Words of wisdom

by on February 3, 2010 at 1:44 pm in Economics | Permalink

From Felix Salmon:

…if you decided to short only countries whose foreign exchange reserves reached some large proportion of gross world product, you’d be batting 2 for 2 right now as you started shorting China. First you would have shorted the USA in the 1920s, and then you would have shorted Japan in the 1980s.

You can make a lot of mistakes by analogizing governments to countries, but every now and then it is worth doing.  If I were a major investor, I would get nervous each time I saw a company with massive cash reserves on its balance sheet.  That's often a sign that discipline is headed out the window.

To be sure, it is possible for a government (or company) to make mistakes in the other direction as well.

1 Andrew February 3, 2010 at 2:00 pm

This is a fallacy.

You still had to get the timing right. If you shorted the Nikkei in 1980, you got short at about 8,000. By 1989, the Nikkei had gone to nearly 40,000. This means you would have lost more than 100% of your investment (a lot more actually), which means you go broke. So you had to get the right short and the timing correct. You can have the right thesis and still go broke if your timing stinks.

Same deal with the Dow Jones in the 1920s. Remember that it peaked in 1929 after a huge rise.

2 Michael F. Martin February 3, 2010 at 2:31 pm

The problem with the analogies is that China’s currency is pegged to another country’s.

3 Michael Nielsen February 3, 2010 at 2:55 pm

According to at least one biography of Bill Gates, Microsoft is known for keeping a lot of cash on hand, and has done so since the 1970s. It’s certainly still true today: http://finance.yahoo.com/q/bs?s=MSFT&annual

4 Ed February 3, 2010 at 4:51 pm

I think “short” is being used as a metaphor for “I know this is a bubble which is about to pop”.

Of course actually shorting a bubble is almost impossible because of the timing, and because the prices in the bubble tend to accelerate upward just before it pops. So if you actually tried shorting a bubble you would go broke first, unless you got very lucky. That is why it is usually used as a metaphor.

5 Swedo February 3, 2010 at 6:33 pm

They need reserves to raise armies in the not so distant future.

6 Russell Nelson February 4, 2010 at 1:30 am

FXI but as Andrew points out, shorting is very time-sensitive. You also have to keep buying more and more on margin, otherwise you miss out on your gains. Takes nerves of steel. But … the worst you can do these days is lose your entire investment, given that the brokerage will automatically sell to cover as you go down the tubes.

7 rluser February 4, 2010 at 2:05 am

I don’t think I can get on board with the

If I were a major investor, I would get nervous each time I saw a company with massive cash reserves on its balance sheet. That’s often a sign that discipline is headed out the window.

either. In the late 90’s Microsoft carried a huge cash reserve. At times Berkshire Hathaway has as well. Eventually it should become clear that board and management lack investment opportunities and the value should be returned to the investor. This happened for the former, but the latter has yet to capitulate (though perhaps he is in his own way).

8 eccdogg February 4, 2010 at 9:29 am

I think shorting is not as hard as people think it is. The key is to not use too much leverage.

Lets say you believe that within the next ten years the Chinese stock market will crash and you have $100 you want to bet.

Just spend $10 a year on at the money puts for 10 years. You can never lose more than $100 and you can ride the strategy for 10 years. If your prediction doesn’t happen in a ten year time frame it really is no prediction at all IMO. Would be equivalent to saying the world will end “Some Day”.

There are lots of other strategies that you can come up with to accomplish a similar result as well.

9 Brent Royal-Gordon February 9, 2010 at 5:14 pm

Eorr: In the past (2001, IIRC), they’ve used their cash reserves to avoid cutting back on product development when the economy damaged their business. Thus, while their competitors laid workers off and ended up with less compelling products once the economy picked up, Apple continued producing new products, and retained the talent they would need in the future.

As things stand now, Apple could operate for years without selling a single computer, phone, music player, or song. They’re also in a position where they can easily buy any small company that has technology they want–for example, their purchase of P.A. Semi a couple years ago got them the assets needed to design the A4 chip in the iPad.

All in all, that doesn’t seem like a bad position to be in.

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