Stop Counting Turkeys (Excellent Investing Advice!)

Great quote from the book Market Wizards by Jack Schwager in the interview with William O'Neill about holding losing stocks. Quit counting your turkeys! Quote is reprinted below:

   In my book, I repeat a story told by Fred C. Kelly, the author of Why You Win or Lose, that provides the best example I know of how the typical investor procrastinates when it comes to making a selling decision. A man has rigged up a turkey trap with a trail of corn leading into a big box with a hinged door. The man holds a long piece of twine, connected to the door, that he can use to pull the door shut once enough turkeys have wandered into the box. However, once he shuts the door, he can't open it again without going back to the box, which would scare away any turkeys lurking on the outside.

     One day, he had a dozen turkeys in his box. Then one walked out, leaving eleven. "I should have pulled the string when there were twelve inside," he thought, "but maybe if I wait, he will walk back in." While he was waiting for his twelfth turkey to return, two more turkeys walked out. "I should have been satisfied with the eleven," he thought. "If just one of them walks back, I will pull the string." While he was waiting, three more turkeys walked out. Eventually, he was left empty-handed. His problem was that he couldn’t give up the idea that some of the original turkeys would return. This is the attitude of the typical investor who can't bring themselves to sell at a loss. They keep expecting the stock to recover. The moral is: To reduce your stock market risk, stop counting turkeys!

Markets. Business. Life. by LoneRngr (screen name) is licensed under a Creative Commons Attribution 2.5 Canada License. Based on a work at marketsbusinesslife.blogspot.com.Permissions beyond the scope of this license may be available at http://marketsbusinesslife.blogspot.com/.

Iphone 4 Review: First Impressions Good, but some Drawbacks

I just picked up my Bell Canada Iphone 4 yesterday and although I haven’t had it for a full 24 hours, I put it through some rigorous testing last night and thought I’d jot down some of my first impressions. My first thoughts are this is one seriously cool phone but it has some drawbacks. I’ve summarized the pros and cons below.

The Good
Easy to use and set up, and lives up to the hype with all the features like camera, video, Ipod, music store, Apps, WiFi, etc etc.

The Bad
Doesn’t sync with MS Exchange Notes and Tasks, small screen & fonts hurt the eyes, lack of customization, lack of horizontal view and spellcheck in many apps, online music store is limited, no auto-on feature(?), ringtones are limited (and expensive to buy), no default calendar reminders (a minor point), surfing the web is tricky sometimes, no Adobe Flash, and of course typing on it will make you crazy!

(By the way, I should say that I ditched an old Blackberry for the Iphone, so I'm sure some of my experience is related to the switch of platforms. I would also consider myself an average “business” user. While this review may focus on the negatives, I haven't focused on the positives because these are well covered in the media and the phone delivers as advertised.)

Out of the box it is a really cool phone: very small and light, bright screen, and sleek lines. In fact I was surprised by how small the box itself was. The woman asked me in the store if I was excited, and I must confess yes, I was like a little kid at Christmas. It’s silly that one phone can generate this much hype but of course because the phone is so hard to get it makes it even cooler! (I have been trying since launch date in Canada and was on the waiting list for the last 2 weeks). Mostly it lives up to the hype and I was impressed how easy it is to use and setup. I was expecting that it would take me a few days to get it set up but it only took a few minutes and then I could actually get down to the business of using it.

My first disappointment came when I discovered that it won’t sync with MS Exchange Notes and Tasks, which is something I use frequently. I will need to develop a work around for this. Email, calendar and contact were a breeze to sync with MS Exchange server and our IT guys set this up quickly. Another small complaint I have is the default calendar reminders – when you set up an appointment on the iphone there is no option to allow a default reminder and you have to set one up as another step in making an appointment. Also, the minimum reminder is 5 minutes, where on Blackberry I often used the 0 minutes reminder for some appointments. There is also no "snooze" function on calendar reminders. Minor points but will take some getting used to.

Of course typing on the phone is a pain, but I don’t need to elaborate and people say it gets easier. It is especially difficult though through the setup because many WiFi keys and passwords can be quite long with upper and lower case letters and numbers and they must be typed in exactly or they won’t work. Once I got through that everything else was pretty easy. I went onto the Itunes store and made some purchases – it was easy and then later synced to my computer easily. Surfing the web is such a different experience on the Iphone over Blackberry. It was generally very good, although because the text is so small it makes reading tricky. When I blow up the web page by pinching the screen, it then requires scrolling back and forth, and in many cases I end up selecting the banner ads by mistake when I do this (which then opens up a new window.) I think that will get easier to use over time.

My biggest complaint is the small screen and fonts. After heavy use last night testing it, my eyes are really strained. I hope this gets better because I don’t want to keep the device if this continues. I should add that because I work for long hours in front of the computer my eyes are sensitive anyway, and anyone who has looked at home theatre equipment can appreciate when I say that DLP projectors also hurt my eyes.

No Adobe Flash is a pain also, as the sites where I watch TV all use Adobe Flash. This was no surprise, but it was still disappointing to get the pop up message from Adobe saying “Apple doesn’t support our technology”. Get it together people!

Lack of customization – maybe I’m just being picky, but on the Blackberry nearly everything is customizable, such as different ringers for different message types or volume levels, etc etc. The Iphone 4 is great because it is so simple and most of the pre-set settings are the ones you want, but sometimes I’d like to be able to customize things a little more. It will take some getting used to. (or maybe I’ll look into jailbreaking!)

The online music store is limited. This was especially apparent in the ringtones and TV sections. It was easy to find the Top Ten ringtones or TV shows, but then to scroll through categories was frustrating and in some cases brought up empty categories. It seems I will be surfing the music store on my PC and then syncing from there as the selection is much better.

This next point will make you think I’m stodgy. I wanted to pick a “normal” ringtone, but the only one available is the old style telephone ringer and I know many people in my office who use that already. Most of the ringtones are fun, but not really suitable for a business setting. Not to mention, $1.29 to buy a 10 second ringtone? I can buy a whole song for $0.99 - how do you spell profit?

Perhaps I’m nitpicking over some things, but the lack of horizontal typing and spellcheck in many apps is a pain. I’m not sure when I can use the horizontal screen and when I can’t, so I’m always rotating the device and waiting for the display to turn but sometimes it doesn’t. Because the typing is so tricky I wait for the auto-correct to kick in but many times it doesn't either. I'm sure that will improve over time.

Lastly, I should say that I set the alarm to go off this morning but the phone was off and so the alarm didn't go off. Maybe there is a way to turn it on with the phone off, but I couldn't find it. Blackberry allows you to set the auto on/off feature for the phone. I will keep playing around with this. At least you know with the Iphone there are enough online forums out there I'm sure I can't be the only one with these issues.

That's it in a nutshell as far as first impressions go, so hopefully this is helpful. Overall it's a great phone and I will probably keep it, although it does take some getting used to!

Keywords: iphone4 review, blackberry, iphone 4

Markets. Business. Life. by LoneRngr (screen name) is licensed under a Creative Commons Attribution 2.5 Canada License. Based on a work at marketsbusinesslife.blogspot.com.Permissions beyond the scope of this license may be available at http://marketsbusinesslife.blogspot.com/.

Nature Sells

from the Economist:
Discovery has been churning out shark programmes for 23 years. Yet ratings are sound. Nature sells. Indeed, it is one of the best businesses in media. Discovery Communications, which also owns Animal Planet, TLC and a few smaller channels, made a profit of $372m in the second quarter of this year. That is about as much as the film studios of Fox, Paramount and Warner Bros put together.

Markets. Business. Life. by LoneRngr (screen name) is licensed under a Creative Commons Attribution 2.5 Canada License. Based on a work at marketsbusinesslife.blogspot.com.Permissions beyond the scope of this license may be available at http://marketsbusinesslife.blogspot.com/.

Quote - Bad Bonds/Prices

"There are no bad bonds, only bad prices."
-anon

Markets. Business. Life. by LoneRngr (screen name) is licensed under a Creative Commons Attribution 2.5 Canada License. Based on a work at marketsbusinesslife.blogspot.com.Permissions beyond the scope of this license may be available at http://marketsbusinesslife.blogspot.com/.

Small Cap Death Trap

Here is a picture of how to lose a lot of money as a small cap investor. The following chart (stock name not important) shows a stock that has been drifting for some time and has consolidated in the $0.95 range. Then the stock starts to break out, trading up to $1.09. It looks like the rounded bottom pattern has played out and the stock is back on an upward move. To the contrary, within 4 trading days, the stock trades down to $0.70, a 35% downward correction. What is more painful is that on the way down, the stock appeared to find support at $0.81, only to fall by another 13% the following day! Once the stock trades down to $0.68 many investors will then decide that this has changed from a short term trade to a "long term hold". Investors in at higher levels (around $1.40) have seen a near 50% loss of capital. The unforgiving rule of percentages is that it takes a 100% gain to get back to even. Ask yourself if you would be a buyer of the stock at these levels. Sometimes it's better to cut losses and move on. As to why the stock fell, who knows: maybe a large aggressive seller or concerns about the business fundamentals? It's a painful experience and I have been there before (thankfully not this time). As to how to avoid it this is a tricky one. Maybe monitor for big moves and put the stock on high alert once this happens?

Markets. Business. Life. by LoneRngr (screen name) is licensed under a Creative Commons Attribution 2.5 Canada License. Based on a work at marketsbusinesslife.blogspot.com.
Permissions beyond the scope of this license may be available at http://marketsbusinesslife.blogspot.com/.

Apple vs. Microsoft

Apple market cap: $213b
Microsoft market cap: $260b

when will we see Apple take over MSFT???

Markets. Business. Life. by LoneRngr (screen name) is licensed under a Creative Commons Attribution 2.5 Canada License. Based on a work at marketsbusinesslife.blogspot.com.
Permissions beyond the scope of this license may be available at http://marketsbusinesslife.blogspot.com/.

Investment Process is Key

from Financial Post, Jonathan Chevreu's review of James Montier's just-published The Little Book of Behavioural Investing.

Results of an investment process:

	Good Outcome	Bad Outcome
Good Process	Deserved Success	Bad Break
Bad Process	Dumb Luck	Poetic Justice

Read more: http://network.nationalpost.com/NP/blogs/wealthyboomer/archive/2010/03/11/how-investors-can-avoid-being-their-own-worst-enemy.aspx#ixzz0ht32osBs
The National Post is now on Facebook. Join our fan community today.

Markets. Business. Life. by LoneRngr (screen name) is licensed under a Creative Commons Attribution 2.5 Canada License. Based on a work at marketsbusinesslife.blogspot.com.
Permissions beyond the scope of this license may be available at http://marketsbusinesslife.blogspot.com/.

Welcome to the New America

from Business Insider:

The Mayor Of Detroit’s Radical Plan To Bulldoze One Quarter Of The City


Michael Snyder | Mar. 10, 2010, 6:28 AM | 684 | 8
Tags: Foreclosure, Recession, Depression, Housing Crisis

(This guest post previously appeared at the author's blog The Economic Collapse)
How do you save a city that is dramatically declining like Detroit? Well, for the mayor of Detroit the answer is simple - you bulldoze one-fourth of the city. Faced with a 300 million dollar budget deficit and a rapidly dwindling tax base, Detroit finds itself having to make some really hard choices.
During the glory days of the 1950s, Detroit was a booming metropolis of approximately 2 million people, but now young people have left in droves and the current population is less than a million. The true unemployment rate for those still living in Detroit is estimated to be somewhere around 45 to 50 percent, and poverty and desperation have become entrenched everywhere. In many areas of the city, only one or two houses remain occupied an an entire city block. In fact, some areas of Detroit have so many vacant, burned-out homes that they literally look like war zones. And yes, it is true that there are actually some houses in Detroit that you can actually buy for just one dollar. According to one recent estimate, Detroit has 33,500 empty houses and 91,000 vacant residential lots. So what can be done when an entire city experiences economic collapse?
Well, Detroit Mayor Dave Bing (pictured) believes that the answer is to downsize on a massive scale. Bing believes that Detroit simply cannot continue to pay for police patrols, fire protection and other essential services for areas that resemble ghost towns.
So his plan is to bulldoze approximately 10,000 houses and empty buildings over the next 3 years and direct new investment into stronger neighborhoods. In the areas that the city plans to bulldoze, the residents would be offered the opportunity to relocate to a better area. For buildings that have already been abandoned, the city could simply use tax foreclosure proceedings to reclaim them. Of course if there were some residents that did not want to move, eminent domain could be used to force them out.
So which areas would be bulldozed and which areas would be left standing?
Nobody knows yet, and those decisions could make a lot of people angry.
Also, the city of Detroit simply does not have the money to purchase land and relocate residents without federal assistance.
So there are problems.
But other smaller cities are already doing this kind of thing on a smaller scale.
The city of Youngstown, Ohio has been bulldozing a few hundred houses a year since 2005.
Flint, Michigan has already torn down approximately 1,100 houses mostly in outlying areas. The program in Flint was actually the brainchild of Dan Kildee, treasurer of Genesee County, which includes the city of Flint.
In Flint, no residents are forced out of their homes unwillingly. Instead, the city has been buying up houses in more affluent areas of Flint to offer to those in areas that the city wishes to bulldoze.
The program in Flint has been so successful that Mr. Kildee has been asked to help implement it in other cities that are in decline.
And there are a whole lot of U.S. cities that are in a serious state of decline - mostly in what is known as "the Rust Belt" of America. Because of reckless U.S. trade policies, the once great U.S. manufacturing base centered in the Rust Belt has been dismantled and those jobs simply are never going to come back.
So now cities like Detroit and Flint are faced with either dealing with the economics of decline or going bankrupt for good.
But the truth is that Detroit and Flint are just on the cutting edge of what is happening to America as a whole.
The U.S. is experiencing a very painful economic decline, and what is happening in Detroit and Flint could happen in your city very soon.
Are you ready?


Markets. Business. Life. by LoneRngr (screen name) is licensed under a Creative Commons Attribution 2.5 Canada License. Based on a work at marketsbusinesslife.blogspot.com.
Permissions beyond the scope of this license may be available at http://marketsbusinesslife.blogspot.com/.

Quote - Fundamentals

"A known fundamental is a useless fundamental."
-Richard Dennis

Markets. Business. Life. by LoneRngr (screen name) is licensed under a Creative Commons Attribution 2.5 Canada License. Based on a work at marketsbusinesslife.blogspot.com.
Permissions beyond the scope of this license may be available at http://marketsbusinesslife.blogspot.com/.

The Only Way to Prove a Concept (from Canadian Tire)

This is interesting - Canadian Tire says that food in stores as a concept is working, despite marketing surveys that show it wouldn't work. There is an important takeaway here, one that business owners have known for a long time that somehow got lost in MBA land along the way. The only true test of a concept is to put it in action, even though that takes money. Or as Jesse Livermore said:

"When I think I have found the solution I must prove I am right. I know of only one way to prove it; and that is, with my own money."

There is only one true way to test theories, and that is by putting up one's own money. You see, as an MBA we look for ways to reduce the risk - a marketing survey instead of actually putting a concept into action. But at the end of the day, a survey is just that: a theoretical question on whether or not people will be willing to part with their money. In actual practice, when people have to part with their money a different decision making process takes place. Kudos to Canadian Tire for having the cohones to test this out! (even though I personally don't plan to buy milk and eggs there in the near future!)

http://www.vancouversun.com/business/fp/Canadian+Tire+grocery+experiment+gains+converts/2602820/story.html


Markets. Business. Life. by LoneRngr (screen name) is licensed under a Creative Commons Attribution 2.5 Canada License. Based on a work at marketsbusinesslife.blogspot.com.
Permissions beyond the scope of this license may be available at http://marketsbusinesslife.blogspot.com/.

Trading is Hazardous to Your Wealth

I finally found an article that cites the trading studies I had heard about, you can read it here. Some good insight:

http://www.travismorien.com/FAQ/trading/futradersuccess.htm


Markets. Business. Life. by LoneRngr (screen name) is licensed under a Creative Commons Attribution 2.5 Canada License. Based on a work at marketsbusinesslife.blogspot.com.
Permissions beyond the scope of this license may be available at http://marketsbusinesslife.blogspot.com/.

Economists' Forecast Accuracy

Get yourself a copy of the May 09 issue of The Elliott Wave Theorist (EWT) for a brilliant discussion on economists' forecast accuracy. It contains these gems:

"Economists generally stay bullish on the macro economy. In most environments, this is an excellent career tactic. The economy expands most of the time, so economists can claim they are right, say, 80 percent of the time, while missing every turn toward recession and depression."

and uses this analogy:

"Suppose you eat at an outdoor cafe daily, but it happens that on average once every 100 days a terrorist will drive by and shoot all the customers. The economist has no tools to predict these occurrences, so he simply stays bullish and tells you to keep lunching there. He's right 99 percent of the time. He is wrong only 1 percent of the time. In that one instance, you are dead."


from: www.elliottwave.com


Markets. Business. Life. by LoneRngr (screen name) is licensed under a Creative Commons Attribution 2.5 Canada License. Based on a work at marketsbusinesslife.blogspot.com.
Permissions beyond the scope of this license may be available at http://marketsbusinesslife.blogspot.com/.

Investor Sentiment at March 09 Lows

Markets. Business. Life. by LoneRngr (screen name) is licensed under a Creative Commons Attribution 2.5 Canada License. Based on a work at marketsbusinesslife.blogspot.com.
Permissions beyond the scope of this license may be available at http://marketsbusinesslife.blogspot.com/.

Sobering Chart

from Gary Schilling:



Markets. Business. Life. by LoneRngr (screen name) is licensed under a Creative Commons Attribution 2.5 Canada License. Based on a work at marketsbusinesslife.blogspot.com.
Permissions beyond the scope of this license may be available at http://marketsbusinesslife.blogspot.com/.

Global warming; Email overload

miscellaneous points:

There is $28 trillion in real estate/infrastructure at risk from a half meter rise in sea level.
-Bloomberg magazine (March 2010)

These days, 2.3 seconds seems to be the average time between sending out an email and getting a response.
www.freddestin.com/blog/2010/02/in-search-of-stillness-or-why-personal-high-availability-is-a-generally-a-bug.html




Markets. Business. Life. by LoneRngr (screen name) is licensed under a Creative Commons Attribution 2.5 Canada License. Based on a work at marketsbusinesslife.blogspot.com.
Permissions beyond the scope of this license may be available at http://marketsbusinesslife.blogspot.com/.

Quote - black swans

"The only black swans are the history that we have not read."
-a modern interpretation of a Harry Truman quote (by William Bernstein)

or this:
"Financial markets are plagued not by “black swans”—seemingly inconceivable events that come up very occasionally—but by vicious snow-white swans that come along a lot more often than expected."
-the Economist


Markets. Business. Life. by LoneRngr (screen name) is licensed under a Creative Commons Attribution 2.5 Canada License. Based on a work at marketsbusinesslife.blogspot.com.
Permissions beyond the scope of this license may be available at http://marketsbusinesslife.blogspot.com/.

Westland Meat Packing

"…a recent investigation of Hallmark/Westland Meat packing Company, once rated as a supplier of the year for school cafeterias in the United States. A rule of thumb in meat processing plants is that only “standers” can go into the meat supply. That is, if a cow cannot stand up, it is probably diseased and should be euthanized, not processed. But because of an incentive program in the company, employees had developed a rather liberal definition of what constitutes a stander. In this case, it appears that employees had decided that if they could prop a cow up with a forklift or shock it into standing up, it was a stander."

from Marianne Jennings, Of Candor and Conflicts: What Were We Thinking?

Markets. Business. Life. by LoneRngr (screen name) is licensed under a Creative Commons Attribution 2.5 Canada License. Based on a work at marketsbusinesslife.blogspot.com.
Permissions beyond the scope of this license may be available at http://marketsbusinesslife.blogspot.com/.

Hitting the Nail on the Head

Article in WSJ this morning hits the nail on the head. The money flow into commodities is playing havoc with prices as producers attempt to manage supply in response to market signals. That money though is fickle, triggering higher volatility. Some excerpts:

Matthew Maloney, a corn trader with R.J. O'Brien & Associates, who called the reaction to the Jan. 12 crop report "one of the most dramatic changes of fortune" he has seen in 19 years on the trading floor.

Takai, general manager of financial services at Sumitomo Corp., said the amount of money wagered on commodities has risen sharply in the past decade and likely will keep climbing.

The number of open contracts to buy or sell copper has dropped by more than 7% since the end of last year, according to the Commodity Futures Trading Commission.

"The high prices of a year ago are still having their effect," [Dan Basse of AgResource] said. "The market does its job."

Markets. Business. Life. by LoneRngr (screen name) is licensed under a Creative Commons Attribution 2.5 Canada License. Based on a work at marketsbusinesslife.blogspot.com.
Permissions beyond the scope of this license may be available at http://marketsbusinesslife.blogspot.com/.

Depressing...

now this is depressing!



Markets. Business. Life. by LoneRngr (screen name) is licensed under a Creative Commons Attribution 2.5 Canada License. Based on a work at marketsbusinesslife.blogspot.com.
Permissions beyond the scope of this license may be available at http://marketsbusinesslife.blogspot.com/.

All is Not Well in the World

Look no further than this tidbit to see that all is not well in the world. Key takeaway: investors don't trust GMAC (or GM for that matter). Or at least not at the price of this deal. Which means that the Canadian government is effectively giving an interest rate subsidy to GM, knowing that businesses will always take the low cost route. Why the auto industry has adopted this "protected status" is another issue. Let's just hope these assets don't implode on BDC's balance sheet.

the Business Development Bank of Canada, an entity owned by the federal government, completed the purchase of $1.263-billion in auto loan receivables-backed notes from GMAC Canada under the so-called Canadian Secured Credit Facility (CSCF) program. That $12-billion program, which is slated to close at the end of March, was set up last year by the federal government in response to the global financial crisis and the resulting drying up of liquidity. The BDC, which is the administrative agent under the CSCF, was the sole buyer of the securities, which yielded 2.716% and whose so-called final scheduled distribution date is May 2016. This deal is the second by BDC.

Read more: http://www.financialpost.com/opinion/story.html?id=bafcadde-d026-4627-abaf-437c6dccc493#ixzz0dk0jHxOD
The Financial Post is now on Facebook. Join our fan community today.

Markets. Business. Life. by LoneRngr (screen name) is licensed under a Creative Commons Attribution 2.5 Canada License. Based on a work at marketsbusinesslife.blogspot.com.
Permissions beyond the scope of this license may be available at http://marketsbusinesslife.blogspot.com/.

Great Site

I'm a little late on this one admittedly, but here is a great site:


www.BusinessInsider.com



Markets. Business. Life. by LoneRngr (screen name) is licensed under a Creative Commons Attribution 2.5 Canada License. Based on a work at marketsbusinesslife.blogspot.com.
Permissions beyond the scope of this license may be available at http://marketsbusinesslife.blogspot.com/.

Digging Out of Debt (from Economist)

The Economist says it best:

The rich world’s debt reduction has barely begun:

http://www.economist.com/businessfinance/economicsfocus/displaystory.cfm?story_id=15269334

The only thing I could add is that according to Soros, in 1929 total credit was 160% of GDP, peaking at 260% in 1932. Ouch.

Markets. Business. Life. by LoneRngr (screen name) is licensed under a Creative Commons Attribution 2.5 Canada License. Based on a work at marketsbusinesslife.blogspot.com.
Permissions beyond the scope of this license may be available at http://marketsbusinesslife.blogspot.com/.

Quotes - Don Coxe

Don Coxe is always entertaining, and his December note proved no exception. It offered these gems:

The cash the Fed created to save [the banks] from the consequences of their own folly sits as T-bills or fed funds on their balance sheets, providing little more stimulus to the real economy than sending out daily re-broadcasts of Jimmy Carter speeches on economic malaise."

There are three considerations in global equity investing: the first is currency, the second is currency, the third is, what makes this an attractive company?"

Some years ago, Washington's National Press Club ran a contest for a newspaper headline that would attract the least readership. The hands-down winner: "Interesting new policy proposals from Canada."

Markets. Business. Life. by LoneRngr (screen name) is licensed under a Creative Commons Attribution 2.5 Canada License. Based on a work at marketsbusinesslife.blogspot.com.
Permissions beyond the scope of this license may be available at http://marketsbusinesslife.blogspot.com/.

Quotable - Boom-Bust

"In every boom-bust sequence people come to believe that the normal rules do not apply, but they usually do."
-George Soros

Markets. Business. Life. by LoneRngr (screen name) is licensed under a Creative Commons Attribution 2.5 Canada License. Based on a work at marketsbusinesslife.blogspot.com.
Permissions beyond the scope of this license may be available at http://marketsbusinesslife.blogspot.com/.

We've seen this movie before - (from Soros)

Continuing with the theme that we haven't learned anything from history (of public markets, that is), I came across these writings by George Soros in the "Alchemy of Finance". This was written in the mid 1980s in response to the international lending crisis, but we could almost substitute the word "sub-prime" for every instance of "international lending". I wish I had read this in early 2007! (Note I have re-ordered the text and made some minor deletions/changes [in brackets] for ease of readability.)

On the credit cycle:
It is only net new lending that stimulates, and total new lending has to keep rising in order to keep net new lending stable.

The process continues until a point is reached where total credit cannot increase fast enough to continue stimulating the economy. By that time, collateral values have become greatly dependent on the stimulative effect of new lending and, as new lending fails to accelerate, collateral values begin to decline.

Eventually, the realization that the trend is unsound and unsustainable comes crashing in. The prophecy is self-fulfilling and the trend is reversed, often with catastrophic consequences. ... the boom is drawn out and acelerates gradually; the bust is sudden and often catastrophic.

On International Lending:
... international lending was too profitable to leave much room for caution. Business could be transacted on a large scale, the risk of adverse interest rate movements could be minimized by the use of floating rates, and administrative costs were much lower than in the case of corporate loans. Fierce competition kept spreads between borrowing and lending rates quite narrow; nevertheless, international lending became one of the easiest and most profitable forms of banking activity, attracting many banks with no previous experience in the field. ...more than a quarter of Citicorp's earnings came from Brazil. ...international lending became the fastest growing sector of the banking industry. Naturally, if banks had set up reserves that would have been appropriate in light of the subsequent experience, the business would not have been as profitable as it seemed at the time.

Banks were so anxious to obtain business that they asked very few questions. It is amazing how little information borrowing countries had to supply in order to obtain loans. Lending banks did not even know how much money the countries in question were borrowing elsewhere.

International lending grew so rapidly that the banks involved became overextended: their capital and reserves could not keep pace with the growth of their balance sheets.

The larger banks typically leveraged their equity 14 to 16 times, with the Bank of America running as high as 20 times. ...many banks had reached the point where they were pushing against the limits of what was considered prudent leverage by the standards of the time. If they wanted to continue growing they would need to raise additional equity capital.

On the reasons for the international lending boom and regulators response to it:
Why the commercial banks were willing and able to sustain such explosive growth in their international loan portfolios is a fascinating question that will be hotly debated for years to come. Part of the answer is that banks did not consider themselves responsible for the soundness of the system. Banking is an intensely competitive business, which is, however, subject to regulation. It is the job of the central banks to prevent excesses. Commercial banks operate under a protective umbrella; they seek to maximize their profits within the framework of existing regulations and they cannot afford to pay too much attention to the systemic effects of their activities. A commercial banker who refuses to go after what seems like profitable business is liable to be pushed to the side, and even if a bank decided to abstain there are many others anxious to take its place. Thus, even those who realized that the international lending boom was unsound found themselves obliged to participate or lose their places.

There is an important lesson here: participants are not in a position to prevent a boom from developing even if they recognize that it is bound to lead to a bust. That is true of all boom/bust sequences. Abstaining altogether is neither possible nor advisable. The best a participant can do is to cease to be a participant at the right time.

The history of central banking is a history of crises followed by institutional reform. It is truly surprising that the lessons of the international debt crisis have still not been learned. The champions of unregulated competition are more vocal, and more influential, than ever. ...regulations are generally designed to prevent the last mishap, not the next one.

Why did the [regulators] fail to [regulate international lending?] ... Had the [US regulators] imposed regulatory restrictions [on US banks], the banks under their supervision would have lost business to [foreign banks].

Thoughts for the future:
Monetarism holds that inflation is a function of money and not of credit. If monetarism is valid, the growth of money supply needs to be regulated, not the growth of credit.

...I can point to the empirical evidence that shows that the money supply always fails to behave in accordance with regulators' wishes.

Economic activity takes place in the "real" economy, while the extension and repayment of credit occur in the "financial" economy.

the Collective system is held together only by the threat of breakdown.
-George Soros

Markets. Business. Life. by LoneRngr (screen name) is licensed under a Creative Commons Attribution 2.5 Canada License. Based on a work at marketsbusinesslife.blogspot.com.
Permissions beyond the scope of this license may be available at http://marketsbusinesslife.blogspot.com/.

Quotes

"As we make our way in the world our sense of self evolves. The relationship between what we think we are and what we are in reality is the key to happiness - in other words, it provides the subjective meaning of life."
-George Soros

"Mothers may still want their favorite sons to grow up to be President [...] but they do not want them to become politicians in the process."
-John F. Kennedy

Markets. Business. Life. by LoneRngr (screen name) is licensed under a Creative Commons Attribution 2.5 Canada License. Based on a work at marketsbusinesslife.blogspot.com.
Permissions beyond the scope of this license may be available at http://marketsbusinesslife.blogspot.com/.

Quote - Changing World

"The world moves so quickly it's hard to keep pace with the times."
-David Sarnoff, President of RCA made this statement to the NY Times in 1929.

Some things never change (or the pace of human innovation never ceases)

Markets. Business. Life. by LoneRngr (screen name) is licensed under a Creative Commons Attribution 2.5 Canada License. Based on a work at marketsbusinesslife.blogspot.com.
Permissions beyond the scope of this license may be available at http://marketsbusinesslife.blogspot.com/.