Two prominent economists note the role of food inflation in global events

Two economists whom we respect recently pointed out a very important aspect to the current situation in Egypt and the Middle East, namely the role that inflation (particularly inflation in the cost of food) plays in the larger picture.

Rising food prices can be the straw that breaks the camel's back (so to speak), increasing the pressure on the public with every single meal, and creating a catalyst for action against other forms of government oppression.

Economist Larry Kudlow recently wrote a noteworthy post on this subject, entitled "Food riots: is Bernanke partially to blame?"

Economist Brian Wesbury sounds a similar note in his most recent weekly outlook, entitled "Egypt, dollars, and history." He points out that the Fed's easy monetary policy has contributed to a 66% rise in the Goldman Sachs Agricultural Index over the past six months, the most for any six-month period since 1974. He also notes that the disastrous revolution in Iran in 1979, which led to the establishment of the far-more oppressive tyranny that still grips that country, took place during the hyperinflation of the 1970s.

As Larry Kudlow writes, "a region-wide revolt against the autocrats may be healthy if it leads to greater democratization and liberalization," but that outcome is by no means certain or even likely.

It is important to recognize that seemingly-esoteric economic issues, such as the over-steering of monetary policy by the Federal Reserve -- as well as the decision to subsidize and mandate the increased use of food as fuel -- impact people all over the world, with numerous unintended consequences, some of which can be deadly.

Continue Reading

Mark Cuban declares Wall Street is for suckers; Maclean's of Canada agrees

Here's a recent article from Maclean's of Canada entitled "'Wall Street is for Suckers'." It lays out a litany of reasons why, in the words of the article's author, "something is very wrong with Wall Street" -- including the allegation that "the stock market has become very disconnected from its primary function of uniting growing businesses with large numbers of long-term investors."

Many of the examples cited in the article are phenomena that we have discussed previously in this blog, including the issue of Facebook's private capital raise, and the tendency towards owning stocks for shorter and shorter periods of time (tying the results more to market moves than to longer-term business success or failure).

It also touches on the fact that a much larger percentage of the public is now participating in the stock market in one way or another, a subject we discussed in "Invest like Mr. Howell."

The article centers around the assertion of entrepreneur and businessman Mark Cuban that "Wall Street is for suckers." We find that quotation somewhat ironic, since Mr. Cuban's wealth is directly a result of his decision to own shares in businesses that he built, and then to sell those shares through the capital markets collectively referred to as "Wall Street."

And, while we agree that all of the changes that the article discusses are important for investors to be aware of, we disagree with the conclusion that things are somehow "broken" now, or that Wall Street was somehow more virtuous in the mythical past.

We point out that Thomas Rowe Price, Jr. wrote in 1973 (in a paper to which we have referred several times in the past) that in the 1930s, after ten years in the investment business, he had an epiphany that led him to forsake the kind of short-term market-based speculating that dominated Wall Street even then, and instead to seek out long-term ownership of successful business enterprises that could grow and prosper "over a long period of years."

We would argue that this is still a valid recipe for success, and that the fact that few investors on Wall Street are following it today creates more of an opportunity for those who do, just as it did in Mr. Price's day.

Subscribe (no cost) to receive new posts from the Taylor Frigon Advisor via email -- click here.

Continue Reading

Likelihood of Fed over-steering increases

In the past, we've compared the Fed's extreme interest-rate swings to a driver of a car going out of control, and we believe the image is a helpful one.

Like an inexperienced driver going too fast on a road with little traction, the Fed's overzealous turns on the steering wheel can lead to a damaging wipeout, especially when one overcorrection is followed by another even larger overcorrection in the opposite direction.

We have argued that the promising technological innovation of the late 1990s was not an illusion but that the real companies creating progress during that time period were caught up alongside companies that were nothing but hype. When the Fed's easy-money policy leading up to the year 2000 created a bubble, the Fed over-corrected for that easy policy with a rapid round of tightening, culminating in a round of deflation. This unfortunate turn of events wiped out many telecom/technology-related companies that had financed their investment plans using debt.

After the disastrous impact of that tightening became evident, the Fed became overly-easy again, leading to a real estate bubble, which further diverted capital from tech investment and led to the cataclysm of 2008-2009.

Technology has been getting back on track again following that almost ten years on "pause," with potentially huge improvements being applied to virtually every aspect of life and business. We have called this phenomenon the "Unstoppable Wave" and have written about it extensively -- even arguing that it is such a powerful paradigm shift that government ineptitude would have a hard time derailing it.

However, one concern we have is that the Fed could blunder in almost the same way they did ten years ago by keeping their foot on the accelerator for too long. This danger is evident in that they have held the Fed funds rate at zero for over two years now. This could mean they have put themselves in a predicament that would force them to spin the wheel wildly to the tighter side when the wall of rising inflation suddenly looms into view.

We believe the likelihood of another oversteering scenario is depressingly possible, with the Fed and many pundits thinking that inflation is unlikely as long as unemployment remains high (a view we think is suspect, at best, and can be traced to the influence of the Phillips Curve). Unfortunately, to use another automobile metaphor, inflationary pressures often act like an overheating engine radiator: pressures build up under the surface and suddenly blow without warning.

One difference between today and 1999 is the fact that many of the leading companies today (especially tech companies) generally have tons of cash and low or no debt. While the continued possibility of Fed oversteering is unfortunate, and may make growth and progress slower than they otherwise could be, we are not bailing out on the "Unstoppable Wave" thesis. We are simply pointing out the likelihood of future Fed over-tightening to make up for the over-easy policy of the past two years, and recommend investors be cautiously optimistic as they allocate dollars in their portfolio.

Subscribe (no cost) to receive new posts from the Taylor Frigon Advisor via email -- click here.

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

• "Inflation is a monetary phenomenon" 03/07/2011.
  

Continue Reading

Don't confuse free enterprise with a questionable theory about securities markets

We've written about our insistence on using the term "free enterprise" rather than "free markets" in previous posts, such as this one and this one.

While this may strike readers as a somewhat cranky or esoteric distinction, we believe that in fact it is an incredibly important distinction, but one that people overlook all the time.

The problem arises when people confuse a certain theory about the efficiency of securities markets with the system of free enterprise capitalism (often referred to somewhat confusingly as "free market capitalism" or simply "free markets"). The two are simply not one and the same, and yet proponents of the efficient market theory often act as though they were!

We believe the efficient market theory is hogwash. As we explained in this recent post, a popular way of explaining this theory is that a blindfolded chimp throwing darts at the stock pages is as effective as selecting stocks using dedicated fundamental analysis. Efficient market theory proponents believe blindfolded chimps are just as effective because their theory says that the market is so good at pricing securities, nobody else should bother questioning its pricing decisions. This theory, or some modification of it, forms the foundation of all of so-called "modern portfolio theory," which we believe to be largely hogwash as well.

Proponents of the efficient market hypothesis, however, often use the success of free enterprise as a supporting argument, even though the two concepts are not at all the same. For example, one modern portfolio theory supporter said in a debate that the only people who don't agree that "markets work" are "the North Koreans, the Cubans, and the active managers." By saying that, he is conflating those who disagree with free enterprise capitalism (the rulers of North Korea and Cuba) with those who disagree with the efficient market hypothesis (the active portfolio managers, who don't believe that blindfolded monkeys can do it just as well).

We have rebutted this argument several times, including here, here, and here. Perhaps the best way to clear up the issue, however, is to simply point out that there is a very real distinction between securities markets (which serve a very important function of allocating capital and providing liquidity, but which sometimes get prices very very wrong) and the system of free enterprise (which enables people to innovate and add value to the best of their ability and which has brought about tremendous advances for humanity wherever it is tried).

The only real connection between the efficient market theory and the concept of free market capitalism is in the word "markets," which is why we prefer the term "free enterprise" (another reason is that it puts the emphasis where it belongs, on entrepreneurial innovation). When you look at it that way, it isn't a small distinction at all.

Subscribe (no cost) to receive new posts from the Taylor Frigon Advisor via email -- click here.

Continue Reading

The growth theory of investment works

At the beginning of the year, we cautioned against becoming too obsessed with annual performance numbers, because what really matters for most investors is performance over periods of time much longer than one year.

That said, we would like to point out that the principles of classic growth investment theory which we discuss on this blog do work. In fact, we would argue that the cold hard record of investment performance is one way of validating the opinions somebody tells you -- in the investment world, if someone is full of hot air, the market often has a way of exposing that in the end.

Above, we show a graph and table of the performance record of the portfolios we manage according to the investment discipline we discuss on this blog. We have presented many arguments in the past against those who take aim at active management, calling it a waste of time (or worse).

Perhaps the best counterargument against those theorists are the track records of active management that has invested capital in above-average companies, and have the results to prove it.

This performance record only shows the period of time since we founded Taylor Frigon Capital Management. We've been at this for twenty-five years now, but regulations do not allow linking this record to the previous record. Nevertheless, we can say with great conviction that we firmly believe in active management, and the investment process that we use and discuss with you the reader.

Continue Reading