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The Blue Money Report
"Freedom of movement of capital is fundamentally good and positive for the world, provided it applies to economies in good shape."
~ Michel Camdessus
managing director of the International Monetary Fund,
in National Journal, Feb, 14, 1998

Welcome to the Blue Money Report

Today's Commentary: 09.13.02
The Round Trip

Many readers of this column will have noticed that I have an ongoing interest in the world of science. I love the sense of discovery. The upheaval of new truths replacing old ones, the rewriting of text books due to new found information.

Most of you tend to think of investing as a science. And it can be. Folks have made lucrative careers from proposing that their theories are based on same type of investigational regiments that science requires of itself. The science I love exists in a parallel world to finance. It is a place where scientific theories run alongside monetary truths in harmonious analogies.

I can understand the difficulty most folks have with science and the world in which it exists. It seems somewhat obtuse at times, able to change course at the intervention of a newer, better idea, which in the course of discovery, can either build on what was known or can be thrown out and started anew.

Three fourths of the way through Stephen Hawking's book, "The Universe in a Nutshell" leaves me understanding why we have so much difficulty. Well into Chapter Three, he talks about the late Richard Feynman's theory on particle paths. The belief that a particle moves from point A to point B can only be found, he asserts, when all of the other possible paths have been eliminated.

This is important stuff. Important because it is not even close to the way we think on an everyday basis. Point A to point B is, and we suppose, will always be a straight line. (I am not even going to go into the space-time bending issues raised earlier in the book.) But this straight line thinking could possibly be the reason that we struggle with our current investment thinking.

We hear terminology such as "thinking outside the box" too often. Coined as phrase by some corporate thinker, it supposedly allows us to think of ourselves as intellectual behemoths, able to see what others fail to see. It simply means, that while we were thinking so hard, we ignored another simpler or more obvious path.

But Mr. Feynman's theory came down to this and with it he proved again what Newton's laws of motion really meant: "only one path matters". But first, he suggests, we need to cancel out the others.

Our investment styles have been in need of a change for quite some time. We have thought, and I have discussed here in previous columns, some of the other possible paths. But changing the investor mindset means that the path you have chosen, must be reevaluated everyday. Even catch phrases like "stay the course" can lead to disaster as any mariner will tell you. Especially one that has found themselves directly in the way of a storm on their chartered course. Reevaluating everyday though seems like a lot of work, and it is.

Let's see if we can apply this to our investing style.

We still believe in equities. We purchase them individually and through mutual funds. With that purchase, we have, at least superficially, investigated the companies or in the case of a mutual fund, the management, for style and effort. We look at past histories contained in that information to try and determine whether these folks have found a path that works with the assumption that they have eliminated all the other possibly paths available.

But are we patient enough to allow them that kind of thinking? Do we look for it from a historical basis only? Often, information on the performance of a company or a fund is based on historical data and with that in hand, we assume that they have found the path from one point to another. We want them to stay on this proven path, allowing them no chance of finding another possible way to the same point. We have little faith in their ability to chose a different path from the one they had previously chosen. In other words, we take the science out of the picture and in doing so, we take the probability of something different, something new away also. If that were the case, we should still believe that fire was stolen from Zeus by Persius.

We are profit oriented. We want to make money based on the decisions we make. We want those decisions to be based on excellent information and preferably irrevocable truths. Suppose, just for a minute, the shortest distance between point A and point B were a straight line as we have always been taught. Suppose then, that the only way a straight line could exist is if it went through the center of a sphere. It would not only be the straightest path, it would also be the most illogical path. We would then need to find another way there, while still being fixated on the point we are headed towards.

This round trip, from point A to point B would be curved, and would allow us to observe other paths to our destination.

Over the next few weeks, we will explore this theory of round trip investing. We will look at the different paths that are part of the possibilities that have always been there. We will still look at the economic influences that affect us on our journey, but we will learn on the way that Mr. Feynman was right. To find the path from point A to point B, we will need to explore all of the other possible paths also. Today's Commentary: 09.10.02
Standing on Ice

Ice can be at once fragile and strong. It can be soothing and threatening. When Jose Arcadio Buendia touched it for the first time in Gabriel Garcia Marquez' novel "One Hundred Years of Solitude", he declared it the greatest invention of our time. To the worker who is no longer able to find employment or insurance, standing on ice means not knowing.

Last week, the unemployment figure was released to much fan fare and anticipation, or as much as can be mustered these days. The bond market reacted accordingly to the slight increase by falling. The equities market also staged a rally based on the appearance of good news. Layoffs have become a trickle, 15,000 here, 20,000 there, mostly devastating regional and smaller economies. Those numbers however seem to mean little whentaken in context on a national, or global basis.

But new jobs are not being created, unless you happened to pick one up courtesy of the federal government. Those jobs, mostly based in security were the only reason there was any upward movement in the index. The conclusion seems to be that the recovery is real but will be choppy, gradual and even muted.

Unless of course it was your job that was lost. Manufacturing has continued to slice workers from their ranks and as they pay for the go-go nineties with their payrolls. At the same time, the remaining workforce has been asked to work longer hours, skewing the numbers kept on the average paycheck of the employed worker.

The Bureau of Labor Statistics publishes their numbers based on a phone survey of 60,000 households, which barely covers one tenth of one percent of houses where folks hold jobs. As has become common these days, the comparison of the early eighties when unemployment blew past the 10% mark, the 5.7% numbers does seem tame. It still doesn't reflect the number of jobs that will return to manufacturing should we ever have something better than "muted" recoveries.

For the workers whose jobs have been lost, the cold feel of no work and the lack of comparable replacement employment makes the effort of standing on ice even more treacherous. These folks were part of the consumer base that had buoyed up the economy. These folks were the free spenders, the debt growers enticed by the low inflation, an adminstration's encouragement to spend to avert a slowdown of the economy and the resultant discounting of everything from cars at zero percent interest to mortgages for homes they may never have been able to afford. These folks have now found that the ice is thin in every direction.

For the worker who has remained employed, they have been struck with the fear that replacement workers are abundant, ready and willing to come in and seize their jobs. These workers are wondering about the same ice and it's relative thickness.

The number however does not reflect the amount of disparaged workers whose weight on the economy has increased. Some have found that disability via Social Security is a viable option to a low paying, service industry job. And those jobs were the very ones shown as a source of strength in the current employment number. Adding workers at amusement parks is hardly a sign of strength. Soon, those same folks will move to driving school buses and eventually, they will move onto Christmas help.

The number does not reflect those folks who have, through dire need, have taken those service industry jobs in multiples exceeding the normal forty hours offered from their previous employment.

So what happened to the good times, when it seemed that jobs were plentiful and workers were scarce. Alan Greenspan, who has come under fire in recent weeks concerning his comments made in Wyoming, has always felt as though a pool of workers available for American business to chose from was far superior to a 3.9% rate of early 2000. This, he felt, would allow business to hire at a competitive rate remaining profitable and viable. This thinking, although generally ignored while he, through deft cheerleading, kept the markets pumped, was part of his efficiency theory.

Mr. Greenspan should have taken better care of the market bubble and in turn, the unemployment rates, much the way he did during the Asian crisis of 1987. As the nation's top economist, he should have been more sensitive to profits without basis, which would inevitably lead to workers without jobs.

Similar crises in Britain during the 20's were identified by John Maynard Keynes as the result of conservative economic policies. Unemployment, Keynes showed, was due to a deficiency in the demand for goods and services. Governments he believed could adjust their own spending to overcome that deficiency. Control of the money supply and interest rates could also influence investment. Unemployment could be eliminated through enlightened monetary and fiscal policies. Stock prices, Mr. Greenspan, are not indicative of corporate profits and dividends.

2001 Nobel prize winning behavioral economist George Akerlof has taken aim at the Greenspan policy. He believes such lax intervention by the Fed is deplorable. Lowering interest rates to encourage businesses to invest at a time when investment is least likely seems hardly pro-active. But Greenspan's thoughts about unemployment seem the most disconcerting to Mr. Akerlof, a behavioral economist who studies how people react in reality rather than theorizing their reactions to ploicies. Unemployment is not a voluntary, he argues. Finding employment is easy if workers are willing to find lesser paying jobs and this is not acceptable to Mr. Alerlof.

There is no natural rate of unemployment. If the jobless rate were lower, inflation would not necessarily find itself on the rise. In fact, this so-called natural unemployment rate has created a belief that folks will find themselves attempting to better educate themselves to get the better paying jobs. The same policymakers believe that people will save enough for their retirement. Here is where the ice becomes very thin.