Another wake-up call

The world is mostly consumed with worry over European sovereign debt as we head into the end of November. We've discussed this subject several times in the past, in posts such as "The question of our time," (06/06/2010), "Not fragile" (07/28/2010), and the recent "European debt issues and the primacy of growth" (11/08/2010).

We've said all along that this "crisis" is actually a good thing (or at least, that it has a silver lining), if it causes people to realize that the endless growth of public-sector (government) jobs and entitlements must be brought to heel, and that the real solution to the problem is to foster private-sector growth and innovation. As George Gilder -- one of the greatest thinkers in the United States for the past four decades -- explains in an article linked in this post, the simple formula for encouraging private-sector growth and innovation is simply lower taxes and sound monetary policy.

There are encouraging signs both in Europe and in the United States that people are starting to get this message.

While they work that out, we would recommend investors focus on the exciting opportunities for growth taking place right before our eyes. In the video above, former Morgan Stanley analyst Mary Meeker* gives a rapid-fire presentation from the recent Web 2.0 summit in the San Francisco Bay Area that highlights the phenomenon we have called "The Unstoppable Wave" and presents incontrovertible evidence that it is definitely taking place.

We would recommend that all investors watch this video and think very carefully about the implications of the trends she is discussing. While the speaker is framing the ten topics she discusses as "questions that internet company executives should be asking themselves" right now, we would argue that they are questions that every investor should also be asking themselves as they commit capital to one company or another (whether in the form of buying bonds issued by a company -- or a country -- or in the form of buying stock).

The speaker touches briefly on Clayton Christensen and his insights into what he calls "disruptive innovation." This is an extremely important concept for investors and one we discussed in some detail in "Clayton Christensen, disruptive technology, and your portfolio recovery plan" (02/04/2009), and we recommend revisiting that post and following some of its links before watching the video above.

This video discusses a huge ongoing phenomenon that illustrates what Dick Taylor and Thomas Rowe Price were talking about when they recommended that investors seek "fertile fields for future growth" (often characterized by what are called "paradigm shifts" today). We believe that many investors -- including many professional investors on Wall Street -- are still not completely tuned in to the size of this ongoing paradigm shift. Investors who heeded our posts on this subject from late 2008 and early 2009 could have taken advantage of some excellent investment opportunities related to this tectonic shift. If not, this can serve as another wake-up call.

While the rest of the investment world focuses on sovereign debt alarm bells (alarm bells that are generally providing a healthy wake-up call to the dangers of creeping public-sector expansion), we recommend investors pay attention to the trends highlighted in this recent video, and ensure they are preparing for them in their own businesses and in their investment portfolios.

* At the time of publication, the principals of Taylor Frigon Capital Management owned preferred stock issued by Morgan Stanley (MS).

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Happy Thanksgiving 2010

This is our fourth Thanksgiving for the Taylor Frigon Advisor, and in keeping with the tradition of our previous posts on this holiday, we find it fitting to reflect on the countless blessings of a free enterprise economy (follow these links to previous Thanksgiving posts from 2007, 2008, and 2009). Such reflection is invited by the very nature of the American holiday of Thanksgiving, which stretches back to the feast celebrated in 1621 to give thanks for their first successful harvest by the pilgrims of Plymouth Bay Colony, joined by the Wampanoag Indians led by Massasoit, who sent his braves into the woods to bring back deer for the occasion.

In 1789, President George Washington recommended Thursday the 26th of November of that year to be a day in which all the people of the United States would come together to give thanks to "the beneficent author of all the good that was, that is, or that will be" for the Constitution "now lately instituted, for the civil and religious liberty with which we are blessed, and the means we have of acquiring and diffusing useful knowledge, and in general for all the great and various favors which he has been pleased to confer upon us."

In 1863, President Abraham Lincoln established Thanksgiving as a national holiday, reminding the citizens that: "Needful diversions of wealth and of strength from the fields of peaceful industry to the national defense have not arrested the plough, the shuttle, or the ship; the axe has enlarged the borders of our settlements; and the mines, as well of iron and coal as of precious metals, have yielded even more abundantly than heretofore."

The incredible sweep of economic growth and prosperity which stretches from 1621 to 1789 to 1863 and on through the twentieth century and today staggers the imagination. The first Thanksgiving was a response from settlers who had every reason to be concerned of starvation from one harvest to the next, while today the United States is so bountiful that it regularly sends hundreds of thousands of metric tons of food into the oppressive and belligerent Communist country of North Korea, which is so bankrupt that it can neither feed its own citizens adequately nor purchase food for them with goods that it produces.

The contrast is an important one. Many today continue to subscribe to the zero-sum fallacy that in a free economy characterized by open competition between producers of goods and services, any gain by one party must come at the expense of someone else. However, as Friedrich Hayek explained in 1968, this free competition "is not a zero-sum game, but one through which, by playing it according to the rules, the pool to be shared is enlarged" (cited in G.R. Steele, Keynes and Hayek: the money economy, page 43). Truly, no one can deny that the pool of opportunity and prosperity in this country has been exponentially enlarged in the years between George Washington's Proclamation of General Thanksgiving in November, 1789 and today.

This result has not been the same in other countries over the same period of time, especially those where the zero-sum theories of Communism (which teaches that wealth always comes at the expense of others) have held sway for long periods of years, or those in which oppressive kleptocracies still prevail (which also operate under a zero-sum approach to economics).

As we noted last year at this time, we believe the cornucopia traditionally associated with Thanksgiving is the perfect opposite to the "fixed pie" of zero-sum thinking. Unlike the view that there is only so much wealth to go around, and that some get it at the expense of others, the cornucopia or "horn of plenty" is a symbol of constant increase, like the expanding pool of which Hayek wrote in 1968. As we gather for Thanksgiving this year, we can reflect again that this is not just a mythical concept!

We wish all of our readers a safe and happy Thanksgiving in 2010.

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Have you heard of this company? NAT

In the past, we have highlighted examples of classic Taylor Frigon growth companies: well-run businesses positioned in front of fertile fields for future growth.

Today, we're posting a November 8 interview with the CEO of a company we own in our Income Strategy, which seeks income-producing securities, some of which may be debt-based (such as bonds) but some of which are ownership-based (preferred stock and common stock in dividend-paying companies).

As we've recently explained, it is very important for income-seeking investors to have a clear understanding of the issuer of their income securities, whether they are buying the company's bonds or the company's stock. They should seek to determine whether the company is well-managed, and whether it is taking steps to grow and ensure its survival against competitive threats.

Nordic American Tanker Shipping, featured in the above interview, has a somewhat atypical operating model compared to many companies investors may be familiar with, in that they pay out substantially all of their net operating cash flow in the form of dividends to their shareholders.*

The company runs a strong balance sheet with little to no debt, and can therefore take advantage of periods in which the prices on tanker ships soften by adding to their fleet more easily than many of their competitors. The company's operating cash flows, of course, are dependent upon the shipping rates they can charge for moving bulk oil across the ocean, rates which fluctuate based on a variety of global economic and political factors.

In the interview above, CEO (and founder of the company) Herbjørn Hansson explains some of the important aspects of his company's business model in exemplary fashion. The interview is also noteworthy for a quotation that all investors should write down and hold onto.

At two minutes and fifty seconds into the video clip, Mr. Hansson says: "As I've said in other contexts, America is a stronger nation than Americans think."

We absolutely agree with Mr. Hansson's statement. We have made the same point ourselves, for example in this recent post, which shows that the US economy has grown almost 30% over a period that many are calling a "lost decade," or this post in which we provided counter-arguments against the constant drumbeat of negative economic predictions and those calling for a new plunge as steep as the one that took place in 2008-2009.

In many respects, the negativity we wrote about in those earlier posts is still going on today, although business earnings in the most recent quarter largely exceeded most analysts' expectations. The bigger picture is that this failure to realize the strength of the American economy leads to all kinds of errors, including the fear of other countries (such as China) and the bashing of their attempts to grow.

Instead of bashing China and other emerging economies, the US should simply remove the self-imposed obstacles to our own economic growth (including excessive corporate tax rates, penalties on the repatriation of capital earned overseas, inflationary monetary policy that drives up commodity prices and weakens the US dollar, and regulations which make it more expensive to hire new employees).

We recommend paying attention to the video above, both to understand some aspects of the environment in which Nordic American Tanker operates, and to hear CEO Herbjørn Hansson argue that America is a stronger nation than Americans think. Underestimating the resilience of the American free-enterprise system is a major error, and one that many commentators of all political persuasions often commit. We hope that it is an error that readers of this blog will avoid.

* At the time of publication, the principals of Taylor Frigon Capital Management owned securities issued by Nordic American Tanker (NAT).

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"Greened" Into Economic Oblivion

In this Wall Street Journal article, our good friend and venture capital partner George Gilder has eloquently framed the salient issues surrounding "green" investing. George highlights the unintended consequences that are already being felt due to the almost cult-like obsession that many in the political, business and now venture capital community have adopted with respect to investment in ventures tied to the environmental agenda. It is the latter group that concerns George the most and we share that concern.

At a time when growth is slow and job creation is at a standstill, the malinvestment taking place in this quest for "feel good" business ventures is, frankly, frightening. Pursuit of investment in businesses that generally wouldn't exist without the "helping hand" of government subsidy starve real innovators and entrepreneurs -- the would-be creators of new products in biotech, nanotechnology and many other scientific fields -- of the capital they require to bring their creations and innovations to market, thereby creating jobs that are truly "sustainable".

We believe George Gilder's article deserves the widest possible distribution. Please read it and pass it on to your friends and family.

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A growth-based perspective on income investing


We've been accused of having a one-track mind when it comes to our message to investors (invest capital in well-run companies positioned in front of fertile fields for future growth). While we take that as a compliment, we decided that, just in case some readers might be a little tired of reading about the importance of growth (if it is possible to get tired of that subject), we decided today to change the subject and talk about income-producing securities instead.

At Taylor Frigon Capital Management, we recognize the need for some investors to own income-producing securities. Because of the danger posed by inflation, we believe that growth in most cases needs to be the foundation of an investor's portfolio, with income playing an auxiliary role "on top" of the foundation of innovative, growing companies (see here and here).

In the Income Strategy that we manage for investors, however, we don't exclusively own fixed-income instruments such as bonds: instead, we seek a variety of income sources, including floating-rate debt instruments, preferred stock, and common shares in companies that pay royalties or dividends.

The important thing for investors to remember is that, in order for the dividends or interest payments of a company to be secure, that company has to have the ability to stay in business. For common stock that pays a dividend, the best way for that company to be able to raise the dividend is for that company to have fields for growth! In other words, we may be sounding like a broken record again when we urge income investors to consider growth as an important criteria when evaluating a potential income investment.

Friday's announcement by Intel Corporation that they will be raising their dividend by 15% to 18 cents per share per quarter (or 72 cents per share per year) is a perfect case in point.*

While we own shares of Intel Corporation for our Income Strategy, one of the reasons we are comfortable owning it is the company's continued ability to add value and grow. In announcing the approval of the increased dividend, Intel CEO Paul Otellini said, "Intel remains on track to have our best year ever and we continue to generate strong cash flows. Our ongoing operational performance and confidence in our business going forward provide the ability to return more cash to shareholders."

We agree with Mr. Otellini in seeing the connection between future growth and dividend yield, and urge our readers to consider this important aspect of investing for income as well.

* At the time of publication, the principals of Taylor Frigon Capital Management owned securities issued by Intel (INTC).
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European debt issues and the primacy of growth

We'd like to elaborate a little further on the question of US Treasury bond yields, which we touched on in our previous post about those who fear nobody will want to lend to America since "we don't make anything here anymore." The comparison is often made between the US and countries such as Argentina or Greece, with the admonishment that America will soon face a similar debt crisis.

Today, the news is focusing on the debt situation in Europe, where countries such as Ireland and Portugal are seeing their borrowing costs go up in response to fears about their economic strength. The sovereign debt of these countries (the parallel to US Treasury debt here) must carry higher interest rates in order to attract investors that are fearful about their ability to make good on their obligations. Their ability to pay the interest on their bonds is directly related to their tax income, which is in turn, of course, dependent upon the strength of their economy, the profitability of their businesses, and their levels of employment.

We recently wrote a series of blog posts about this subject relative to the debt problems in Greece, where an economy that doesn't produce very much is expected to support a massive number of government employees and retirees, who receive ongoing salaries at retirement of up to 80% of their "pensionable salary" for the rest of their lives, and who retire at an average age of 58. When it became clear that Greece could not possibly continue to support these lush pension plans forever, the more industrial and productive nation of Germany was called in to support Greece's debt payments to Greece's lenders, and Greek politicians began enacting "austerity" packages to slow down the runaway government benefits train (see "Greece and California" and "The Question of Our Time").

This situation is admirably laid out by Jan Randolph, the head of the Sovereign Risk Department at IHS Global Insight, in an interview on Bloomberg Television this morning (see above).* He says:

"If you take the perspective of German taxpayers and the German government, they're always called in at the last moment, at the height of the crisis, to come in and save the situation, and the way they do that is to provide the German government's balance sheet, and the taxpayer, to effectively guarantee, to ease the situation as far as investors are concerned; they've done that with the big backstop package now in place for Greece, Spain and Portugal, but they resent it -- they don't like being used like this. The Germans say this is, you know, we can't have a situation where investors are playing 'moral hazard' with German taxpayers, and if we do have, in future, a sovereign debt crisis, then investors have to understand those risks at the point of making the investment, rather than expecting the sovereign to come in and bail them out."

This is exactly the situation that many fear may take place in the United States in the not-too-distant future, substituting China for Germany as the lender that becomes fed up with lending money to a nation that "doesn't make anything" anymore.

The difference, however, is that the United States of America remains an extremely vibrant and productive economy, in spite of the protestations of the doomsayers. How much more productive we would be without government stimulus packages and excessive regulation and corporate tax rates is hard to say (probably many times more productive), but the fact remains that innovation and growth are still part of the DNA of our nation and there are plenty of young entrepreneurs trying to start companies right now (and coming here from other parts of the world to try to start companies as well).

And America's economic output is not merely "phony services" as some critics maintain: the nation's industrial manufacturing output is still at levels of magnitude above anything achieved in previous decades. Take a look at this graph of the most recent industrial manufacturing output as measured by the St. Louis Fed:

As the graph shows, America produces far more "stuff" than any time in its past history, even though there was a sharp dropoff during the recent recession. That steep drop has since rebounded sharply, as seen by the "V-shape" uptick at the end of the graph.

Because America is so productive, comparisons to Greece, Argentina, Portugal, or Ireland are really not valid.

However, just as the German taxpayers Mr. Randolph describes in the quotation above are resentful of having to bail out the lush pensions of the less-productive nations in Europe, American taxpayers (the producers) are resentful of having to bail out the lush giveaways of states such as California and Illinois, and of auto industry companies in Detroit. This is the resentment that makes some people quick to agree with the doom-and-gloom scenarios painted by those who argue that America's economy is falling off of a cliff, and that we won't be able to get it back because "China won't give us any more money."

Such talk has an air of wisdom and economic sanity, but it really misses the most important aspect of capitalism: growth. It grossly underestimates American capitalism and its power for growth. Yes, that growth can be retarded by foolish policy from Washington and foolish monetary policy from the Fed, but as we have said in the past, America has always had to "get by in spite" of such foolishness. Today is no different.

We believe strongly in the primacy of growth and human creativity, as we wrote here. The real solution for countries in Europe -- as well as for US states such as California -- is to foster growth, primarily through lower corporate and marginal income tax rates. That would spur even more growth and innovation in America. In the meantime, however, investors should realize that wild comparisons between the US and Argentina (or even Zimbabwe) are completely overblown.

* At the time of publication, the principals of Taylor Frigon Capital Management owned securities issued by IHS (IHS).

For later posts dealing with this same subject, see also:

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Glenn Beck is an economic butterbar

There's an old saying in the US Army that "there is nothing more dangerous than a second lieutenant and a map." The gist of this rather unkind sentiment is that a second lieutenant (the most inexperienced officer rank) has a lot of authority, as well as a lot of training, but does not yet have the experience to have the big picture. Everyone who has ever been a second lieutenant has heard that saying, and its effect is to make them more humble and more open to learning so that they do get the big picture as quickly as possible, as most of them rapidly do.

While we respect Glenn Beck's formidable ability to communicate and educate, it occurs to us that when it comes to economic matters, he is a bit like the second lieutenant described above. He knows just enough to be dangerous, and he has a position of great influence, but he does not have the big picture, and the theorists that he is listening to are leading him astray. He has absorbed a kind of "Cliff's Notes" of solid Austrian capitalist economic theory, but not the entire system, and it is leading him to make frightening economic pronouncements that have the power to scare a lot of people.

Yesterday on his November 3 show, Glenn Beck argued that the reason jobs have not been coming back is that "we don't make anything here anymore" and therefore we have to borrow money from "our bank," the Chinese. However, they aren't going to want to give us anymore money, because they don't have any confidence in our ability to make anything, and that everyone will lose 20% of their money -- if the Fed's untested plan even works, which it probably won't.

He suggests that this may all be part of a conspiracy to bring the dollar down, in order to impose a single global currency, much like the euro in the European Union.

It all sounds very logical, and scary, and Beck trots out enough "Cliff's Notes" economic theory (accompanied by talented cartoon illustrations on his chalkboard) to scare the average viewer into complete paralysis.

However, like the proverbial "second lieutenant with a map," it is trying to provide direction, but it is heading the wrong way.

Readers of our blog will know that we are no fans of the oversteering Fed and the devaluation of the US dollar (see for example here and here and here). Neither are we fans of excessive government spending, and have written about that previously as well.

However, Beck's arguments -- that the dollar is really just an IOU that is becoming worthless since "we don't make stuff here anymore" and that the Chinese are "our banker" who give us money and may decide to stop doing so -- do not follow from the above two observations, and they echo almost exactly the Cliff's Notes economic theory touted by Peter Schiff, who was telling all his clients to bet against the dollar and invest in foreign securities in 2008 (which was exactly the wrong thing to do at that time, as it turns out). In fact, we wouldn't be surprised to see Peter Schiff appear as a guest on Mr. Beck's show, or learn that the two have had conversations about economic theory**.

We provided a link to a video with some of Mr. Schiff's comments, such as his arguments that America was on the way to becoming a "banana republic" because we've thrown away our industrial base and have become "just a phony service-sector economy," and some counter-arguments to those incendiary remarks, in a post back in December 2008 (the chart in that post shows that we are manufacturing more here in the US than ever before!).

America is still an innovative, growing economy that produces an absolutely staggering array of goods and services. How can Beck and Schiff say with a straight face that America doesn't make anything anymore? Does Microsoft still make software? Does Apple make iPhones? Did a little company in Pennsylvania invent and manufacture the drill bit that broke through to rescue the Chilean miners a few weeks ago? It's true that iPhones may be assembled in other parts of the world, but their design and software come from Silicon Valley.*

The actual fact is that China and other countries hold US bonds not out of some sense of paternalistic good-will towards the US, as we explained in a post from May of this year, but rather because America remains a vibrant, growing, innovative economy -- far more vibrant and growing than almost anywhere else in the world. When a world crisis strikes, the demand for American bonds and American dollars goes up, not down, which proves this point.

Also, while we do not believe the Fed needs to implement QE2, and have said all along that the Fed should stop the easing already (but that Bernanke's Phillips Curve fascination keeps him afraid of deflation instead of inflation), the experienced, insightful and freedom-loving economist Scott Grannis explains here why Beck's explosive description of the latest Fed move is not exactly in line with what is really going on.

We believe investors should be very careful when someone is preaching a doom-and-gloom scenario filled with quasi-economic theory. The Fed has been practicing an inflationary policy for decades, to one degree or another, and investors do need to be aware of that. But, as we have argued recently, we believe that growth and innovation are the best way to combat this decades-long policy.

Glenn Beck should stop underestimating the resilient capitalist system we have here in the United States and the growth and innovation that it allows (growth and innovation that was even present during the dark hyperinflationary days of the 1970s). He obviously has absorbed some decent economic theory, but like a brand-new lieutenant, he has not yet accumulated the experience to go in the right direction when it comes to making economic pronouncements.

Investors who are driven to panic by these sorts of dire predictions from people they see on TV should understand these matters.

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* At the time of publication, the principals of Taylor Frigon Capital Management did not own securities issued by Microsoft (MSFT). At the time of publication, the principals of Taylor Frigon Capital Management did own securities issued by Apple (AAPL).

** For those readers who do not believe they sound alike, we provide below a partial transcript of Glenn Beck's remarks from the November 3 show, and suggest they compare them to the arguments of Mr. Schiff such as those voiced in this December 2008 interview which was linked in our December 2008 blog post referenced above:

Well, when you devalue the dollar so much that people say, “I don’t think it’s going to be worth anything anymore; I don’t think it’s going to be any good.” When you devalue the dollar or when you just keep spending money, and then you start to print it, well today the Fed announced – now this is the Fed – they’re going to buy government debt – they’re going to buy Treasurys themselves – that’s $600 billion to buy government debt. Let me show you something: when the Fed says they wanna buy it [holds up a dollar] – this is an IOU -- that says – this is a Federal Reserve Note – that’s what it says, right at the top, Federal Reserve Note, this is the Fed, promising you that they will give you a dollar – of gold (it used to be gold or silver, not anymore) – they’re gonna buy now, the Fed, $600 billion dollars, this is what they call quantitative easing. I know what you’re thinking: “I’m sure my neighbors don’t know what ‘quantitative easing’ is.” Here it is – simple definition: the government buys stuff to stimulate the economy. OK. You’re now thinking: “Well that’s not new for this administration.” You’d be right. But there is a difference here. Quantitative easing – this kind – where we are buying our own debt and printing the dollars to be able to buy that debt, is really kind of the last bag of antibiotics.

[. . .]

That’s the last line of defense. That is the “big-dog” antibiotics. Once those antibiotics don’t work on you: [falsetto voice] “bye-bye.” Well after stimulus packages – that’s like, I don’t know, amoxicillin or z-pak – then bailouts (ooh, that’s a little stronger) – then more stimulus package, more bailouts, reducing bank interest rates to zero or close to zero . . . we’re out! We got nothing left. Here comes the nurse with a bag of really strong antibiotics . . . What does it tell you? That Obama’s Keynesian philosophy of “spend our way out” has not worked. It won’t work. We need to re-set ourself. This is the “Hail Mary.” This is the final spending attempt. This is the last line of defense, or, as I have called it now and warned you that it was coming, I’ve been telling you that it would be the “Weimar Republic” moment. It is largely untested and unconventional – I mean, sure, Zimbabwe tried it. It’s a huge gamble. It is probably the biggest bet in history, and the biggest bet in the history of the planet, but all the chips . . . are yours.

And here’s how it works. Right now we’re having a problem . . . with jobs. One of the reasons we don’t have jobs is: we don’t make anything here anymore. WE don’t make ANYTHING. Why don’t we? Pensions is one reason. You can’t make stuff in America because it costs too much.

[. . .][vignette about unions sending money to Congress to get them to borrow money][. . .]

Don’t worry, we’re gonna borrow the money. Bonds. Bonds. Remember, what is this? This is an IOU – remember that! An IOU. Don’t worry, we’re gonna borrow it, so we can buy stuff. We borrow it – where do we get it? This is us, going for a mortgage. Who’s our bank? The Chinese. Well, here’s the problem. At some point, the Chinese say: “Yeah . . . you know, I don’t think so, guys. This is junk bond status. I don’t think you’re gonna pay us back, because you guys are spineless, and you’re in bed over here, and the whole system is corrupt. I don’t think your country is ever going to be able to make ANYTHING ANYMORE. So I don’t think we’re gonna buy your bonds.”

Well, that’s what they’re afraid that is coming, they’re afraid this is gonna happen. We have to pay – we have to raise interest rates – we have to raise the yield on bonds, say, we’re gonna pay you 10%, 15%, 20% in profits -- just take a bet on us, will ya? It’s like a credit card, when you’re a bad client they just jack your interest rates? They’re afraid that’s coming – and it is coming! China won’t give us any more money.

So, what do we do? Instead of being reasonable and having this guy go back and saying, “you know what? No! We can't do any of that” --

Instead, they’re going to bypass the Chinese, and they’re going here. These are the bankers. Now, I thought we hated Wall Street people, and banks, they – they’re evil. Right? No, no, no! This is actually the Fed. What is the Fed? Don’t worry. Just a collection of big bankers, you know, the Goldman Sachs people -- we don’t really know for sure, because we’re not allowed to look – oh, that sounds honest!

So you go to the bankers, and the bankers say, “Don’t worry! We’re gonna go to the Treasury, and print more money. We’ll just print more money, and we’ll take this money off the printing press and buy your bonds, so you can help out the unions.” That’s fantastic. You know where that leaves us? EXTRA BROKE! It leaves us with nothing in the end.

At the time of publication, the principals of Taylor Frigon Capital Management did not own securities issued by Goldman Sachs (GS).

[Editor's note -- after this post was published, Mr. Beck quoted Mr. Schiff by name in the episode that aired later that day (November 04, 2010), confirming the thesis put forward above].

For later posts on this same topic, see also:

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Giants win! Giants win! Giants win!

We suppose there are other news stories to discuss, but we can't help posting one more baseball-themed discussion in honor of the 2010 World Series victors, the San Francisco Giants. Having grown up watching Giants greats like Willie McCovey, Will Clark, Matt Williams and many others, this victory was very moving for your humble blog authors as well as for millions of other longtime Giants fans in the Bay Area and around the world.

There are many amazing things to say about this year's San Francisco Giants team and their savvy manager Bruce Bochy, who seemed incapable of making a wrong tactical or strategic move during the entire postseason. One that we feel is perhaps most valuable to point out to investors, however, is the fact that the "conventional wisdom" did not give the Giants much credit or much chance of winning.

In contrast to the conventional wisdom, the Giants not only won the division series, championship series, and World Series, but they made it look like they were completely in a league by themselves. This is stunning, and deserves consideration by investors, who are often subjected to "conventional wisdom" that is absolutely positive that some outcome is a foregone conclusion, and those investors should stop and think about how many times conventional wisdom has been completely and utterly wrong (remember the predictions of $200 oil in 2008?).

The San Francisco Giants were never "supposed" to make it to postseason play, let alone the World Series, according to many commentators. Of course, we know that the world of sports is full of surprises, and that Cinderella stories like the 2010 Giants have happened before, but take a look for example at this Sports Illustrated story from August 30 of this year, discussing the postseason prospects of various major league teams. Not only are the Giants not mentioned at all, but the article goes on to point out that, a sports-oriented odds prediction site, gave the Padres (whom the Giants would later beat out to advance to the postseason) a 95.3% probability of winning their division and advancing to the playoffs --"the closest to a sure thing in the majors," the article's author said.

The rest, as they say, is history. We've written many times before about the fact that statistics and industry pundits and computer models and mathematical probabilities are all helpful tools, but that well-led, innovative groups of human beings often surprise all the naysayers (see for example this previous post, this one, and this one).

Our advice for investors has always been to commit investment capital to well-run businesses operating in fertile fields of growth, rather than trying to "play" some prediction about what is "certain" to happen next based on some computer program, statistical prediction, or the latest tenet of conventional wisdom. We think that this year's baseball season, and especially the spectacular postseason, can provide a memorable and colorful lesson in that vein for all investors.

Congratulations to the 2010 World Series Champion San Francisco Giants!
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