Felix Salmon


Nick Rizzo
Sep 16, 2011 00:44 UTC

FBI agents have received training that “mainstream” Muslims are “violent” terrorist sympathizers — Wired

The heretofore rocky Groupon IPO could come as soon as late October — Dealbook

Goldman Sachs is shutting down its Global Alpha hedge fund — WSJ

Jesse Eisinger: How much capital a bank like, say, Wells Fargo, has is largely “guesswork” — ProPublica

In this climate of economic uncertainty, Black Swan funds are soaring — Bloomberg

Geithner reportedly wants the EU’s bailout fund to be a lot like ours — Reuters

Alleged UBS rogue trader’s last Facebook post: “Need a miracle” — FT

The SEC steps up its CDO probe, and may also be near a settlement with Citigroup — WSJ

The “Texas Miracle” for jobs is largely attributable to growth in four metropolitan areas — The Atlantic Cities

John Mack will step down as chairman of Morgan Stanley — Dealbook

Losing your job during a recession can cut your earnings by 19% — Brookings

All these stories, plus many more, appeared today at Counterparties.com with witty tags and amusing headlines. Please check us out there if you haven’t already.


1. That sure is enlightening. Here is a Gallup poll from last month that showed that Muslim Americans were the LEAST likely to approve of military attacks against civilians! It actually kind of shocked me: http://www.gallup.com/poll/148763/muslim -americans-no-justification-violence.asp x

2. That means Groupon is burning even more cash, at a faster rate, as a bigger percentage of revenue, and the rate is itself increasing (2nd derivative AND 1st derivative positive!). Time to fleece the public for funds!

3. Goodbye global alpha

4. Capital? What Capital?

5. If black swan funds are anything like bear funds, they’ll be out of business soon, even if the market does drop, or even if there is volatility. Because of the “daily reset”, they perform the opposite of dollar-cost-averaging, meaning they DROP in the long term, particularly when volatility are high. Short the bear funds, AND but puts on the long funds

5. Can we send Geithner over to the Bundesbnk, i mean, ECB? Perhaps he can be Trichet’s boss? Might save Obama. Too late, Obama has already blown his Presidency!
http://economicmaverick.blogspot.com/201 1/09/moment-obama-ruined-his-presidency. html

That’s all for now! More later from the Economic Maverick. Thanks for the great stuff

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Can Netflix still win when cable TV loses?

Felix Salmon
Sep 15, 2011 22:44 UTC

Ryan Lawler makes a very important point: even as the number of people living in poverty continues to rise, and median incomes have gone nowhere since 1996, the price of cable TV just goes inevitably and inexorably upwards. Which is a nasty dynamic, since cable companies make a huge proportion of their money by selling their service to the poor. A whopping 40% of US households spend all of their income on food, shelter, transportation and healthcare, leaving nothing for the modern necessities of cable TV and phone service.

While Gawker’s Ryan Tate sneers at “Netflix’s entitled yuppie customers”, then, the reality is that a huge reason why the Netflix stock price was so bubblicious to begin with is that investors could see that it was vastly cheaper than cable TV. And that’s a value proposition which is very compelling when you’re struggling to make ends meet.

So the implosion of Netflix, today, is interesting because it seems to indicate that Netflix’s recent unilateral price rise has significantly slowed its subscriber growth — or even possibly put an end to it altogether. No longer does it seem sensible to bet on Netflix supplanting the cable operators as the video provider of choice to cost-concsious America. And that, it turned out, was a large part of what was embedded in the share price.

Netflix is still a formidable competitor, and the likes of Google and Hulu have a lot of work to do before they can credibly challenge it as a cable alternative. In fact, right now nothing is a true cable alternative — and the cable companies are desperate to keep it that way.

Which is why it’s important to note this, from the LA Times report on how the Netflix/Starz deal fell apart:

Representatives for the cable network owned by John Malone’s Liberty Media were insistent that Netflix create a new “tier” for subscribers who wanted its movies at a higher price than the $7.99 it currently charges for online video. That would have put Netflix more in line with the pricing of cable and satellite companies, a step the video company apparently wasn’t willing to take.

Essentially, Starz wanted to turn Netflix into another cable company, and Netflix said no; the logic on both sides is impeccable. Starz makes its money from cable companies; it has no interest in seeing them disrupted. Meanwhile, Netflix makes its money from not being a cable company; it has no interest in getting into that business.

Over the long term, I’m sure that video programming is going to stop rising in price and start falling in price. The large number of poor people in the US demand it, as does the enormous rise in free video content. Even bloggers are getting in on the act now. And technologies like AirPlay are making it ever easier to watch live events on a TV without cable service. The cable TV companies are going to be the losers here; the big question is who will be the winners. Up until now, there’s been a lot of money riding on Netflix. But maybe, after today, that’s not such a foregone conclusion after all.


netflix doesn’t have enough new content to be a direct competitor to cable. It’s a niche add-on for most people. Thus the outcry over the price increase. Most people that use netflix aren’t ditching cable they are using them both. If you have to give up one, I suspect most will give up the one with the old content. It’s awesome its cool but you still can’t pay to watch a new movie. that’s gonna be the sweet spot if Hollywood will come to its senses. Sell the old stuff cheap as a buffet and offer new releases on a pay per view. If netflix can’t negotiate that they’ll die. I believe hollywood wants them to die so this could be a long slow death.

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When investment banks hire risk-takers

Felix Salmon
Sep 15, 2011 21:42 UTC

Matt Taibbi is quite right about the $2 billion of rogue-trading losses at UBS. Basically, investment banks hire for risk-takers; they shouldn’t be surprised when this kind of thing happens.

The brains of investment bankers by nature are not wired for “client-based” thinking. This is the reason why the Glass-Steagall Act, which kept investment banks and commercial banks separate, was originally passed back in 1933: it just defies common sense to have professional gamblers in charge of stewarding commercial bank accounts.

Investment bankers do not see it as their jobs to tend to the dreary business of making sure Ma and Pa Main Street get their $8.03 in savings account interest every month. Nothing about traditional commercial banking – historically, the dullest of businesses, taking customer deposits and making conservative investments with them in search of a percentage point of profit here and there – turns them on.

In fact, investment bankers by nature have huge appetites for risk, and most of them take pride in being able to sleep at night even when their bets are going the wrong way.

Taibbi is receiving some blogospheric pushback, because the term “investment banker” means two very different things depending on the context. On the one hand, there’s investment banking as in M&A advice and old-fashioned merchant banking. A typical sentence would be “traders have replaced bankers in the executive suite at Goldman Sachs”. And then there’s Taibbi’s meaning: investment bankers as opposed to commercial bankers, or people who work at investment banks rather than at commercial banks. These are the people that the Vickers report is scared of.

The fact is that old-fashioned advisory bankers are pretty irrelevant here: the big money in finance has always been where the balance sheet is. And balance sheet is used on the trading floor and in commercial banking. So let’s put the fee-based bankers to one side: it’s absolutely true that investment bankers tend to love risk, even as commercial bankers have historically shunned it.

I’m reading The Devil’s Derivatives right now, Nick Dunbar’s fantastic book about credit derivatives traders. (I’ll have much more on the book when I’m done with it.) In the introduction, he makes this distinction really well, introducing the hotshot traders he dubs “the men who love to win”:

This rare, often admirable, but ultimately dangerous breed of financier isn’t wired like the rest of us. Normal people are constitutionally, genetically, down-to-their-bones risk averse: they hate to lose money. The pain of dropping $10 at the casino craps table far outweighs the pleasure of winning $10 on a throw of the dice. Give these people responsibility for decisions at small banks or insurance companies, and their risk-averse nature carries over quite naturally to their professional judgment. For most of its history, our financial system was built on the stolid, cautious decisions of bankers, the men who hate to lose. This cautious investment mind-set drove the creation of socially useful financial institutions over the last few hundred years. The anger of losing dominated their thinking. Such people are attached to the idea of certainty and stability. It took some convincing to persuade them to give that up in favor of an uncertain bet. People like that did not drive the kind of astronomical growth seen in the last two decades.

Now imagine somebody who, when confronted with uncertainty, sees not danger but opportunity. This sort of person cannot be chained to predictable, safe outcomes. This sort of person cannot be a traditional banker. For them, any uncertain bet is a chance to become unbelievably happy, and the misery of losing barely merits a moment’s consid- eration. Such people have a very high tolerance for risk. To be more precise, they crave it. Most of us accept that risk-seeking people have an economic role to play. We need entrepreneurs and inventors. But what we don’t need is for that mentality to infect the once boring and cautious job of lending and investing money.

When you’re hiring people for the UBS trading floor, you’re hiring men who love to win, congenital risk-takers. And then you surround them with risk-management protocols designed to keep them under some semblance of control. There’s a natural tension there. And if you take the hundreds of thousands of risk-takers working on trading floors in London and Hong Kong and New York and Paris, it’s a statistical inevitability that one or two of them will go rogue every year or so.

Risk-managment protocols are important, but they can never be foolproof, because they’re run by humans. So we really shouldn’t let investment bankers — by which I mean risk-hungry traders with access to billions of dollars of balance sheet — anywhere near the systemically-important balance sheets of our largest commercial banks. Losses like the $2 billion at UBS are manageable. But they’re small beer compared to the entirely legitimate losses made by the likes of Morgan Stanley’s Howie Hubler during the financial crisis. He managed to lose $9 billion, and get paid millions for doing so.

Multiply that by an entire company, and you get Lehman Brothers, or Merrill Lynch. One of the great good fortunes of the financial crisis was that neither of them was attached to a commercial bank at the time; one of the great bad fortunes of the financial crisis is that the sins of Merrill Lynch weigh down BofA’s balance sheet to this day, and are in large part responsible for the fact that, still, no one really knows whether the bank is solvent or not.


FifthDecade, LloydsTSB didn’t have a US boss either in the sense of a company in the US or an american CEO or chairman.

NRK and HBOS and B&B got into trouble over vanilla commercial and retail banking loans that went bad. HBOS was a “victim” of a massive fraud – and i mean actual fraud, not a lazy rubber stamper not ticking all the boxes – that costs it billions of pounds in its SME loans operation. Absolutely sweet FA to do with investment banking.

Frannie were always what people seem to think IBs are, that is government back-stopped hedge funds where the profits went to the shareholders and management and the massive losses were socialised, yet weirdly they are the “victim”.

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Will Warren Buffett step down as Berkshire CEO?

Felix Salmon
Sep 15, 2011 19:53 UTC

Alice Schroeder, Buffettologist exraordinaire, notes the careful form of words in the press release announcing the hiring of Ted Weschler as an heir to Buffett’s investing throne:

The press release contains another tantalizing hint. Twice, it refers to the period “after Mr. Buffett no longer serves as CEO.” These cues are subtle — way too subtle to mean anything definitive. But it makes me wonder whether, at some point, Buffett is going to appoint a CEO while retaining the nonexecutive-chairman role.

That would be a move the business world has definitely not been expecting. It’s also one that may make sense, for Buffett as well as Berkshire. He would remain the company’s most valuable asset — making the phone calls that get those lucrative deals done, playing the world’s economic statesman, and flattering business owners into selling their companies to Berkshire. Meanwhile, Weschler and Combs would have the primary responsibility for investing Berkshire’s $10 billion a year of cash flow and constantly compounding pool of assets.

Schroeder’s point is that Weschler has serious CEO chops.

He does, in fact, cover all the bases: finding acquisitions, financing them, overseeing management of acquired companies, designing their compensation, allocating capital of the entity that owns the businesses, and understanding lending and credit markets from a bank’s perspective. He also knows how to finance acquisitions in special situations such as bankruptcies; manage long-tailed risks like his former employer W.R. Grace & Co.’s asbestos liability; and control equity- portfolio risk in a volatile market using positioning, derivatives and moderate leverage.

Meanwhile, Buffett himself has always been a better investor than CEO. He basically does three things: he speculates in stocks; he buy insurance companies and invests the enormous amounts of cash they have on hand; and he buys companies which throw off cash which he can then use to invest. Essentially, he’s an investor. By contrast, if you give him a company and ask him to grow it, he’s much less good. Look at Berkshire holdings like Dairy Queen or See’s Candies or NetJets or that furniture store in Omaha: none of them have seen particularly notable growth or breakout success under Buffett’s watch.

So it makes sense to me that Buffett semi-retire to an elder-statesman-and-CIO role much like that of Bill Gross at Pimco, and hand over the reins as CEO to Weschler. Or possibly Ajit Jain. And this could happen any time: Buffett is 81, and really doesn’t need the boring managerial hassles of being a CEO. So long as he’s Warren Buffett, and has the “chairman” title (which will be as long as he’s alive, most likely”), Buffett won’t lose any of his Oracle status — he’ll be in the happy position of getting credit when things go well for Berkshire, while not getting all or even most of the blame if things go badly. As Schroeder says:

It’s significant that Buffett has begun the transition to a new investing team, whether he remains CEO in the years ahead or not. Buffett is taking his hands off the reins of the portfolio. Hiring a manager of Weschler’s caliber is an important signal. The transfer of power won’t happen overnight, but its magnitude is something to ponder for those who are interested in the markets. Meanwhile, we get to watch a new story, featuring new players, unfolding at Berkshire Hathaway.


Thanks, y2kurtus. This is a difficulty with comparing stocks and bonds by “earnings yield”. In some businesses, a fraction of the earnings must be reinvested simply to avoid shrinking.

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WATCH the euro crisis explained with lego

Felix Salmon
Sep 15, 2011 18:49 UTC

Michael Cembalest’s idea of explaining the euro crisis with lego was pure genius. So, of course, I had to go out and find some lego myself; the above video is the result. If you look very closely, you might even be able to see the French banks!


who is the dinosaur?

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The can-kicking bank bailout

Felix Salmon
Sep 15, 2011 17:07 UTC

When the WSJ published an allegation on Tuesday that BNP Paribas had been cut off by US money-market funds, the bank responded with indignation, saying that it “categorically denies the statements made by this anonymous source”. But it never quite came out and said that it had access to US money-market funds — it just said that it still owed them money, and that it was “fully able to obtain USD funding in the normal course of business, either directly or through swaps”.

Today, Gareth Gore reports in a bit more detail what’s going on, and the WSJ report seems to be holding up:

US banks have become the unlikely saviours of their ailing European counterparts, signing private agreements to lend them billions of dollars in recent weeks after an exodus of nervous money market funds left many without ready access to short-term funding.

Agreements worth tens of billions of dollars have been signed in the last month alone…

Loans have been made as repo agreements, with banks posting assets such as corporate loans and mortgage portfolios as collateral.

“We were able to use some of our assets to get long-term repos,” said one board member at a French bank. “It was a move we made to monetise some of the assets we had on the balance sheet which were good, quality assets, and also to mitigate the withdrawal of money market funds.”

Meanwhile, in a huge move reminiscent of the worst days of the financial crisis, the biggest central banks in the world — the ECB, the Fed, the the Bank of England, the Bank of Japan and the Swiss National Bank — have announced a massive coordinate injection of unlimited three-month liquidity, designed “to offer banks as many dollars as they needed”.

Yes, I think that it’s fair to assume the reports of a liquidity crunch were pretty much on the money.

The world’s central banks, then, have managed to kick the can another three months down the road — but I’m with George Soros on this one: we’re pretty much at the end of that road, now, and something much more substantive has to be done.

Soros wants a much more federal Europe, with a new treaty setting up “a European treasury with the power to tax and therefore to borrow”. If that doesn’t happen, he says, we face “a possible financial meltdown and another Great Depression.”

Tim Geithner reportedly has a slightly more modest idea, which is just that the ECB can and should leverage the EFSF, turning the couple of hundred billion euros remaining there into something much larger. His model is the US TALF, which had roughly 10-to-one leverage, which would imply that a similar program in Europe could generate more than $2 trillion of firepower.

I’m not at all convinced that the independent ECB would go along with such a scheme. Here’s Soros again:

The ECB’s earlier decision to buy Greek bonds had been highly controversial; Axel Weber, the ECB’s German board member, resigned from the board in protest. The intervention did blur the line between monetary and fiscal policy, but a central bank is supposed to do whatever is necessary to preserve the financial system. That is particularly true in the absence of a fiscal authority. Subsequently, the controversy led the ECB to adamantly oppose a restructuring of Greek debt—by which, among other measures, the time for repayment would be extended—turning the ECB from a savior of the system into an obstructionist force. The ECB has prevailed: the EFSF took over the risk of possible insolvency of the Greek bonds from the ECB.

The point here is that the EFSF was specifically designed as a fiscal alternative to the ECB; if the ECB wasn’t happy putting up $440 billion of its own money for such schemes, it’s unlikely to put up $2 trillion.

Still, today’s news is encouraging — it shows some progress, on the central-bank front, in terms of willingness to grapple with the problem. Europe’s choices are simple: it can bail out its banks on a federal basis so that they in turn can write down their sovereign-debt holdings; it can bail out its sovereigns on a federal basis and then get the sovereigns to bail out the banks; or it can do a bit of both. In providing unlimited liquidity to Europe’s banks, an important precedent has been set. Now we just need to get them a few hundred billion dollars in capital. But I have to admit I have no idea where that might come from.


I’m gonna put my bet on empty, irrelevant slogans and Magic Beans.

Yep, Magic Beans it is. That’ll fix everything.

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Thought experiment of the day, job-creation edition

Felix Salmon
Sep 15, 2011 13:16 UTC

Note to “job creators” out there: With $2 billion, you could employ 40,000 people for a full year at $50,000 each. #roguetradeless than a minute ago via web Favorite Retweet Reply

My colleague Pedro da Costa has this intriguing tweet this morning, and I thought I’d throw it out there for bloggers and commenters: let’s say I gave you 40,000 people earning $50,000 apiece, and asked you to put them to work for one full year. Could you create a business worth more than $2 billion? How would you do that? And how many people would that business employ going forwards?

(Small print: yes, you can spend $X over and above the cost of labor, but then the business has to be worth $X+$2 billion. And you can pay some people more than $50,000, so long as you still employ 40,000 people in all. And for the purpose of this thought experiment, let’s ignore things like payroll taxes and the like.)

I’m sure that Andrew Mason would have some ideas here: he’s one of the few entrepreneurs who isn’t shy about hiring a lot of people.

My idea: outsourced mortgage servicing. Create a mortgage servicer from scratch, where everybody who calls in is given a single point of contact — a unique individual who owns their problems and is charged with finding solutions to any problem, including refinancing and loan modification. There’s got to be a way of building up enough trust with both banks and homeowners, over the course of a year, to build a $2 billion business somehow.


“My idea: outsourced mortgage servicing. Create a mortgage servicer from scratch, where everybody who calls in is given a single point of contact — a unique individual who owns their problems and is charged with finding solutions to any problem, including refinancing and loan modification.”

That’s assuming you can find enough qualified people to do the job well.

If you offer health insurance benefits as well, I’d gladly sign documents (with my own name, or someone else’s…your choice) for $30K/yr. As long as I don’t have to read any of ‘em.

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Nick Rizzo
Sep 14, 2011 23:02 UTC

Greece’s best plan is to “default big,” says former Argentine central bank governor Mario Blejer — Bloomberg Businessweek

Barclays was lucky, Bank of America was stupid — Dealbook

One of Warren Buffett’s successors had a twenty-five year streak of running every day — WSJ

AOL, Microsoft, and Yahoo have formed an ad pact to take on Google — TNW

“The correlations we note among industry sectors are profoundly and dysfunctionally high” — FT Alphaville

Federal prosecutors are investigating whether eBay took confidential information from Craigslist — Reuters

And Donald Trump’s new tenant paid its deposit in gold bars — WSJ

Find all these stories, and many more, on Counterparties.com.


http://www.nationalreview.com/agenda/277 220/megan-mcardle-and-arnold-kling-psych ic-inequality-reihan-salam

Rarely can I stand to read anything from NRO, but this post highlights a key concept. Our economic measures focus on GDP — but for a wealthier country, where the basic essentials cost only a small fraction of the per capita income, it is a poor proxy for what really matters.

How might we even begin to measure “psychic income”? Are there perhaps instances where “psychic wealth” and “material wealth” would drive different policies?

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Chart of the day, retirement account edition

Felix Salmon
Sep 14, 2011 20:13 UTC


Many thanks to the good people in the Thomson Reuters HR department for helping put the data for this chart together; it’s my contribution to the TR Financial Wellbeing Month.

The blue bars on the chart show the average balance, quarter by quarter, in TR’s 401(k) accounts — more than 20,000 of them, at last count. The latest figures show an average balance of $94,581, an all-time high and an increase of $19,157 from a year earlier. That’s a rise of more than 25% in one year.

Americans tend to be much more obsessed with the stock market than the citizens of any other country; when it’s rising they’re happy, and when it’s falling they’re sad. One reason for that is that they tend to pay attention to retirement-account balances, and a falling stock market makes them feel that they’ve just lost lots of money.

For instance, from the third quarter of 2007 to the fourth quarter of 2008, the average 401(k) account dropped by $18,281, or 26%. That’s a lot of money: Thomson Reuters pays well, but we all could use an extra $18,281. And when you keep on paying money into your account, only to see it decline for five successive quarters, you can definitely get the feeling that you’re throwing you money away, and that you’d be better off not bothering. Wouldn’t you be better off not paying anything into your account, and instead spending $18,281 on, say, a new car?

Actually, you wouldn’t. The y-axes on this chart both go all the way to zero, which means that the decline in 401(k) balances really was a lot smaller than the decline in the broad stock market. And our retirement balances have been doing pretty well since the bottom of the market, too — better, actually, than the S&P 500.

What’s more, everybody wants to be invested in stocks when the market’s going up — just not when it’s going down. Is it possible to actively manage your 401(k) so that you try to go long stocks when they’re going up and then move to cash or bonds when stocks are falling? Well, you can try. But that’s called timing the market, and it tends to end in tears. You are not a hedge-fund manager, and even they get these things wrong. Don’t think you can time the market, because you can’t. So if you want to be invested in up markets, you have to be invested in down markets, too. And as the chart shows, your retirement account will tend to grow most of the time anyway.

The main reason for this is that we’re not just sitting back and hoping that the stock market will do all the heavy lifting. Every paycheck, we’re putting money into our 401(k) accounts — about 8.7% of what we earn, on average. And so every quarter, we see our balance rise not just because we’re great at investing, but also because we’re manually adding to the pot.

And in fact that second aspect of saving for retirement is significantly more important — and much more under our own control — than the first aspect. When it comes to our 401(k) plans, people tend to focus far too much on the quarter-to-quarter fluctuations in mark-to-market asset value, rather than trying simply to save as much money as they can for when they’re older. My advice is to think of a retirement account like a piggy bank: you put money in there on a regular basis, and eventually it grows to a substantial sum. Once it’s in there, of course, you try to invest in something reasonably sensible — target-date funds are a pretty good idea, so long as their fees are low. But you don’t have much control over the internal returns on your retirement funds; you do have control over how much you save. So concentrate on the latter more than the former.

And in fact the lower the stock market, the better for someone who won’t be retiring for another few years. I, for instance, won’t be retiring for another couple of decades — and so what I want is for stocks to remain as cheap as possible for as long as possible, so that I can buy as many of them as possible with the money I save. When stocks rise, that just makes them more expensive.

So when you get your 401(k) statement, just file it away in a drawer, unopened. Knowing your balance won’t do you any good, unless perhaps it scares you into saving more. If you’re already saving as much as you can, or if you’re maxing out your 401(k) contributions anyway, then it’s a good idea to just ignore both the stock market and your retirement balance. Neither of them is nearly as important to you as you think, especially since there’s nothing much you can or should be doing in response to either piece of information.


This is quite possibly the worst chart ever. For those of you who were even remotely fooled into thinking that this guy has any idea what he is talking about; please think again. The chart is a joke. What is wrong? Let me help:

1) You can not chart average balances to compare total returns with an index. The contributions being made to the 401k accounts would skew the results (like it does here)

2) The chart axes should show percentage changes, not absolute values. This also skews the graph and makes it impossible to interpret (not that the underlying data has any validity)

3)A growth in 401k account balances could be attributed to non-market factors such as: more people retiring or leave the firm (smaller denominator), accelerated contributions (higher numerator), or some other factor.

The only thing that this chart measures, at least in proportional terms, is the author’s relative level of stupidity vs. the average population. As you can see it is rising over time, presumably as he becomes more confident in his poorly researched theories. Honestly, what qualifications do you need to be a financial writer? Apparently none.

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