December 22, 2003

Holiday Reading List

You’ll notice on the right an updated list of books I’m reading (or trying to read as the case may be). I’ve also run across some interesting articles on the Web that I haven’t quite fit into my strategic picture yet. But they all, in some way, bear on the work we’re doing…figuring out the world and what’s going on in it. Being back in France, a natural topic for me is Anti-Americanism in France and its roots. Haven’t read the Revel book yet, but looking forward to it. And it just so happens that in catching up with my reading, I ran across a blogger who was in France while I was away. Roger Simon had this to say: “France is in bad shape. Strange as this sounds, it reminded me in a way of some of my visits to the Soviet Union in the late eighties. The range of opinion in the press is about as extensive as the difference used to be between Pravda and Izvestia. Of course, that’s an exaggeration, but I had the sense more than ever of a society ruled by a nomenklatura (who more Politburo-like than Chirac and de Villepin) with, in this case, a populace of semi-employed drudges whiling away hours smoking, drinking watery espresso and debating Derrida in grimy cafes.” I’ve only been here about 14 months, and that’s not the impression I have. But then again, my impression is fairly superficial. There are other bloggers (with a much better command of the language) that agree with Simon. If you’re interested, you can check Merde in France and The Dissident Frogman. It would be hard to “unpack” this entire issue of alleged French decline in a few short sentences. But it’s Monday and the coffee is fresh, so why don’t we try? For context, I’ll refer you to a great article a Tech Central Station by Frederick Turner called Tiananmen in London. The article is nominally about the sources of Bush-hatred. But it might also help explain what’s going on here in France. Turner makes a great distinction between two different concepts of a legal order, one based on a concept of what is right (what is ethical, honoring contract) and what is good (moral prohibitions, commandments). Roman law and English common law are largely the history of law of what is right. The U.S. and England--although having strong religious elements in their political order--are mainly based on the law of what is right…of the law applying equally to everyone and guaranteeing an equality of opportunity rather than an equality of results. France, on the other hand, has drifted into (and since the Revolution has always been more about) a law of the good…where the State takes it upon itself to establish not just liberty, equality, and freedom…but a material manifestation of that…an equality of result. Of course in this conception, freedom is diminished. For example, Chirac’s decision to ban the Muslim headscarf (hijab) in schools, along with “prominent” crucifixes and Jewish skullcaps surely doesn’t advance the cause of religious liberty. It merely affirms the coercive power of the State. Equality becomes a whitewashing of individual difference, compelled by the State. But the French have been steadily headed toward a purely secular State for years. In such a State, political authority is purely democratic--in other words, whoever marshals the most votes is in position to direct the moral goals of the State. The more you drive out non-secular sources of authority, the more power you cede to the State to decide what is right and wrong. If you’re deciding what’s moral in a political context, you’re going to get what Europe got in the 20th century…namely Communism, Nazism, and Fascism. Today, you have a creeping socialism that’s a hodgepodge of political correctness, bogus environmentalism, and anti-capitalism. And what makes it dangerous is that instead of focusing on big ideas, it often focuses on smaller, ones...the "Bike Path Liberalism" Mark Steyn talks about. If you have the time, it's worth a read.

New Bells, Whistles, Digital Cameras, Saint's Days

Mea culpa. I did my part to boost semiconductor prices by buying a new digital camera at Best Buy the day I left Colorado for Paris. Camera phones and digital cameras are supposed to be the big drivers of semi prices in the fourth quarter. It sure seems like the camera phones are taking off. When I was in Baltimore, I had dinner with my colleague Thom Hickling. During dinner, Thom's college-aged son called and needed a picture of a $20 bill for a report. I forked over my yuppie food stamp and Thom snapped a quick pic with his camera phone and emailed it directly from his phone to his kid's PC. Please, nobody tell the Fed how easy it was to create new money out of thin air. As for the digital camera...I went with a Sony DSC-P10, mostly on the strength of the recommendation by my nephew Tyler, who showed me how to operate it. I'm not much of a tech geek, and I probably won't use all the features the camera has. But it does have some nifty ones. And from time to time, I'll post some images here. Most of these images won't have anything to do with investing, at least directly. But I will note that the proliferation of cheap audio visual digital technology is going to shake up the media even more in the coming years. Already, you're starting to see the images, words, and sounds of Iraqis and U.S. soldiers hit the Web, completely unedited and unfiltered by Big Media. Digital technology makes everyone an eyewitness, with the footage to prove it. The decentralization of the opinion making class is under way. And it's a good thing. Now...on to the pictures... First...the bells of St. Merry. You've heard about them on the Daily Reckoning. Heck, with the MPEG feature on the camera, I suppose I can even record them for you sometime. Until then, here's what they look like from our fourth floor perch across the street. DSC00029.JPE Next, the entrance to the hotel St. Merry, right next to the infamous Cafe Paradis...not too many cafe drinkers out right's only lunch time, and it's fairly chilly right now. DSC00029.JPE And finally, a look up north in the direction of the rue St. Jacques and the Sorbonne. I wish I knew more about the history of this shot to tell you what you're seeing. What I can say is that on the North side of Paris (the left bank) this ramrod straight road is called rue St. Jacques. On the southside it's called the rue St. Martin. It's so straight because it's an old Roman road that runs straight through the original Celtic settlement in Paris on Ile de la Cite (where Notre Dame is). I'm told that the Rue St. Jacques is named for St. James and that pilgrims took this road south to visit his church in Spain (Santiago de Compostela). I say HIS church because some Catholics believe St. James founded a church in Spain at that his remains are relics at Compostela. The Catholic Encyclopedia (from my quick glance) is ambivalent on whether this happened or not.) The building you see in the picture, if I'm not mistaken is the observatory of the Sorbonne. Construction began under Louis XIV in the mid 1600s and the guide books say you can still find bullet holes from the last days of the liberation of Paris in August of 1944. It's about 39 meters above the ground, a good sniper's perch. There are two pictures. I posted them to show you what you can do with the DSC-P10 (even though I'm not very good at it.) The first is taken from the balcony without any manipulation. Here it is... DSC00032.JPE The second is one I monkeyed around with...going from 3 megapixels to five and using the zoom feature. You lose a little granularity with something so far off. But you get the idea of how it can work. Oh yeah, one last note, going with a higher number of megapixels improves image quality (thought not the way I did in the case). But it also increases image size, meaning it will take your pictures longer to upload and email. I've just linked to it here so it doesn't slow down the page uploading. That brings up an interesting point...bandwidth is a pretty big issue with these new camera phones. It's no surprise that they've taken off in South Korea especially because bandwidth there is so much more robust. It can support the rapid transfer of large files...something that ain't quite the case yet in the USA. Stock to consider on the camera phone trend: Samsung DSC00033.JPG

Reader Mail: A Democracy of Savers, Action on the BED Spread?

Hoping to add a letters page here in a few weeks so you can view more of what your fellow readers are saying. In a few weeks, the Insider goes out to all the paying readers of Strategic Investment. I want to thank all of you who've spent your time and thought helping me refine what I'm doing so that it's more useful, interesting, and hopefully, profitable for you. And you should know that it's quite a distinguished group of readers that's been beta testing the new format. Professional money managers, brokers, high net-worth investors, doctors, lawyers, retired name it. A formidable group. My hope is that it's just the beginning of a high-caliber exchange of ideas. We won't always agree. But the level of investment analysis and thinking should remain high. Here are a e-mails from readers this week. By the way, if you do NOT want me to include your name when I post a letter of yours, please let me know when you send it. Dan: You asked in a recent article about what would replace the dollar. a) WHY does it have to be another currency, and ... b) WHY does it have to be just one thing? My answer ( for you to ponder): I believe what we are headed for is a basket of things. 1) People will store their wealth in gold (and other metals on deposit) which is, of course a form of currency. 2) People will store their wealth in contracts with other businessmen - since businessmen, who have to live by providing true value for value in a free exchange arena where no one is compelled to buy, are the only true honest people left on earth. .... Well, maybe they are not always honest people, but they exist in the most honest forum. 3) People will crate their own currencies. An example of a currency is stock in a new technology. If you list it, lets say on Nasdaq or on the OTCBB, the founders create a kind of currency. This "kind of currency" runs just like a paper currency does. Create too much and its relative value drops. Exchangeable, via the stock market, for other currencies including government issued fiat currency. The company can buy thins (like other companies) by issuing its own currency (stock). The trick of course, is to have a great underlying technology that people will value. 4) and so on. The implications of the world shifting to a basket of values from the current dollar standard is that people have to start thinking again. Isn't it funny that the unsophisticated people of 1830 knew intuitively how to value the hundreds of currencies that were floating around. People today have lost that ability because the almighty dollar was, through the Fed Reserve, established as the ONLY standard. People didn't have to know anything other than they needed dollars. Now that this is changing, my submission is that people will go back to a "basket case" approach, each human being with his own prejudice as to value, reflected in the composition of his basket. Curiously, the very existence of this basket will encourage democracy, sort of back in the days when 1,000's of banks issued their own currency. There was no ONE standard, and therefore no Alan Greenspan who cold misuse the standard for his own ends (or those of his friends). When no politician can manipulate the standard, he will be forced to issue policies that he can afford, and no others. The "one standard" has been the greatest impediment to true, direct democracy, for the last 90 years. We were freer in 1912, then we are in 2004. I believe we will head back there. Every movement needs a socio-economic driver. The driver in this case will be a mass movement of the savers to establish their own basket. They understand the need and have the ability. They will scurry to protect themselves from those who would want to latch on to their savings. Such a basket would include holdings in places where people normally can't reach. The non savers will have a greater problem. For all of the character flaws which this exposes, non -savers like to rely on other people's saving to survive. When the crunch comes, and the savers disassociate themselves from the non saves by storing their holdings in baskets that are out of reach, it is h non saves who will suffer. I am not an editorial write and, as such, my explanation may lack the right stuff to be a complete argument. But .. perhaps you can bat this around your crew and comment in your articles as and when you see fit. I believe my point f view has merit and with sufficient close argument might be capable of peeking into tomorrow's newspaper. regards Carl Wimmer AND THIS EXCERPT FROM A READER ABOUT THE BED SPREAD.... Like yourself, I sense a change coming, and soon, very soon. So I am positioned, I think, for a drop in the dollar, a drop in the markets, a forced increase in interest rates, or all three. Somebody's bluffing and we'll soon find out who. I like your BED spread and am wondering why you haven't or will you suggest a long or short position of the components which make up your unique indicator. I will always be a subscriber of yours, if for no other reason than I enjoy your writing. Thank you again for your time and attention as well as your dedication to your subscribers. Sincerely and with Best Wishes for a Happy New Year, Mark Richardson Illinois, USA DENNING COMMENT: Since the BED spread is an analysis of interest rates, with the presumption that as risk rises, rates will rise...the most obvious way to directly trade on it is through interest-rate related investments (IEF, TLT, TNX, AGG, and LQD). I've proposed doing just this with my new reco in the January print issue. I'm aiming to make this available on line late this week or early next. And by the way, once all SI subscribers are aware of the Insider, I plan publishing the new issue on-line as soon as it's you won't wait long for new ideas when I have them.

London Black Cabs, Trust on the Internet

One of the early benefits of starting the Insider (for me and for you) is that I've been able to sign up Lord Rees-Mogg to begin writing a weekly, slightly less formal letter for publication here. The medium is new to him. But when you write with as much experience and insight as he has, you're bound to find something thought provoking to explore each week. This week, the issue is trust, but in a Internet context. As LRM points out, the Internet is largely a self-regulating medium (as opposed to un-regulated, if you ask me.) The upside, no government authority is telling you whom you can consort with. The downside, to some, the existence of unsavory types willing to take advantage of neophytes. To be honest, I don't think the existence of criminals on the Internet, whether corporate or amateur, is substantially different than criminals in your neighborhood. The marketplace is full or rogues. And the buyer should always beware. But if there IS a difference, I'd say the difference is that there are fewer layers of people between you and your interlocutors on the Internet than in the real world. And after all, that is exactly what a lot people celebrated about the 'net in the early days...the lack of "friction" between a business and its customer. The Internet made it easier to find the lowest price on virtually anything, effectively lowering prices for everyone. The "friction" in the transaction was the lack of pricing transparency. Take away the fog of costs coming from middlemen, and you'll pay lower pricesThis works well for consumers. And for low-cost producers or retailers (even producers of financial information) it works. But what it also does, as LRM points out, is put the issue of personal trust front and center. Businesses that are used to viewing each new sale as a "transaction" rather than a "relationship" soon find themselves besieged by customers who demand and expect a highly personal response to questions. How do you establish your bon fides as a business? Lacking a brand name that establishes trust, your garden variety firm doing some its business the Web has to earn trust one customer at a time. Trust is performance based. And performance is personal. No more hiding behind a corporate facade. I'd like to say that's one of the reasons I started blogging rather just writing a weekly or monthly e-mail. That is, all things being equal, the wide availability of information today means no one--particularly in the investment world--has a competitive advantage based on superior information. THe advantage comes from doing more and better work, turning the mish-mash of the news cycle into meaningful and actionable investment analysis. The only meaningful advantage a finanial product has today is having a highly-personal, subjective, "strategic perspective" (or 'Orientation' in the language of the Boyd Cycle you'll read about in the January issue. That orientation is just another way of saying direct and indirect experience. The direct experience being your own, the indirect being the experience of others. And since nothing new under the sun happens in financial markets, the indirect experience is often more valuable than the direct. As Liddell Hart says in Strategy, "The greater value of indirect experience lies in its greater variety and extent. 'History is universal experience'--the experience not of another, but of many others under manifold conditions.'" So, enough contextualizing. Here is your weekly helping of indirect experience from LRM. And incidentally, I plan on spending a LOT more time in London this year...where we've quietly been building some new contacts that should add even more to our "strategic perspective." Strategic Insider -- 22 December 2003 -- William Rees-Mogg In London, there are two kinds of cabs. The first is the familiar black cab. It is relatively expensive, but offers a high quality service. The price is fixed by regulation, the driver has had to spend a year learning the geography of London, on foot or on bicycle. He will lose his licence if he commits any but a very minor crime. The cab itself has to meet standard specifications which include the ability to carry a customer safely in a wheel chair. These regulations go back over a hundred years to the days of the Hansom cab. The alternative cabs are unlicensed minicabs. At their best they offer a cheaper service than the black cab and will pick up customers at times and places when there are few black cabs about. However, at the worst, they are driven by convicted rapists, who may have no insurance, may bully their customers into paying excessive fares, and very probably know only the most obvious London addresses. From time to time they are rounded up by the police. Londoners are nervous about using them, particularly London women. I do not write this as a travel note for people who are thinking of a winter break in England. Our two types of cab are as good an example as I know of the difference between regulated and unregulated markets. There are advantages in regulation, though not all regulatory systems work as well as the one which regulates the black Londotaxises. But low price is not one of them. The Internet is as near as one can get to an unregulated system. Its advantages are immense and they have changed almost every business system. But, like all unregulated systems, the Internet lacks the safeguards which regulations build in. The Internet is extremely attractive to criminals. The world’s police have now woken up to the danger of children being recruited by paedophiles in unregulated chat rooms, but parents still worry that a paedophile may have introduced himself, under a false name and giving a false age, into their child’s bedroom via a website the parent has never heard of. Police action is being taken to prevent that, which may or may not be successful, but paedophiles are an extreme example. At the other end of the scale of nuisance is Spam, and action is being taken to reduce that nuisance because it threatened the viability of the Internet itself. But the basic risk remains. None of us can be sure whom we are dealing with on the Internet. All sorts of scams and cons can flourish. All business depends on trust. The vendor has to trust the customer to pay and the customer has to trust the supplier to produce the goods as described. When businesses reach a certain size they no longer have an interest in cheating. Their reputation is worth more to them than any individual scam would be. We do not worry that Microsoft will not sell us the software as described, nor that Coca Cola will make a saving by cutting the quality of the product. Firms rely on celebrity or the value of the brand name, though this is even more expensive that regulation itself. But most businesses do not have a global brand name; hence the successgeneralizedised brand names, like the Virgin brand which applies to widely differing products. Yet the combination of the superboom of the 1990s and the Internet has created a problem of trust. There are real criminals prowling the virtual streets of the global city. There were hyper-criminals making phoney IPOs on the Wall Street of the dotcom bubble. No-one has forgotten the lesson of Enron. Those global businesses that do inspire trust will gain a very precious asset in the post Enron era. That may be worth remembering in 2004. William Rees-Mogg

December 21, 2003

The VIX is Flashing a Sell Signal

CBOE's Volatility Index, the VIX, is about as good a technical indicator of investor complaceny that you'll find. And right now, as you can see from the cart below (courtesy of the VIX is at a new four-year low. As you'll see in the January paper issue of SI next week, anytime the VIX is this low, the overall stock market has suffered some quick setbacks. Thought for the evening: perhaps the January effect came early this December...and 2004 will kick off with a correction, not a rally. VIX Making a New Five-Year Low: "Where's the Risk?" investors ask.