Niall Ferguson on entrepreneurial freedom and innovation

I am presently watching Niall Ferguson speak on entrepreneurial freedom in the global financial system, a presentation given at the St. Gallen Symposium 2010.

According to Professor Ferguson, the innovations brought about during the industrial revolution not only increased the efficiencies of goods manufacturing, it also made it easier for the very people who made those goods to buy more. These advances in economic ingenuity and processes are at the heart of rising living standards and economic growth.

Ferguson begins this lecture with some frank talk about Americans' delusions over their rapidly rising wealth twice over a ten year period (first in the dot com bubble, followed by the real estate boom); he then moves on to address the realities of economic decoupling, as seen in the recession in the developed world vs. slowing growth in developing economies.

He then offers a quick rundown of the factors which brought on the recent financial crisis, leading up to a historical overview of the industrial revolution and the efficiencies created by the "entrepreneur-driven process". Where industrial technologies and industrial processes were successfully spread, they came about mainly as a result of risk taking by entrepreneurs.

Relentless innovation and competition from entrepreneurs have driven down the costs of manufactured goods ever since. Schumpeter's description of the process of "creative destruction" speaks to the realities of economic survival; according to the evolutionary mode of thought, there are businesses and business models that, not unlike a species doomed to extinction, are not supposed to survive.

Unfortunately, we seem to face some very real threats to the workings of this spontaneous cycle of innovation and renewal. The long-term economic prosperity that has come about as a result is also in danger, says Ferguson.

What are the principal threats to entrepreneurial freedom and innovation? Let's tune in and find out.

FT on the "true value of gold"

Well I'm a bit skeptical that any modern news outlet will accurately pinpoint the true value of gold, but let's give the Financial Times points for trying in this latest piece (hat tip: James Rickards):

"The Baird & Co warehouse sits in a dreary business park, half a mile east of London’s City airport. A black Mercedes and a blue Jaguar near the entrance are the sole touch of glamour. Step inside, and men in overalls are fashioning medallions, bars and rings from molten gold, purified in vats next door.

From an office upstairs, Tony Baird, the company’s managing director, and a former coin dealer, presides over the hubbub. “Gold is stable,” he says. “It’s the value of money that goes up and down.” Baird & Co sells gold to everyone from pension funds to jewellers, and as the MD says: “Our machines can’t work fast enough these days...”

Gold is still hot with investors, especially with leading hedge funds who have entered the trade in recent years, and with more conservative and libertarian-minded individual investors who seek a refuge from the uncertainties of our current government and the eroding paper money system.

As the FT notes in this piece, the leading mints and gold refineries are struggling to keep up with booming demand worldwide. And it's no mystery why, when you acknowledge the fact that many sovereign nations face grave financial problems and deficits that may lead to further "debt monetization", aka inflation via the running of electronic printing presses.

Ron Paul speaks to the problems of fiat money systems in the FT's article.

"...In his book Gold, Peace and Prosperity, Paul decries the end of the gold standard – the practice of backing currencies with a fixed weighting in the metal, which took many forms through history. President Nixon brought an end to the gold standard in 1971, as part of his attempt to overcome the strain of funding the Vietnam war and the US’s mounting trade deficit. Paul thinks the system of fiat money facilitates “governments’ attempts to inflate, control the economy, run up deficits and fight senseless wars”. He worries, too, that both the supply of paper money and government debt levels are spiralling out of control.

“My beef is with the paper money,” he says. “All the problems we’re having today were destined to happen. Gold plays an important role in the monetary system because it restrains government spending.” Without it, Paul argues, central banks have the power to print money without pausing to consider the consequences, and more impetus to spend it."

Check out the full piece for more on gold from private banker Adam Fleming and Jim Rickards, who is quoted on the issues of GATA, gold short positions by the bullion banks, and rumored gold sales from LTCM in 1998.

StockTwits now home to private companies

Last Friday, StockTwits announced they would partner with SecondMarket, an independent marketplace for private company stock and illiquid assets, to provide an expanded new commentary stream for discussion on private companies.

Some thoughts from Howard Lindzon on the new partnership:

"I love stocks and I LOVE investing in startups. About 8 months ago I started calling Facebook $fbook and Twitter $twit when I tweeted. I felt the IPO market was struggling and it would be cool if Private Companies had a lightweight exchange or center of conversation to point people too to learn about them in real-time. A place where employees and investors could get a pulse of what people were saying about private companies.

It would be cool for the Companies and REALLY COOL for STOCKTWITS is we could own all the company conversations on twitter. When I had the idea and Fred Wilson noticed me doing it, at least he thought so and his hunches are better than mine.

Through a partnership with SecondMarket, the marketplace for illiquid assets, we are excited to deliver to our community at StockTwits the capability to comment on an entire network of private companies..."

You can find the newly expanded private companies stream here, along with a database of ticker symbols that helps users find company info and profiles and allows them to tag their discussions on private firms for all to follow in real-time.

Here are some snapshots of the discussion stream and the private company symbols database:

We (notably Howard and Fred Wilson) started out tagging private companies like Twitter ($TWIT) and Facebook ($FBOOK) with unique tickers on StockTwits earlier in the year as a way to include up & coming private businesses in our discussions on the stream. A few more proposed symbols were added for companies like Skype ($SKYPE) and Bloomberg ($BBERG), and we were well on our way.

The sudden expansion of this list from a handful of ticker symbols to a list of more than 200 companies is a surprising and exciting development. Furthermore, StockTwits will allow private companies to declare and manage their own ticker symbol. Seems like they are hip to the recent urging by Fred Wilson to open up the private company database to new firms, and this will likely help fuel the growth of this new database and the buzz around it.

So, in summary, now you know where to go when you want to chat about private companies in real-time. The StockTwits private company stream should prove to be an increasingly active venue for aggregating info and chatter on innovative, new businesses that have yet to IPO (or prefer to remain private in a post-SarbOx world). Should be fun. See you on the stream.

Nassim Taleb on fragility, black swans at EconTalk

Nassim Taleb, author of Fooled By Randomness and The Black Swan, joins Russ Roberts at EconTalk for a discussion on Black Swans, Fragility, and Mistakes.

You'll find an audio podcast of the interview, along with a transcript and some related articles & links, at the link above.

Be sure to check out this very worthwhile and wide-ranging discussion on the nature of debt, robustness in Mother Nature versus lack of robustness in certain man-made systems, and the harm that is levied on society by its overreliance on forecasting and vulnerability to the large mistakes made by "expert" forecasters who are not held accountable for their hubris and error-prone guidance.

Here's a choice quote from Taleb on the difference between small, relatively inconsequential mistakes and large-scale mistakes which impact the greater society:

"I want to live in a society in which human error doesn't penalize the multitude. This is pretty much my mission for the rest of my life: to try to figure out how to build a society in which people can make mistakes. Mistakes are inconsequential; that's my tinkering idea, because you make a lot of small mistakes and so society should be able to make a lot of small mistakes. Mistakes are like an option on discovery.".

Enjoy the interview and I hope it stimulates some thinking and action heading into the weekend.

Related articles and posts:

1. More podcasts with Nassim Taleb - EconTalk.

2. Russia Forum 2010: Nassim Taleb, Marc Faber, Hugh Hendry - Finance Trends.

War on savings continues: bank fees and zero rates

Bank fees and ultra low interest rates continue to hit US savers hard. Bloomberg has the story in, "Savers Pay Banks to Keep Cash as Rates Dip, Fees Rise":

"It’s getting tougher for U.S. savers to find a bank where they won’t end up paying to keep their money safe.

The average interest paid on savings, checking, money-market and certificate of deposit accounts fell to 0.99 percent in July, the first dip below 1 percent in a decade, according to researcher Market Rates Insight. Banks also have been raising fees and adding new ones, most recently in response to the financial-services overhaul bill that became law July 21.

The result is that an increasing number of savers are seeing their deposit earnings eaten up by charges. That’s frustrating people like Ken Ward, who recently passed on a savings account with a 0.01 percent interest rate at the Chase bank branch near his home in Wantagh, New York..."

As if years of hyper-spending and living beyond our means consumption haven't hurt the average American family's balance sheet enough, we continue to struggle through a period in which near zero rates and real world inflation take their toll on savers.

Here's an interesting (and depressing) little fact from Tradefast: "if you need/want $100,000 of income in retirement, you only need to buy $26.7 million of US Treasury 2 year notes to reach your goal".

Of course, if you go out 10 years at 2.51% (current yield on 10 year US Treasury), you'll probably only need about $4 million worth of Treasury bonds to reach the same income goal.

It's interesting to note that many retail investors seem to have abandoned the stock market over the past 30 months, taking $209 billion out of domestic stock funds while $559 billion flowed into bond funds during that time. If these ultra low rates can't spur investors into the stock market, it seems that nothing (short of an incredible, longer-term rally) can.

One of the big investing themes in recent months has been the search for yield, as US savers and investors reach to grab any interest income that they can. Meanwhile, as mainstream news outlets tout vehicles such as junk bond funds and ETFs to yield starved investors, onlookers such as John Rubino warn this trend will only end badly for savers and investors.

Low to negative real interest rates continue to greet savers and investors; it seems the war on thrift and savings continues unabated.

Related articles and posts:

1. The Low-Interest Rate Trap - Dollar Collapse.

2. Investors Shake Up Funds w/ Record Bond Love Affair - Bloomberg.

Pete Sampras on Winning (IBD)

Nice inspirational article from IBD on Pete Sampras' quest to find his winning edge:

"In a career defined by victories, Pete Sampras learned his most valuable lesson in defeat.

At 19 years and 28 days, Sampras made a global splash by becoming the youngest men's champion of the U.S. Open in 1990.

For the next two years, he was ranked as high as sixth in the world. He was making a good living and was content with his career.

Then came the 1992 Open final. It was Sampras' first Grand Slam title match since his 1990 breakout. This time he lost to Stefan Edberg.

Sampras usually stayed even-keeled even after a defeat, but the way he lost ate away at him.

"You know as an athlete when you're fighting hard or not. All I did was just sort of play. I didn't dig deep. I didn't fight hard. I felt mentally I just sort of gave up," Sampras, 39, told IBD.

For the next few months, that loss stayed with him.

"It bothered me to the point where it was my 'ah-ha' moment," he said. "It just sort of woke me up to 'I do hate to lose.' From that point on, if I was going to lose a tennis match, it wasn't going to be because I gave up, but because I was outplayed or I didn't play well. It changed everything, that one loss..."

Check out the full piece and find out what Sampras was willing to do in order to harness his killer instinct and compete at the top levels of the game. I found some lessons here that could certainly apply to the arenas of trading, investing, or any endeavor where you are competing to reach your best "level of play".

FT interviews Adam Fergusson: When Money Dies

Financial Times sits down to lunch with Adam Fergusson, author of the newly revived classic, When Money Dies, a social history of the Weimar hyperinflation.

Fergusson's 1975 book has recently been republished to sate demand from a new generation of investors eager to learn the lessons of Germany's inflationary catastrophe. In fact, recent reports that the book had been recommended by none other than superinvestor Warren Buffett (a rumor later reported to be false) seemed to stoke readers' demand.

Author Fergusson notes that Mr. Buffett is now in possession of a copy, so it will be interesting to see if the lessons of Weimar Germany take hold and influence Buffett's thinking on our own inflationary path and the ability of central planners/bankers to manage our monetary affairs.

An excerpt from FT's interview with Adam Fergusson:

"Fergusson wrote When Money Dies in the early 1970s when the British economy was buckling in the wake of the first oil shock – which killed growth and pushed prices up. “When I started researching it in 1973, inflation was about 10 per cent, and when the book came out in 1975 it was nearly 25 per cent,” he says. “Somebody said, ‘We must go back and look at what happened in the 1920s when prices got out of ­control’.”

It started life as a series of articles in The Times that drew on the Weimar story in order to warn Britain off the inflationary track. But, I interject, weren’t the parallels rather thin? Even at its peak in 1975, British inflation hit an annual rate of only just over 24 per cent. At the climax of the Weimar disaster, prices were doubling every two days.

The quantum was different, Fergusson agrees. But, he says, all periods of high inflation – however harsh – involve the same moral slide. “The corrupting thing about inflation is the way the feelings and jealousies are exactly the same,” he says. “You worry that some people are doing better than you are – people who know what to do about rising prices while you don’t.”

In the Weimar time, this was particularly extreme. High inflation wiped out debts, atomising the savings of the prudent and redistributing wealth to the fortunate or simply unscrupulous..."

Read on at the link above for the full piece, and see our related post links for more on When Money Dies and an audio interview with author Fergusson.

Related articles and posts:

1. When Money Dies: read it online - Prudent Investor.

2. Interview with author Adam Fergusson - BBC.

3. Dying of Money - Finance Trends.

Hazlitt's Economics In One Lesson online

Jeff Watson at Master of the Universe's blog recently posted a Mises Institute video discussion of Henry Hazlitt's classic text, Economics In One Lesson.

You can read Hazlitt's wonderful primer on economics for free online (PDF download also available) at FEE.org.

Here's what the Mises Institute has to say about Hazlitt's widely appreciated lesson on applying sound economic principles to the functions of our everyday world:

"Henry Hazlitt wrote this book following his stint at the New York Times as an editorialist. His hope was to reduce the whole teaching of economics to a few principles and explain them in ways that people would never forget. It worked. He relied on some stories by Bastiat and his own impeccable capacity for logical thinking and crystal-clear prose...

...Written for the non-academic, it has served as the major antidote to fallacies in the popular press, and has appeared in dozens of languages and printings. It's still the quickest way to learn how to think like an economist. And this is why it has been used in the best classrooms more than sixty years. ".

For those who'd like to purchase a hardcopy of Hazlitt's book, check out the Mises bookstore where you'll find an inexpensive hardbound edition with volume discounts for orders of two or more copies. Perfect for anyone who'd like to pass out copies to their friends and associates (or even their political representatives).

Ready for the GM IPO?

General Motors (or "Government Motors" as some wags have dubbed it) prepares for its upcoming post-bailout IPO. I guess you could call this the investor road show.

China surpasses Japan as world's 2nd largest economy

China has surpassed Japan to become the world's second largest economy, in terms of nominal GDP. Yeah, I'd say that's a noteworthy trend on the world economic scene.

Bloomberg has the details:

"China surpassed Japan as the world’s second-largest economy last quarter, capping the nation’s three- decade rise from Communist isolation to emerging superpower.

Japan’s nominal gross domestic product for the second quarter totaled $1.288 trillion, less than China’s $1.337 trillion, the Japanese Cabinet Office said today. Japan remained bigger in the first half of 2010, the government agency said. Japan’s annual GDP is $5.07 trillion, while China’s is more than $4.9 trillion.

China led the world out of last year’s global recession with an economy that’s more than 90-times bigger than when leader Deng Xiaoping ditched hard-line Communist policies in favor of free-market reforms in 1978. The country of 1.3 billion people will overtake the U.S., where annual GDP is about $14 trillion, as the world’s largest economy by 2027, according to Goldman Sachs Group Inc. chief economist Jim O’Neill.

China’s surpassing of Japan “is a marker of its increasingly dominant role in the global economy,” said Eswar Prasad, a senior fellow at the Brookings Institution and former head of the China division at the International Monetary Fund. “The resilience of China’s growth during the crisis enabled a number of other countries, particularly commodity-exporting economies, to ride on its coattails...”"

According to a PricewaterhouseCoopers report cited by Bloomberg, China is expected to overtake the US as the world's largest economy sometime around 2020.