Posts filed under “Think Tank”
As every school child knows, water is formed by the two elements of hydrogen and
oxygen in a very simple formula we all know as H2O. Today we start a series that
starts with the question, What are the elements that comprise deflation? Far
from being simple, the “equation” for deflation is as complex as that of DNA.
And sadly, while the genome project has helped us with great insights into how
DNA works, economic analysis is still back in the 1950s when it comes to
decoding deflation. Notwithstanding the paucity of understanding we can glean
from the dismal science, in this week’s letter we will start thinking about the
most fundamentally important question of the day: is inflation, or deflation,
in our future?
But quickly, I want to thank the many people who wrote very kind words about last
week’s letter. Many thought it was one of the better letters I have done in a
long time. If you did not read it, you can read it here. And of course, you can go there and sign up to get this letter sent to you each week for free. Why not become of my 1 million (plus and growing) closest friends?
The Failure of Economics
Among the economists and writers I regularly read, there are some who, if they agree
with me, I go back and check my assumptions – I must have been wrong. Paul Krugman is one of those thinkers. I admit to his brilliance, but his left-leaning philosophy does not particularly square with mine, and I find that most of the time I disagree.
That being said, I strongly encourage you to read his essay in the New York Times Magazine, which comes out this weekend. It is worth the high price of the Times to read it, if you can’t get it online. It is a very hard critique and analysis of the failure of current macro and financial economic
thought, which didn’t even come close to predicting the current financial
malaise. Indeed, as he points out, most schools of thought said the state we
are in could not happen. You can read at the essay if you are a member, or
register for free if you are not.
Krugman writes, as I have in repeated columns, that we have taught two generations of
economists and financial practitioners faulty theories. Even now, believers in
the Efficient Market Hypothesis and CAPM hold to their beliefs in the face of
clearly contrary evidence. It is a very thought-provoking piece and worthy of a
long weekend read. He names specific names and pulls no punches. This is as
close to starting a barroom brawl as you get in economic circles.
Category: Think Tank
Good Evening: After giving ground in recent days, U.S. stocks found their footing on Thursday. The S&P 500 had been fidgeting around just below 1000 since Tuesday’s downdraft, but the widely watched index managed to finish above this psychological barrier today. Whether this rebound after the 4% pullback from last week’s high signals either a…Read More
The performance of a number of global stock markets is given in the table below in local currency terms for different measurement terms ended August 31. The numbers speak for themselves, but it is noteworthy that the MSCI World Index (+3.9%) and MSCI Emerging Markets Index (-0.2%) followed separate paths in August as China, Hong Kong and India underperformed.
Click here or on the table below for a larger image.
Top performers during August included Austria (+11.3%), Ireland (+10.9%) and Venezuela (+10.6%). At the bottom end of the performance rankings countries included China (-21.8%), Hong Kong (-4.1%) and India (0%).
The key moving-average levels are also given in the table above. With the exception of the Chinese Shanghai Composite Index, which fell below its 50-day moving average about two weeks ago, all the indices are trading above their respective 50- and 200-day moving averages. The 50-day lines are also above the 200-day lines in all instances.
The gains/declines mentioned above are all in local currency terms. However, converting the movements to US dollar gives a better picture, in general, for the non-dollar countries (see table below).
Investment letter – August 26, 2009
HOW TECHNICAL ANALYSIS CAN IMPROVE FUNDAMENTAL ANALYSIS
Over the last 3 years, most economists have fallen into one of two groups. The smaller group were those economists who saw the housing and credit crisis coming. Granted, most were a bit early and turned negative in 2006. Given subsequent events and the severity of the crisis, being early was certainly not a character flaw. The second and far larger group of economists failed to see almost any aspect of the credit crisis and severe recession coming. Many were still forecasting that there would be no recession as late as last July and August.
What I find fascinating is how these two groups believe the economy will perform in coming quarters. The first group, who correctly anticipated the crisis and recession, believe the economy will bounce and then dip again and form a W pattern. A few think the economy will remain in recession until 2010. For the most part, this group did not see the rally in the stock market coming, and now believe valuations are too high, especially in light of the coming second dip and its impact on corporate earnings.
After failing to see the deepest recession since the Depression coming, and a 50%+ decline in the stock market, the second group of economists are the most stringent supporters of the V-shaped recovery. This view is credible, since economic activity is giving signs of at least bottoming, and nascent signs of improvement. The rally in global stock markets and commodities like oil is based on the expectation of better economic growth. Strategists then cite the improvement in markets as proof of the recovery. This bit of circular logic is taken as an article of faith by those who believe markets ‘know’ something about the future, and are merely discounting better times. I’m not sure what better times the stock market was discounting in October 2007. But this inconvenient truth never fails to dissuade the ‘market discounts the future’ fools from advancing this bit of Wall Street ‘wisdom’.
Something each group of economists and strategists have in common is the omission of technical analysis as part of their analysis. It is a critical omission, and accounts for why each group missed either the significant turning points in October 2007, or March 2009.
Most of the economists who saw the housing crisis coming turned negative on the economy and stock market in 2006. Although housing was clearly rolling over, technical indicators of the stock market’s health uniformly showed that the up trend in the stock market was intact. Throughout 2006, the advance/decline line continued to make higher highs after every decline. As I noted numerous times throughout 2006, there was a very supportive supply/demand dynamic at work. Companies were buying enormous quantities of their own stock and private equity firms were using cheap credit to take over a record number of firms. In total, almost 5% of the supply of existing shares was absorbed thru buybacks and takeovers. This underlying demand was not met with much selling since the economy was in good shape. Had those crisis prescient economists incorporated technical analysis into their fundamental analysis, they would have remained more constructive on the stock market, without compromising their excellent fundamental work.
Dan Greenhaus is the Chief Economic Strategist at Miller Tabak + Co. where he covers global economies, markets and portfolio theory. He has contributed several chapters to Investing From the Top Down: A Macro Approach to Capital Markets (by Anthony Crescenzi). This is his most recent commentary: ~~~ It is well known at this point…Read More
Good Evening: U.S. stocks finished a strong August on a down note, causing investors to wonder what awaits them during the seasonally weak months of September and October. With some strong (though admittedly junior) economic data released this morning, today’s downdraft had little to do with the U.S. economy. Global market participants were instead more…Read More
Years ago Charles Goodhart minted an eponymous law that is applicable today in financial markets. Last week, Pimco’s Mohammed El-Erian coined the metaphor “sugar high.” He was talking about the converse of Goodhart’s Law. We think he wasn’t harsh enough; hence, we use the metaphor “LSD.” The 99th edition of Pears Cyclopaedia (1990-1, pp. G27,…Read More
Category: Think Tank
Stock markets, in general, again logged gains last week as pundits perceived economic data to be better than expected. But the recovery path is not home and dry yet, as shown by declines in crude oil, a number of emerging stock market indices, small cap indices and high-yield corporate bonds. All said, risky assets displayed some fatigue despite positive economic reports.
Caution remained over the robustness of any economic upswing, as reflected by the solid performance of government bonds, with safe-haven currencies such as the US greenback and the Japanese yen also edging up.
As expected, Federal Reserve Chairman Ben Bernanke was appointed by President Barack Obama on Tuesday to serve a second term. “Mr Obama is said to credit Mr Bernanke with a leading role in helping to avert economic catastrophe. By reappointing Mr Bernanke – who worked in the Bush White House – Mr Obama can also emphasize his bipartisan credentials at a time when he is embroiled in a fiercely partisan battle over healthcare reform,” commented the Financial Times.
However, critics of Obama’s decision were plentiful and Morgan Stanley’s Stephen Roach, blaming Bernanke for his pre-crisis actions, said (via the Financial Times): “It is as if a doctor guilty of malpractice is being given credit for inventing a miracle cure. Maybe the patient needs a new doctor.” Bill King (The King Report) ascribed the stock market rising subsequent to Obama’s announcement to a “thank God it’s not Larry Summers” rally.
The past week’s performance of the major asset classes is summarized by the chart below – a set of numbers showing both the S&P 500 Index and government bonds rising, indicating an expectation of a subdued economic recovery and that the Fed’s monetary policy will stay easy for an extended period of time.
A summary of the movements of major global stock markets for the past week, as well as various other measurement periods, is given in the table below.
The MSCI World Index (+1.3%) and MSCI Emerging Markets Index (-0.2%) again followed separate paths last week as China, Hong Kong and Brazil underperformed. Mature stock markets have recorded gains for a straight seven weeks, whereas emerging markets have seen two back-to-back weeks of declines. The end result is that emerging markets have now underperformed developed markets for four weeks running. Could this be a sign of a retrenchment in risk appetite?
Category: Think Tank
An Uncomfortable Choice
August 28, 2009
By John Mauldin
An Uncomfortable Choice
What Were We Thinking?
Frugality is the New Normal
And Then We Face the Real Problem
Argentina, Brazil, Uruguay, New Orleans, Detroit, and More
We have arrived at this particular economic moment in time by the choices we have made, which now leave us with choices in our future that will be neither easy, convenient, nor comfortable. Sometimes there are just no good choices, only less-bad ones. In this week’s letter we look at what some of those choices might be, and ponder their possible consequences. Are we headed for a double-dip recession? Read on.
An Uncomfortable Choice
As our family grew, we limited the choices our seven kids could make; but as they grew into teenagers, they were given more leeway. Not all of their choices were good. How many times did Dad say, “What were you thinking?” and get a mute reply or a mumbled “I don’t know.”
Yet how else do you teach them that bad choices have bad consequences? You can lecture, you can be a role model; but in the end you have to let them make their own choices. And a lot of them make a lot of bad choices. After having raised six, with one more teenage son at home, I have come to the conclusion that you just breathe a sigh of relief if they grow up and have avoided fatal, life-altering choices. I am lucky. So far. Knock on a lot of wood.
I have watched good kids from good families make bad choices, and kids with no seeming chance make good choices. But one thing I have observed. Very few teenagers make the hard choice without some outside encouragement or help in understanding the known consequences, from some source. They nearly always opt for the choice that involves the most fun and/or the least immediate pain, and then learn later that they now have to make yet another choice as a consequence of the original one. And thus they grow up. So quickly.
But it’s not just teenagers. I am completely capable of making very bad choices as I approach the end of my sixth decade of human experiences and observations. In fact, I have made some rather distressing choices over time. Even in areas where I think I have some expertise I can make appallingly bad choices. Or maybe particularly in those areas, because I have delusions of actually knowing something. In my experience, it takes an expert with a powerful computer to truly foul things up.
Of course, sometimes I get it right. Even I learn, with enough pain. And sometimes I just get lucky. (Although, as my less-than-sainted Dad repeatedly intoned, “The harder I work the luckier I get.”)
Category: Think Tank