We had
an engaging meeting today at Chili’s! We had a total of 6 attendees: (from left to right) Jeff
Harrington, VJ Arjan, Elena Swindull, Ry Zamora (who joined us later) and one
more who chooses to remain anonymous. I
want to thank Ry Zamora who made some very detailed notes on the extensive
material covered during the meeting, which helped me very much in compiling the
minutes below. As there was a lot of
material, some of it has been omitted to preserve brevity.
Facebook Fiasco and A Discussion on Bubbles
“Those
who cannot remember the past are doomed to repeat it.” - George Santayana
It was
quite evident that this topic would come up for discussion. It is quite incredible how the public can get
suckered into these schemes again and again.
In
short, here is what occurred:
The
initial public offering was set at $38 per share, which would put Facebook’s
market cap at $100+ billion. During the
last year, Facebook reported earnings of $3.7 billion, and there were major
revisions, upwards to 10%, to its growth prospective merely a week or so before
the IPO. The bottom line was that it
would take the investor 100 years to breakeven on the initial investment at the
initial public offering. The stock
subsequently sold off close to 40% in the weeks after.
And who
might we ask was selling their shares? Goldman
Sachs, Morgan Stanley, and many of the insiders, including Mark Zuckerberg,
unloaded a majority of their stake onto the public. Mr. Zuckerberg sold $5 billion worth of his
ownership interest. Interestingly
enough, according to a Reuters article (http://blogs.reuters.com/felix-salmon/2012/05/22/the-facebook-earnings-forecast-scandal/), the public probably
doesn’t know that Mr. Zuckerberg also deliberately created a dual-class share
structure to ensure that they (the shareholders) can be completely ignored on
all decisions.
Elena mentioned that this is
not to knock that Facebook may indeed be a leader in the social media industry
for many years to come, but the hype, in this instance, perhaps, superseded the
reality. Jeff even suggested how Facebook could become an evolution of our current system of government - a social government, if you will.
The
group then had a discussion on bubbles and how the public fails to see them
coming time and again.
Elena Swindull
and Jeff Harrington explained how the tulip bubble in the early 17th
century in Holland is proof how ignorant people are willing to gamble away
their life savings on the promise of fantastic returns on an instrument they do
not completely understand. The truth of
the matter is that as great an investment Facebook may pose, the old money was
suckered in, got duped by the promise of exponential returns, by an investment
they did not completely understand.
VJ
Arjan bought up the South Sea Company bubble in 18th century France,
which was the Enron of old on a much larger scale. For more historical details about bubbles,
please read Extraordinary Popular
Delusions and the Madness of Crowds by Charles MacKay.
Mythbusters: Sell in May and Go Away
As
we all know, the market wiped out the year’s gains in the month of May and it
is now actually at a negative return YTD.
This
prompted VJ Arjan to explore whether there is any truth to the market
aphorism. Here is what he found
analyzing data on the Dow Jones Index since 1968.
In
44 years:
- 21
had positive returns with an average gain of 148
- 22
had negative returns with an average loss of 146
The
data is compelling in that although there is not major loss in the month of
May, there is also no gain. So the
tentative conclusion is that it is the month of May seems to be a wash.
That
being said, Jeff Harrington pointed out that the historical returns from the
periods October to April, are significantly better that those from May to
September.
JP Morgan Trading Loss
On
May 10th, JP Morgan Chase reported that it had accumulated a trading
loss of at least $2 billion.
The
stock subsequently dropped from $40 to the low $30, wiping out approximately
$30 billion in market capitalization.
VJ
Arjan asked whether this might be an overreaction as it is hard to justify a
$30 billion loss in market cap even if the worse-case scenario were the loss
was $5 billion. Jeff Harrington cautioned that the loss was on interest-rate
swaps and these instruments are the equivalent of a financial atomic device
were an institution on the wrong side – it is prudent remember Lehman and Bear
Stearns. He believes it is best to lie
low for a while and wait for the dust to settle before getting into Chase.
Ry’s experience in China
Unbeknownst
to any of us, Ry has actually visited China several times. We asked him to relay his
experience with a host family over there.
In
his estimation, much of the conversation amongst the Chinese revolves around
how to accumulate money – they are very wealth-creation driven and very
entrepreneurial. They admire and try to
emulate the Americans and are very inquisitive about American culture and
lifestyle.
Personal
space is a concept that is less important in China than it is in the US. A Westerner might find that if one were to
take a step back, the Chinese might just step closer. There are also not big on the concept of
lines.
Ry
also talked about “spit culture”. It is,
in fact, normal for the Chinese to spit when they feel like it. It is not considered disrespectful, but is
simply a way of life for them.
“To be or not to be, that is the
question: Whether ‘tis Nobler in the mind to suffer the Slings and Arrows of
outrageous Fortune, Or to take Arms against a Sea of troubles, And by opposing
end them” - William Shakespeare, Hamlet
We
had a lengthy discussion about this global crisis. George Soros recently made the remark that
the Euro has another 3 months to go before it will completely collapse should a
financial arrangement of the PIIGS not be made.
The
problems of this Euro arrangement are plentiful and they have been discussed in
this blog before:
Jeff mentioned how Spain’s pension
system allows expatriates to possess a dual citizenship and still take
advantage of the federal pension system, even though they do not pay taxes to
the Spanish government. Ryan chimed in
stating that this can only lead to further money-printing, which would
eventually lead to hyperinflation.
However, he did point out that Spain’s crisis might be much worse than
say the hyper-inflationary period in Mexico or Argentina because Spain does not
have any substantial natural resources it could use to contain the
hyperinflation.
Greece is unable to raise money in
the debt markets, and the yield on their debt continues to surge. All bets are on Germany lifting these betroubled
countries out of their fiscal mess as Atlas carries the world upon its
back. Jeff talked about how yields for
the German sovereign debt were negative, meaning people were paying just
to get the principal back. As a result, the Germans are virtually receiving
free money, which provides further incentive to spend freely and proceed with
bailout policies. On the flip side, this
also provides an incentive for Germany to leave the Euro behind, as this could
not go on indefinitely.
With all the money coming into the
safe havens of U.S.Treasuries, Jeff mentioned the TLT (T-share 20 year yields).
It is an ETF that might present a profitable short since the rise of bond
prices. If the economy should recover,
the result will be a drop in bond prices as yields rise once more.
Ryan’s Analysis on the Euro Crisis
Ryan had a particularly articulate
well-thought out diagnosis of the Euro crisis, which I present below, except a
few edits, verbatim from his own notes:
His observations and research on the
unfolding crisis shows that the Euro crisis revolves around four factors: (1)
accountability, (2) acceptance, (3) teamwork, and (4) value. He explains it as
such:
o Accountability: people must recognize that there is a
culprit behind the crises. It doesn't have to be tagged to any specific
individual or group of people - it could be a trait. For example, complacency
in fiscal discipline, culture of entitlements and government-given
spoonfeeding.
o Acceptance: while many informed citizens are aware of the
real problems, the politicians still must accept that the problems are not
fiscal/monetary, but deep-rooted in cultural and/or fundamental concerns.
o Teamwork: if this is followed by teamwork, then this means
ceding political sovereignty -- to some extent, freedom -- to a figurehead. It
also means one nation's unity towards a certain action (consider that Greek
politics are fragmented into at least five parties)
o Value: but whatever the choice, the only thing that can
save the nation in question is a unique value proposition. Without it, poverty
or dependency ensues. Greece can gamble on tourism. Ryan does not know what
Spain, Italy, or Ireland has.
In a talk with VJ after the meeting,
Ryan talks about how the humanist point-of-view is even more important now that
the crisis has taken the events out of the economics textbooks' jurisdiction.
Change of the Seat of Power
(The Fall of Rome)
Ryan brings a change to the
conversation, introducing a subject on cycles - how the seat of power has
changed over the past few millennia.
First came Mesopotamia, then Egypt, then
Rome, then the European era of dominance (particularly Spain and Britain), and
then America. Now, it looks like it's shifting to China.
As the saying goes, what goes around comes
around, and now we are full circle.
Jeff explained how 500 years of
European hegemony as the world power shifted in 1991 with the fall of the
Soviet Union and moved a couple thousand miles east to Asia. He also mentioned how many
countries in Europe, primarily the PIIGS, haven’t woken up to this fact, and
the experience now for the Europeans is similar to being hit with the bag of
bricks upon the head as a heavy dose of reality.
Jeff also explained how emerging
empires largely stole the technologies from other existing empires and built
and improved upon them to emerge dominant.
Such is the case halfway around the world with the current problem of the
piracy of intellectual property.
VJ also explained how it seems that
the abuse of credit is a singular factor in the decline of a reigning
empire. This is especially discussed in
Gibbon’s The Fall and Decline of the
Roman Empire as a key factor along with a host of others, as being of
principal importance in its collapse. Also
as part of his observations, he noted that the problem of deficit spending for
the Romans was denied for quite a long time, and by the time they had
recognized the severity of the problem, it was too late. Looks like the U.S. may be headed in the same
direction.
A Bear in India
While China is flying up the economic and political totem pole, India, at least In VJ's opinion, has it dead wrong. VJ started talking about the problems
of India in his estimation:
Unlike the Chinese who were united by Emperor Shi Huang-Di of the Qin dynasty for 2 millenia, and who remain united according to very similar borders today, the Indians have been so divided as a country that it took the British to come along and occupy their territory for 250 years before there was any real semblance of unity.
To this day, there is constant competitiveness and social class warfare amongst their own people. This extends especially to their bureaucracy, which by some estimates is the worst bureaucratic system behind Egypt; a system designed by the British empire to favor the upper class and aristocracy and make life more difficult for those coming up the ranks. They also have the second-worst road and telephone system in the world, second only to Haiti.
There is a superiority complex when it comes to culture
and intelligence. This is one reason that countries isolate themselves and actually end up not progressing because the fail to see the beam in their own eye. Openness breeds creativity and innovation, closeness breeds the opposite. For proof, look at North Korea and Myanmar.
At the most fundamental cultural level, a crab mentality exists, along with a cultural habit of
exploitation for one's own desires. For proof, the Indian government has recently been swamped with one political scandal after another, some of which directly implicate the current Prime Minister, Manmohan Singh.
Long-run emerging companies
Here are a few companies that were brought up during our meeting that are looking like companies in emerging industries that have great long-term growth potential:
The
next meeting will be on Sunday, July 1st, 2012.
For
those who have not attended a meeting, but would like to attend, please email
your wish to VJ Arjan at scarletkings@gmail.com
Also I find that there are many domestic and
international readers who are following our blog posts not only in the United
States but all over the world including Europe, Latin America, and Asia. If you
wish to be added to our email list, please email at scarletkings@gmail.com
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