WSJ: Fund managers turning defensive

Amid market volatility, several stock-fund managers have been turning defensive. Managers across investment styles have lately been buying stocks of companies that they expect will hold up better through the recession, and are trading at what they consider to be low prices. These include a range of companies, from makers of toothpaste and soaps, to food companies to pharmaceutical firms.

~ WSJ, "Beaten-Up Managers Grab for 'Safter' Picks," March 4, 2009, by Shefali Anand

Mohamed El-Erian, Pimco on the recapitalization of the financial sector

Q: So what is anchoring the markets today?

A: We're seeing a much-needed recapitalization. Over the past decade you've seen the balance sheet of the emerging markets get recapitalized. Then it was the turn of the U.S. corporate and industrial sector on the back of Enron and WorldCom. Today we're seeing the recapitalization of the U.S. financial system. A massive amount of capital has been issued in the past two weeks, some in the form of preferred stock. Once we get through [this period], we'll all look back and realize that it's positive.

Q: Is the worst behind us?

A: We're three-quarters through a major dislocation that has repriced the U.S. financial system. The risk going forward is less about Wall Street and more about the small and midsize banks. They missed much of the current crisis because they never really got into structured products. But they're heavily tied to commercial real estate and the consumer.

~ Mohamed El-Erian, Pimco, "A Peek at Pimco's Long View," BusinessWeek, May 19, 2008

Andrew Jackson on equality under the law and his veto of the recharter of the Bank of the United States

It is to be regretted that the rich and powerful too often bend the acts of government to their selfish purposes. Distinctions in society will always exist under every just government. Equality of talents, of education, or of wealth cannot be produced by human institutions [but]... every man is equally entitled to protection by law; but when the laws undertake to add to these natural and just advantages artificial distinctions, to grant titles, gratuities, and exclusive privileges, to make the rich richer and the potent more powerful, the humble members of society... who have neither the time nor the means of securing like favors to themselves, confine itself to equal protection... it would be an unqualified blessing. In the act before me [to recharter the Bank of the United States] there seems to be a wide and unnecessary departure from these just principles.

~ Andrew Jackson, statement on his veto of the Bank of the United States

(Quoted by Robert Remini, Andrew Jackson and the Bank War, p. 83.)

Andrew Jackson on central banking

[The Bank of the United States (precursor to the Fed)] is a monster, a hydra-headed monster... equipped with horns, hoofs, and a tail so dangerous that it impaired the morals of our people, corrupted our statesmen, and threatened our liberty. It bought up members of Congress by the Dozen... subverted the electoral process, and sought to destroy our republican institutions.

~ Andrew Jackson, March 1829

Andrew Jackson
1902-1903

AIG on Hank Greenberg's role in creating the ill-fated financial products unit

It strains common sense to accept [Hank] Greenberg's allegations that he was misled or did not appreciate the risks from the multisector CDS book written by AIG.

~ AIG (press release?), "AIG Fires Back Over Greenberg Suit," WSJ, March 4, 2009

Amelia Earhart on decision making

The most difficult thing is the decision to act, the rest is merely tenacity. The fears are paper tigers. You can do anything you decide to do. You can act to change and control your life; and the procedure, the process is its own reward.

~ Amelia Earhart, aviation pioneer

Ron Paul on Wall Street, bailouts, and who pulls the strings in DC

You know, it is said that the Congress didn't have enough strings attached to the money that they were giving away, but I think the strings go in the other direction. I think Wall Street has the strings on Washington. And they pull and do what they want and that's where the corruption is. They control the monetary system.

~ Congressman Ron Paul, "Ron Paul on the recession: 'None of this is behind us'," The Hill's Blog Briefing Room, October 20, 2009, by Michael O'Brien

Ludwig von Mises on evil

Do not give in to evil, but proceed ever more boldly against it.

~ Ludwig von Mises

Charles Schwab on the government rescue of Fannie Mae and Freddie Mac

Q: Friday [July 11] was particularly scary. Do you think that the just-announced rescue plan for Fannie and Freddie will be enough to restore confidence?

A: It truly is a confidence issue. All professionals knew Fannie Mae and Freddie Mac would be sustained by federal assistance if required. I don't think that was really an issue. But yes, it is scary that it was even contemplated that they wouldn't [be backed by the government]. I think the Fed and the Treasury are doing all the things they can do. I wish we would do something like they do in firefighting—put a line in the sand a little bit further away from where the fire is that would stop the contagion that's going on.

~ Charles Schwab, "Chuck Schwab on Scary Markets and Election '08," BusinessWeek, July 16, 2008

Charles Schwab on short sellers and regulation of hedge funds

Q: With the SEC trying to crack down on short-sellers, do you see regulation of the market going too far?

A: It's very natural for us all to overreact in times of stress, but I'm not a fan of unmitigated shorting. We have nearly $2 trillion in hedge funds that simply don't have any reporting responsibilities.

~ Charles Schwab, "Chuck Schwab on Scary Markets and Election '08," BusinessWeek, July 16, 2008

Giff on the aging process

You can't outrun Father Time. 

~ Dave Giffen, a.k.a. "Giff the Sage"

M.S. Peck on evil

Evil is not committed by people who feel uncertain about their righteousness, who question their own motives, who worry about betraying themselves. The evil in this world is committed by the spiritual fat cats, by the Pharisees of our own day, the self-righteous who think they are without sin because they are unwilling to suffer the discomfort of significant self-examination.

~ M.S. Peck, People of the Lie: the Hope for Healing Human Evil (1990)

Bill Bonner on debt

For much of history, failing to repay debt was regarded as not merely a breach of contract, but a crime. People who failed to repay their debts in timely fashion were thought to have stolen from their lenders; they were put in prison. In the Middle Ages even a dead debtor's children could be sent to prison.

Now, bankruptcy laws allow individuals and businesses to go to rehab. Then, they can stiff creditors again. Neither sin nor crime, debt is now just a cost of doing business.

~ Bill Bonner, "Paying Off Debt Is Like Dying…," LewRockwell.com, October 21, 2009

Rich Karlgaard on the (bad) advice of Forbes columnists

Happily, there is a small but reliable pro-market commentariat that will guide you in understanding the world's economies. Two of them precede me on these pages. I also always listen to Brian Wesbury, the chief economist for First Trust Advisors, and the great Art Laffer of Laffer Associates.

For stock tips, you can't beat Ken Fisher. Even if you have read Ken's FORBES columns, don't miss his new book, The Only Three Questions That Count: Investing by Knowing What Others Don't. Original thinking and witty writing by a great investor.

~ Rich Karlgaard, publisher, Forbes, "Pundits Versus the Market," January 29, 2007

Cicero on education

To add a library to a house is to give that house a soul.

~ Cicero

Bob Chapman on home equity loan exposure at four large banks

U.S. financial institutions hold almost $1.1 trillion in second liens, also known as home equity loans or "helocs." Some 42% of all helocs are held by four banks—Bank of America, J.P. Morgan Chase, Citibank and Wells Fargo. Since in a traditional mortgage foreclosure the second loan is usually wiped out, these big four banks have an exposure in the hundreds of billions of dollars.

Mortgage-finance consultant Edward Pinto points out that these same lenders have about $800 billion of first mortgage loans on their books, representing 8% of the total outstanding first mortgage loans in the U.S. But they also act as the servicers on almost 60% of total first mortgages, which means they handle negotiations on loan modifications. Thus when a home owner asks one of the big four banks to redo a loan, the banker may have a greater interest in saving the home-equity loan than in protecting the creditors of the first mortgage…

~ Bob Chapman, "US Treasury Controlled by Wall Street," LewRockwell.com, October 20, 2009

Legg Mason analyst on Countrywide Financial (2007)

The fallout among smaller subprime lenders will give survivors like Countrywide even more market share. We liked the stock when it was trading at $44 a share and we see even more value now.

~ Legg Mason analyst Mitchel Penn, "Top Funds Stand by Subprime Stocks," Fortune, March 9, 2007

(Countrywide, which gets only 10 percent of its revenues from subprime lending, continues to deliver solid growth, he pointed out.)

Bill Miller on his decision to increase his holdings of financial stocks in 2007

We bought financials after the Fed [first] injected liquidity [into the market by cutting the discount rate on Aug. 17, 2007, and then the fed-funds rate on Sept. 18, 2007, continuing into 2008.] That's what you do in a liquidity crisis... This turned out to be a collateral-driven crisis caused by underperforming debt... We've analyzed that mistake and tried to make adjustments to risk management and the portfolio-construction process.

~ Bill Miller, portfolio manager, Legg Mason Value Trust, "It's Miller Time!," Barron's, October 12, 2009

Bill Miller on his decision to invest in Bear Stearns

When it failed in March [2008], it had the highest capital ratios ever. There was no rogue trader... But that didn't stop a run on the bank.

~ Bill Miller, portfolio manager, Legg Mason Value Trust, "It's Miller Time!," Barron's, October 12, 2009

(Bear Stearns was eventually purchased by JPMorgan Chase for $10 a share, leaving Value Trust with a huge loss.)

Hayek on morals and compulsion

Responsibility, not to a superior, but to one's conscience, the awareness of a duty not exacted by compulsion, the necessity to decide which of things one values are to be sacrificed to others, and to bear the consequences of one's decision, are the very essence of any morals which deserve the name.

~ Friedrich A. Hayek, The Road to Serfdom - The Definitive Edition, Page 217

Burton Wheeler on despotism

Every despot has usurped the power of the legislative and judicial branches in the name of the necessity for haste to promote the general welfare of the masses—and then proceeded to reduce them to servitude.

~ Senator Burton K. Wheeler, Montana New Deal Democrat, referring to Franklin D. Roosevelt's attempt to pack the Supreme Court in the mid 1930s

Justin Fox on the stewardship of the world's oil and gas reserves

Only 7% of the world's estimated oil and gas reserves are in countries that allow companies like ExxonMobil free rein, according to consulting firm PFC Energy. Fully 65% are in the hands of state-owned companies such as Saudi Aramco, and the rest are in the likes of Russia and Venezuela, where Western companies can get a foothold one day but lose it the next.

~ Justin Fox, "No More Gushers," Time, May 31, 2007

Michael Kinsley on libertarians

Libertarians and communitarians (to continue this unjustified generalizing) are different character types. Communitarians tend to be bossy, boring and self-important, if they're not being oversweetened and touchy-feely. Libertarians, by contrast, are not the selfish monsters you might expect. They are earnest and impractical--eager to corner you with their plan for using old refrigerators to reverse global warming or solving the traffic mess by privatizing stoplights. And if you disagree, they're fine with that. It's a free country.

~ Michael Kinsley, "Libertarians Rising," Time, October 29, 2007

Keynes on Lenin and inflation

Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

~ John Maynard Keynes, The Economic Consequences of the Peace

Henry Adams on politics and hatred

Politics, as a practice, whatever its professions, has always been the systematic organization of hatreds.

~ Henry Adams

Friedrich Hayek on monetary policy from the mid-1920s to the early 1930s

We must not forget that, for the last six or eight years monetary policy all over the world has followed the advice of the stabilizers. It is high time that their influence, which has already done harm enough, should be overthrown. 

~ Friedrich Hayek, 1932

William Trufant Foster: "Thrift is wasteful" (1931)

The glow of righteous satisfaction that many have felt in their recent savings should be replaced by the knowledge that thrift under certain conditions is very wasteful.

~ William Trufant Foster, leading pre-Keynesian economist in the “underconsumptionist tradition,” September, 1931

Business Week on the global boom (2006)

John Templeton, the elder statesman of global investing, famously remarked that among the four most costly words in market history are "this time is different." Yet we all share a sense, from the factory floor to executive suites, that something new is going on in the global economy. And that something new is optimism. For the first time in history, almost everyone in the world economy has a chance for a better life -- or at least their children do. Let the long boom begin.

~ Business Week, "Let the Good Times Roll," March 27, 2006, by Chris Farrell

Business Week on a new "era of nonexistent inflation and rapid economic growth" (2006)

Nevertheless, despite all the twists, hedges, and cautious asides, a much bigger theme emerged from [Fed chairman] Bernanke's speech. He believes that real bond yields have taken a fundamental step down. If he's right, and I think he is, the significance of lower real rates is a seismic event for everyone from a young, first-time homebuyer to a grizzled venture capitalist. Put it this way: The world economy is on the cusp of an era of nonexistent inflation and rapid economic growth -- a long boom of historic proportions.

~ Business Week, "Let the Good Times Roll," March 27, 2006, by Chris Farrell

Ludwig von Mises on the impoverishment of the boom

The boom squanders through malinvestment scarce factors of production and reduces the stock available through overconsumption; its alleged blessings are paid for by impoverishment.

~ Ludwig von Mises, Human Action (1949)

David Kramer on Barack Obama winning the 2009 Nobel Peace Prize

If the economically-ignorant Paul Krugman could win the 2008 Nobel Prize in Economics while continuing to promote the exact same economic policies that got us into our current economic mess, why shouldn’t Barack Obama win the 2009 Nobel Peace Prize for escalating an unjust war in Afghanistan plus starting a potential new war by already bombing Pakistan (something even his predecessor didn’t have the “pleasure” of doing)?

What did George Orwell write in 1984? War is Peace? I guess so—at least according to the Nobel Peace Prize committee members.

~ David Kramer, "First Krugman, Now Obama," LewRockwell.com Blog, October 9, 2009