Indy Telecom & Industrial Media

A bunch of people have sent me this, and it’s definitely worth reading – Jeremy Grantham talks about the state of the world (and American) economy in the 4th GMO quarterly of 2008.

Reading it brought to mind some points that I have been thinking about for a while now – and this is as good a place as any to talk about them.

One of the interesting things that is mentioned is the four ways in which the economy could turn out – a few big write downs until our debt is back to something reasonable, wait for the passage of time to wear down debt levels, or inflate our way through this debt. Of course, he also talks about the fourth option (which I would call a Greenspan-ian one) where we just move from one asset-class driven inflation to another (tech bubble to real estate – we all know how well that worked out).

Traditionally, the US has always inflated its way through all debt. Unfortunately, right now we are in an economically deflationary period. However, our government seems to think that writing down our debts is somehow wrong, and that we need to print more money to get through our current predicament. This does not make sense in the slightest because this is the very definition of a bubble — overinflated asset valuations, and a correction when the bubble bursts.

Of course, it does not help that everyone keeps calling it a credit crunch. Was there a period when there was a lack of credit liquidity in the market? Of course. But is it really a credit crunch? No, a more realistic take would be a debt overload (or, in Lana’s words, a big cluster fuck).

Therefore, printing additional currency is more likely to make things worse because printing more money is a short term patch that will worsen things in the long run.  Soon, we’ll reach a period of excessive liquidity, which will end up driving inflation through the roof within the next five years, if not sooner.

Another thing that I really enjoyed is when Grantham mentions Taleb’s Black Swan. Many people (and I’m guilty of this on occasion, as well) have misused Taleb’s Black Swan as a definition for high sigma events. Yes, Black Swans do occur in nature and yes, they serve as a fantastic example to all of us on the impact of the improbables and the unthinkables.

However, the current economic crisis is by no definition a Black Swan. We all knew it was coming all along, and we fed it along. Every American consumer consuming in excess of what’s needed, buying McMansions, big cars, and being knee deep in debt. And every one with half a brain cell predicting the bubble for what it was.

If anything, this is as white as it gets and we were just too blinded by our greed to see it. If you did not see this coming, you were a fool.

I also liked his take on Obama’s cabinet, and how he had a chance to bring in some real change, but instead chose yes-men and spineless folks who I’m afraid won’t stand to do the right thing.

That said, here are a few predictions from my end –

• Our economy has not bottomed out. There will be more write downs, and this is not going to be over any time soon.
• We will definitely go through a period of some rather unhealthy inflation that is likely to wreak even more havoc into American families already strapped for cash.
•  There is another asset class whose bubble hasn’t really quite burst yet — retail consumer economy. Sure, we are going through a rather conservative spending phase. But in my mind, that’s a bubble that may have fizzled out a little, but is far from bursting. And that is another rather scary thought.
• We really haven’t seen the full implications of this world wide. We’ve not even truly begun seeing the effects of this in the middle east (think Dubai), China (who knows what the real economic situation there is – outside of what the government tells us), India or South America.
• One word -Buffet.  Could he be wrong? As an investor in Berkshire Hathaway and an ardent devotee of the Oracle of Omaha, I’d like to think not. But there is always this tingling doubt at the back of my mind.

That’s my take. Arguably, it is a bit cynical, but I’d like to believe that it is a bit more realistic than what the media would have you believe.

More Taleb, yes.  An excellent essay in the Edge Foundation’s Third Culture by Taleb on statistics, and how it is often misused.

And here is an interesting analogy from the essay, comparing a Thanksgiving turkey fed consistently until its unfortunate end, and IndyMac’s performance.

Oh my.

While the rest of the market plummets, investors of Universa Investments LP (where Taleb is an advisor) have gained 50% or more this year.

That told you so sort of gets painful, especially when the man is right.

An interview from August in the Portfolio magazine with Taleb which talks about how he predicted this crisis ages ago:

N.N.T.: Yeah, I only do things where there’s a natural stimulation. I had no natural stimulation to sit in a meeting, so I would not sit in a meeting, and that has worked for me. I want to free up the time to think—that requires the details in my reading and my writing and thinking. Enjoyable activities. When I’m writing, if I get bored, I’ll stop immediately, mid-sentence, that’s it, I don’t write anything that bores me…You have a copy of The Black Swan? Let me show you, I think I have it here, page 225, in the footnote. Read it.

L.G: [Reads] “Likewise, the government-sponsored institution Fannie Mae, when I look at their risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup. But not to worry, their large staff of scientists deem these events ‘unlikely.‘”

N.N.T: That’s the central point. The rest is noise.

L.G.: You wrote that footnote in 2005?

N.N.T: Yes, but actually I saw their positions in 2003, when a very smart journalist, Alex Berenson of the New York Times, came to me and said, Can I show you the risk of Fannie Mae? When I saw it, I almost choked. [In Berenson's August 2003 article, Taleb was quoted as saying Fannie Mae and other major holders of mortgages and mortgage-backed securities chronically underestimate the odds of a big move in interest rates that could decimate the value of their portfolios, over-relying on computer models that don't account for rare but devastating events, i.e. black swans. "The fact that they have not blown up in the past doesn't mean that they're not going to blow up in the future. The math is bogus," he told the Times.] The core of my idea, the central problem here, is not to be a sucker for 1,000 days—not to be a turkey. See?