Munger Has Lost His Mind

“There are periods of history when the visions of madmen and dope fiends are a better guide to reality than the common-sense interpretation of data available to the so-called normal mind. This is one such period, if you haven’t noticed already.”

-Robert Shea, Robert Anton Wilson, “The Illuminatus Trilogy”





One would expect someone of Mr. Mungers statue to provide solutions to the ills facing the United States. Unfortunately, he provided quite the opposite.
In a twisted parable called "Basicland", The Oracles long time business partner, Charles Munger lays out what he sees as the end of American Capitalism. This manifesto appears to be a last ditch effort to outshine Warren in the PR wars. Perhaps, Mr. Munger has forgotten about innovation and how greed will work in positive ways. I disagree with him 100% and find this rant rather ridiculous to say the least. An ill fated attempt for the old guy to be remembered. I think it's going to backfire in a big way. The capitalistic spirit will prevail over the neighsayers and cynics....... Time will tell.

Here is the essay from Slate for those who missed it:

In the early 1700s, Europeans discovered in the Pacific Ocean a large, unpopulated island with a temperate climate, rich in all nature's bounty except coal, oil, and natural gas. Reflecting its lack of civilization, they named this island "Basicland."

The Europeans rapidly repopulated Basicland, creating a new nation. They installed a system of government like that of the early United States. There was much encouragement of trade, and no internal tariff or other impediment to such trade. Property rights were greatly respected and strongly enforced. The banking system was simple. It adapted to a national ethos that sought to provide a sound currency, efficient trade, and ample loans for credit-worthy businesses while strongly discouraging loans to the incompetent or for ordinary daily purchases.

Moreover, almost no debt was used to purchase or carry securities or other investments, including real estate and tangible personal property. The one exception was the widespread presence of secured, high-down-payment, fully amortizing, fixed-rate loans on sound houses, other real estate, vehicles, and appliances, to be used by industrious persons who lived within their means. Speculation in Basicland's security and commodity markets was always rigorously discouraged and remained small. There was no trading in options on securities or in derivatives other than "plain vanilla" commodity contracts cleared through responsible exchanges under laws that greatly limited use of financial leverage.

In its first 150 years, the government of Basicland spent no more than 7 percent of its gross domestic product in providing its citizens with essential services such as fire protection, water, sewage and garbage removal, some education, defense forces, courts, and immigration control. A strong family-oriented culture emphasizing duty to relatives, plus considerable private charity, provided the only social safety net.

The tax system was also simple. In the early years, governmental revenues came almost entirely from import duties, and taxes received matched government expenditures. There was never much debt outstanding in the form of government bonds.

As Adam Smith would have expected, GDP per person grew steadily. Indeed, in the modern area it grew in real terms at 3 percent per year, decade after decade, until Basicland led the world in GDP per person. As this happened, taxes on sales, income, property, and payrolls were introduced. Eventually total taxes, matched by total government expenditures, amounted to 35 percent of GDP. The revenue from increased taxes was spent on more government-run education and a substantial government-run social safety net, including medical care and pensions.

A regular increase in such tax-financed government spending, under systems hard to "game" by the unworthy, was considered a moral imperative—a sort of egality-promoting national dividend—so long as growth of such spending was kept well below the growth rate of the country's GDP per person.

Basicland also sought to avoid trouble through a policy that kept imports and exports in near balance, with each amounting to about 25 percent of GDP. Some citizens were initially nervous because 60 percent of imports consisted of absolutely essential coal and oil.

But, as the years rolled by with no terrible consequences from this dependency, such worry melted away.
Basicland was exceptionally creditworthy, with no significant deficit ever allowed. And the present value of large "off-book" promises to provide future medical care and pensions appeared unlikely to cause problems, given Basicland's steady 3 percent growth in GDP per person and restraint in making unfunded promises. Basicland seemed to have a system that would long assure its felicity and long induce other nations to follow its example—thus improving the welfare of all humanity.

But even a country as cautious, sound, and generous as Basicland could come to ruin if it failed to address the dangers that can be caused by the ordinary accidents of life. These dangers were significant by 2012, when the extreme prosperity of Basicland had created a peculiar outcome: As their affluence and leisure time grew, Basicland's citizens more and more whiled away their time in the excitement of casino gambling. Most casino revenue now came from bets on security prices under a system used in the 1920s in the United States and called "the bucket shop system."


The winnings of the casinos eventually amounted to 25 percent of Basicland's GDP, while 22 percent of all employee earnings in Basicland were paid to persons employed by the casinos (many of whom were engineers needed elsewhere). So much time was spent at casinos that it amounted to an average of five hours per day for every citizen of Basicland, including newborn babies and the comatose elderly. Many of the gamblers were highly talented engineers attracted partly by casino poker but mostly by bets available in the bucket shop systems, with the bets now called "financial derivatives."

Many people, particularly foreigners with savings to invest, regarded this situation as disgraceful. After all, they reasoned, it was just common sense for lenders to avoid gambling addicts. As a result, almost all foreigners avoided holding Basicland's currency or owning its bonds. They feared big trouble if the gambling-addicted citizens of Basicland were suddenly faced with hardship.

And then came the twin shocks. Hydrocarbon prices rose to new highs. And in Basicland's export markets there was a dramatic increase in low-cost competition from developing countries. It was soon obvious that the same exports that had formerly amounted to 25 percent of Basicland's GDP would now only amount to 10 percent. Meanwhile, hydrocarbon imports would amount to 30 percent of GDP, instead of 15 percent. Suddenly Basicland had to come up with 30 percent of its GDP every year, in foreign currency, to pay its creditors.

How was Basicland to adjust to this brutal new reality? This problem so stumped Basicland's politicians that they asked for advice from Benfranklin Leekwanyou Vokker, an old man who was considered so virtuous and wise that he was often called the "Good Father." Such consultations were rare. Politicians usually ignored the Good Father because he made no campaign contributions.

Among the suggestions of the Good Father were the following. First, he suggested that Basicland change its laws. It should strongly discourage casino gambling, partly through a complete ban on the trading in financial derivatives, and it should encourage former casino employees—and former casino patrons—to produce and sell items that foreigners were willing to buy.
Second, as this change was sure to be painful, he suggested that Basicland's citizens cheerfully embrace their fate. After all, he observed, a man diagnosed with lung cancer is willing to quit smoking and undergo surgery because it is likely to prolong his life.
The views of the Good Father drew some approval, mostly from people who admired the fiscal virtue of the Romans during the Punic Wars. But others, including many of Basicland's prominent economists, had strong objections. These economists had intense faith that any outcome at all in a free market—even wild growth in casino gambling—is constructive. Indeed, these economists were so committed to their basic faith that they looked forward to the day when Basicland would expand real securities trading, as a percentage of securities outstanding, by a factor of 100, so that it could match the speculation level present in the United States just before onslaught of the Great Recession that began in 2008.

The strong faith of these Basicland economists in the beneficence of hypergambling in both securities and financial derivatives stemmed from their utter rejection of the ideas of the great and long-dead economist who had known the most about hyperspeculation, John Maynard Keynes. Keynes had famously said, "When the capital development of a country is the byproduct of the operations of a casino, the job is likely to be ill done." It was easy for these economists to dismiss such a sentence because securities had been so long associated with respectable wealth, and financial derivatives seemed so similar to securities.

Basicland's investment and commercial bankers were hostile to change. Like the objecting economists, the bankers wanted change exactly opposite to change wanted by the Good Father. Such bankers provided constructive services to Basicland. But they had only moderate earnings, which they deeply resented because Basicland's casinos—which provided no such constructive services—reported immoderate earnings from their bucket-shop systems. Moreover, foreign investment bankers had also reported immoderate earnings after building their own bucket-shop systems—and carefully obscuring this fact with ingenious twaddle, including claims that rational risk-management systems were in place, supervised by perfect regulators. Naturally, the ambitious Basicland bankers desired to prosper like the foreign bankers. And so they came to believe that the Good Father lacked any understanding of important and eternal causes of human progress that the bankers were trying to serve by creating more bucket shops in Basicland.

Of course, the most effective political opposition to change came from the gambling casinos themselves. This was not surprising, as at least one casino was located in each legislative district. The casinos resented being compared with cancer when they saw themselves as part of a long-established industry that provided harmless pleasure while improving the thinking skills of its customers.

As it worked out, the politicians ignored the Good Father one more time, and the Basicland banks were allowed to open bucket shops and to finance the purchase and carry of real securities with extreme financial leverage. A couple of economic messes followed, during which every constituency tried to avoid hardship by deflecting it to others. Much counterproductive governmental action was taken, and the country's credit was reduced to tatters. Basicland is now under new management, using a new governmental system. It also has a new nickname: Sorrowland

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Any Questions?? A Harbinger Of Things To Come??

Victor Niederhoffer Interview Circa 2005

VN, Wiz,Peter, Surf contemplating profound market truth on
a good day in 2005

Victor is a legendary speculator, market philosopher, gamesman, and racquet sport champion. He worked directly with George Soros and was ranked the number one hedge fund manager in the world for several years then disaster struck. In 1997, an overly expansive speculation in the Thai stock market caused spectacular losses in his accounts. Due to extensive leverage, his losses were magnified over and above his 50% loss in Thailand, and spillover effects from that debacle caused his fund to be well over its head in U.S. equities when they closed down limit on Oct. 27,1997.

In short, a combined sequence of events � huge declines in individual Thai stocks,losses in the Thai currency and the closing of the U.S. stock market and extensive up moves in the prices of options the fund was short; all came together in one day, in a short and disastrous coincidence. The loss, over and above profits made and withdrawals from the fund, totaled approximately $50 million. In addition to the losses in the funds, Victor had invested heavily in his own trading. To cover his debts and living expenses, after much soul-searching, he took out a mortgage on his house at an interest rate of 18% a year and sold his liquid assets, including his entire silver collection and his holdings in private and publicly held companies. He started again from the bottom. He scraped together a small trading stake and started plying his trade, slowly building back what was lost, determined never ever to allow the same mistake to happen twice. In a true example of the human spirit and his will to be a champion again, he is back in the game at a top level.

Since inception in February 2002, Vic�s current fund, �Matador, � had a three-year annualized return of 31%, placing it among the top five offshore funds. In 2004, Matador had a 50% return, the best of all offshore funds with more than $45 million in assets, according to the TASS rankings. Here�s a gentlemen who came from materially meager beginnings, rose to the top academically, athletically, and financially---lost it all, and is now back on top. He is truly someone we can all learn valuable market and life lessons from, since he has been and suceeded on the front lines in all capacities and levels .

Most investors and traders don�t realize the extent of the subterfuge, con games and outright deceit that occur daily in the financial markets. Victor and Laurel have extensively studied, researched and tested the commonly held beliefs of market participants. As described in their recent book �Practical Speculation�, they have discovered that many of these beliefs simply do not stand up to rigorous testing and are merely delusions that result in losses. In this interview, we will examine the biggest market con games and how you can profit from these popular delusions.

Dave: Welcome, Victor and Laurel, to Real World Trading.

Victor: Thank you for having us.

Dave: Let�s start off by talking about what first perked your interest in �stock market cons�.

Victor: Laurel and I have been working together on the philosophy of markets over the last 8 years. The ideas I will present are our joint work and some of them are touched on in our book, �Practical Speculation�. Laurel, would you please enlighten Dave as to the genesis of our research into the �Invasion of the Body Snatchers� concept.

Dave: Invasion of the body snatchers!? Isn�t that a sci-fi movie from the 1950�s?

Laurel : Yes, It�s a Jack Finney film from 1954. We believe it�s the perfect allegory for an introduction to the big market con. The film is about invaders from outer space that take over people�s bodies, making them hopeless and listless, ready to accept whatever propaganda they hear. It�s a perfect analogy of how investors are misled by market cons

Dave: I see. You believe that the public has been duped by the market�s propaganda machine, so to speak?

Victor: Part of the backdrop to our research was the concern about financial reporting and the corruption of corporate executives, as well as the normal issues with the economy like interest rates and international affairs. But there is always something wrong with the backdrop of the market, the economy and individual companies. The problem is, the public is generally mistaken in its enthusiasm for determining whether factors are bullish or bearish

Dave: Are you saying that it�s impossible to tell how the market will interpret various factors as positive or negative?

Victor: Yes. Retrospectively, after the market has gone down, it�s generally assumed that we are in a bear market and conditions are terrible. This causes the public to lose hope and refuse to take on risk.

Dave: Do bear markets even exist?

Victor: Bear markets only exist in retrospect. This is one of the greatest fallacies in the market. One of the main philosophical points in our book is that it�s guaranteed to happen.

Dave: What�s guaranteed to happen?

Victor: The public must always believe absolutely, with the strongest conviction, the idea that will make them contribute the most to the market and one of the things the public has to do is sell low and buy high.

Dave: That makes sense. It�s how the market feeds and supports itself .

Victor: I wrote about this extensively in my first book, �Education of a Speculator�. The dead weight costs of the market are tremendous. In terms of ecology, there�s a huge loss of energy in the market. This loss of energy, in market terms, is commissions, communication costs, salaries, fancy offices, etc.. These things need to be paid for the market to continue. The public pays these costs, the same way the sun provides the energy for the earth .

Dave: The public needing to buy the tops and sell the bottoms plays right into your aversion to the �trend following� concept of trading. You actually have it listed as number 3 in your 10 big cons of the market. Why?

Victor: I have an aversion to all fixed systems and purportedly easy ways of making money in the market because the market learns and adapts to allow flexible, sagacious and strong decision makers to profit at the expense of the weak .

Dave: OK, why �trend following� in particular?

Victor: The public needs to be tricked or deceived out of their basic role of buy and hold. If they follow the buy and hold mantra, they are going to achieve the Dimsonesque [editors note: Elroy Dimson, Paul Marsh and Mike Staunton co-authored �Triumph of the Optimists, � a 2002 book that documented for the first time the 100-year returns of the world�s stock markets] returns of 10, 000 fold per century. I am particularly averse to trend following methods because of the following reasons: 1. They are often untested. 2. If tested, their variability is too high to rule out randomness, and 3.If tested relative to uncertainty, they assume past seemingly non-random movements of prices are predictive of what�s going to happen in the future.

Dave: Is this strictly for the stock market or all financial markets?

Victor: When trend following methods are tested on the stock market indexes, they tend to show that the correlation of past returns and future returns is negative, and that the number of runs of price changes in the same direction is less than would be expected by chance. I have never seen an example of a real life movement in prices that would allow trend following to work retrospectively that does not also show positive serial correlations and an observed number of runs in the same direction that is greater than would have been expected by chance.

Dave: Are you able to support this view with actual numbers?

Victor: In my book �Education of a Speculator�, I report that the correlation between weekly stock price changes in the S&P futures during the 1990�s is approximately -0. 08. The correlation between daily changes is approximately -0.04 over almost all relevant periods. The chances of a rise following a series of 2, 3, 4 or more consecutive declines, in stocks, is approximately 10% higher than normal. Therefore, trend followers in the stock market averages would appear to be playing in a game heavily stacked against them.

Dave: What about the other markets? Do the same studies hold true?

Victor: No. I hasten to add that such tests would not show similar biases against trend following in other markets such as fixed income, or foreign exchange.

Dave: Then what is your objection to trend following in these markets?

Victor: In general it�s the philosophical objection that the followers of long term trends don�t take into account one of the fundamental rules of economics, which is that incentives matter.

Dave: Please explain what you mean.

Victor: The supply curve moves outward and to the right when prices rise, and inward to the left when prices decline. Moreover, trend following does not take into account the fundamental tendency of the market to abhor upsetting the apple cart by moving prices to permanent new level, thereby creating threats to its tried and true tendency to make the public lose more than they have any right to by constantly buying too high and selling too low. If the public were all trend followers, and the vast majority of them are, then prices would be constantly moving to permanently higher or lower levels, and this would be bad for the well-heeled upholders of the market infrastructure who must survive for markets to continue.

Dave: This all seems to make sense in theory. However, how do you explain the fantastic track records of the major trend followers reported in books on the subject or the economic argument that speculators on big moves are paid an economic return by hedgers and equilabrators?

Victor: Well, I would look as a criterion at the total profits that all trend followers have made over time for their public clients rather than the personal profits they have made for themselves. I would also compare the past high returns that the publicly cited great exponents have made to the total dollar amount that their clients have made or lost. In addition, I would look at the actual total dollar returns to the public of those who invested in some of the greatest trend following funds who admittedly have had much inferior results, lawsuits, and tragedies in their publicly reported and audited results versus the legendary stories of great past performance. Another thing I would like to point out is the publicly reported results of the famous trend followers in the last two years, when money at their disposal is at the maximum. I dare say that billions upon billions have been lost as a review of the rankings of CTA�s would show. But, of course, that�s guaranteed to happen. Looking at the April TASS Flash report, I�d estimate the average trend fund is down 20-40% over the last 2 years, and some are really getting killed. Please bear in mind that the big CTA�s typically offer 8 or 10 different �programs�, so that they can quietly close down the worst performers, or just stop reporting their result.

Dave: Wow, that�s some indictment of trend following. Is there anything else on this subject?

Victor: Of course, I am just getting started! I normally don�t like to talk about this subject since it foments much hatred against me. Many of the proponents of trend following are attempting to market systems, seminars and funds based upon the concept and I stand as a reasoned voice against their profits and thus must be discredited for their own survival. With that said, my major objection to trend following is that it doesn�t take into account one of the most important regularity of the markets, aside from the laws of incentive, and the immense degree of deception and big cons---i.e. the principle of ever-changing cycles . The public is always behind the form. I would even go so far to compare the concept of trend following to a cult like scientology. It�s impossible to have a rational discussion with some of its proponents since so many people have vested interest in perpetuating the myth.

Dave: We are on a roll on this subject, let me see if I can dig a little deeper into your thoughts on the concept of market trends. Do you believe that trends don�t exist at all or simply that an existing trend is not tradable?

Victor: Any trend that exists can be quantified and its departure from randomness can be measured with the usual statistical procedures, such as confidence intervals and likelihoods. Serial correlation coefficients, regression coefficients of current changes versus past changes, and magnitudes of the impact of past moving averages on the future, distributions of the length of runs, the correllelogram, the expected waiting times between peaks and valleys, survival statistics. All these techniques are very good at discovering any non-random elements.

To join a proper debate, such measures must be quantified for various markets and various times, and the degree of uncertainty and departure from randomness must be ascertained. I have never found a movement in prices that anyone could make money with by a trend following method that didn�t also show a major departure from randomness revealed by the standard statistical measures I mentioned. The tragedy is the mysticism and blind acceptance of trendism, that trend following exponents proclaim, without any evidence as to magnitude and uncertainty. No self-reported results that selected individuals or leaders might have made in the past shed light on the debate.

Dave: Your well known saying, �If it can be tested, it must be tested� comes into play here . Exactly what testing have you done to prove the above idea?

Victor: These tests can readily be performed My group of colleagues performs these tests maybe 2-3 thousand times a year over different markets and time frames. Those of a cognitive bent and those with their feet on the ground are always open to the existence of trends, but they test them with the best statistical methods existing. If you apply these tests to stock market moves, you will find that all such tests show negative serial correlation. In fact, they indicate a tendency for reversal.

Dave: What about the upward bias in stock prices? Why can�t that be interpreted as a trend?

Victor: Well, all proper statistical tests take into account this upward drift. They would look for serial correlations over and above the basic drift of the market. One of the other market cons is the permanent bearishness of some of market pundits, and I am the last person to say that this upward drift, evidenced over the last 200 years, does not exist. This in no way refutes, but it does refine the statistical tests required for the stock market. However, I hasten to add that no such upward drift exists in any other market.

Dave: Very insightful, Victor. Your last sentence opens up the next big market con�commodities are better for the long term than stocks. Can you elaborate on this topic?

Victor: This con is very closely related to the trend following big con. There is no upward drift in commodities.

Dave: That idea really flies in the face of the recent increased interest in commodities as promoted by a certain world traveling commodity fund manager.

Victor: Yes, I believe you interviewed him recently. This type of renewed public interest seems to be indicating a top soon. The fact that money was made in the past buying commodities in no way indicates that this will continue. The Niederhoffer/Kenner camp believes in the principle of ever changing cycles. It�s one of our hallmarks.

Dave: Wait a second, Victor. Ever changing cycles? That sounds like a contradiction to me. If a cycle is ever changing, it�s no longer a cycle. What am I missing?

Victor: That�s an excellent question, Dave. The idea of ever changing cycles comes from a racetrack bettor whose insights and value to the public are far superior to even the greatest stock market experts. His name was Robert Bacon, and he wrote a book called �Secrets of Professional Turf Betting�.

Laurel : Bacon also called the concept the principle of ever-changing trend. His great insight was that even if the public ever managed to overcome the crazy urge to gamble and got wise to a winning idea, the principle of ever-changing trends would quickly and drastically change the results. As he wrote, �The would-be professional player must always understand that the form moves away from the public�s knowledge.�

Victor: Unfortunately, the book is out of print and has become very difficult to buy. We also recommend �Horse Trading� by Ben Green, and that is much easier to obtain.

Laurel : We�ve posted some excerpts from Bacon on our Web site, www . dailyspeculations .com. He explains ever-changing trends this way: Say an owner who had been sending his star racehorse out to do its best at odds of 3-to-1 cooled off as the prices sank below 5-to-2.He tells the jockey to win if he can win easily, but to pull back out of the money in the stretch if he sees that an easy winning was not possible. That way, the bad race will put the public off the horse for next time.

Dave: Horse racing and trading, Victor, Laurel? Isn�t that stretching things a bit?

Victor: Not at all, the concepts are very similar. There are two things that happen�the payoff goes down if the horse wins, and the payoff reduction is such that even if the horse were to win with the same probability the system becomes unprofitable. The horse racing business is very similar to the stock market in this way. Strangely enough, most of the major horse racing systems of the 1930�s have the same philosophical underpinnings as trend following systems . They basically say take the horse that�s winning the most, bet on him, and stay away from the horse that�s losing the most . The horse racing people actually have a much higher standard of analysis than the proponents of the current stock market systems. The horse bettors always demand workouts, unlike many practitioners of the trend following systems .

Dave: Let me see if I understand how the horse betting systems relates to trend following . Everyone bets on the horse that is in a winning trend, thereby reducing the payoff should that horse win again?

Victor: Correct, but, Bacon says that would be true if the percentage of wins were the same and here�s his fantastic insight: the percentage of wins does not stay the same, it goes down because the owners like to bet on their own horses. Therefore, if the odds are 2 to 1 for a win, they don�t bet as much or push the horse as much as they would when the odds are 10 to one . The chances of winning is actually greater the fewer wins a horse has.

Dave: I see how that would relate to trend following systems.

Victor: Those systems are designed to create the same situation on paper. These systems look good in the past, and they look good with small amounts of money�10, 20, 50 million dollars -- thereby luring the public to put billions and billions into it. Then they fail. There are people who must exist for the markets to survive; these are the easy money people. It�s the big players who see the exponents of easy money coming. The people who are flexible, analytical and scientific�like those who read our books and those who read your interviews trying to find the insights -- are the ones who survive and thrive in the market.

Dave: Thanks for the compliment to my readers! So, you are saying that flexibility is the key to success in the market?

Victor: That�s one key. One needs to have strength, flexibility and a foundation. People should know this intuitively. Most people understand this via playing cards or any sport for that matter. It is a fact that deception is rampant and flexibility wins the game. Those people who play the same game and are predictable are easy prey. This is another reason why even in those markets that test well for trend following, we have an aversion to accept it as a given. This all relates back to the fact that the anecdotal method does not prove anything. This �My dad can beat up your dad� nonsense is a real waste of time. Many CTA�s and hedge fund managers become very wealthy, but this does not prove that they have made money for the public. It means they make a lot on fees.

Dave: Let�s move on to the next big con, the fund of funds. It seems to make sense to me that diversifying a fund into multiple funds would be a good thing. Why is this concept a con?

Victor: I like to say that all funds of funds will converge to a Sharpe ratio of minus 1000.

Dave: What?!

Victor: Well, that is just a figure of speech. Actually, the issue is the fees. They pay fees on about 10 different levels, but that is not the worst of it. Currently, most of these funds tend to be equally weighted on the long and short side. Therefore, since the market is pretty much a random walk with a positive drift of 10% or so a year, they end up with a zero percent return . They make 10% on their longs, lose 10% on their shorts, and often pay multiple fees. It�s a losing proposition for everyone but the manager.

Dave: Moving onto another one of your favorite big market cons, technical analysis. Many traders trade exclusively with TA. Why do you consider it a con?

Victor: Everything is part of the basic philosophical backdrop that we discussed earlier. TA tends to unleash people from the fundamental foundation that they need to be successful.

Dave: It gives most traders false hope? Is that what you are saying?

Victor: That is part of it. It also gets traders to trade too quickly. It makes people fearful and elated, causing too much turnover -- and turn over is very expensive in this game.

Dave: Do you see any value at all to technical analysis?

Victor: Many of my best friends are technical analysts and I am actually a technical analyst myself. However, the kind of technical analysis I perform is scientific. I put forth hypothesis, I test them, I consider the uncertainty, I quantify them, I try to put them in an economic framework . When done in this manner, TA has value. What I don�t believe in is the idea that the visual intuiting of price charts can give much insight into the subsequent distribution of prices. This is the way most people view TA and why TA cons most traders. I do believe that the interplay of markets, and price distributions, are of a highly predictive nature.

Dave: These predictive distributions and market interplay is how you make decisions in the market?

Victor: It�s what I am most renowned for. A large part of the managed account industry in one way or another started out with this basic idea that I pioneered. Monroe Trout, Roy Niederhoffer and Toby Crabel, among many others started at my firm. A number of managers with over a billion dollars under management started with me. This makes it much harder for me since many of my former top people are using and augmenting my methods elsewhere, and of course my ideas become subject to the principle of ever-changing trends.

Dave: Correct me if I am wrong, Victor. But I think your studies have shown some value in the VIX indicator. Is this accurate?

Victor: That�s an example of a fixed system, a shooting star. In general, a good rule of thumb is when the market is looking terrible that�s a very good time to buy and when it�s looking great it�s a good time to reduce your exposure. Not to short it -- I don�t ever believe in selling the stock market short. The VIX is very highly correlated with the recent market move, so it�s very hard to separate the VIX from the current market move. A very good predictor of future VIX is the current VIX.

Dave: Explain what you mean by this, please.

Victor: If the VIX is 14% now the best predictor of where it will be in a year is 14%. There is nothing �too high� or �too low� about it. There are just as many factors that will pull it down as will pull it up. There are many statistical measures to forecast volatility. The book by F.X. Diebold, �The Elements of Forecasting, � is excellent in this regard. Changes in VIX have a much better forecasting ability than the levels themselves.

Dave: You mean the rate of change?

Victor: Yes, if VIX changes in a one-month period by several percentage points, this is the kind of indicator, in conjunction with the market move, that is a proper area for testing .

Dave: Moving back into market cons. One of the heroes of investors is an individual named Benjamin Graham . His �Security Analysis� book is the bible to value investors and required reading in many business programs. What was his actual performance in the market?

Victor: Abysmal! His performance in romance was much superior to his performance in the market. The Rea-Graham fund applied Ben�s ideas over a 15-year period, and it was one of the worst-performing mutual funds of all time. He actually got out of the market when the Dow was 500, believing there was no way it could go very much higher. However, that�s anecdotal evidence. He could have very good insights even if his performance as an investor was poor. The fact is, his book is very shoddy, not scientific. I consider his basic idea of value investing one of the worst big cons.

Dave: Value investing is a con!? Why?

Victor: In general you get paid for taking risk in the market. The basic idea of value investing is to invest in companies that can�t lose money. If you can�t lose money there�s no profit, there�s no return, since there is an unchanging demand structure.The rate of return quickly goes down to the risk-free rate.

Dave: Isn�t the Sage of Omaha the best known value investor?

Victor: Yes, he used to invest in things like farm equipment, candy stores, shoe manufacturing, textile plants with tax losses. These are the kinds of companies where the rate of return is usually less than the risk-free rate. Practically speaking, I happen to know something about valuing companies. I ran the largest merger business involved with selling private companies to public companies. I visited thousands of companies. My people sold over 1500 companies. One can never sell one of these value companies above its liquidating value. If you could there would be tremendous competition to drive it down. That�s the economic argument. The real-world argument is that the kind of companies the Sage boasts about buying in 5 minutes are simply not the stocks you want to buy.

Dave: OK, growth is where the average investor should be, and avoid value stocks?

Victor: Yes. The one study that I consider superior to all others is the Value Line study. They set out to prove that value is where to be, but the study proved that growth has beat value by about 20 to 1. It�s a real-life study unlike many others .

Dave: Wow, that sure is impressive. Is this why you don�t buy stocks with a low P/E?

Victor: Yes. Low P/E stocks tend to be the �value� stocks that have a rate of return close to the risk-free rate. The average IPO is priced by the underwriters to yield 50-60% per year. This is in normal times. When people are so risk-averse, as they have been for the last few years, the underwriters discount the yield to make the IPO more appealing.

Dave: Laurel, I would like to direct this next question to you. In �Practical Speculation� you talk about an indicator that I find fascinating, it seems counter-intuitive like many of the things you and Victor have discovered�you call it the stadium indicator. Tell me a little about what happens to a company after they sign a stadium naming deal?

Laurel : This question needs to put into the general framework of culture. The consequences of the hubris, excess and expansive behavior Hubris was a favorite theme of the ancient Greek historians and storytellers, who used it to show the fate in store for the arrogant and the boastful. The stories are still highly relevant today. The stadium indicator was a number of hubris indicators we invented and tested for �Practical Speculation". We looked at CEOs who said �We�re No . 1, � and at companies that announced they would be building the world�s highest skyscraper as headquarters, and at companies who named stadiums after themselves.

There were plenty of anecdotes that saw their stock prices plunge after they named stadiums after themselves. Enron's pre-bankruptcy $100 million stadium deal comes to mind, and 3Com and CMGI saw their stock prices fall from the clouds. To find whether there was any general truth to the idea, we did a systematic study. We found that stocks performed significantly worse than the S&P 500 after acquiring stadium naming rights, both that year and the subsequent year.

Victor: What we have found is that the companies that tend to be most hubristic tend to be the ones that perform the worst.

Dave: Pride goeth before a fall.

Victor: Exactly. Related to this is our baseball indicator.

Laurel : This one goes back to what we were saying about expansiveness and excess in popular culture. We found that when home run hitting records are being broken right and left, a down market tends to follow. Think Babe Ruth in the 1920s. When the rules of the game change to favor pitchers over hitters, and teams start focusing more on defense -- hitting singles and stealing bases -- that seems to portend an up market.

Victor: These indicators are cultural examples of how excesses cause the public to be betting on the wrong type of horse at the wrong time.

Dave: I can see how all these factors you mentioned tie together. Now let�s get down to the nitty gritty. How do you trade?

Victor: I am happy you see the correlations. What we teach in our book is to try to understand the forces involved the market. Pay attention to rates on fixed income versus the rates of return on the stock market. Pay attention to buybacks as signals, cash earnings versus accrual accounting, negative serial correlations in stock market indexes. But of course our book was a worst-seller. They didn�t even have a copy of it in my local book store. We are happy there are a few eagles out there who gave us a good review . �Active Trader� magazine and the �Journal of Investment Management� are two.

Dave: We are almost out of time. Is there anything you would like to leave our readers with?

Victor: I try to teach a method of thinking. We are dedicated to try to deflate ballyhoo and create a proper framework for proper stock market decision-making.

Dave: Victor, Laurel �Thank you for joining me today. I truly appreciate your time .

Victor: It was our pleasure. Thank you

A Decent Of Lucifuge Proportions--Has It Started??

Daedlus your child is falling and the Labrynth is calling--- Neal Fallon CLUTCH

Story coming soon....

Greenspan's Fraud--- Marketsurfer Meets Dr.Ravi Batra

Today, I am pleased to be joined by New York Times best selling author and highly controversial economist Dr. Ravi Batra. Dr. Batra is Professor of Economics at Southern Methodist University and has recently authored, Greenspan’s Fraud. This book exposes the many myths that surround the Chairman of the Federal Reserve and provides Dr. Batra’s unique solution to the issues that plaque the US economy. As I stated earlier, Dr. Batra is highly controversial and a true outside of the box thinker. Be prepared to have your long held beliefs challenged in this interview. Let’s get started!

Dave: How are you today, Dr. Batra?

Dr. Batra: I am fine Thank you

Dave: I want to start out by talking about the history of Allen Greenspan, prior to him becoming the chairman of the Federal Reserve. How did Greenspan obtain this powerful position?

Dr. Batra: Greenspan had a great friendship with some people that were at the White House, people that were highly placed. He himself did not have great credentials in Economics, but he was a good friend with Arthur Burns, who was Fed Chairman in the 1970s. Burns wanted Greenspan to become the Chairman of Economic Advisors. He recommended his name to President Ford in1974, and as a result he was appointed to the CEA as Chairman. At that time Greenspan did not even have a PhD in Economics. He has his Masters in Economics, but not his PhD. Nor had he written any path breaking articles in Economics, which was read by his peers or sited by his peers or so on. He did not have much in the form of economical credentials when it came down to it, but he became one of the top economists of the world. Being the CEA chairman got him recognition. Also, this is a position that is normally held by prominent and star economics.

Dave: Interesting. How did he meet Arthur Burns who was instrumental to his success?

Dr. Batra: Arthur Burns was once a professor at Columbia University in the early 1950s. Greenspan attended Columbia to do his PhD, and met Burns there. He spent two years trying to finish his PhD in Columbia , but then he dropped out of school for financial reasons. He never finished his PhD there, but he did have commonality of interest with Arthur Burns. Greenspan was against Keynesian Economics, and so was Arthur Burns, so the two had common views and they became great friends. In fact, Greenspan even loaned money to Burns to buy a home in Washington DC . They were very close to each other, but that was all Greenspan had in terms of credentials. Those credentials were efficient enough for him to become the CEA chairman. Once he became the CEA chairman in 1974, he became friends with many other people at the White House which eventually helped him become the Fed Chairman in 1987.

Dave: In your book, Greenspan’s Fraud, you go into the underpinnings of Greenspan’s economic philosophy. Two names stood out to me: the first one being Jeremy Bentham, and the second one being Ayn Rand. Let’s talk a little bit about Jeremy Bentham and who he is.

Dr.Batra: Jeremy Bentham is a philosopher from the 18th century. His philosophy is that people are highly calculating in their motives and actions. They calculate the profit and loss, utility and disutility of everything they do. Based on those calculations, their actions occur. He did not pay much attention to emotions or trying to do good to others. These kinds of motives are not important in human action. What is most important is the calculating nature. Bentham had a great influence on Greenspan. I sited him extensively in the book to show that Greenspan also developed a calculating nature. It shows when he became a businessman, to becoming an economic advisor to President Reagan, and then when he became the Fed Chairman, and so on.

Dave: OK, Bentham promotes a concept called hedonic calculus, what exactly is this?

Dr.Batra: That is exactly what it is. That human beings have a calculating nature, they make sure to calculate the profit and loss from the facts of every action. It is done in a totally rational way, with no emotion involved. In Bentham’s hedonic calculus, there is no scope for love of any sort. These are all calculations that motivate people in their actions.

Dave: Moving on to Ayn Rand. Rand ’s philosophy seems similar to Bentham’s. How specifically did Rand influence Greenspan?

Dr.Batra: Yes, she taught the same philosophy also. Her philosophy has commonalities to Bentham. Bentham use to say that people are selfish. Rand taught that people should be selfish to make sure social welfare is maximized resulting in a society with high living standard. Bentham said that people are by nature selfish, and Rand said that people should be selfish, so you can see they have a lot in common that is why Greenspan was much attracted to Ayn Rand as well.

Dave: I know there are some difference between the two, where Ayn Rand taught something called Ethical Egoism, and Bentham promoted Psychological Egoism. Can you explain the difference between the two?

Dr.Batra: Well with that said, Bentham is looking at human psychology. The psychology to him is that everyone is selfish and wants to follow action based fully on calculations from profit and loss. Where as Ayn Rand is saying that capitalism has a higher moral effect which is better for society, which is why everyone should be selfish. If everyone acted in his or her self interest, then we will meet our highest productivity in the economy. So Rand is talking from the ethical viewpoint in saying capitalism is moral and ethical, because acting selfishly will lead to moral good.

Dave: I know that Greenspan became part of Rand ’s inner circle, is that correct?

Dr.Batra: Yes, he taught something to Ayn Rand, and Rand taught things to him. Some of the things are shocking to me. Rand at one time denounced President John F Kennedy for being a facist dictator. She compared Kennedy to Hitler and Mussolini. Some of those things were extremely shocking to me, but I am not surprised.

Dave: Wow, that’s radical. Was there a romantic component to Greenspan’s relationship with Rand ?

Dr.Batra: No, not to my knowledge, but they did share ideas because they had a lot of common ideas. Greenspan helped her write a novel called “Atlas Shrugged.” In that novel, someone robs the poor and rewards the rich, and Greenspan thought that that was a great example of social justice. He called it unrelenting justice and I pointed out that this is the kind of concept that he later applied to our tax system.

Dave: That’s unusual to say the least. I know you mentioned in the book, two types of fraud that you believe Greenspan committed; financial fraud, and intellectual fraud. Can we talk about the financial fraud that you believe Greenspan is guilty of?

Dr.Batra: The financial fraud is actually very serious fraud. It has resulted in almost $2 trillion worth of wastage as far as the average taxpayer is concerned. What happened was that in 1981, the income tax was sharply reduced, and as a result the government deficit went up sharply. At that time, high budget deficits created very high interest rates. As a result, America had the worst recession since the 1930s. So the problem was this huge budget deficit that it had to come down. Meanwhile, Greenspan had been appointed to bring some reform to the social security system which itself did not have much of a deficit. Greenspan came up with a theory that the system would run out of money in 50 to 60 years and so we should raise sales taxes even more than they had been raised before, we should raise payroll taxes sharply, create a surplus to the trust fund, so that would guaranty future benefits. This is the promise Greenspan gave to the public and then he was able to persuade Congress to adopt this scheme but since there was no money since the government was already in a deficit, there was no way the surplus would survive in the trust fund. And Greenspan knew that in fact his intent was not to create a surplus in the trust fund but to raise money for the government, that is exactly what happened in 1984 when the surplus began to arrive all that money had been used up by the government in its own expenses, that is in massive social security fraud because the very intent of that legislation was not to create a surplus for the people, but to raise money for the government and it’s own operating expense.

Dave: OK, let’s move onto what intellectual fraud you believe Greenspan is guilty of committing.

Dr. Batra: In addition to financial fraud, Greenspan also has committed an intellectual fraud, which occurs when a person changes his or her theory in their self interest. I think Greenspan has done that constantly so that he can remain as the Chairman of the Federal Reserve and be appointed again and again. A very simple example is when Jimmy Carter was president, Greenspan opposed a cut in the income tax. Under Reagan, Greenspan supported an income tax. Then Clinton came along, and Greenspan opposed a cut in the income tax, then bush came along and Greenspan supported the cut in income taxes. So he has been changing his theories with the changing of the guard at the White House. There were times where he did not go along with the White House. For instance, in the case of Bush Sr. he was not friendly with him as he was Wall Street. He followed policies that made Wall Street more happy and comfortable, because then Wall Street became a key to his reappointment. So he has been changing his theories and ideas constantly to be reappointed as the Federal Reserve, and why not, his position is one of the most powerful in the world.

Dave: Perhaps these changes in philosophy are based on new information. There is nothing wrong with changing your viewpoint when provided with new information.

Dr.Batra: He may believe this, and there is nothing wrong it. There is nothing wrong with changing your theories when you do come across new information. But look at what Greenspan did in the late 70s. He said we must oppose a cut in income taxes, because it would create a budge deficit and raise inflation. Then Reagan came along and he said we must cut the income tax to fight inflation. How could the same policy achieve two opposite results? Reagan wanted a cut in income tax and Greenspan wanted to be cozy with Reagan so that he could get a higher government position late on. He provided the rational for Reagan’s position. Then when the budget deficit came up sharply, he came up with the scheme that raising social securities tax was to bring down the deficit and reduce interest rates and so on. That is his intellectual fraud.

Dave: Moving on, here is something I found very interesting in your book. The theory that having a minimum wage does not create unemployment but actually a minimum wage helps employment. . This seems counter-intuitive to me. Please explain your position on this issue.

Dr.Batra: Sure, there are a lot of problems with the idea that not having a minimum wage creates employment. I know it is an accepted idea but it is not supported by history, and I can also show that it is not supported by logic. Every producer has to sell their product. If wages are kept very low, there has to be a connection between wages and productivity because productivity is the source of supply for the producer. If productivity is high, supply will be very high. But wages are the source of demand. So if there is a big difference between wages and productivity, demand will not be enough to absorb the entire supply, and if demand is not enough, then the producer does not make any profit. The goods have to be sold before the company can recognize any profits.

Dave: Let me see if I follow your logic. Your concept is that if a worker is not being paid enough, he would not be able to purchase the product created by the producer?

Dr.Batra: Exactly, it is the working class that buys the products of the producer. The producer is not making goods for their own consumption, but instead for workers. If workers are paid very low wages, then products will, not be sold and the producer can not realize any profit. The idea of minimum wage is that it brings the wage level close to productivity. If the minimum wage is above productivity, then it would certainly hurt the economy. It should be fairly blow productivity, the average product of the worker. History will find that the minimum wage slightly raised the wage rate closer to productivity. As a result, demand went up. When demand went up the producers sold more goods, in fact their products were realized. So rising minimum wage increased output, production went up, and employment went up also.

Dave: That does make some sense, but, myself being trained in classical liberal economic theory, this immediately comes to mind: are you not leaving out the other forms of income, such as investment income used to purchase products?

Dr.Batra: There are other forms of income, but they are a fraction of the wage income. The main form of income in America and other advances economies are wages. Like 65-70% of income comes from wages. Investment income and rental income assets or even farm income make up the rest of the 30%. Wages have to be sufficiently higher. I am not saying that they have to be so high that they exceed productivity. They should always be below productivity, but the minimum wage in the United States has never been that high where that has happened. That is the theory, let’s explore some of history as well. In history, we find that the highest minimum wage in terms of the purchasing power occurred at the end of the 60s. At that time, the purchasing power in terms of today’s prices was about $8 per hour. Today the minimum wage is $5.15 per hour, and back then it was $8 per hour. Take a look at the unemployment rate at that time, it was just 3.5%. So we had the lowest post World War II employment rate in 1968 and 1969, when we had the highest minimum wage. Also, another historical data I show in the book is that the minimum wage went up about 17 times from 1950 to 1997. Each time it went up to catch up to rising prices, so between that time, every time minimum wage went up employment would go up within one year, and it never went down. Again, the theory is that rising minimum wage creates increased consumer demand, so with the higher consumer demand, the producer sells more, and when they are selling more they hire new people. The theory and history both support the idea.

Dave: Let’s move on to some of the global crisis’s that Greenspan was involved with, starting with the Mexico ’s crisis of 1994 when the peso collapsed and also the NAFTA situation there. Can you fill our readers in on how Greenspan was involved?

Dr.Batra: Greenspan followed a type of methodology that he learned from the stock market crash of 1987. He was faced with the situation, which he was not expecting at all. What he did was sharply lower the interest rate to expand the money supply quickly, and told banks around the world to lend money to brokers and stock markets. The result was that the crisis was stopped in its tracks and it did not spread. So Greenspan learned at that time that whenever there is a crash, or a crisis, the best thing to do is bring interest rates down and create liquidity to promote more lending in the economy. Soon after the crisis passed away, Greenspan realized that rates ere too low, so he raised them back in 1988. That is exactly why he came into a sort of clash between himself and George Bush. The next crisis after the 1987 crash was the Mexican peso crisis starting in late 1994 lasting until 1995. In this case a foreign country was involved, so increasing loans and lending to borrowers in the US was of no help. He persuaded the IMF to loan money to Mexico . Clinton ’s presidency was on the line at that time because both Clinton and Greenspan had supported NAFTA, which had gone into effect at the start of 1994. NAFTA, which stands for North American Free Trade Agreement, was passed in 1993 so Mexico , America , and Canada could reduce tariffs on each other’s products and ease regulations on capital flows. In late 1994, the peso went down sharply and people associated that decrease to NAFTA, so both Clinton’s and Greenspan’s credibility was on the line. They both swung into action by bringing IMF into the situation and loaned a lot of money to Mexico to avert the crisis. Interest rates had also come down, but later Greenspan raised them, following his old method he learned in 1987.

Dave: How about the Asian Crisis when the Bhat collapsed in 1997. Did Greenspan apply these same ideas?

Dr. Batra: Yes, again, the same type of currency crisis was occurring which started because Greenspan insisted on financial deregulation around the world. To Greenspan free trade not only means removal of tariffs but also the removal of capital control around the world. Once capital controls were lifted people started taking a lot of risks in the Asian markets and markets of Africa and so on. Once you speculate a lot, the speculation can backfire and there is a crisis. So the Asian crisis of 1997 started from excess speculation of currencies. Greenspan himself was partly responsible for this crisis, and he needed to do something to protect the system from the effect. So he followed the same learned policy of the Mexican crisis. He persuaded the IMF to lend money to a lot of countries this time. It wasn’t just Thailand . Money was loaned to the Philippines , Indonesia , South Korea , and even Brazil later on. The crisis spread and it was worse than the Mexican crisis, but he followed the same methodology by cutting interest rates and lending money to the countries in this case and then bringing back the rate after the crisis.

Dave: Obviously his techniques worked. This is a good thing, what’s wrong with how Greenspan handled these situations?

Dr.Batra: It did seem to have worked. But it created a lot of problems for the future. Investors around the world realize that anytime there is a stock market crisis, Greenspan is going to come back and intervene, so they become fearless and are not afraid to take the risks anymore, thinking whenever there is a problem, Greenspan will come to bail them out. So there is an increasing amount of risk which perpetuated the stock market bubble from 1997 to 2000. This bubble was so powerful that it continued to expand for three years. It was so powerful that NASDAQ stocks continued to gain 9% per month. The stock index in 1999 went up 9% per month. Greenspan’s policies created this reckless investing policy around the world. Greenspan had cut interest rates sharply in 1988 to avoid the aftereffects of the Russian default. If you recall Russia had defaulted on its foreign debt. What I am trying to say is that these crisis’s are brought upon by Greenspan’s inspired policy of global financial deregulation, and not free trade.

Dave: Global deregulation and free trade? Are they not the same thing? Please explain the difference.

Dr.Batra: Well, free trade historically meant the removal of tariffs of imported goods. That is how Adam Smith argued, that is how economists looked at it. There was a small fringe of economics that argued in favor of lifting controls of capital movement from one country to another. However, was very small and not much attention was paid to this idea. Greenspan made another idea popular, which was to not only remove tariffs, but also lifting controls of capital from one country to another. His idea of globalization is far reaching. It was his policy of financial regulation that encouraged speculation and then created these currency problems. To solve these crisis’s he would need to hop from one to another, bring interest rates down, encourage IMF lending, then raise interest rates back to their old levels. In 1999, Greenspan started to do what he hand done in the past. First he had brought interest rates down, and now it is time to move it back to the former level. He forgot, that by 1999, we were in the middle of a horrendous bubble. He began to continue to follow his old habits since he thought the crisis had passed. If he had just looked at Japan ’s history in 1989- 90 they had a bubble as well. If he has looked at their history he would not have raised rates in 1999. But he started to do that and kept raising rates until the middle of 2000.

Dave: Well, let’s assume he did not raise rates. What would have happened with the Dot Com bubble and what else could have he done?

Dr.Batra: He had created the problem, so he could have followed other methods to control the speculation. Things like controlling margin requirements and so on were options. But when you raise interest rates it not only has an effect on the stock market but it also has an effect on the rest of the economy. So as he rose rates consumer demand did not grow as fast as was expected by these dot com companies, high tech companies, and telecommunication companies. Demand growth slowed down, and as a result supply began to exceed demand and profits began to fall. As profits fell, everyone was so shocked since it was unexpected, that soon later the stock market crashed.

Dave: Lets move on to another idea in your book. You have a theory that high income taxes are synonymous with high growth. This seems bizarre and nonsensical. I would think the exact opposite is the case.

Dr.Batra: That’s right, you think it is opposite because you pay attention to only supply. The economies are run by two forces, demand and supply and if the economy is to grow year after year at a high pace without creating a bubble, then both demand and supply need to rise proportionally to each other. We had high growth when income tax was high, but other taxes were low. This is actually very important because you can’t have high taxes all around. If you have high taxes all around that will cripple growth. What we had in the 50s and 60s was a high income tax rate but the social security tax, sales tax, and gasoline tax were extremely low, being around just 2-3%. But the income tax rate was between 70-90%, yet we had the highest growth rates after the second war. The reason why growth rates were so high was because of the low taxation of the middle to lower class, demand growth was very high. Consumer demand comes from low taxation of the middle class, and when demand growth is high investments stay high even though taxes are high on top incomes. Remember the producers want to sell their goods, and when sales are brisk and strong they automatically expand their business to take advantage of those sales. After all, we all in economics believe that every producer wants to maximize profits. Profits are maximized only when sales are brisk. When sales are brisk, automatically sales advance without any tax incentives even when sales tax is high. The moral of history and logical economic theory is that taxes should be low on the middle class and the destitute, and taxes on the upper class doesn’t really matter. But since somebody has to pay for government services, then taxes should be as I stated. Taxes on the wealthy should be depending on how much the government wants to spend. It so happens that the government has been trying to spend a lot of money, so there should be a very high income tax rate, but low taxes on the lower class, which is what worked very nicely in the 50s and 60s. But from 1981 on we have been decreasing income taxes sharply but increasing social security to make up for lost revenue, gasoline taxes have also risen sharply, and the result is that economic growth has been falling ever since 1981.

Dave: Well, that is debatable. Let’s move on to what you see as solutions to the policies Greenspan has put into effect.

Dr.Batra: The short term solution we see right now has resulted from Greenspan’s policy of financial deregulation which made it easy for the rest of the world to invest money into the United States . But as a result of that ease we now have a huge trade deficit, even a rising trade deficit. Greenspan and some others think that the trade deficits no longer matter anymore because the rest of the world in their self-interest is going to finance it, and that perhaps is true. But even then the rising deficit hurts our economy sharply because it kills our manufacturing business and employment. Service jobs pay high wages to doctors, attorneys, engineers, and highly educated people, but for the vast majority of workers who only have high school diplomas, wages only come from manufacturing. So if manufacturing goes down, then the vast majority of people lose wages.

Dave: Reviving manufacturing? Isn’t that taking a big step backwards? We are in an information economy at this time, shouldn't be educating our former manufacturing workers to function in the new economy?

Dr. Batra: We need to revive our manufacturing business to revive our living standard, which is the real wage of the vast majority of Americans which is about 75% of Americans. So if we revive manufacturing, then we will improve the living standard in the United States otherwise it will continue to go down as it has, and it will continue to go down in the future. So how do we cut the trade deficit? Some people have talked about forcing China or Japan to revalue its currency, and that is partly right. There are two causes: the cheap currency that comes from Asian countries, and the other is that our manufacturing business is totally demolished. If you do not produce much at home, what are you going to export in the end? So this problem is a serious problem and complicated, but there is a simple solution even at this time. Looking at these Asian countries, we see there are two advantages they have over us. They have cheap labor and they also have a cheap currency. There is nothing we can or should do about cheap labor, but we can certainly neutralize their advantage in terms of the cheap currency. They are keeping their currency value artificially low, but exchange rates are two way streets. If they can set an exchange rate on us, then we can set an exchange rate on them unilaterally without depending on what they do without respect to their currency. This is permitted because of the free trade rules, and the entire world is doing it except us. China , for instance, sets its Yuan to, I believe 8.281 to the dollar. We can turn around and simply set our dollar to 5 Yuan to the dollar. We will apply this to only our exports and to no other international transaction. What does this do? A Chinese importer right now has to pay 8 Yuan to get 1 dollar. He will instead come to the Fed and pay 5 Yuan to get 1 dollar and he will import a lot of American goods because prices drop by almost 40-45%. A small fall in our prices to the Chinese or a small rise in the prices of Chinese goods is not going to help our trade deficit at all because we barely make anything in this country, and Chinese prices are very low already. So if we follow these policies and reduce our export prices by 40-45% the Chinese will buy a lot more from us but we will not buy less from them. Because Wal-Mart can still go to the Central Bank of China , give them 1 dollar, and get 8 Yuan. So the Chinese prices will not rise to us, our prices will sharply fall to the Chinese, so this process is not even inflationary. This can be done unilaterally, and even China would be happy to see it because they would then no longer be under pressure to revalue their currency and raise their export prices.

Dave: You mention something called mass capitalism in the book. What is it and is it a long term solution to Greenspan’s policies?

Dr.Batra: Yes, the problems in the rest of the world arise because wages are not keeping up with rising productivity. Productivity is rising because of the Internet revolution, and computer revolution but wages simply are not keeping up. As I said earlier, productivity is the main source of supply, and wages are the main source of demand. The result of this is that the government keeps following expansionary policies by borrowing money to keep up demand, and lowering interest rates so people can borrow money to keep up demand. All this demand creation is done by the creation of debt. Debt creation is necessary only because wages are lagging the productivity. So the long term solution is that we should have this mass capitalism in which the majority shares of big companies are owned by workers themselves. The workers then elect governing boards for each company. The governing board then regulates things like making sure the CEO’s salary does not rise so much, and worker salary does not lag productivity. When we create this mass capitalism, or economic democracy if you will, then wages will keep up with productivity. When that happens, we will not need expansionary or fiscal policy to solve the problem of insufficient demand.

Dave: Whoa, Doctor! Power to the Proletariat? This sounds like a new age form of socialism. Are you advocating socialism as a solution?!

Dr.Batra: Not at all. In socialism, the means of production are owned by the government. Where as in mass capitalism, means are owned by the vast majority of people. It is the ideal form of capitalism and far from socialism. In this kind of system you will have the minimum economic problem, and you will not have inflations, recessions and stock market bubbles because wages keep up with productivity, demand keeps up with supply, and when demand and supply are in balance, there are no economic troubles.

Dave: Let’s step back to Greenspan. Is Fed Chairman a lifetime appointment?

Dr.Batra: No, Greenspan has to retire by 2008. Some people say that he will retire in 2006, and perhaps under some rules he should do so. But there is a catch, if President Bush does not nominate anyone else to replace Greenspan, then he can stay on until 2008. However after that he does have to leave.

Dave: Do you foresee any particular person taking his place?

Dr.Batra: I think some names surfacing are Glen Hubbard, Ben Bernanke who is currently the chairman of the CEA, Martin Fairstein is another name that comes up. I think these people are all just Greenspan’s clones so it really will not make a difference. Likely, they will not be able to do as much damage as Greenspan has done in the past, because the damage is already done. What we have to do is undo his policies, and none of these three whose names are mentioned frequently would do that.

Dave: Unfortunately, we are out of time. Is there anything you would like to leave our readers with today?

Dr.Batra: Yes, what I am trying to say in Greenspan’s fraud is that the problems are complicated, and society is polarized now, and the living standard is going down. There is one solution that we can follow right away without hurting anybody else, and that is to follow the policy of dual exchange rate where we set lower exchange rates for our exports into Asia . This very simple mean can solve a lot of problems.

Dave: Thank you for joining me today, Dr. Batra.

Dr.Batra: I appreciate the time, Dave.

Cipriani's Gold Bull Missing??

Story coming soon......

Bull Market Decadence In Manhattan--Signaling A Major Market Top? by marketsurfer&annaland

Flashes of 1920's style excesses flashed into my mind, as Anna and I entered Club Macunudo on Manhattan's Upper East Side, for Trader's Monthly Magazine's "Top 100 Earning Traders" celebration. Trader's Monthly is the premiere lifestyle magazine of the trading industry. It is both vilified and respected for showcasing the over the top lifestyles and missteps of the financial world's elite. One needs to have earned a minimum of 25 million dollars last year in order to even be considered for this honor, with many earning many multiples of this figure. Giving a nod to Tom Wolfe, these are the new Masters of the Universe.

Arriving early, we pushed our way thru a phalanx of media types milling about the front door and were quickly whisked into the main party room. Large movie monitors played endless video loops of private jets and high end resort destinations on both sides of the room. Sponsors quickly descended on us offering property ownership and private jet leases. Although somewhat aggressive, they were highly professional and classy quickly backing off when given suttle hints of non interest. The club began to quickly fill to capacity, as cigars, high end liqueurs and unusual hor d'orves flowed freely to the gathering of predators, their groupies and various wannabees. One of the more well known Hedge Fundees in attendance ( who shall remain nameless) rose to notoriety due to his habit of leasing jets for the express purpose of entertaining the world' wealthiest people to obtain funding for his latest hedge fund project. Conversation swirled at deafening levels focusing on markets and deals.

Not surprisingly, Manhattan's ubiquitous blond gold digger tribe was well represented in their short dresses and impossibly high heels, intently milling about to latch onto anyone who gave them a second glance. The room soon became uncomfortably over crowded making navigation and interaction a difficult chore. The collaborator and I rounded up our gang including a well known fund manager, a top computer programmer who designs trading platforms and a rising NYC based actress to find a more peaceful spot to continue our lively conversation. We ended up at a lovely and scrumptious Italian restaurant/pizza joint on 61st indulging in home made pasta and talking long into the night........We then left Gotham for even more peaceful surroundings and deeper talks on various esoteric and not so esoteric subjects......

On May 1st, Trader's Monthly held a grand opening party at Bulgari's flagship store at 57th and

5th. My raven haired, eastern European co-conspirator looked positively scrumpdelicious in her

long black dress and perfectly shiny leather pumps. After negotiating the substantial velvet rope at the entrance, we began to explore the babbles and nick knacks of the ultra rich. The store quickly filled to capacity with an assortment of wall street characters, deal makers, traders, cubicle cowboys,and various media types. The crowd appeared to be much more refined and interesting than the previous party.

We quickly made our way upstairs, finding an observation spot on a bed/couch type thing asthe crowd ebbed and flowed around us. While closely lounging we partook of well made excellent Martinis and snacked on superb finger foods. We were introduced to multiple other attendees. One gentleman was wearing Bono style sunglasses and had multiple mystical amulets hanging around his neck, so ofcourse an entertaining conversation was struck up, others were more conservative but everyone was having a great time. There was a thick, bull market positive vibe filling the space and we stayed almost to the end. Upon leaving, the swag bag contained various pieces but the full-sized bottles of Bulgari perfume or cologne added an additional layer of class to an excellent event. We quickly made our way to our current favorite restaurant to chat and hang with the supreme beings of leisure types who normally populate the joint at this hour. The food was fantastic, but we were seated too close to several Upper East Side Mavens who were overtly keen on our every word. The rain began to all in earnest when we left for the office, a cold, heavy spring thunderstorm. The co-conspirator and I were soaked to the bone on the 10 block stroll in the pelting icy rain. On the upside,I was awarded the wet pink shirt contest during this romantic, lightning aided walk. Drying off a bit in the office, during a quick game of Foosball and shooting some baskets--which I won of course, we then left Gotham ending another unforgettable night during, what may be, the greatest bull market in history.

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I believe this type of celebration of the trader is

signaling a near term top in the US equity index

markets. Market fever is so wide spread, Ciro

Cipriani has installed 2 near life size wall street

bulls outside his downtown location in Soho. One

is in antique gold and the other in platinum, it will be interesting to see how long these remain

during any type of market correction.