09 August 2011

This Week on Bear Radio: The bear market caused the US debt downgrade, not the other way around.

In this week’s episode we discuss why most commentators have it backwards in blaming the market downturn on the S&P US debt downgrade. The S&P downgrade occurred BECAUSE the general economic mood is becoming more bearish instead of the reverse. The markets would have crashed anyway even if there hadn't been a downgrade.

Stocks had already been losing ground for weeks and there is ample evidence that the global economy has been slowing down. The US debt downgrade is almost irrelevant. The established trend (i.e. long before the downgrade) has been for investors to flee for the perceived safety in bonds of the largest industrial nations (i.e. Germany, US, Japan). Nothing has really changed, the process has just sped up a bit.

In the end, the US dollar is set for massive appreciation as the global economy goes into another tail-spin. Most of the world's private (and public) debt is denominated in dollars which creates unstoppable deflationary forces in an economic contraction as debtors are forced to sell whatever assets they have in order to raise the cash to repay loans. Ironically, all the debt everyone complains about is going to be the primary force that drives up the value of the dollar (and the subsequent crash in all asset prices).

We also talk about the idea that as volatility increases we can expect the unexpected with relationships between asset classes behaving in ways that no one would have imagined. The web of relationships between assets has become so convoluted with modern financial instruments and trading strategies that things will behave in surprising ways when markets are under stress.

Download the sound(right click and save as link) : Download

NOTE: Remember to tune into the Optimistic Bear weekly financial round-up every Tuesday at 9:00pm, Pacific Time. You can also listen to previous shows.

07 August 2011

Ideas are cheap - making them a reality is hard

I think that innovation, in and of itself, is over-rated. There have always been people who “think outside the box” and come up with new and interesting ideas. The crucial issue is making these ideas into reality. This is where the challenge lies.

Just look at big companies whose research groups came up with amazing ideas, but the companies were unable to capitalize on them (leaving it to new upstarts to found new empires).

The same thing with countries. There are some countries with LOTS of brain power, and super-innovative thinkers. Yet these same nations are unable to ever harness the brainpower of its citizens into winning commercial franchises. France, for example, comes to mind. I am constantly amazed at the ideas which that nation’s intellectual’s and engineers come up with, yet they rarely manage to build thriving new businesses on those ideas. Russia is another excellent case in point.

You need a vibrant economic and investment environment for innovation to truly thrive and get beyond the garage. I think it is no coincidence that the number of new innovative product introductions tank during recessions and depressions, when investment decreases. In fact, it is my contention that people who look for innovation as an economic driver have things backwards. Innovation doesn’t drive the economy, the economy drives innovation (or at least the successful commercialization of new ideas). Funding more scientific research won’t do much to help if the broader economy is on the rails.

In short, ideas are cheap and plentiful. It is the wherewithal to turn those ideas into reality that really counts.