Juggling Dynamite

I have had a very interesting week this week. ..lots of interesting inputs and conversations.
Wednesday I did an interview on CBC Newsworld with Danielle Bochove on the announcement by the BOC that they were pausing in their tightening cycle to watch the on-going slow down in the US economy. A couple of months ago, the BOC and the Fed Reserve were saying (at least public ally) that the subprime issues were contained and the housing recession was not seemingly hurting the overall economy. Today's “shocking” non-farm payrolls report apparently caught many by surprise as not only did the US economy not add the expected 100K + net jobs in August but it lost net 4k jobs and half of the jobs that had been previously reported as added over the prior 2 months. So it turns out job growth in the US has been weak over the past 3 months. In fact we have not seen it this weak in the US since 2003 when we were moving out of the last recession. Time will tell, but I suspect job losses will be in the cards for a few more months in here as the auto and housing recessions take their ongoing toll on debt-laden consumers.
I was at a great conference yesterday organized by Girls, Gals, Gurus. The day was devoted to health education, empowering and inspiring attendees to reject the myths of conventional western medicine and take greater responsibility for managing our health through preventive diet, exercise and efforts to detoxify our living environment. The bad news is that the big drugcos are in charge of the bulk of health information and marketing and so most of what the public learns is reactive solutions aimed at promoting drug sales. The good news is that there are many lifestyle changes which regular people can implement to take back the management of their own health and greatly diminish the risks of disease. It is estimated that a full 50-70% of the disease we suffer from in North America can be avoided through wiser health choices.
One other item that came out of all the presentations yesterday: on-going personal discipline is key to success in managing the risks to our health. This is of course not news to those of us who have been long devoted to daily discipline and maintenance of our health. But as I scanned around the room yesterday I could see that many in the audience were feeling somewhat overwhelmed. If they had not already been committed to buying organics, rejecting junk food, and exercising daily the advice from the experts was no doubt a bit overwhelming. They suggested that everyone start with a couple of things they could implement and add improvements gradually over the next several months. Good health is not built in a day of course; it is a life long commitment. It’s not about losing weight for a special occasion or swimsuit, commitment to our health is a lifelong passion for the health of our bodies, our environment and the health of our families.
The starting point in this journey was clearly to realize that much of what we have been taught about the randomness of disease and our vulnerability to its risks is absolute rubbish. The most poignant speaker on this theme for me was Dr. Christine Horner, MD. Dr. Horner is a board certified surgeon from the US. She was trained in conventional western medicine and worked in it diligently for 20 years before she realized it was hopelessly focused on drug treatments for disease and sorely lacking in wisdom about prevention. As puppets in a billion dollar pharmaceutical franchise, conventional medicine has brainwashed many main-stream doctors and patients. The marketing engine of the sales franchise has controlled and dictated what research and information is disseminated. They have been able to control what the rest of us “know” about our health. And masses of people have too easily accepted the path of no resistance, abdicating personal responsibility for themselves.
In listening to Dr. Horner I was taken-a-back by how similar her experience had been to my own conventional training and education in the money business.
So much of what people “know” about investing nowadays just isn't so. The investment sales machine like the pharmaceutical sales machine convinces people that risks are all random so the best we can do is spread things out, embrace the risks and hope for the best. Case in point is the notion that market cycles are all random, completely unpredictable things that we must just blindly ride out and hope we can survive. An article this month in The Analyst by Anne Maggisano “Technical analysts: Fooled by Randomness?” (Sept 2007) made this type of argument rejecting the idea that market cycles move in generally predictable patterns that one can roughly anticipate and thereby manage risk exposure to accordingly. This is a preventive thesis that I recommend in Juggling Dynamite as alternative to a passive, buy, hold and hope investment approach. Ms. Maggisano perhaps not surprisingly has a day job in the long-lonly investment business herself, so perhaps its not unusual that she might summarily reject a precept that questions the value of this type of management.
Maggisano cited my admission that it is hard for regular people and professionals to maintain the discipline required to execute a successful investment strategy as grounds for rejecting efforts to do so. If it is hard to keep up the discipline then one should not bother to try?
Sorry to offend mainstream players, but the truth must be told. Dr. Horner had to turn her back on the conventional medical business to teach the truth about health, just as a I too had to leave the conventional investment industry years ago to teach the truth about money.
Bucking the status quo is an inevitable part of the journey to truth. It is certainly not a comfortable path of least resistance, but we who have inside information need to call bullshit fraud on our own industries if we are to get on with helping and empowering real life people. I am always happy to hear about the others out there fighting this good fight. Power to the people.

Implode-o-meter now reports that 145 lenders have gone out of business since late 2006. Lately the count has been accelerating with a few more reported each day.
The markets have now priced in a full half point cut anticipated in the US Fed funds rate on September 18. So party on Garth?
Unfortunately the current problems of over-leverage and reduced liquidity cannot be given a quick fix with some knee-jerk fed cuts. Today's problems were not created by too-tight credit so they can't be fixed by loosening the purse strings. Today's problems were created by fed policy that was too loose for too long.
Lately critics have been pounding their chest and gnashing their teeth that the Fed is waiting too long to cut interest rates and that this is a policy error threatening to drive the US into a significant slow-down or recession. I would point out however that the policy error here has not been in failing to cut fast enough. The policy error we are suffering from today is the one where the Fed cut their funds rate to less than inflation and left it at 1% for a year 2003-2004. Not only did they leave the floodgates wide open, but the Fed left their post completely. The should-be-guards failed to man the gate at all. They turned their back on the party that got underway and refused to step in to curtail the irresponsible lending and consuming that followed. This lengthy lapse of reason is the root of the evils we are now confronting.
This patient cannot be rehabilitated by handing out more opium (other people's money through credit). This patient (consumers and risk-junkie investors) will need to spend some time in rehab to clear this overhang and find their way back to healthful habits. People need to reign in their spending–sorry it will slow the economy,–but that is the inevitable outcome of spending our brains out on credit over the past few years. The markets may rally on the hope of coming rate cuts, but the fact is that profits will decline, growth will slow, and risk assets will need to be re-priced
For now, at least, the party is over.

Today the US Federal Reserve stepped in with yet another emergency effort to ease a building liquidity crisis in world markets by cutting the discount rate “temporarily” from 6.25% to 5.75%. The markets cheered on the open roaring up with great relief. As the day rolled on the intial exuberance moderated a bit, as averages dropped back from opening heights. And volume on today's rally has been low.
Today several commentators (the same ones who weeks ago said sub-prime was a contained, non-issue) are quick to pronounce that the serious economic consequences caused by the “non-issue” are now behind us thanks to the Fed stepping in.
Facts must be faced. The truth is that there is no extreme-makeover solution to the present problems of over-levered consumers and markets. An emergency cut may help with emergency relief but it is really the equivalent of dropping a bed roll and food rations from the rescue helicopters. It may help the most critical casualties to buy some time, but it does not restore a nation to healthful habits and a robust recovery. This will take a bit more work than that. As Bloodier and Bloodier points out in New York magazine this week, the current imbalances are vast and wide-spread they have come from years of abuse and consumption at all cost. The health of the US ecomony (and thereby feeder-fish like Canada) are all compromised at present. Lipo-suction-like intervention by the Feds may smooth the surface for a bit, but restoring real health will take longer. There will need to be systemic and life-style changes. Consumers will need to stop spending like million-aires just because they could borrow, and start living within their actual means. This means inevitably slower economic growth for a while. We have borrowed a lot of consumption from the future months through goods bought on credit in the past couple of years.
I am hopeful and optimistic that better habits and policies will be the positive outcome of these painful lessons learned about credit-abuse (at least for a while anyway, I acknowledge that people have short memories).
Sorry to be the party-pooper, but at some point it really is not just how things look on the surface that matters. True health requires real work and rehabilitation of the foundation underneath.