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xkcd

Sorry, You Can't Take it Back

Economics Lesson

We think THIS is correct. Goldman Sachs is being charged with selling a financial instrument which permitted one side of the transaction to lose -- and lose big -- while the other side of the transaction won -- and could win big:

First, because the instrument used here was a synthetic CDO, all parties knew that by definition there was someone holding the short side of a position that had been custom made for this trade. That’s what a synthetic CDO is for. A synthetic CDO has no existence outside the trade and there is always a long and a short party.

So it’s not like Goldman hid the fact that there was a short seller. It hid only the fact that the short seller was the legendary John Paulson, who wasn’t a legend yet because he became a legend only by doing these sorts of trades.

What was Goldman supposed to disclose: that the guy on the short side was smarter — like way, way, way smarter — than Goldman’s clients on the long side?

Perhaps the Government should require warning labels on investment transactions, like all those stickers that are now put on ladders: "CAUTION: Gravity is a force determined by the Federal Trade Commission to cause objects to fall; falling may result in embarrassment, injury, or death." We propose that every broker, when confirming the purchase or sale of a stock, bond, or other investment, be required to include the following warning:

NOTICE: THE GUY ON THE OTHER SIDE OF THIS TRANSACTION THINKS YOU ARE AN IDIOT.  IN FACT, HE'S SURE OF IT.

CAUTION: HE MAY BE RIGHT -- ONLY ONE OF YOU IS.

Time to Retire

Thanks to the ever-cynical Old Timer.

The Shape of Things to Come?

Marginal Revolution observes:

The Environmental Security Hypothesis says that in tough times men will prefer women who are good at production, generally older, taller, heavier, less curvaceous women with less body fat. In good times, they will prefer women who are good at reproduction, generally younger, shorter, lighter, more curvaceous women.

Of course, it just may be that beauty is in the eye of the optimist.

h/t to R2D2.

Buffetted by Bad News

In today's New York Times, Warren Buffett writes:

THE financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.

So ... I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.

Why?

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

[snip]

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was.” Today my money and my mouth both say equities.