The Insolvent Investor

Investing and economics – it isn’t easy.

Barack’s economic advisor is a reason to vote Obama

Posted by Warren on August 18, 2008

Hard not to trust him....

The US economy is rightly the top priority of most Americans in the 2008 presidential election. Without a strong economy it makes it hard for the US to improve its health care system, fix education, and maintain a robust foreign policy that will encourage peace and prosperity in the rest of the world.

Given the above, what is a thoughtful voter to do? This is beyond the scope of my little blog, but if I were voting strictly on the economy I would vote for Barack Obama. Why Barack? One man – his senior economic advisor Austan Goolsbee. Mr. Goolsbee is an impressive young economist who shares the same practical economic policy principles as centrist economic luminaries such as Greg Mankiw, but Goolsbee also possesses the charisma of a television personality. If you missed it, he recently made an appearance on Charlie Rose.

While Barack Obama spent a lot of time during the primaries criticizing NAFTA and talking about raising taxes, he is no left wing tax and spend liberal. To be sure, Barack often sounds like a populist-pandering to the audience to which he is speaking-but his appointment of and friendship with Goolsbee tells me otherwise. A vote for Barack Obama is a vote for a stronger US economy.

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Our Central Bankers are Failing Us

Posted by Warren on August 9, 2008

Beranke is about to let the monsters out

Beranke about to let the monsters out

A good article in today’s Economist describes how central bankers in the US and Europe may be risking their credibility as effective inflation fighters – arguably their most important function. Asset bubbles, high commodity prices, and a low savings rate have led the US, Europe and Japan into the current difficult economic situation. While Central Bankers have done well to squelch financial crisis so far by propping up banks (Northern Rock), mortgage lenders (Freddie, Fannie), and investment banks (Bear Sterns), those actions will only serve to incent managers to continue to take more risks, and in conjunction with the current low interest-rate environment, will do little to curb inflation brought on by high commodity prices. We’re in for some bumpy economic times for a long time to come.

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Fiscal stimulus doesn’t work

Posted by Warren on August 7, 2008

Our tax dollars

Our tax dollars

Harvard economist Marty Feldstein wrote a great piece in the

Wall Street Journal today about why fiscal stimulus (including the last rebate and Obama’s plan) does not work.

Marty, as usual, is right on the money. Fiscal stimulus suffers from a significant time lag to its impact on the economy (if there is one), stimulus checks are often saved not spent, and stimulus can be inflationary. And so the doom and gloom for the US economy continues….

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Small cap biotech stocks are risky but undervalued

Posted by Warren on August 5, 2008

Biotech companies are not immune to the business cycle. Although many make life saving drugs that are consumed regardless of economic conditions, many others make products that are discretionary (eg, Botox). Also, many smaller biotech companies rely on larger pharmaceutical companies to license their drugs and even purchase their entire companies. Big Pharma’s ability to do this often can be compromised if their stock prices are depressed (as happens to almost all equities in economic slowdowns).

Despite this, many small biotech companies could be seen as underpriced because many investment analysts do not understand them and are risk adverse.

One such example of a company is Infinity Pharmaceuticals. I own shares in this company because I think it is underpriced relative to the expected value of its drug pipeline. Moreover, it is an early stage biotech company so very few analysts cover the stock and very future institutional investors are holders. I anticipate within the next 2 years a large pharmaceutical company will offer to buy them at several times their current value. However, there is also a greater than 50% chance one or more of their drugs will fail and the stock will become worth a faction of its current market capitalization. I recently a post on the company on SiteJabber.

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Markets will remain irrational longer than you can remain solvent

Posted by Warren on August 4, 2008

He didnt listen to Kaynes

He didn't listen to Kaynes

Or so said economist John Maynard Keynes. The US equity markets of today, one could argue, are overpriced. While PE ratios are not high by historical standards, US corporate earnings are poised to fall. The American consumer who has driven the global economic expansion of the last 15 years is out of gas. Housing prices will continue to fall and remain low for years to come. The asset to debt ratio of Americans is at its worst since the before the depression.

Where amongst all this gloom is the silver lining for investors? I don’t think there is one.

With so much liquidity sloshing around, undervalued assets are not to be found. The emerging markets of India, China, Latin America, and Eastern Europe are all over-bought (and likely more precarious than is conventionally believed). Commodities are overpriced. Gold is expensive. So unless you’re willing to try to catch a falling knife and bet against one of these asset classes, a smart investor should probably be almost completely in a mixed basket of currencies. This may not produce the 20% annual returns of the late 90s, but it will keep your portfolio well above the market return for the years to come. Live to fight another day.

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