Are we Blind to Evidence?

In her intriguing book The Science of Sherlock Holmes, E.J. Wagner recounts the true tale of Sir Roger Tichborne. In 1854, Sir Roger was reported as lost at sea. His mother refused to believe that her son, whom she had lovingly raised in France, was gone forever. She kept putting out inquiries, asking for any news on her son.

Twelve years after the loss of Sir Roger, it appeared that Lady Tichborne's prayers had been answered. She received a letter from Australia (from a lawyer) claiming to have found her son. The letter explained that having been shipwrecked, Sir Roger eventually made his way to Australia, where he became involved in a series of business ventures after having vowed to make a success of himself following his miraculous escape. Unfortunately, the businesses did not work as well as he had expected, and he had been too embarrassed to contact his mother.

However, he had recently seen her inquiries and was filled with remorse for the worry he had caused her over the years! The letter concluded with a request to send the money for the travel fare for Sir Roger, his wife and children. Lady Tichborne was delighted to hear this news, and sent the relevant monies to allow for the family reunion. When Sir Roger arrived in England he was received by Lady Tichborne as her long lost son, and granted a stipend of £1,000 p.a.

However, not all the Tichborne family were quite as convinced that this new arrival was indeed the real Sir Roger. After all they reasoned, Sir Roger had been a lithe man of slim frame, the new arrival was obese in the extreme (to see photographs go to http://en.wikipedia.org/wiki/Tichborne_Claimant).

While people can change their size, it is rare that tattoos disappear. Sir Roger had some, the new arrival had none. Nor is it easy to change one's eye colour, Sir Roger had blue eyes, the new arrival had brown eyes. He was also an inch taller than Sir Roger had been, didn't speak French (which Sir Roger did) and had
a birth mark on his torso which Sir Roger didn't!

Somehow Lady Tichborne managed to ignore all this evidence. It was only after her death, that the family finally managed to show that the Australian import was an impostor. He ended up serving ten years for imposture and perjury.

source: James Montier (7-May-2008)

Why doesn't CPI include commodities?

Krugam answers:

"The problem of embedded inflation applies only to prices that are set at fairly long intervals — especially to wages, which are usually set only once a year. There’s no comparable problem with commodities like wheat or oil, where the price changes minute by minute, and goes down as easily as it goes up. It may sound perverse, but embedded, hard-to-reverse inflation is only a problem for parts of the economy with relatively sticky prices.

So to get a sense of whether embedded inflation is becoming a problem, you have to purge the highly volatile prices — basically, commodities — from the picture. That’s why the Fed focuses on “core” inflation that excludes food and energy: it’s not a nefarious scheme to ignore the real hardships people face, it’s an attempt to figure out if inflation is getting built into the system."

A Billionaire's Brand Strategy

People are creatures of habit. This is an interesting article.

"Really, nothing can go wrong with the Wrigley and Mars brands," Buffett said on CNBC after announcing that he would finance part of McLean-based Mars's buyout of Wrigley. "They have faced the test of time over decades and decades, and people use more and more of their products every day."

"Brand name companies, said professional money managers who consider themselves brand investors, can often charge more for their products than their less-established competitors and weather tough times more smoothly because of their loyal customer bases."

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If you think about Coke vs. no-name cola - production costs are basically the same (same amount of aluminum, sugar, water, etc. ). Coke however has prominent shelf-space, marketing, brand, etc. The additional costs are spread out over billions of "sips" making it extremely difficult to knock them off.

Taxpayers May Face Hurricane Tab

Article from the WSJ.

"As hurricane season begins, Democrats in Congress want to nationalize a chunk of the insurance business that covers major storm-damage claims.

The proposal -- backed by giant insurers Allstate Corp. and State Farm Mutual Automobile Insurance Co., as well as Florida lawmakers -- focuses on "reinsurance," the policies bought by insurers themselves to protect against catastrophic losses. The proposal envisions a taxpayer-financed reinsurance program covering all 50 states, which would essentially backstop the giant insurers in case of disaster."

Of course the insurance companies are in favor with this idea - another re-insurance company with essentially zero default risk, forced to compete on the open market, is a great idea.

Taxpayers who live in areas that are likely to have no damages from "storm-damage" subsidize others does not make a lot of sense. The state of Florida already offers insurance to some degree. Perhaps the government and the taxpayers would be wise to see how this plays out in hurricane weather rather than the sunshine. I think, and I might be wrong, that another major hurricane would bankrupt Florida.

Look before you leap: New study examines self-control

In a number of settings, researchers found that consumers who think about the pros and cons before making decisions reported that they were more likely to exercise and consume healthy foods. They had lower rates of alcohol abuse, procrastination, and overspending. They were also more likely to be saving money for retirement.

The good news, according to the authors, is that people who aren't inclined to consider the consequences of their actions can be aided by simple interventions, like brochures and advertising that encourage them to think about the dangers of obesity or the benefits of saving for retirement. Scare tactics, it seems, were the most effective. "The consideration of negative consequences has a bigger impact than the consideration of positive consequences," the authors write.

Link to Article.

Generic Drugs

Surprisingly, generic drugs are more profitable than branded pills for the drugstore operators. With all the generic drugs coming off patents and an aging population it might work to increase profits at drugstores.

Failings of Wall Street

Evan Newmark is more right than even he knows about the failings of Wall Street. His article in the WSJ states:

"Today’s awful earnings announcement (from sears) confirmed the company’s many failings. But the failings of Sears also reflect the failings of Wall Street. 

It is a textbook case of how Wall Street can promote a stock based on wishful thinking and myths rather than on the performance of the core business. Until the core business deteriorates to a point where even Wall Street can’t promote the stock anymore." 

What the earnings announcement and subsequent media reaction really confirmed was Wall Street's myopic focus on what is easy. This is different from what is important. Little attention focuses on why someone who has allocated capital at above average returns for a prolonged period of time continues to buy back as much stock as he can get his hands on because that would be hard (and require thought). 

Is Starbucks in the wrong business?

Why doesn't Starbucks sell the company-owned locations to local entrepreneurs and get into the franchising business. 

It would be less capital intensive, less risky, and allow them to distribute enormous amounts of free cash flow back to shareholders. 

They're wrong about oil

Rip up your textbooks, the doubling of oil prices has little to do with China's appetite.

According to this link the present commodity and oil boom shows all the classic symptoms of a financial bubble. 

It's always the same. It might seem different this time, but it's always the same.