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!