Posts filed under “Asset Allocation”
European governments are preparing to borrow at least $43 billion this week, reflecting deterioration in the sovereign debt story.
This loan/bailout is pressuring markets around the world; the MSCI World Index lost half a percent, and US Futures, especially SPX futes, are showing modest pressure. Bloomberg reports that the Stoxx Europe 600 Index fell 0.8%, while the Hang Seng lost 1%.
The Street, however, is in the midst of a major rotation, dumping bonds for stocks.Whether its in anticipation of Growth, Inflation, political restraints on the Fed, or some combination of all three is difficult to say. Earnings may be peaking, and could have a hard time maintaining their torrid pace.
Regardless, this rotation has kept a firm bid under equities. It has contained market downside, with markets not falling quite as far as the early morning futures have indicated.
Edward Harrison here. This is an updated version of a post I wrote about two-and-a-half months ago over at Credit Writedowns. When I wrote it, I had been looking for bullish data points as counterfactuals to my bearish long-term outlook. I found some, but not nearly enough.
Early this year, I wrote a post “We are in depression”, which called the ongoing downturn a depression with a small ‘d.’ I was optimistic that policymakers could engineer a fake recovery predicated on stimulus and asset price reflation – and this was bullish for financial shares if not the broader stock market. But, we are witnessing temporary salves for a deeper structural problem.
So my goal was to find data which disproved my original thesis. But, I came away more convinced that we are in a tenuous cyclical upturn. This post will discuss why we are in a depression, not a recession and what this means about likely future economic and investing paths. I pull together a number of threads from previous posts, so it is pretty long. I have shortened it in order to pull all of the ideas into one post. So, please read the linked posts for background as I left out a lot of the detail in order to create this narrative.
Let’s start here then with the crux of the issue: debt.
Deep recession rooted in structural issues
Back in my first post at Credit Writedowns in March 2008, I said that the U.S. was already in a recession, the only question being how deep and how long. The issue was and still is overconsumption i.e. levels of consumption supported only by increase in debt levels and not by future earnings. This is the core of our problem – debt.
I see the debt problem as an outgrowth of pro-growth, anti-recession macroeconomic policy which developed as a reaction to the 1970s lost decade trauma in the U.S. and the U.K.. The 70s was a low growth, high inflation ride that generated poor market returns. The U.K. became the sick man of Europe and labor strife brought the economy to its knees. For the U.S., we saw the resignation of an American President and the humiliation of the Iran Hostage Crisis.
In essence, after the inflationary outcome that many saw as an outgrowth of the Samuelson-Keynesianism of the 1960s and 1970s, the Reagan-Thatcher era of the 1990s ushered in a more ‘free-market’ orientation in macroeconomic policy. The key issue was government intervention. Policy makers following Samuelson (more so than Keynes himself) have stressed the positive effect of government intervention, pointing to the Great Depression as animus, and the New Deal, and World War II as proof. Other economists (notably Milton Friedman, and later Robert Lucas) have stressed the primacy of markets, pointing to the end of Bretton Woods, the Nixon Shock and stagflation as counterfactuals. They point to the Great Moderation and secular bull market of 1982-2000 as proof. This is a divisive and extremely political issue, in which the two sides have been labeled Freshwater and Saltwater economists (see my post “Freshwater versus saltwater circa 1988”).
We have a few slots left to meet with folks next week in south Florida (Mon/Tues/Weds, December 14 -16th). Anyone in the Miami/Fort Lauderdale who would like to sit down one-on-one with us to discuss their current and future financial circumstances investments, retirement accounts, etc. please email Joe Fitzgerald with your contact information to schedule…Read More
Those who believe the rally in gold is sending the wrong message on inflation might take comfort from the fact that the price of the yellow metal relative to that of the 30-year Treasury bond is approaching a 30-year high. Perhaps not coincidentally, the earlier run-up marked the peak of hysteria about inflation — and a multi-decade top in…Read More
Interesting New York Times article about the overall markets’ valuation: “Market valuations are another consideration. By almost every measure, stocks are far cheaper at Dow 10,000 today than at Dow 10,000 in March 1999. Back then, the price-to-earnings ratio for domestic stocks stood at a very high 41.4. That’s based on 10-year average earnings, a…Read More