Meeting Minutes

We had a very interesting and varied meeting today at On The Border!  We had a total of 5 attendees: (from left to right) Ry Zamora, VJ Arjan, Elena Swindull, Kevin Day and Jeff Harrington.

Presidential Debates Matter

The very first topic we began chattering about was on how Romney's spectacular performance has possibly turned the probabilities in this election upside-down for the incumbent. 

Kevin Day mentioned how he felt that Romney was clearly on the offensive the entire time and for perhaps the first time, without the use of a handy teleprompter, the public was able to see the current President in a fatigued light.

Elena Swindull felt that the President felt nervous based on the body-language he was communicating, like a person who is unsure of himself.  She did not feel the radiance of confidence that usually shines forth from his personality.

We're not sure whether it had been a day full of difficult decisions, as often a day is being "leader of the free world" or perhaps it was as simple as he didn't eat a proper breakfast that morning, whatever the reason, it seemed that President Obama didn't want to be there.

The importance of a televised debate has really been in effect since the famous Kennedy-Nixon debate.  The non-verbal communication of the participants spoke volumes to the millions watching.  The small unconscious gestures, the grimaces, even the posture with which the participants carry themselves speaks volumes to the American people.

Above is a picture snapped at the most recent presidential debate.

Compare the defeated look of the current President to the Senator Obama who ran, 4 years ago.  What a remarkable difference in non-verbal communication is being portrayed in both instances!

Although, VJ Arjan was wary to point out whether or not Romney's debate performance was enough to clinch the election.  He feels that there are still a couple hurdles to go, but it is by no means in the bag for him.

This election battle has been by no means a very cordial one.  Jeff Harrington pointed out that when an analysis was conducted by FactCheck as to the accuracy of their assertions about their opponent, both were lying or exaggerating about the truth on several topics.

Cooking The Books

"Figures lie and liars figure." - Kevin Day

The Bureau of Labor Statistics (BLS) announced last week that the unemployment report surprisingly dropped from 8.2% to 7.8%.  A drop so drastic is certainly strange given the increasingly tepid economic environment we are currently seeing.

Kevin pointed out that the jobs numbers can very easily be "miscounted for" and that he suspects this is not the first time that such tactics have been used in increasingly politically-heightened scenarios.  VJ pointed out that apparently the difference of approximately 400,000 jobs came from a revision of jobs numbers stretching several months back.

No doubt, this gives President Obama some ammunition against Governor Romney who has painted the President as the primary blame for the economy's current situation.

The Case Against Government in the Private Sector

VJ, who is reading the marvelous, common-sense book entitled Economics in One Lesson by economist Henry Hazlitt read a chapter on the case that the author makes via the Austrian School of Economics (more colloquially known as the economics of common sense) on the reason why the government is an inefficient allocator of capital.

The reason why governments, historically, have generally trailed the private sector in how effectively they spend their money is that governments have a hard time saying no.  

As a public organization, the U.S. government in particular has taken on the father-figure role for millions of its citizens and its image as care-taker has only grown over time.  

Proof of this is that since the Great Depression and the subsequent New Deal enacted by President Roosevelt, several presidents had the chance to repeal the New Deal and label the New Deal as temporary relief programs that would end once the Depression came to an end, but none of them did. 

After Roosevelt, it can be argued that Truman was still busy cleaning up World War II and in jump-starting the Marshall Plan to help German and Japan to rebuilt their economies.  However, both Presidents Eisenhower and President Kennedy had the chance to cut back the entitlements programs, but they didn't.  Politically, it was not the feasible thing to do.  

It was a hard choice, but history has shown that politicians would just as much rather buy votes instead.

President Johnson solidified the entitlement culture along with his slogan of The Great Society by enacting the reforms known as Medicare and Medicaid.

VJ continued that the author argues that as private entities have accountability to its shareholders/equity-holders, more care is given to the allocation of capital whereas if there is a failed government policy, it can always print more money.

A perfect example of a failed government policy, VJ mentions, is the FHA loan.  The FHA loan did wonders when it was initially started.  However, over time the guidelines became more and more lax to the point where today, it is estimated that between 10-20% of FHA loans are delinquent each month.  Some research suggests that that number is closer to 30%. (http://www.bloomberg.com/news/2012-06-28/fha-underestimates-mortgage-delinquency-rates-study-says.html)

The Miracle of China

At a time when it has become fashionable in the investment community to bash the emerging markets, VJ thought he would share a story about the incredible effect that China is having on the global economy.

He had to buy a pair of eye glasses recently and remembered the lesson learned in spending $300 for a pair of Versace glasses that did not end up lasting very long at all.  So he did some shopping and found the following fashionable pair. 

How much do you think they cost?  Well, the shocking and amazing truth is that he paid a mere $25 from Zenni Optical to get prescription eye glasses complete with shatter-proof lenses and anti-reflective coating.  Curious about how in the world this company is able to do this, he called up their consumer help desk and he found that the glasses are manufactured in a factory in Shanghai and that the majority of the $25 actually goes to import fees imposed by the U.S. customs department.

Now consider how the range and diversity of the products that China makes and we have an integral piece of the manufacturing function of the global economy.  

Add to this fact that Chinese stocks today seem to be the cheapest since 1997 with an average price-earnings multiple of 11.4 for the Shanghai Composite.

No doubt, like all countries who have remarkable growth rates, there will be crisis.  But between the years 1800-1915, the United States had 15 financial crisis/panics and a Civil War and still averaged 3-4% annualized GDP growth rates.

Kevin has mentioned before that the major slowdown in China could only be momentary if it could be called a slowdown at all as the engine of growth is simply too robust and will continue to produce superior returns for decades to come.

Jeff, however, mentioned that the Chinese government may also be having its share of fiscal problems, the principal one being that their pension fund program for retirees of the State is financially in trouble and may in time snowball into a vicious political problem for the Communist Party, which the people are looking as the preserver of 6-8% GDP growth per annum.

Natural Gas and Other Potential Investments

We spent some time discussing the importance of the most viable fuel source next to crude oil, natural gas.  Strictly from a jobs perspective, Jeff argued, the growth in natural gas and its related industries is slated to create 3.5 million jobs in the next 10 years.

It is also becoming cheaper to drill and easier to transport, so it is a natural alternative to crude oil, as the world stops depending less and less on the Middle East.

Kevin and Jeff mentioned a few ways to play natural gas, some of which have been brought up before at previous meetings:

- First Trust ISE Revere Natural Gas (FCG)

- Targa Resources Partners L.P. (NGLS)

Some other investments that were brought up during the meeting are mentioned below:

- Rio Tinto Plc (RIO)

- Barrick Gold (ABX)

- Sandstorm Gold (SSL) - Kevin has been mentioning this stock for more than a year and it has nearly tripled in value since his first mention

- HOLCIM (HCMLY) - Ry believes a buy target price below $55 would be advisable

Conversation Amongst Two Gentlemen of Verona

"O heaven! were man But constant, he were perfect." - William Shakespeare

"Economics is envious of physics" - George Soros

After many of the attendees left, Ry and VJ sat discussing the reality of economics and the economy.

Alas, quoteth Ry, economics is not a science as Man is not constant.  (Enough of Shakespeare.)

All jokes aside, Ry discussed how the very nature of economics cannot be as constant as the law of gravity precisely because the participants in an economy are not ruled by a set of constants.  The participants are always in motion and so economics, according to Ry, cannot be categorized according to "growth" or "value" characteristics. 

Each situation is a function of three forces: price, expectations, margin of safety.  The fluctuations of economies is a result of the disparities between expectations and reality.  The further divorced from reality the expectations are the greater one's margin of safety should be.

Ry believes that the next "shoe to drop" may be student loans, a sector which is hardly getting any notice as the "shoe hasn't dropped yet".  Students are largely unable to find employment leading to delinquencies on student loan payments, not to mention that the return on investment of a college education and the cost of the tuition is in stark contrast to the economic benefit derived from having a degree.

Ry went on to say that the real economics solutions are, at the moment, politically impossible.  Hence, we have the caprices of Man enter into the equation.

He also believes that should hyper-inflation invade the U.S., it could most certainly begin once the world decides to give up the U.S. dollar as its reserve currency.  He believes that since at least 75% of the world's transactions are made in the U.S. dollar, the inflation is being shared throughout the world.  Once the dollar is not longer a the currency of choice, that inflation will come back home multiplied.

The next meeting will be on Sunday, November 4th, 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

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