HELPING PHYSICIANS ATTAIN FINANCIAL SECURITY
By Robert M. Doroghazi, M.D., F.A.C.C.
Oscar Schafer
Schafer is co-founder of O.S.S. Capital Management and has been a member the Barron’s Roundtable for 19 years.
The macro picture is important; the US has a real problem with debt. Washington doesn’t have much choice but to continue to ease. The QE will go into financial assets, not homes. The market will probably be higher by the end of the year. You should be in stocks, not bonds.
Viacom (VIA): A quality company getting market share back will, get to the mid-40s.
Time Warner (TWX): He is a huge fan; they are much more financially oriented.
MAKO Surgical Corp (MAKO) makes robotic devices for orthopedic surgery. “They are where Intuitive Surgical (ISRG) was 10 years ago. The devices are expensive, but if one hospital has one, the others want it”. A spectacular speculative company.
Health care industry: It is difficult to find a good big drug stock. There will be constant cost pressures. He would look on the short side. Washington has a great influence on pharma and hospitals; don’t invest when you must depend on Washington.
The whole financial industry is in a bear market. He would steer an 18 year old away from a career in finance.
The NYC economy is strong because of the weak dollar (see p 3).
Mohamed El-Erian
El-Erian is CEO and co-CIO of investment giant PIMCO.
(RMD comment: I have met a lot of smart people along the way. Most of the time I told myself I was as smart as they were, or I could out-work them. But there were 4 or 5 people who clearly had so much brain power that no amount of work on my part would be enough to get ahead of them. El-Erian is one of those; he has a blazing intellect.
He is also gracious, gladly autographing my copy of When Worlds Collide: Investment Strategies for the Age of Global Economic Change, McGraw-Hill, 2008).
We spend a lot of time thinking about how we should think, to come up with the difficult questions that are testable. Unless investors have both perseverance and agility, they will not do well in the current environment.
We are re-structuring after the collapse of 2008. You must realize things have changed and think differently about 1) asset allocation, 2) vehicles, and 3) risk management. It will take many years to clean up the over-leverage.
(In 2008) Only the government had an adequate balance sheet to bail people out. Public debt will continue to increase. Unemployment is high, will stay high, is structural, and will change behavior. We have privatized gains and made the losses public. People look to Washington for help. We must develop an escape velocity to break this trend.
What are we looking for the Federal Reserve to deliver?
1) Will the Fed levering-up allow people to de-lever?
2) People will take more risk with interest rates kept low.
3) Banks are not lending. We must push the money out to the economy.
4) More important than what was done, was it fair?
People will rely more on themselves. The preference of people, esp. the wealthy, is to decrease risk and hold cash.
The rest of the world is terrified of QE2. They think we are delaying addressing the problem (I have said this many times, as did other presenters). The money from QE2 will flow out to other countries, and they are trying to prevent these capital inflows. You get nervous when you have to worry about government policy. The market looks for Washington to deliver outcomes—and they don’t. QE1 was supposed to be temporary, yet now we have QE2.
Commodities used to be a diversifier, now they are closely correlated with stocks and currencies. Commodities prices depend upon if everyone devalues their currency.
You must ask yourself: What mistake can I afford to make? Investors are hedging the tail, to hedge the Black Swan (see The Black Swan: The Impact of the Highly Improbable, Tabib, Random House, 2007). The most important point; don’t think about the best case, look at the tails, the worst case. Consider all possible outcomes.
Don’t think about how we look at the Chinese, think about how they view themselves. We think of them as the world’s second largest economy; they think of themselves as being 99th in per-capita income. China may be a global citizen, but their first responsibility is to their citizens.
The new normal:
1) Growth in the US will be 2%.
2) Continued high unemployment.
3) There will be an over-shoot in government regulation.
4) Continued growth in the undeveloped countries.
5) Our central bank can overuse their balance sheet.
6) A possible global currency war.
7) China could markedly re-value their currency (to encourage their middle class to consume).
RMD
In 2000, there was $6T of mortgage debt in the US. In 2009, this number was $15T.
RMD comment: That difference is a shorthand way of estimating what the final real estate losses will be. That is a lot of money, and it will take a long time to digest.
In a recent letter, a NYC subscriber thought I was too bearish. I received these comments.
“Sometimes your letters are too depressing. However, reports are informative”.
AM, NJ
“Living in the east, he may not see all of the negative indicators that those of us in the “fly over zone” see. New Yorkers have not experienced the loss in home values and jobs we see first hand”
JM, Columbia, MO
RMD comment: Just about every presenter at the conference thinks there could be some potential trouble. My message “appears” bearish but is an accurate observation. I must be doing something right; subscriptions are up about 40% this year, and it is very uncommon for a current subscriber not to renew.
Many people have commented they like the books I mention. I have read the following within the last three weeks (I was traveling and had a lot of time).
1) Ugly Americans: The True Story of the Ivy League Cowboys Who Raided the Asian Markets for Millions. Ben Mezrich, Harper, 2004.
RMD comment: There are two ways to make money; honestly and dishonestly. You always have a choice.
2) Colossus: Hoover Dam and the Making of the American Century, Hiltzik (has won a Pulitzer), Free Press, 2010.
RMD comment: Good book. Prior to Roosevelt’s election in 1932, working conditions were often unsafe. Now with OSHA, regulations (and plaintiff’s attorneys) are stifling US industry. Somewhere in between would be best.
3) The Creature from Jekyll Island: A Second Look at the Federal Reserve, 4th ed, Griffith, American Media.
RMD comment: Once a year, I think a book is so important I devote a letter to reviewing it. I should have done that with this book but couldn’t quite pull the trigger. You should read this yourself. Everything he says has current applications: The Fed was conceived to insure the survival of the big banks at the expense of the American public, while small banks are allowed to fail. Profits are privatized and losses are foisted on the public (sound familiar?). Politicians finally had a way that allowed them to print money. As I have mentioned many times, I believe the end of this mess will be marked by A) a return to the gold standard and B) the dissolution of the Federal Reserve.
CNBC Squawk Box, Monday, co-anchor Joe Kernen said “”They’re (Federal Reserve) probably more powerful than Congress or any branch of government”.
RMD comment: I don’t think it is good that non-elected bureaucrats have that kind of power.
4) Dupes: How America’s Adversaries Have Manipulated Progressives for a Century, Kengor, ISI Books, 2010. Mostly devoted to how the Communists (Lenin and Stalin were beasts, the devil incarnate) used western liberals (such as George Bernard Shaw) as their apologists. It has applications today in relation to western apologists for the atrocities committed by, and agenda of, the Islamic fundamentalists.
5) The Grand Design, Hawking and Mlodinow, Bantam, 2010.
RMD comment: save your money.
6) Citizens of London: The Americans Who Stood with Britain in its Darkest, Finest Hour, Olsen, Random House, 2010.
RMD comment: No living American knows what it is like to live through a war on our own soil. At the bottom, the spring of 1941, before the US entered the war, the Germans were within months of starving out the British. And the British had it good compared to many places on Continental Europe or Asia. War is not heroic; it is savage, brutal, and degrades humanity.
7) Outliers: The Story of Success, Gladwell, Little Brown, 2008.
RMD comment: Gladwell wrote Blink, which I commented on in Issue #118 (8/16/10). He notes that a good part of success is opportunity; when and where you were born. Example: a Jew born in New York City in 1932; birth rate was low, thus less competition later, too young to fight in WW II, chance for superior education; the sky was the limit. A Jew born in Warsaw or Berlin in 1932; very lucky to be alive in 1945. I read this book in one day. Consider what it will mean that 1 B Indians and 1.4B Chinese now have real opportunities.
I recently purchased some BU (Bright, Un-circulated) 1921 Morgan Silver dollars. Maybe it’s just me, but holding a silver dollar in your hands will quickly give you an idea of the difference between real money and the fake junk now in circulation.
The specific gravity (weight in comparison to water) of silver is 10.5. The specific gravity of gold is 19.3 (platinum has the highest specific gravity—20.3—of the non-radio-active natural elements). A one ounce US Gold Eagle is basically ½ the size of a silver dollar.
You have to be about 55 years old to remember when silver was in circulation. You have to be almost 90 to remember when gold circulated freely.
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