Mid Week Pit Stop #28

Men Never Learn From History


Last week, I stated that some people believe that the great men alive out there will draw lessons from history and apply appropriate measures. I will like to reiterate that human nature never changes. In a way I'm still quite pissed with the idea that men will "learn" from history. So let me give somemore concrete reasons. This is actually very important for investing in stocks and I will also explain why as well.

1. Greenspan Put

This is actually a famous phrase in wall street. It just means that no matter what goes wrong, the fed will rescue you by creating enough free money.

i. Crash of Oct 1987
Fed cuts interest rates three times in six weeks.

ii. Asian financial crisis, LTCM fiasco, Russian Default
Fed cuts interest rates three times in seven weeks

iii. 2001, worsened by 9/11 attacks
Fed cuts interest rates three times in seven weeks again, and later on bringing the interest rates down to 1%

iv. Only one chairman presided over a longer period of negative interest rates than Greenspan did. He was Arthur Burns. It took Paul Volcker (cool, Obama is smart enough to hire him) a nasty recession and decade of interest rates to repair the damage. By negative interest rates, I meant inflation adjusted short term rates, which simply means, money is free.

v. 2007 Housing bubble. The rest is history.

So...
If you were to ask any statistician, they would tell you that such bubbles and market crashes happen only once in many many years. We have tons of them in this century. Linking back to the forest fire analogy, putting out the forest fire immediately by flooding more leaves on it sounds awesome and effective.

But one must realise that the bubble gets bigger each time. With interest rate this low for many months to go, it will only lengthen the problem and we will have the great inflation of the 70s back again. Whether you are burnt to death or frozen to death, you are still dead. But I believe we might get both. In a way, my quote on Greenspan Put is to highlight the fact that lowering interest rates will resolve the problem only for now. During those big bubbles, it seems to be the best policy because the economy continues its growth afterwards. But it does not solve the root cause of the problem and it only leads to another bigger problem.

2. Smart people aren't that smart after all

Well, LTCM fiasco was caused by a group of smart people including two Nobel prize winners. Smart enough? They nearly brought the financial system down with them. They over leverage themselves, underestimate risks back then. Sounds familiar? All these are common sights in today's problem. Does men learn from history?

3. No one listens to real smart people (I'm not refering to myself =D)

Felix Rohatyn. I doubt many people know about him. You can read The Last Tycoons to know more about Lazard Frères & Co. He is the only man that criticizes on junk bonds in the 80s and no one listens to him.

Warren Buffett. No one listens to his shareholders meeting and the term that he coined - financial weapon of mass destruction.

Top 5 Hedge Fund managers (Soros, Paulson etc). Actually, they hardly speak.

Toh Chin Sheng. No one listens to me. Alright just kidding.

Conclusion: You have to learn from history. Based on history, commodities will go up. I like argiculture for the long time like what Jim Rogers said. I totally agree with him. Good times, bad times, you still have to eat. I dislike stocks for the super long run. Of course there will be bear market rallies but again, you can try to eat like chicken and shit like elephant.


Word of The Day
Seigniorage
Refers to the persistent overvaluation of a reserve currency