Sunday, August 12, 2012

Meeting Minutes


We had a very invigorating meeting today at BJ’s!  We had a total of 3 attendees: (from left to right) Jeff Harrington, VJ Arjan, and Kevin Day.


The Slow Death of Reno

Kevin began speaking about the incredible turn of events that has taken place in Reno, Nevada, a place where he once previously lived and even chaired on several economic development boards.  He explained how he secured several companies, including Porsche, to create their American headquarters in Reno and prior to the crash, Reno had been a boomtown of sorts. 

The development that crippled Reno was that its remarkable gaming industry, which was what made it famous and a tourist destination from their neighboring Californians, was slowly being chipped away at over the last couple decades with the Indian gaming venues being built in California.  This development took many years, but as long as the city had multiple companies headquartered there, there was little noticeable difference.

However, with the real estate crash of 2008, the flaw in the foundation began to show its affect.  With the base of its revenues, gaming, unable to create the revenue flow it once had, the city went towards a downward spiral as home values were exacerbated by leaving or bankrupt businesses, one of the worst hit cities in the country.  Many of the existing gaming establishments are only open 2 to 3 days per week.

As a former board member on several economic committies, Kevin is being invited back to Reno for a pep-rally of sorts to galvanize the remaining population there to continue building back towards economic growth. 

(Silver mining ghost-town of Bodie, CA)

Jeff and VJ chimed in that it seems unlikely this even would do anything substantial unless they were to develop some other industry, outside of gaming.  This story seems reminiscent of boom towns that were created a century ago in California, due to the gold rush, and then died away when the action was no more.  Perhaps, Reno could end up as a ghosttown, like these other cities that have died away in the past.


LIBOR Scandal

(Bob Diamond, ex-CEO of Barclays who resigned recently due to the scandal)

To see something as fundamental as the LIBOR being manipulated by traders at Barclays and RBC was a real shame and discredit to the faith and credit of the financial marketplace.  The rigging affected trillions of dollars worth of securities and the initial readings suggest that such wanton collusion has been rampant in the system for the past decade.

Jeff explained to us his understanding.  For those who do not know LIBOR is the equivalent of the U.S. Treasury rate; it sets the cost for borrowing.  Lenders and bankers add a spread to this rate and pocket the difference.  The concerning parts regarding the scandal were that, one, not only did these big banks give out inaccurate numbers, but, two, they also colluded to set interest rates and create opportunities for profit from trading with this information.

Now how does this scandal affect you and me?  Well, according to Jeff, the rates for borrowing were actually lowered; so you, the borrower, received an interest rate that was less than the "true market rate". 

However, the person that gets defrauded were the investors who were sold the securities to these debt instruments, that should actually have received more interest than they were told.
It also affected the shareholders of these banks as the fines set on these banks tally up to the hundreds of millions of dollars, and investigations are still in progress, which is likely to affect their profitablilty negatively in the future.

Jeff suggested a great article for those who are interested in the finer workings of the scandal.  It is a lengthy article, but well worth a read:

The Scam Wall Street Learned from the Mafia by Matt Taibbi



Market Overview

Kevin explained that although there are reports of economic reports coming out about the market fundamentals, the real effect may be forestalled by the current Olympics games, which are serving, at the moment, as a distration.  After this, later on in August there will some political conventions, so that by the time we see any meaningful movement in the market it could be towards the end of August.  Until then, it may be prudent to hold no expectations of severe volatility, which as been the market normal since October 2007.

Kevin shared an article with us by Anthony Mirhaydari of MSN Money that explains how it is certainly not the time to pull out of the market and that the evidence is pointing to, at least for the near-term, a favorable environment for equities.

There were 2 graphs in the article that I found especially insightful and that is the relationship between the price action of the NYSE composite index and the volume of the same.  I have copied them for your viewing below:


This is a simple question of common sense, if most of the money was pulled out in the 2007-2009 era, as the graph shows, and the markey rally since March 2009 was created on low volume, at some point the other money has to be invested in some other asset class or at some point come back to the equity market.  It is certainly a plausible argument.

I have attached the link to the article below for those who are interested:


The question also remains as how the market will act after the elections are over.  The market movement will depend, in Kevin's estimation, on 2 things:

One, what policy goes into effect regarding the taxation of dividends and long-term capital gains, and two, the issuance, or lack thereof, of Q3.

Both issues could have differing outcomes depending on which candidate is elected.


Real Estate

Jeff notioned to us that he has been thinking about whether or not to buy a house in the current real estate market, and whether or not things look good or bad from this point in time.

Kevin mentioned that there are certainly many things that would be favoring the buyer at this point in time:
1. Cheap money - interest rates and hence the cost of borrower has never been this low in U.S. history
2. Depressed prices - although there is always the possibility of an asset value going to zero, it seems unlikely 
that they could go much lower given that much of the heavier bleeding has already passed through the system.  

He also related to us to never be afraid of giving a low-ball offer for a home.  You never know how desperate the seller is to get out.  He has used this time and again to his benefit and he has learned that he was often able to secure prime real estate at far below the market price in this way.


India's Power Outage

VJ, who has for many years had an unfavorable view of the investment opportunities in India, was unsurprised at the power outage that took out power for 600 million people. 

First of all, this number, 600 million, is just staggering to imagine.  To put things in perspective, there are approximately 3 million people in the Dallas/Fort-Worth metroplex.  The power outage in the northern part of India affected 200 times more people.

The problem, in VJ's view, lies in the poor infrastructure upon which the country is built and also in bureaucratic hold ups in advancing it.  The politicians, of course, blamed the light monsoon rains which generated less than needed hydroelectric power.  However, that does not solve the angst of the person who had to wait on crowded trains and busses in the inner cities for 2 days while the power was fixed. 

(Power and telephone lines in India)

If anything else, this event will hopefully serve as a wake up call to India's major problems and its failed political leadership, which has been thoroughly embarrased on the world stage from the magnitude of the event.


The Seen vs. Unseen Effects

Building on the broken window fallacy, VJ shared with everyone some other nuggets of economic wisdom from Economics in One Lesson by Henry Hazlitt.

Hazlitt talks about the study of economics as the study of cause and effect - the immediate and the secondary effects.  There are two groups that are effected in any economic stage, the intended group and the every one else. 

For example, the government stimulus during to war manufactories during World War II led to the weapons makers and the like to experience boomtimes, hence the seen effect.  This effect of the war upon these industries is often cited as an example, although falsely credited, of the economic boon of war.  The unseen effect of the stimulus was that the destruction caused by these weapons whether on our or another's territory led to an overall, global wealth destruction.

Any cursory glance at history will suggest the opposite, that it is peacetime, not wartime, when societies have been more prosperous. 

He then mentions that the reason why politicians focus so much on the seen effects, is because the seen economic policies are what get them elected, even though the policy can be detrimental to all people over the long-run.  Oftentimes, the very thing that a politician needs to do is simply stay out of the spending arena, and "let the good times roll", but then they wouldn't get elected.

The "cash for clunkers" is an example of such a policy that had seen benefits intended for a particular group, but which eventually was a failed economic policy which had detrimental effects on the system.


The Importance of Self-Talk

VJ related an epiphany he had when studying the treatment of American prisoners by the North Koreans during the Korean War during the early 1950s.  Instead of physically torturing them, they resorted to systematically brainwashing them mentally and psychologically, which was far more devastating.

Once a prisoner, he/she would be bombarded by suggestions like, "Your country has deserted you.", "Your wife is with another man.", "You are defeated.", and the like.  At first, the Americans would laugh this off, but over several years of being spoken to and treated in this way, they began to become despondent, some of whom became so depressed that they really did not want to go back to the U.S. once the Americans won the war.

Although the effect of this was temporary, in most POW's cases, it opened up to VJ the importance of one's self-talk.


This same tactic was used by legendary boxer, Muhammad Ali, in the epic 'Rumble in the Jungle' fight against George Foreman.  In one of the greatest fights in boxing history, Ali repeatedly told the younger, stronger, and heavily favored George Foreman - "Is that all you got, George?" - and in this way he had beat him up mentally and psychologically. 

The 8th round and final round including the knockdown is attached above for your viewing.  Notice how often Ali pulls Foreman in to taunt him.


The next meeting will be on Sunday, September 2nd, 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

No comments:

Post a Comment