Sunday, August 7, 2011

This time is Different by Reinhart and Rogoff

This book’s full title is “This time is Different, Eight Centuries of Financial Folly”. The authors are Carmen M. Reinhart and Kenneth S. Rogoff. See interviews and a review of this book at Princeton University Press. See a better review of this book at Harvard Magazine.

One of the first things that these authors bring up is the trouble with bonds. Their remarks are especially true of government bonds. How governments have ended up buying their bonds debts off, if you could call it that, is by inflation. If you have inflation, the dollars government use to pay off a bond is worth less than the dollars they originally got by selling bonds.

The US debt after WWII was 120% of GDP. How US “paid” off their debt from the 2nd world war was a combination of economic growth and inflation. In the current situation of little economic growth and very little inflation, you got to wonder how the US will bring down their current debt except by some hard decisions on taxes and entitlements.

Interestingly, there are a few countries that never had a central government default. They are Australia, New Zealand, Canada, Denmark, Thailand and the US. Europe had a lot of serial defaulter governments in the past. And some are like England, which had its last default in the 16th century, haven’t defaulted lately. There were also no defaults of central governments between 2003 and 2008, but this is far from normal.

Countries, institutions and financial instruments have changed over time, but human nature does not. Financial crisis follow a rhythm of boom and bust though the ages. The recent financial crisis that originated in the US and spread across the globe is only the latest manifestation of this pattern.

The think is that highly indebted governments, banks or corporations can merrily roll along for an extended period of time and then bang – confidence collapses, leaders disappear and a crisis hits. The thing is that leverage (thin capital to assets) can be fragile and subject to crisis of confidence.

This book may not be everyone’s cup of tea. It can get quite technical. Most people might be better off hearing the author speak. However, for an academic paper, I found this book written quite clearly. Below, I have listed a few places where you can hear both Carmen Reinhart and Kenneth Rogoff speak.

See “The Anatomy of Financial Crises: A Global Perspective by Professor Carmen Reinhart” at John Hopkins lecture. See also Carmen Reinhart on Financial Crisis and Fiscal Policy at CATO Institute . See Interview with Kenneth Rogoff on "This time is different" at Jyske Global. Also see Ken Rogoff - Debts, Deficits and Global Financial Stability at INET Economics.

On my website is how to find this book on Amazon if you care to purchase it. See Reinhart and Rogoff. Also, this book review and other books I have reviewed are on my website at Book Reviews.

Friday, August 5, 2011

The Great Reflation by Anthony Boeckh

This book is fine for this type. However, personally, I liked the book “This Time is Different by Reinhart and Rogoff, better. However, Boeckh does make some interesting points.

He first talks about the Kondratieff wave. This is a popular thing to talk about. What I have found is that a lot of people believe in it, but few agree to just where we are on this wave. The basic problem is that we know where we have been, but we do not know where we are.

I think that the best thing that this author points out is that the current reflation going on in the US is an experiment. People thought this sort of action could have save the US from the Great Depression. However, it is all theory. No one has tried it before.

He, like a lot of US analysts, feels that we are still in a secular bear market. This author does not say so, but I know that a lot of analysts feel that there will be one more downswing in the market before we start on the next secular bull market. The author provides a lot of charts going back to 1885 in the US and these are very interesting.

He talks about how prior to 1960’s, lots of stocks were bought for dividends and dividend paying stocks were more prevalent. There were gradual changes to what people thought companies should do and one of the things is that, especially after 1980, companies cut their dividends and did stock repurchases instead. This was meant as a way to provide more value to taxpaying shareholders, who would have increased capital gain. This is because capital gain is taxed less.

Personally, I do not think that this move worked out well for shareholders. I think partly this has to do with the fact that companies got into giving out stock options. Now, it seems that most of the stock repurchasing is to cover the stock options given out. Also, companies tend to repurchases stocks, not at market lows or when their stocks are undervalued. They do not seem to do the repurchasing at at good prices.

I know a lot of people talk about the current bull market in commodities. This is because of the big demand for commodities from China and India. However, Boeckh points out that huge demand increases in commodities does not lead to rising prices in the long term. He says that the evidence is overwhelmingly clear that over long periods of time supply has risen sufficiently to sustain a powerful long term inflation adjusted decline in commodity prices as a whole.

If you think back to what happened about oil prices in the 1970’s when OPEC increased prices greatly, everyone was looking for oil and they found lots of it all over the world.

Another interesting thing he talks about is a long wave in Political Values. I had not heard of this before. He says that politics go from Progressive to Cosmopolitan to Conservative to Parochial. This matches up with an economy going from Expansion to Peak to Decline to Trough. John Sterman wrote a paper on this and it is available at MIT. Paper is called “An Integrated Theory of the Economic Long Wave”.

For a 10 minute radio interview with Boeckh, see Anthony Boeckh (pronounced Beck, by the way) has an investment newsletter at Boeckh Investment Letter.

On my website is how to find this book on Amazon if you care to purchase it. See Boeckh. Also, this book review and other books I have reviewed are on my website at Book Reviews.

Wednesday, August 3, 2011

War: The Definitive Visual Guide

The full title of this book is War: The Definitive Visual History, from Bronze-Age Battles to 21st Century Conflict. This is a DK (Dorling Kindersley) book. If you have not had or read any books from DK, you are in for a real treat.

DK books are marvelous books. They are gorgeously illustrated and written clearly and beautifully. If you get the idea that I admire their books, you are very correct. I have bought their books before and have enjoyed them immensely.

This may not be a subject you will enjoy. It certainly shows human’s violent side. However, we should not forget our history. History is full of battles. We should also not forget how destructive we can be. No matter how we feel about the matter, the truth is that campaigns and conflicts that have shaped world history.

I certainly read this book, cover to cover. However, it is just as good as a coffee table book to browse through when you have some spare time.

On my website is how to find this book on Amazon if you care to purchase it. See DK. Also, this book review and other books I have reviewed are on my website at Book Reviews.