The Economics Behind Work

Everyone knows what they make from their work, but many are either over or underestimating what they make on an hourly basis. A friend once told me whenever she got fed up with work, she would add up all the different components of her compensation, including bonus, pension top-ups, health and dental benefits, travel opportunities, and sum up all the time she spent getting to work and working, and figure out how much she was getting paid on an hourly basis. That number was usually motivating enough for her to finish whatever cumbersome tasks laid in front of her.

For some professionals, this kind of angst simply does not exist. Somebody who had undergone a dozen years of medical training will most likely not need to think about her hourly pay to motivate her in the operating room. My neighbour from first year dorm life used to read three-inch thick chemistry textbooks the way I used to read Stephen King novels. For him, getting paid to do a PhD now is far from an economic decision, but one that stems from, well, passion.

For those of us with less clear callings, finding work that fit us, and working out the economics behind our choices, may result in considerable anxiety. This is never too clear than during business school recruitment season, when salary and bonus offers were the barometer of someone’s worth. One guy was rumoured to have given up a position in a highly reputable firm for a better salary and bonus package with an employer less prestigious. Given we knew little about the long-term competitive landscape in the industry and future trajectory of those prospective employers, clearly, choices like these were driven purely by economics.

But numbers alone do not give you a good picture that accurately portrays the value you are providing to your work and your compensation. Some jobs come with benefits that are non- monetary. Meeting people and building connections, learning skills to be leveraged for the rest of your career, providing you with a readily available social circle – all these can open doors for the future.

At the same time, you are giving back something in return: your time, for those privileges. Consider your time spent at work, your time commuting to work, your time spent doing unpaid work, your time thinking and worrying about work when you’re not working, your time spent shopping and dry-cleaning clothes that you wear to work. Alas, most of us never break our days down to miniscule pieces. With email and Blackberry nowadays, few can truly enforce that blurry line between work and personal time. Besides, we are social animals. And the social environment at work holds too much sentimental values to us to be compartmentalized so crassly.

A much-neglected issue that is difficult to quantify, but nevertheless important, is the opportunity cost of working. The older we become, the more we’ll come to realize that time, is all we have. The time spent working on one thing means time not spent working on something else. This “something else” could be work in another industry that is fascinating but promises little stability for a steady paycheck. Or it could be striking out on one’s own, taking chances with little guarantee of success. I know that entrepreneurship is not all about inspiration and clever risks-taking, many times it’s done out of necessity and pure foolhardiness. Nor is working for someone else risk-free and anything less of a rollercoaster ride, as many found out recently.

But the question still begs, for someone in the relative early stages of their careers, is it better to spend it learning the ropes in a business that provides steady and ever-rising compensation (provided there’s a low likelihood of structural adjustment in the industry going forward), or will there be a higher payoff from taking chances and living with career and financial uncertainties?

The crust of the argument here is the idea of potential. Should one trade in unproven, largely untested and unleashed potential against measurable progress, however mediocre it may be? The issue of potential is a complex one, because it is unknown, unquantifiable, and matters little without success. To put it simply, you can’t cash in a check today for your future potential.

It also sparks off a slew of otherwise unrelated questions. Does the society one resides in encourage risk-taking, both socially, and economically? How does one’s upbringing influence and impact his tolerance of risks and uncertainty? How does one view social acceptance and self-worth? And how does one deal with timing, self-doubt, self-motivation, and self-discipline? Because however one may resent grinding away at a job, the prospects of generating value and providing for others may be an even more terrifying experience.

I will continue this discussion on another day. But in the meantime, are you willing to trade in your “worth” today for your potential tomorrow?

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In Search of Sustainable Careers – 5 Reasons Why I Would Not Go Back to Business School

If I was eighteen, and clueless about what I wanted to do with my life, I would do business school all over again.

I’m not eighteen anymore, so I would not go back to business school.  Not when there are many other ways of learning out there.

1. I’m not fit to give you any business advice

A couple of months ago, a friend of mine headed back to school in a remote community in interior BC.  She wrote to me, excitedly about her new surroundings.  She was also excited about a business idea she’s had: the campus was set up miles away from the nearest town, so why not start a grocery delivery service for the hungry students?  I was the only person she knew with a business degree, so it found me.

I started to write back somewhat vague and non-committal, than I stopped typing, hit the ENTER key, and wrote the following: “The thing is, a business degree is probably the least helpful to someone that wants to start their business, because in business school, all we got trained on was how to service someone else.”

I wrote this to concede that I had little practical advice for her.

I was not wholly clueless when it comes to entrepreneurship – I did get my hands dirty on a business for a couple of years during university, and that has proven to be one of the biggest confidence-booster of my life.  But whatever skills I had gained during this time became neutered in a classroom setting.

School trained us to become task-masters, one that is great at driving efficiency, expediency, and a razor-sharp ability to prioritize.  We become extremely proficient at functional tasks, but terrible at matters involving creativity and imagination.  It takes a smart and able person to answer a question correctly, but a non-conformist to re-phrase the questions posed in the first place. In face of the current crisis, I think that kind of out-of-the-box inquisitiveness might have been helpful.

But perhaps that was the plan all along with business schools and their generous donors. Just like the military, business schools are probably better at training problem solvers instead of thinkers.  It didn’t profess to churn out Aristotles that philosophize.  Equipped with plenty of discipline and normalized by years of standardized training, we marched into the corporate world.  I then got into bed with Excel, let someone else worry about the bottom line, and became a cog.

2. Business school made us masochists

I was a mediocre student at best, struggling to keep up with endless lists of projects, papers, presentations.  After four years of hard labor, I barely made it out with honors.

The only subject that I liked was statistics.  Not because I was a huge fan of means and standard deviations, but because statistics was the only subject where the exams were open book!  All other subjects had exams that required an immense and inexhaustible capacity to memorize and reproduce.  Whether they’d be accounting principles and subsequent treatment of business scenarios, or spewing out every piece of marketing jargon that we could to cram into a 30-page exam, or to reproduce mind boggling hedging formulations. Exams were like bulimia for the brains.

The mantra in business school was “work hard, play harder”.  It wasn’t until I left school that I found out this was the mantra employed by every other sports team or cultish business organization.  Most of us bought the idea wholesale, because work and partying looked so cool in movies, and it worked for a while with coffee slurping and caffeine pills popping.

The type-A success stories graduated to high-rolling careers in banking or consulting.  When alumni visited our school, they would boast of working 80, 90, or over 100-hour weeks – because they were so dedicated to their careers and cared so much.  We were in awe.  They told stories of themselves falling asleep in the shower or taking naps in the bathroom, we thought they were hilarious.  Worse yet, most of us thought we could beat that.  Because at 22, we were all Superman with complete disregard for our bodies, and working inhumane hours get you a badge of honour.

3. I’m not sure I would trust me with your money

I can’t say it with a straight face anymore. But back then, “maximizing shareholders’ value” was something we strived to put on every slideshow that could fit during case study presentations.  If you’ve been to a business school, you know what I’m talking about.  It’s nothing to smirk at.

There is a fine line between corporate responsibility and civil responsibility.  Sometimes the line is gray and very blurry; other times it is, unfortunately, a zero-sum game.  I’m sure all business professors are well aware of the fact, and it must be a struggle to instill business principles into our impressionable mind, without crossing that line of ethics.  Because every marketing principle, every tax minimization tactic, and every financial hedging strategy could be turned into something sinister and potentially corrupt in the hands of an ethically ambiguous individual.  Give that person a budget to work with, put in some skewed incentive structures, add lax regulation, sprinkle genuine misunderstanding and ignorance of the marketplace, then top it with a 90-hour workweek, is it really any surprise that within the last ten years, we’ve had three severe instances of corporate breach?

The bursting of the tech bubble in the early 2000s was partially blamed on the team of analysts that talked up stocks despite evidence to the contrary.  Failing to sniff the trail of accounting misconduct and fueling the speculative frenzy based on investment banking relationships, the stock market wiped out $5 trillion of market value.  Everyone had invested in the stock market then, and almost everyone I knew lost money, directly, or indirectly.  That includes my college fund.

After 9/11, accounting scandals surrounding Enron and Worldcom, among others, eventually brought down Arthur Andersen, and forced the SEC to examine the relationship between auditors and their consulting branch.  We were in school then, and we most definitely did not delight in learning the new rules ordained by Sarbane-Oxley.

Again, the first decade of the 21st century, saw us failing again to learn from neither the speculative hubris of the tech bubble, nor from the accounting fraudulence of the Enron era: banks, lawyers, and accountants had helped to create a debt-induced housing recession.  Skeptics that doubted reckless lending practices were either ignored by the authorities, or chided by the mainstream media.

It could’ve been isolated cases of bad apples that got us to where we are today.  But it is hard not to see those disastrous endings as results of concerted, if not colluded effort by those in charge.  Incentives are a huge part of the problem, and so is the overall framework in place that resulted in the hubris.  So it really begs the question from or an ex-business school student: who’s at fault here, the system itself, or the people in charge of the system?  And given the system and the opportunity, what would I have done?

4. Where did our sense of humor go?

We all took ourselves so seriously.

We studied separately from the rest of the school.  We had our own buildings, and were usually only friends or housemates with people from the business school.  We studied in private meeting rooms named after wealthy donors, many of which were heads or former heads of something publicly listed.  We held roles in clubs manned exclusively by business students.  The air of self-importance, cliqueness, and hierarchy can put Mean Girls in a corner.  At 18, we wore our first power suit, trying to walk on heels while looking professional.  At 20, we were using various permutations of the word strategy without really understanding what it meant.  At 22, some of us had signed on to jobs that made more than our professors, business professors!  On some days, it’s a wonder how all our egos could fit in one room.

I’m sure some people had it all figured out, and probably saw the whole thing as one big joke.  I was not bright, so I went along for the ride.

5. In pursuit of sustainable careers

Talking about career burn-outs in a big banking firm for a 22-year-old was not unlike talking about hangovers from the best frat party.  It sounds painful but the sheer awesomeness of the job, and the doors it would open for you, would makes the pain worthwhile.  At the time, the popular roadmap for soon-to-be bankers was to toil as an analyst for two to three years, then leave to get an MBA, or to move on to the buy side.

It occurred to me a while ago that this short-term mindset is hardly the exception among bankers of all ranks and ages.  Hardly anyone I know had plans to stick around for the long term at one firm, and nor should they have.  But the issue of employee attrition may be the problem behind a genuine disregard of corporate responsibility.  Short-term financial incentives begets short-term profiteering behaviour.  And when an entire layer of a business is expected to depart after two or three years of sweatshop labour, how realistic is it to expect the firm to create and foster a culture that emphasizes anything long-term? So is it any surprise that a couple of years of record profits were made on backs of unreasonable risk-taking activities?  No, because they were offsprings of short-term thinking.

It’s hard to say how much structural changes will really take place as a result of this economic fall-out. Business cycles will most likely continue oscillating in response to economic activities, and careers will be made and then broken.  But as business owners, investors, consumers and employees, a longer term, more sustainable way of doing business, of investing, of consuming, and of working, may be a solid way forward.

One way of dealing with a broken economy: Ignore History

“How do I define history? Well it’s just one f-ing thing after another.” The History Boys

As market continues to hit record lows every week, everyone and their mother has felt the “lack of confidence” that haunts the economy. Things have gotten so bad, quipped Jon Stewart, that the “British are cheering us up”, “and it’s like Seattle over there, rain, but without coffee.”

What’s setting this recession apart from all its predecessors is the fact that so many fast-and-loose rules have been broken. We’re told that young people nowadays can’t count on an ever-rising standard of living anymore. Nor can we expect the truism that housing prices have nowhere to go but up, and thus always a good investment. It’s hard to trust high-return investment brokers too, even those you’ve known for 50 years. Your corner community banks might go out of business and the next thing you know, the FDIC will be running it. All of these uncertainties, strung together, signal the utter collapse of confidence. Whatever our previously held ideas of people, institutions, and truisms may have been, that foundation is shaken and cracked.

But how sensible was it for us to subscribe to these rules in the first place? In retrospect, could all these occurrences not have been a series of lucky coincidences, happily re-enforcing themselves into our collective memory, and has since then become a self-fulfilling prophesy?

In political science, there’s a theory that addresses this issue, although in different contexts. It’s the idea of constructivism. It rose to prominence after the Cold War, as no existing theories were able to foresee and predict the sudden collapse of the Soviet Empire. In retrospect, it was hardly sudden, but hindsight is 20/20. So the idea of constructivism challenged the traditional assumption that the external environment determines one’s interest and subsequent behaviour. That is to say, too much emphasis had been placed on the power and structural limits of the system, and too little on the players within. For example, instead of thinking of these awful 10-year plans as a product of Communism, try to see how the practice of central planning shapes and even further solidifies the Soviet utopian commitment.

Do you see what that does? It implies a mutually re-enforcing snowballing effect between the system and its people. They reciprocate and mirror one another by defining and re-defining both parties’ interest, beliefs, and actions. If all goes well, the ideas or ideologies behind the momentum becomes more and more entrenched, until one day, it’s hard to distinguish cause from effect, or whether the chicken or the egg came first. It’s hard to qualify how much of the systemic responses are created by us, and how much of our behaviour is dictated by the system.

But instead of seeing the past like a continuous feed-back loop, us human like stories, told in a linear fashion. And when it comes to the past, we love to connect the dots, and then simplify. The many nuances, contradictions, and kinks in history are smoothed out and written out of books. There might’ve been no extraordinary build-up, no list of forces that contributed to one climax as opposed to the anti-climax of another possible ending. Maybe history, in all its glory, is just us stitching an accidental past into a coherent story. Maybe, it was just one thing after another, after all.

Unfortunately for our economies, the loop ran out, and we are forced to face the cognitive dissonance that we’ve worked hard to foster over the last couple of decades. For years, our beliefs in the ever-rising price of the housing market (darn demand and demographics) perpetuated and encouraged the continual injection of liquidity into the credit market. We took that as a signal that we were on the right path, and pushed the housing bubble further along, while helping ourselves to some generous consumption habits. We had all but forsaken the pursuit of productivity and real value creation. But the wheels kept turning, and the system happily complied by signaling what the players had been projecting onto it for years.

Now the party’s over, all previous experiences and expectations of how the system should function are subject to stress testing and dismissal. The best we can do is not to lament the disarray and passing of our past beliefs, but to construct a healthy and sustainable economic environment for the future. So long as we are wedded to the idea that the market will function in the way that it had always been, we will only delude ourselves as we did in the last decade: by creating a debt-induced bubble and then watch it disappear into thin air.

Love it or hate it, demographics matter for an investor (Part 1)

This is a two-part article that addresses economic and investment implications of demographic trends. Today, I look at what happens when we ignore demographics. In tomorrow’s column, I look at some investment opportunities supported by population and demand trends.

I still remember presenting David Foot’s book “Boom, Bust, and Echo” in my high school economics class. It was the first time I was exposed to the idea. It was clear, succinct, and for me, absolutely mind-blowing (I was 17, ok?). Its sociological, marketing, economic and political implications kept me engaged and excited for weeks leading up to my talk. I still remember feeling exasperated at not being able to present the explanatory power of this concept within an hour of allotted time. This was before Powerpoint came along to provide structural assistance and graphics entertainment. So God bless my fellow classmates for sitting through the hour of what must’ve been an excruciatingly boring experience: me, with questionable level of articulateness, wildly gesticulating with my right hand, while waving pages of notes with my left.

It’s been a while since high school, and the over-use and abuse of the term has since left me disillusioned with its clairvoyance. The rest of the world must have discovered the magical potential of a concept that is always readily available to provide digestible explanations for, well, everything.

When I worked in the oil boom town of Calgary in western Canada, any high school drop-out rig worker or administrative assistant, when asked about the sustainability of sky-rocket crude prices, would shrug their shoulders and say: it’s China and India, they need oil, it’s all about demographics. The same line of reasoning was used to explain the rise of food prices last year: developing countries are getting richer and eating better, there’s an increase in demand, again, it’s demographics. The same explanation sufficed for the bio-tech and pharmaceutical stock rallyevery few years: the baby boomers, they’re getting older and need medication, it’s demographics!

Then the oil boom ended, the food crisis abated, and has anyone heard anything about the explosive growth of the pharmaceutical industry lately? For a while, demographics became a mere pop-cultural sound bite: a convenient simplification of complex problems. The flagrant abuse of the term, combined with its questionable predictive powers, led me to more or less abandon my earlier enthusiasm.

Lately, the idea of demographics has returned in a slightly different incarnation. As frivolous as some broad-brush generalizations of this concept can be, I found numerous instances of past disaster and future opportunities off the backs of demographics. I’m now convinced that demographics is still a credible tool, but only when paired with common sense. Here’s an example of what happens when we desert demographics and common sense.

Demographics and housing prices

One school of thought that addresses the “irrational exuberance” of the property bubble is this. There was no underlying demographic trend that supported the astronomical rise in housing prices. The population demographics signaled no spike or increase in the demand for real estate.

In fact, some argue that housing prices moved up over the past half century because of the steady progression of baby boomers through various ladders of the property market. This growth has all but halted during the past decade. Population growth has not been large enough to justify price inflation in the hot zones, even if one takes into account the emergence of Gen X and immigrants as property buyers. From a demographics perspective, once the boomers’ needs are met, realistically, the market should have plateau and flatten out, if not trending down. Given some members of the baby boomers have already entered retirement, thus further reducing the demand for housing, it’s reasonable to deduce that the pattern over the past fifty years cannot be extrapolated infinitely into the future. By that measure alone, the idea that real estate prices will never go down was plain wrong.

Just to show that demographics analysis only work in conjunction with good sense, you can also make an opposite case given the same numbers, or with a different set. You can also confuse your readers by throwing around the terms “demographics” and “baby boomers” that neither support nor refute your point.

Employment based on a false boom

What are the employment implications of the housing bubble? Here’s one scary statistic: 30% of job creations in California since 2000 had been in real estate related fields, i.e. real estate agents, construction, Home Depot, insurance brokers, mortgage brokers, stock brokers investment banking, etc. Suffice to say, originally created to sustain and support a castle in the sky, once the delusion ends, these jobs are not coming back anytime soon. The re-education and the re-absorption of the unemployed back into the economy is an interesting phenomenon to watch. Many are going back to community colleges in the fields of nursing, engineering, or accounting: fields that have high demographic demands going forward, and will be discussed in tomorrow’s column.

Output outpaces spending, a new paradigm?

The whole world is in recession, but there are two kinds of recession. Export-led economies such as Germany, China and Japan are facing a recession of the real economy, whereas the US, UK, and Iceland, are facing problems in its financial economy.

It might be a good time to acknowledge how a large number of western countries had been able to sustain its growth and wealth accumulation despite a lackluster real value-generating economy. Let’s not forget how the U.S. was able to grow during the last couple of decades: for the most part, businesses and individuals borrowed to invest in over-inflated assets, whether they were tech stocks or bundled housing assets.

Now the bubble has burst again. Is it time to re-examine the issue of value creation as a sustainable path for growth? With the downfall of Detroit and Wall Street, where do we turn to next? What will we invest in going forward?

First, turn on our protective coping mechanism. Many are dealing with the uncertainties and financial challenges of this crisis by doing what our ancestors must have done for thousands of years: by paring our needs down to what is absolutely necessary. Gone are the days for designer clothes and barely used appliances piling up in a 3-car garage.

This new consumer behaviour is duly reflected in the game of retail survival. Sellers of inessential goods and services are either doing badly or going out of business altogether; where retailers of basic necessities are going strong.

Of course, we are doing this in face of economic hardship. Nobody in their right mind would prefer to forego Starbucks or trading in Chanel for Wal-Mart. It is not the American way. But if structural adjustment of the economy is allowed to continue, and people are forced to stop buying thing they don’t need with credit that they don’t have, then perhaps the not-so-subtle shift towards a more frugal mentality will take permanent hold.

Perhaps our investment choices in the future will follow a similar trajectory as our  consumption behaviour, and more merits will be given to businesses that satisfy the needs and necessities, versus the wants, of our global society?

In tomorrow’s column, I’ll discuss my thoughts on some investment ideas that are driven and supported by demographic trends.

Who is worse off than you?

Growing up, whenever I screwed up in a test or assignment in school and had to face my mom, I would always preface my failure by citing more spectacular blow-ups by my classmates. The habit never escaped me.  Now instead of placating my parents, I use it as a self-administered sedative whenever things get bad.  By reminding myself that it could be worse.

It’s easy to fall into a depressing spiral these days.  There’s little voyeuristic pleasure in watching your economy on a high speed race heading for the cliff, especially when your savings and investments are wrapped in the vehicle.

But maybe you can take solace in the fact that we are all in this together.  And whichever corner in the world you might be, there’s some level of financial uncertainty, maybe even serious suffering going on.  But let’s take a break from self-pity today, and indulge ourselves in the guilty knowledge that out there in the big world somewhere, exist those that screwed up (or got screwed) way worse.


With a population of 300,000, this northern tundra is the size of Kentucky. Inheriting this insular landscape with your large extended family, gifted with little other than thermal geezers and short days, the setting is already rather glum.

Add reckless Icelandic fishermen, stir in some explosive banking capital epitomized by a stock market that multiplied nine times from 2003 to 2007, and we get the tragic climax: a bankrupt country with debt 850% of its GDP.  To put that into perspective, an average of $330,000 is owed by every Icelandic man, woman, and child to its numerous and very angry foreign debtors.

What’s worse, to get out of this mess, the Icelandic has abandoned their currency, and now needs to claw its way up Brussels’ ass to save its economy. To be allowed entrance in the EU, it will most likely have no other choice than accepting reduced fishing grounds in exchange for debt forgiveness. The monumental humiliation of it all will shatter the Icelandic collective confidence for decades to come.


Looking at the astronomical debts of the US, economists and politicians no doubt salivate at the thought of being on the other side of the balance sheet. How sweet it must be: to make things and sell them to the rest of the world, to have a manufacturing driven instead of a consumption driven economy, and to run a budget surplus instead of a deficit. Except grass is almost never greener on the other side: cue Germany.

Germany is the world’s largest exporter. Surprised it’s not China? What’s more, it’s one of the major auto manufacturing countries in the world. One in six jobs in the country is related to the auto industry. When its wealthy European and American customers halted their vehicle orders last quarter, the factories became empty – of workers, not cars.

Germany is also heavily dependent on machinery sales to Eastern Europe and Asia. With large-scale industrial projects in those regions put on the backburner amidst falling demand for finished products exported to Western Europe and America, Germany’s manufacturing orders are nearly cut by half this year.

It’s one thing to recklessly run up debt, chase property bubbles, and get punished for it. It’s another to slavishly economize your finances by pinching public spending and controlling your labour costs, and still get dragged into the mud. There’s no getting off easy for good behaviour, darn it!


Combining the worst ills of both rapidly falling exports, high public debts, lasting psychological and financial baggage from its previous decade-long recession, Japan is now dubbed the “structural pessimist”.

And who can blame them? Japan does not have the deep pockets to stimulate its economy nor placate its struggling citizens through either pumping money into public projects (i.e. China), nor going into additional debts by exercising fiscal and monetary policies (i.e. US). Clearly reeling from large public debts accumulated from the last recession, Japan is tapped out from any more public spending. Nor can it rely on the export sector Asian neighbours for sales in machinery, nor the US for finished auto and electronic products. Now combine the gloomy economic outlook with a lack of Social Security or tax-advantaged retirement plans, you get an excessively frugal population that, well, have resorted to some truly miser methods to save money, such as using old bath water to do laundry.

Surely domestic consumption cannot be the only engine driving growth. But at a time when little government stimulus will prove effective, main wealth-generation machine (export) is shut off, and now domestic consumption falling year after year, is Japan kaput?


Oh to fly so high and fall so fast. One day, you’re the Celtic Tiger, the textbook success of a low-tax and open economy, in Europe of all places. After millennia of oppression, poverty, violent clashes and petty bullying by its stronger neighbour, Ireland was finally able to stand straight and hold its own.

Corporate investments poured in from all directions to fuel its growth. Ryanair, Intel, Dell, IBM, HP, Oracle, Lotus, Microsoft, made Ireland the unlikely high-tech and investment capital of western Europe.

The commercial corporate boom led to a construction boom and exuberant optimism. Massive borrowing followed against (rising) property prices, leading to a ballooning construction industry that pre-crisis, made up one fifth of the total economy.

Then the American sub-prime crisis hit. Ireland became the first euro zone country to officially enter into a recession. With global contraction, many companies have slashed jobs or bailed altogether. The country is left with an Americanized mess that includes shaky banks, collapsed building sector, and little credit. Except in a country of 4 million, and short of a sensational Icelandic flop, the rest of the world barely hears the Irish whimper.

Mirror mirror on the wall, who’s the gloomiest of them all?

We set out to see what the experts are saying about 2009.  What we didn’t realize was how the art of providing financial outlook has become a game of “one down-manship.”  How else would you explain the boom in competition for the title of Dr Doom?

So it would seem that the Rapture is upon us, are you ready?  Yeah, we feel the same way.

Here’s our survey of what some of the bigwigs in the investment industry have said about 2009 in recent months.  In our mock* roster, we have Warren Buffet the sage; Nouriel Roubini aka Dr Boom/perma-bear, or our favourite, the playboy Professor; Nassim Taleb aka Black Swan; Peter Schiff who’s-laughing-now; Jim Rogers my-kids-speak-Chinese-and-that-is-my-investment-hedge; Marc Faber the original-Dr-Doom; Don Coxe via Basic Points; and John Embry the Canadian goldbug.

Outlook for 2009

Investoralist: So how bad is 2009 looking?  Don’t hold back now, give it to us straight-up!

Warren Buffet: We have lived in one way in one type of economy. And we’re now deleveraging that economy. We’re gonna have to live without the same impetus from credit expansion that really helped propel the economic engine for a long period of time. That wind will not be at our back.

The economy will be in shambles throughout 2009, and, for that matter, probably well beyond, but that conclusion does not tell us whether the stock market will rise or fall.

Nouriel Roubini: The worst is yet to come.  I don’t want to name names, but many [banks], given the housing bust, will become insolvent. Their losses are mounting because they have written down only their subprime loans so far. They haven’t started writing down most of their consumer-credit losses, and reserves for losses are much less than they should have been. The banks are playing all sorts of accounting gimmicks not to recognize them. There are hundreds of millions of dollars outstanding in home-equity loans that eventually could be worth zero, too.

Nassim Taleb: The problems are still here. People that were in charge, they are still around. The bankers that got us here are still around. And we’re giving them more money. It’s not a regular crisis, the whole system need to be changed. We need to reduce debt. We need to reduce asymmetric pay-offs of the banks. This is just the beginning, we need to de-leverage so massively.

Peter Schiff: I wouldn’t get to enthusiastic about it. I think the lows are not in for the Dow, if you measure Dow in terms of ounces of gold, then US stocks are headed for a lot lower in 2009. Ultimately, everything that Obama is proposing is destructive to our economy.

The government is interfering with the free market cure, and they are worsening the disease. We are broke because we borrowed and spent too much, we need a serious recession by going back to saving and producing. The government is trying to re-inflate the bubble, to dig us into a deeper ditch. And therefore it’s going to be much more difficult to get back to the viable economy again.

Had they allowed a more severe recession to take place in 2001-2002, we never would’ve had the housing bubble in the first place. We need to let the market function.

We’ve had a bull market in bonds since the 1980s.  We’re now in the maniac stage, when the bubble bursts, we’re gonna take out the lows in the bond market in the 1970s.  The dollars in which they’re denominated in are gonna plunge too.  People are going to get wiped out in its purchasing power.

Jim Rogers: We are in a period of forced liquidation, which has happened only eight or nine times in the past 150 years. The fact that it’s historic doesn’t make it any more fun, of course.

But it is a pretty interesting time when there is forced selling of everything with no regard for facts or fundamentals at all. Historically, the way you make money in times like these is that you find things where the fundamentals are unimpaired. The fundamentals of GM are impaired. The fundamentals of Citigroup are impaired.

Marc Faber: Well, economically it will be very bad. We have a contracting economy, globally, everywhere. And, I mean, not mildly contracting, but falling off a cliff. However, after this fall off of a cliff, the news in the next 3 months could look somewhat better than expected. In other words, there could be some rebound from the lows in economic activity.

John Embry: [On the subject of currencies] Nouriel Roubini recently checked in with his latest prognostication and it qualifies as a true shocker.  He suggested that credit losses in U.S. institutions could now peak at a level of $3.6 trillion, half of them absorbed by banks and broker-dealers, and to him, this means the US banking system is insolvent.

However, those wishing to flee the U.S. dollar aren’t going to be all that thrilled with their alternatives in other currencies, all of which appear to be terminally flawed.

The euro is being dragged down by the countries formerly known as Club Med but now derisively being referred to by the acronym PIGS (Portugal, Italy, Greece and Spain).  These countries are suffering from economic and financial infirmities that are approaching or, in some cases, exceed those of the U.S.  The question is not what the relative value of the euro might be but whether it can even survive if things continue to worsen.

The English pound does not even deserve mention in view of the horrific state of the British economy, while the Japanese yen, despite its current strength, will ultimately be dragged down by the endemic deflationary problem plaguing the country which has one of the highest government debt-to-GDP ratios in the world.  The Russian ruble is headed down the toilet hand in hand with the discredited oligarchs whose proclivity for debt has brought many of them to the edge of ruin.

[And] I honestly think most observers may be missing what is really going on in China.  The country for years has had one of the most unbalanced economies on the planet with exports and capital spending constituting an inordinate large amount of economic activity in the country.  To keep the Yuan from rising, China is going to have to print a lot of money domestically.

This will all be part and parcel of the world’s major nations staging a race to the bottom in a declining currency derby.

Exit Timeline?

Investoralist: What do we have to do to get out of this, can we get out of this, what’s the timeline here?

Warren Buffet: Well, I don’t think it’ll be five years. But I don’t have the answer to that. I don’t know what the stock market will do in the next year. What I do know is that, if you go back to the 20th century, 100 years, you had two great wars, you had other very large wars, you had the Great Depression, you had the flu epidemic, you had a dozen recessions and panics, you had all kinds of things.

At the end of that century, the average American was living seven times as well as the start of the century. The Dow Jones average went from 66 to 11,497. With all those problems. This is a country that has the ingredients that well, it unleashes the potential of humans. And they’re still here. So five years, you can put me down on that one. You can’t put me down on one year.

Nouriel Roubini: Every time there has been a severe crisis in the last six months, people have said this is the catastrophic event that signals the bottom. They said it after Bear Stearns, after Fannie and Freddie, after AIG, and after $700 billion bailout plan. Each time they have called the bottom, and the bottom has not been reached.

Nassim Taleb: The ones that saw the crisis coming, should be put in charge. Nationalize banks, guarantee bad assets. Do what they did in Sweden versus what they did in Japan. We need to look at the credit losses.

Peter Schiff: This is a bear market that began in 2000, we’re 8 years into it, I think there’s 5-10 years minimum left of the bear market.

Jim Rogers: The (biggest issue) right now is that the American government is printing gigantic amounts of money right now and that in the end is going to be the worst problem. They’re propping everyone up everybody in sight; throughout history, when you’ve printed that much money it’s led to inflation, and in some cases runaway inflation.  I think in the end, the credit problem is not going to be the serious problem.

Marc Faber: I think a recovery will not come for the next couple of years— maybe in five, ten years time. But I really don’t see a catalyst that would propel economic growth to a higher rate. I think we’ll fall sharply like we fell in economic activity in October, November, early December. And we’ll be at the bottom of the valley for quite some time, and maybe we’ll go even lower. I think 2009 is going to be a catastrophe, economically speaking.

Don Coxe: Both Keynesian and Friedman policies are put into place.  There’s some serious heroin economics going on, but the alternative is dying in horrible pain.

In the meantime?

Investoralist: Capital preservation?  What can we invest in while the rest of the world falls to pieces?

Warren Buffet: If you own a farm nobody tells you when it’s gone down 50 percent ’cause you don’t get a quote every day. But you really look to the farm and what it produces to determine whether you made a good investment. Now if people look to the newspaper every day at the price of a stock to determine whether they made a good investment they’re making a mistake.

They have to look to the business, the asset itself. If you own an apartment house you wouldn’t get a quote on it every day. You’d just look at– what the rent rolls were, and what your taxes were and expenses were. And if they all came in with– in line with what you expected when you bought it you’d feel you’d made a satisfactory investment, and you’d never get a quote on it. So I don’t look at quotes. I can’t tell you what Berkshire Hathaway is selling for today.

Nouriel Roubini: Cash.

Nassim Taleb: Cash.

Peter Schiff: Opportunities are to preserve your purchasing power. By getting out of US dollar assets. The biggest casualty is going to be the value of our money. Seek out a tax haven from the inflationary tax, and invest aboard. There’s been a firesale on foreign assets.

Load up on quality companies outside the US, continue to buy precious metals (gold), and we’ve had a major dip in commodities, industrial, energy, agricultural commodities. This is one of the best commodity buying opportunities that I’ve seen.

Jim Rogers: Virtually the only asset class I know where the fundamentals are not impaired – in fact, where they are actually improving – is commodities. But if and when we come out of this, commodities are going to lead the way, just as they did in the 1970s when everything was a disaster and commodities went through the roof.

What I’ve been buying recently is agricultural commodities. I’ve also been buying more Chinese stocks. And I’m buying stocks in Taiwan for the first time in my life. It looks as if there’s finally going to be peace in Taiwan after 60 years, and Taiwanese companies are going to benefit from the long-term growth of China.

I have covered most of my short positions in U.S. stocks, and I’m now selling long-term U.S. government bonds short. That’s the last bubble I can find in the U.S. I cannot imagine why anybody would give money to the U.S. government for 30 years for less than a 4% yield. I certainly wouldn’t. There are going to be gigantic amounts of bonds coming to the market, and inflation will be coming back.

In my view, U.S. stocks are still not attractive.

Marc Faber: Buy gold, buy commodities, and buy natural resource stocks while getting ready to short U.S. debt massively.

Well, I personally, I think that the Chinese economy will suffer very badly. They’ll have a bad recession. And I also think that politically in the world, geopolitically, we have tensions coming up. And so I would be trading Chinese stocks— maybe you buy them here and you resell them like other emerging economy stock markets that have underperformed the U.S. over the last 14 months. Since the market peaked in November 2007, the emerging markets and those of commodities have been hammered. And so the rebound may occur there more than, say, in the United States. But, as I said, look at it as a trading opportunity.

I continue to like gold. And, at the present time, that is very depressed compared to physical gold are gold miners— the exploration companies. I would also say that oil at around this level is becoming attractive, and that oil companies are reasonably attractive. So these are the investments I would carry out at the present time. And the big mining companies— CVRD, Rio Tinto, BHP, and larger gold producing companies like Newmont. But after their very strong rebound I think we have to wait for a correction.

I think the dollar is a disastrous currency. But the others are not much better. The Swiss franc is not the Swiss franc we had in the 1950s. Its quality has gone down very substantially. And the Fed, by pursuing this zero interest rate policy, which leads essentially to dollar weakness, it’s to some extent a trade war. You cheapen your currency, so you export problems to somebody else. But since the whole world is engaged in trying to lower the value of their currencies, it may very well happen that all currencies lose value against, say, hard currencies like precious metals, silver, platinum and gold.

Don Coxe: Commodities stocks, not commodities.  You want to be able to identify management talent.  For coming out the other side, an appropriate portfolio should be 50% commodities.  There will not be a dawning of the new world unless the banking sector reforms.  Commodities in 2011 will go higher than I thought they would ever go, because of what’s been done in response to the [banking] crisis.  The next commodity bull market will make the first one look tame.

In 2008, commodities caught up with the rest of the market and other risk assets.  they were the last to go down, which is characteristic of where they should fit in the cycle.  They have traded as if they were stocks.  The slaughter was more dramatic because they had a last-minute run up when the stock market was going down.  As for oil, for the majority of the cycle, demand was always slightly ahead of supply, driving the price up.  Once the recession hits and supply drops, you fill up the extra tankers, and that extra little supply is enough knocks the price out.

John Embry: Gold. [But] as long as people are abandoning the sector and taking money out of these funds, then there’s a lot of irrational selling. The fund manager has no choice but to sell. This is creating a phenomenon where prices don’t make much sense. The larger cap stocks are the ones being bid up; they trade because generalists buy them. There’s a far bigger pool of capital prepared to buy them. That’s why you’ve got this remarkable discrepancy in valuation between the little guys and the big guys.

You can’t get into production because it’s hard to attract capital and the capital costs have risen so much, but an existing mine with a good orebody is fine. This credit problem will significantly impact gold production over the next three or four years. There’s a bunch of mines coming off the table as they get depleted and the high-grade ores run out. Without new mines, production is going to fall regardless of the gold price. The supply-demand gap, which is already yawning, is growing wider and wider. Central banks will do what they can to fill the gap but if they can’t, the price is going to explode.

The downturn in both gold and silver was literally preposterous in magnitude relative to the rise in the dollar. This was a violent intervention by the paper players. Three U.S. banks on COMEX shorted something like 8,000 contracts in a very short time. That’s more ounces than all the world’s miners produce in a month.

Who would you trust with your investments, Lindsay Lohan or Meryl Streep?

Let me explain.

I am a huge gossip hound, I don’t read People or US Weekly, but I do follow a number of gossip bloggers almost religiously. I love one in particular, not only because she’s highly entertaining AND introduced me to Fight Night Lights, but because her insights allowed an outsider like me glimpse into the cynical workings of the entertainment industry. How else could I have come to understand the dire consequences of plastic surgery addiction, passive-aggressive diatribes of an insecure diva, and the many layers of hidden media manipulation that’s unbeknownst to most of us?

Time and time again, the lesson that I take away from the smut is this. The IT boys and girls come and go, but the Meryl Streeps of the world do their jobs, go home, and wake up to see another decade or two of good works ahead of them.

Now, this is not a gossip blog, and there is a point to be made here, I promise. The thing is, just like an actor, an economist or analyst has a very long working life ahead of them (if they are lucky). And like Hollywood, the waters of Wall Street and the investment industry is just as treacherous. It’s hard to get ahead or get noticed in those ultra-competitive and dog-eat-dog kind of environment.

So when an analyst suddenly gets exposure by mastering some new trading anomaly or has a part of his or her research predictions come true, their status is swiftly elevated. It’s not unlike a starving actor in LA, rejected after years of unsuccessful auditions.  His luck turns, he unexpectedly lands a starring part in some Josh Schwartz hit show. And just like that, he becomes household name in a desirable demographic.

But Wall Street, just like Hollywood, is fickle. The media is always looking for a fresh perspective, much the same way Hollywood paparazzi are always on the look-out for fresh faces to sell pictures. The end motivations are the same: getting people’s attention, whether it comes in the form of a contrarian opinion or drunken debauchery on Rodeo Drive. Media looks for controversy, and there are always willing participants.

They are usually always too happy to be typecast in a role. Whether it’s the perpetual bull, perma-bear, or the new party boys and girls frequenting Il Sole. What they don’t realize yet, is the limited shelf life of their newly minted status, and how quickly the media will tire of them and hold auditions for the next cast when the time comes. It may be a new kind of show the audiences turn to, or it might be the market taking an unexpected turn for the better or worse.

Then, as quick as it came, fame departs, and the IT stars of yesterday will be forgotten. Squeezed dry of their appeal by their handlers, pigeon-holed in their respective niche, they are left fending for their careers by groveling on their knees for scrappy roles, or occasionally getting exposure by pulling stunts that capitalize on their fading fame.

Then you have someone like Warren Buffet. You can’t typecast him in any particular sectoral or trendy investment class, because he is in a class of his own. Because for half a century, he’s been the only thing he has ever claimed to be: a value investor. He did not dabble in anything sexy that modern finance dangled on a plate. He was not interested in making quick profits with complex leveraging instruments, he didn’t believe in beta nor the benefits of diversification for his customers, he was highly suspicious of mergers and acquisitions, and he disapproved of aggressive accounting standards. How straight-laced can you be, huh?

Do you remember the last time Warren Buffet went on CNBC and MSNBC to defend his investment views? That’s probably as likely as seeing Meryl Streep or Tom Hanks on the cover of gossip rags by the supermarket check-out. Why not? Because they were too busy doing their jobs to attract unnecessary publicity. And what do you do when you bunker down to do your job? You get respect, a rarely talked-about commodity that is sometimes more valuable than money. End of the day, these guys realize the career they have is based on value and substance, and not the ability to generate hype and controversy.

So why are so many analysts out there making the rounds with their one-trick pony show? Why are so many talented guys and gals chasing that illusive IT status that’s both unsustainable, and ultimately, self-defeating?

I will leave you this snippet from an interview with Meryl Streep not so long ago.

She sketches a frame around herself with her finger. ‘This is all you have, and the fewer compromises you make on this template the better off you are, I think. Especially when you’re young. I mean, I understand the economic necessity of doing something. But very early on you’re putting stuff into the world, so look at it carefully.’

Why cable business news will drive your investments into the ground

Where I used to work, we rotated MSNBC, CNBC and CNN Business in the background non-stop. Every market movement relevant to the energy market was followed, analyzed, and regurgitated on those channels. For the oil trading desk I worked next to, every threat of Iranian oil embargo, every possible hijacking off the Somalian coast, every Nigerian riot, would send the trading guys off in a flurry of activities.

Back in 2007, oil was trending up into infinity and beyond, and everyone was in a great mood. I don’t know about now. But my point here is, these kinds of reporting are great and useful.

For a trader.

But you are not a trader, are you? You don’t trade Forex or options for a living, do you? Because if you are an investor – and I define an investor as someone that holds investing instruments for the medium to long-term, then SHUT OFF the TV. They are worse than useless. They are downright detrimental to your investment portfolio.

The business reporting business, much like the regular media outlet, is like a stage. There is a cast of characters. They play their roles to the T, and they do not improvise. The networks themselves are self-serving media machines that get turned on for one reason and one reason only: to make a profit. Next time you see Maria Bartiromo, Erin Bennett or Becky Quick, you need to realize who’s paying their bills. It’s the advertisers, usually financial service companies that fill up these 10-20 second slots right after they tell you they’ll be “right back”. And who do they return with after the commercial breaks? Oh don’t you know it, it’s the in-house economist/strategist/analyst from those very firms.

Do you see what I see here? I see irreconcilable conflict of interest. I see many of those guests coming on the show with a very clear agenda in promoting a certain investment style, a sector which they are experts (and happen to do business) in. The intentions are not always malicious, but it does place a bit of a gag order on the interviews themselves. After all, should a disagreement arise, how far can an anchor go on challenging their guests’ positions, knowing fully well their counterpart is partially footing her salary.

And then there are those anchors that leave you scratching your head. These are the personalities that would be better off working in the pits of the Chicago Options Exchange. Because they seem to confuse their responsibility in covering useful business and economic analysis, with pulling hourly trading tricks out of the hat. Watch this (especially towards the end) and tell me there’s any integrity in what they are doing here. What’s the obsession with actionable items, are they trying to cure a rash? I don’t know if what they are selling is going to show up on some late-night infomercials, but I ain’t buying.

Lastly, there’s the experts themselves. Now given these are rational, intelligent analysts and economics that have swum against the tide and now at long last proven right. They come on the show with little to sell. What happens? Firstly, there’s very good research indicating that (much) more often that not, one year of correct outlook is usually not followed by another. So statistically speaking, the much celebrated genius you are watching on screen is probably going to be wrong in whatever it is that he is championing right now.

Secondly, there is the issue of ego. Imagine if you are an academic that has been writing papers on some obscure anomalies in the market or impending doom for years, floundering in relative obscurity. To be proven right all of a sudden, exalted to rock-star status, touted on cable news as the sage, paraded trough conferences like a peacock, what would that do to an average man’s ego? They may be genius, but they are still ego-centric just like everyone else, right?

It’s easy then to see how they could be affected by newly-found fame, attention, influx of respect and adoration. Not wanting to disappoint, or merely driven by stubbornness to continue being right, it’s no surprise that success in market predictions are rarely replicated, year after year.

So with all these: Conflicts of interest, confused role-playing, ignited by gigantic egos. Are you not better off by turning off the cable news? Pick up the FT or WSJ, brush up on the investment classics. There’s more than enough sense out there to keep your money safe.