You know something weird is going on when two of the largest retailers in the US are restricting the purchase of RICE. Both Costco and Wal-Mart limited consumer purchase of the grain, due to what Costco called “recent supply and demand trends.” This sounds like a story out of the former Soviet Union, circa 1975, not from American the Beautiful.
Evidently the rice issue has something to do with Vietnam and India, two large rice exporters, but the trend is disturbing across the globe: as agricultural prices soar, retailers like Costco and Wal-Mart do not want to promote a run on all of their inventories. But as soon as the stores impose a limit, the natural inclination is for consumers to want to buy more simply to hoard what appears to be a valuable asset, even if they do not need the items. Unfortunately, that cycle is tough to break once it starts.
The rice incident is a mere scuffle, when compared to the riots erupting in certain parts of the world, as food availability comes under pressure. Accelerating food prices are a global phenomenon, have recently intensified, and the sources of the increases are global in scope.
U.N. officials recently noted that there was a perfect storm of problems that created the current crisis, but specifically, the growing demand from India and China’s rising middle class after years of tremendous economic growth and the divergence of US corn crops to ethanol production, have pushed prices higher -- the S&P GSCI agricultural commodities nearby index jumped by over 80% over the past 14 months.
Many are hoping that inflation will recede, as the US economy contracts. After all, if the world’s number one consumer is pinched in the pocketbook, it is likely to effect prices. Despite the recent headlines screaming about rice rations and how certain restaurants are now charging for sour cream due to rising prices (who needs those extra calories anyway?), the above-mentioned agricultural index has tumbled by 10.5% from its mid-March peak.
While I think that in the near term, we could see some of these prices fall a bit, it is disconcerting that the factors that have pushed up food prices are still in play and likely will be around for a while. Strong global demand from the developing world, rising living standards and associated demands for protein in the developing world; and the rise in energy costs that drives up both fertilizer and transportation costs for food producers, are all likely to keep ag-flation on the radar screen for some time to come.
Friday, April 25, 2008
Wednesday, April 23, 2008
What a Difference a Fortnight Makes
Two weeks ago, I had dinner with one of my best friend’s father “Eli”. He is about 76 years old and loves to talk about his investments. As we munched on our Chinese food, he pulled out a slip of paper – on it, his total dollars made or lost in the portfolio each year since 1999. He wanted to talk to me because he felt like although he had done pretty well, he was concerned that he could no longer handle the account on his own.
To some extent, investing was Eli’s hobby. His wife has been sick for about ten years and as she became more and more incapacitated, Eli expanded his knowledge base and became a student of the markets. Although he had gone through most of his life working with brokers who sold him “hot” stocks, he came to me at the end of 2000 to ask what he should do. “I have all of these gains and the broker doesn’t think I should sell. The broker begged me to ‘hang in there’ because he believes that the market will come back.”
At that moment, I encouraged Eli to manage his own accounts. For years, he seemed to have better ideas than his broker and I feared that unless he took over the account himself, things could go south. I talked to him about exchange-traded and open-ended mutual funds and suggested that he develop a plan to create a more diversified portfolio, sell some of his stuff and move into a structure that he could effectively manage with an easy-to-use on-line brokerage firm.
To say that I created a monster is an understatement. Eli became obsessed with portfolio management, reading everything he could and keeping tabs on the various new funds that were introduced. In honor of his 70th birthday, he called me to talk about his new favorite asset class-bonds and even dabbled in commodities with a small percentage of the portfolio. I figured that things were going along well because I did not hear from him too much. That’s why I was surprised when we went out to dinner two weeks ago and he lamented “I’m too old for this…it just hurts too much to go through the gyrations.” We discussed solutions and by the end of the meal, he seemed OK.
Yesterday, I attended the funeral of Eli’s wife, Liz. When we were back at his house talking about her, he said to me, “Can you believe how much my life has changed since I saw you two weeks ago? Then it seemed like my most important problem was my stupid account and today, I could care less about it.” I reminded him that he did not need to think about that right now. He smiled and said, “You know, Liz used to tease me that my portfolio was like the only girlfriend she would share me with!” I noted that they both appreciated whatever got him through hard times. I got home and thought indeed, what a difference 14 days can make.
To some extent, investing was Eli’s hobby. His wife has been sick for about ten years and as she became more and more incapacitated, Eli expanded his knowledge base and became a student of the markets. Although he had gone through most of his life working with brokers who sold him “hot” stocks, he came to me at the end of 2000 to ask what he should do. “I have all of these gains and the broker doesn’t think I should sell. The broker begged me to ‘hang in there’ because he believes that the market will come back.”
At that moment, I encouraged Eli to manage his own accounts. For years, he seemed to have better ideas than his broker and I feared that unless he took over the account himself, things could go south. I talked to him about exchange-traded and open-ended mutual funds and suggested that he develop a plan to create a more diversified portfolio, sell some of his stuff and move into a structure that he could effectively manage with an easy-to-use on-line brokerage firm.
To say that I created a monster is an understatement. Eli became obsessed with portfolio management, reading everything he could and keeping tabs on the various new funds that were introduced. In honor of his 70th birthday, he called me to talk about his new favorite asset class-bonds and even dabbled in commodities with a small percentage of the portfolio. I figured that things were going along well because I did not hear from him too much. That’s why I was surprised when we went out to dinner two weeks ago and he lamented “I’m too old for this…it just hurts too much to go through the gyrations.” We discussed solutions and by the end of the meal, he seemed OK.
Yesterday, I attended the funeral of Eli’s wife, Liz. When we were back at his house talking about her, he said to me, “Can you believe how much my life has changed since I saw you two weeks ago? Then it seemed like my most important problem was my stupid account and today, I could care less about it.” I reminded him that he did not need to think about that right now. He smiled and said, “You know, Liz used to tease me that my portfolio was like the only girlfriend she would share me with!” I noted that they both appreciated whatever got him through hard times. I got home and thought indeed, what a difference 14 days can make.
T is for Testosterone…and Trading
Just two days apart, two articles with the word “testosterone” in the headline made me think that I was reading the science pages, not the financial ones. Of course I have seen the effects of testosterone gone wild when I was a trader on the floor of the Commodities Exchange in NY. There was an almost animal spirit to the pits, which after reading the latest research on the hormone, may in fact be attributed to the magic T.
According to a study by two researchers (John Coates and Joe Herbert) from the University of Cambridge, there is a link between the level of testosterone and the profitability of traders. (The findings were published in the Proceedings of the National Academy of Sciences -you can read more about it at newscientist.com) The scientists sampled the saliva of seventeen traders in London twice a day for eight days in order to determine how levels of testosterone affected performance. Their findings may offer clues for all investors and help explain why trading has sometimes been linked to thrill of other activities, like gambling.
The study showed that fear, confidence, greed and exhilaration can influence financial decisions, even among professional traders. But here is the interesting thing: the net result was those with elevated levels of testosterone when they started their days made more money than those who did not. As Coates noted, “The popular view is that experienced traders can control their emotions, but in fact their endocrine systems are on fire.” This does not mean that investors should run out and start taking testosterone supplements. As is the case with most things in life, excess may breed ill effects.
The research notes that over-the-top testosterone can lead to irrationality, which may help us understand the root cause of bubbles or manias. For most, the antidote to the exhilaration is another chemical that our bodies produce called cortisol. Of course while cortisol can bring a bit more rationality to decision-making, it can also make you too risk-averse and it may diminish brain activity over time. As my father would like to say, “Are those my only choices?” -- irrational exuberance or brain mush?
In the end, we have all known for some time that money is a wildly emotional topic. Because the science is there to prove brain behavior impacts financial decisions, it is imperative that all investors develop and maintain a disciplined system to keep those chemicals in check. If you can’t do it, hire someone who can. Otherwise your brain may lead to committing costly financial mistakes.
According to a study by two researchers (John Coates and Joe Herbert) from the University of Cambridge, there is a link between the level of testosterone and the profitability of traders. (The findings were published in the Proceedings of the National Academy of Sciences -you can read more about it at newscientist.com) The scientists sampled the saliva of seventeen traders in London twice a day for eight days in order to determine how levels of testosterone affected performance. Their findings may offer clues for all investors and help explain why trading has sometimes been linked to thrill of other activities, like gambling.
The study showed that fear, confidence, greed and exhilaration can influence financial decisions, even among professional traders. But here is the interesting thing: the net result was those with elevated levels of testosterone when they started their days made more money than those who did not. As Coates noted, “The popular view is that experienced traders can control their emotions, but in fact their endocrine systems are on fire.” This does not mean that investors should run out and start taking testosterone supplements. As is the case with most things in life, excess may breed ill effects.
The research notes that over-the-top testosterone can lead to irrationality, which may help us understand the root cause of bubbles or manias. For most, the antidote to the exhilaration is another chemical that our bodies produce called cortisol. Of course while cortisol can bring a bit more rationality to decision-making, it can also make you too risk-averse and it may diminish brain activity over time. As my father would like to say, “Are those my only choices?” -- irrational exuberance or brain mush?
In the end, we have all known for some time that money is a wildly emotional topic. Because the science is there to prove brain behavior impacts financial decisions, it is imperative that all investors develop and maintain a disciplined system to keep those chemicals in check. If you can’t do it, hire someone who can. Otherwise your brain may lead to committing costly financial mistakes.
Tuesday, April 22, 2008
Rich or Poor…
One of my mother’s favorite sayings comes directly from her father, a hard scrabble guy who was quick with a one-liner. Poppy used to say, “Rich or poor, I’d rather have money!” After reading up on recent research conducted on our attitudes about wealth, it seems that my grandfather and my mother may have been on to something.
Two young economists from the University of Pennsylvania (Betsey Stevenson and Justin Wolfers) have created a stir in the world of economics. As highlighted in the New York Times (Money Doesn’t Buy Happiness. Well, on Second Thought… by David Leonhardt), I learned that maybe the old phrase “money doesn’t buy happiness” is not entirely true. While the two economists probably did not set out to disprove that notion, they did find that “money tends to bring happiness, even if it doesn’t guarantee it. ‘The central message,’ Ms. Stevenson said, ‘is that income does matter.’” Wow, that kind of sinks the whole Pollyanna view of money.
Hold on one minute---I thought that it wasn’t the actual income that mattered but how people felt in relation to others. In other words, if you have the biggest house on the block, maybe you feel like a big shot, while if you are surrounded by those who have lots more money than you yourself have, it may make you fell less wealthy. Not so, at least as far as these results indicate. “Absolute income seems to matter more than relative income.”
From a purely non-academic standpoint, this is not my experience. I have seen hundreds of folks and spoken to thousands of people on the radio and invariably there are more than a few people who ask me: “how am I doing compared to those my age?” These are not people who have no means—in fact, this is a question that is usually posed by someone who has a few bucks. What is funny is that even when I tell the person, “Don’t worry, you’re doing just fine”, I sense that he or she really does want to know how fine, compared to the neighbors.
Of course if we were able to see a rundown of everyone’s net worth, that wouldn’t make you happy either. What is clear is that figuring out what you need to accumulate in order to make sure you can get where you want to go, can make you happier, simply by providing peace of mind. “Affluence is a pretty good deal” because it may allow you reach those goals faster, but it will not make you happy in and of itself. Then again, given the choice, who among us would choose to be less wealthy? Or as mom says, “Rich or poor, it’s nice to have money.”
Two young economists from the University of Pennsylvania (Betsey Stevenson and Justin Wolfers) have created a stir in the world of economics. As highlighted in the New York Times (Money Doesn’t Buy Happiness. Well, on Second Thought… by David Leonhardt), I learned that maybe the old phrase “money doesn’t buy happiness” is not entirely true. While the two economists probably did not set out to disprove that notion, they did find that “money tends to bring happiness, even if it doesn’t guarantee it. ‘The central message,’ Ms. Stevenson said, ‘is that income does matter.’” Wow, that kind of sinks the whole Pollyanna view of money.
Hold on one minute---I thought that it wasn’t the actual income that mattered but how people felt in relation to others. In other words, if you have the biggest house on the block, maybe you feel like a big shot, while if you are surrounded by those who have lots more money than you yourself have, it may make you fell less wealthy. Not so, at least as far as these results indicate. “Absolute income seems to matter more than relative income.”
From a purely non-academic standpoint, this is not my experience. I have seen hundreds of folks and spoken to thousands of people on the radio and invariably there are more than a few people who ask me: “how am I doing compared to those my age?” These are not people who have no means—in fact, this is a question that is usually posed by someone who has a few bucks. What is funny is that even when I tell the person, “Don’t worry, you’re doing just fine”, I sense that he or she really does want to know how fine, compared to the neighbors.
Of course if we were able to see a rundown of everyone’s net worth, that wouldn’t make you happy either. What is clear is that figuring out what you need to accumulate in order to make sure you can get where you want to go, can make you happier, simply by providing peace of mind. “Affluence is a pretty good deal” because it may allow you reach those goals faster, but it will not make you happy in and of itself. Then again, given the choice, who among us would choose to be less wealthy? Or as mom says, “Rich or poor, it’s nice to have money.”
Monday, April 21, 2008
A LIBOR of Love
You may have heard some grumblings last week about a once-obscure, now well-known benchmark for interest rates. The London Interbank Offered Rate (“LIBOR”), overseen by the British Bankers Association (BBA), serves as the basis for interest rates at which banks offer to lend unsecured funds to other banks in the London wholesale money market (or interbank market). Trillions of dollars in floating rate corporate and mortgage loans are based on the level of LIBOR. That’s why when the three-month rate ticked up at its highest level since the height of the credit crunch in March last week, people started to talk.
Why should you care about LIBOR? Well, if you have an adjustable rate mortgage, you are impacted, because the interest rate on your loan probably keys off of the LIBOR rate. That means that your monthly payment rises when the LIBOR rate increases. If you are fortunate enough to be sitting pretty in a fixed-rate loan, there is another reason to think about LIBOR: the change in the rate may indicate that large institutions don’t quite trust each other and that the credit problems are not completely behind us.
Despite last week’s robust action in the stock market, there was one troubling note: the interbank cost of borrowing three-month dollars rose by its biggest daily amount since the credit crisis hit last August. The rate jumped almost 20 basis points last week alone -- the biggest weekly jump since mid-August -- as concern about the possible understatement of dollar Libor quotes by contributing banks surfaced and doubts emerged about the pace of further U.S. interest rate cuts.
To sum up the problem: banks are wary of doing business with one another and are hoarding cash, which is causing the credit market to seize up. The crunch in even short-term lending is a manifestation of a loss of confidence in the system. Until this is repaired, financial market pressures will remain and the effects of a contracting economy or some other event from commercial banks, the credit card industry or maybe the auction rate market, which is still not functioning normally, could catalyze another bout of de-leveraging. (It should be noted that the NY Attorney General has launched an investigation into the auction-rate market after it virtually collapsed in February when demand for the long term securities that price weekly or monthly dried up and Wall Street firms stopped supporting them.) Although these risks appear to be abating, to ignore them would be foolhardy. Sometimes being an investor truly is a LIBOR of LOVE!
Why should you care about LIBOR? Well, if you have an adjustable rate mortgage, you are impacted, because the interest rate on your loan probably keys off of the LIBOR rate. That means that your monthly payment rises when the LIBOR rate increases. If you are fortunate enough to be sitting pretty in a fixed-rate loan, there is another reason to think about LIBOR: the change in the rate may indicate that large institutions don’t quite trust each other and that the credit problems are not completely behind us.
Despite last week’s robust action in the stock market, there was one troubling note: the interbank cost of borrowing three-month dollars rose by its biggest daily amount since the credit crisis hit last August. The rate jumped almost 20 basis points last week alone -- the biggest weekly jump since mid-August -- as concern about the possible understatement of dollar Libor quotes by contributing banks surfaced and doubts emerged about the pace of further U.S. interest rate cuts.
To sum up the problem: banks are wary of doing business with one another and are hoarding cash, which is causing the credit market to seize up. The crunch in even short-term lending is a manifestation of a loss of confidence in the system. Until this is repaired, financial market pressures will remain and the effects of a contracting economy or some other event from commercial banks, the credit card industry or maybe the auction rate market, which is still not functioning normally, could catalyze another bout of de-leveraging. (It should be noted that the NY Attorney General has launched an investigation into the auction-rate market after it virtually collapsed in February when demand for the long term securities that price weekly or monthly dried up and Wall Street firms stopped supporting them.) Although these risks appear to be abating, to ignore them would be foolhardy. Sometimes being an investor truly is a LIBOR of LOVE!
Friday, April 18, 2008
The Pope and Passover
I love ritual, which is why I felt great this whole week. Between the Pope’s arrival in the US and the advent of Passover, I’m feeling hopeful. I have been reflecting on the intersection of Pope Benedict XVI’s first papal visit to the US and the story of Passover to extract some lessons for us as we wade through the messy financial markets. I was struck how in both the Pope’s words and the story of Passover, there is an acceptance of the dualities of life: bad and good things occur and what gets us through is not just hope, but the knowledge that we will once again see better days.
Pope Benedict’s decision to address priestly sexual abuse as a central theme was courageous. He first raised the issue on his trip from Rome and did so again during an open Mass in Washington DC before nearly 50,000 people. Before you send an e-mail telling me that the Vatican was quiet for too long, let’s all agree on that point. But we are talking about the future here and the Pontiff chose to dredge up the worst part of the church’s dirty laundry and apologized by saying, “No words of mine could describe the pain and harm inflicted by such abuse…It is important that those who have suffered be given loving pastoral attention.”
I know that this is a stretch, but wouldn’t we applaud if CEOs, regulators (including Federal Reserve Governors, past and present) and everyone in the financial services industry took a similar path? It would be great if all participants could admit the role that they played, not by pining mistakes on anything other than some of the most basic human emotions: greed and overconfidence.
The story of Passover also confronts the best and worse that humans have to offer, telling the story of the Jewish enslavement in Egypt and the eventual freedom over the course of a meal, called a “Seder”. The holiday is celebrated by retelling the story, acknowledging all of the bitter hardships that occurred and the sweetness of freedom that finally occurred. One of the more interesting parts of the holiday is that it calls on Jews to remember not only what happened to Jews, but tragedies of slavery that occur even today.
It may seem trivial to compare economic worries or investment concerns to issues of abuse or slavery, but how we navigate treacherous times can so often define who we are. We are all afflicted by the condition of being humans: good, bad, greedy, and fearful – and all of the other dualities that we face. Having faith and knowledge can help us get to those better days with a bit more grace and less anxiety.
Pope Benedict’s decision to address priestly sexual abuse as a central theme was courageous. He first raised the issue on his trip from Rome and did so again during an open Mass in Washington DC before nearly 50,000 people. Before you send an e-mail telling me that the Vatican was quiet for too long, let’s all agree on that point. But we are talking about the future here and the Pontiff chose to dredge up the worst part of the church’s dirty laundry and apologized by saying, “No words of mine could describe the pain and harm inflicted by such abuse…It is important that those who have suffered be given loving pastoral attention.”
I know that this is a stretch, but wouldn’t we applaud if CEOs, regulators (including Federal Reserve Governors, past and present) and everyone in the financial services industry took a similar path? It would be great if all participants could admit the role that they played, not by pining mistakes on anything other than some of the most basic human emotions: greed and overconfidence.
The story of Passover also confronts the best and worse that humans have to offer, telling the story of the Jewish enslavement in Egypt and the eventual freedom over the course of a meal, called a “Seder”. The holiday is celebrated by retelling the story, acknowledging all of the bitter hardships that occurred and the sweetness of freedom that finally occurred. One of the more interesting parts of the holiday is that it calls on Jews to remember not only what happened to Jews, but tragedies of slavery that occur even today.
It may seem trivial to compare economic worries or investment concerns to issues of abuse or slavery, but how we navigate treacherous times can so often define who we are. We are all afflicted by the condition of being humans: good, bad, greedy, and fearful – and all of the other dualities that we face. Having faith and knowledge can help us get to those better days with a bit more grace and less anxiety.
Thursday, April 17, 2008
They’re Just Like Us!
One of my favorite indulgences is to pick up a copy of US Weekly and read the segment called “They’re Just Like Us!” In it, paparazzi snap celebrities doing ordinary things—look, there’s Meg Ryan eating lunch; Madonna running in Central Park; and Drew Barrymore grocery shopping. I thought of the feature after reading two articles about Merrill Lynch: one in the April 16th edition of the Wall Street Journal (Merrill Upped Ante as Boom In Mortgage Bonds Fizzled by Susan Pulliam, Serena Ng and Randall Smith) and the other about Merrill’s former CEO, Stan O’Neal in the March 31, 2008 edition of The New Yorker (by John Cassidy).
The New Yorker article took an in-depth look at O’Neal, but what made me think “they’re just like us” is the description of how an obviously smart guy could be seduced by the outsized returns of a complicated asset—in this case it was collateralized debt obligations. I can not count the number of times that people come in and talk to us about opaque strategies or products that they don’t really understand. “I really don’t know what it is, but I made money.” If that happens, my advice is to get out while the getting is good!
In the Journal article, it is noted that Merrill made easy money early in the housing boom. Again, “they’re just like us!” If you bought technology stocks in the mid-nineties or participated in IPOs (which you never really understood), you probably made a bunch of money. But as a good idea matures and ultimately morphs into a boom or mania, things can get dicier. The risk ratchets even higher and you may think to yourself, “I’ll be all right—I’ll know when to get out.”
That’s kind of what happened at Merrill. According to the Journal, “By early 2007, as cracks in the housing and mortgage markets widened, Merrill again missed a chance to scale back. In fact, it revved up its production of complex debt securities -- despite a shortage of buyers for them -- in what turned out to be a misguided effort to limit its losses…Instead of scaling back its underwriting of CDOs, however, Merrill put the business in overdrive. It began holding on its own books large chunks of the highest-rated parts of CDOs whose risk it couldn't offload.”
They really are like us-tempted by big returns, investors as big as Merrill and as small as you, can get sloppy and disregard risks that exist. The behavior usually does not change until the market extracts its pound of flesh for these mistakes. In Merrill’s case, we’ll find out whether the bleeding has stopped when it reports its quarterly results today.
The New Yorker article took an in-depth look at O’Neal, but what made me think “they’re just like us” is the description of how an obviously smart guy could be seduced by the outsized returns of a complicated asset—in this case it was collateralized debt obligations. I can not count the number of times that people come in and talk to us about opaque strategies or products that they don’t really understand. “I really don’t know what it is, but I made money.” If that happens, my advice is to get out while the getting is good!
In the Journal article, it is noted that Merrill made easy money early in the housing boom. Again, “they’re just like us!” If you bought technology stocks in the mid-nineties or participated in IPOs (which you never really understood), you probably made a bunch of money. But as a good idea matures and ultimately morphs into a boom or mania, things can get dicier. The risk ratchets even higher and you may think to yourself, “I’ll be all right—I’ll know when to get out.”
That’s kind of what happened at Merrill. According to the Journal, “By early 2007, as cracks in the housing and mortgage markets widened, Merrill again missed a chance to scale back. In fact, it revved up its production of complex debt securities -- despite a shortage of buyers for them -- in what turned out to be a misguided effort to limit its losses…Instead of scaling back its underwriting of CDOs, however, Merrill put the business in overdrive. It began holding on its own books large chunks of the highest-rated parts of CDOs whose risk it couldn't offload.”
They really are like us-tempted by big returns, investors as big as Merrill and as small as you, can get sloppy and disregard risks that exist. The behavior usually does not change until the market extracts its pound of flesh for these mistakes. In Merrill’s case, we’ll find out whether the bleeding has stopped when it reports its quarterly results today.
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