The Big Picture

---

• Global Trend Indicators
• Here’s the Thing: Peter Frampton
• Uh-Oh: NYT’s Front Page Cover Indicator
• My Hometown
• Prisoner of the Bureaucracy
• Your Three Investing Opponents
• Tea Party Membership Cards
• Shiller: U.S. Housing Decline `Could Go On’
• 10 Weekend Reads
• Cost of Borrowing Shocks and Fiscal Adjustment

Global Trend Indicators Posted: 26 Jan 2013 04:00 PM PST   ~~~~ (click here if tables are not observable)

Here’s the Thing: Peter Frampton Posted: 26 Jan 2013 03:00 PM PST This week on Here's the Thing, Alec talks with Grammy-winning guitarist Peter Frampton. "Sound is very inspirational to me," explains Frampton – and it always has been: he started playing guitar before he was 8 years old. Frampton talks about his musical roots in England, playing in bands like The Preachers and The Herd. At age 14 he was playing at a recording session produced by Bill Wyman, who he says is "sort of like my mentor, my older brother." Eleven years later, Frampton was on stage in San Francisco, recording “Frampton Comes Alive,” one of the biggest selling live albums of all times. Frampton also talks about the challenges of his extraordinary success: "I don't think anybody can be ready for that kind of success," explains Frampton. Peter Frampton recently completed a 35th anniversary tour of Frampton Comes Alive – a DVD will be available later this year. Peter Frampton July 16, 2012

Uh-Oh: NYT’s Front Page Cover Indicator Posted: 26 Jan 2013 12:00 PM PST “Americans seem to be falling in love with stocks again.”   That is the first sentence of a front page NYTimes article, titled As Worries Ebb, Small Investors Propel Markets. The rest of the article is just as bullish: “Millions of people all but abandoned the market after the 2008 financial crisis, but now individual investors are pouring more money than they have in years into stock mutual funds. The flood, prompted by fading economic threats and better news on housing and jobs, has helped propel the broad market to within striking distance of its highest nominal level ever.” To be sure, there are some caveats throughout: “While the rising market may lift the nation's collective spirits, it will not necessarily restore everyone's portfolios. In good times and bad, many individual investors tend to buy and sell at precisely the wrong moments. They dump stocks after the market falls and buy stocks after the market rises, the opposite of what investors aim to do.” But overall, there is no escaping the sentiment of either the headline of that first sentence or the gist of the entire column. Stocks are back, baby! Now is the time to jump onboard. I have been fairly selective as to what qualifies as a magazine cover indicator and what is merely media noise. Let us look at the details of this one: 1) A mainstream non-business publication; 2) Front page or cover story 3) About rallying asset class 4) With a decidely bullish tone to it That is how I determine when the magazine cover has been initiated. I cannot think of any reason why this one does not qualify. This chart accompanied the article: A Steady Ascent Source: NYT     Previously: • Uh-Oh: Time Magazine on Housing (June 6, 2005) BEARISH • Uh-Oh: Facebook's Zuckerberg is Time Man of the Year (December 17th, 2010) BEARISH • Uh-Oh: Gold on the Cover of NYT Magazine? (May 15th, 2011) BEARISH • NYT Sunday Business: Magazine Cover Indicator? (January 1, 2012) BULLISH • Barron's Cover: Don't Lose My Money (January 28th, 2012) BULLISH • Magazine Cover Indicator: New York "End of Wall Street" (February 6th, 2012) BEARISH Source: As Worries Ebb, Small Investors Propel Markets NATHANIEL POPPER NYT, January 25, 2013 http://www.nytimes.com/2013/01/26/business/daily-stock-market-activity.html

My Hometown Posted: 26 Jan 2013 10:00 AM PST My mother had a two-tone Maxima, light and dark blue. It replaced the five cylinder Audi which was a great car when it ran right, which was rarely. Only buy Japanese cars. Unless you’re rich, or leasing, or both. And it was in this car I found myself driving on Route 7 from Middlebury to Rutland on one of those days when it’s not sure whether it wants to rain or snow. When the temperature is hovering around thirty two degrees and God can’t decide whether to add to the snowpack or deplete it. And on the radio I heard “My Hometown.” It used to be a boonie ritual. Driving with one hand on the steering wheel and the other on the radio knob, trying to pull in a station. You’d get the farm report, some country music, the real, twangy stuff, not the faux rock and roll of today, and if you were lucky something you wanted to hear on a Top Forty station. This was back when our relationship was teetering. A year and a half after we got married. And when things are going south you know it because of the silence. Suddenly there’s nothing to say. And if you venture a few words you get no response, except maybe a guttural “um” or “mm.” And the song keeps playing on the radio and you keep listening and your whole life plays out in your brain as you stare at the highway. “I was eight years old and running with a dime in my hand Into the bus stop to pick up a paper for my old man I’d sit on his lap in that big old Buick and steer as we drove through town He’d tousle my hair and say son take a good look around this is your hometown This is your hometown This is your hometown This is your hometown” My father loved his hometown. He took pride in the location of our domicile, just a block from the main drag, where we could get a quart of milk or a loaf of bread whenever we wanted. The upwardly mobile moved to Skytop Drive, but things were good down on Black Rock Turnpike, where we had Richelsoph’s Bakery. Where they sliced the rye after you bought it and it was still warm and if your mother didn’t restrict your grabbing you could eat half of the loaf before you got home. But my dad never put me on his lap to drive. He was a safety bug. Nothing untoward was ever done. But the cancer got him anyway. He died five years after the purchase of that Maxima. I told my mother to give it to my little sister when he passed. They trucked it to Minnesota where it never died, but was replaced when my brother-in-law’s career floated upwards in the boom of the last decade. “In ’65 tension was running high at my high school There was a lot of fights between the black and white There was nothing you could do Two cars at a light on a Saturday night in the back seat there was a gun Words were passed in a shotgun blast Troubled times had come to my hometown My hometown My hometown My hometown” Big Al struck it rich and bought a barn in Newtown. He died in a hotel in New York, his Parkinson’s felled him while he was waiting for the elevator. But back in the seventies, we used to drive over and play tennis, badly, during the boom, when it caught the national mood. This was after the sixties, when every year someone got assassinated and everybody was fighting for his rights, when the youth took the country from the old men, when we were all in it together. Before greed and income inequality created a gap so wide in my hometown the poor don’t interact with the rich unless they’re bused in to clean. “Now Main Street’s whitewashed windows and vacant stores Seems like there ain’t nobody wants to come down here no more They’re closing down the textile mill across the railroad tracks Foreman says these jobs are going boys and they ain’t coming back to your hometown Your hometown Your hometown Your hometown” They never made much in my hometown, but I know too many people who lost their job and their house and are struggling. As we get older every day. We assumed our kids would do better than us. We no longer believe that. “Last night me and Kate we laid in bed Talking about getting out Packing up our bags maybe heading south I’m thirty five we got a boy of our own now Last night I sat him up behind the wheel and said son take a good look around This is your hometown” I got out. I saw Los Angeles on television, I listened to the Beach Boys & Jan and Dean sing about a happy, carefree life and when I graduated from college I moved. And it is better. But now I’m approaching sixty and I’ve got no kids and instead of worrying about finding a station on the radio I’m overwhelmed with input. I’ve got AM, FM, XM, iPod, iPhone, Internet…and we’re all closer together, just an e-mail or a text away, but we’ve all retreated into our niches, we’ve lost our cohesiveness. We’re no longer all in it together, we’re doing our own thing. And when you take a break and look up and realize no one’s around you wonder…are we better off? “My Hometown”: http://spoti.fi/Jhc5p4 ~~~ Visit the archive Twitter If you would like to subscribe to the LefsetzLetter

Prisoner of the Bureaucracy Posted: 26 Jan 2013 09:00 AM PST Prisoner of the Bureaucracy By John Mauldin January 25, 2013     Greece Must Stay in the Euro Beware of Greeks Bearing Bonds Contagion, Thy Name Was Greece Prisoner of the Bureaucracy Toronto, New York, Washington DC, Las Vegas, and Argentina   I wrote some time ago that Greece had a choice between Disaster A: staying in the euro; and Disaster B: leaving the euro. I have recently come back from four days in Greece, meeting with lots of people at all levels of society, and will share with you in this letter my analysis of their choices and the results. I'll also have a few things to say about what the developments in Greece might mean for the rest of Europe and the developed world. I penned these words in January of 2010: "Everyone knows the problems of Greece. There is no political will in the country (so far) to do what Ireland has done, and really cut their budget. I think Spain is an even bigger nightmare for the EU when compared to relatively small Greece. Italy? Belgium? Portugal? All those countries (and their voters) will be watching to see how the EU deals with Greece." Which was good for Greece, as it gave good reason for the rest of Europe to care about what happened to Athens. Greece Must Stay in the Euro Let's start with the conclusion: they have chosen to stay in the euro. If a depression meets your definition of an economic disaster, then it is reasonable to conclude that their choice has been a disaster. Greek GDP is projected to be down by 25% by the end of 2013, as measured from the beginning of the crisis. Exiting the euro at this time would only double the disaster. They must now finish what they began. As we will see next week, this may be the story all over Europe. The cost of breaking up the euro, or of a country leaving on its own, is simply now too high. For better or worse, the marriage must endure. Let's rewind the tape to see what I meant when I said that whatever Greece decided to do would be a disaster. At the beginning of the crisis, Greece was totally dependent on borrowed money both to finance its government spending and its massive trade imbalance in the private sector. While the cause of the crisis was too much debt and a deficit (both public and private) that was out of control, the immediate trigger was the loss of access to the bond market as interest rates rather quickly spiraled out of control. Let's look at two graphs. The first is the Greek ten-year bond for the last five years. Notice that three years ago Greek interest rates had not yet moved up. The bond market was clearly not seeing what I and other observers (and multiple hedge funds) were seeing: Greece simply could not pay its bills. Greek (and peripheral-country) debt had become the new subprime. But European leaders were in massive denial about Greek solvency. You only have to do a simple Google search to find dozens of quotes from said leaders assuring us that Greece would not default, almost right up until the moment they did! (One even admitted that it was necessary to lie about it!) The second chart is Greek two-year debt. By this time last year interest rates had skyrocketed to 177.37% (and bond values had plunged!). As the crisis was unfolding, a narrative developed about the Greek national personality. "They don't pay their taxes." (There is more than an element of truth there. Tax evasion was a national sport at which they excelled, perhaps matched only by the Italians.) "They are overpaid and don't work hard." (Verifiably false.) "They cheated to get in the eurozone." (True, but they were in good company.) Beware of Greeks Bearing Bonds The classic piece was the story written by Michael Lewis for Vanity Fair, delving into the systematic corruption of the tax system, among other national issues (more on which later). I have written about that article in this letter and quoted it here and in Endgame. It is a brilliant piece of narrative journalism. It became easy to dismiss Greece as a failed system. "Spain is not Greece," Prime Minister Rajoy told us in the midst of their own crisis. Indeed, we were told by leader after leader that their countries were not Greece, that somehow their crises were different and that helping them was not the same as helping Greece. We were greeted almost daily with the spectacle of riots and demonstrations, of political chaos. It seemed like the news was "all Greece, all the time." Was Greece going to be the first in a series of dominoes to fall as it exited the euro? Those of us who characterized the euro as an experiment and not yet a currency (as it had not gone through a crisis) saw even more reason to be skeptical of a currency union that existed without a fiscal union. The term "PIIGS" (Portugal, Italy, Ireland, Greece, and Spain) entered the vernacular as a euphemism for debt-ridden profligates. Writing that Greece had only a choice between two disasters was not being dismissive on my part. It was simply recognizing the cumulative effects of the failure to make difficult choices. Once Greece lost access to the bond market, the game of borrow and spend was over. (By "lost access" I mean that they could not borrow money at interest rates that gave them any hope of being able to pay off their debt. The compounding nature of their debt and deficits would mean that soon the interest payments would be more than government revenue. Bond markets will exit long before that point.) Since we know what happened as a result of Greece in the euro, let's undertake a thought experiment and imagine what Greece would look like if they had exited the euro. The "good news" is that the new drachma would have immediately dropped by 50%, thus eliminating almost overnight the trade imbalance, as any imports would require a "hard" currency (euros, dollars, pounds) and that money would only come from exports. Greece would have been plunged into an immediate and steep depression. While government workers would get paid in drachma, banks would have gone bankrupt and been forced into nationalization. Businesses that needed to import materials to make goods, either for local use or to turn into exports, would have been cash-starved. It would have been chaos. True, Greece could simply have walked away from their debt and then appealed for emergency and humanitarian aid from the IMF and others. But it would take time for any such institutional response to happen. At the time, I thought that Greece might indeed elect a government that would leave, because of the pain involved in staying. If you remember, there were several elections, keeping politicians throughout Europe on edge for months on end. It was close. Last year it took two elections to come up with a coalition government. In the end, a real majority of Greeks wanted to stay in the euro, whether they were politically left or right. A crisis-management coalition government emerged to try and figure a path out of the mess. And it has not been (and will not be) easy. Greece has been, is, and will be on financial life support for some time. That means money from the "Troika" (the IMF, the ECB, and the European Union). But that money has come with strings. It has meant a regimen of "austerity," otherwise known as living on a budget. As I have written about at length, the European banking system is a systemic disaster. The regulators ENCOURAGED (there is no graphic strong enough to express the outrageousness of such a design) their banks to buy government debt and allowed them to leverage that debt by up to 40 times. This was on the theory that no sovereign (European) government could actually default, so therefore there was no need to actually reserve capital against the possibility of a default. And if Greek (and Portuguese and Irish, etc.) debt returned a modest premium (2-3%) over German or French debt, then the spread was worth it to the bank managers and shareholders. After all, the regulators had said there was no risk; it was easy money. Even economists can figure out how to make money at a "modest spread" on 40 times leverage with no risk. Just ask those clever guys at Long Term Capital. And if the spread was 2%? Then back up the truck and give me some more. 100% on your capital per year with no risk? Where do I sign up? And thus the EU found itself in a credit crisis when Greek debt started to rise in risk, having already been decimated by the subprime crisis. Someone finally noticed that Greece could not hope to pay off its debt. However, German and French banks had so much Greek (and other peripheral-country) debt that if Greece defaulted they would be bankrupt. That would of course force the respective governments to capitalize their banks to keep their countries afloat. But then that would call into question their own credit worthiness as we are talking a great deal of money. Contagion, Thy Name Was Greece And if Greece were allowed to default, then what would that imply about other peripheral-country debt? The word contagion slipped into the economic lexicon as Merkel and Sarkozy (and many other European leaders) openly worried that if Greece were allowed (or forced) to exit the euro, the entire euro experiment might be called into question. So the easy fix was to simply loan Greece the money to allow them enough to pay the banks until the loans were small enough that what remained could be written off. Of course, the loans from the Troika were considered sacred and have not yet been written down (more below). But private holders of Greek debt are down some 90% on a mark-to-market basis (as I predicted). And I may have been optimistic. We shall see. So, let's fast forward to my four days in Greece. I was in Europe for a series of speeches in Scandinavia for the Skagen Funds. I had to be in Geneva eight days later, so rather than return home to Dallas just to fly back again, I decided to stay in Europe. I had been writing about Greece for many years but had not visited, though I had corresponded with Greek readers during that time. So after Scandinavia I spent the weekend in the south of Spain, a day in London, and then flew on to Athens. I had asked my good friend Christian Menegatti, managing director and head of research at Roubini Global Economics, to come with me. Christian is Italian and married to a Greek wife (with a new baby!). Between the two of us, we stayed extraordinarily busy with meetings. We saw business leaders and entrepreneurs, politicians, economists, central bankers, and investors. And at night, neither of us being shy, we made a point of frequenting the tavernas and meeting the locals. Let's review a few quick facts, and then I'll share with you some of what I learned, starting with some anecdotes gleaned from those evening sojourns. The Greek economy is down some 20% in terms of GDP since the beginning of the crisis. This year it is forecast to be down another 5% or more. Indeed, The Economist projects that Greece will be the worst-performing economy in the world in 2013. A glance at the table below shows the best and worst nations among their forecast. (Question for the people putting this forecast together: How can Greece be worse than Syria? Seriously?) Unemployment, I was told, is close to 27%, still rising, and could approach 30%. Youth unemployment is over 50%, and young people are leaving. Over €80 billion has left the banking system for other countries. Banks are basically depending on emergency Greek central bank lending in order to maintain liquidity. Theoretically, these loans will eventually be a debt of the Greek government. Greek banks are totally bankrupt, having had to take massive haircuts on their Greek debt. Banks that are considered "systemic" will be required to raise 10% of the money needed to recapitalize them, in order to get the 90% available from EU funds. Banks that are not considered systemic will simply be nationalized. This is a point we will revisit. That all sounds so grim. And indeed, there were reports of bombs being set off as I left the country. Apparently, no one was hurt. And there was a demonstration of sorts arranged for me on Saturday afternoon. They blocked the streets off in front of our hotel (the Grand Bretagne), which is on the plaza in front of the capital building. When you see pictures of Greek demonstrations, they are likely taken from the same vantage point we had. After experiencing a march with 700,000 protesters when I was in Buenos Aires last November, this seemed rather tame. Mostly it looked and sounded like a rock concert with bad music. I was told by the doorman that it was a protest by the "radical left" against the racism of the "radical right." "If no one shows up, then they will open the streets pretty soon." I waited, and when the only assault was upon my ears, I went back to my room. All the economic devastation and political talk conjures up a mental picture of a war zone, yet it all seems so normal when you are there. The setting is somewhat surreal, with the Acropolis and 2,500-year-old Parthenon dominating the view, beautifully lit up at night. (Athens really should be on your bucket list. It is off-season now, but the streets are not empty at night, and the restaurants and tavernas fill up, mostly with locals, as the evening progresses.) Christian and I ended up taking the same early-evening plane to Athens. We quickly parked our luggage and set out to find dinner, walking to an area that Christian knew. We sat outside, ordered some simple fare, and planned our next few days. Eventually the owner came by, noticed the odd accent (mine), and stopped to chat. When he found out we were trying to learn about the situation in Greece, he opened up. We peppered him with questions about business and his feel for the economy. How was he making it? It struck me as odd at the time that he emphasized several times that he had cut his overhead by going directly to local farms for his food (which was good). No middlemen for him! I wondered why you would wait until a crisis to source better and less expensive food, but I didn't ask. We shook hands and he started to walk away, and then on a whim I asked him what he thought about the new coalition government. He looked down and then glanced around. He said quietly that he had voted for the Golden Dawn Party, looking to see if we would turn away. When we simply asked more questions, without commenting, he warmed up. (Note: this is the party of the "radical right" that was mentioned by the doorman. Golden Dawn gets about 8-10% in the polls. When it is mentioned in the global media it is often referred to as neo-Nazi.) Within a few minutes he was quite upset – not at us, though! He pointed animatedly in the direction of the capital, punching the air for emphasis, and exclaimed (without raising his voice too much), "They stole billions and put it in Swiss accounts and now they want to tax us more to pay for their theft. They're all the same!" The next night offered quite a contrast. In the evening we walked to the base of the Acropolis and found what looked like a promising venue and entered. It was early by Greek standards, but a performer was playing a guitar and singing Greek tunes to a table of six (ahem) older gentleman, clearly old friends eating and drinking together. (Later we found out they had been gathering once a month like this for 20 years.) As the evening went on and the wine kept flowing, they began to sing. A second guitar appeared. The aromatic cigars came out and were smoked directly beneath the no-smoking sign, with no sense of irony. One patrician gentleman stood a few times to have his picture taken with locals who dropped by that evening. The singer sang on for three hours without a break, clearly into the moment. Evidently, you cannot sing certain songs without using your arms. At first it was just one participant providing the counter-melody, but then others joined in a multi-part chorus of practiced harmony. The young owner of that tavern came by, and we started out as the night before, asking questions. When he found out what we were looking for, he went to the table and pulled one of the elderly gentlemen away and introduced us. It turned out that he was an economic journalist and chairman (emeritus) of a Greek journalism society. I quickly borrowed a pen and began to take notes on a paper placemat. Prisoner of the Bureaucracy He was an odd mixture of pessimism and hope, a perfect living metaphor for what I found from top to bottom in Greece. This was the best government he had seen in his life: "I trust this government." But when asked if he was optimistic, he shook his head wearily and said no. When we pressed him as to why – and we had heard variations on this throughout the trip – he said, "The government is the prisoner of the bureaucracy. We have 4,021 associations and 6,200 codes. You simply cannot change things. There are 600,000 tax elements. No one really knows who pays what." He continued: "Remember the spectacle a few years ago, when a new government came in and found massive debts and accounting irregularities? The blamed all the problems on the old government as they negotiated for new loans from the EU. Of course, the people they were blaming were bureaucrats they themselves had appointed, the last time they were in power. The government still to this day does not know how money is spent. They will try to change. But even if they pass new laws, under the rules a minister does not have to enforce them." It seems the bureaucracy is the prisoner of the associations – what we refer to in the US as regulatory capture. This is when a regulatory agency, "created to act in the public interest, instead advances the commercial or special concerns of interest groups that dominate the industry or sector it is charged with regulating. Regulatory capture is a form of government failure, as it can act as an encouragement for firms to produce negative externalities. The agencies are called 'captured agencies.'" (Wikipedia) Which brings us back to the comments by the first restaurant owner about cutting out middlemen. I asked one of my hosts (and got someone to confirm) that the rules are set up so that very few suppliers of a product get to compete. You buy your oil or produce from a very limited group of suppliers. Going direct is legal but evidently not all that easy. Is it the same in every business and industry? No, but enough to be an issue. One businessman told us that he has a factory in Germany and one in Greece. The one in Greece is just as productive as the one in Germany, but he needs five times the number of accountants and lawyers and clerks to deal with the system. This letter is getting long and I am only halfway through (but just getting going on Greece!), so I will pen a second part next week, detailing my impressions from meetings with businesses and government officials, along with some new reports and quotes. But I don't want to end here without giving you some sense of my conclusions. I found guarded optimism in Greece that things can change, and from people that six months ago would have been deeply pessimistic. The source of that change, as we will see, is somewhat ironic. Greeks are natural entrepreneurs. As I noted a few weeks ago, it was the son of a Greek immigrant who pioneered horizontal drilling and fracking here in Texas. And new Greek businesses are sprouting everywhere. There is real potential for an upbeat finish to what was a disastrous beginning to this crisis. I heard time and time again, "If we can get through the next six months without real protests or …" More cuts are coming, and deep ones. Things must change, and there is a real constituency, especially in the bureaucracy, that does not want to see change, at least for their part of the world. But all that will have to wait for next week – just remember, what happens in Greece will not stay in Greece. As I noted three years ago, the rest of Europe is watching. This Greek song will be sung in tavernas and inns and bistros and gasthäuser and pubs and osteria all over Europe. The words will be different, but the tune will be the same. Sung by old men who wish for better times for their grandchildren. Toronto, New York, Washington DC, Las Vegas, and Argentina I leave Sunday for Toronto, where I will spend the evening discussing life and economics with good friend David Rosenberg, and then meet the next day with Rick Rule and the team at Sprott Investments. That evening I will be speaking for my Canadian partner, Nicola Wealth Management, at the Trump Hotel. I will be on the Suns News Network in the morning and guest host on BNN at 3 PM with Andrew Bell and Saijal Patel, old friends whom I have only met so far through the camera, so it will be fun to be with them live. The following day I fly to New York for some meetings and, I think, a spot early with Tom Keene on TV and then radio at 8 AM. Then a few more meetings and some media still being worked out, before I head off to Washington, DC to be with my good friend Newt Gingrich and have some meetings on the Hill the next day, before flying back to Dallas that evening. The next week I fly into Las Vegas to give a speech to the Turnaround Management Association. (I can see my opening line: "I just came back from Europe, and ladies and gentlemen do I have an opportunity for you!") I am making plans to go to Argentina for two weeks in the middle of March. My friends and partners at Casey Research have built a magnificent resort in the north of the country (Salta Province), just outside the city of Cafayate. It is magical horse and wine country, set in the foothills of the Andes, with a year-round perfect climate. One of the best golf courses in South America (at least the longest!), world-class spa and gym, and the wonderful Cafayate plaza at night. They do a semi-annual event for property owners and people who are interested in having a special getaway place. I will be spending most days there working on my latest book, getting in workouts and visiting the spa, and just taking in the beauty of the place. There will be evenings with friends Doug Casey, David Galland, Olivier Garret, Bill Bonner, and whoever else shows up. (This is one of the few places I go where I am the tolerated liberal; but these guys, being libertarian by nature, tolerate almost anyone as long as they are interesting.) I intend to spend more time there each year, I think. They still have a few spots open if you want to join me. You can check it out here. You can view photos of the area and the resort on the website; but realize that pictures don't capture how breathtaking this place is when seen live. And the ride to Cafayate through the canyon is simply not to be missed. Ed D'Agostino, the guy who really runs Mauldin Economics, wants me to note that they are looking for a few good marketing copywriters, who know the difference between marketing copy and the hype that sometimes gets associated with economic letters. You can contact him at Talent@MauldinEconomics.com. It is time once again to hit the send button. That time in the Greek taverna with the elderly gents is a special memory for me. It was like a setting from Zorba the Greek. It is what we imagine Greece to be, so rich and fruitful and full of heart. Now I just need to figure out how to get to a Greek beach this summer! Your thinking about how things must change everywhere analyst, John Mauldin subscribers@mauldineconomics.com

Your Three Investing Opponents Posted: 26 Jan 2013 07:00 AM PST "Tough Year!" We hear that around the office nearly every day – from professional traders to money managers to even the 'most-hedged' of the hedge fund community. This year's markets have perplexed the best of them. Each week brings another event that sets up some confusing crosscurrent: call them reversals or head fakes or bear traps or (my personal favorite) the "fake-out break-out" – this is a volatile, trendless market has been unkind to Wall Street pros and Main Street investors alike. Indeed, buy & hold investors have had more ups and downs this year than your average rollercoaster. The third and fourth quarters alone had more than a dozen market swings, ranging from 5 percent to more than 20 percent. Despite all of that action, the S&P 500 is essentially unchanged year-to-date. It doesn't take much to push portfolios into the red these days. Three Opponents in Investing With markets more challenging than ever, individual investors need to understand exactly whom they are going up against when they step onto the field of battle. You have three opponents to consider whenever you invest. The first is Mr. Market himself. He is, as Benjamin Graham described him, your eternal partner in investing. He is a patient if somewhat bipolar fellow. Subject to wild mood swings, he is always willing to offer you a bid or an ask. If you are a buyer, he is a seller – and vice versa. But do not mistake this for generosity: he is your opponent. He likes to make you look a fool. Sell him shares at a nice profit, and he happily takes their prices so much higher you are embarrassed to even mention them again. Buy something from him on the cheap, and he will show you exactly what cheap is. And perhaps most frustrating of all, Mr. Market has no ego – he does not care about being right or wrong; he only exists to separate the rubes from their money. Institutional Competitors Yes, Mr. Market is a difficult opponent. But your next rivals are nearly as tough: They are everyone else buying or selling stocks. Recall what Charles Ellis said when he was overseeing the $15-billion endowment fund at Yale University: "Watch a pro football game, and it's obvious the guys on the field are far faster, stronger and more willing to bear and inflict pain than you are. Surely you would say, 'I don't want to play against those guys!' Well, 90% of stock market volume is done by institutions, and half of that is done by the world's 50 largest investment firms, deeply committed, vastly well prepared – the smartest sons of bitches in the world working their tails off all day long. You know what? I don't want to play against those guys either." Ellis lays out the brutal truth: investing is a rough and tumble business. It doesn't matter where these traders work – they may be on prop desks, mutual funds, hedge funds, or HFT shops – they employ an array of professional staff and technological tools to give themselves a significant edge. With billions at risk, they deploy anything that gives them even a slight advantage. These are who individuals are doing battle with. Armed only with a PC, an internet connection, and CNBC muted in the background, investors face daunting odds. They are at a tactical disadvantage, outmanned and outgunned. We Have Met the Enemy and They Is Us That is even before we meet your third opponent, perhaps the most difficult one to conquer of all: You. You are your own third opponent. And, you may be the opponent you understand the least of all three. It is more than time constraints, lack of discipline, and asymmetrical information that challenges you. The biggest disadvantage you have is that melon perched atop your 3rd opponent's neck. It is your big ole brain, and unless you do something about it, it is going to lose all of your money for you. See it? There. Sitting right behind your eyes and between your ears. That "thing" you hardly pay any attention to. You just assume it knows what it's doing, works properly, doesn't make too many mistakes. I hate to disabuse you of those lovely notions; but no, sorry, it does not work nearly as well as you assume. At least, not when it comes to investing. The wiring is an historical remnant, hardly functional for modern living. It is overrun with desires, emotions, and blind spots. Its capacity for cognitive error is nearly endless. It was originally developed for entirely other purposes than risk assessment in capital markets. Indeed, when it comes to money, the way most investors use those 100 billion neurons or so of grey matter, they might as well not even bother using their brains at all. Let me give you an example. Think of any year from 1990-2005. Off of the top of your head, take a guess how well your portfolio did that year. Write it down – this is important (that big dumb brain of yours cannot be trusted to be honest with itself). Now, pull your statement from that year and calculate your gains or losses. How'd you do? Was the reality as good as you remembered? This is a phenomenon called selective retention. When it comes to details like this, you actually remember what you want to, not what factually occurred. Try it again. Only this time, do it for this year – 2011. Write it down. Go pull up your YTD performance online. We'll wait. Well, how did you do? Not nearly as well as you imagined, right? Welcome to the human race. This sort of error is much more commonplace than you might imagine. If we ask any group of automobile owners how good their driving skills are, about 80% will say "Above average." The same applies to how well we evaluate our own investing skills. Most of us think we are above average, and nearly all of us believe we are better than we actually are. (Despite having taken numerous high-performance driving courses and spending a lot of time on various race tracks, I am only an average driver. I know this because my wife reminds me constantly.) As it turns out, there is a simple reason for this. The worse we are at any specific skill set, the harder it is for us to evaluate our own competency at it. This is called the Dunning–Kruger effect. This precise sort of cognitive deficit means that areas we are least skilled at – let's use investing decisions as an example – also means we lack the ability to identify any investing shortcomings. As it turns out, the same skill set needed to be an outstanding investor is also necessary to have "metacognition" – the ability to objectively evaluate one's own abilities. (This is also true in all other professions.) Unlike Garrison Keillor's Lake Wobegon, where all of the children are above average, the bell curve in investing is quite damning. By definition, all investors cannot be above average. Indeed, the odds are high that, like most investors, you will underperform the broad market this year. But it is more than just this year – "underperformance" is not merely a 2011 phenomenon. The statistics suggest that 4 out of 5 of you underperformed last year, and the same number will underperform next year, too. Underperformance is not a disease suffered only by retail investors – the pros succumb as well. In fact, about 4 out of 5 mutual fund managers underperform their benchmarks every year. These managers engage in many of the same errors that Main Street investors make. They overtrade, they engage in "groupthink," they freeze up, some have been even known to sell in a panic. (Do any of these sound familiar to you?) These kinds of errors seem to be hardwired in us. Humans have evolved to survive in competitive conditions. We developed instincts and survival skills, and passed those on to our descendants. The genetic makeup of our species contains all sorts of elements that were honed over millions of years to give us an edge in surviving long enough to procreate and pass our genes along to our progeny. Our automatic reactions in times of panic are a result of that development arc. This leads to a variety of problems when it comes to investing in equities: our instincts often betray us. To do well in the capital markets requires developing skills that very often are the opposite of what our survival instincts are telling us. Our emotions compound the problem, often compelling us to make changes at the worst possible times. The panic selling at market lows and greedy chasing as we head into tops are a reflection of these factors. The sort of grinding market we had in 2011 only exacerbates investor aggravation, and therefore increases poor decision making. Facts and logic go out the window, and thinking gets replaced with naked emotions. We get annoyed, angry, frightened, frustrated – and that does not help returns. Indeed, our evolutionary "flight or fight" response developed for a reason – it helped keep us alive out on the savannah. But the adrenaline necessary to fight a Cro-Magnon or flee from a sabre-toothed tiger does not help us in the capital markets. Indeed, study after study suggests our own wetware works against us; the emotions that helped keep us alive on the plains now hinder our investment performance. The problem, as it turns out, lies primarily in those large mammalian brains of ours. Our wiring evolved for a specific set of survival challenges, most of which no longer exist. We have cognitive deficits that are by-products of that. Much of our decision making comes with cognitive errors "secretly" built in. We are often unaware we even have these (for lack of a better word) defects. These cognitive foibles are one of the main reasons that, when it comes to investing, we humans just ain't built for it. We Are Tool Makers But we are not helpless. These large mammalian brains of ours can do a whole lot more than merely overreact to stimulus. We think up new ideas, ponder new tools, and create new technologies. Indeed, our ability to innovate is one of the factors that separates us from the rest of the animal kingdom. As investors, we can use our big brains to compensate for our known limitations. This means creating tools to help us make better decisions. When battling Mr. Market – as tough as any Cro-Magnon or sabre-toothed tiger – it helps to be able to make informed decisions coolly and objectively. If we can manage our emotions and prevent them from causing us to make decisions out of panic or greed, then our investing results will improve dramatically. So stop being your own third opponent. Jiu jitsu yourself, and learn how to outwit your evolutionary legacy. Use that big ole melon for a change. You just might see some improvement in your portfolio performance. Individual Investors Have Certain Advantages Over Institutions One final thought. Smaller investors do not realize that they possess quite a few strategic advantages – if only they would take advantage of them. Consider these small-investor pluses: • No benchmark to meet quarterly (or monthly), so you can have longer-term time horizons and different goals; • You can enter or exit a position without impacting markets; • There is no public scrutiny of your holdings and no disclosures required, so you don't have to worry about someone taking your ideas; • You don't have to limit yourself to just the largest stocks or worry about position size (this is huge); • Cost structure, fees, and taxes are within your control; • You can reverse errors without professional consequences – you don't get fired for admitting a mistake; • You can have longer-term time horizons and different goals; And with those thoughts, good luck and good trading in 2012! ~~~ This was originally published as part of a longer piece in Thoughts from the Frontline exactly one year ago, on January 25, 2012.

Tea Party Membership Cards Posted: 26 Jan 2013 05:00 AM PST Source: Talking Points Memo

Shiller: U.S. Housing Decline `Could Go On’ Posted: 26 Jan 2013 04:39 AM PST Robert Shiller, a professor at Yale University and co-creator of the S&P/Case-Shiller index of property values, talks about the global economy and the U.S. housing market. He speaks with Tom Keene on Bloomberg Television’s “Surveillance” on the sidelines of the World Economic Forum in Davos, Switzerland. (Source: Bloomberg) Bloomberg, Jan. 24 2013

10 Weekend Reads Posted: 26 Jan 2013 04:00 AM PST Ahhh, good to be back. Here are my long form pieces of journalism to start your snowy weekend: • Siri Rising: The Inside Story Of Siri’s Origins — And Why She Could Overshadow The iPhone (Huffington Post) • What Is Middle Class in Manhattan? (NYT) • Exposed: The regime of fear inside Barclays – and how the boss lied and shredded the evidence (DailyMail) • How To Solve Problems Like Sherlock Holmes (Fast Co.Create) • Awaiting a New Darwin (The New York Review of Books) • Buying the NYSE, in One Shot (NYT) • The Delights of Disgust (The Chronicle) • TOASTMASTER: HYPOCRISY, EXPLOSIVE LISTENING, AND THE FEAR OF DEATH AT THE WORLD CHAMPIONSHIP OF PUBLIC SPEAKING (The Believer) • Frontline & Longreads: Inside Obama's Presidency (Frontline) • The Placebo Phenomenon (Harvard Magazine) What’s up for the weekend?     Bull Market Winding Down. Don’t Panic Source: CNNMoney

Cost of Borrowing Shocks and Fiscal Adjustment Posted: 26 Jan 2013 03:00 AM PST

You are subscribed to email updates from The Big Picture To stop receiving these emails, you may unsubscribe now.	Email delivery powered by Google
Google Inc., 20 West Kinzie, Chicago IL USA 60610

.