The Laziest Investment of All

Posted on March 27, 2012 by ayecapitalist

In today’s financial column on CBS’s MarketWatch, Paul B. Farrell writes about “Lazy Portfolios” – i. e. Buy-and-Hold long term, “lazy” strategies that always beat brokers’ and advisors’ more aggressive, managed strategies.

Here’s an excerpt of what he says:

“America’s investors have been ripped off as massively as a bank being held up by a guy with a gun and a mask,” …

Lazy Portfolios give investors a far superior alternative than gambling retirement savings in Wall’s Street’s casino. Simple solutions: Just three to 11 no-load low-cost index funds, and zero trading. And in the past decade we’ve discovered eight great Lazy Portfolios that investors are using as guides to building their own portfolios, without brokers or advisers.

Today, Wall Street, the fund industry and brokers hate these eight Lazy Portfolios even more. Not just because they consistently beat the S&P 500 on a long-term basis. Not because they’re based on the exact same Nobel Prize-winning model Wall Street’s top wealth managers use. Not because you don’t need any fancy algorithms to rebalance your portfolio. And not because Bogle calls industry insiders casino “croupiers” because they skim a third of your market returns off the top, leaving you leftover crumbs.

The more you trade at Wall Street’s casino, the richer your broker gets.

Farrell suggests that you build your own lazy portfolio using just a few index type mutual funds with low loads. Low loads are important, he says, because a typical mutual fund silently skims off about a third of your return, with no great benefit to you but a lot of benefit  to your advisor/broker. He offers six principles of sound investing – all of which are just one principle stated six times: You can’t time the market and you can’t beat the average. You must avoid getting effected by short-term swings and market sentiment. Have a definite time horizon for your investments and you will beat the experts. Don’t even watch the market and your portfolio day to day and have realistic expectations.

Read Farrell’s article here.

Farrell then goes on to give an example of 8 mutual funds that would be great candidates, singly or together, for a lazy portfolio. These are summarized below along with their 1-, 3-, 5- and 10-year returns.

He notices that they beat the S&P 500 over 5 or 10 years.

Mirror Mirror on the Wall. What’s the Best Fund of them All?


As you may know from reading my previous columns I think that the best investment vehicle of all is the simplest index of them all – The Dow Jones Industrial Average, or the Dow as we familiarly call it.

As of this writing how did the Dow fare over the same periods? Here’s how:

Dow Jones Industrial Average with Dividends Re-invested
1-year           11.6%
3-year           22.8%
5-year             4.3%
10-year           5.0%

Over 1-, 3- and 5-year periods the Dow beat all 8 of the lazy portfolios suggested by Farrell. Over the 10-year span the Dow did a bit worse. Over longer spans – 15, 20, 30 or 40 years – the Dow has returned a whopping 11% annual return compounded!

The Dow is easy to invest in – you could buy the ETF with the symbol DIA. You will pay a 0.5% or less total annual fee. Be sure to reinvest dividends automatically.

If you want to save the fee you just need to buy the 30 component stocks – equal shares of each. That’s it. You’re done. Reinvest dividends, and if buying 30 stocks with periodic dividends is too much work, sweep the dividends into DIA.

You will have less volatility than all the 8 “lazy” portfolios mentioned by Farrell and you will have comparable to better results. Best of all you need not waste your time studying and timing, or even watching, the market casino. You will be getting the best returns the house has to offer without making the sharks rich.

Posted in Current Events, Investing, Money, Politics | 1 Comment

Our Human Future – Green, Healthy, Prosperous, Abundant!

Posted on March 9, 2012 by ayecapitalist

Sugata Mitra

Thank God we have people like Sugata Mitra. Or Peter Diamandis. Or the hundreds of other pioneers who think like them and are transforming the world for the better. They have a vision of boundless optimism: a world of plenty, unlimited resources and resourcefulness, and an earth that comfortably yields cheap and renewable abundance for all of mankind, soon to top out at 9 billion people on our little planet.

Peter Diamandis, Chairman and CEO of the X-Prize Foundation, is also a cofounder of the Singularity University (SU) in Silicon Valley and the author of the book, Abundance. The Future is Better Than You Think. In this book he describes the vision mentioned above: of transformations and exponential innovation that will result in a world that is connected, healthy, sustainable, educated and prosperous. This is not just a dream for a utopia someday far in the future – this is a blueprint eminently achievable well within one generation. Peter’s goal in founding SU, as he says in his book, is to propagate this vision and spawn at least one company that will directly and positively impact one billion people.

Who will be the first one to do that?

One likely candidate is Sugata Mitra. He is an educator and a scientist who tackles one of the greatest problems of education — how to educate a billion kids in this world where we have a great shortage of teachers and schools. Self-directed learning was a possibility in his mind, but were kids living in slums, with no education, language, access to teachers and schools capable of all that much self-direction?

He did a series of real-life experiments in India that could revolutionize how we think about teaching. Please see the TED video below – it’s uplifting and amazing!

Slum Children at Mitra's Computer

In a New Delhi urban slum Mitra cut a hole in the boundary wall and installed a computer with the screen facing the slum. A track pad allowing point and click was attached. The computer was connected to the Internet and had a web browser. Mitra installed a video camera to record the results and walked away.

The kids living in the slum could not speak English, did not know how to use a computer and had no knowledge of the Internet, but they were curious. Within minutes children of the slum had learned to click and browse the Internet. Groups gathered and soon the kids were trying different experiments and teaching one another how to use the web. This raised a lot of questions in Mitra’s mind. Was this real or was someone out of sight of his camera explaining the technology to them?

He repeated the experiment with many variations. One amazing experiment was in the village of Kalikkuppam in Tamil Nadu. Mitra set himself an “impossible” target: (as he puts it, see his Ted talk in the video below) – can a bunch of impoverished, Tamil-speaking, twelve-year-olds, learn to use the Internet in English, and teach themselves biotechnology? Yes, biotechnology – this guy does not think small!

“All I told them, ” he says, “is that there was some very difficult information on the computer and that they probably would not understand it.” And that he would be back in a couple of months to test them.

When he returned and asked them if they had learned anything, one 12 year old girl raised her hand and said, “We learned nothing.“

He was somewhat disappointed and asked them when they had stopped trying to learn on the computer realizing that they had learned nothing. The girl said they were on the computer every day. ”But you learned nothing at all?“ asked Mitra.

“We learned nothing …… except that improper replication of the DNA molecule causes genetic disease.” He was agape. Actually the kids had learned a lot more than that. When Mitra tested them they scored 30% on a standard test given to kids who attended formal school. 0% to 30% in two months with no formal education! Wow!

Mitra kept refining the process. By adding an elderly person to encourage the kids and give them feedback (a grandmother, if you will, who didn’t need to be proficient herself) he was able to increase the test score to over 50% (better than at formal schools) and best of all the kids retained what they had learned when he came back and tested them several months later without a computer!

Sugata Mitra’s “Hole in the Wall” experiments have shown that, in the absence of supervision or formal teaching, children can teach themselves and each other, if they’re motivated by curiosity and peer interest. Ever the scientist Sugata Mitra concludes:

Education is a self-organizing system and shows strong emergence.

Since then Mitra has formed schools all over the globe called SOLE’s (Self Organizational Learning Environment). He enrolled real grandmothers from the U.K. and India to act as mentors via a Skype type hookup to these schools, each of which can educate 100 kids.

Mitra’s goals are nothing short of audacious:

  • Educate 1 billion children around the third world
  • Use 100 million mediators (grandmothers and such, easily available if can be used remotely
  • Establish 10 million SOLEs.
  • Cost: $180 billion
  • Time to achieve: 10 years!

Now that’s visionary and, in this world of naysaying, a huge blast of fresh air!

Posted in Current Events, Education, Evolution, Money, Science | 5 Comments

Photosynthesis – A Bright Ray of Hope in our Energy Future

Posted on February 27, 2012 by ayecapitalist

Cyanobacterium call

Last Thursday, invited by my friend Sam S. Vasan, I attended a dinner meeting of the AIChE ( American Institute of Chemical Engineers) held in Walnut Creek. The speaker was Prof. Anastosias Melis, a Biochemist from U. C. Berkeley, and the topic was Photosynthesis-to-Fuel.

Professor Melis presented the results of his research in which he is genetically modifying bacteria to directly convert sunlight into hydrocarbons. This technology has a lot of promise and is on the doorstep of commercialization. If implemented it can provide us with a solar source of energy that has big advantages over photovoltaics in cost and storage.

Blue-green Algae Growing Naturally

Blue-green Algae Growing Naturally

The key player in this technology is a single cell creature,  called cyanobacteria, that is mass produced in nature as blue-green algae. It blooms fast and abundantly on bodies of water, such as lakes and seas – creating a blue-green scum like appearance.

This little organism has developed a fantastic trait –  photosynthesis, which means it uses chlorophyll (and carbon dioxide and water) to gather light and convert it to energy. Once the conversion is complete, the organism stores that energy as sugar, while releasing oxygen as a byproduct.

Blue-green algae in various forms are responsible for about 20% of all solar energy conversion to bioenergy in the world. Their total production is 450 trillion watts or (TW), 24 hours a day as there is sunshine somewhere all the time. Compare this with peak energy usage by mankind of about 8 TW.

These algae also use up CO2, which solves yet another problem for us – carbon induced global warming. (The carbon is released back when the photosynthetic fuel is burned, so no net carbon released into the air for the cycle).

The trouble with the photosynthetic activity of these cyanobacteria is that they produce sugars and  other products not easily usable by our industries as energy sources. What if we could induce these organisms to directly produce hydrocarbons that we can burn in cars or generate electricity with? It would be a great, non-polluting assist to our energy needs.

Genetically Modified Algae Produce Hydrocarbon Fuel Directly

Professor Melis described how his research has produced  genetically modified cyanobacteria that can do just that – they can modify the products of their photosynthesis to produce a hydrocarbon called isoprene (C5H8) which is easily storable as a liquid without having to freeze it (it boils at 34°C or 93°F). The algae cells still produce sugars and other biomaterials they need to replicate and live, but 16% of their sunlight conversion now goes into the usable hydrocarbon. See Prof. Melis’ paper describing his research here.

Professor Melis, to show scalability of his lab results, built a “bioreactor” in his backyard which uses a cubic meter of algae, CO2 (in Baking Soda form), and water to produce and trap hydrogen. He used stock materials picked up in a hardware store and aquarium supplies. He has since refined the process to produce the more usable isoprene instead of hydrogen, which is difficult to handle. His gizmo can provide clean energy, sufficient enough to supply an individual household needs, any place the sun shines.

The results of this and related research have excited many investors/entrepreneurs and Prof. Melis says he is receiving numerous inquiries from venture capitalists. The economic tipping point for commercialization, he says, is a production ratio of 20% isoprene. He is still tinkering with the algae genetics and other parameters to achieve that result, which he says is within sight.

The advantages of photosynthesis over photovoltaics are:

  • No expensive manufacturing or rare earths required. The cyanobacteria once genetically modified, can replicate themselves fast and indefinitely.
  • No battery technology with its attendant bulk and disposal issues
  • The hydrocarbon produced is very versatile and can be used in many industrial processes directly. It can be stored much more easily than, say, hydrogen in liquid form and shipped safely.

An Algae Bioreactor

The bioreactors can be built in remote or waste areas where the sun shines and algae reactor farms can be built. Transmission lines are not required as for photovoltaic electric generation plants. The costs have been estimated as low: just a few cents for a gallon equivalent of gasoline, if a viable, scalable technology is implemented.
This is not some pie-in-the-sky radical environmentalists’ pipe dream. It is mostly here and has great promise.

Wanna do a new start-up?

Posted in Uncategorized | 4 Comments

Resurrection – A Natural Adaptation in Yellowstone!

Posted on February 13, 2012 by ayecapitalist

At Yellowstone Park (see my photo essay of recent trip) winter is a time of survival. The conditions are harsh and life must adapt to survive. In fact after the long, cold winter many animals who are at  less-than-peak fitness die and springtime reveals thawed out expanses littered with dead animals.

The woolly shag of the bison keeps it well insulated. Photo by my colleague, Larry Porter

So nature has devised strategies for survival. The bison, for example have developed a dense shag and a dark color that absorbs almost all of the precious sunlight. They can continue to forage under the snow on soggy grasses, unless there’s a very hard freeze, in which case they cannot push the snow aside to reach the grass, and cannot eat. They have lots of body fat stored and can run temporary deficits in calories to survive.

Other animals, such as the grizzly bears, hibernate through the winter to conserve energy. Marmots go into deep hibernation, reducing their metabolism by 80%. The sleep is so deep that they cannot be woken up during hibernation.

A Frozen Frog in Yellowstone National Park

But the most astonishing strategy is adopted by the boreal chorus frog (and some of his kin in other parts of Montana and Canada, such as the wood frog). The boreal frog literally allows itself to “die” for the winter! As winter approaches it creates a shallow burrow of dead leaves, sneaks underneath and freezes over. Literally, it looks like a chunk of ice in the shape of a frog. Its metabolism stops – no heartbeat, no blood circulation, no oxygen transport. No respiration. All the functions that we associate with life are absent. It’s not merely hibernating, it is almost literally dead. You can kick one and it will be like you kicked a block of ice.

Then, when the thaw sets in at winter’s end, the boreal frog miraculously resurrects itself! The water in its body melts again and it somehow restarts its heart and metabolic activity. It’s alive again! This is not waking up from deep hibernation, this is resurrection from the dead!

For normal living beings like you and me, if we froze the water in our body cells, the cells would explode and die. There would be no building them back again. But the boreal frog has adapted by developing a special gene that sets processes in motion to expel all the water from the cells and lets the water freeze outside its cells. The cells are completely desiccated and inert during the freeze but they are technically still “alive”. After the thaw the gene sends a signal to restart the heart and for the water to rehydrate the cells. Viola! A live boreal frog ready to feast on the plentiful mosquitos and other insects of spring and summer.

Nature is magical. There is evolutionary beauty and elegant solutions to impossibly harsh environmental challenges. Somehow life clings to every niche no matter how inhospitable. The boreal frog, whose habitat we were lucky enough to visit, is a wonderful example.

Posted in Evolution, Photography, Science, Travell | 7 Comments

Winter in Yellowstone: A Place of Exquisite Beauty

Posted on February 7, 2012 by ayecapitalist

Bison Grazing in a Snowstorm

Last week, along with a dozen other photographers, I made a trip to Yellowstone National Park. I found winter in Yellowstone to be a unique experience: it was cold, harsh, snowing. Temperatures ranged from -15°F to +20°F – even colder with a whipping wind – but it was also serene, starkly beautiful and unspoiled. No bustling tourists that you see in summer, just you and the sounds and sights of nature in hibernation or survival mode.

Snow Coach

The park is closed to all cars in winter. We traveled by a Snow Coach, a vehicle with a tractor drive, specially chartered for the purpose. Along with snowmobiles it is the only way to access the icy, snowed-in park roads. It trudges along at 15-20 MPH and provides ample time to soak in the winter beauty of the Yellowstone plateau which rises 6000 to 11000 feet above sea level.

A Frozen Walk to Midway Basin, Yellowstone NP

Yellowstone is the first National Park in the U. S. It was so designated in 1872 by President Ulysses Grant. The concept of a National Park was mandated for the first time – a wilderness and biosphere reserve to be maintained in unspoiled form for the enjoyment of the people. It is also huge, encompassing more than 2 million acres or about 3500 square miles (larger than Rhode Island and Delaware combined).

It boasts the largest caldera of a volcano on earth, and while the volcano has not erupted full bore since 640,000 BC, simmering volcanic activity is still very much evident, as the hot spot just below a thin crust of earth sends up plumes of gurgling steam, erupting geysers and boiling mudpots. In winter the icy landscape is covered with a steamy vapor from all the hydrothermal activity that dominates the lava dome in the huge caldera.

Music Video of Photos and some Video Clips:

Old Faithful

Yellowstone has some 10,000 hydrothermal features, about two thirds of all such features in the world! The most famous, of course is the Old Faithful geyser which has been erupting faithfully every 93 minutes, year in and year out. See slideshow from trip.

Near this famous geyser is the origin of the Firehole river, which is fed by hundreds of hydrothermals creating a steaming, vaporous, fuming river, which never freezes as it runs through an icy landscape in temperatures sometimes as low as -60°F.

Clouds of Steam Over Firehole River

The Yellowstone River also originates in the park and flows into Montana and eventually into the Missouri river. It is huge – bigger than the Missouri and, had it been discovered before the Missouri, the biggest river system in the U. S. would properly have been called the Yellowstone river instead of the Missouri/Mississippi.

Lower Canyon Falls

The Yellowstone River forms a magnificent canyon – known as the Grand Canyon of the Yellowstone – flanked by the majestic lower canyon falls. The Grand Canyon runs for 26 miles and is more than a quarter mile deep encompassing a sharp icy drop to the river from the towering mountains of the Yellowstone plateau.

The Grand Canyon of Yellowstone

You see many animals wintering in the park. There are bison, their shags all covered with snow, rooting in the snow for the soggy grasses beneath. You also see the beautiful red fox, elk, coyote, trumpeter swans and, if you’re lucky, wolves.

Trumpeter Swans in the Steamy Madison River

Lots of beautiful pictures to share from this memorable trip. Please check out a slide/video show here.

A Red Fox Checks Us Out

It was a great week at Yellowstone National Park. My toes are still thawing out but it was well worth the discomfort. The mind was feasted with a landscape displaying its stark beauty and a bioscape of ethereal charm.

Posted in Photography, Science, Travell, Uncategorized | 21 Comments

An Evolutionist’s Meditation on the Miracle of Being

Posted on February 2, 2012 by ayecapitalist

Some time ago I was asked to give an opening invocation at the Board of Trustees Meeting of CIIS (California Institute of Integral Studies) in San Francisco. How does an Evolutionist invoke the transcendent? I re-read what I had said and thought it worthy of repeating in this blog.

Meditating on the Miracle of Being

I invite you, please, to join me in a contemplation of the miracle of our being here.

My presence here is miraculous. For me to be here a million, trillion, trillion drifting atoms had to assemble in an intricate manner in an arrangement so specialized and particular that only a transcendent intelligence could unravel it. It has taken 14 billion years in which nature has moved relentlessly and improbably so that this special assembly, me, can be here today. And this remarkable assemblage of atoms has, incredibly, developed a mind, a sense of self and the ability to inquire. “Who am I?” “Why do I feel” “Who made me?”

I know that the atoms that comprise me will one day disperse and go on to form other entities. I ask, “As these atoms disperse will also my consciousness, my essence?” Only because I have a sense of “I” does the question even arise. Alone, among all the billions of species of life, 99.999% of which are extinct, am I that am aware of my impending death, because I alone developed a sense of “I”. But my consciousness, like everything else living, was forged in the furnace of survival, by the inexorable forces of replication and experimentation, mediated by survival. The urge to survive, for immortality, is thus primal, etched into me since that first pinch of chemicals on earth twitched alive in the primordial slime some 4 billion years ago.

So it is not a surprise that I crave with all my being to transcend death. Do I then delude myself when I invent a soul and scream out for immortality? In reality, am I just an, oh so fleeting, note in a grand cosmic raga?  Isn’t it narcissistic of me to assign an existential permanence, and a divine purpose separately to this fleeting note, to myself?

Maybe so.

Or maybe what I need to do is evolve a bit further so that my consciousness and my sense of self broadens to include this eternal raga of the universe, ever evolving, forming, re-forming, dying, being born, going extinct, coming into existence in an infinite dance. Perhaps I am not an entity but a process,  eternal after all, if I just break through the boundary that my current sense of self has boxed me into.

Amen

Posted in Uncategorized | 9 Comments

A Jihadi State-of-the-Union Presentation

Posted on January 17, 2012 by ayecapitalist

Dateline, Pakistan
January 11, 2012

The Heir to the Caliphate, Mullah O.

In a remote mountain cave in the Hindu Kush, somewhere within Pakistan’s western border regions, an important meeting is convened. The convener is none other than the famous Mullah O, a Taliban imam formerly from Afghanistan and now the de facto spiritual leader of the Islamic Caliphate movement, living in Pakistan.

Mullah O. sits on a large silk Kashmiri prayer rug reclining slightly on a cushion in the center of the cave. He is blind and his unblinking, blank eyes seem hard and determined, filled with a fundamentalist, messianic resolve. He is after all a chosen warrior of God, a Jihadi in the true sense of the word, who will restore the Kingdom of God on earth, a Utopia promised in the Holy book. He calls the meeting to order. Four of his top commanders flank him, two on each side. These are:

  • Ayman al-Zawahiri, the head of Al Qaeda,
  • Hakeemullah Mehsud, the leader of the movement of the Taliban in Pakistan and a close ally of al Qaeda,
  • General Ashfaq Kayani, Head of the Pakistani Army, a most secret double agent and a member of the Al Qaeda/Taliban network and Mullah O’s  inner cabinet,
  • Jalalabad Haqqani, the head of the Haqqani terror group.

Other commanders of the many affiliated terror cells sit in a group in front with their Kalishnikovs in their laps.

Mullah O: (invokes) Bismillah ir-Rahman ir-Rahim … By the grace of God may this meeting come to order. This is our annual meeting to discuss the State of the Union, the progress of the Mujahiddin Movement to destroy our Western enemies and their proxy dictators and occupiers of the Holy Lands. Since we met last year we have lost Sheikh Osama bin Laden,  our Founder and most precious Leader – he has become a shahid, a martyr, in  God’s struggle, and is no doubt in heaven with his 72 well-earned virgin houris.

The Mullah chuckles, and mutters under his breath:
Although, he seems to have been getting quite a lusty preview in the porn sites he was glued to in Abbottabad. Note to Self: Must ask Kayani for a fast Internet connection in my safe house.

I now urge the head of Al Qaeda, brother al-Zawahiri to give us a brief account of our progress in the last year and our goals for this year.

Ayman al-Zawahiri: Thank you, beneficent Mullah and God’s Prime Warrior. It is an honor to lead the Al Qaeda movement after so suddenly and treacherously losing brother Osama.

Unfortunately, I must sum up the State of the Jihad in 2011 in one phrase: Not Good.

We lost not only Osama bin Laden, but the head of our Yemeni operations, Anwar al-Awaki, the American born cleric who was an invaluable asset, and seven of his prized, highly-trained commanders in one drone raid alone. The Al Qaeda ranks have lost two hundred of its most zealous and ruthless regional leaders, emirs, funders and weapons experts. Former warlord governors of Balkh, Kandahar, Zabul, Baghlan, Kunduz – dedicated jihadis – all killed by drone strikes. Our key cabinet members, Ministers of:  War, Money Laundering, Drug Running, Propaganda and Misinformation, Human Trafficking – all gone. Regional commanders of the affiliated Pakistani terror cells – the Lashkar e-Toiba, Jaish e-Mohammad, etc. etc. – you know the groups I’m talking about – all quietly killed! We cannot replenish this kind of talent! Our affiliate groups in Kashmir, Indonesia, Chechnia, Somalia etc. have been similarly decimated.

Mullah O: With all our bluster Allah has made us no match for the powerful infidels. No, our only hope was that we could sow terror in their hearts, make them hysterical and get them to overreact. Only they have the ability to hang themselves and our plan is to induce them to do so. How deliciously they bit by taking the bait on Iraq!


Ayman al-Zawahiri: Yes, they did indeed. Our master terrorism trainer in Afghanistan, Ibn al-Shaykh al-Libi, when tortured in Gitmo in 2002, held out superhumanly until he was ready to deliberately feed the interrogators carefully pre-planned misinformation. He told them (after an insanely ineffective waterboarding session) that Iraq was a hotbed of Al Qaeda and that Saddam Hussain had WMD’s which he was planning to share with us.

Although we knew that the overly trigger-happy leadership of the U.S. at the time was prone to bite on this kind of stuff, we had never imagined how successful we were going to be. By the grace of God they ignored their allies, their analysts and their own Intelligence agencies and attacked! They had not the most rudimentary knowledge of our politics and factions and did not realize that Baathist Saddam had kept the islamic zealots out of Iraq. And of course they had no idea that we cannot abide the majority Shia population of Iraq, the unbelievers and apostates who worship a false Caliph.

Mullah O: The results were spectacular. Our most glorious victory! God is Great!

Ayman al-Zawahiri: Yes, esteemed holiness, they were spectacular. It was as if we had perpetrated a thousand 9/11’s! The infidels spent $3 trillion dollars by one account, lost upwards of 4,000 lives not counting the couple of hundred thousand Iraqis and injured countless of their youth. It was delicious. A gift that kept on giving.

Hakeemullah Mehsud: And they took their attention off Afghanistan where they had us on the run. Sheikh Osama was trapped and many of my Taliban warriors were in perilous danger. Even you, Mullah O, were dispossessed and risked being trapped had the Americans continued the hot pursuit in Afghanistan/Pakistan. The attack on Iraq allowed us to escape to Pakistan and find sanctuaries. We must, of course, thank the Pakistani military and the ISI for taking us all into their protection and initiating a brilliant double game with the Americans.

Iraq is now a terrorists’ playground. The Americans have finally left and there is not a shred of stability or a functioning democracy. We have got a foothold and run many recruitment and training camps as anti-Americanism runs rampant and much of the Iraqi elite has fled. Ideal conditions for us. And, of course the removal of Saddam means that Iran can now control the Shiite Iraq. There’s supreme irony in this for the Americans have delivered Iraq to the most hostile country to them in the entire world!

Mullah O: Ok, so we were doing great. The Great Satan was hanging himself with his own rope. What changed?

Ashfaq Kayani: They got a new President, sir. Barack Obama. At first we rejoiced. He seemed naive and idealistic and something in his background suggested a muslim seed. But he proved crafty and quietly ruthless. He created the only kind of warfare that works against terrorism – unsymmetrical, targeted counterattacks to take us out in pinpoint accurate raids, coupled with heightened intelligence, superior technology  and special ops skill. He ratcheted up the drone attacks and called our Pakistani bluff to be allies with him by requiring us to provide him targeting information.

We complied giving them whatever we could get away with – we needed the billions in aid to which my officers had become hopelessly addicted. Still we assiduously protected the core leadership of the Al Qaeda, Taliban and Haqqani networks. I am astounded and incredulous as to how they still got Osama bin Laden – I had personally given him the prime safe house in our military’s possession. We have no answers in the ultimate analysis against smart Special Ops and their technology.

Mullah O: What is our best hope for 2012 and beyond?

Jalalabad Haqqani: We simply have to get them to attack Iran. It will be a doozie if they bite. A country much bigger and more powerful then Iraq – and one where we can’t get access because they are Shia. If we can get the Americans to tear it down we can have another terrorist haven to fight the infidels. And the black eye that it will give the Americans could prove an existentialist blow. Another few trillions that even they cannot afford, a fractured and war-riven middle class, a polarized American electorate, a destabilized middle east and a lot of motivated jihadis – it is a goal we must avidly fight for.

Mullah O: But Obama won’t easily bite, right?

General Ashfaq Kayani: No sir, he won’t. He is being infuriatingly deliberate in how he takes on the Iran threats. Again he chooses to use the very effective and cheap targeted destabilizing techniques. He injects their nuclear systems with computer viruses causing multi-year setbacks, he takes out their intellectual assets and he aids their growing anti-mullah movements from behind the scenes. Even Mehmud Ahmedinijad is frustrated and has begun saber rattling in the Straits of Hormuz to tempt him to start a ground war. That would be great for Mehmud, of course, as it would give him wartime prestige and power – a legitimacy that he lacks.

Mullah O: What can we do?

Ayman al-Zawahiri: The Republicans are our only hope. They are beating the tom-toms and whooping up bloody war cries like a bunch of demented, native American shamans. Michelle Bachmann even called for missile attacks and war strikes right now! May God give her a hundred lives.

Mullah O: But she has already withdrawn from the race. What about Rick Perry, the born again from Texas? He said that he would not only start a war with Iran but reopen a third front for the Americans by going back to Iraq! Maybe God is working His will on the infidels.

Ayman al-Zawahiri: No, I’m afraid Perry is far too dumb even for his ultra-right constituencies. He doesn’t have a chance in the Republican primaries.

Mullah O: Rick Santorum, surely, then. Isn’t he a possibility?

Ayman al-Zawahiri: He does have the fanatic, fundamentalist fervor. Doesn’t believe in science or college, only in the absolute Infallibility of the Word – God’s and his own. He will be happy to induce the Apocalypse – it’s prophesized by their heathen texts. We pray five times a day that he becomes the next president, but alas, the odds are low. The infidels have gone moderate and are liable to pick Mitt Romney.

Mullah O: That’s not as bad as Ron Paul, I guess. He’s a real anti-war freak. What’s with the Republican Party these days?

Ayman al-Zawahiri: Floundering and giving us a scare. Still Mitt Romney won’t be that bad for us. He said he’s very squarely for a big, destructive war with Iran.  We don’t know for sure what’s in his heart. He is rather the chameleon – acts stupid every so often to please his Republican base.

Mullah O: Well let’s hope it isn’t Obama for another four years. Lucky for us that Obama doesn’t follow up his devastating missions on us with strutting, twirling his gun or landing on an aircraft carrier in bomber pilot duds declaring “Mission Accomplished“.

So the majority of Americans are unaware of his victories and buying into the unscrupulous ruddy-necked rhetoric of him being an appeaser.  God is Great!

The meeting goes on in this vein for several hours…

_______________________________________________

January 12, 2012 (the Next Day)

Phone call from Ayman al-Zawahiri to the Mullah, intercepted by western intelligence.

”Holy Leader, I have bad news. On his drive back to Waziristan, brother Hakeemullah Mesud was killed today by a drone strike. Six of his body guards and several Taliban regional chiefs, who were present at yesterday’s conference, also perished. May God rest their soul and give them the promised fulfillment in heaven!“

Amen.

Posted in Current Events, Money, Politics | 6 Comments

And The Winner Is …..

Posted on December 31, 2011 by ayecapitalist

2011 has been a year of uncertainty and turmoil in the global markets. In the latter part of the year we saw wild gyrations in the U. S. stock markets with the Dow Jones Industrial Average (DJIA) having a record number of days with 400 points or more moves. The European and Asian markets were no better. So what was the final scorecard?

Here’s a summary of U. S. market segments as measured by their indices:

Performance of U.S. Markets

The Dow Jones Industrials (or Dow as we’ll call it)  did the best with an annual return of 8.4%, just 2-3% below its historical average of about 11%, since 1940. At its peak for the year the Dow was up 11% (in May) and at its bottom it was down about 7% (in October) for a net see-saw of 18%.

The S & P 500 Index, on the other hand, only gained 2.3% for the year including dividends. And it gyrated a bit more: from a peak of 8.5% to a bottom of -11%. Its volatility as measured by the annual standard deviation was similar to that of the Dow.

The NASDAQ did worse than both the Dow and S&P500. The annual return was negative and the volatility was similar to the Dow and S&P500. This last bit was a surprise as the NASDAQ is usually quite a bit more volatile.

The worst performer, by far, was the Russell 2000, an index of 2000 small companies. It lost 4.5% while the volatility was sky high. At its worst it was down 23%!

Thus the winner in the U. S. was (tada!) the Dow.

How about if we looked at Europe and Asia? Were they better or worse than the U. S.?
Here are the results in U. S. dollar terms:

They all did very poorly indeed, with the U. K. being the best at a return of -7.7%! In addition the risks in these markets were very high as you can see from the standard deviations and the variations from the highs to the lows. The standard deviation for India is artificially low because it is calculated in rupee terms and does not include the additional volatility of the rupee. The rupee fell almost 20% in 2011, while the other currencies were not so volatile. India was a complete disaster and the prospects for 2012 are also quite cloudy.

So the good old United States was the place to be in 2011.

The Global winner in 2011: The Dow.

You could have beaten the Dow, of course by being in gold, or oil (big integrated oil companies only), or  big cap, high dividend stocks (like large utilities), or consumables (like tobacco). Would you have known? Maybe. Best to stay in the Dow for most passive investors. Most professionally managed mutual funds, after fees, as usual, did not beat the Dow. Hedge funds are said to have done very poorly in 2011 also. If you were weighted financials, high tech, health care, airlines, drug companies, even coal or alternate energies you would have been creamed.

In general when the economy is doing poorly, as it is now, and pessimism is rampant and prospects for housing, employment, credit etc are low, the large cap stocks will have an advantage. They can borrow cheaper because they can float their own paper, and they are less likely than their competitors to perish from market forces and inability to set prices. ”Them as has, gits“ goes a popular market idiom (along with “aint no free lunch”). The Dow represents about 40% of the total market cap of the NYSE so even though we are talking about only 30 stocks they are substantial.

For the next year the Dow stocks are predicted to yield 3.01% according to IndexArb, that tracks such matters. That’s icing on the cake in times when the 10-year government bond is yielding less than 2%.

Have a Happy New Year!

 

 

Posted in Current Events, Money, Politics | 2 Comments

Newt Gingrich Gets A Christmas Sermon

Posted on December 27, 2011 by ayecapitalist

Newt Gingrich is awakened, like Abou Ben Adhem, from a deep dream. It’s 5:00 am on Christmas Day – he peers around in the darkness. He senses it – there’s a supernatural kind of presence in the room.

“Who’s there?” he cries out as he hauls his bovine bulk out of bed.

“It’s I, Jesus”, says a voice. “Your savior and Lord. I want to talk to you.”

Newt snaps awake. Yes, indeed, in the room he spots a glow and the form of Jesus, upright, gentle and yet exuding a powerful divinity. A shimmering, translucent halo lights up the bearded face and long, dark hair spilling over the shoulders.

Newt Gingrich: Happy Birthday, Father. What a pleasant surprise! I feel blessed and privileged. I am being singled out by your special grace.

Jesus: Newt, I am here to ask you to put Christianity back in Christmas.

Newt Gingrich: Yes, Father. I have been working tirelessly for just that. The secularists, the atheists and the Politically Correct have hijacked you out of Christmas. They will not allow us to even say, ‘Merry Christmas’, or put up The Ten Commandments or Creches in public places. They want God out of all discourse and separate our great Christian nation from its founding culture.

Jesus: That’s fine, Newt. But my injunctions frown upon the gaudy display of graven images in lieu of following my teachings. Take the Ten Commandments. Remember something in there about not committing adultery? You have been cheating on your marriages, since your first marriage to Jackie in 1962, 49 years ago! And in 1980, when you first discovered she was dying of cancer, and when in violent disregard for the Christian commandments you were having an affair, you actually served her with divorce papers in front of your two daughters! And then you lied and said that it was she who had asked for the separation!

Newt Gingrich: Father, I know I have sinned. I do not deny having gone astray.

Jesus: You actually took part in the public stoning of an ex-president that you felt was a hindrance to your power grab, impeaching him for adultery as you yourself were committing it! How strongly did you succumb to the devil, Newt? Even the Hindus know better than to perpetrate that kind of hypocrisy.

Newt Gingrich: The essence of your teachings is forgiveness, isn’t it, and I have repented truly within my heart – openly, on Television even, after I gave the reason for my inattention to your commandments, viz that I was so preoccupied with fixing my beloved country I sometimes forgot which woman I was supposed to be with. So even though I’m not technically responsible for my adulteries, being so distracted, I have repented, as humbly as you have endowed me with the capacity to.

Jesus: For more than 30 years, one blatant godless act after another! Surely, after you saw the depredations of your behavior, you must have felt like doing something equally momentous to show your repentance and seek atonement. Something like a few years taking care of the lepers, washing the feet of the poor or renouncing wealth, shaving your head and living among the wretched, healing and …

Newt Gingrich: You are fu—ing kidding me! Oops, sorry about that. I repent I ever said that, specially in front of you, Jesus. I will repeat Hail Mary three times to atone for my vulgar outburst.

Jesus: Remember my Sermon on the Mount? Blessed are the poor, for theirs is the Kingdom in Heaven?

Newt Gingrich: But, sir. The poor these days are not what you may have seen in Biblical times. They have no culture of work. Many of them drink, do drugs and have no family values.  They fornicate and have babies out of wedlock and we’re supposed to transfer money to them?

Jesus: You don’t get the true spirit of Christianity, do you?

Newt Gingrich: Father, you are advocating class warfare. Teaching envy of the productive among society, the job creators, the, um, rich.

Jesus: No, Newt, I am advocating Christian values of charity, love and personal sacrifice. Ours is a religion of the underdog – it believes in uplifting everyone, no matter how wretched. It believes in simplicity, sacrifice and truth. Humility, not self righteousness, looking for evil within ourselves not denouncing others. By the way, we’re also against gluttony and avarice, if you missed that in Bible studies.

Newt Gingrich: Frankly you sound like a liberal. Have you been watching Rachel Maddow? Jeez! (Oops, Hail Mary, Hail Mary).

The room was dark again. The gentle form of the Lord had left.

Posted in Christmas, Current Events, Politics | 11 Comments

Going for Broke. Our Ponzi Economy.

Posted on December 23, 2011 by ayecapitalist

How do bad deals, such as subprime lending, become good deals with some financial engineering?

Let’s do a thought experiment, with 3 hypothetical deals.

Deal #1: Here’s the deal: You invest $100 with me. I’ll pay you $110 at the end of a year. Except 15% of the time you’ll lose all your money. Would you do the deal?

Of course not, you say. What a bad deal. And you’d be right. The “expected return” on your money is -5%. Can’t get rich that way.

Deal #2: You invest $100 with me. I’ll pay you $117 at the end of a year. Except 15% of the time you’ll lose all your money. Would you do the deal?

Tougher choice this time. You stand to make an expected 2% return over the long haul, 17% return about 6/7th of the time and -100% about 1/7th of the time. It’s still not a great deal. You are taking too much risk for a small expected return of 2%.

Deal #3: You invest $100 with me. I’ll pay you $150 at the end of a year. Except 15% of the time you’ll lose all your money. Would you do the deal?

Almost all would do this deal. The expected value of your return is 35%. You will make 50% in 6 out of 7 years and lose everything 1/7 th of the time. I still wouldn’t do the deal with the baby’s milk money – don’t want to take a 15% chance that the poor innocent will starve. But with “Risk Capital” the deal would probably be done. Risk Capital is the money the affluent can afford to lose in order to spice up their expected returns.

All pretty straightforward so far. But sometimes a bad deal like Deal #1 is all you got. But with a little sleight of hand you can make it a good deal and maybe you won’t be around when the fan gets besmirched. That’s what financial engineering is. Let’s go back to Deal #1 and do some financial engineering.

Suppose you could borrow $90 interest free and collateral free when doing the deal. Now you borrow the $90 add in your own $10 for a total of $100 with which you do the deal.

At the end of the year, if you get back $110, as you will 85% of the time, you return the $90 to the lender and you end up with $20 – hundred percent return on your $10 investment!

15% of the time the investment loses $100, but the lender loses the $90 (it’s non recourse – he can’t come after your other assets) and you lose your $10. All of a sudden this has become a great deal for you – a 100% return 85% of the time and loss capped at 100% of your investment 15% of the time. You would almost certainly do the deal.

Fine, you say, but what kind of lender would be foolish enough to make that loan?
Answer: The Federal Government, if the risk taker is a bank!

You’re a bank, let’s say Giddybank. You have $1 Trillion in customer deposits, which is really a loan to you from your depositors, hopefully at a rate of interest that lures customers to deposit money with you. Without regulations you can invest this money any way you want. Say only bad deals such as Deal #1 are available. If you take too much risk, such as Deal #1, you can eventually have losses and therefore no money to repay the loans. No repayment of loans would mean no further depositors and ultimately no business. So you would take only prudent risks to survive and thrive. Good capitalism.

But here’s the difference – the Federal Government through the FDIC insures the customer loans. You can take a high risk flier with the money, such as Deal #1, highly leveraged, and if the default doesn’t happen (6 out of 7 times in our example) you make tons of money. High fives and bonuses result and the Government declares that the FDIC insurance is working. But when (15% of the time in our example) the risk kicks in and you  lose, the Federal Government swallows the losses. How highly leveraged can you go? It used to be about 12x, but rules were relaxed in 2002 on and banks were allowed to go upto 35x! Think about that – you can use $97 of the loan (from the depositer) and just $3 of your own money and do $100 of Deal #1. Your $3 will produce a $10 return (minus the interest on the loan) or a whopping 333% return. Oh minus the interest on the deposits – how much is that? Answer – 0%. Yup, 0%. The Fed is willing to loan the banks money at 0% indefinitely, thus forcing down the interest that banks pay to depositers to 0% also. That makes the return on Deal #1  333%!

Heck, the deal doesn’t even have to be that good to be viable. Banks can take on even lesser deals, with say a 6% return in a good year and a 30% failure rate. Such deals (subprime loans, e.g.) would be ridiculous in a normal free market, but with the Government providing the free “loan” a bank would be insane not to do it. Or insanely moral, which is insane in a competitive capitalist setup.

Another way the government allows bad deals to happen is by insuring the deal itself. If Deal #1 is a mortgage loan to a bad bet (15% chance of default in our example) in a rational banking system such a loan would not be made. But because our society wants to encourage home ownership the Federal Government set up Fanny Mae and Freddie Mac, agencies that implicitly insure home loans against default. They were supposed to take on some of the risk of home loans in return for many more people being able to afford homes. And if the default rate was low, the cost to society was low and the gain was home ownership.

But with risk back-stopped by the government the banks saw enormous opportunity to profit by making really terrible loans that met no sane guidelines. Fanny Mae and Freddie Mac were co-opted – a collusion between banks and government, horrors! – and the go-go era of subprime mushroomed. The risk was even further kited by creating derivatives on credit, but that’s another story, not part of this blog. The effective leverage went from 35x to 300x or even more.

Profits in non default times were huge! The financial sector in 2007 accounted for 40% of all corporate profits in the US!! But the money made by insiders was even larger than that, in commissions, bonuses and hedge fund affiliates.

The crash inevitably came. The government gave trillions to the banks to make them whole again. The banks took the money, thank you, and the hi-fives and the bonuses continued. Back to leveraged loans, derivatives and so on, as if nothing had happened. We continue to operate with the government underwriting deals such as Deal #1 which only work with leverage and backstopping of risk.

Luckily for the banks most of America cannot fathom the arcana in which the financial sector couches this fundamental Ponzi model. They rail against the government and regulation and capital requirements and disclosure. Also, they say,  the reason they made so many insanely risky home loans is because the Federal Government made them do so by guaranteeing the loans. Good capitalism takes what it can get. There is no such thing as right or wrong.

The truth is that the banks today have a fundamentally flawed business. They cannot make any money in a free, capitalist, risk-reward based financial system. They have to take imprudent risk with other peoples’ money to make the profits that they are accustomed to. And when the kiting stops, the Ponzi deflates, they need the government to unshatter the shattered economy.

Posted in Current Events, Money, Politics | 4 Comments