Wednesday, June 30, 2010

Prohibition's rise and fall: EconTalk interview with Daniel Okrent


While yesterday's post dealt with money laundering and present-day drug smugglers, today's feature looks at their 1930s precursor: bootleggers of alcohol and the US Prohibition era of the 1920s and '30s.

Russ Roberts of the EconTalk podcast speaks with author, Daniel Okrent about his latest book, Last Call: The Rise and Fall of Prohibition.

Roberts notes at the outset that the book is not only a history of Prohibition, but also a thorough look at America and its social history leading up to the Prohibition era. It also seems to provide a real insight into the development of the progressive movement and its resulting "well intentioned" legislative acts.

Have a listen to Okrent's and Roberts' look back at the rise and fall of prohibition; you may enjoy the insights on the unintended consequences of Constitutional amendments which were set up to restrict individual rights (rather than defend them).

Related articles and posts:

1. The Economics of Prohibition (free pdf or hard copy) - Mark Thornton at Mises.org.

2. End the Drug War - John Stossel at Reason.

Tuesday, June 29, 2010

Bloomberg: Wells Fargo, large banks aided drug gangs

Here's a rather interesting piece of reporting from Bloomberg: "Banks Financing Mexico Drug Gangs Admitted in Wells Fargo Deal".

"Just before sunset on April 10, 2006, a DC-9 jet landed at the international airport in the port city of Ciudad del Carmen, 500 miles east of Mexico City. As soldiers on the ground approached the plane, the crew tried to shoo them away, saying there was a dangerous oil leak. So the troops grew suspicious and searched the jet.

They found 128 black suitcases, packed with 5.7 tons of cocaine, valued at $100 million. The stash was supposed to have been delivered from Caracas to drug traffickers in Toluca, near Mexico City, Mexican prosecutors later found. Law enforcement officials also discovered something else.

The smugglers had bought the DC-9 with laundered funds they transferred through two of the biggest banks in the U.S.: Wachovia Corp. and Bank of America Corp., Bloomberg Markets magazine reports in its August 2010 issue.

This was no isolated incident. Wachovia, it turns out, had made a habit of helping move money for Mexican drug smugglers. Wells Fargo & Co., which bought Wachovia in 2008, has admitted in court that its unit failed to monitor and report suspected money laundering by narcotics traffickers -- including the cash used to buy four planes that shipped a total of 22 tons of cocaine..."

This is a must read piece, and one that will surely lead you to consider the realities of criminal enterprise arising from the illegal drug trade.

There must be an inordinate amount of pressure and danger for bank insiders who try to blow the whistle on these money laundering activities. The lure of profits from laundered money must be great (surely greater than the settled fines) and the risk of crossing violent criminals with refusal to do business may be fatal.

Bloomberg's piece also serves as testament to the fact that criminals will always find a way to work around intrusive laws, while law-abiding citizens who are not focused on evading the law will often be stymied or ensnared by these same regulations.

"...No big U.S. bank -- Wells Fargo included -- has ever been indicted for violating the Bank Secrecy Act or any other federal law. Instead, the Justice Department settles criminal charges by using
deferred-prosecution agreements, in which a bank pays a fine and promises not to break the law again...

...Large banks are protected from indictments by a variant of the too-big-to-fail theory.

Indicting a big bank could trigger a mad dash by investors to dump shares and cause panic in financial markets, says Jack Blum, a U.S. Senate investigator for 14 years and a consultant to international banks and brokerage firms on money laundering.

The theory is like a get-out-of-jail-free card for big banks, Blum says.

“There’s no capacity to regulate or punish them because they’re too big to be threatened with failure,” Blum says. “They seem to be willing to do anything that improves their bottom line, until they’re caught.”"

Check out the full article, along with the related video clips from Bloomberg TV.

Related articles and posts:

1. Show us your money - Reason.

2. Feds sift through financial data - Finance Trends.

Friday, June 25, 2010

Chart of the day: Post-massive bear market rallies


Chart of the Day brings us this latest figure on "Post-Massive Bear Market Rallies".

In other words, they're plotting the extent and duration of some major index rallies that have occurred after a 50% or greater decline. Have a look at their chart description for more on the Dow and Nasdaq rallies which followed major market declines, and why this post-bear rally may be flattening out over the coming weeks and months.

What do you say: are we in for a downward move in the major US market averages or a sideways consolidation period? Or are you prepared for whatever comes our way?

Wednesday, June 23, 2010

Slate profiles Victor Niederhoffer


Slate's recent profile of writer/speculator, Vic Niederhoffer has been getting some attention from traders and finance types in recent days. I thought we'd take a look at it here too, to offer up some possible educational value from Vic's experiences with trading and loss.

Here's an excerpt from Slate's profile of Victor Niederhoffer:

"
I've enjoyed getting your e-mails. It sounds like you've thought a lot about being wrong.

Well, the reason you contacted me, to call a spade a spade, is that I'm sort of infamous for having made a big, notorious, terrible error not once but twice in my market career.

Let's talk about those errors. The first was your investment in the Thai baht, which pretty much wiped you out when the Thai stock market crashed in 1997.

I made so many errors there it's pathetic. I made one of my favorite errors: "The mouse with one hole is quickly cornered." That is key. There are certain decisions you make in life that are irreversible, that lead you into a path you can't get out of, and unless you have more than one escape clause, the adversary can gang up on you and destroy you. What else? I didn't have a proper foundation. I was not sufficiently private in my activities. I was playing poker with men named Doc. I must've made a hundred errors on that one, but those are five or six that come to mind.

And then there's the greatest error of all, which is that I had delusions of grandeur. Unfortunately I was so successful for so many years in that particular field that I began to believe in my own success. I thought that because my method worked in markets that I knew about and had quantified, I could apply the same methods to something I didn't know about. And I had as an example [George] Soros, who would always say, "I made the most money in things I don't know about."..."

So, given that Vic's well-known blowouts as a trader served as a focal point for this interview on error and "being wrong", I still have to wonder if Vic really answered the question about why he failed as a trader. Yes, he offered up some reasons or what some might call alibis (brokers and floor traders circling like sharks, etc.), but did he really get at the root of the problem (that he touched on in comparing his squash game to his investing career), which, in his case, had more to do with leverage and taking on outsized risks?

Note that in addition to the discussion on error and losses, Vic also says some interesting things about his father, his mentor George Soros, taxpayer-funded bailouts, and life. Certainly a worthwhile read overall.

Related articles and posts:


1. Altucher: Things I learned from Vic Niederhoffer - Finance Trends.

2. Writings of Victor Niederhoffer and friends - Daily Speculations.

Monday, June 21, 2010

What a renminbi revaluation means for commodities, economy


As I don't pretend to be an expert on matters of currency movements, here are comments from a few more knowledgeable sources on the recent policy shift in the Chinese renminbi (yuan) currency peg.

1. China to put renminbi in a currency basket - Daily Reckoning. "The renminbi is now 'flexible!'" These cats reckon that moves higher in the RMB vs. the dollar are not a foregone conclusion (as many/most suspect).

2. Chinese yuan under 5 by 2020 - Maoxian. Chairman Maoxian sees a long-term controlled appreciation of the Chinese currency that is likely to suit the country's own interests (and timetable).

3. Yuan revaluation impact to be limited - PragCap. Bondsquawk contributes this post on the revaluation, noting that deterioration in the euro is having an effect on "China's plan of allowing considerable appreciation for the yuan".

4. Chinese currency: why Americans should care about yuan revaluation - CSMonitor. Notes on how the exchange rate flexibility announcement could affect Chinese export prices and prices of US exports into China.

On a related theme, Wall Street Journal notes that anticipation of a stronger RMB has "sparked hopes of increased Chinese demand for commodities". As noted in the WSJ piece, some of the basic materials and metals mining stocks are getting a boost today on the revaluation.

While traders are taking the yuan revaluation news as a sign of strength for resources and the global economy, we wonder if investors like Felix Zulauf would agree with this one day verdict.

Zulauf and Marc Faber were both recently quoted in Barron's mid-year Roundtable as saying they expected a downturn for commodity prices, along with a slowdown (or "tightening") in China and the resource economies (Australia & Brazil) tied to its economic prospects.

Will the yuan revaluation turn out to be more of a strategic move which favors China rather than its economic rivals and resource suppliers?

Friday, June 18, 2010

Features of the week

Some Friday reading (and listening material) for you in our, "Features of the Week".

1. Medvedev says he'll make Russia a "dream" for foreigners - Bloomberg TV.

2. Russian President Medvedev's interview on BP, Euro, political instability - WSJ.

3. North America in the lead? ETF assets & money flow. - Derek Hernquist.

4. James Rickards on, "Why BP Will Not Survive" - King World News.

5. Looking for stocks making "The Next Big Move" - Joe Fahmy.

6. "Refusing to Be Counted": a conscientious objector to the census - Vijay Boyapati.

7. Interview with Jim Rickards on IMF, a global currency, and the economy - King World News.

Hope you enjoyed these articles, interviews, and video features. Have a nice, peaceful weekend and we'll see you next week!

Wednesday, June 16, 2010

BP spill estimates upped (again) & a $20 billion escrow fund

As noted on Twitter this AM, government estimates on the BP oil spill have been raised again, with the Obama administration now claiming 60,000 barrels a day are flowing into the Gulf.

We've been following these estimates with interest, noting earlier this month that estimated spill numbers seem to be purposefully climbing higher towards Matt Simmons' earlier call of 120,000 barrels/day.

Simmons made his call on the BP spill's magnitude toward the end of May in this Financial Sense Newshour interview. That estimate seemed to echo a report from Purdue University engineering professor Steve Werely, and today Matt Simmons is on Bloomberg repeating the 120k barrels/day estimate, citing research from a report published on Sunday.

If you're curious about what the credit markets are saying about BP's future, here's a snapshot from Weekly TA on the CDS market's reading. WSJ reports that CDS on BP debt climbed to a record 625 basis points Wednesday, before settling back down to 565 basis points on news of a deal with the US government over its spill liability.

BP has agreed to fund a $20 billion escrow account to cover damages to those affected by the spill, though White House adviser David Axelrod claims there will be "no upward cap" on the fund or BP's liability.

The news for BP and our environment just keeps getting worse. If I were a BP shareholder (no position), I'd stop worrying about a return on capital and start worrying about a return of capital at this point.

Related articles and posts:

1. Gregor MacDonald and Howard Lindzon on BP fiasco - Stocktwits TV.

2. BP's deepwater oil spill - why flow rates are increasing - The Oil Drum.

3. Simmons & Co. cuts ties to outspoken founder - Reuters.

Monday, June 14, 2010

Seth Klarman profiled in Bloomberg

Hedge fund manager and author, Seth Klarman (Baupost Group) was recently profiled in Bloomberg for his investing acumen, as well as for the enduring popularity of his 1991 book, Margin of Safety.

An excerpt from, "Klarman Tops Griffin as Investors Hunt for 'Margin of Safety'":  

"Seth Klarman almost doubled his hedge fund’s assets to $22 billion in the past two years as the industry shrank by sticking with the off-the-beaten-path investments he’s pursued since starting out in 1983.
Unlike John Paulson, who made $15 billion by betting against home mortgages, Klarman didn’t see one big trade that would profit as markets began to collapse. The founder of Baupost Group LLC focused on corporate bonds he calculated would yield solid returns even if the economy got worse.
“We didn’t have the degree of conviction Paulson had,” said Klarman, whose views are so closely watched by investors that his out-of-print book, “The Margin of Safety,” is offered on Amazon.com for more than $1,700. “We don’t deal in absolutes. We deal in probabilities,” he said in an interview at his Boston office..."
Check out the full piece above for more on Klarman's super-impressive investment returns (risk considered) and investing philosophy.

You can also find more about Klarman and his book, Margin of Safety, in our related posts section.

Related articles and posts:

1. Seth Klarman: Margin of Safety - Finance Trends.

2. Seth Klarman: Lessons from 2008 - Value Plays via Finance Trends.

Friday, June 11, 2010

Leigh Drogen on technical analysis

Leigh Drogen, who you may know from the Stocktwits stream and Stocktwits TV, has a nice post up at his blog on the utility of technical analysis. Here's a bite:

"
Joe Retail Investor: But isn’t technical analysis just a religion, it’s one of those things that only works if everyone thinks it’s real. Is there anything real about technical analysis, I know when a company is cheap, can you tell when a stock is cheap based on the technicals?

Leigh
: Well, no, that’s not really the point of technical analysis, and no, technical analysis isn’t just a religion. Here’s what technical analysis is. Because people are the ones buying and selling assets in the market, or writing the algorithms which buy and sell assets for them, asset prices will always be subject to the fallibility of human emotions.

Certain emotions in the market represent themselves by certain price and volume patterns, the same patterns have existed since the beginning of the market, and they will exist until the market is gone. Why? Because human emotions don’t change, the name of stocks change, the fundamentals of companies change, but human emotions never will, and the chart is the representation of that emotion..."

Check out the full post, I think Leigh has done a nice job of addressing the back and forth that occurs on this subject between TA practitioners and those who decry technical analysis.

Tuesday, June 08, 2010

On a return to Classical Education


"A mind without instruction can no more bear fruit than can a field, however fertile, without cultivation." - Cicero (Roman author and statesman, 106 BC - 43 BC).

Found my way to this New York Times piece from Stanley Fish entitled, "A Classical Education: Back to the Future". Here's an excerpt from Fish' commentary:

"I wore my high school ring for more than 40 years. It became black and misshapen and I finally took it off. But now I have a new one, courtesy of the organizing committee of my 55th high school reunion, which I attended over the Memorial Day weekend.

I wore the ring (and will wear it again) because although I have degrees from two Ivy league schools and have taught at U.C. Berkeley, Johns Hopkins, Columbia and Duke, Classical High School (in Providence, RI) is the best and most demanding educational institution I have ever been associated with. The name tells the story.

When I attended, offerings and requirements included four years of Latin, three years of French, two years of German, physics, chemistry, biology, algebra, geometry, calculus, trigonometry, English, history, civics, in addition to extra-curricular activities, and clubs — French Club, Latin Club, German Club, Science Club, among many others. A student body made up of the children of immigrants or first generation Americans; many, like me, the first in their families to finish high school. Nearly a 100 percent college attendance rate. A yearbook that featured student translations from Virgil and original poems in Latin.

Sounds downright antediluvian, outmoded, narrow and elitist, and maybe it was (and is; the curriculum’s still there, with some additions like Japanese), but when I returned home I found three new books waiting for me, each of which made a case for something like the education I received at Classical..."

Reading through this editorial on educational standards, and the comments it brought forth from readers, helped me to understand more about an issue I've been mulling over these past few years. Have we, chiefly those of us in the younger generations, been severely shortchanged by the American school system in recent years?

Upon finishing the article, I spent a few moments reading through the reader comments to get more feedback on this issue. If you do the same I think you'll find a worthwhile array of thoughts on why a grounding in the classics, with an understanding of reason, logic, and the timeless wisdom of the ancients, is imperative for any member of a civilized society.

As for my own schooling (pre-college) I recall being taught Greek mythology in two different years by two separate teachers (both knowledgeable and passionate about their subject), but I never read Milton's Paradise Lost or Pope's Essay on Man, and I don't recall seeing them on any course syllabus.

I started to realize how much we missed later on in college, and quickly came to the conclusion that any revisiting of these lost subjects would have to be done on my own. This essay serves as a reminder that I never made much progress here, as my book sale copies of Homer's Iliad and The Autobiography of Ben Franklin remain,
to this day, largely unread.

Was your educational experience strengthened by a foundation in the Classics? Do you feel this exposure (or lack of exposure) to a time honored curriculum helped (or hindered) you in life? Has it made you a better citizen, thinker, and/or investor?

We seem to have a very international and broad reader base here at Finance Trends, so I'd be interested to hear from you all on this subject. If you have some thoughts you'd like to share, please do so here with a comment. In the meantime, enjoy the Times piece and the e-book classics linked above.

Friday, June 04, 2010

Art Institute Matisse exhibit


An image of one of many beautiful paintings & sketches seen at the Art Institute of Chicago's Matisse exhibit. This painting is called Blue Nude (Souvenir of Biskra) and was painted by Henri Mattisse in 1907.

If you're in or near Chicago and love art, go see the exhibit if you haven't already.

Not only are there some fabulous paintings & sculptures on display, but also some great drawings that seemed to be overlooked, judging by the attention paid to them by the visitors I shared the viewing galleries with.

For those who can't make it to Chicago for the exhibit, you may be interested to catch a glimpse of the work on display in this video overview of
Matisse: Radical Invention, 1913-1917.

Wednesday, June 02, 2010

Government's role in ratings agencies' failures overlooked

John Carney on, "The Missing Culprit at the Credit Ratings Hearings":

"While there can be little doubt that the ratings process was not what it should have been, it is hard to understand why the ratings of a venerable company like
Moody’s went so awry without focusing on the role of government regulation. Even more importantly, it’s impossible to understand why the poor performance of ratings agencies led to a financial crisis of such scale and extremity without delving into the role of government.

For decades, the has government all but guaranteed that the ratings process was reserved for a narrow oligopoly of just a few companies—primarily Moody’s and Standard & Poor’s, with Fitch a distant third. The main mechanism for this guarantee is a rule put in place by the SEC in 1975 that declared that brokerages and money market funds have to hold securities rated by a small clique of companies the SEC annointed as Nationally Recognized Statistical Rating Organizations.

Without serious competition, the ratings agencies had little incentive to improve their own performance. Even today, nearly every credit agreement created by a major U.S. financial institution requires a rating from Moody’s or S&P..."

Yep.

Tom Woods makes the very same point about the ratings agencies in his book, Meltdown. How can anyone have expected these firms to hand out timely and accurate assessments of credit risk in (once politically favored) mortgage-backed securities when their own politically protected existence, and profits, hung in the balance?

Tuesday, June 01, 2010

Notes: Flight to hard assets, Felix Zulauf interview, and BP spill

Tuesday's notes, culled from our Twitter stream and our favorite blogs and news sources:

1. Matthew Simmons was interviewed on the Financial Sense Newshour, where he discussed the BP Gulf oil spill disaster with host Jim Puplava. Simmons says the spill
"could be the biggest ecological catastrophe the world's ever had".

2. Here's a weekly chart of BP I posted to Chart.ly this afternoon. Note that today's down move, the biggest 1 day drop in BP since 1992, has brought BP's share price down toward its 2003 & 2009 lows.

3. Richard Russell says the world's wealthy are fleeing fiat currencies, piling their money into hard assets such as gold, silver, gems, art, and beachfront real estate.

4. Bear Mountain Bull wraps up today's market action, and is on the lookout for short setups. Randy also points us to Puru Saxena's piece on the latest bubble-blowing actions of the world's central banks. Be sure to check that out.

5. Eric King interviews investor Felix Zulauf on the European bailouts, gold, and more. Many of you probably know Zulauf from his frequent Barron's Roundtable appearances. Thanks to John at Controlled Greed for pointing out this rare interview.

6. Speaking of which, Controlled Greed also highlights Kevin Duffy's recent talk at the Mises Circle in New York entitled, "Navigating the Financial Markets with an Austrian Compass". Highly recommended.

That's it for now, gang. Enjoy the links, and let us hear your thoughts.