay the excise tax on high-cost plans. The Joint Committee on Taxation indicates that 87% of the burden would fall on Americans making less than $200,000, and more than half on those earning under $100,000.

Industry fees are even worse because Democrats chose to make these fees nondeductible. This means that insurance companies will have to raise premiums significantly just to break even. American families will bear a burden even greater than the $130 billion in fees that the bill intends to collect. According to my analysis, premiums will rise by as much as $200 billion over the next 10 years—and 90% will again fall on the middle class.

Senate Democrats are also erecting new barriers to middle-class ascent. A family of four making $54,000 would pay $4,800 for health insurance, with the remainder coming from subsidies. If they work harder and raise their income to $66,000, their cost of insurance rises by $2,800. In other words, earning another $12,000 raises their bill by $2,800—a marginal tax rate of 23%. Double-digit increases in effective tax rates will have detrimental effects on the incentives of millions of Americans.

~ Douglas Holtz-Eakin

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My take: Why should anyone be surprised by this? Health care "reform" is not free and will not pay for itself. The savings from eliminating fraud and waste in Medicare will not be achieved. The price tag of $890B will be underestimated by a factor between 2 and 4, and substantial taxes, penalties, fees will be imposed on the middle class to pay for this plan. Those who were counting on getting something for nothing will be in for a rude awakening-- their costs for health care will be greater after the reform than before the reform.