Category Archives: Economics & Politics

Currency Wars

Posted on March 17, 2013 | 6 comments

images

And when the money failed in the land of Egypt, and in the land of Canaan, all the Egyptians came unto Joseph, and said, Give us bread: for why should we die in they presence? For the money faileth.” –Genesis 47:15 King James Version

We’re in the midst of an international currency war.” Guido Mantega, Finance Minister of Brazil, Sept. 27, 2010

I don’t like the expression….currency war.” Dominque Strauss-Kahn, Managing Director, IMF, November 18, 2010

Before you sell your stocks, buy gold, and huddle in the basement with your canned food and ammo cans, none of what you read below is inevitable. I post this to make you aware of what is going on and to encourage you to learn about money and credit. Turn off your TV and read.  We may be entering the end of one monetary regime and the beginning of another, though the process may take several years.

The Theory of Money and Credit_Mises plus the STUDY GUIDE to_Money and Credit,   Course Outline by Robert Murphy  and   Mises on Money_Vol_3 by Gary North  and  2012 1Q Mises on Money and Banking Lecture 1 (If enough readers are interested I can put up a folder with audio lectures and notes of each chapter of Mises’ monumental work, The Theory of Money and Credit).  Yes, the book will take careful, multiple readings to fully grasp, but you will have a greater understanding of money and credit than 99.99999% of anyone on Wall Street or Washington, then you can place the world around you in context.

Note that the period from 1971, when President Nixon severed the last anchor to gold, to today is an unusual period in monetary history. Compare these 43 years to the thousands of years where money had some linkage to an object(s) of intrinsic value like gold, copper, or silver. Listen to Nixon’s excuses for his actions–blame the “international speculators” instead of his government’s wildly inflationary policies.

The Book, Currency Wars, The Making of the Next Global Crisis is one that I recommend. See more: http://www.currencywarsbook.com/

The cause of currency wars: http://www.peakprosperity.com/blog/james-rickards-paper-gold-or-chaos/71504

A simulated currency war

Not to give away the conclusion, but if we linked the dollar to gold then this might happen: Gold Fair Value

An explanation here:  The Gold Money Index and gold

Our Current Situation (March 2013) James Rickards:

rickards-02242013 and more scenarios: http://youtu.be/4gx4osDMfGw

What does this have to do with today? Warning bells are ringing: Cypriot_Bailout_Sends_Shivers_Throughout_the_Euro_Zone. On the one hand, people should be aware of how banks are inherently bankrupt under today’s current fractional reserve banking system and loss of their savings would teach a lesson. However, to simply change the rules of the game with a sudden theft by bureaucrats devastates savers who may have had nothing to do with the crisis and are the ones whose savings are crucial for the economy. If you think U.S. is different from Cyprus, it’s not. $400B per year goes from depositors to banks via the Fed zero rate policy. See how the Fed devastates poor savers and those on fixed incomes (an important read): Senate-Testimony-Hearing-Rickards-03-28-12

Wake up! SYDNEY (MarketWatch) — Asia stocks reacted badly on Monday March 18th to details of a bailout of Cyprus over the weekend — with U.S. stock-index futures and the euro also sharply lower — as investors fretted about the potential implications of a decision to levy private bank deposits.

The Euro Has Brought Central Planning and Destruction

The Euro has succeeded in serving as a vehicle for centralization in Europe and for the French government’s goal of establishing a European Empire under its control—curbing the influence of the German state. Monetary policy was the political means toward political union. Proponents of a socialist Europe saw the Euro as their trump against the defense of a classical liberal Europe that had been expanding in power and influence ever since the Berlin Wall came down. The single currency was seen as a step toward political integration and centralization. The logic of interventions propelled the Euro system toward a political unification under a central state in Brussels. As national states are abolished, the market place of Europe becomes a new Soviet Union.

Read: The Tragedy of the Euro

A Way Out?

Murray Rothbard, the great American Austrian monetary historian and economist suggested: 100_percent Gold Back Dollar Rothbard

The problem of moving to a gold-backed dollar: http://mises.org/daily/5492

Ben Graham knew no country engaged in a currency war ever benefited. His solution, a dollar backed by a basket of commodities:

http://www.bloomberg.com/news/2013-02-28/benjamin-graham-s-clever-idea-for-averting-currency-wars.html

You have about six months of reading if you spend 40 minutes each day tackling the various subjects.  Good luck!

—-

PS: The ext post I will answer readers’ questions and post a valuation study for beginners.

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Claim Your Prize, Marks on the Equity Risk Premium

Posted on March 14, 2013 | 1 comment

Great Fence

The Thai Stock Market (ETF) on fire up 500% in four years (moving to a mania?)

Thailand

For those who worked on our moral dilemma (See http://wp.me/p2OaYY-1Lr) please claim your prize. https://www.yousendit.com/download/UVJpZEU4R3NCTWtPd3NUQw

I hope the prize encourages you to study other asset classes and markets outside the U.S. even if you never invest outside America.  At least you will be aware of global forces and opportunities/threats. If you hear the world economy is becoming stronger, look at the baltic freight index and copper futures instead.

Howard Marks on the Equity Risk Premium

Many of the important things about investing are counterintuitive. Low-quality assets can be safer than high-quality assets. Things get riskier as they become more highly respected (and thus appreciate). There can be more risk in thinking you know something than in accepting that you don‟t. This counter-intuitiveness is a favorite theme of mine.

…To me, the answer is simple: the better returns have been, the less likely they are – all other things being equal – to be good in the future. Generally speaking, I view an asset as having a certain quantum of return potential over its lifetime. The foundation for its return comes from its ability to produce cash flow. To that base number we should add further return potential if the asset is undervalued and thus can be expected to appreciate to fair value, and we should reduce our view of its return potential if it is overvalued and thus can be expected to decline to fair value.

So – again all other things being equal – when the yearly return on an asset exceeds the rate at which it produces cash flow (or at which the cash flow grows), the excess of the appreciation over that associated with its cash flow should be viewed as either reducing the amount of its undervaluation (and thus reducing the expectable appreciation) or increasing its overvaluation (and thus increasing the price decline which is likely). The simplest example is a 5% bond. Let‟s say a 5% bond at a given price below par has a 7% expected return (or yield to maturity) over its remaining life. If the bond returns 15% in the next twelve months, the expected return over its then-remaining life will be less than 7%. An above-trend year has borrowed from the remaining potential. The math is simplest with bonds (as always), but the principle is the same if you own stocks, companies or income-producing real estate.

…But the study of market history only makes us better investors if it teaches us how to assess conditions as they are, rather than in retrospect.

Marks on Equity Risk Premium March 2013

Doug Casey on Not Hiring MBAs

http://www.kitco.com/news/video/show/on-the-spot/55/2012-10-25/There-Will-Be-Panic-Into-Gold-Casey-Research   (see 4 minute 30 second mark)

Interviewer: Do they need a good degree to work at your shop? (www.caseyresearch.com)?

Doug Casey, “We don’t care if someone has an MBA or college. We don’t care whether they went to college. We ask, “Do they have good character, intelligence, diligence, are they hard working and do they want to improve themselves. I don’t see how a college degree has anything to do with that, especially what they are teaching today—gender studies, etc. If someone comes to work for us today with an MBA, we look at them and say, What’s going on in your head that you allocated $100,000 and two years of your life to get more theory instead of doing in the real world.

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The Banana Dow

Posted on March 14, 2013 | 3 comments

DOW

Yeah, another RECORD high in the Dow. Can you hear the cheers? But what can the Dow buy you in Bananas vs. the past? What is the real Dow in Bananas1

bananas-vs-dow

Based on the wholesale price of bananas, the Dow currently buys you a whopping 15.35 tons of the tropical fruit. But this is exactly the same amount of bananas the Dow would buy back in February 2008, when the Dow was just 12,266. And it’s a massive 60% drop from June 1999 when the Dow bought 38.51 tons of bananas.  While investors are cheering the new nominal high in the Dow or S&P 500, they fail to grasp what is happening to their purchasing power. Buffett always said THE goal of an investor is to maintain his or her purchasing power. At the end of your investing period will the dollars obtained after selling your investment bring you the same amount of “bananas” as your dollars would have obtained at the beginning of your investment period.

Bear Market Dow in Gasoline

gasoline-vs-dow

Read more: http://www.sovereignman.com/finance/reality-check-the-dow-jones-industrial-average-vs-bananas-11112/

All investors should understand the effects of inflation on their equity investments. Read, memorize, and sleep with the following:

Buffett & Inflation Highlighted and Buffett inflation file and for beginners: Buffett Inflation depreciation and capex

Buffett Lecturing on Inflation

Don’t believe the lies:

shadow-stats-alternative-inflation-data-as-of-nov-15-2012-source-shadowstatscom

CPI Year-to-Year Growth

The CPI-U (consumer price index) is the broadest measure of consumer price inflation for goods and services published by the U.S. Government’s Bureau of Labor Statistics (BLS).

While the headline number usually is the seasonally-adjusted month-to-month change, the formal CPI is reported on a not-seasonally-adjusted basis, with annual inflation measured in terms of year-to-year percent change in the price index.

The chart below shows the Shadow Government Stats -Alternate CPI estimate. It figures inflation based on our own government’s official methodology for computing the CPI-U in the years through 1980.

Under the old rules US inflation has been in the double-digits for much of the preceding five years. The ‘new’ BLS numbers want you to believe price increases since 2008 have been quite mild.

The Bureau of Labor Statistics also uses a technique called ‘substitution’ to hold down their reported inflation figures. If an item in their index goes up in price they can assume consumer would simply trade down to something cheaper instead.

If your favorite rib-eye steak went from $7.99 to $12.99 per pound you’d simply eat hamburger instead. Have those organic bananas gotten too expensive. Try prunes. Need a replacement for your Lexus? Buy a Kia instead. Presto, there’s no inflation evident in any of those situations according to the BLS.

All these changes in the way CPI is calculated have been duly disclosed to the public. That doesn’t make them any less dishonest when viewed the way most people gauge changes in their real cost of living.  See http://www.beatingbuffett.com/?tag=inflation

http://www.beatingbuffett.com/?p=4436   Individual investors making poor decisions.

http://marketshadows.com/2012/12/31/covered-calls-the-hidden-risk-for-2013-and-beyond/ The danger of selling covered calls now.

More discussion about Buffett and inflation here: http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/buffett-on-inflation-and-stocks-%28part-1%29/40/

You’re warned! Now plan.

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What’s Happening and What’s Gonna Happen

Posted on March 6, 2013 | Leave a comment

 

Dow 50

Happy Days, Stock Trader my stocks are going up. Is it because of my astute valuation discipline? Perhaps this (Money Supply Growth)  might be influencing conditions:fredgraph (19)

Last week, Chairman Bernanke clearly stated his position: “In light of the moderate pace of the recovery and the continued high level of economic slack, dialing back accommodation with the goal of deterring excessive risk taking in some areas poses its own risks to growth, price stability, and ultimately, financial stability.”

So Bernanke is saying, let it rain: Helicopter-ben-bernanke-11

How will this end? Last week in front of Congress Fed Chairman Bernanke spoke of the exit strategy once again, “We haven’t done a new review of the exit strategy yet.”

Well, we know how his EXIT STRATEGY will end:helicopter-crash

See more: http://www.economicpolicyjournal.com/2013/03/bernanke-money-printing-disease-about.html

By the way, WHO benefits? http://mises.org/daily/6376/Who-Benefits-From-the-Fed  No surprises here–the banks and the government. Guess who pays?

How do we know that?

Inflation Expectations

While important, however, the expectations component of the demand for money is speculative and reactive rather than an independent force. Generally, the public does not change its expectations suddenly or arbitrarily; they are usually based on the record of the immediate past. Generally, too, expectations are sluggish in revising themselves to adapt to new conditions; expectations, in short, tend to be conservative and dependent on the record of the recent past.

In Phase I of inflation, the government pumps a great deal of new money into the system, (Read pages 66 to 74 of this book, mystery of banking) so that Money supply increases sharply.  Ordinarily, prices would have risen greatly but deflationary expectations by the public have intervened and have increased the demand for money, so that prices will rise much less substantially.

Unfortunately, the relatively small price rise often acts as heady wine to government. Suddenly, the government officials see a new Santa Claus, a cornucopia, a magic elixir. They can  increase the money supply to a fare-thee-well, finance their deficits and subsidize favored political groups with cheap credit, and prices will rise only by a little bit! (Conditions as of today, March 5, 2013).

It is human nature that when you see something work well, you do more of it. If, in its ceaseless quest for revenue, government sees a seemingly harmless method of raising funds without causing much inflation, it will grab on to it. It will continue to pump new money into the system, and, given a high or increasing demand for money, prices, at first, might rise by only a little. But let the process continue for a length of time, and the public’s response will gradually, but inevitably, change.

Slowly, but surely, the public began to realize: “We have been waiting for a return to the good old days and a fall of prices, but prices have been steadily increasing. So it looks as if there will be no return to the good old days. Prices will not fall; in fact, they will probably keep going up.” As this psychology takes hold, the public’s thinking in Phase I changes into that of Phase II: “Prices inflation expectations will reverse from deflationary to inflationary.

The answer will differ from one country to another, and from one epoch to another, and will depend on many subtle cultural factors, such as trust in government, speed of communication, and many others. In Germany, this transition took four wartime years and one or two postwar years. In the United States, after World War II, it took about two decades for the message to slowly seep in that inflation was going to be a permanent fact of the American way of life.

When expectations tip decisively over from deflationary, or steady, to inflationary, the economy enters a danger zone. The crucial question is how the government and its monetary authorities are going to react to the new situation. When prices are going up faster than the money supply, the people begin to experience a severe shortage of money, for they now face a shortage of cash balances relative to the much higher price levels.

See Case for Gold Part 2

Phase 3 of inflationary expectations leads to a flight from fiat currency (Let’s hope this does not happen) Billionaires

which often leads here: HitlerWithWhip2

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Two Value Investors with an “Austrian” Perspective; Florida Land Booms/Busts

Posted on February 18, 2013 | 4 comments

GDXJ

Junior gold mining stocks (GDXJ) vs. the physical gold price (PHYS)

The new global monetary standard, unlimited quantitative easing–Fred Hickey

A thirty minute interview worth hearing. Pay attention to what these value investors say about Austrian (“common-sense”) economics.

http://classicvalueinvestors.com/i/2013/02/mental-insanity-interview-with-bill-fleckenstein/

The Great Florida Land Boom

I love the old pictures and advertisements to take me back to prior booms/busts, but gazing at historical facts won’t help you–other than make you aware that the world can change drastically and suddenly–because you need a proper theory of the trade cycle to understand causality and sequence of events. This might help:Reformulation of ABCT_Salerno

Go back in time and see how the 1920s boom relates to more recent real estate speculation in Florida.

get-attachment.aspx

 

 

 

 

 

 

A short video of Florida Real Estate MALINVESTMENT:

 

 

 

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Hell Ship

Posted on February 15, 2013 | 1 comment

cuba-map-400x286HELLSHIP_20130213_213636-400x181

They’re all stuck in the Caribbean, adrift.   No air-conditioning.  Power blackouts.  Short on running water.  Backed-up toilets.  Rotting and dwindling food supplies.  Abysmal medical care.  No control over circumstances, or over the stench and heat.

Can’t flee.  Complaining is useless.  And the media doesn’t care much about their plight.

Yeah.  Welcome to CUBA, suckers.  You thought you were on a Carnival cruise ship, but really ended up taking the only real people-to-people Cuban excursion available, even without docking there, or without having to deal with noisy Cubans.  You get to live like 99% of the Cuban population.  Congratulations.  It’s the experience of a lifetime, but you only have a few days till you are rescued.

Sorry about your plight.  Honestly.  But you should expect a big fat refund.   You are still protected by the free enterprise system and capitalist ethics.  Once you get off the ship, please think about 11 million Cubans who have been living your Carnival nightmare every day for 54 years without hope of rescue.  And without any hope of ever being reimbursed.

And you don’t have to put up with news reports that praise conditions on your ship, or with academics who analyze and laud it as one of the most successful ventures in human history.   And….  no t-shirts imprinted with the image of your co-captain will ever be sold all around the world. —Carlos Eire

My Travels with Cubans: A Glimpse of Cuba

Waiting for Fidel to Die

CUBA CEF

This Closed-End Fund (CUBA) represents companies that might benefit with a Cuban trade opening.  Today the CEF trades at a premium, so avoid as an investment.

But why the spike in 2007/2008 with the CEF trading at over a 25% premium to the underlying stocks–arbs where were you?  I guess people took joy in this :

Socialism Benefits dieters–empty shelves in Venezuela.

Empty Shelves

 

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Shorting Socialism

Posted on February 7, 2013 | 3 comments

Shorting Socialism

Petrobras: Bloated with debt and run by the Brazilian Government–a short-seller’s wet dream. I use this as a hedge against investments in US oil and gas companies.  But, the short on its own, PBR is a good proxy for the failures of “socialism.” 

Petrobras

Oh, look at how the US Govt. runs its monopoly: Post_Service_Revenue_Volume_USPS-112879

Meanwhile Jim Rogers shorts Treasury Debt http://www.economicpolicyjournal.com/2013/02/jim-rogers-treasury-securities-headed.html

and from www.economicpolicyjournal.com

THE FED MONEY PUMPING WILL CONTINUE FOR AT LEAST A HALF YEAR, MAYBE MUCH LONGER

Chicago Fed President Charles Evans says Fed policy will remain accommodative until the economy improves. His definition of “improvement” is not clear/Evans said the $85 billion per month of asset purchases is needed to get the run started. “We’re loading up with carbs, energy bars. We’re going to do that until we’re clear that the labor market outlook has improved. It might be a half a year, it might be a whole year, could be longer,” he said.

The Fed policy of quantitative easing is designed to rebuild the asset inflation edifice that collapsed in 2008. (Mal-investment here we come!)German banker and economist Kurt Richebacher provided some of the earliest warnings of the dangers. In his April 2005 newsletter, he wrote that “there is always one and the same cause of asset inflation, and that is credit creation in excess of current saving leading to demand growth in excess of output.

….The rising Dow is good news for savers, who have been forced into equities to try to find a decent return on investment. Thanks to Fed policy, “safe” 10-year Treasury bond yields near-zero or negative return, depending on whether you measure price inflation at the official rate or at higher private companies.

….But an economy built on an illusion is hardly a sound structure. We may be doomed to learn that lesson once again before long.  Wall Street Journal, Feb. 8, 2013

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A Reader’s Book Suggestion; Opposing Views of the Manipulated Boom; Lonely Bear

Posted on February 4, 2013 | Leave a comment

Ice

Everyone holds his fortune in his own hands, like a sculptor the raw material he will fashion into a figure. But it’s the same with that type of artistic activity as with all others: We are merely born with the capability to do it. The skill to mold the material into what we want must be learned and attentively cultivated–Johann Wolfgang von Goethe

A Lonely “Bear” on the Market:

As a side note, the Federal Reserve presently has a balance  sheet of about $3 trillion, on total capital of about $54.7 billion, meaning  that the Fed is leveraged about 55-to-1. At an average maturity of over  10-years, the duration of the Fed’s portfolio is about 8 years, meaning that a  100 basis point move in interest rates impacts the value of the Fed’s holdings  by about 8% (about $240 billion). Since July, interest rates have increased by  about 60 basis points, which has undoubtedly wiped out the Fed’s capital,  making it technically insolvent (fortunately for Ben Bernanke, the Fed doesn’t  mark its capital to market). As a practical matter, the only effect is that the  interest that the public pays on Treasury debt cannot actually be remitted by  the Fed back to the Treasury as usual, but must instead be retained by the Fed  in order to recapitalize itself due to losses on the bonds it holds. The losses  therefore effectively represent an unlegislated fiscal expenditure. Moreover,  assuming an average interest rate of about 2.5% on Fed holdings, each further  increase of 30 basis points in interest rates would wipe out a full year of  additional interest payments. Needless to say, nobody cares. These observations  aren’t central to our current concerns, but it’s worth understanding how  reckless Fed policy has already become.

On the subject of Fed policy and market behavior, Bill Hester wrote an outstanding research piece this week – Fed Leaves Punchbowl, Takes Away Free Lunch (of International Diversification). It provides good perspective on the link between economic performance and international market returns, also highlights the growing importance of country selection in international investing. I’ve included a second link to that article at the end of the Fund Notes section.

http://hussmanfunds.com/wmc/wmc130204.htm

http://hussmanfunds.com/rsi/intldiversification.htm

A reader makes a book suggestion

http://boards.fool.com/quotthe-emotionally-intelligent-investorquot-30521293.aspx

A new title that arrived yesterday via Amazon (AMZN) that you’ll also enjoy is Ravee Mehta’s The Emotionally Intelligent Investor. Mehta, the eldest son of immigrant parents, graduated summa cum laude from the University of Pennsylvania with degrees from the Wharton School of Business and also School of Engineering, and later worked for George Soros and Karsch Capital before retiring at a young age to travel the world, teach, and study philosophy at Oxford. Now Mehta manages his own funds and enjoys the freedom of working for himself.

While not having a boss is liberating, I suspect Mehta realizes that he needs a certain amount of structure (as we all do), so he can stay independent and not have to get a job with another financial services firm. In this paperback, whose title is a nod to Ben Graham’s landmark The Intelligent Investor, Mehta tells us what he learned from his search for an investing framework, including the behavioral errors that separate us from our money.

“After writing this book, I have developed daily and weekly routines to understand myself and others better, deal with my particular vulnerabilities, prioritize my to-do list, evaluate investment opportunities, empathize with other market participants, monitor my portfolio, learn from prior decisions, leverage the intuition of others and anticipate danger with individual investments and more overall portfolio’s construction. I also make sure that my investment approach fits with my personality and motivations.

Mehta’s The Emotionally Intelligent Investor, like Train’s The Money Masters, is loaded with useful tips. Despite just 200 pages in length, this is a “big” book.

The companion website: http://theemotionallyintelligentinvestor.com/

Another link: http://www.amazon.com/The-Emotionally-Intelligent-Investor-self-awareness/dp/0615688322/ref=lh_ni_t?ie=UTF8&psc=1

Manipulated Boom: 

James Grant: http://www.economicpolicyjournal.com/2013/02/lauren-lyster-talks-to-james-grant.html

Contrast that video with Krugman calling the artificial boom a “virtuous circle.”

http://www.economicpolicyjournal.com/2013/02/krugman-calls-artificial-boom-virtuous.html

Enroll in a Critical Thinking Course

https://class.coursera.org/criticalthinking-001/auth/welcome?type=logout&visiting=https%3A%2F%2Fclass.coursera.org%2Fcriticalthinking-001%2Fclass%2Findex

FPA Crescent Fund Annual Letter: crescent-2012-q4-1-24-138663BD8AD6C2 . This letter is an excellent read for understanding the current quandary that investors face today. The PM even quotes Von Mises. BRAVO!

 

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Mental Models, The Franchise of Legos (plastic blocks)

Posted on January 21, 2013 | 3 comments

robber

But why should we learn about the world and its history, why bother trying to live in harmony with others? What is the point of all this effort? And does it have to make sense? These questions, and some others of a similar nature, bring us to the third dimension of philosophy, which touches upon the ultimate question of salvation or wisdom. If philosophy is the ‘love’ (philo) of ‘wisdom’ (sophia), it is at this point that it must make way for wisdom, which surpasses all philosophical understanding. To be a sage, by definition, is neither to aspire to wisdom or seek the condition of being a sage, but simply to live wisely, contentedly and as freely as possible, having finally overcome the fears sparked in use by our own finiteness. –Luc Ferry in A Brief History of Thought

Mental Models: http://www.farnamstreetblog.com/mental-models/

Why Legos Are So Expensive — And So Popular? Hint—it is a FRANCHISE!   (I hope readers who have children that play with Legos can add their input–Why did you shell out those big bucks for plastic blocks?)

LEGOS

January 16, 2013

A lot of people wonder how Lego, selling a now un-patented product, can command both massive market share and sell at twice the price of the nearest competitor: Megablocks.

pm-gr-legomega-616Mega blocks are much cheaper than Legos yet Legos dominates in sales.

Rhett Allain, in his WIRED article addressing why lego sets are so expensive, unsatisfyingly concludes “Honestly, I don’t know much about plastic manufacturing – but the LEGO blocks appear to be created from harder plastic. Maybe this would lead them to maintain their size over a long period of time.”

While lego offers a superior product, that doesn’t wholly account for why they sell so well.

Chana Joffe-Walt offers a much better explanation in her NPR Planet Money article: (click on link to hear the radio show on Legos)

Lego did find a successful way to do something Mega Bloks could not copy: It bought the exclusive rights to Star Wars. If you want to build a Death Star out of plastic blocks, Lego is now your only option.

The Star Wars blocks were wildly successful. So Lego kept going — it licensed Indiana Jones, Winnie the Pooh, Toy Story and Harry Potter.

Sales of these products have been huge for Lego. More important, the experience has taught the company that what kids wanted to do with the blocks was tell stories. Lego makes or licenses the stories they want to tell.

Lego isn’t just selling a product, they are selling a story. Still, I doubt that alone fully explains the difference.

I think Warren Buffett offers the best explanation. Talking about the brand power of See’s Candies, he comments:

What we did know was that they had share of mind in California. There was something special. Every person in Ca. has something in mind about See’s Candy and overwhelmingly it was favorable. They had taken a box on Valentine’s Day to some girl and she had kissed him. If she slapped him, we would have no business. As long as she kisses him, that is what we want in their minds. See’s Candy means getting kissed. If we can get that in the minds of people, we can raise prices. I bought it in 1972, and every year I have raised prices on Dec. 26th, the day after Christmas, because we sell a lot on Christmas. In fact, we will make $60 million this year. We will make $2 per pound on 30 million pounds. Same business, same formulas, same everything–$60 million bucks and it still doesn’t take any capital.

… It is a good business. Think about it a little. Most people do not buy boxed chocolate to consume themselves, they buy them as gifts—somebody’s birthday or more likely it is a holiday. Valentine’s Day is the single biggest day of the year. Christmas is the biggest season by far. Women buy for Christmas and they plan ahead and buy over a two or three-week period. Men buy on Valentine’s Day. They are driving home; we run ads on the Radio. Guilt, guilt, guilt—guys are veering off the highway right and left. They won’t dare go home without a box of Chocolates by the time we get through with them on our radio ads. So that Valentine’s Day is the biggest day.

Can you imagine going home on Valentine’s Day—our See’s Candy is now $11 a pound thanks to my brilliance. And let’s say there is candy available at $6 a pound. Do you really want to walk in on Valentine’s Day and hand—she has all these positive images of See’s Candy over the years—and say, “Honey, this year I took the low bid.” And hand her a box of candy. It just isn’t going to work. So in a sense, there is untapped pricing power—it is not price dependent.

The reason Lego is awesome and Megablocks is not has as much to do with what’s in the consumers’ mind as the product on the shelf. It’s the experience you have with Lego that makes it so amazing.

Remember the first time you played with Lego? You want to pass that experience off to someone else. No one wants to show up to a kid’s birthday party and announce to everyone they took the ‘low bid’ on a relatively cheap children’s toy.

Lego is a safe bet and we want to reduce uncertainty.

Read more posts on Farnam Street on:
Association bias • Lego • Warren Buffett

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I went to Toys R Us recently to buy my son a Lego set for Hanukkah. Did you know a small box of Legos costs $60? Sixty bucks for 102 plastic blocks!

In fact, I learned, Lego sets can sell for thousands of dollars. And despite these prices, Lego has about 70 percent of the construction-toy market. Why? Why doesn’t some competitor sell plastic blocks for less? Lego’s patents expired a while ago. How hard could it be to make a cheap knockoff?

Luke, a 9-year-old Lego expert, set me straight.

“They pay attention to so much detail,” he said. “I never saw a Lego piece … that couldn’t go together with another one.”

Lego goes to great lengths to make its pieces really, really well, says David Robertson, who is working on a book about Lego.

Inside every Lego brick, there are three numbers, which identify exactly which mold the brick came from and what position it was in in that mold. That way, if there’s a bad brick somewhere, the company can go back and fix the mold.

For decades this is what kept Lego ahead. It’s actually pretty hard to make millions of plastic blocks that all fit together.

But over the past several years, a competitor has emerged: Mega Bloks. Plastic blocks that look just like Legos, snap onto Legos and are often half the price.

So Lego has tried other ways to stay ahead.

The company tried to argue in court that no other company had the legal right to make stacking blocks that look like Legos.

“That didn’t fly,” Robertson says. “Every single country that Lego tried to make that argument in decided against Lego.”

But Lego did find a successful way to do something Mega Bloks could not copy: It bought the exclusive rights to Star Wars. If you want to build a Death Star out of plastic blocks, Lego is now your only option.

The Star Wars blocks were wildly successful. So Lego kept going — it licensed Indiana Jones, Winnie the Pooh, Toy Story and Harry Potter.

Sales of these products have been huge for Lego. More important, the experience has taught the company that what kids wanted to do with the blocks was tell stories. Lego makes or licenses the stories they want to tell.

And kids know the difference.

“If you were talking to a friend you wouldn’t say, ‘Oh my God, I just got a big set of Mega Bloks,’ ” Luke says. “When you say Legos they would probably be like, ‘Awesome can we go to your house and play?’ ”

Lego made almost $3.5 billion in revenue last year. Mega made a tenth of that.

But Mega Bloks may yet gain on Lego.

Mega now owns the rights to Thomas the Tank Engine, Hello Kitty, and the video game Halo. And, on shelves for the first time ever this week: Mega Bloks Barbies.

PS: I will post shortly on a Reader’s Question: What besides an Index would you recommend for a person who seeks safety and return on his/her capital?

 

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Career Advice; The Fed; Overvaluation and Black Swans

Posted on January 14, 2013 | 2 comments

AGREE

 

If you’re not focusing on becoming so good they can’t ignore you, you’re going to be left behind. This clarity is refreshing. It tells you to stop worrying about what your job offers you, and instead worry about what you’re offering the world. This mindset — which I call the craftsman mindset — allows you to sidestep the anxious questions generated by the passion hypothesis — “Who am I?”, “What do I truly love?” — and instead put your head down and focus on becoming valuable.

Becoming a Craftsman

In a 2007 episode of the Charlie Rose show, Rose was interviewing the actor and comedian Steve Martin about his memoir Born Standing Up. They talked about the realities of Martin’s rise. In the last five minutes of the interview, Rose asks Martin his advice for aspiring performers.

“Nobody ever takes note of [my advice], because it’s not the answer they wanted to hear,” Martin said. “What they want to hear is ‘Here’s how you get an agent, here’s how you write a script,’ . . . but I always say, ‘Be so good they can’t ignore you.’ “

In response to Rose’s trademark ambiguous grunt, Martin defended his advice: “If somebody’s thinking, ‘How can I be really good?’ people are going to come to you.”

This is exactly the philosophy that catapulted Martin into stardom. He was only twenty years old when he decided to innovate his act into something too good to be ignored. “Comedy at the time was all setup and punch line . . . the clichéd nightclub comedian, rat-a-tat-tat,” Martin explained to Rose. He thought it could be something more sophisticated. It took Martin, by his own estimation, ten years for his new act to cohere, but when it did, he became a monster success. It’s clear in his telling that there was no real shortcut to his eventual fame, and the compelling life it generated. “[Eventually] you are so experienced [that] there’s a confidence that comes out,” Martin explained. “I think it’s something the audience smells.”

If you’re not focusing on becoming so good they can’t ignore you, you’re going to be left behind. This clarity is refreshing. It tells you to stop worrying about what your job offers you, and instead worry about what you’re offering the world. This mindset–which I call the craftsman mindset-allows you to sidestep the anxious questions generated by the passion hypothesis—”Who am I?”, “What do I truly love?”—and instead put your head down and focus on becoming valuable.

Martin’s advice, however, offers more than just a strategy for avoiding job uncertainty. The more I studied it, the more convinced I became that it’s a powerful tactic for building a working life that you eventually grow to love. As I’ll explain below, regardless of how you feel about your job right now, adopting the craftsman mindset can be the foundation on which you build a compelling career.

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This is a great article on improving “YOU” follow the links and hear Martin rip on the banjo:

Banjo

Learn from Steve Martin: http://www.mises.org/daily/6247/What-Austrians-Can-Learn-from-Steve-Martin

 

Job Crafting: Job_Crafting-Theory_to_Practice-Aug_08 and Crafting a job

Become a Study Hack (Study Success) http://calnewport.com/blog/

 

Fed Regional Bank President Calls Out the Fed By Joseph Salerno ·

Sunday, January 13th, 2013

In a speech in New Jersey last week, Philadelphia Federal Reserve Bank President Charles Plosser sounded an Austrian note in reportedly calling for the Fed to slow or halt its bond purchases in the near future because their benefits are “pretty meager” and they involve “lots of risks” including distorting the economy.  Plosser also criticized the Fed’s zero interest-rate policy as counterproductive, stating:

Efforts to drive real rates more negative or promises to keep rates low for a long time may have frustrated households’ efforts to rebuild their balance sheets without stimulating aggregate demand or consumption . . . Monetary policy accommodation that lowers interest rates is unlikely to stimulate firms to hire and invest until a significant amount of the uncertainty has been resolved. Firms have the resources to invest and hire, but they are uncertain as to how to put those resources to their highest valued use.

President Plosser is to be applauded for his Austrian insight that rational entrepreneurial skittishness in the face of regime uncertainty–and not a shortage of money or Krugman’s mythical “liquidity trap”– is responsible for the U.S economy’s stagnant recovery.

Black Swans

These articles reconcile Tobin’s Q with Austrian Business Cycle Theory:

Austrians and the Black Swan and Q Ratios and Stock Market Crashes

Let me know if you grasp those two articles.

PS: Now there is a way to place PERMANENT links to the investing videos and book vaults.   I will post those later this week. If someone does NOT think that is a good idea let me know.   Anytime someone wants to view a video lecture, they can go to the links page.

 

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