Too Big To Fail

Avoidance Of Failure

One of the tenets of Socialist Economics is that there ought to be an avoidance of bankruptcy. I’ve posted references to back that claim in the past so I’m not going to bother repeating them here. It is a well accepted cornerstone of Socialism. You can see ample evidence of it (“existence proofs”) all over the world. From nationalizations to ‘bailouts’, it’s the same story. It’s too big to fail and would damage the General Social Good, so must be taken over by The State or bailed out by The State (with a load of strings and controls attached, be they in the guise of Commissar or Regulations). The Central Authority knows what to do better than the bankruptcy courts and The Central Authority can avoid all the collateral impacts of a bankruptcy (layoffs, loss of pensions, loss of customer interests – but, curiously, not worrying at all about ‘loss of bond holder rights’ or ‘loss of stock holder wealth’… It’s OK to screw the “rich” who own stocks and bonds; even if a lot of them are middle class folks with a retirement fund.)

So look around the world and count up the times that the various governments have done nationalizations, takeovers, and bail-outs. All with the goal of “avoidance of bankruptcy”. If bankruptcy is so bad, why not get rid of it for the ‘little guy’ too? Why is it good for the local grocer or car dealer, but bad for GM?

IMHO, mostly because GM has a politically well connected union. Unions being another cornerstone of the Socialist Agenda. No, I have nothing against unions in general; they provide an important ‘countervailing power’ to monopsonist and oligopsonist industries where only one or a few folks are purchasers, so can set the price. But there is a very long history of Socialism exploiting the unions for political purposes. Fascist comes from the Italian word for “bundle” that was used in Italy to refer to unions where a bundle of sticks is stronger than any one stick alone. The notion of becoming a ‘bundle’ and having unions or The State control the means of production is central to all Socialisms.

So if it is so good to avoid failure, where’s the “Free Money” window for all the Little People? Where is MY “Free Money”? Or am I just too little to politically matter? So think again about who has been nationalized or bailed out in the last 50 years around the globe.

Pretty long list. Many of them now long gone. Yes, you can find a few ‘success stories’, but even then you must take them with a ton of salt as the alternative, what was NOT done, is unavailable for comparison.

The Alternative

Yet we’ve got a different set of existence proofs too. Look at capitalist economies and you see failure. Massive and repeated failure. Just like in the natural world where most species that have ever existed are EXTINCT. (Somewhere in the 90% range). That does not mean that capitalism and biology are failures. It means that the Ability To Fail is paramount to natural selection and creation of the fittest.

Capitalism simply can not function properly without the Ability To Fail. Like all those Fancy Breed Dogs, where they are just full of things from hip dysplasia in many breeds, to bulldogs where they must give birth by Cesarian Section as they have been bred for hips too narrow and shoulders too wide for survival without medical intervention. Human management of animal breeds gives fancy breeds that are not very fit. Some breeds have even been recommended for extinction as their accumulated health issues are so bad. Compare the wild fox, coyote, or wolf. Not very many of them with hip dysplasia, difficult births, the need for constant grooming, or dependency on The Master for food.

Can we make a similar A/B comparison with companies? Is there a ‘wild west’ of companies still in existence?

IMHO, yes. I’ve spent most of my career in Silicon Valley. Most of the companies I’ve ever worked for have gone out of existence. From simple bankruptcies to being consumed by stronger rivals. Amdahl. National Semiconductor. Innovacom. Freegate. And a few others. Major players who dominated their industry regularly fall by the wayside. Remember DEC Digital Equipment Company and the VAX computers? How about Tandem Computer that dominated financial computing for a while? Commodore?

So how do you measure ‘success’ in an industry so full of turmoil? By the survivors. So we can take an index that includes the survivors, but lets the losers leave. The NASDAQ 100 has the largest 100 tech stocks in it. By definition it lets the losers leave gracefully as they shrink from Alpha Dog to the back of the pack and it keeps in the biggest, baddest, and most fit. Who that is will constantly change. Right now, the biggest Alpha Dog is Apple Computer. (At one point, prior to a recent re-balance of the QQQQ it was 20% of the index, it had grown so much.) I was at Apple when it was having ‘hard times’ and was suggested as a takeover candidate for larger players, like DEC. Folks got motivated, brought Jobs back, and decided to change the world again.

The result is pretty clear. We DID change the world. The stock holders and company and employees played “die or double”, like all natural life, and the result was things that no Central Plan would ever have created. From Pixar to iPhones and iPads, they just would not be on the political radar. Herr Commissar would have preserved DEC and the VAX and we’d all have desk sized vaxes costing $10,000 each. (The “VAX on a chip” was a product at one point…) As much as I loved my VAXen and liked Ultrix, the iBook just blows it away.

http://www.compaq.com/alphaserver/vax/timeline/1985.html

(An amusing link in itself as it has an HP logo on it, but is a ‘compaq’ URL, as HP ate Compaq some years back, who had eaten DEC …)

The MicroVAX chip was Digital’s first 32-bit microprocessor and the first manufactured with internally developed semiconductor technology. The revolutionary “VAX-on-a-chip” had the highest level of functionality of any 32-bit processor in the industry. With the MicroVAX chip, Digital became the first company to register a new semiconductor chip under the Semiconductor Protection Act of 1984.

Gee. “Highest level of functionality” from an industry leader and even given government protection by law. Great story. Surely a Government Agent would keep them from failure… But Intel ‘ate their lunch’ in the chip market.

And the iPhone and iPod? Well, ask Motorola and the music industry about ‘disruptive technology’. The Central Authority would have preserved the Record Industry and all those jobs. “Failure” of such a large industry would be a Very Bad Thing! Think of all the record stores that would be at risk if music were sold over the internet! (And note that Tower Records is no more…) So which is better? Music on an iPod for 99 cents a song from apple, mixed as you like it? Or vinyl records at $20 each with a ‘must take all songs’ method and you have to play them on a record player (no digital copy allowed)? Just look at all that failure and ‘job loss’ caused by the iPod.

Does this show in stock charts?

Well, yes and no. You can plot the rocket ride of AAPL, but vs. what? DEC? It’s gone. Mergered into HPQ HP some time ago. How about Sun? Oh, wait, they were absorbed by ORCL Oracle.

The comparison that I think is more useful is the current crop of “too big to fail’ companies. Banks and GM that got “bailouts” (in exchange for being in Herr Commissars noose) vs that unstable wild west Tech Sector QQQQ index. The “survival of the fittest” world where losers get eaten and flushed. Just which of those two paradigms has worked best in the recent market crash, recession, and semi-recovery? Surely the safety and security of The Government Regulatory Blanket will have given those protected industries a much easier path to success:

Nasdaq 100 QQQQ vs selected financials and GM - Government Motors

Nasdaq 100 QQQQ vs selected financials and GM - Government Motors

This is a live chart, so will change over time. I may add a static version in a few days for historical reference. It is also a very big chart, so click on it for a very large view.

Notice that GM, the green line, only comes into existence again toward the right hand side. It has shed all it’s old stock holders. It has shed it’s bond holders (who were cleaned out against all legal rights they held by Government fiat). It has shed a great deal of debt. You would think all that would make for great competitive advantage. Unfortunately, it didn’t shed the things that matter the most. There was NOT a wholesale reworking of management (as happens in a takeover or bankruptcy – as the bond holders become the new stock holders and ‘clean house’) and it could not shed it’s old labor contracts and all the dead weight that comes with them. That was the GOAL of the Government Takeover, so no surprise.

Notice that since the stock as ‘come public’ again, it’s just gone down.

Sure, there may be some chance for an eventual recovery, but that will be despite the intervention, not because of it. A GM that had gone through bankruptcy would still exist. It just would have better labor rates, fewer and more efficient factories, and better fresher management. THAT stock would be rising faster (or would not have been brought public yet).

Notice C Citibank and BAC Bank of America. Two of the biggest banks. Just tanked. Laying there on the bottom. Just above them: MS Morgan Stanley and the XLF financial sector fund are just about tied on each side of the 70% loss line. Even the “good banks” of GS Goldman Sachs, JPM J.P. Morgan, and WFC Wells Fargo are at 30-40% loss and headed down as the present trend.

Golly, that Central Authority doesn’t seem so good at picking winners and losers nor very good at assuring success.

What about that gold line on the top? The one with a 30-40% gain? Oh, that’s the QQQQ Nasdaq “Wild West” where failure is allowed to run free and nobody is “too big to fail”…

And how’s that whole “regulated industries” thing working out? Looks like the unregulated “wild west” is healthier.

In Conclusion

And that, in a nutshell, is why I’m not so fond of “Regulation” and any other Government intervention; and especially un-fond of it in the extreme case of Socialism (in any of it’s guises). Not from any emotional baggage, nor from any preference for one ‘story’ over the other. Certainly not from a love of capitalism and competition (as it is very hard work and uncomfortable to be a successful competitive capitalist – I know, I’ve done it). No, I love the Siren Song of Socialism as much as the next rube. I just recognize that it leads to bad results. Consistently and repeatedly. No matter how diluted and no matter how good the story; “this time is different” never is.

IMHO, this comparison is a reasonable view of just why Central Planning fails. Call it Socialism, or call it “Government Bailout”, or call it “Too Big To Fail”. It all comes down to government picking winners and losers. Governments pick show dogs. Things that look good and with a great story, but sickly inside. Even when they think they are picking a good fighter, it turns into a Bulldog that is dependent on them forever or it will die. Markets pick a mix of wolves, coyotes, foxes, rabbits, beetles (lots of beetles ;-), worms, doves, hawks, fishes, hummingbirds and even the completely unexpected new species that evolves…

There is simply no way for Herr Commissar, or the President, to ever do that. Politics and limited horizons assure it. See Solyndra as an example of government pissing away 1/2 $BILLION on a failed attempt to play Venture Capitalist. Driven by a political motive, it was forced to back the wrong horse (instead of the pack of Chinese Wolves who are eating up the solar panel production market with lower cost of production products…)

The solution is also evidenced in Solyndra. The eventually DID go into bankruptcy. It was politically untenable to keep tossing even more Government Money into that black hole.

So what about the ‘too big to fail’ companies?

My solution would be simple. Make them small enough that they CAN fail. Break them up. You get a government hand-out / bail out as the consequences of a normal bankruptcy would be too disruptive? Fine. But you also get a contract that says you will break up and spin out at least 10 parts, no one of which is larger than 20% of the whole. Just like the AT&T break-up of years past. Break it up and let the parts fight it out in a competitive market. If one of those parts is deemed ‘too big to fail’, repeat. If you need to repeat it a third time, the largest part will be no larger than 1/5 x 1/5 x 1/5 or 1/125 of the original. I can’t think of any industry where that would be ‘too big to fail’…

I suppose you could make it 5 parts and 40%, but then you have 2/5 ^3 or 8/125 as the ‘tell me three times’ end point. I suppose 6% is small enough… but wonder if a first cut to 40% would really be sufficient. At any rate, such a detail could be worked out over time, if needed.

So, for my money, if someone says it’s ‘too big to fail’, then we simply need to make it smaller and turn it loose to compete in the woods… Wolves and all…

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About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
This entry was posted in Economics - Trading - and Money, World Economics and tagged , , , , . Bookmark the permalink.

32 Responses to Too Big To Fail

  1. Kevin B says:

    E.M., while I largely agree with the substance of your post, you have managed to hit my pedantry hot button.

    This is the third time in the past few days I have seen ‘tenant’:
    1.
    a person or group that rents and occupies land, a house, an office, or the like, from another for a period of time; lessee.
    2.
    Law . a person who holds or possesses for a time lands, tenements, or personalty of another, usually for rent.
    3.
    an occupant or inhabitant of any place.
    verb (used with object)
    4.
    to hold or occupy as a tenant; dwell in; inhabit.

    used instead of:

    ten·et

    noun
    any opinion, principle, doctrine, dogma, etc., especially one held as true by members of a profession, group, or movement.

    Sadly, this has overflowed my ‘suck it up and move on, it’s only a minor mistake’ quotient for the week and I feel compelled to comment on it.

    I feel sure that you or your commenters will find many examples of Muphry’s Law in this comment, but there you go.

    As to your idea to break up TBTF entities, how on earth would the political class extort money out of them if they couldn’t promise to prop them up with taxpayer’s money?

  2. oldtimer says:

    What you say is very true of experience in the UK where I live and have worked. Governments unfailingly get it wrong. In the 60s and 70s the prevailing group think was that big is better. It did not turn out that way. In the recent financial crisis, the government succeeded in ruining an apparently viable bank (Lloyds) by encouraging and facilitating it to take over two failed financial institutions (HBOS and Northern Rock). The taxpayers, as well as Lloyds shareholders, have taken the hit; they will not see their money back. The same disaster is now being played out on a European scale over the sovereign debt of greece, presumably to be followed by one or more of the other PIIGS as markets test this latest wheeze to destruction.

    In some, though not all, instances baleful shop steward/Trade Union influence was significant in the decline – often by use of the strike weapon. This usually turns out to be a self destruct weapon for its practitioners. It took a decade or two for the message to sink in.

  3. PhilJourdan says:

    There is nothing here that I can find to disagree with. I think you laid it out very well, and hit the major points. An easy and enjoyable read!

    But one example you left out (only because I went to school next to one of its major centers) was NCR. Like the old swiss watches, they failed to adapt to the new paradigm of cash registers. AT&T bought them out eventually, but how many AT&T cash registers do you see? versus how many Dell, HP, and other assorted stripped down computers that are now cash registers?

  4. E.M.Smith says:

    @Oldtimer:

    Nice examples. Yes, The UK has embraced the paradigm for a while now. And where has it taken the Empire? ….

    @PhilJourdan:

    Another nice example. Would NCR have ever come up with those little ‘wipe your card to charge’ not quite a cash register? Apparently not…

    My grandfather made nails and horseshoes for a living. My Dad ran a restaurant and then sold real estate (and had a ‘toy farm’). I’ve done ‘computer stuff’ and am now ‘in transition’. To what? Only time, and markets, will tell.

    No Central Planner could tell a practicing farmer / Smith that his grandson would be a Unix Computer Geek, or spend time posting on the internet… Nor even tell my father that the future of sales would be electronic. He used a Polaroid Camera to make pictures of homes to show clients. And where is Polaroid today? Trying to adapt and survive, but nowhere near the darling it once was: http://www.polaroid.com/en/products

    And Eastman Kodak is rumored to be near bankruptcy. Wonder if the world would be a better place if Herr Commissar mandated that we all had to keep using film cameras to support those many jobs…. (Sidebar: For those of us who have nostalgia for B&W chemical film and printing, the films still available come from the UK and ex Soviet Union in large part. Socialism is nice for nostalgia and ‘hanger ons’, but not so good for creating the future… Still, I’m glad someone is still making film as ‘the big boys’ die out.)

  5. Gary says:

    The only real business of governments should be to prevent everybody from cheating on the commonly agreed upon rules of business. But that’s boring and when you have the guns it’s so much more fun to push your own political agenda. You feel like you’ve accomplished something or failed in a noble cause at least. Being the disciplinarian at the nursery school is tedious and doesn’t pay very well. Until government does only what it should do, the people will continue to suffer more than nature dishes out.

    Right… we’re doomed.

  6. PhilJourdan says:

    @E.M. – Good example with Kodak. As the entire company is in trouble, parts are very profitable and can be saved – but only by selling them or through bankruptcy. For large companies, Kodak still has some of the best copiers. But no one should be forced to buy film or film cameras (although they have shed most of that. I understand they no longer produce 35mm film).

  7. tckev says:

    Hallelujah! Well said.
    If only the governments in the west would get the message – leave business to itself and govern by maintaining the rules to keep all parts of the marketplaces healthy.

    Instead we have the madness of governments everywhere using public money to “save” banks, paid for by issuing more government debt bonds that the banks have to buy. This surely is the very definition of a viscous circle, as government debt rises, interest rates fall and the inefficiencies of the banking system are maintained.

  8. R. de Haan says:

    Very nice article.
    It should be forbidden for Governments to meddle with the economy. Period.

    Competition without a level playing field isn’t competition at all.

    In Europe for example private companies become tax rebates depending on turnover.

    If anyone wonders why there isn’t much appetite among entrepreneurs to start their own company this is one of the reasons.

    In the USA today there is a similar “discrimination by size” that pulls the plug on private initiatives.

    But it comes even worse.

    Today every job, from truck driver to cook has become subject to loads of regulations, paperwork and a relentless control system that makes them subject to huge fines.

    A truck driver today underway on Europe’s roads is treated like a criminal by the authorities.

    As a result we see a massive outflow of our most talented and most motivated people.

    In fact we see the collapse of the entire Middle Class.

    What we need is a total reset of the Federal Government and it’s policies.

    And this reset has to come as quickly as possible.

    And one thing is for sure.
    The OWS protesters are not going to bring it.

    Their attack on capitalism and their demand for 1 billion US dollars for environmental justice (whatever that means) will push us in the wrong direction.

  9. R. de Haan says:

    I really think “to big to fail” only goes for financial institutions posing a systemic risk in case of a bankruptcy.
    Splitting them up is a very good solution.

    A company like GM however I.M.O. could go bankrupt without any problem.

    The market would take over the healthy parts and most of the working force would be back on the job within months.

    What we desperately need is a retreat from government setting ever higher cafe standards for fuel use driven by the CO2/climate change scam and the peak oil scam.

    It is a bloody shame that the production of a car like the Hummer has been shelved even when a Chinese company was in the market to take over the production tools only because the Chinese government was pressured not to grant a manufacturing permit based on false environmental pressures.

    As long as we have to deal with these kind of false morals the prospects of our entire economy is at risk.

  10. R. de Haan says:

    Just imagine OWS becomes “to big to fail”. The horror.
    http://www.nationalreview.com/articles/280173/crisis-decadence-mark-steyn

  11. Libertarian says:

    OK Chiefio, your post and the commenters agreeing with it wont change anything. Things are bad and probably will get worse. What I would like to see from you is guidance how your insight and wisdom can be turned into income right now. (I used to have some GM stock and sold it years ago, anybody who hung on after the rise of the VW and who had business contact with GM management was proving the triumph of hope over experience). Please point us towards the safest way thorugh those terrible mountains ahead.

  12. pyromancer76 says:

    Fine essay. The thrill of the ride for free marketers (marketeers?) in 19th Century U.S. is something to behold. In my economic history, most of the business cycle meltdowns were due to the winners getting greedy and trying to “hide their decline” by lying about profits, debt, etc. and buying every government favor they could until the fall. The eventual transparency usually cleaned out the mess. And those hungry to have a go at the “race” were waiting in the wings. My history suggests that people often went through nine failures before the tenth was successful — and often amazingly so. There also were the consistent failures that relatives had to look out for.

    I hope our current politics — tea party awakening in its generic sense — are about to do some monstrous housecleaning and unleash that pent-up entrepreneurialism — and admiring devoted workers. Those who must go: 1) the socialists (and radical marxists) who have taken over the Democratic party and the statist fellow travelers of the Repubs; 2) the bureaucrats/lawyers/lobbyists who are trying to suck up and scoop out all the remainder (there ain’t much) of the affluence/savings of the last three generations — especially those cushy pensions and cap-n-trade/regulations which were their tickets to eternal prosperity; and 3) those financial types who think they can sell and trade debt as equity as long no one will look at the books.

    Keep us posted. Glad there is more activity on chiefio.com.

  13. adolfogiurfa says:

    @Dear E.M. So….it was not a giant meteorite that killed dinosaurs, they died because of a “change in the market” (gravity): they would no longer support their own weight. Small mammals managed to survived. ….thus, it´s just a matter of wait and see.
    BTW, more than 45% of Peru´s GDP is from small and micro enterprises, which were founded by unemployed dismissed from the civil service: They were not helped by any social program so they were oblige either to survive or die. The great majority not only survived but created a robust economy.
    This shows once more that we should not overprotect our children. The “struggle for life” is the evolution law. Usually good hearted people are inclined to favour socialism, but that is a big mistake.

  14. E.M.Smith says:

    @Keven B.:

    Ok, just for you, I’ve “fixed it”.

    As a ‘defense’ of those of use less afflicted with pedantry than others:

    Please note that in the past languages were all spelled as the person heard things. Over time, some words have their sounds shift. Over long periods of time, German turned into English. In a very real sense, you are attempting to freeze evolution at a moment in time. It can’t work, and it isn’t even very useful.

    So I’ve been in The South for a while, and hanging out with some folks who’s diction is not exactly the best. One says “mute point” instead of “moot point”. We’ve also got behavior instead of behaviour and the folks here don’t pronounce Mod any different from Maud. So I’ve soaked up some local sound qualities, and with that comes variant spelling. (It doesn’t help that my hearing is damaged, so sometimes I don’t even hear the words the same any more).

    When 90% of the people can’t tell you the difference between affect and effect, is it really valid anymore? When ‘whom’ is substantially never used anymore, does it matter who says it to who? To tenet and tenant on on their way to forming a new homonym: Oh Well. Like peas becoming a plural of pea (when it originally was singular too… yes, “One Peas’ was the correct form…) and like an apron being formed from a naperon (yes, it really was). Things Change.

    Some folks are bothered by this. Others, not so much…

    But, just for you, I’ll join the ‘stop the change’ side on this one. Just this once ;-)

    Otherwise your gonna wanna bust a gusset… ;-)

  15. E.M.Smith says:

    @Libertarian:

    Well, I do that regularly (or semi-regularly) in the Wall Street Week postings. Some time ago I said “go to cash” and that’s been pretty good for many months now. I called the silver bubble and stepped out of gold (a bit early, but one of my mantras is ‘late in, early out’). We were in Brazil for a long run up, and stepped out at just about exactly the top.

    So it’s not exactly like I’ve not been giving some OK guidance along the way.

    For now we’re still in a ‘be in cash and / or bonds’ mode.

    Yes, it can take a while for things to change enough to be worth changing the best position to take. I also have to cut a fine line between traders (who could play a one month run up like we’ve had lately) and investors (who would be killed trying to time that trade). So what I say has to be ‘slowed down’ a bit and risky things (like trade long for a short swing) typically omitted or stated only as a “I’m going to do this and it’s risky”.

    So there will be another WSW posting soon enough. For now, other than folks swing trading the week scale ‘ripple’ it’s best just to sit in cash and wait. Same thing I said some weeks and months ago. Were there trades you could make in between that could make a lot of money? You bet! But you can’t have week or month time scale postings about day trades or less than a week swing trades. For those you can only ‘show how’ and let a person do their own. I’ve ‘shown how’ from time to time, and will ‘show how’ again. But I can’t post “Short Copper Now” and leave that laying out there without folks knowing how to read the charts to know when to exit that trade. If the short only lasts a week, and I’m posting comments on it once every 2 weeks, someone could get significantly damaged. So best I can do is attempt to teach how to read the charts and show examples trades I’m doing ‘for educational purposes only’.

    THE basic fact of life about investment and trade vehicles is that ‘no tree grows to the sky’. Everything has a time and a season. So ‘what works’ will constantly change. You can’t just say “buy this” and be safe, or done. You must say “this is working now and here is how to know when it stops working and you ought to exit”. What is ‘working now’ is defensive positions in cash and bonds along with some individual stock trades. I try to avoid recommending individual stocks as it’s a hard game to play and folks want to take it to mean ‘buy and hold’ when it is NEVER buy and hold, it’s only ‘hold until it stops going up’. When price violates the moving average stack and returns from below, failing to penetrate back to a new run.

    So where can you run to escape Sovereign Risk and Socialism? It’s an ever shrinking universe. For a while metals were a haven. Then they went bubbly and it was time to leave. (For a while…)

    As soon as the ‘flight to safety’ ends and The Fed is willing to stop their very loose monetary policy, bonds will no longer be safe (as they were not when the stock recovery was underway). The Swiss Franc was a great haven For A While (and I called it as such) but also said their central bank was likely to try to weaken the Franc just about the time they started to do the same, and it began to tank. The Japanese Yen is still pretty good, but the run from Euro has largely been into the US Dollar, so weakened the Yen advantage.

    ALL things are just For A While.

    So I can’t tell you “Go This Way”. I can only say “Here is how to see the way” and “this is the path For This Moment”.

    For now, it’s to avoid the Euro Zone and any country headed toward more socialism instead of less. As the US Congress is now in a deadlock state, we’re no longer changing toward more socialism. That makes our cash ‘safe’ compared to other countries For The Moment. Brazil got crushed, and their stock market is way down. Lately their currency has been rising vs the US Dollar. They are more socialist than we are, but are (perhaps?) not increasing their degree. I suspect it is the Chinese dumping USD to buy Brazilian real assets causing the rise, but For The Moment, BZF is a reasonable currency to be in.

    But, you see, the ‘correct answer’ is a constantly changing target. You must assess the first derivative of socialism for each target country. (It is the rate of change, not the absolute value, that changes risk; and if point in time risk is already priced in, it is only the rate of change of risk that changes the value…) Though within any degree of change, the lesser socialist player will have greater opportunities for stock market growth… As social cycles turn, the best place to preserve wealth turns too… For a while, it was China. Now (actually, as of a year or so back) that’s ended.

    Where will the wealth creation move next? Nobody knows. That’s why “sit in cash and wait’ is still the dominant theme. The exceptions are a few Momentum Stocks. I’ve delayed making a ‘momentum stock’ mo-mo posting as the market in general rolled down (and it’s hard for even strong momentum stocks to hold up against a falling market trend). Another exception has been some of the Master Limited Partnerships with very high dividends. I’ve posted on some of them a while back, but not in depth. I’ll likely do more on them soon (but even they tend to drop in falling markets). So why take on that general market risk now?

    In essence, there are times when ‘the minimal loss at the lowest risk’ is as good as it gets. Recently has been one of those times. It’s hard to sit on your hands and ‘do nothing’; but sometimes that all you can do. Refinance the house to take advantage of the low interest rates and sit on cash in the safest governments you can find. As other trends develop, I’ll holler.

    FWIW, when the next long term ‘secular’ trend begins, it is likely to last for many years; so waiting a few months for it is not a big loss.

    Hope that helps…

  16. P.G. Sharrow says:

    I my opinion, persision is spellin is gratey over rated. ;-q pg

  17. George Bush and his crony capitalism have been taken even further by the current administration so the loony left (.g. Occupy Wall Street) can claim that Capitalism needs to be torn down. The Republican establishment is no better than the Obamacrats.

    Lord save us from the likes of Eric Cantor and his “Income Mobility”.
    http://dailycaller.com/2011/10/17/limbaugh-scolds-cantor-for-accepting-premise-of-occupy-protests/

    Bailouts and subsidies are the kiss of death for wealth producing activities. They eliminate the main virtue of capitalism which is the “Market Test” that decides who shall survive and who shall fail. Peter Drucker in several of his books and particularly “Management” explains this better than anyone.

    Two weeks ago I visited a US manufacturer of solar panels that is expanding rapidly in the same market that killed Solyndra. What is the secret of their success? They did not get a penny in government subsidies so they had to create a business plan that attracted private investors.

    Real capitalism creates jobs, capital and prosperity; crony capitalism kills jobs, wastes resources and generates an endless string of scandals.

  18. adolfogiurfa says:

    @gallopingcamel: There was, some time ago, a “nano bubble”, as a product, also, of government meddling in private affairs: The “nanotechnology bill” had among its effects that several companies were founded to profit from this “business”. As I had discovered the way for producing copper (and other metal) nanoparticles, it happend that one company in the USA, bought 10 kgs. of my product…but that was all what they needed. They took these 10 kilos, arranged them in beautiful flasks and made also a well designed webpage and began raising money from the market. Of course it does not exist anymore….
    On the contrary, all successful enterprises commonly begin as a consequence of individual effort and personal ingenuity. An infinitely addition of zeros does not make a one.

  19. TIM CLARK says:

    Although I don’t agree with you always, on this I do. They did it to AT&T, (with good results IMHO) they should do it to banks, investment houses, insurance, etc……………

  20. tonyb says:

    Hi EMS

    I saw your comment on the Eurozone. As someone who thought it was a completely stupid idea 10 years ago I have a certain sense of smugness coupled with a considerable concern of the outcome of the dithering by Europe’s leaders.

    The second best thing would be to let Greece default and leave the Eurozone and let their new currency find its own level. That would probably cause a few other dominoes to fall. The BEST thing would be to let Germany leave and form a strong group of Northern countries with the new euro and let the remainder have a much weaker southern Euro group. I wondered if from the perspective of the US you had any thoughts on the likely outcome

    Tonyb

  21. E.M.Smith says:

    Well, from the perspective of the USA, for almost everyone here they have no idea what a Euro is other than they could guess it has something to do with folks in another land or country or somewhere. Unless it’s slang for some new drink… or maybe a new car… ;-)

    But, for the small percentage of us who do know there are other countries with currencies, and for the smaller group who know there are some currencies shared by countries, and inside that, from the very small set who have a clue about what that implies:

    It was pretty well given from the start that one of two things had to happen:

    1) Germany and N. Europe had to accept a southern attitude toward inflation and hiding debt by inflating it away. Or…

    2) Southern Europe had to develop German Discipline.

    XOR

    3) The whole thing would last a while, then break up.

    IMHO, we’re headed for #3, but not until the maximum possible damage from dithering has been done. Politicians never fix something before the damage is done if they can let it completely collapse, take all possible damage, and when the fix no longer matters, then they can take action (as, by then, nobody cares any longer and if it fails, well, it was already broken so they don’t get much added blame…)

    SO I think we’re headed for #3. It will take bleeding Germany and maybe some of France to the point they can no longer stand it, but don’t expect Italy and Greece to put up with not spending ALL of someone else’s money they can get.

    Personally, I think a mixed nations currency can work if, as suggested, it’s of ‘like minded economies / cultures’. So just have a Euro with Italy, Greece, Spain, Portugal, etc in it and a Mark with Germany, Denmark, etc. in it. That would likely work out OK. Britain could use both ;-)

  22. adolfogiurfa says:

    Predators, among Dinosaurs, were the first ones to disappear :-)

  23. adolfogiurfa says:

    This is really funny: New research suggests two-legged predatory dinosaurs would have ended up only eating plants.

  24. tonyb says:

    EMS

    I agree that we’re heading for scenario 3 but due to the arrogance and pride of politicians they will spend any amount of our money in order to prevent it and shore up their belief in the desirability of the currency.

    There are many parallels with CAGW in as much our govts our spending billions in order to try to prevrent the smallest of temperature increases. Do those in the US realise the size of the Euro economies-as large as Americas-and the potential for disaster in the world economy
    Tonyb

  25. adolfogiurfa says:

    @tonyb: Really you are underwater and you don´t feel it like it would if you were not paying your debts by just printing money. The local currency in my country, in spite of the fact that to avoid overvalue it (or really to avoid it reaching its real value against the dollar) it has “overvalued” by almost 25%. This means that in round figures the dollar currency has devaluated in about 30% or perhaps 40%.
    To fix the world economy you (and Europe) would have to endure inflation and poverty for a while, and just for a time, one year or two, until prices in the economy reach real levels……or China, one day or the other will make a sudden and surprising move…

  26. tonyb says:

    Adolfo

    one of the big problems is indeed China. The west has transfered its manufacturing economy there. Then it has spent money to buy the good back. Then China has not recycled the money we have paid to them, but has either saved it, spent it internally or is lending it back to us. There is a huge imbalance in money flow because of that which hasn’t been helped by the West living beyond its means for at least a decade, suported by easy money and expensive credit cards.
    tonyb

  27. E.M.Smith says:

    @TonyB and Adolfo:

    IMHO, the China issue will be ‘resolved’ by our present ‘race to the bottom’ on currency forcing China to either dump the debt (i.e. recycle the cash) or have the value inflated away anyway.

    The “short form” is that manufacturers moved the factories to China and screwed over non-China labor. Now, after borrowing to buy the Chinese stuff for a decade+, the credit cards are full and labor can not buy more. At this point the China bankers and factories are faced with a bankrupt customer base. One way or another the debt has to evaporate or the currencies shift such that the Euro-American labor again has a job.

    Chinese mercantilism is not letting the currency adjust at any reasonable rate.
    Euro Socialism is not letting the debt evaporate and have the credit cards cut up (just moving it to ever more wealthy creditors).

    The game ends when either there are no more pockets for the Euro Socialism to exploit for “Other Peoples Money” and the debt bomb explodes or … A trade war with China happens (winner TBD…)

    Greece and Italy are on the front line of this. Ireland and Spain just behind. USA, as usual, standing in ‘reserve’ until the war is well underway…

    So watch for a Euro Crisis and / or a USA Trade war as modestly likely. BUT, only after all possible continued ‘bail outs with other peoples money’ have been done. (And I’d not be surprised if a sudden significant war broke out somewhere in the middle east to Pakistan just to put an ’emergency’ face on the default / trade war / devaluation…)

    IMHO, of course.

  28. Jason Calley says:

    @ E.M. “IMHO, we’re headed for #3, but not until the maximum possible damage from dithering has been done. Politicians never fix something before the damage is done if they can let it completely collapse, take all possible damage, and when the fix no longer matters, then they can take action (as, by then, nobody cares any longer and if it fails, well, it was already broken so they don’t get much added blame…)

    I think that what you say is correct… but the question is WHY are you right? Allow me to philosophize for a moment. Also, note that below, when I say “politician,” I include within that group all who use political means (i.e., government sanctioned coercion and violence) to reach their goals. In this sense, the CEO who pays Congress to pass favorable legislation to stop his competitors, is a politician, even if not elected.

    The most pervasive and damaging meme in modern cultures today is the fantastical notion that politicians are some sort of governmental doctors. People imagine that the proper role of a politician is to research and analyze a nation and to work toward curing its various social, cultural, existential and fiscal woes. No. Not even maybe, certainly not at any level higher than local waterworks. Seriously, ignore everything they say and only look at what they actually do; it becomes clear what their role is. Look at history.

    The truth is, politicians are parasites, or maybe more kindly, they are farmers and ranchers. They harvest the wealth and labor of nations the same way that a rancher raises cattle, a farmer harvests a field of grain, or a woodsman tends a forest prior to logging. The brilliance of a fiat monetary system is that it automates the harvesting process. No toiling with gangs of collectors sent all over the land to threaten the peasants into giving up their goods! Just punch some computer keys and the wealth is yours, instantly! The nations of the E.U., and the U.S. have spent the last few decades being fattened in the feed lot of third world cheap imports, and the time for harvest is here. The systemic problems we are experiencing will not be solved, for the same reason that the stalks of corn in the path of the combine will not convince the driver to turn aside and steer back to the barn. With a little luck, the farmer will at least let these fields lie fallow a while and regain some fertility while he farms some other property — that other property being somewhere across the ocean from California.

    By the way, don’t think I am pessimistic. The current unpleasantness won’t last forever, and long term, large scale, the human race is in an extraordinary time!

  29. Pascvaks says:

    @Jason Calley

    ..”By the way, don’t think I am pessimistic. The current unpleasantness won’t last forever, and long term, large scale, the human race is in an extraordinary time!”

    Jason, I think you you could have said that about any point in time during the last 6 million years;-)
    ———–

    About “Too Big To Fail”, when I first saw the title I thought we’d moved on from production, industry, high finance, and higher education to gobblement. I agree with everything said here about these small change things and really think it applies to the Big Boys on the Planet too. The problem I see is that while politicians are the dumbest turkeys on the Farm, the real turkey-of-all-turkeys are John and Jane Farmer (aka -Voters and Taxpayers Anoniemusses) who have really gotten addicted to the opium of “Social Welfare” and have no clue whatsoever about anything except the present and where their next e-joint is coming from, dear old Uncle Sugar.

    Oh well, like you said Chiefio, when things get really complicated there’s always the Solution of Last Resort. What number are we up to? WWI, WWII.. That’s it! WWIII. It’s easier to fight someone else than deal with each other fixing a ginormous, old, crumbly, leaky house of cards and the EPA, and the Impact Statements, and the lawyers, and the courts, and the flakes from either major party, and some wizbang president who want’s to ride a bus all day, and they’re just the turkeys at the federal level. Remember the Maine!

  30. E.M.Smith says:

    @Jason Calley:

    I’d add one tiny ‘finesse’ to your analysis of the impact of inflating fiat money:

    It is automatic debt forgiveness AND it only hits the holders of money assets.

    Perfect too for the typical “progressive” goal of ‘tax the rich’ and ‘debt jubilee’. Folks who have no cash have their wages temporarily reduced in buying power, but markets eventually correct for that. Folks who own real property, like land, are not hurt. But the banker or ‘wealthy’ person who owns the mortgage DOES get hurt while the debtor is rewarded. (All while the government take in real terms holds constant as they inflation adjust property tax via ‘reassessments’…) The asymmetry of it is not to be ignored. As a peasant worker, I don’t care what my ‘cash holdings’ are worth tomorrow as I don’t have any. I very much DO care that my home increase in ‘value’ that I own vs the ‘value’ I have to pay back to the note holder… I’m all for having my ‘debt burden’ reduced in real terms.

    So now the ‘debt holder’ is China and we’ve got too much mortgage and not enough retained worth. Easy to fix… inflate away the mortgages and increase the percentage of tangible value that is retained worth. That, in the end, is how the “toxic mortgages” will be fixed (and all the other mortgages too). But the dance will take a couple of decades to play out and will have a lot of quirks along the way. Can’t let the mortgage holders catch on before you’ve done the deed… So, for now, it’s OK to hold USD, but not Euro. Next month? Well, they may swap. 10 years from now? BOTH will have inflated vs real wealth… if the Euro still exists at all.

    Along the way all the PIIGS and US Credit Card and US National Debt will continue to spend all they can (though less now than it was once as our collective ability to borrow is squeezed…) and continue to live beyond other peoples means…

    @Pascvaks:

    The bit I really do worry about is the extraordinary population growth rate in Muslim countries. They are deliberately trying to win via the womb (especially against Israel) and reach over 50% in democracies so they can vote in Sharia. The problem is that in places like Egypt and Yemen and Saudi Arabia: They are surviving not via innate production but via money from outside their country. Egypt via tourism and exports (both threatened by instability), Yemen via wealth transfers from oil states, and Saudi (and Iran and Iraq and…) via massive oil dollar inflows.

    What happens when the oil dollars (and Euros) stop and the accumulated wealth evaporates? What happens when the Saudi Royal Family can not provide a nice ‘living wage’ to all the idle young men with wives, kids, and no job? What happens when the $1 Billion / year in ‘foreign aid’ the USA sends to Egypt is not enough to keep the government ‘bought off’?

    I expect that the “Arab Spring” was only the appetizer..

    When “things do not improve”, a very cranky and over populated Muslim World will want someone to blame, and they simply can not find it in themselves to blame themselves…

  31. Pascvaks says:

    One tiny planet of many, many worlds, all too big to fail. A lot more “Solutions of Last Resort” await the dawn. I have a feeling the next 6 million years are going to be as productive and pleasent as the last 6 million.

  32. Jason Calley says:

    @ Pascvaks
    Jason, I think you you could have said that about any point in time during the last 6 million years;-)

    Yes, but some times are more crucial than others. I am convinced that the current explosion and decentralization of information — due to the growth of digital information technology — marks a shift at least as great as Gutenberg’s time. Scary? Painful? Yes; but so is childbirth! :)

    @ E.M. You make good points about wage creep and taxation shifts that affect the common person during times of inflation. On the other hand, (and I have learned the dangers of disagreeing with you and your Wondrous and Awful Insight! You are not merely a regular genius… :) ,) uh, where was I? Oh yeah, on the other hand, I think that the situation about debt forgiveness and the loss of value involved to loan and mortgage holding banks, is not so bad as you say. In its simplest form, imagine that I have a system (let’s call it Central Banking, plus Fiat Money, plus Fractional Reserve Banking) that allows me to essentially create money out of thin air, but only if I use the new money as a loan to some poor schmo who is not a member of The System. Even if the value of the money drops by half over a decade, I still come out ahead. I have harvested points, fees, and years of interest from a loan of — what? — a loan of nothing, as far as my capital is concerned. The fact that I still get back only half of what I loaned out is a small price since I made the money originally by a simple computer entry. Granted, Mr. Schmo is paying back in devalued dollars as the loan progresses, but I, as a banker, am always ahead of the devaluation curve. Also, if Mr. Schmo defaults and I repossess his house, I get a physical asset that is likely worth more than the existing principle of the loan.

    As for how the current system will unwind the inflation, the mortgages and loans, the bonds, and the HUGE derivative market, who knows? One thing I think though, is that there is not a fair or painless way to do so. SOMEONE(S) is going to be crushed when the walls tumble down. There is no good way to kick an addiction, especially an addiction that is such a wonderful source of money and power to the people who run the system.

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