Thursday, October 30, 2008

Why I am voting against John McCain

The nature of our political system most often leads me to vote against someone, rather than for someone. In other words, I generally find the quality of the two major candidates to be so low, that I just try to elect the least bad candidate. This year's presidential election is perhaps a bit different. It is normal in the fact that we have an incredibly horrifying Republican candidate. So, here are my reasons for voting against McCain:

  1. Privilege. John McCain is the son of an admiral who was the son of an admiral. Despite poor academic performance, nepotism got him into the Naval Academy. He then proceeded to nearly get kicked out and was saved only by his family connections. He ultimately graduated 884th out of 889 in his class. Normally, such a poor performance in the Naval Academy would get you posted as XO to the nastiest Marine Corps company that could be found. John McCain got a glory posting, becoming a fighter pilot. Once he was a pilot, he had at least two incidents whose consequences would normally get you banned from flying if not kicked out of the service entirely. His last name kept that from happening. After his time as a POW, McCain went on to marry an heiress young enough to be his daughter. The only private sector job he has ever had was with his father-in-law, a rich beer distributor who was also a convicted felon. To put it simply, McCain is not where he is because of his own virtue or hard work. His position is predicated mostly on the parentage of both him and his wife. Being born to successful parents does not disqualify one. However, McCain has never displayed that he was indeed worthy of the societal position he inherited. In fact, he has, throughout his life, shown that he takes that position for granted. I cannot vote for a man who attains his position through privilege, and by his actions, shows that he is unworthy of such position. He's been an average Senator at best. He's been very good at getting good press, though.
  2. Intelligence. John McCain has displayed very little of it. Issues of even moderate complexity befuddle him. He seems to honestly believe that Fannie Mae and Freddie Mac are the cause of the current financial crisis. His plan to purchase mortgages at face value is pure idiocy. His response to the Georgia-Russia conflict showed a complete lack of understanding or curiosity about what was actually happening. His belief that he can continually belittle Russia and still have cordial relations with its leaders is another idiocy. To put it simply, the man just does not have the necessary horsepower between the ears to be president.
  3. Judgment. His choice of Sarah Palin for his running mate showed terrible judgment. Only the most cursory vetting was done. The choice seems to have been based on pure impulse and id. A simple Google search would have picked up her ethics problems and complete lack of substance. Similarly, his behavior during the Georgia-Russia conflict was provocative and unproductive. Much of the blame for the conflict should rightfully be placed on the Georgian president, but McCain has acted as if the man is a modern day Washington, Jefferson and Hamilton combined. The final example I will list is his behavior when Congress was negotiating the financial bailout. He suspended his campaign in a great show and then gummed up a process that was close to agreement. It's already well-established that he does not even understand the issues in play. A person with good judgment would have taken a secondary role with the understanding that leadership often occurs out of sight.
  4. Temperament. John McCain has consistently shown that he is of inconsistent temperament who is quick to anger. No one will ever describe him as graceful. In fact, it's been made abundantly clear, that when the pressure is on, he loses his cool. His suspension of his campaign to go to Washington is a great example. So, the pressure is on for the presidential candidates to show some leadership. What does McCain do? He acts like a drama queen, parachutes into Washington and then makes things worse. He made it abundantly clear that he was going to claim credit for anything that was passed. That's not leadership. Another example is his behavior in the first debate. McCain would not look at Obama. His body language made it clear that he was uncomfortable in Obama's presence. His performance was erratic. There are lots of words to describe him that night and the nicest one is "rattled." If he's rattled by Obama at a debate, how's he going to behave with Putin or Hu in negotiations over sensitive issues? Furthermore, the man is terribly inconsistent. Now he would veto spending bills he actually voted for. He can't even stick to a line of attack on Obama. Even without discussing his anger issues, the man is temperamentally unsuited for any position with executive responsibilities.
  5. Character. The man is an admitted adulterer who married a woman young enough to be his daughter before the ink on his divorce was even dry. He has called his wife a "cunt" in front of reporters. He told a horrible joke about Chelsea Clinton in front of reporters and fundraisers when Chelsea Clinton was still a teenager in the White House. (Here it is: Why is Chelsea Clinton so ugly? Because Janet Reno is her father.) In his campaign, he has aired ads that contain absolute lies about Obama (sex education for kindergarteners? not even close to the truth.) To put is simply, if you judge the man by his actions and not the image he has cultivated, he is a man who few of us would tolerate.
  6. We cannot afford him. We've had eight years of an underachieving, unintelligent member of a prominent family in the White House. We now have record deficits, two wars that are not going well, what looks like the deepest recession in several generations, infrastructure in desperate need of care and a society where too many people have abandoned the basic value of civility. If McCain were the latest genius from a brilliant family, that would be one thing. Instead, he's a person of mediocre talent who has gotten by on pure nepotism. The White House needs to be earned.
  7. I'm tired of unnecessary wars. We have one right now in Iraq. I don't want another one in Iran and I certainly do not want one right next to Russia. McCain seems to almost relish the idea of goading Russia and Iran into a shooting war.
  8. Maverick. The idea of a "maverick" running things is just stupid. In a deliberative body without executive responsibilities, a few mavericks are useful. They help guard against groupthink. In an executive position, though, you want the smart, thoughtful guy. Anyway, calling John McCain a maverick is giving him too much credit.
These are all reasons to vote against McCain irrespective of who his opponent is. I often joke that elections are about picking the tallest midget. In John McCain, we have an angry dwarf.

Monday, October 27, 2008

Emerging Market Chaos shows problems are not just from American mortgages

Go listen to the Giant Pool of Money again.

There has been an excess of leverage in almost every sector of the global economy. Deleveraging will be painful and after an initial deflation risk, central bankers will likely try to inflate the economy out of the crisis. Yes, inflation is coming. Probably not too bad, but three years of inflation at 5-6% in the United States would not surprise me.

Some countries are in trouble because, even though they have accumulated currency reserves, their private sectors borrowed in dollars. They borrowed in dollars because interest rates were low and in recent times, the dollar was weakening. This was very successful in recent times as the dollar was weak and emerging market firms had access to very cheap capital.

Now, the world's risk appetite has collapsed -- so emerging market currencies are crashing and that cheap capital is now extremely expensive in local currencies. The government can try to defend their currencies by selling dollars, but their power to do this is dictated by the amount of reserves they hold. So, China, with about a year's GDP of dollars, can fully defend their currency (yes, I know the RMB does not float, a fact that depends on China's reserves.) Other countries are much less able to.

The difference with 1997 is that these economies cannot export their way out of the mess. The developed economies are in recession. So, emerging economies are going to have to develop local demand. That's going to be hard.

Friday, October 10, 2008

You should be buying into the market right now

If you have a time horizon beyond like five years, you should be buying into the market right now.

First of all, there are two ways companies return earnings to shareholders, stock buy-backs and dividends. From an academic, non-behavioral point of view, they are the same. However, in bull markets, buybacks help the stock price more and in bear markets, dividends help more. That's tangential to the current argument, though. The main point is that some stocks pay dividends and any type of fund that holds them passes on those dividends. So, at any time, most every fund that holds stocks will throw off some income.

For a variety of reasons, companies are loathe to reduce their dividends. You want to really signal to the market that things are bad for your company? Reduce your dividend.

So, with the stock markets in open panic, your going to buy a pretty nice dividend yield. The yield on the S&P 500 was 2.38% on September 30. The market's declined something like 30% since then, so dividend yields are probably well over 3.0%. Furthermore, many companies that pay dividends are "safe" havens -- their financial performance is fairly constant across all economic environments. What I'm getting at is that in a panicky market, dividends are going to decline at a much slower rate than equity prices. Buying at just about any time during the panic will get you a decent dividend yield.

Let's say we find a bottom at a 50% market decline. Recovering all those losses in five years requires ~14% growth each year, right around historical norms (returns are geometric, not linear.) Let's be conservative and say you get 8.5%. Add in your 3% dividend yield. You've got 11.5% appreciation. Actually, if you reinvest the dividends, it's even better. The math is kind of complicated and path-dependent, so I'm going to leave that alone right now, though.

What if you time the bottom wrong? Let's say you get in at a 30% decline. With the 8.5% return, you're looking at about 1.5 years more to get your price back. Your dividend yield will be a few basis points lower. You still get double digit returns. You should still buy.

THIS IS THE BUYING OPPORTUNITY OF A LIFETIME! You can try to time the bottom, but it's already sweet enough for me.

Monday, October 6, 2008

Music was way awesome on Today's Marketplace

"Everything Counts" by Depeche Mode
"Where is my Mind?" by the Pixies

The news was horrible, but at least the musical clips were awesome.

Financial Crisis -- What's happening

On my MBA alumni mail lists, a lot of commentary is floating around. As it's a semi-public forum, the people who are angriest are talking a lot more. This is unfortunate, because the most angry seem to be the least knowledgeable about what's going on.

I don't feel like teaching a basic economics class, but suffice it to say that a modern economy is very dependent on credit being extended at a variety of durations. We extend credit to financial institutions by stashing our cash there and getting some interest back. They extend credit it others in much the same way.

For a business, matching cash inflows with outflows is a fundamental act. Now, when you sell something, you're usually not going to be paid until after you deliver it. However, you're going to start incurring costs much sooner than you're paid. Nearly every business has to pay at least some of its bills before it is paid. Those that don't are the subject of much admiration in MBA classes. Aside from that, short term credit is necessary for a functioning economy. We could insist that everyone hold enough cash to cover all their bills before they commit to a sale. That sounds good, but is impractical. We would seriously limit the capacity of the economy and if you think about it, this mode just does not make sense. Let's say a guy convinces everyone on a block to pay him to do their lawns. Wouldn't it be better if he could then go borrow money to buy the equipment? Oh, we could make him wait until he had enough money to buy the equipment outright. Then his boss can keep charging us more to do our lawns and pay the guy so little that he never can go into business for himself. Hopefully, now you're getting the idea.

The short term credit markets right now are frozen. The commercial paper market is basically non-existent right now. Commercial paper are short term notes that large, very stable companies issue. They have generally been considered so safe that you can account for them the same as cash. Companies need to issue commercial paper to finance their day-to-day operations. These are companies that are very solvent, but they use short term debt to enhance their liquidity. Thus, they can extend their decision horizon on how best to deploy their assets. This is a good thing. Here's the thing, no one will lend to them right now and they have their cash tied up in longer term investments. They can get the cash, but not without taking losses on these investments.

Just imagine how tough life would become if credit cards disappeared. This is essentially what is happening right now. Imagine what the fallout would be. We are talking Great Depression-level disruption and shrinking. Hopefully, reasonable people can agree that some ideological purity is a worthy sacrifice if it can avert this crisis.