Thursday, December 24, 2009

Here Comes Santa Claus...???

Today, on Christmas Eve, the market set a new high for the year. That is always good news, even if it is still down 25% from its high two years ago. Often called a "Santa Claus Rally" (SCR), the market is usually good this time of year and extends through the first two trading days of the New Year. But, does it predict a good year for next year? As it turns out, a good SCR doesn't necessarily mean a good next year, but a bad SCR usually predicts a bad next year. So stay tuned for the news next week.

More importantly, I do wish you and your family a warm, healthy Holiday Season....and a bull market next year.

Wednesday, December 16, 2009

Golden Vices???

For many years, I managed the portfolio for a wonderful gentleman in Williamsburg, who died a few years ago at the age 99. He was a great guy, and I miss him. Coincidently, his son-in-law was Morgan Stanley’s legendary investment strategist, Barton Biggs, whom I have followed closely over the years and have read both of his books. Last week, he was interviewed by Advisor Perspectives and updated his thoughts. You can read the short interview at:

But, there is one subject that made me laugh. Talking about gold as an investment, he said: “What is the P/E ratio on gold? What’s the yield on gold? It doesn’t have one, whereas I can prove to you that US high-quality, large-cap stocks are as cheap relative to value and to their history as they have been in hundreds of years. As Winston Churchill once said of one of his political opponents – who was vegetarian, a teetotaler and very liberal – the same is true of gold; it ‘has all the virtues I dislike and none of the vices I admire.’”

The only disagreement I have with him is that a good part of the current demand for gold results from the concern that the dollar will lose its status as a reserve currency, and that may have caused the demand curve to have permanently shifted to the right, which is “econo-speak” for a fundamental change in supply and demand, which drives the price upward. While I am bullish on gold in the long run, it did get ahead of its fundamentals recently.

Regardless, Barton Biggs is a genuine sage, and I recommend him to you!

Tuesday, December 15, 2009

Farewell to Arms............

Long-time readers know that I have proudly served for many years on the certification committee of a prestigious national investment association. For a number of reasons, we recently began making the examination process more difficult, which was fine. But, we became increasingly technical, finding a formula for every question. I recall Warren Buffett saying “Don’t do equations with Greek letters in them.” Given the collapse of almost every asset class last year, the whole concept of Modern Portfolio Theory has been called into question. However, instead of incorporating new information into our concept of investing, I felt we were desperately clutching what we were originally taught, fearful it might need to be updated.

It was a very wise person indeed who said “neither investing nor war making nor love making is hard science”. Nothing supplements education like years of experience, proven judgement and the ability to keep learning. I felt like we were giving a new toolbox full of shiny tools to a bunch of grade-school kids calling themselves financial advisors.

Wednesday, December 9, 2009

........connected to the shin bone.......

Last week’s trouble in Dubai is connected to this week’s trouble in Greece, whose credit rating was decreased both Monday and Tuesday and that is connected to Spain, whose credit rating was reduced today. This has raised worries for the safety of foreign bonds in general, which sold down, as people ran for safety. Because the dollar is still the safest currency in the short run, they bought dollars, which increased the value of the dollar. And, since an increasing dollar hurts our exports, which are fundamental to the “new normal”, the stock market drops. Got that? Data is never free-standing. It is always connected.

Long time readers know how little I think of bond funds, i.e., mutual funds that invest in bonds. Those mutual funds that invest in long term bonds are the worst. Nonetheless, if you must invest in foreign bonds, I would only do it via a large bond fund that specializes in that. Some analysts believe foreign bonds are a separate asset class because they are not perfectly correlated to any other asset class. Frankly, the only use I have for those funds is to benefit from the depreciating dollar. If you think the dollar will continue to depreciate, one good way is to hold un-hedged foreign bonds, preferably in a bond fund. (Un-hedged means you are exposed to swings in currency values.) I’ve bought more in the last six months than ever before. Don’t forget, you will lose money if the dollar appreciates, as it has done for the last few days.

I’m confident the long term trend of the dollar is down . . . which makes imports inflationary . . . which is connected to the shin bone . . . which is connected to the hip bone . . .

Friday, November 27, 2009

Take a baby aspirin, and enjoy the weekend!

As I write this, it looks like the market will open about 200 points down, entirely due to the news that Dubai’s biggest company has asked for a “standstill” on almost $60 billion in debt for six months. Will this trigger the systemic heart attack that worries me? Probably not! Even if the lenders had to write-off their entire loan as worthless, which is silly to contemplate, it is only a small sliver of the total $1.5 trillion that is expected to be written off over the next two years. A more legitimate concern is that Dubai will fire-sale their other assets, driving down market prices, in order to raise cash. Most of those assets are in the UK, including a large ownership interest in the London Stock Exchange itself. However, this “chest pain” will undoubtedly reduce investors’ appetite for risk, slowing or stopping the markets rise. But, that’s OK, because the market has gotten too far ahead of the economy and needs a rest. It is even well ahead of its own 50-day-moving-average. It needs to slow down now to avoid a more disruptive drop later.

For the economic cardiologists among us, the thing to watch is not stock market closing prices, but the cost of credit default swaps. These derivatives played a large part in triggering the crash in September of last year. Unfortunately, information is hard to obtain on them. Nobody even knows how many there are. There is no central exchange to keep track of them. A mere $60 billion related to Dubai would mean nothing. But, that can be leveraged a great deal, thru derivatives called “CDOs squared”. A trillion dollars worth could easily produce the heart attack I fear. We need a central exchange NOW!

One thing is certain: The market will over-react. It has a long history of that, and it is especially true following a recession. The next few days could be ugly, but you don’t need to go the emergency room. I’ll let you know when you do!

Saturday, November 21, 2009

Dr. Bernanke: STAT

While data about our economic health has been improving rather consistently since the Crash of 2008, I’ve become very concerned that the patient might suffer an unexpected heart attack. The problem now is the same as the problem then. We still have not figured out how to intelligently regulate derivatives, which Warren Buffett described as “financial weapons of mass destruction”. But, heart attacks are often triggered by something exogenous, e.g., sudden exertion, surprises, etc. So, what would trigger our economic heart attack?

A few years ago, many economists fretted about the Yen-carry trade. At that time, investors were borrowing Yen in Japan at essentially zero interest rates and buying dollars in Australia or New Zealand, for example, which paid as much as 7%. They kept the difference in interest earned in Australia and interest paid in Japan as their profit. Their risk was that Japan might raise interest rates, which would cause the Yen to appreciate, which would then make it more expensive for the investors to buy enough Yen to repay their loans. This is the greatest risk to the investment strategy of “currency carry trades”. When the reversal happened, Japan paid a heavy price as the value of the Yen suddenly spiked, which made their exports un-competitive worldwide overnight.

Recently, famed pessimist Nouriel Roubini, who accurately predicted both the timing and the intensity of The Great Recession, claimed the Yen-carry trade was nothing compared to the new Dollar-carry trade, calling it “the mother of all carry trades”. I suspect he is right. The world is awash in dollars right now, borrowed at no cost and invested in more risky assets elsewhere, which has been a major factor driving up stock markets worldwide this year. However, when the market feels the Fed is ready to raise rates, we can expect a vast amount of more risky assets, such as international stocks, to be sold quickly, driving down their values. It will happen suddenly.

Will that trigger the heart attack I fear? Probably!

Will the patient be better prepared for a reversal of the Dollar-carry trade if we better regulate derivatives before then? Absolutely!

I wish it wasn’t so boring that Congress cannot pay attention . . . paging Dr. Bernanke!

Friday, November 13, 2009

Why did we send in the clowns?

Late last year, a client wisely predicted that China would emerge from the crisis before the U.S. His reasoning was interesting. He thought that great problems require great decisions, but that the U.S cannot make great decisions like China, which is governed by engineers, while the U.S. is governed by lawyers. I've thought about this alot!

Yesterday, I heard from David Gergen, advisor to five different U.S presidents, of both parties. He pointed out that our founding fathers intentionally created a difficult legislative process. However, they had no expectation that the process would later be made ever more difficult with (1) the problem of filibusters, requiring 60 votes instead of 51, (2) the complexity of requiring CBO analysis of all spending bills, (3) the pointless "food fights" created by the media to sell advertising and (4) the "quiet conspiracy" between Republicans and Democrats to protect safe seats during re-districting every ten years, which pushes candidates to the extremes instead of the center.

If the founding fathers could have seen what would happen, would thay have made the legislating process so difficult? But is it too late to send in the engineers?

Thursday, November 12, 2009

But, what is the recipe?

Today, I listened to one of my favorite thought leaders, John Mauldin of Dallas, author of Bull's Eye Investing. He spoke of the difficult state of the U.S. economy and the few but painful choices we have:

1. The Argentine Solution - induce hyper-inflation to "inflate away"
the huge indebtedness of our country. He gave this a 1% probability.

2. The Austrian Solution - induce a collapse to eliminate the weak,
effectively flushing away the problems but creating 30%
unemployment now,while insuring the good times will return sooner.
He also gave this a 1% probability.

3. The Eastern Europe Solution - following the Soviet collapse,
that part of Europe had no choice but to make huge re-structuring
changes. However, given our inability to re-structure the health
care system, which "everybody agrees needs to be re-structured",
how can the U.S. effectively make the necessary decisions within
our current political system.

4. The Glide-Path Solution – announce an exit strategy for the huge
government deficit to expect an eventual return to the good times
at some point in the future, without trashing the dollar in the
meantime. This, he said, is our best hope!

My judgment is that he is correct, but we will have to experience all of the above before the good times return. We will experience significant inflation, as soon as deflation is eliminated. We will allow some companies to fail, as we did with Lehman. (We should have allowed GM to fail.) We will make some re-structuring decisions, e.g., health care, energy, or whatever. (The real restructuring we need is to improve our decision-making system, which was devised in the 18th century.) And, of course, the Fed has already made numerous comments about devising an exit strategy but cannot put a timeline on it, for obvious reasons.

It is not a simple trade-off between raising taxes or cutting spending. There are real strategies to be implemented.

Q: Which one is best?
A: All of the above!

Saturday, October 31, 2009

Below Thursday’s Headline

Thursday’s big 200 point rally of the Dow was ignited by the surprisingly strong GDP report for the third quarter. It was a healthy 3.5%, which was substantially stronger than the 3.2% that was widely expected. Of course, when the market realized that number was “juiced-up “on steroids from the stimulus, the market dropped almost 250 points the next day.

But, nobody noticed some other good news on Thursday. For the week, the Federal government had to sell a whooping $123 billion in Treasury bonds to cover continuing large deficits. Normally, the bids for such bonds are twice as much as the amount offered. This week, there was three times as much. With all the concern about whether the U.S. could continue to finance its huge deficits, this was very good news. Even better, 75% of that demand for Treasury bonds came from Americans, not foreigners. Can you handle even more good news? Historically, commercial banks have kept about 20% of their assets in Treasuries. Today, it is only about 14%, which means they will be buying more of our Treasuries as they heal.

The nightmare scenario is that we are unable to sell our bonds, either because the credit of the US government is questionable or because the strength of the US dollar is questionable. The first does not appear reasonable, as our bonds are selling nicely. The second is more worrisome. Long term, the dollar must depreciate, to help our exports and to help create the inflation needed to manage our heavy debt burden, by “inflating it away”. But, it must be done slowly!

Tuesday, October 20, 2009

Finally....Real Progress

During the 1990s, our trade deficit averaged about 2% of GDP but started rising in 2000. In December of 2006, I wrote this was not sustainable and possibly dangerous, as it approached 5% of GDP. The latest figures show it has decreased to only 3% of GDP and hopefully still dropping.

One reason is the weakening dollar makes our imports more expensive and our exports cheaper for foreigners to buy from us. Another reason is that China’s trade surplus has decreased from 10% of GDP to only 6.5%. That’s progress . . . real progress!

We’re watching a fundamental realignment of the global economy. It will be bumpy, but the worst is behind us . . . and, that’s also real progress!

Saturday, October 3, 2009

Sobering Reminder

That’s how the President referred to yesterday’s unemployment release that another 263 thousand Americans lost their jobs. Since the recession began in December of 2007, over 7.2 million people have lost their jobs. Even 54 thousand government jobs disappeared last month! And, we are many months away from any good news. Unemployment improves only after the economy improves. If this is a “double-dip” recession, jobs could continue to disappear for another two years, which would be a political debacle for the current administration. Unfortunately, there is little they or anybody else can do about it.

Economists often talk about U6 unemployment, which is the number of unemployed people plus the number of people working part-time who want to work full-time, plus those people who have given up looking for work. There are now 17 million people who want to contribute to the GDP but cannot. That is a valuable national resource being wasted.

Tuesday, September 15, 2009

A Light at the End of the Tunnel.........?

Long time readers know I have expected a retest of the March lows. While the stock market has remained strong during the traditional September/October correction . . . so far, . . . I’m still worried. The Great Recession did a great deal of damage, unemployment will come down very slowly, and the economy must become more export oriented and less consumption oriented. That takes time. The lows of the Great Depression came about fifteen months after the Crash of ’29.

Now, it could be the lows of the Great Recession came in March of 2009, only six months after the crash in September of 2008. I hope so . . .

Another factor arguing that the worst is past us is the inventory cycle. Inventory levels have fallen a record eleven straight months. At some point, inventories must be rebuilt. At that point, the economic recovery will begin. I hope so . . .

Lastly, the continuing decline in the dollar will accelerate our transition from a consumption oriented economy to a more export oriented one. I hope so . . .

Tuesday, September 8, 2009

Take a side!

Economists and securities analysts usually work together well. Sometimes, when they do disagree, it is more apparent than real. The current disagreement is such a case. Economists remain glum, while analysts are giddy. Why? Because U.S. economists have a consensus forecast of a 2.4% growth rate next year, while analysts expect earnings of the S&P 500 to increase 25%. How can there be such a difference? Two reasons: First, the S&P contains the 500 largest U.S. companies, and they disproportionately benefit from international growth. Their growth is not limited to the U.S. Second, the earnings growth we have seen this year has been from cutting expenses, not revenue growth in a shrinking economy. That means their earnings per share are “spring-loaded” to jump as soon as revenue increases drop straight to the bottom.

So, who’s right? I hope they both are!

Wednesday, August 26, 2009

Re-appointment of Ben Bernanke

Yesterday's re-appointment of Ben Bernanke as Chairman of the Federal Reserve System was wise a decision! Sure, he was slow recognizing the subprime problem, but he showed true innovative genius once he engaged. Although there is never any way to prove it, I am confident he prevented the Great Recession from becoming another Great Depression!

But, rewarding a person for a job well-done understates the significance of this re-appointment. If nothing is done to unwind all Bernanke has done, inflation is a certainty! Unfortunately, unwinding these actions will be politically unpopular. It will be easier to unwind them by Bernanke than someone else, who is more beholden or less familiar with the details. Bernanke knows his legacy is ruined if it doesn’t prevent inflation. This was the best thing President Obama could have done in the short run to prevent inflation in the long run.

Friday, August 21, 2009

What a difference a year makes.......

I learn so much from my friends. This is from one of them, i.e., Ben Valore-Caplan, CEO of the highly respected Syntrinsic Investment Counsel in Denver. He reminds us of our reality a mere twelve months ago.

• At market close on launch day, the Dow stood at 11,417, about 23% above the
current 9,315.
• George Bush was President.
• Oil stood at 113 versus 67 today.
• Barack Obama was en route to Denver to accept the Democratic nomination.
• Few people had heard of Bernie Madoff. Those who had heard of him thought
that they were lucky.
• Citigroup was trading at about 17.5 (now trading at 4.3), AIG over 400 (now
26.6), and GM at 10 (now trading as Motors Liquidate at 0.90).
• Sarah Palin was a relatively obscure governor of Alaska. Now she is neither.
• Many thought that the worst of the US stock market correction was over (the
S&P 500 actually rose in August 2008 before a precipitous September-October-
November 20 decline of 42%).
• Lehman Brothers was a major investment bank (until mid-September).
• Many hedge fund investors still did not know what “gates” were or how easy
they were to put up.
• Inflation as measured by CPI stood at 5.6% (the highest in 17 years), just
prior to massive negative changes in CPI in October and November. CPI this
week is at 0.0%.
• The Olympics in China were proceeding without the hitches many had expected.
Few outside the State Department had heard of Uighers.
• Health care reform was something from the early 1990s.
• Town hall meetings were generally confined to small towns in New England.
• Former Goldman CEO, Hank Paulson ran the US Treasury Department while former
Goldman Chairman, Stephen Friedman, ran the New York Federal Reserve.
Goldman stock was at 158 one year ago; it is at 158 today. Curious.
• The Tamil Tigers controlled much of north and east Sri Lanka.
Stanford Group was selling 10% CDs issued by their bank in the Caribbean.
• Housing starts of 950 million in August 2008 had economists wondering if the
housing market had stabilized at last.

Life moves on . . . thankfully!

Wednesday, August 19, 2009


Was I the only person applauding Monday when the Dow dropped 186 points? It blew a little froth off the market, which is a good thing! There is a loose but direct relationship between the financial markets and the overall economy. The Conventional Wisdom is this: if the economy improves, the market usually senses this and starts improving 5-8 months sooner. While we have clearly enjoyed a strong V-shaped recovery in the markets, I expect a long U-shaped economic recovery. While we are at or near the economic bottom now, does anything expect a rapid rebound in the economy? The market is ahead of itself and needs to blow off steam . . . and froth too!

Sunday, August 16, 2009


I just finished reading The Fourth Turning by William Strauss and Neil Howe. It makes the point that generations have a predictable flow, starting with growth (the prophets) followed by maturation (the nomads) and then entropy (the heroes) and finally destruction (the artists). The World War II generation could not have foreseen that “America would soon become so confident and institutionally muscular, yet so conformist and spiritually complacent." My generation of Boomers could not have “predicted that America was about to enter an era of personal liberation and cross a cultural divide . . "

My daughter’s Gen-X could not have predicted “ that the nation was entering an era of national drift and institutional decay. And, the millennial generation could not have predicted “a decisive era of secular upheaval” or a period of unraveling.."

They then make the point this generational evolution has happened many times in the past and is not to be feared. It argues we think too much in terms of linearism, which sees the future as a straight line, instead of a series of cycles. Think of the next generation as being more like The Greatest Generation! (There is also a wonderful quote from Mark Twain that “nothing is older than our habit of calling everything new.)"

From an investment standpoint, it should offer solace to those who fear the sky is falling, that this time is different. We have been thru a crisis many times, and better times always follow. It means our asset allocation should not be for Armageddon but for the inevitable and eventual re-birth.

Thursday, August 13, 2009

The Feast Continues...thankfully!

I attended a meeting yesterday and listened to the fear some investors have of China, particularly its ability to crush the dollar by dumping all their dollar-denominated holdings, such as US Treasuries. Their angst is understandable but misplaced. Dumping the Treasuries would create huge losses for themselves and risks sending the world, including themselves, into a genuine depression. Indeed, during a recent visit to the White House, the Chinese leadership expressly assured the President that they would continue buying our Treasuries, which is certainly not a warning to dump Treasuries.

But, such assurances are just pretty words. However, the proof is that they do continue to buy our Treasuries as promised, but there is a difference. They are now buying more 10-year issues and fewer 30-year issues, which limits their exposure to a collapse of the US. In addition, they are spending their huge dollar reserves, which are not invested in Treasuries, to buy assets around the world, especially in Africa. This also limits their exposure to a collapse of the US.

Today, the US Treasury issued another $15 billion in 30-year Treasury bonds. There are always more bidders for the bonds than there are bonds to sell. This is called the Bid-to-Cover ratio and is normally about 2.3 times. Today, it was 2.54X, which means there is considerable appetite remaining for those bonds. While that appetite is not infinite, there is certainly still plenty left.

While the world continues to feast on our debt, the Fed needs to provide us with an “exit strategy” very soon, to keep the guests at the dinner table.

Wednesday, August 12, 2009

Canary in a Coal Mine??

Nassim Taleb is the brilliant author of the “Black Swan”, which described how huge, unpredictable events occur, such as the current market collapse. This morning, he said the current Chairman of the Fed, Ben Bernanke, has performed poorly and should not be re-appointed when his tenure as Fed Chair expires in January. A survey of economists by The Wall Street Journal was also released today, showing 71% of them disagree with Taleb and think Bernanke should be re-appointed by President Obama.

I also think Bernanke has done a remarkably agile job and hope he will be confirmed. It was fortunate that we had one of the leading authorities on the Great Depression as Chair of the Fed during the Great Recession. But, the re-appointment of Bernanke is a “canary in a coal mine” for me. If he is re-appointed, there is a chance the inflation could still be controlled. However, if he replaced by someone less independent, as any President would naturally hope, I fear a return to 1970s-style of inflation. We'll see . . . .

Monday, August 10, 2009

No Champagne Yet!

Friday’s jobs report was great . . . or the headline was great, that unemployment dropped from 9.5% to 9.4%. Also, over 700 thousand workers were losing their jobs in January, compared to “only” 244 thousand last month. Still, how can the rate of unemployment decrease when 244 thousand workers lost their jobs?? Simply, hundreds of thousands of people have quit looking for work. They have gone to part-time work, gone back to school, gone home to live with Mom & Dad, given up, or whatever. If all those people are added in, the total “under-employment rate” is a staggering 16.3%.

Certainly, the financial markets are suggesting the recession is over, but whatever happened to the “toxic assets” . . . remember those? We may have "ring-fenced" them, but they are still a problem. Also, have we made the derivatives market transparent yet, which was the other primary cause of this collapse? There is still work to do, much work!

Sunday, July 19, 2009

20/20 Hindsight

Last week, I watched as Hank Paulson was grilled by legislators about his actions last year as Treasury Secretary during the most frightening part of the Crash. Red-faced and obviously uncomfortable, it was clear he did not want to be there. I actually felt sorry for him. He was thrust into an unforeseen crisis last year that was different from anything we’d ever seen before. While I’m confident he would, of course, do some things differently with 20/20 hindsight, we were still fortunate to have him.

One of the reasons I remain so concerned about investing in Europe is that Eurozone banks are still more highly leveraged today than US banks were last year, but it does not have a unified banking regulator. Sure, it has the ECB or European Central Bank which sets rates but does not regulate the banks of each member country. Early in the last U.S. Administration, five banks were allowed to increase their leverage from 12:1 to 30:1. Three are now gone, i.e., Bear Stearns, Lehman, and Merrill Lynch. The other two, JPMorgan and Goldman, survived only because they were saved by the taxpayers. Many European banks now have 45:1 leverage, a recipe for collapse, and they have no Hank Paulson . . .

Tuesday, June 30, 2009

Madoff Justice

Longtime readers know my belief that our society is over-regulated and under-punished. Convicted swindler, Bernie Madoff, got off easy at 150 years. Assuming this 71-year-old man actually lives another 150 years, it means he will have to spend only a few seconds in jail for each dollar stolen and only 40 days for each victim swindled. He has lived 70 years in extremely fine style, funded by his victims. Now, he will live out his remaining years with no worries about food, clothing, housing, and even have better medical care than many Americans, all funded by the taxpayers. At some point, a person indeed becomes “above the law”.

Financial journals are now discussing the “lost generation” of investors, people so traumatized by Madoff that they have become paralyzed with fear and confusion. That would be the greatest damage that Madoff has accomplished. The $65 billion that may have already been lost by his victims is nothing compared to the profits that this “lost generation” will miss.

By the way, kudos to Sen. Jim Webb, who is crusading for a new perspective on our prisons. With 5% of the world’s population, we have 25% of the world’s prisoners. And, at what cost? How many hospitals could we build with the money we spend feeding, clothing, housing and caring for prisoners? Or, how many more aircraft carriers could we afford? Now, we must pay for a pampered swindler!

Tuesday, June 23, 2009

Change is coming.......

It was obvious last September when the markets crashed, following the Lehman failure. It became certain last December with the arrest of Madoff. There will be a re-regulation of the securities markets, which is desperately needed. Of course, “the devil is always in the details”!

Last week, the Obama Administration introduced their plan for re-regulation. It is large, complex, and far-reaching but certainly unlikely to be implemented as presented. The most interesting part to me is whether financial advisors should be held to a suitability standard or to a fiduciary standard. It is an important difference and could re-shape the industry. A stockbroker is currently held to a suitability standard, which only requires the advisor to present investment choices that are “suitable” for the client. On the other hand, financial advisors who are Registered Investment Advisors are required to act in the client’s best interest, not the advisor’s best interest, nor the firm’s best interest. Currently, neither the stockbroker nor the firm must act in the client’s best interest. The new chairman of the SEC recently advocated that all advisors be held to a fiduciary standard, which means every stockbroker of every firm will be incurring fiduciary liability for the firm. That is an enormous unseen and unknowable contingent liability to every firm. They may well sell pieces of their retail business to brokers and spin them off into separate legal entities.

Regardless, I don’t plan to own any shares in brokerage firms until this is made more clear. It is a BIG change!

Wednesday, June 3, 2009

The Wisdom of Crowds?

All year, I’ve been advising clients that the economy would “bottom-out” in the fourth quarter. Last week, the latest survey of the National Association of Business Economics (NABE) showed that 90% of economists believe the bottom will be late this year. (As a member, I naturally participated in that survey.) Maybe, I should feel comforted that so many economists agree with me, but there is an old joke among economists that the purpose of forecasters is to make astrologists look respectable.

At this point, my forecast for the U.S. economy remains the same, but something very different is happening to the financial markets. While there has never been a sharp V-shaped recovery from a credit-driven recession, this appears to be happening in the market now, and the only explanation I can believe is that the reversal is coming from the emerging markets, which are not as dependent on credit or capital. Stay tuned . . . we certainly do live in interesting times!

Wednesday, May 20, 2009

The Problem with Averages

I was reading a marketing piece from one of the mass market financial advisors. His argument was that since the average recession since the Great Depression has been 21 months and since the stock market has been up an average of 45% twelve months later and since this recession is now officially 19 months old, then it must be time to get fully invested in stocks. Averages can be so misleading!

Over the same period, recessions have ranged from 3 months (twice) to 62 months. Credit-driven recessions, like this one, tend to be longer than inventory-driven or trauma-driven recessions. Also, the average bounce-back of 45% twelve months later has been declining markedly. The first 3 recessions bounced-back an average of 72% while the last 3 only bounced back 25% on average.

Averages can be so misleading! Like every investor, every recession is unique and should be evaluated individually!

Friday, May 15, 2009

A Sainted Businessman

In the early 1990s, I was appointed by the Governor of Texas to the State Depository Board, where I served with the State Treasurer, State Banking Commissioner, and State Controller. We wrestled with the collapsing Texas Savings & Loan Associations, which had wrecked the Texas economy so badly. I was there when the legendary Bill Seidman arrived with the federal Resolution Trust Corporation. It was like Moses parting the sea. It was an experience I’ll never forget. Bill Seidman was a man I’ll never forget. America has lost one of those great businessmen, who made the life of every American even better, even though they’ll never know.

R.I.P. Bill Seidman

Monday, May 11, 2009

The Un-Stressful Stress Test

After all the stressful suspense, the "Stress Test" results were released last Thursday, and it wasn't as bad as I feared. Still, there are two lingering issues. First, the assumptions were 10.3% unemployment, GDP dropping 3.3% in 2009 and rising 0.5% next year, and home prices falling another 27%. I'll be surprised if unemployment doesn't exceed 10.3% by the first quarter of next year. I suspect GDP growth will not be as good this year nor as bad next year. And, with record low home mortgage rates, it is hard to forecast another 27% drop in home prices. Overall, the government did a good job.

The second lingering issue is that the Stress Test only looked at nineteen banks, but what about the thousands of other banks, many of which are heavily exposed to local commercial real estate loans? Many analysts believe that is the next big shoe to fall.

As always, the things we know that we don't know worry us the most!

Tuesday, April 14, 2009

Maybe Bernanke Is Right?

Today, I watched a speech by Ben Bernanke discussing the cause of the current Great Recession. For several years, he has been warning about the “savings glut”, i.e., those nations like China who run huge cash surpluses and lend the cash back to the consuming nations, effectively pushing up debt levels in our national economy. I’ve always felt like that was blaming somebody else for the mess we created. Bernanke gently hammered that point again today, and I’m starting to believe him. Regardless, it is one more reason we should become an exporting-oriented economy, which benefits from a weaker dollar.

Friday, April 10, 2009

Back To The Future

Yesterday we learned the U.S. trade deficit decreased unexpectedly. The surprise was not that imports fell for the seventh consecutive month, but that exports actually rose for the first time in six months, despite the strong dollar. Our trade deficit in 2006 was $681 billion compared with an estimate of only $373 billion this year. Nice trendline, indeed!

Early stage economies tend to grow by being export oriented. Mature economies tend to grow by being consumption oriented. The rest of the world has long envied our consumption based economy, which consumed their products. They were only too happy to continue lending us money to buy their goods. But, the world has changed . . .

To change our consumption orientation and again become an export economy, we need a cheaper dollar, which is the inevitable result of inflation. In other words, maybe we actually need inflation!

Friday, March 20, 2009

A Greater Wrong

While I am as disgusted as all those pontificating politicians about the AIG bonus issue, there is a greater issue than this additional instance of unfairness, and that is the sanctity of contracts.

While contracts can be set aside for a few narrow reasons, this is not one of them. Even worse, over-turning these contracts will have a very chilling effect on dealing with the many other financial problems we face, because the private sector won’t trust the contracts they negotiate.

The TALF plan is dependent upon contracts with funds to clean up the toxic assets. Would you want to do business with the Federal government, to help clean it up, when you don’t know if the contract will be honored or not?

Revenge may be sweet, but it has a bitter aftertaste!

Monday, March 16, 2009

Our future leaders are impressive

Last week, I spoke before 750 people for Virginia Beach’s annual “State of the City” address. It was a piece of cake!

I also spoke before the 24 brightest high school seniors in Virginia Beach, who are competing for a large scholarship. That was intimidating! These kids are so bright. They asked questions about the difference between Keynesian economics and Austrian economics. They asked how to protect themselves from people like Bernie Maddoff. Amazingly, they seemed resigned, but not angry, about inheriting all the debt we are piling on them. They were a much tougher audience.

Sometimes, it is nice to be reminded that our country’s future is in good hands, indeed!

Sunday, March 8, 2009

Jobs Report reflects long year ahead

A year ago, I predicted unemployment would reach nine percent. On Friday morning, the Labor Department released the monthly “Jobs Report,” showing unemployment had already reached 8.1 percent, the worst in 26 years.

If you add in the under-employed, those people who are forced to work part-time or who have given up, 14.8 percent of the workforce is struggling. As if that wasn’t bad enough, don’t forget that unemployment is a “lagging indicator,” which means it will not improve until after the economy improves, which is not expected before the fourth quarter of this year.

That means unemployment is likely to rise all year, making a 10 percent level of unemployment almost a certainty. The rate of under-employment could even approach an unthinkable 20 percent. It will be a very long year indeed for millions of people.

Sunday, March 1, 2009

Economics is not a religion

Sitting at a traffic light yesterday, listening to Rush Limbaugh’s speech to the Conservative Political Action Committee, I saw pick-up trucks go by, helpful for small cargoes. I saw 18-wheelers go by, helpful for large cargoes. I saw cement trucks, refrigerated trucks, and even a fire engine -- all helpful tools for specialized missions.

Some people, especially politicians, see economics as a religion, rather than a tool box. If you are trying to get the economy out of a deep ditch, Keynesian economics has a proven track record. If you are trying to stimulate a sluggish, under-performing economy, supply-side economics has a proven track record. If you are dealing with a specialized mission, such as inflation/deflation, monetarism has a proven track record.

There is a difference between a flathead screwdriver and a Phillips screwdriver, and each tool accomplishes a specific mission.

Saturday, February 28, 2009

Stock market actions should be observed with steady hand

Yesterday, we learned that the fourth quarter was worse than we thought. In fact, it was the worst in 26 years. We thought our economy shrank 3.8% but learned it actually shrank 6.2%. Not too surprisingly, the stock market was disheartened and lost even more wealth.

The perspective of time is everything. When we were originally told last month that the economy shrank 3.8%, we were expecting to be told 5.5%. The stock market liked that and created wealth that day.

The stock market can be expected to over-react, which emphasizes the importance of not obsessing about any one report or any one day’s performance. If you have a real life outside your portfolio, this is a particularly good time to enjoy it!

Friday, February 6, 2009

Job loss mounts worldwide

The Jobs Report this morning showed another 598,000 Americans lost their jobs, the most in 35 years. The unemployment rate jumped from 7.2% to 7.6%. Totally heart-breaking! Don’t look for foreclosures to slow down . . .

So far in this recession, 3.5 million of us have lost our jobs. But, that pales in comparison to China, where some reports indicate 26 million workers have lost their jobs. The possibility of social unrest there should not be minimized. As they are our second most important trading partner, we need them to stay healthy enough to buy our goods, as well as to keep buying our Treasury debt.

Saturday, January 31, 2009

Will the 'January Effect' ring true

Uh, oh . . . one of the oldest Wall Street adages is the “January Effect,” which states that … so goes January, so goes the year. The bad news is that the Dow lost 8.4% this month, the worst January in history, indicating a terrible 2009. A little piece of good news is that the “January Effect” is not ALWAYS correct.

More bad news was Friday’s report that the GDP decreased 3.8% in the fourth quarter, the worst since 1982. More good news is that we were expecting a decrease of 5.5%.

Oh, yeah . . . then there is Warren Buffett’s ageless and priceless advice to … be fearful when others are greedy and be greedy when others are fearful.

Thursday, January 29, 2009

Nothing chills a market like uncertainty

I’ve seen this show before. The best thing about seeing it the first time was that it did eventually end!

There is now much discussion about a “good bank/bad bank” approach to solving the credit crisis. The problem is that banks cannot be sure how much capital they have to lend, because it's impossible to know the value of some of their assets right now. For example, banks don't know the value of their mortgage-backed securities because everybody is afraid to either buy or sell them. Nothing chills a market like uncertainty! The market is frozen.

I was in Texas during the 1988 - 1992 “Savings & Loan Debacle” when the Federal government created the Resolution Trust Corporation to buy the assets from the troubled S&Ls, replacing uncertainty with certainty, while wiping out the shareholders of the S&L. It worked! Credit flowed. The recovery of Texas began.

Doing this on a much grander scale will be much more difficult, but it must be done. Uncertainty must be replaced with certainty, before our national recovery can begin. Everybody will be relieved when this show is over, and we can write/read the “credits.”