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Alpha Theory Blog - News and Insights

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2 posts from June 2009

June 14, 2009

Wall Street Journal Op-Eds: My Two Recent Articles on Taxes and Inflation

This is a special guest post by Dr. Arthur Laffer, Economic Adviser to President Ronald Reagan.

Art Laffer


Get Ready for Inflation, and Higher Interest Rates | Wall Street Journal | June 11th, 2009

The percentage increase in the monetary base is the largest increase in the past 50 years by a factor of 10 (see chart nearby). It is so far outside the realm of our prior experiential base that historical comparisons are rendered difficult if not meaningless. The currency-in-circulation component of the monetary base -- which prior to the expansion had comprised 95% of the monetary base -- has risen by a little less than 10%, while bank reserves have increased almost 20-fold. Now the currency-in-circulation component of the monetary base is a smidgen less than 50% of the monetary base. Yikes!

The expansion of money, given an increase in the monetary base, is inevitable. Ultimately, the consequence of this expansion of money is higher inflation and interest rates. In shorter time frames, the expansion of money can also result in higher stock prices, a weaker currency, and increases in commodity prices such as gold and oil, as we are currently seeing.

This WSJ Op-Ed is a follow up to my previous report, "1970s Redux, Inflation, Back from the Dead."


Soak the Rich, Lose the Rich | Wall Street Journal | May 18th, 2009

With states facing nearly $100 billion in combined budget deficits this year, we're seeing more governors than ever proposing a "simple" solution to balancing the budget: Soak the rich.  However, we have found that from 1998 to 2007, more than 1,100 people every day including Sundays and holidays moved from the nine highest income-tax states such as California, New Jersey, New York and Ohio and relocated mostly to the nine tax-haven states with no income tax, including Florida, Nevada, New Hampshire and Texas. We also found that over these same years the no-income tax states created 89% more jobs and had 32% faster personal income growth than their high-tax counterparts.

This WSJ Op-Ed is a follow up to my previous blog post "Rich State, Poor State."  The report itself can be found here (2009 State Competitiveness Report).

June 10, 2009

You Should Know about "More than You Know"

One of the best investing books I've ever read is "More than You Know" by Michael Mauboussin.  The great thing about Mauboussin is his focus on what he calls Consilient Investing.  He takes the best concepts from varying fields and applies them to investing, like what baseball managers can teach investors about improving our odds of winning or how biological patterns can teach us about expectations of human nature.  The concept of Consilience is how I came up with the idea for Alpha Theory after reading a book on Poker Theory.  Many times the best way to improve your own process is not to take the best practices of those in your field but to learn the best practices of all fields and see if they can spark an idea that makes you rethink the dogma that can ossify even the smartest industries.

Alpha Theory embodies many of the facets of "More than You Know" including a foundation based on expected return, constructing a portfolio based on idea quality, risk management that is not based on volatility, and an understanding that controlling emotions is critical to success.

Here is the opening of Chapter 1 of "More than You Know."

Paul DePodesta, a former baseball executive and one of the protagonists in Michael Lewis’s Moneyball, tells about playing blackjack in Las Vegas when a guy to his right, sitting on a seventeen, asks for a hit. Everyone at the table stops, and even the dealer asks if he is sure. The player nods yes, and the dealer, of course, produces a four. What did the dealer say? “Nice hit.” Yeah, great hit. That’s just the way you want people to bet -- if you work for a casino.

This anecdote draws attention to one of the most fundamental concepts in investing: process versus outcome. In too many cases, investors dwell solely on outcomes without appropriate consideration of process. The focus on results is to some degree understandable. Results -- the bottom line -- are what ultimately matter. And results are typically easier to assess and more objective than evaluating processes.

But investors often make the critical mistake of assuming that good outcomes are the result of a good process and that bad outcomes imply a bad process. In contrast, the best long-term performers in any probabilistic field -- such as investing, sports-team management, and pari-mutuel betting -- all emphasize process over outcome.