ColinTwiggs, Author at the patient investor

June 22, 2014

Why US hard power failed in Iraq and elsewhere | Bill Moyers

Outstanding. Military historian Andrew Bacevich sums up the stupidity of US foreign policy and how repeated failures could be rectified. He exposes the “duplicity of ideologues” on calls for intervention in Iraq and discusses the moral responsibility to the people of Iraq. What can be done to alleviate the suffering of the people in Iraq? “There is remarkably little discussion as to cost if you want to bomb someone, but we suddenly become acutely cost-conscious if there is a proposal to assist them.”

Dick Cheney [at 06:00] in 1993, answering a question on the first Gulf war, predicted what would happen if Iraq was invaded: “…Once you take down Saddam Hussein’s government in Iraq, then what are you going to put in its place? If you take down the central government in Iraq, you could easily see pieces of Iraq fly off…..it’s a quagmire.”

Projection of hard power by the US has not solved global problems over the last 50 years. In fact it has exacerbated problems in the Middle East. Soft power is far more effective. But it needs a change of mind-set on the part of the US. Don’t get me wrong. You still need Teddy Roosevelt’s “big stick” as a deterrent, but soft power — engineers, doctors and school teachers — are far more effective at winning people over to your world-view than B52s and unmanned drones.

June 22, 2014

Margaret Thatcher’s free market legacy | Charles Moore

Margaret Thatcher’s biographer Charles Moore discusses the former Prime Minister’s legacy. Moore provides insights as to how Margaret Thatcher’s stance on the market economy developed and how she popularised it. He seeks to outline her approach to foreign affairs, in relation to the EU, the US, and her broad approach to the Cold War.

http://vimeo.com/85613703

June 22, 2014

Richard Epstein on Thomas Piketty | IEA

Excellent critique by Richard Epstein, Professor Emeritus of Law and Senior Lecturer at the University of Chicago Law School, of the thesis and policy recommendations of French economist Thomas Piketty from his recent book, Capital in the Twenty-First Century.

http://vimeo.com/98657610

With voluntary bargaining, one can assume that both parties will benefit from the transaction: they are unlikely to enter into a bargain where there is not at least some benefit for themselves. What Epstein does not address is crony capitalism, where special interest groups (either corporations or unions) may influence government to act (or fail to act) in a way that benefits the group at the expense of the whole. Wal-mart profits, for example, may rise as a result of China’s suppression of the yuan/dollar exchange rate, but the same exchange rate may cause the loss of manufacturing jobs and exports, and depress wages.

June 22, 2014

The inequality debate | Thomas Piketty and Ryan Bourne IEA

The inequality debate: Thomas Piketty and Ryan Bourne, of the Institute of Economic Affairs.

http://vimeo.com/98715433

One mistake Piketty makes: he uses a marginal tax rate of 80% in the US in the 1920s and 1930s on incomes over $1 million to justify higher taxes on incomes over $1 million today. This fails to consider inflation. Adjusted for the CPI, an income of $1m in 1920 equates to an income of $12m today.

High marginal tax rates in the 1920s in the US were introduced to pay back war debt from WWI. They had the opposite effect of that intended and reduced tax collections. Treasury secretary Andrew Mellon subsequently increased tax collections by reducing maximum tax rates, with the famous quip: “73% of nothing is nothing.”

June 22, 2014

The inequality debate | Richard Epstein

Professor Richard Epstein on the inequality debate and related issues in the US.

http://vimeo.com/98678656

June 22, 2014

EUROPP – Divided Nations: Why global governance is failing, and what we can do about it

Ian Goldin, Professor of Globalization and Development at the University of Oxford, discusses the challenges of cross-border governance presented by globalization and presents 5 core principles necessary for a solution:

….Yesterday’s structures are not equipped to deal with today’s problems, but thankfully it is not too late. Aggressive action must be taken, and such action would be effective if it incorporates five core principles which I have developed together with my Oxford colleague, Ngaire Woods. First, global action is only required on global problems. Local jurisdictions matter and should continue to address local and national problems on their own terms.

Second, while not everyone must be included in global negotiations, inclusion of key actors is essential. It is an obvious point that if the biggest polluters are left out of climate change agreements, the agreement is useless—but this principle must be central to any reform efforts.

Third, efficiency is essential. Unwieldy bodies that include everyone are worse than nimble, exclusive bodies that involve the key players. Who are the key players? It depends on the issue. The small island nation of the Maldives, sinking from rising sea levels, should not be included in questions about regulating climate change but must be included on negotiations about mitigating its impacts. If small groups of key countries with much at stake are involved, gridlock can be broken.

Fourth, legitimacy is required for effective global governance. A system must be in place wherein countries may disagree with certain rules of the game, but accept the referees. Fifth, enforceability is paramount. None of these principles matter if they cannot be enforced.

Global governance is the challenge of our time. Our arsenal of stale institutions cannot cope with existing threats to peace, stability, and prosperity. Whether we like it or not, we are all in this together. It’s time we start acting like it.

June 22, 2014

“Highly unlikely to ever see a Storm again”

Andrew Starke welcomes the latest proposed changes to Future of Financial Advice (FoFA) legislation in FINSIA News:

Changes… outlined by the government on Friday have generally been well received, with many in the industry now hoping for final clarity on a process that has been running since the Labor Government revealed the proposed reform package in April 2011…..First and foremost, the changes outlined by the government on Friday ensure a clear ban on commissions after it had previously left the door open via the so-called ‘Wolf of Wall Street’ clause within general advice. Any possibility of a return to commissions on investments or superannuation products has now been ended.“This response removes all doubt that commissions will be introduced in the provision of general advice. The government will define and ban commissions in black letter law” said John Brogden, CEO of the Financial Services Council FSC. “The changes outlined by the government also maintain a detailed and comprehensive best interest duty requiring a financial adviser to act in the best interests of their client.”

Best interest clarified
While the perceived watering down of the best interest duty has attracted a great deal of attention in the mainstream press, Brogden said this should be put in perspective. Prior to FoFA, financial advisers simply had to offer ‘appropriate advice’ while they now need to comply with a raft of regulation. “There are six separate duties in the Corporations Act that require a financial adviser to act in the best interests of their client. In addition, there are six specific steps that must be met by an adviser when providing advice that codifies the best interest duty,” Brogden said. “The government has made one minor change to the best interest duty by removing an unnecessary ‘catch all’ provision. This change will actually clarify the best interest duty and remove any ambiguity for a financial adviser to always act in a client’s best interests.” The FSC has legal advice from leading commercial counsels Ian Jackman SC and Gregory Drew which it said confirms that the removal of ambiguous ‘catch-all’ phrase will not dilute the obligation of an adviser to act in the best interest of their client……The Australian Bankers’ Association ABA also welcomed the announcement and said the amendments would preserve the original intent of the law while correcting the current overreach and broader uncertainties.

What puzzles me is:

How an overriding provision — that advisers act in the best interests of their clients — can be “ambiguous”?
How removal of the overriding provision helps to clarify the situation? and
Why, if legal advice confirms that removal of the ‘catch-all’ phrase “will not dilute the obligation of an adviser to act in the best interest of their client”, should it be removed?

Major banks have spent billions of dollars buying up financial planning firms in order to secure distribution of their investment products. Christopher Joye at AFR puts it in a nutshell:

The big vertically integrated institutions (mainly the four majors and AMP), which now control 70 per cent of planners, want these tied distributors to have the freedom to recommend in-house platforms, super funds and investments without being hampered by a catch-all best interests duty.

An overriding provision would certainly not be in the banks’ best interests.

June 21, 2014

Financial Reform Rising | Perspectives | BillMoyers.com

Simon Johnson describes how support for financial reforms is rising despite banks fighting tooth and nail to restrict changes to the current status quo.

In the early and mid-2000s, US officials allowed large financial institutions to take on big risks – being persuaded that the people running those firms knew what they were doing. In particular, important parts of our financial system became highly leveraged, in the sense that they took out debts that were very large relative to their shareholder equity. At that time, on average, the world’s largest banks had equity worth only around two percent of their total balance sheets. As asset values went up, so did bonuses – financial executives are typically paid based on their “return on equity,” unadjusted for risk. When house prices turned down and related losses mounted, these small amounts of shareholder equity – the core of what is known as capital in the banking world – were quickly wiped out for the most highly leveraged firms.

The logical next step would have been a set of reforms to prevent big financial firms from ever becoming so highly leveraged again…..Not surprisingly, the big banks and their allies fought back against any reasonable reforms that would limit their leverage and their ability to take big risks. The Dodd-Frank reforms passed by Congress in summer 2010 were, as a result, disappointing.

Increasing bank capital requirements and limiting the types of activities that FDIC-insured banks can engage in are in everyone’s best interest. Even in the long-term interest of banks. But unfortunately bankers are focused on their short-term bonuses and not the long-term stability of the financial system.

June 21, 2014

How Indonesia and the Philippines Solved Their Maritime Dispute | The Diplomat

Arif Havas Oegroseno is Indonesia’s Ambassador to Belgium, Luxembourg and the EU, and President of the 20th Meeting of the States Parties of United Nations Convention on the Law of the Sea (UNCLOS) 1982:

There are two important lessons arising from the negotiations between Indonesia and the Philippines over their bilateral maritime boundaries. Firstly, whether you like it or not, the current prevailing law to settle maritime boundaries is UNCLOS. This is true regardless of your historical record, even if it is 115 years old. If a rectangular line map from a century-old Treaty had to be aligned with UNCLOS, aligning a dash-line map that was created only in the mid-1940s with UNCLOS should be relatively problem-free. While there is a difference in shape between the rectangular line of the Treaty of Paris that the Philippines previously used with Indonesia, and the nine dash-line map that China currently bases its maritime claims in the South China Sea on, they share one similarity: both are unilateral expressions of claims that are not based on international law. The first Indonesia-Philippines maritime boundary signifies the emergence of a state practice whereby in a maritime boundary dispute a unilateral proclamation of maps will eventually be aligned with prevailing international law. Secondly, the claimants need not look far to see how countries in the region can work together for the larger interest over a large swath of waters devoid of maritime boundaries…..It is my conviction that all claimant states in the South China Sea, especially China, which is also a Permanent Member of the UN Security Council, carry the moral, political, and legal responsibility of creating peace and stability in the world and are able to work together peacefully.

June 21, 2014

Resist the urge to avoid discomfort

Momentum stocks have suffered a fair degree of turbulence since April, after a strong first quarter. Investors unfortunately have to endure periods like this, when the market appears hesitant or lacks direction, in much the same the same way as travelers can expect turbulence during an air flight. It is important is to resist the urge to avoid discomfort by exiting positions. Enduring uncomfortable parts of the journey are necessary if you want to reach your intended destination. Our research on both the ASX and S&P 500 has shown that attempting to time secondary movements in the markets does not enhance but erodes performance: the average (re-)entry price is higher than the average exit price after accounting for brokerage.

A basic rule of thumb in investing is that investors need to endure higher volatility in order to achieve higher returns. If your investment time frame is long-term, it is important to focus on the end result and not be overly concerned by weekly fluctuations.