Archive for October, 2008

Oct 17 2008

Advice from an economic oracle – buy American stocks now!

Op-Ed Contributor – Buy American. I Am. –

So Wall Street has recently experienced its worst shocks since the great depression. Every day the Dow Jones is like a roller coaster, DOWN 800 points, then  UP 500 points, then DOWN 200 followed by another rally of 600! In just three weeks the Dow has gone from 11,500 to below 900 points. Surely, the wise thing to do is get OUT of the stock market, right? WRONG! At least, so says the richest man in the world, Warren Buffet, someone who should know a thing or two about smart investing.


A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was.” Today my money and my mouth both say equities.

Discussion Questions:

  1. Why does holding cash seem like the smart thing to do during periods of volatile stock prices like the last month or so? Why does Mr. Buffet think that holding cash is NOT so smart?
  2. Mr. Buffet’s advice is counter-intuitive to some. Buying more of something that is falling in value (American stocks) may appear unwise… but what is Buffet’s rationale for why buying now may in fact be the smartest thing for an investor to do?
  3. Does the behavior of investors on the stock market reflect the behavior of consumers in a typical product market? In other words, do the laws of supply and demand apply to the stock market? Discuss…

12 responses so far

Oct 16 2008

Those who foresaw the meltdown…

The Huffington Post – Economic Honor Roll

The liberal blog and news site, Huffington Post, has an interesting post sharing excerpts from the writings of some prominent economists over the last several years who foresaw the economic meltdown now underway in the world’s financial markets. It’s interesting to read these passages today and realize that the financial crisis that seemed to take Washington by such surprise in the last few weeks was something economists have seen coming for quite some time.

Nouriel Roubini, NYU professor of economics: from “The Rising Risk of a Systemic Financial Meltdown: The Twelve Steps to Financial Disaster” (subscription req’d), February 5, 2008

…it is possible that some large regional or even national bank that is very exposed to mortgages, residential and commercial, will go bankrupt. Thus some big banks may join the 200 plus subprime lenders that have gone bankrupt.[…]

Ninth, the “shadow banking system” (as defined by the PIMCO folks) or more precisely
the “shadow financial system” (as it is composed by non-bank financial institutions) will
soon get into serious trouble.[…]

Tenth, stock markets in the US and abroad will start pricing a severe US recession
rather than a mild recession – and a sharp global economic slowdown.[…]

A near global economic recession will ensue as the financial and credit losses and the
credit crunch spread around the world. Panic, fire sales, cascading fall in asset prices will
exacerbate the financial and real economic distress as a number of large and systemically
important financial institutions go bankrupt. A 1987 style stock market crash could occur
leading to further panic and severe financial and economic distress.
In this meltdown scenario US and global financial markets will experience their most
severe crisis in the last quarter of a century.

Paul Krugman, New York Times columnist (and winner of the 2008 Nobel Price for Economics)

Krugman has been warning about the dangers of the housing bubble for years, and the terrible toll it could take on the economy when it pops. Here is a Krugman warning from August 29, 2005:

These days Mr. Greenspan expresses concern about the financial risks created by “the prevalence of interest-only loans and the introduction of more-exotic forms of adjustable-rate mortgages.” But last year he encouraged families to take on those very risks, touting the advantages of adjustable-rate mortgages and declaring that “American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage.

If Mr. Greenspan had said two years ago what he’s saying now, people might have borrowed less and bought more wisely. But he didn’t, and now it’s too late. There are signs that the housing market either has peaked already or soon will. And it will be up to Mr. Greenspan’s successor to manage the bubble’s aftermath.

How bad will that aftermath be? The U.S. economy is currently suffering from twin imbalances. On one side, domestic spending is swollen by the housing bubble, which has led both to a huge surge in construction and to high consumer spending, as people extract equity from their homes. On the other side, we have a huge trade deficit, which we cover by selling bonds to foreigners. As I like to say, these days Americans make a living by selling each other houses, paid for with money borrowed from China.

One way or another, the economy will eventually eliminate both imbalances.

Joseph Stiglitz, Nobel Prize-winning economist: Washington Post, “The Iraq War Will Cost Us $3 Trillion, and Much More,” March 9, 2008

We face an economic downturn that’s likely to be the worst in more than a quarter-century.

Until recently, many marveled at the way the United States could spend hundreds of billions of dollars on oil and blow through hundreds of billions more in Iraq with what seemed to be strikingly little short-run impact on the economy. But there’s no great mystery here. The economy’s weaknesses were concealed by the Federal Reserve, which pumped in liquidity, and by regulators that looked away as loans were handed out well beyond borrowers’ ability to repay them. Meanwhile, banks and credit-rating agencies pretended that financial alchemy could convert bad mortgages into AAA assets, and the Fed looked the other way as the U.S. household-savings rate plummeted to zero.

It’s a bleak picture. The total loss from this economic downturn — measured by the disparity between the economy’s actual output and its potential output — is likely to be the greatest since the Great Depression.

Daniel Altman, author, economic journalist and Huffpo blogger, from “Contracts So Complex They Imperil The System”, February 24, 2002

When companies that rack up huge hidden debts and traders who illicitly amass mountains of risk are exposed, Wall Street’s big players rush to cut their losses and collect on their debts. If that kind of rush were ever to result in a shortage of cash, it would paralyze the financial system. Stock markets would tumble and banks would close, putting the savings of households at risk.

One response so far

Oct 05 2008

Where I’ll be this week: Economic development experiential learning trip to Egypt

Mediterranean Center for Sustainable Development – Collaborative School Programs

One of the great joys of teaching at an international school is the opportunity for travel. Not only during breaks and summer vacations, but also with students through programs such as Zurich International School’s kids planning in a circleClassroom Without Walls.

My colleague and fellow Economics teacher (and blogger!) Joe Hauet decided last spring to organize an economics research and experiential learning trip to a sustainable living community on the banks of Egypt’s Nile River, near the city of Beni Suef, two hours south of Cairo. 40 ZIS Economics students, mostly year 2 IB students, will spend the coming week learning about economic development from experts in the field who are part of the Mediteranian Center for Sustainable Development Programs. The students, Joe and myself will spend three days at the Nile delta’s Kan Yama Kan village, followed by two days exploring the ancient Egyptian sites at Giza and around Cairo:

When teachers bring their students to Kan Yama Kan Village and engage them in our programs, they know we take a holistic approach to learning. Students learn about the environment through hands-on activities designed to provoke critical thinking and follow-up discussion in the classroom. They are exposed to sustainable development concepts and practices that are simple, easy to comprehend and replicable. Educating youth about the environment and developing their character leads to an informed citizenry with the capacity to reach the Millenium Development Goals

Our programming is proactive and flexible. We recognize that youth today face social and global challenges in a fast-paced world and we believe that as educators it is our responsibility to help them gain the intellectual and life skills they need to succeed. We do this by exposing students to practical learning experiences and modeling the behavior and values we teach; we use issues that arise while living in a community as learning opportunities about respect for others, good governance, human rights, and personal and collective responsibility.

Each visit to Kan Yama Kan is unique. Each program is tailored to the needs of the teachers, students or group. Whether the program kids doing soil experimentsfocuses on biodiversity, animal behavior, renewable resources and searching for fossils or planning and building a habitat for tortoises, scripting a drama performance or revision for end of year exams, MCSDP works closely with faculty and school administrators to understand their objectives and meet their expectations.

The goal of the ZIS Classroom Without Walls trip to Egypt is to allow IB Economics students to experience the challenges faced by communities in developing countries, as well as to gain a deeper understanding of the development strategies rooted in sustainability that are going on around the Mediteranean region.

I owe a huge thanks to Joe Hauet, whose dedication and work in planning this trip over the last six months will truly pay off for the 40 students and four teachers leaving for Egypt bright and early tomorrow morning.

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Oct 05 2008

Welker’s daily links 10/04/2008

Published by under Daily Links

  • Is the financial crisis purely a result of market failure? Professor Russel Roberts doesn’t think so. Read this great post to learn how the government may be the real culprit behind our financial mess.

    “…before we conclude that markets failed, we need a careful analysis of public policy’s role in creating this mess. Greedy investors obviously played a part, but investors have always been greedy, and some inevitably overreach and destroy themselves. Why did they take so many down with them this time?

    Part of the answer is a political class greedy to push home-ownership rates to historic highs — from 64% in 1994 to 69% in 2004. This was mostly the result of loans to low-income, higher-risk borrowers. Both Bill Clinton and George W. Bush, abetted by Congress, trumpeted that rise as it occurred. The consequence? On top of putting the entire financial system at risk, the hidden cost has been hundreds of billions of dollars funneled into the housing market instead of more productive assets.

    Beware of trying to do good with other people’s money. Unfortunately, that strategy remains at the heart of the political process, and of proposed solutions to this crisis.”

    tags: economics, financial crisis, market failure

2 responses so far

Oct 04 2008

“Business Syphillis” – Colbert debates himself on the causes of and the cure for America’s sick economy

Formidable Opponent – Business Syphilis | Thursday October 2 |

Business syphilis infects the market after a corporate orgy…

8 responses so far

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