In response...

USA 2009 = Argentina 2001?
My response to that article is this: Pure sensationalism. Economics is such where you can pretty much draw almost any conclusion that you would like and then graphically and fundamentally support that conclusion. I see this article, and I think back to what I have read and studied relating to Argentina. It is my rudimentary understanding, as I am not an economist, that Argentina had a currency board. What does this mean? Well, in short, it means that they did not have monetary policy. Their central bank, if I remember correctly, was forced to maintain a dollar peg and currency speculators eventually pressured and succeeded in forcing a devaluation of the currency relative to the dollar. Combine this with the fact that many debts were in dollars and the Argentinian currency, with a devaluation, was worth substantially less of them per constant unit, and you can see the significant potential for problems. However, for the following reasons, I think that this conclusion and subsequent comparison is ill-founded for the long term, as many, MANY very bad things would have to occur prior to its ever coming to actual fruition.

First, the United States has a central bank and independent monetary policy. Is it perfect? Of course not. But, did Argentina have the TALF, the TLGP, or any of the other major programs put into place to help to stabilize confidence in its debt markets? This alone does not and will never ensure that major issues can't ever occur...not in the slightest. But, a comparison to Argentina, at this point, to me, completely discounts the effectiveness of many of the programs that were instituted quickly and efficiently during the early stages of crisis.

Second, the United states economy is clearly not comparable to the Argentinian economy in any major or measurable way. True, the case can be made that both economies had larger measures of their populations borrowing more than they should be borrowing. That's kind of a subjective rather than objective point, but the whole idea of credit contraction advanced in the article is certainly true. However, look at some relatively common economic indicators. I won't bore you with too many details, but, just think about per capita GDP. Per capita income. Things that compare the purchasing power of the average US citizen to that of the average Argentinian. I'm not saying that Argentina is a backward nation, not by any means. I am merely saying that they two are far from comparable. Types of jobs, training, education, standards of living...two vastly different countries...and this cannot and should not be discounted.

Thirdly, look at the causes of crisis. Argentina was a country that attracted a lot of foreign investment that, at the first sign of trouble, turned on its heel and ran out of there as quickly as possible. What does that tell you? Well, to me, again, based on my experience in looking superficially at the crisis, it says that there were a lot of short term projects looking for a quick return, and there was less real, long-term focus on value creation. The United States is a service-based economy depended, at least in recent past, on its consumers. Foreign investment is nice, and it does currently finance a massive fiscal deficit and a massive trade deficit. This cannot and should not be overlooked. If all of that money turned on its heel quickly and flew out of the country tomorrow, we would be in SERIOUS trouble as a nation. But, look at this logic. If money is running out of Argentina, where can it go? If money runs out of the United States, where can it go? It's true, China has been talking, Russia has been talking, and the IMF is in the early stages of what seems like bond issuance. In the near term, will this market be sizeable enough and liquid enough to replace the treasury market as the most liquid and most safe market in the world? It's just not possible to think of it at this point as a near-term alternative. The Euro, the Yen? Again, not possible. A country like China has a simple problem. Had it invested in Argentina, this country and investment opportunity was never large enough to be "significant." It was a diversifier...a diversion of some reasources, but one that could be easily written off and backed away from. The US market? The US market is not at the point of being a diversion. No major player invests in treasuries to "diversify." It is the most liquid and safest market in the world. Bonds of almost any maturity are offered, and, the key, the BIG key, is that you know when and what you are getting back at all times.

Fourthly, look at the lead up. Securitization...financial innovation...banking or mortgage malfeasance, etc. But, in Argentina, an important question to ask is simple. Did they have the FDIC? Where customer deposits safe? I'm not talking about loans...I'm talking about the savings of citizens. I'm talking about the need for people to make "runs" on banks. With US policy, this hasn't happened? I believe it did happen in Argentina, and I believe, but might be incorrect, that citizens in some cases lost everything even if they weren't taking risks and simply leaving their money at the bank. This is a big deal, and, in the United States, it has mitigated many potentially disastrous effects.

There are many other points and questions that can be brought up, but they all point back towards the same point. The article is interesting, the title grabs you, but it's the same as comparing the US to Zimbabwe, which was another article that came out 2-3 weeks ago when the yield on the 10-year increased "dramatically." It's pure sensationalism. Government and FED policy cannot and will not be perfect as we navigate forward. The Deficits could cause rather significant problems. But, saying that we are in danger of being similar to Argentina, Zimbabwe, or any other country in the developing world is an extreme leap and cannot yet be supported. Extreme negatives such as those might be just as likely to happen as extreme positives, but, no one writes about those. I guess they aren't as interesting to read.

As I signed into facebook on May 23rd, I contemplated the fact that this weekend was not like other weekends. It was memorial day! Nothing beats that extra day off. So, already in a great mood, I saw a reminder pop up. Oh! It was my friend's birthday that evening and I was set to go to a club. Admittedly, I am nowhere near the biggest "clubber" on the block, but when certain people your friends with invite you to things, I've learned you kind of don't have a choice. So, as I polished off the dancing shoes, I realized that there was an upside. I was part of the "pre-party", and the pre-party had the privilege--at least I thought so at the time--of dining together before hand at the restaurant of Justin Timberlake. The place is called Southern Hospitality, and it's located on the upper east side of NYC. I joked with a couple of people that maybe we'd be sitting in the back corner of some swanky, dark, stylish joint complete with hints of N'Sync playing in the background. I wouldn't have even minded actually. Couple drinks, good company, music that takes you back to, well, around junior high...good times. I couldn't have been more mistaken.

I arrived on time (which is impressive because I had the 4, 5, and 6 trains to pick from, and I think I went from the 4, which was the express, to the 6, which I thought was the express). Ok, I'm not great at subways either, but I'm better than I was the time on my birthday when I was waiting with my girlfriend at the wrong track entirely. She still makes fun of me for that one. I saw the place immediately from the across the street. Southern Hospitality in bold letters and a completely open front. I'm not a fan of the completely open front. I like a door, a wall, keep the light out, make it dark inside. Maybe really exclusive, velvet ropes and the feeling like you couldn't get a reservation if you called 30 times because the line would be busy every single one. Hey, if you've ever eat in NYC, you know it's crazy expensive. I want the whole expensive look and feel. I walked in and was greeted with TVs...as FAR as the eye could see. There was even one of the big, 10 feet across screen projection things on the wall. That, combined with the wall of noise and commotion (I guess in place of the physical wall), precluded me from finding anyone, so I did the awkward walk in, looked around, and, not finding ANYONE at all, walked back out and got on the phone, only to walk BACK in 2 minutes later all the way to the back to find my group. Seating was kind of TIGHT, even by NYC standards, and the crowd was of the more "I'm here to watch sports and get hammered" variety. I think there was a Mets game on...I know this because there was some yelling throughout the meal to that effect. So, overall, not the atmosphere that I was expecting.

Possibly, this was due to the fact that it was Ultimate Fight night. For 50 dollars, I could stay from 10-1 and have open bar AND I could watch the ultimate fighting championships. Maybe some people enjoy that...I'm not one of them. For 20 dollars I could just "be there" to watch the ultimate fighting championships. Hmmmmm, it made me wonder...were the food and drinks that I was ordering free, or would I have to buy a meal, and then ALSO pay another admission fee on top of that meal? What?

The food and drink itself was lackluster. If anyone reading this has been to a Chili's, an Applebees, a Cheesecake factory, or any version of a similar place...where you basically get reasonably priced food with REALLY GOOD and REALLY BIG specialty drinks, they would be better served heading in that direction. My margharita was not all that impressive. True, they had the mango, which was good. True, it was sizeable. True, they were LIBERAL on the tequila, which was nice. But, I don't know. I've had better. The cornbread was good, but, I can buy muffins at my grocery store. This is going to be a food and drink combined 35-50 dollar experience. Cornbread, to me, isn't part of that experience. I tried the fried tomatos, which had absolutely no seasoning at all, I actually had to pour some tabasco all over them just to give them some LIFE. And I had the fried chicken, all white meat for my meal. Chicken was very good, but, considering I was paying 20-25 dollars to have it, it wasn't any better than a wendy's spicy chicken would have been. Scratch that...Wendy's spicy chicken is AWESOME. This place...it's like the chef would fry the stuff and then just stop. Bro, where's the seasoning? And, anyone who has eaten with me knows, I am the LAST person to complain about the seasoning...so it HAD to be lacking.

Overall-if you like sports and want to get hammered, visit southern hospitality. If you want to have a nice meal on the upper east side of NYC, then, I might recommend a number of other options. I could have gone to Chilis, spent half as much and gotten two times as many drinks.

La Costena

Over the weekend, our favorite Silicon Valley burrito stop made it into the travel section of the New York Times!! La Costena, or as we so lovingly call it, "La Co", was recently featured as one of three restaurants that one must ABSOLUTELY check out if visiting the Silicon Valley. For more, read the article: http://travel.nytimes.com/2009/04/17/travel/escapes/17Amer.html

The Response...

We all know the tale...the man, given the gift of flight and able to fashion the perfect wings, only to take advantage just a little bit too far, melting off the coating of adhesive wax and falling back to the earth below. Time and time again throughout history, societies could have done well to heed the lessons inherent within this story. And yet, human nature drives us...no, it FORCES us to just try to take that one little bit more. That fateful..."if I could just...then I will be done...really..." The first mortgage brokers who sold subprime loans and got rich doing it...the first insurance companies who wrote massive amounts of Credit Default Swaps...the first rating agencies that "rated" packages of loans AAA...these entities were not the problem. The problem lies in the addiction...that need we all have to get just a little bit more and to eek out that last remaining possibility of performance. When bad practices with selfish aims begin to crowd out and erode more prudent foundations, it's only a matter of time before a house of cards comes crumbling down, or, better yet, wings of wax wither and melt as the fundamental forces of physics dictate a final trajectory.

2008. The year of the "structured product." There is nothing wrong with structured products. These securities, derivatives, are meant to hedge risk. Their returns are based on price movements or returns generated by some "underlying assets." The problem arises when the term "hedging risk" becomes synonomous with "eliminating risk," and clients eventually believe their accounts can never go down. The important thing to always remember, the first question to be asked with ANY security is HOW DO I POTENTIALLY LOSE MONEY? That's it, right there, plain and simple. If it's not FDIC insured...if it's not a CD...if it's paying more than some "risk free" rate, then, by definition, there is a risk, and there is a potential of loss. After 2008, it should be crystal clear to all investors that the idea that they "don't have to worry about a risk that is so miniscule, so infinitessimally small, that it could never happen", that idea, it has to be thrown out the window.

I recently read a paper regarding asset and liability matching and M-notes. Asset and Liability matching is a technical term, frequently used to duration match the cash flows of fixed income portfolios with pre-set or predetermined liabilities, or liability projections. It is used most often with large institutional pensions...they have assets that need to be there for retirees, and those assets need to be managed in such a way that there is the best possible chance that what is needed will always be there. It's tough, in my view, to take that approach and apply it to an individual person. If you think of a company as a large group of people, you feel like, as the group gets larger and larger, for the most part, the behavior of the group as a whole, which will have many common and similar interests, will be easier and easier to predict. Not with 100% certainty, and not for 100% of the members all the time. But, the averages used in the actuarial calculations for large groups of people are those for a reason...there are always deviations but, for the most part, projections can be made to reasonably conform to reality. Trying to do any such thing for an individual or single household...WOW. That would be tough. Not because the intellectual foundation is wrong or incorrect, rather, it's just so hard to know the exact liabilities that one will incur next week, next month, next year, or over the next 10 years. If one were to base their calculations on the averages for the population at large and then have an experience drastically different from the average of that population...well, I would shudder to think. Until one has a crystal ball, I'm not sure that this institutional approach is going to have widespread applicability to individuals, especially since those truly concerned can position portions of their portfolios in guaranteed products, like annuities.

M-notes are interesting. My understanding is that they cap both upside and downside of "an index." A cursory read seems to make it appear that there is no way to lose money. At worst, principal is returned. I am disconcerted, not because it seems like a horrible idea, but because it seems like too good of an idea. How is the "packager" making money? How does the investor "lose"? Where is the catch? It is unclear. Why is this different from an annuity or other product with some type of "guarantee" attached? Not enough is known to draw a complete opinion at this point, but, when in doubt I will always return to the fundamental truths. Risk always persists. Always look for the ways in which you can lose, and be surprised and even skeptical when these seem to be outweighed by the probability of a win. The extra thought and care, it will have no effect on the intrinsic value of the opportunity and, over the long-haul, you'll be glad you made the extra investment in time and effort. No idea can fly forever...they always come back to earth. Let's never be surprised.

Quantum of Solace

James Bond, 007.
I have to say, this Daniel Craig does an absolutely incredible job, in my opinion. True, most of what he pulls off is utterly and completely unbelievable and obviously done with the help of computers and simulations, but, who cares? It's AMAZING entertainment. This new movie, the Quantum of Solace, had somewhat of an environmental twist. I noticed it especially because I have been noticing environmental things and green causes more and more these days, but this movie really made me think. To give a basic synopsis, the main villain was the CEO of a green corporation focused on the environment...or so we and the world would be led to believe. Bond obviously knows better, and he realizes and uncovers a plot that, under the guise of buying up land to create natural parks and perserves, the company is actually buying up access to fresh water in various countries. Engineering droughts and driving up the price of, of all things, water, our most valuable resource and one of the FEW things we cannot live without. The story centers around Bolivia, and, among other things, the villain's company would buy up forest land. That land would be sold to logging companies, which would then cut down all of the trees. This would lead to the earth being looser and less able to retain water, and so, without the vital root systems of the trees, water was more apt to run off into the oceans or evaporate. Additionally, river beds were strategically dynamited and damns were erected. At one point, one of the country's leaders is quoted as saying that citizens need to spend half of their paychecks just to be able to drink one bottle or bucket. Living in America, such a thing sounds unfathomable, and, I know that this was just a movie, but you can't help but to think of certain other, real world situations that have, did, and do actually occur. Situations that make you really think...just how impossible would this be?

People want cachet, they need power, and, quite frankly, it's tough to get this without having the cash to back it up. Reading a book recently, titled "Eco Barons", I read about Chile and what they do for what seems to be salmon aquaculture. I had heard of this before, but from the perspective of Wal Mart, a huge company that depends on Chile's aquaculture to sell fish cheaply in its grocery stores. The issue was debated from two sides. Fish is healthy, and Wal Mart makes it more accessible to Americans known to have serious issues with cardiovascular disease and cholesterol. By the same token, the cheap fish are coming with an expensive price. Salmon was introduced to an area of the ocean where it had not previously existed. The farmers make sure that it flourishes, and it actually flourishes to such an extent that everything else in that area dies. All the fertilizers and antibiotics and biohazard wastes cause various microbial blooms occuring at various levels of the ocean's thermocline. These blooms consume all available O2 in respiration, leaving behind an ecosystem devoid of life. So, that clean, efficiently sliced pink fish at the end of the isle. True, you can pick it up at an extreme discount. But, what if, embedded in that cost of getting that price so low it was proven that farmers providing that fish had killed a species that would have led to the cure for cancer? When we kill without truly knowing the consequences of our actions, can we really prove that this hasn't happened? Might we be the authors of our own demise? The world's ecosystems are incredibly resilient; there are ways to do things, albeit, in slight more expensive fashion, that will have less of an adverse effect. Are we in immediate danger of corporations scheming to control our world's water supply? Ha, of course not. But there are other resources and species that we should make more of an effort to preserve, especially the ones about which we know the least. They could be the ones to save us when we need it most.

Age

I heard two stories this week with respect to investing in the stock market at this, can you say, VOLATILE time. One involved the friend of a colleague. This friend was able to put some money into Citigroup stock when it was around, let's simplify and say, about a dollar. It went to 3 or 4 dollars a short time later, allowing him to triple or quadruple his money, depending on when he exercised the sale. Ironically, my father had called me a few weeks before asking if he should put 500 dollars into Citigroup. I don't know if he ultimately did or didn't, but I had told him that the political risk had been too high and that I would not have touched the stock, even if the price was so cheap relative to "where everyone seems to think it should be." Had he invested, he too could have doubled or tripled his money. Had I been able to invest, it would appear that I would have missed out on an opportunity.

The other story concerned the other side of the coin. A buddy of mine had a friend working in Boston at an investment firm. He was a trader, involved on the equity side, and he had been doing well. Apparently, from the sound of it anyway, he had "earned" his opportunity to take a chunk of money, presumably part of a larger fund, and put it somewhere of his choosing. He chose AIG at $4.00. One word...OUCH!! Needless to say, he will now need to work his way back up to getting that opportunity again.

If one is to invest, especially in these markets at this point in time, feelings of regret such as this, either at trades taken or opportunities forgone, can and will be part of the experience. I saw an article today with an incredible quote reading, "Life can only be understood backwards, but it must be lived forwards." So often, we feel the need to extrapolate future potential based solely on the past. Citi stock is cheap...why? Look at where it was a year ago... We have all heard that statement. Maybe even the "everything is cheap right now." Maybe that's true, but, what it certainly doesn't mean is, "If I pick stocks at random, since they're so low right now, they have to go up. I have to make money." If 2008 teaches us anything and we choose to extrapolate past to future, take one thing. Nothing is certain. Nothing can't happen. Anything can go down to zero...it just happens much faster from 50 cents than it does from 50 dollars. Have a process, have a reason, and go deeper than a simple "because it's cheap right now." Over the longer-term, you'll be glad you did.

In the land of the Basques...

Last night, after hearing interesting reviews from people who travel from all points across the Bay Area to South San Francisco, we headed to San Francisco Basque Cultural Center (http://www.basqueculturalcenter.com/). Besides having three restaurants (that house up to 200-300 ppl each), this enormous building is also home to three floors of pelota courts. I can say I have never have had a dining experience quite like last night....
First off, the WAIT was an experience in itself! We had made reservations the day before for 8pm (we had heard from devotees that they fill up quite quickly). We arrived at 7:45 to the hostess letting us know that it was "absolutely crazy" and that it would be a "25 minute wait" for those who had made reservations at 8pm. Twenty-five minutes turned into an hour and a half- it was 9:30 before we finally sat down. I felt as if I was back in Spain...where a set time to eat is more of a guideline. Instead of complaining or yelling at the hostess (which several of the patrons who had hoped to dine at 8pm did) I sidled up to the bar among a seemingly never-ending line of true vascos. Jolly, bearded old men sharing beers with their fellow pelota players. If you decide to spend an evening (and believe me, plan on spending an entire evening) at the Basque center, go for the ambience. As soon as you enter the doors of the center, it is as if you are stepping into the town center of any given small town in Northern Spain. Families, laughter, drunken debauchery...
Once you actually sit down, the best part of the meal is that you will probably be seated next to huge parties of 15 Spaniards who just know how to have fun. They sit and linger for hours, with no sense of urgency, and although this probably leads to an anxiety attack for the hostess who is trying to turn over tables to prevent being shot by exasperated patrons, it is a welcomed reminder of how a meal should really be enjoyed. As for the food, you can probably tell I was not super impressed by anything. For the most part, the dishes lacked seasoning. We tried the sea bass, sweet breads, veal, and seafood crepe, escargot, country pate...I can't say that I would go on record to say that I'd recommend any of them. Overall, this WAS a pleasurable dining experience- despite the mediocre food. Everything was authentic and wine flowed freely (and cheaply). Next time you find yourself in South San Francisco, make an effort to visit the center.
Viva el pais Vasco!