Monthly Archives: November 2016

Foreign Investment Risk

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The People’s Republic of China seems about to illustrate one form of this risk.

The State Council, China’s cabinet, will soon announce new measures that subject many overseas deals to reviews of “strict control,” according to people with direct knowledge of the matter and documents reviewed by The Wall Street Journal.

Targeted for particular scrutiny by the pending measure are “extra-large” foreign acquisitions valued at $10 billion or more per deal, property investments by state-owned firms above $1 billion, and investments of $1 billion or more by any Chinese company in an overseas entity unrelated to the investor’s core business.

This is nothing but an overt attempt to restrict capital flows across the PRC’s borders.  Restricting such flows from one nation to another, no matter the rationale, elevates the risk of foreign investment.  The investor, whichever the nation of his domicile, cannot count on a reliable income flow from his investment or even being able to get his money back from that investment at the expiration of the arrangement.

Separately, it demonstrates an attitude toward law and government that’s been extant in the PRC and its antecedents for thousands of years: “I don’t like what you’re doing—this investment plan of yours—here’s a nice ex post facto law that makes your activity illegal.”

Federal Green Expenditures

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Watts Up With That has some ideas for budget cutting in the next administration.  Or, actually, these ideas come from Salon (!) via WUWT (never mind that cutting isn’t what Salon meant).

  • Energy Department

2017 climate-related budget: $8.5 billion

  • Interior Department

2017 climate-related budget: $1.1 billion

  • State Department

2017 climate-related budget: $984 million

  • NASA

2017 climate-related budget: $1.9 billion

  • Environmental Protection Agency

2017 climate-related budget: $1.1 billion

  • National Oceanic and Atmospheric Administration

2017 climate-related research and development: $190 million

That works out to $13.8 billion of “useless waste.”  Yes, indeedy.

While we’re about it, let’s cut the “green” subsidies, too.  Every single one of them.  The fossil fuel (coal, oil, and gas) enterprises don’t need the $3-$5 billion (depending on who gets asked) in subsidies they get, either.  That’s yet more budget cutting.19+, although fossil fuels get much less than the “green” money being tossed down rat holes.

Times to Invest in the Market

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My personal stock market investing mantra has always gone like this: “The best time to invest was yesterday; the second best time is today; the worst time is tomorrow.”  I decided to take check that and see how accurate it might be, so I built a simple Microsoft Excel® spreadsheet to take a back of the envelope look.

I looked at a few scenarios over a 30-year investment period, each of which consisted of a single $10,000 investment done in Year 1 that then grew at 3%/yr for 29 (or 30) of those years.  In one of those scenarios, the investment simply grew at those 3%/yr.  In the other scenarios, the investment would spike upward by 20% in the first year, in the last year, or in the middle of the sequence; or the investment would spike downward by 20% in those three selected years.  It’s important to note, too, that since I’m comparing these three scenarios with each other to look at the underlying principle, it doesn’t matter whether those 3% are nominal, real, or compared to this or that stock market index.

The bottom line is this: the 20% spike up or down makes a significant difference in the final value of the investment.  That final value becomes $24,300 if the investment grows without the spike, rises to $28,300 with a spike up, and falls to $18,900 with the spike down.

That seems to make my mantra useless, until we look at the effect of when the spike occurs.  That difference is zero.  It doesn’t matter whether the spike occurs at the start of the investing period, at the end, or in the middle; the end values are all the same: $28,300 with a spike up and $18,900 with the spike down.

My bottom line: unless I can time the market with considerable specificity, I stick with my mantra and simply enjoy the spike or ride it out.

My spreadsheet, which unrolls this year by year, is here.

Note: use this at your own risk.  I’m not a licensed investment (or any other type of) advice giver, nor do I play one on the radio.

Systemic Importance and Institutions

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Minneapolis Federal Reserve President Neel Kashkari is on the right track, but he’s not there yet.  He’s one of a very small number of financial regulators (of any sort of regulator, come to that) who has the self-assurance and intellectual honesty to say, and to mean, things like

I start with the assumption that regulators are going to miss the next crisis.  We’re going to miss it.

He’s got a solution to that, too, but it’s only a partial solution, and that incompleteness stems from a fundamental lack of understanding.

The lesson he drew [from the Panic of 2008] is that if you want to reduce the risk that taxpayers will have to finance another rescue, financial giants need to be much better fortified before the next panic hits.

This is a start (we can argue with specific levels of fortification, of capital reserves, that are suitable, but the principle is sound), but he needs also to recognize the other side of this cash coin: businesses, including banks and systemically important institutions, need to be allowed to fail without taxpayer monies.  We have a perfectly fine bankruptcy system that works admirably well.

But the lack of understanding that regulators have of their capabilities, even with Kashkari’s degree of understanding as a start, makes much of that two-part solution less than fully relevant.  The lack of understanding is this: if the regulators can’t predict the next financial (or any other) crisis, if they can’t characterize what it will look like, on what basis do they presume to be able to predict the institutions that are/will be important to those crisis systems?

Foolishness

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This time regarding the Iran nuclear weapons deal, exemplified by this excerpt from a Wall Street Journal article concerning the Obama administration’s efforts to strengthen that deal during these last two months of overt lameduckness.

The picture they [Obama officials] plan to articulate for Mr Trump’s team is stark: if the agreement falls apart, and the US is blamed for its collapse, Iran would resume its nuclear program more aggressively. In that case, the US risks alienating Europe, as well as China and Russia, and limiting its ability to use sanctions again to contain Iran. Military action against Tehran’s nuclear facilities, these officials argue, could be the only alternative.

If the deal falls apart, Iran surely will accelerate its nuclear weapons development program.  But this is a program that Iran has never stopped, nor even held in abeyance, the deal notwithstanding.  Iran is aggressively pursuing development of missiles capable of delivering nuclear warheads against Israel and Europe, and Iran already has been caught—twice—with more heavy water than the deal permits.  Honest mistakes, that water.  Sure.

The US risks alienating Russia and the PRC?  They already are alienated from us, and have been for some time: see Georgia, Ukraine, Kaliningrad, the East China Sea, the South China Sea, the two nations’ cyber attacks against us, and on and on.

Limiting our ability to use sanctions again?  That was lost when the guy who sits in the Secretary of State’s chair, John “Motorboat Skipper” Kerry, with President Barack Obama’s (D) backing, browbeat France into accepting a much weaker deal than even the French wanted.  It was lost, too, when the Obama administration lifted so many of our sanctions and agreed to the lifting of UN sanctions.

Military action is the only alternative left?  To the extent that’s true (and it isn’t; alternatives remain, even if many of them have been made harder to use by this administration), it is so strictly as the outcome of the Obama administration’s foolishness.