Mark Bittman: What’s Wrong With What We Eat

The End of Wall Street

Terrific article in Portfolio by Michael Lewis of Liar’s Poker fame.  Notable Excerpt:

But he couldn’t figure out exactly how the rating agencies justified turning BBB loans into AAA-rated bonds. “I didn’t understand how they were turning all this garbage into gold,” he says. He brought some of the bond people from Goldman Sachs, Lehman Brothers, and UBS over for a visit. “We always asked the same question,” says Eisman. “Where are the rating agencies in all of this? And I’d always get the same reaction. It was a smirk.” He called Standard & Poor’s and asked what would happen to default rates if real estate prices fell. The man at S&P couldn’t say; its model for home prices had no ability to accept a negative number. “They were just assuming home prices would keep going up,” Eisman says.

My First Gold Coin

For as long as I’ve been writing this blog, and for at least two years before that, I’ve been interested in gold. Over this period I’ve maintained a roughly 10% allocation to gold in my portfolio – I’ve done this through two ETFs: GDX and GLD.

Even though I’m not a hardcore gold bug, I’ve recently come to believe that “paper” gold is not really gold. Unless you hold physical gold, you miss out on several advantages of gold ownership. In addition to its properties as an investment, gold also provides some protection against really nasty things like hyperinflation, confiscatory governments, and major counterparty failure for COMEX gold. Not to mention that it’s a completely untraceable form of wealth (unless you blog about it).

And the final reason: there is a growing disconnect between the physical and paper gold markets. Many coin shops and even the US Mint have completely sold out of physical gold. And there is a growing spread between what you pay for gold and the spot price.

So today, partly because of my investment thesis and partly out of curiosity, I purchased my first gold coin. I called all of the coin dealers in the Raleigh/Durham area and eventually found two that had gold coins. One shop had two coins – an American Eagle and a Canadian Maple Leaf – but wanted $140 over spot! Eventually I found a dealer who had a single American Eagle for sale at $80 over spot. I bought the coin and also had an interesting conversation with the owner of the store. In the end, it was a fun experience…. I’m hoping for a continued decline in gold prices so I can buy more!

Why Our System is Prone to Panics

In today’s WSJ, John Steele Gordon addresses the question:

How could the richest and most productive economy the world has ever known have a financial system so prone to periodic and catastrophic break down? One answer is the baleful influence of Thomas Jefferson.

Jefferson, to be sure, was a genius and fully deserves his place on Mt. Rushmore. But he was also a quintessential intellectual who was often insulated from the real world. He hated commerce, he hated speculators, he hated the grubby business of getting and spending (except his own spending, of course, which eventually bankrupted him). Most of all, he hated banks, the symbol for him of concentrated economic power. Because he was the founder of an enduring political movement, his influence has been strongly felt to the present day.

It’s so interesting that today’s financial crisis can be traced back to the fight between the Federalists and the Anti-Federalists – between Jefferson and Hamilton. I can’t help but to compare today’s congress with Jefferson circa 1790: well-intentioned and in positions of great power, but with an acute lack of financial sophistication.

What good is wind energy if we can’t transmit it?

Paul called my attention to this NYT article: Wind Energy Bumps Into Power Grid’s Limits. Notable excerpt:

The dirty secret of clean energy is that while generating it is getting easier, moving it to market is not.

The grid today, according to experts, is a system conceived 100 years ago to let utilities prop each other up, reducing blackouts and sharing power in small regions. It resembles a network of streets, avenues and country roads.

The basic problem is that many transmission lines, and the connections between them, are simply too small for the amount of power companies would like to squeeze through them. The difficulty is most acute for long-distance transmission, but shows up at times even over distances of a few hundred miles.

The antiquated electricity transmission infrastructure poses a classic Catch-22: we need alternative energy and the technology exists, but we can’t utilize it because the grid can’t handle it. An overhaul of the grid is needed – something which became very apparent after the NYC blackout and Hurricane Katrina – but it’s almost impossible to accomplish on a national scale because of all the competing interests.

Stuff I Like

** In order to make the blog more interesting, I’m starting a new category called Stuff I Like **

SIGG Water Bottle
These things are impossibly cool. I finally broke down yesterday and bought one. At $20 for the small bottle, I’m sure someone, somewhere is making a ton of money!

Tilex Fresh Shower
I love having a clean shower, but I hate scrubbing. I’ve been using this product on my new shower for over a month and it still looks good as new!

High Thread Count White Sheets
There’s something nice about bright white sheets. These are luxurious and soft — worth every penny.

Craziness in the Gold Market

Gold prices have fallen from $1,000 to under $800 per ounce just in the last month. As prices fell below $800, demand for physical gold rose to the point that many dealers – including the US Mint! – ran out of supply.

Bill Fleckenstein offers a great explanation for the strange recent action. Notable excerpt:

There are huge amounts of money being managed according to mechanical or mathematical trend-following systems. When those systems kick in, gold and silver can drop in price even on days when inflation is reported to be high, as happened Aug. 14. That’s because when a major liquidation is under way, the economic fundamentals have no bearing on market action. The quantitative systems take control.

Except for the dollar’s huge rally, virtually nothing has changed in the case for owning gold, though the price recently tanked by more than 20%. However, in the short run, fundamentals do not make any difference when powerful tailwinds or headwinds push prices around.

In the stock market, price action often reflects underlying events in businesses, industries and the economy. With commodities, price is just a reflection of the market’s attempt to help balance supply and demand, as the cost of production and other variables have only long-term relevance.

A closer look at the gold market reveals shortages driven by price declines and a subsequent explosion in retail demand, and many dealers have run out of assorted forms of gold coins, bars, etc. If you click here, for example, you can see that Tulving is out of gobs of products. Kitco.com has been warning about delivery delays.

These shortages likely have something to do with the fact that last week the U.S. Mint suspended sales of gold coins — a reflection of the surging demand. The fall in price also triggered an outpouring of buying in India and the Middle East. In addition, the exchange-traded funds, or ETFs, that hold gold and silver showed an amazing resilience in the face of plunging prices.

Thus we witnessed an unusual dichotomy: Physical buying (and here I’m kind of including the ETFs, though they aren’t purely physical) was ratcheting up even as the selling of futures contracts was driving the market lower. When the price was rallying, the futures market had a big hand in that, so we can’t ignore it when it seems to be at the epicenter of lower prices.

In any case, if we saw (as it appeared) heavy selling or short-selling in the futures market while demand for gold in the physical world was rising, that historically would be a very bullish development.

Narrowing Ecologies of Global Finance

Paul McCulley of PIMCO on why global interconnectedness has complicated the picture for central bankers:

The mobility of capital combined with the mobility of information across countless interconnected nodes, hindered occasionally by politics and the transparency tolerance of various governments, gives the largest holders of capital something of a “God-complex” in today’s global economy. Small banks expand to become mega-banks, regional banks consolidate to become universal banks, and foreign central banks “self-insure” to become sovereign wealth funds. Wealth and capital supercede the common CEO, the everyday purchasing manager, and humble central bankers of today in velocity, mobility and connectivity. Global central bankers in particular need to catch up quickly.

********

The article in a nutshell:

• Global asset prices are deflating

• This is having a contractionary effect on the real economy and causing a decrease in aggregate demand (or, at least the growth of agg demand in certain countries)

• The problems of the financial system – whose collateral is these falling assets – is resulting in a reduction of available credit.

• Central banks are doing everything they can to liquefy the banks and to ensure the world that they will not let the big banks fail. But it’s not having enough of the desired effect – cost of capital is still too high for the banks.

I’m not sure what McCulley’s prescription is, though he seems to suggest that central banks should pay more attention to asset prices. I think by now we should realize that asset prices are as important to consumption and demand as consumer prices (blogged about here).

KC Concert II

Here are a couple of pics from the Kenny Chesney concert last night Raleigh. I went with a big group of my new friends from school.

That was my third KC concert (second one blogged about here) and I had feelings of deja-vu when he played some of the same songs I’ve heard at every concert. It’s weird to repeat things after a multi-year break. I felt the same way visiting the Calgary airport a few weeks ago.

It makes me think about how random life is and also about how much has changed in my life… mostly for the better!

What’s Most Important In This Election?

The other night, Paul and I were arguing about the election. I am still undecided. Paul was trying to convince me to vote for Obama.

Why I’m Undecided

I am totally opposed to Obama’s plans for taxes and healthcare. If they get passed, I think it will be disastrous for the country. On both of these issues, I prefer McCain’s plans.

But when it comes to “social” issues, I think Obama will be a better president. He will nominate left-leaning judges to courts that are likely to hear cases on gay marriage and other issues that are important to me. Beyond the judge thing, I think Obama has the opportunity to permanently change public opinion on these matters.

Paul’s Argument

Paul makes an interesting, if cynical, argument. He says a) social issues are more important anyway; and b) major policy proposals have little chance of passage. He uses Bush as an example: Bush claimed to be fiscally conservative yet his administration has been marked by huge budget deficits, profligate spending, a collapsing currency, and inflation.

This is a smart argument because it plays on my cynicism about the Federal Government. But even if it is logically coherent, I’m not sure it’s empirically plausible. There are numerous recent examples of presidents affecting major policy changes: Bush tax cuts, Iraq War, NAFTA, and several examples from the Reagan administration.

So when I’m thinking about who to vote for, I’m assuming there’s a reasonable chance that his policy proposals will become law. And so I have to decide what’s more important to me: healthcare and taxes or social issues?

Obama Town Hall

My friend Alan got me tickets to an Obama Town Hall in Raleigh last night.  It was fun and our seats were amazing!

Is College a Waste of Time?

Charles Murray writes that higher education in its current form is a waste of time. As an alternative, he suggests a system of certification exams:

Outside a handful of majors — engineering and some of the sciences — a bachelor’s degree tells an employer nothing except that the applicant has a certain amount of intellectual ability and perseverance. Even a degree in a vocational major like business administration can mean anything from a solid base of knowledge to four years of barely remembered gut courses.

The solution is not better degrees, but no degrees. Young people entering the job market should have a known, trusted measure of their qualifications they can carry into job interviews. That measure should express what they know, not where they learned it or how long it took them. They need a certification, not a degree.

The model is the CPA exam that qualifies certified public accountants. The same test is used nationwide. It is thorough — four sections, timed, totaling 14 hours. A passing score indicates authentic competence (the pass rate is below 50%). Actual scores are reported in addition to pass/fail, so that employers can assess where the applicant falls in the distribution of accounting competence. You may have learned accounting at an anonymous online university, but your CPA score gives you a way to show employers you’re a stronger applicant than someone from an Ivy League school.

Certification tests need not undermine the incentives to get a traditional liberal-arts education. If professional and graduate schools want students who have acquired one, all they need do is require certification scores in the appropriate disciplines. Students facing such requirements are likely to get a much better liberal education than even our most elite schools require now.

Certification tests will not get rid of the problems associated with differences in intellectual ability: People with high intellectual ability will still have an edge. Graduates of prestigious colleges will still, on average, have higher certification scores than people who have taken online courses — just because prestigious colleges attract intellectually talented applicants.

But that’s irrelevant to the larger issue. Under a certification system, four years is not required, residence is not required, expensive tuitions are not required, and a degree is not required. Equal educational opportunity means, among other things, creating a society in which it’s what you know that makes the difference. Substituting certifications for degrees would be a big step in that direction.

I’m not sure I like this idea, mostly because college was a lot of fun. But I guess that’s kinda the point.

** With this post I’m creating a new blog category: “status quo bias.” In my opinion, we are averse to new and different ideas because they are new and different — they challenge the status quo. That doesn’t mean they’re bad, though. If nothing else, it’s fun to think about “radical” ideas.**

Beijing National Stadium

Here’s a neat satellite image of the Beijing National Stadium. Click on the picture for the link to the NASA website with details about the image.

McCain endorses Will’s Healthcare Plan

Back in December I wrote down some details of my free market healthcare reform plan. It appears that McCain has endorsed aspects of my plan. John Goodman (advisor to McCain) in today’s WSJ:

Under the McCain plan, no longer would employers be able to buy insurance with pretax dollars. These payments would be taxable to the employee, just like wages. However, every individual would get a $2,500 credit (and every family would get $5,000) to be applied dollar-for-dollar against taxes owed.

The McCain plan does not raise taxes, nor does it lower them. Instead, it takes the existing system of tax subsidies and treats everyone alike, regardless of income or job status. All health insurance would be sold on a level playing field under the tax law, regardless of how it is purchased.

The impact would be enormous. For the first time, low- and moderate-income families would get just as much tax relief as the very rich when they purchase health insurance. People who must purchase their own insurance would get just as much tax relief as those who obtain it through an employer. Whereas Mr. Obama would continue the current practice of giving the vast bulk of federal help to the rich (through tax subsidies) and the poor (through spending programs), the McCain tax credit would give the most new tax relief to the middle class.

The McCain plan would also encourage all Americans to control costs. The tax credit would subsidize the core insurance that everyone should have. It would not subsidize bells and whistles (marriage counseling, acupuncture, etc.) as the current system does. Since employees and their employers will be paying for additional coverage with aftertax dollars, everyone will have an incentive to compare the value of extra health benefits to the value of other things money can buy. When they eliminate health-care waste, they would get to keep every dollar they save.

The McCain tax credit would be refundable. People could apply $2,500 per person or $5,000 per family to the purchase of health insurance, even if they do not owe any income taxes. Families would not have to wait until April 15 the following year to get their credit. They could obtain the subsidy at the time the insurance is purchased.

The credit would also be transferable. Insurance companies and other intermediaries would be able to help families obtain their credit and apply it directly to health-insurance premiums.

The McCain health plan would allow people to buy insurance across state lines — thus creating a competitive, national market for health insurance. It would provide additional federal money for people who have been denied coverage because of a pre-existing condition, making it easier for people who have lost their insurance to obtain new coverage. It would also encourage Medicare to become a smarter, more efficient buyer of care.

The McCain plan will not solve all our health-care problems. But it has a far better chance of positively reforming the system than any other plan that has been proposed in this campaign season.

The Obama Tax Hike

Larry Boskin in today’s WSJ:

States Are in Trouble

From Today’s WSJ: States Slammed by Tax Shortfalls

The stumbling U.S. economy is forcing states to slash spending and cut jobs in order to close a projected $40 billion shortfall in the current fiscal year.

…Unlike the federal government, most states are required to balance their budgets. Most have so far resisted tax increases, instead opting for raising prices on things like tolls and college tuition, and cutting back on services like education and health care. Some chose one-time measures such as tapping rainy-day funds that were built up in flusher times.

The housing slump, now well into its second year, is the primary culprit. The decline in home sales has cut into real-estate transfer taxes. Construction spending and employment has declined. Fewer home sales have resulted in lower sales of home furnishings and washing machines, eating into sales taxes.

Of course, for many states, today’s budget woes stem at least partly from expanding their services during good times and not planning enough for the inevitable downturn.

[rant]

Ahh! The last sentence is only partly true: I would say that at least 95% of the state’ budget woes stem from expanding government too much in the good times of the past few years. This is cold and cynical but here’s my analysis of the current situation:

Many states (New York, New Jersey, California, Maryland, Massachussets all come to mind) have horribly irresponsible governments. These states are run by liberals who use any chance they get to increase the size and scope of the state government. They got their chance too: all of these states participated in the housing bubble. This created a temporary surge in tax revenues. These states increased services and made promises with the expectation that the good times would last forever. Anybody with half a brain (much more than anyone in the New York State Senate has) could have seen that this was a bubble and was not going to end well.

Now that the shit is hitting the fan and the bubble is busting, legislatures in these states are acting like their problems were inevitable. The irony is, if these states raise taxes and fees, they will further encourage the people who live there to get out and move to more responsible states where taxes are lower.

The tendancy of democratically elected governments to overspend (and over-promise) in the good times is a key reason why inflation/debasing of the currency is a virtual guarantee.

Q2 ’08 Portfolio Review

The Most Sensitive Political Issue of the Beijing Olympics: Pollution

The notoriously toxic Beijing air is already a major story of the 2008 Olympics. Despite drastic measures already underway, the government is unlikely to be able to clean the air enough to satisfy athletes and tourists.

The air pollution issue is going to focus the world’s attention on the unbelievable environmental degradation happening in China. Of course, this is the last thing Chinese officials want. Notable excerpt from WSJ article yesterday: Olympic Athletes Wearing Masks Could Cause China to Lose Face.

U.S. triathlete Jarrod Shoemaker has a decision to make at the opening ceremony of the Olympics next month in Beijing: Should he strap on a mask?

Though the practice is less common today, Chinese for years have worn masks to protect their lungs from the country’s heavy dust and pollution. But foreigners wearing them during the Games this summer — particularly at the opening ceremony broadcast to billions of television viewers around the world? That’s a different matter.

Having foreigners cover their faces at the Olympics could mean a loss of face for the Chinese. “When you’re walking around with a mask on, you’re basically saying, ‘You guys stink,’ ” says Scott Schnitzspahn, performance director of the U.S. triathlon team.

Will Agrees with Al Gore

I have never been Al Gore’s biggest fan, but on this we agree:

In a speech not far from the U.S. Capitol, Mr. Gore called for moving the U.S. toward “zero-carbon” electricity over a decade, and reiterated his support for a carbon tax accompanied by a “sharp reduction” in payroll taxes.

MB Changes His Mind on Gold

Back in September 2007, Miserly Bastard wrote a post — My Thoughts on Gold — in which he outlined reasons why he thought gold was a bad investment. I responded here with my thoughts on why gold is a good investment.

Now, MB has changed his position and is buying physical gold. Notable excerpt:

A lot of people advocating the purchase of physical gold are anti-federal government, to one degree or another. Maybe not full-on Timothy McVeigh types, but at least suspicious of most federal government actions. I count myself in the latter camp. This is another reason I like physical gold to synthetic gold–you can touch physical gold, and so long as the government doesnt know where you keep it, it’s yours.