Saturday, September 19, 2009















mcdruid said...

I am not sure you should dismiss US Government contributions to Pharma R&D as you seem to. I can't yet find any hard numbers, but there are some articles ( and that suggest Pharmas' drug portfolios are deeply indebted to public funds. The former article points out that a third of Bristol-Meyer's anti-cancer revenue in 1995 is due to a single, government developed drug.
An accurate accounting would also have to consider failed drugs: ones that don't work. This also constitutes an expense for developing new drugs.

Nemo Incognito said...

John, you might want to look at some commentary on China, either here at my blog or at Pivot Capital here. Its doubtless the big consensus long / nothing to see here position for a good many people, not least of all Australian economic forecasters and Goldman. Additionally, it looks like politics there might be less than stable, Xi Jinping just missed his promotion.

Andy said...

I generally agree with your comments here, but I believe you are a victim of your own ideological blinkers in thinking that making money is the be all and end all of human endeavor. This is the same virus that infected the bankers that caused the financial crisis. But, keep up your good work in rattling the cages of ideologs everywhere.

John Hempton said...

The blog is for fun. I run an investment company whose job is to make its rich clients richer.

I am essentially non-egalitarian in my endeavors.

Whether it is ethical or not - I will leave that for others to decide...

But I see stories about how sports people (multi-millionaires) are typically broke 3 years after quitting.

I can fix that.

I can't make a vaccine. I can't do nuclear physics.

I am not very high up on the global usefulness scale.

Sorry if you find otherwise - but I write an investment blog and that is it.

And yes - i use the blog because smart people sometimes tell me I am wrong. And I like that.

Being told I am wrong is easier emotionally than having the market demonstrate to me I am wrong.


William said...

There will be a V-shaped global economic recovery and growth in the U.S. will surpass expectations.

The right wing does not believe that keynesian stimulus works. It does. The left wing does not believe that monetary policy works . It does.

They are both wrong and are underestimating how vigorous this recovery will be. Everything we know about business cycles says that this one coming is going to be incredibly strong. Being long on stocks now is like being short in late 1999 early 2000.

It's also the best time to buy a house in the U.S. but try telling that to people at a cocktail party.

John Hempton said...

on v shaped - I agree.

Keynsian stimulus works.

stranger said...

joo be calm..

what's --HSBC-- up for !?
tell us anythings...

BrianNowhere said...

I love this idea. For example when Obama got elected, gun sales rose and gun related stocks went up because ideologues on the right thought he would ban guns.
Then when he didn't do that, the sales and stocks went back down. It was an ideological bubble.

One thought would be to get in on the same ride insurance stocks will go on if/when the Obama reforms pass. Many ideologues on the right will assume the stocks are as good as dirt and dump driving the price down. Then when it becomes clear that public insurance will survive "Obama Care" the stocks will slowly go back up.

Get in at the right moment here and you could clean up.

This is my first post here but I may be checking back in. The wife and now I are trying to learn how to play in the stock market and have been dabbling in Fannie and Freddie because it's so affordable to play with now. I still have no idea how to short stocks and find it a bit intimidating to learn.

Can anyone here point time to any information on how to short stocks?

I am sure that will be important to know when it comes to making money off of ideologues, something I too am very interested in because I truly believe stocks and commodities run on pure emotion more than anything else. I knew the housing market would crash two years out and I know very little about stocks. I did know that most people can't afford a $500,000 house in the town I live in.

I predicted the tech bubble and crash based on the same common sense approach and was 100% right on the money on that one. Unfortunately I never figured out how to make any money off of this kind of knowledge/sense. I really would like to be ready to capitalize next time I see a trend like that.

Anonymous said...

A comment on making money and the whole global warming thing. This is more "food for thought" than real advice. I dunno how well it fits in with your theme and it needs a brighter man than me to work out how to get rich from it.

If you look at the cost of doing something in a "low carbon" way vs a "carbon intensive" way, there's not too much additional cost. Often there's a cost benefit, because you're wasting less energy or whatever.

The *trick* is that often businesses have made huge capital investments on the back of doing things the carbon intensive way.

People have thought a lot about the obvious things, e.g. power stations and aluminium smelters.

There's one other big area that people haven't talked about endlessly - *property*. Property hangs around for 20-40 years on razor margins. Long leases. If cap rates go down a percent REITs fall over like dominoes. The whole sector is so finely tuned it can't cope with big kicks up the bum (witness the last 12 months).

I'm pretty sure that all this Copenhagen stuff will end up being derailed. Then in 10 years time people will wake up and we'll have a big "oh shit" moment. Carbon taxes and whatever will be to late. We will get direct government action at it's most headless.

And what's going to happen? Power and aluminium is easy to work out. No idea what happens to transport. But commercial property, where every building suddenly needs all its windows changed and insulation installed and low energy air-con installed and so on? That's 5% of the value of the property in a lot of cases. Government will just mandate it. No compo. Lessees won't cop it. Lenders won't cop it. REIT managers will probably try to pull out yet more fees. Investors will get screwed.

So I think commercial property is a long-term avoid. Particularly anything with a lot of glass and air-con. If you can think of a magic way to keep a short on these guys on long timescales you could do well.

- disclaimer - I have a lot of carefully picked REIT sub-debt at the moment I picked up very cheaply over the last few months.

But What do I Know? said...

@ William

I guess faith in the "business cycle" is the new religion of the 21st-century. Just a few years ago the economists were telling us that they had overcome it; now it is back and will lead us to the Promised Land.

Those who are clinging to the idea of a cycle now when they perceive that we are near the nadir are the same ones who a few years ago refused to accept that we could have an apex.

I'm not saying another bout of increased leverage and currency devaluation can't raise nominal asset prices, but the certainty that it is inevitable and imminent is as dangerous to one's financial health (as is any certainty of inevitability and imminancy.)

Anonymous said...

your a smart guy, I enjoy reading your tirades.

Also, I learn alot from your technical analyses, especially Fannie and Freddie, I did not have any comments because, my mind was still tryiing to catch up with everything.

I am in the energy business and I think that there is alot of misconceptions in the energy business.

Most people in the energy business are extremely right wing.

People sneer at wind or solar power and assume it will never amount to anything. Peak oil is another topic which gets only stares when one mentions it. The Oil industry lives in a ideological world, one which does exist in reality.

Big oil thought that the U.S would need to begin importing LNG immediately and spent billions to be wrong.
Big oil thinks that wind and solar are 100 years away from being competitive - wrong.
Big oil thought that there was not domestic natural gas to explore - wrong
Big oil thought that small oil domestic oil fields were a waste and sold them - wrong
Big Oil has just experienced massive inflation in its costs and expects to be able to pass those costs on to consumers.
Big oil is doing everything to thwart the Obama Administration.

MikeT said...


I'm sorry but this actually pertains to the FRE series. I put it here because I thought there is a larger chance that you will see it:,0,2560658.story

You were not worried about homeowners voluntarily walking away from their mortgages in that long write up. Does this at all change your mind?

I haven't seen the raw data or the actual study, but 588K is clearly a pretty big number, and it's no help that these are disproportionately prime.

I would appreciate your thoughts, thanks.

John Hempton said...

Will the anonymous oil exec please contact me.

On some of those statements I know you are right - eg LNG and the US...

I need the second part - which is how to make money.


John Hempton said...

Re the walking away. Strategic default is a big issue - but it tends to affect large value houses.

The AVERAGE mortgage at FRANNIE is under 200K in the traditional book.

There is almost nowhere in the US where you can default on a $200K mortgage and immediately rent something AND substantially reduce your outgoings.

If you default you need a few months mortgage payments saved in cash to (a) move, (b) pay the rental bond and inditial rent on the new house.

There is plenty of strategic default going on - but the place is 900 thousand houses with 1.3 million mortgages or even 500K houses with 800K mortgages.

There is very few strategic defaults in Frannie's traditional book because strategice default is difficult for those people.


But What do I Know? said...

Re Walking Away

Mr. Hempton, I agree with your analysis on the fact that you can't substantially reduce your payment by defaulting on your mortgage and renting. I think there is another issue (not sure of the size of it) of people simply ending their mortgage payments while continuing to live in their house. I personally know some people who have done this for around 6 months now with no action on the part of the mortgage servicer. I live in a state which is not particularly favorable to defaulters (as far as I know).

I assume this situation is temporary, but if the servicers really are reluctant to foreclose then won't that cause losses to Fannie/Freddie since they are guaranteeing payment to the bondholders?

I have no idea how widespread this refusal to pay is, but I'm sure that the GSE's would prefer to amortize the non-payment and call the loan good. It does create a cash flow problem, however.

John Hempton said...

The default for housing happens. People just stop paying.

Shows in the deliquency data - so I have modelled it.


Josh Kalish said...

I always enjoy your blog. I do disagree with your analysis on health care. Once you take out murders and accidents the US does better than almost every country. If you adjust out black people who are for some reason more likely to be ill across all income groups, then you are at the top by far.

My gut is that people know that (and as much as the US is not any sort of free market paradise today) and they do not want it to change. I think there's going to be a point where a long XLH/short SPU type trade will outperform. You just have to put it on before the first vote on a big healthcare "reform" package.

In the same vein, IMHO most people either believe that local municipalities are headed for bankruptcy or that this is overrated. A good analyst could put on a widening trade with shorts in some muni's and long others.

Anonymous said...


Not exactly in the equity sphere, but in currencies and commodities there seems to be a lot of ideological capital invested in the notion that the evil government will destroy the value of money and the US will soon experience (hyper)inflation.

US bankers/traders seem as a rule to be strongly disposed to a Libertarian/Randian worldview and the "dollar goes down forever/commodities to the stars" trade seems justified largely with ideology driven arguments that the dollar will be deliberately destroyed even as the US trade deficit declines sharply and actual inflation seems remote.

To make money of that ideology driven trades unwind (if correct) would require going long dollar, and for those with lots of intestinal fortitude, short commodities, esp. gold and oil.

babar ganesh said...

how much of the depressed price of the rating agencies is due to perception that their business will be damaged potential regulatory changes?

MikeT said...


This is another nagging question I have about FRE/FNM

Now that they are allowed to guarantee much larger mortgages than before, how much confidence do you have in the future performance of their "traditional" books? It seems to me that the past data we have about the behavior of their guaranteed mortgages cannot necessarily be trusted to predict future losses. We are introducing another uncertainty that was never present in the data sets before.

I don't really have much knowledge on how much the book is evolving over time, but I thought you might be better informed.

Anyhow, does this consideration weigh at all on your assessment of FRE's earnings power? Given that even a few basis points of net defaults make a huge difference in valuation...


TH said...

Fact: World GDP was estimated to be about 32 trillion per year in 2000. World GDP is estimated to be 64 trillion per year in 2009.

Subjective Feeling: Technology advances (everything, not just computer related) made over the last 9 years don't seem all that significant given that the pool of money from which to draw investment has probably doubled.

Hypothesis: global wealth growth is outpacing technological innovation.

Conclusion: global marketing may be the most important thing any company should do right now, not R & D.

Anonymous said...

Zion OIl and Gas. Heh.

Google it, Qualitystocks Zion Oil.


-Bob Dobb

Uno said...

The biggest mistake American ideologes makes is they believe that America has a free-market.

For example, there is currently no free market in heatlh care - try and start you own Medical Systems and train your own doctors by a new method of care.

For example, trying and create a competing legal association to compete with the US Bar Assocation of Lawyers.

For example, try and start a "Primary Dealer" and get in on the gravy train of printed money from the US Federal Reserve.

No free-market in America - most people think that there is - don't know how to make money off it.


Anonymous said...

Most people think that Economics is a science and has some kind of truth to it.

Anonymous said...

Most Americans believe that America can never collapse nor lose her standing in the world no matter how lazy, unproductive, ideological, ect.. the people become.

"Never Bet Against America"

No reminds me more of the old U.S.S.R then America today - go ask any old Russian that now lives in New York.

The way to make money off it is to bet against America.

Rob said...

The NY Times just (9/22/09) wrote about a UPenn study that explains that the poor relative performance of the US system in during the middle years of life, while in latter years patient care compares favorably with other countries. Why? Until recently too many Americans smoked, rates of obesity are higher than many countries and drug use is significant. Combine that with 12 million illegal aliens who only seek health care when it is absolutely necessary, you can account for much of the problem. But the cause is not the delivery system.

Anonymous said...


Can we assume you will be voting for Peter Schiff in his run for a Senate seat?

Can we assume that this will quite possibly benefit Peter's brokerage business more than it will be an actual success at campaigning for office?

On a second note, did you know that Pete's dad is currently serving a prison sentence for continually breaking certain U.S. laws?


Bob Dobb

Anonymous said...

The Fed reserve bought ~$800 million of mortgages so far in 2009 while there have only been about $650 million mortgages orginated.

The Fed reserve is trying to put a floor under housing prices and hence a floor under property taxes to stop local and state governments from going bankrupt across the nation.

Many, many, many US city and state governments are insolvent. There needs to be an across the board blood letting in US government.

Current America is divided in public employees with jobs, health care, and pensions.

Private employees with nothing, left to compete against illegal Mexicans and H1-B Indian and Chinese labor.

Not sure what will happen. Perhaps all US citizen get government jobs and everyone else is a slave.

Anonymous said...

Ron Paul is going to become the next president of America.

Anonymous said...

Each day more Americans are realizing the home "ownership" in America means slavery.

More and more Americans realize the renting means no property taxes, no maintance, no insurance, and no real estate cartel transaction costs.

Freedom in America means being a renter.

If you want to invest in real estate then you simply own a few mortgages of home "owner" slaves and them send you a check every month.

Name said...

Ease up on the creationism attacks. We get the message: You think creationism is ignorant and absurd. Collect your bozo button and move on.

Anonymous said...


There is a great little site by the name of

With your guess that Ron Paul will become the next President of the United States Of America, now, I would love to include you into their site. But I doubt allows an entry posed by someone named Anonymous.

-Bob Dobb

Alex said...

Here my (late) 2 cents about stupid beliefs/trends:

photovoltaic and wind turbines are very hot and trendy, but the reality is that without subsides from the government they just don't make much economical sense. My feeling is that they prosper RIGHT because they're capital intense: a lot of people can steal from that big amount of almost or totally free money flowing from government and banks. Myself i got a proposal to invest in a photovoltaic project where investors recover immediately 50% of the sum invested because they pump up cost and get 85% leverage.
My opinion is that the only real cheap energy source will be new generation nuclear plants, geothermal energy (which is exploiting earth's nuclear energy...), high altitude wind energy, solar termal energy. Google invested in the latters 3 technology.
Makers of photovoltaic panels are just like hard disk producers: high technology risk, high research cost, fast obsolescense. I would never invest in any of these.
Having said this, the lowest hanging fruit for energy generation is actually saving energy. I'm pretty sure that saving a wasted kw is todays' world is much cheaper than producing it.
These are the areas where i'd focus energy investments.

I would stay away like hell from personal computer producers. Everybody is noticing that a powerfull and up-to-date computer is just not needed anymore. You just need a light computer with internet: google and other online resources will enable you to do whatever you need to do. You don't need a new expensive OS each 2 years also, only the pc producers need it so that they can sell you a newer and more expensive machine.

Robotic may be next big thing. I see robotic innovation everywhere and not many talking about it.
We have the need and we have the technology now.
We have robotic arms:
We have full esoskeleton for soldiers:
We have robot mule:

We need this technology for health care, for security and surveillance, for elders assistance.

My feeling is that this maybe be all fake. It looks like western countries are pushing this argument in order to force cap & trade system, so that they can tax imported products made from high co2 producing countries, and sell their carbon dioxide sequestration technology to the same developing countries. Also this will create a huge trading market for carbon credits and many people will make money with it.
An article worth to be read:

IHMO all fake. All propaganda to make money and make WHO feel important. Do you know anyone who died of any of these flu? It's just flu. I made money myself buying Biota, sold it today, cause at this point to me it's clear it's all bullshit.
interesting article:

Soon or later people will realize that's n. 1 health problem in developed countries. At that point all the money Coca Cola and Mcdonald can put in lobbying won't be enought to stop the process. Government will be forced to act and to act fast.

Alex said...

another topic of massive disinformation:

Growing corn or soy and other plants to extract ethanol doesn't make any sense, because in modern agricolture, due to the intense usage of machinery and fertilizers, you need to invest several Kcal of OIL or OIL equivalent to get 1Kcal of food. If you convert this food to fuel, you need to invest even more energy, so the net result is less than 1kcal of fuel. It works only if heavily subsidized by government.

Using exhausted vegetable oils, animal fats or waste oil to produce biodiesel is a completely different story. You're using something which usually is trashed to extract fuel. Every year many millions of tons of this kind of wastes is... well, just wasted. Companies well positioned to take this business should do well. An investment idea could be Gushan Enviromental Energy, is the leader in china in producing biodiesel from waste, and its stock value is less than half its book value. They're facing a tax problem but i think they will do well.
more info:

Nemo Incognito said...

Uh, in my experience tax probes in China are normally one way tickets either for the founder or the company: Fu Ji Food, Gome, etc etc

Alex said...

it's not a probe. There's a new fuel tax in china since 2009, and GU is not sure they have to pay it, and made a formal clarification request to the government, they're waiting for an answer. In the meanwhile, they stopped part of the production, and put aside 20M usd to pay the taxes in case they have to. That's why share prices collapsed.

exuberance said...

It would be fun to have your take on what you look for when gaging the 2nd part, i.e. make money. It's not hard to have confidence that this or that widely held (particularly inside the bubble of a given industry) conventional wisdom is wrong; but it is a damn site harder seeing when and how the break away from that delusional state will happen. Some of this is social, but some of it is the immovable installed base(s).

General disclaimer
