Nostradoofus

(Contributed by Richard C Hsu)

My brother and I happen to work in the same industry and we recently got nearly identical new jobs. My boss turned out to be really difficult and as I struggled on a daily basis dreading to go to work every day, my brother was doing very well at his, getting lots of praises and even getting a mid-year bonus for excellent performance. And while I knew (intellectually) I was supposed to feel happy for him, I found myself becoming very envious which, in turn, actually made me feel worse about my own situation. I began to think, “why is the fact that his job is going so well affecting my attitude on my job (and life) when it has no impact whatsoever?” That is when I realized that the source of my envy was actually from a lack of empathy and that it is much more difficult to empathize with someone’s fortunes than misfortunes.

The reality is that empathy is far easier to feel when someone is having less fortune than you. When someone else loses a loved one, becomes ill or experiences some other tragedy, you empathize easily because you feel grateful to God for all your blessings – in other words, by putting yourself in their shoes, you realize your own fortune. However, it is much harder to put yourself in their shoes when they become a millionaire, buy a big house or land a high paying job. There is an old saying which says “nothing is as infuriating as seeing your neighbor get rich” but if you can truly be happy for someone else’s fortune, you have achieved the ultimate form of empathy.

Equity investors often feel obligated to remain fully invested, because equities have a much higher average rate of return, at least historically.

But you can think of cash as an option, conferring the right, but not the obligation, to pick up assets cheaply during panics. Unlike other forms of option, this one pays you a premium, and never expires.

This option is only useful if you can tell the difference between a cheap and an expensive equity.

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Ah, youth. How fondly I remember the endless Monopoly games of summer, in which the winner would loan ever greater sums to the loser, thereby averting bankruptcy and continuing the game.

“You landed on Park Place again? What a shame! And me with hotels there. Don’t worry, I’ll loan you the $1,500, and you just keep right on rolling.”

Evidently the scions of our federal government were similarly raised. Lenders going insolvent? No problem, we’ll loan you more, and cheaper, to keep you going. Borrowers feeling strapped? No problem, we’ll simply tear up your mortgage contract and write a new one where you pay less.

Japan tried this in the 1990s, in case you don’t remember.

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Pundits worry the mortgage collapse may push us into Japan-style deflation. That’s one possibility, but there is a more likely one.

Japan headed into its long deflationary spiral with a mostly balanced federal budget, high trade surplus, immense foreign reserves, immense personal savings, low unemployment, and high educational level. This buys an awful lot of flexibility.

The US teeters on a similar precipice, but with no net underneath: gigantic federal budget deficit, large trade deficit, high personal debt, high corporate debt, net debtor status, and uneven educational level.

The stage is thus set more for Argentina than Japan: banking crisis, hyperinflation, currency collapse. I’m not saying it will happen; only that it’s more likely than the Japan scenario.

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