Posts filed under “Think Tank”

If You Take a Walk, I’ll Tax Your Feet

Dan Greenhaus is at the Chief Economic Strategist at Miller Tabak + Co. where he covers 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:


Monday November 23, 2009

After two weeks or so in which the equity and bond markets had little in the way of corporate earnings and macroeconomic data to deal with, the economy will again take center stage beginning today with existing home sales. Over the course of the week, numerous data points will be released, each of which have the ability to push the market around especially in the reduced trading environment in which we currently find ourselves. Indeed, two of the five trading days in the most recent week saw volume of less than 4 billion shares, something that hasn’t occurred since the beginning of July when trading is expected to slow down. Additionally, we haven’t seen a 5 billion share day since November 4, thirteen trading days ago.

As for the data, housing will be in the forefront as the market gets new data on existing home sales (the largest part of the housing market), the Case-Shiller HPI (YOY comparisons are starting to get much, much easier) and new home sales (high correlation with the homebuilders which are about 4% below September month end levels). Perhaps most importantly though, oddly enough, is the first revision to third quarter GDP. Usually revisions, even to data as important as GDP, are treated as old news however the importance of growth in GDP these days cannot be overstated. To repeat, with an unemployment rate north of 10% and an underemployment rate north of 17%, it takes a considerable amount of economic growth in coming quarters to put the 15.7 million unemployed persons back to work. This was key to the expansion in 1983-1885 which brought the unemployment rate down from nearly 11% to 7% and one of the reasons that the path of growth coming out of this recession, by any measure, will be muted in relation to what the models would suggest.

Key to our argument is that the pace of economic growth going forward will not be robust enough to soak up the unemployed and underemployed persons which will serve to put a lid on the pace of consumer spending going forward. With respect to this outlook, we will be monitoring not just the headline reading – which we are expecting to show growth of 3% rather than the 3.5% originally reported – but also its composition. We have argued that a large part of the growth experienced int he third quarter can be attributed to government spending and while there is a case to be made (we make it) that the government has a role to play at the depths of a recession this deep, it will be up to the private sector to carry us forward. It just wont happen after three months.

Which brings us to our final point this morning. We have detailed our believe that any given modest adjustment to the tax code, by itself and at current levels, is not enough to destroy incentives to the degree some would assert. While we believe that taxes should always and forever be as low as possible, we do not believe that a few percentage point move in either direction, at current levels, dramatically affects revenue and incentives. However, there is no doubt that going forward, the tax structure is going to be more challenging for many Americans and we are dismayed to see our colleagues on the economic side of things who are calling for robust rates of growth from 4-5% in coming quarters on the back of a rebound in consumer spending levels dismissing this major hurdle for the private sector.

We bring this up because the list of tax increases that we know about apparently just got a big longer this weekend:

  1. We know that the top marginal tax rate is going to increase in 2011 to 39.6% from 35%.
  2. We know that the capital gains tax is set to increase 5 full percentage points while dividends are set to be taxed as ordinary income.
  3. We know that the upper income brackets will lose the ability to deduct mortgage interest from their state and local tax liabilities.
  4. We spoke on Friday of our horror at learning the payroll tax would increase to 1.95% for some individuals and we spoke earlier this fall of the impending tax related to the health care initiative.

We know of all these tax increases and we have no doubt that upper income bracket consumption patterns (the top quintile accounts for anywhere from 40-50% of spending) will be affected. We would doubt the argument that it is enough to derail economic growth but it seems at least fair to say that consumption will be affected.

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Category: Think Tank

If you blinked, you missed the US$ rally

Just like that, the US$ has given back all of last week’s modest gains and then some and gold is rising to another fresh record high in response. Assuming an 1100 open in the SPX and a gold price of 1165, the S&P 500 is down more than 7% this year in gold terms. Any…Read More

Category: MacroNotes

Words from the Investment Wise 11.22.09

Words from the (investment) wise for the week that was (November 16 – 22, 2009)

Stock markets succumbed to a bout of profit-taking last week, sparked by concerns that the rally has overshot the pace of economic recovery. Riskier assets were showing signs of fatigue as the US dollar – the catalyst of many recent moves – stabilized and was perceived to be near its trough (if only short-term in the books of ardent dollar bears).

The greenback, usually the remit of the US Treasury, received support from Fed Chairman Ben Bernanke in a speech. He noted that the Fed was “attentive to the implications of changes in the value of the dollar and will continue to formulate policy to guard against risks to our dual mandate to foster both maximum employment and price stability. Our commitment to our dual objectives, together with the underlying strengths of the US economy, will help ensure that the dollar is strong and a source of global financial stability.” These comments spurred some buying interest.

Bill King (The King Report) summarized the situation as follows: “For the past few months, bad economic news was perceived to be good news for stocks on the rationale that it ensured more juice. Dollar down, stocks and gold up has been the routine. Are we at an inflection point, where bad economic news is becoming bad news for stocks?”


Source: Ed Stein,, November 20, 2009.

The past week’s performance of the major asset classes is summarized by the chart below. With the exception of equities and investment-grade corporate bonds, most asset classes closed higher on the week despite nervousness creeping in before the weekend. Gold bullion touched a record high of $1,152.74 on Thursday and helped platinum, silver, palladium and copper reach fresh peaks for the year.



A summary of the movements of major global stock markets for the past week and various other measurement periods is given in the table below.

The MSCI World Index (-1.1%) and the MSCI Emerging Markets Index (+0.3%) followed different paths last week, resulting in year-to-date gains of 24.5% and an impressive 70.2% respectively. Notwithstanding solid gains since the March lows, no major index has yet been able to reclaim the 2007 pre-crisis peaks.

As far as the US indices are concerned, the Dow Jones Industrial Index eked out a small gain for the week as investors emphasized high quality, but the other major indices all reversed a two-week up-patch. Six of the ten economic sectors closed lower for the week, with Technology (-1.4%) and Consumer Discretionary (-1.1%) underperforming,

The year-to-date gains in the US remain firmly in positive territory and are as follows: Dow Jones Industrial Index 17.6%, S&P 500 Index 20.8%, Nasdaq Composite Index 36.1% and Russell 2000 Index 17.1%.

Click here or on the table below for a larger image.


Top performers among stock markets this week were Bangladesh (+21.3%), Latvia (+4.5%), Kazakhstan (+4.3%), Qatar (+4.1%) and China (+3.8%. At the bottom end of the performance rankings, countries included Ecuador (‑9.3%), Egypt (-7.6%), Greece (-7.1%), Turkey (-7.0%) and Macedonia (‑6.3%).

Of the 98 stock markets I keep on my radar screen, 39% recorded gains (last week 66%), 58% (31%) showed losses and 3% (3%) remained unchanged. (Click here to access a complete list of global stock market movements, as supplied by Emerginvest.)

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Category: Think Tank

Where the Wild Things Are

November 20, 2009
By John Mauldin

Where the Wild Things Are
It Is Not Just Japan
The Euro-Yen Cross and the Dollar Carry Trade
New York, London, and Switzerland

From ghoulies and ghosties
And long-leggedy beasties
And things that go bump in the night,
Good Lord, deliver us!

–Old Scottish Prayer

Where the Wild Things Are is a beloved children’s book and now a beautiful movie. But in the investment world there are really scary wild things lurking about in the hidden recesses of the economic landscape. Today we look at one of the unintended consequences of the Federal Reserve’s low interest rate policy.

For quite some time, I have been arguing that we are faced with no good choices, not just in the US but in the entire “developed” world. I see a low-growth, Muddle Through world over the next years (with a double-dip recession just to liven things up). However, that does not mean that we will lack for volatility. Things could get volatile rather quickly. Let’s quickly set the background.

It Is Not Just Japan

Let’s look at today’s interest rate picture. Yesterday, we had the bizarre occurrence of banks actually paying the government to hold their cash. Three-month treasuries yield a miniscule 0.01% in interest. If you opt to buy a one-year bill you get all of 0.26%. You can see the entire spectrum below.

Look at the graph of the yield curve below. It is as steep as we have seen it in a long time. But that is almost the point. Banks are essentially getting free money. If you are a banker and can’t make money in this environment, you need to quit and find meaningful employment.

And that is part of the rationale that the Fed espouses with its low interest rate regime. Not only does it allow banks to repair their balance sheets, it also encourages investors to put money into riskier assets in order to get some return on their investments. Over $260 billion has gone into bond funds this year, and just $2.6 billion into stock funds. However, you have to balance that with the fact that some $400 billion has left money market funds paying less than 0.2%. So there is some movement to capture yield.

But is it just banks that are getting cheap money? And is encouraging investors to find riskier assets a sound policy? Maybe not.

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Category: Think Tank

It’s All About Supply, Not Demand

> Jim has run Bianco Research out of Chicago since November 1990. He has been producing fixed income commentaries with a circulation of hundreds of portfolio managers and traders. Jim’s commentaries have a special emphasis on: money flow characteristics of primary dealers, mutual funds, hedge funds, futures traders, banks, and institutional investors. ~~~ It’s All…Read More

Category: Think Tank

US$ rally continues

Asian currencies continue to sell off vs the $ on the heels of the news yesterday that South Korea said they will look into hot money inflows stemming from the $ carry trade and the Bank of Indonesia said they are looking into the foreign buying of bills. This follows the news a few weeks…Read More

Category: MacroNotes

The fed funds futures thinks Bernanke will be all talk and no action

While the US$ caught a bid this week, albeit modest, in part due to Bernanke’s acknowledgement of it on Monday in terms of its impact on commodity prices and thus inflation, the fed funds futures continue to reduce its belief that he’ll follow words with actions. Since Friday’s close, full odds of a 25 bps…Read More

Category: MacroNotes

Philly Fed survey

The Nov Philly Fed manufacturing survey was 16.7, 4.5 pts above expectations and up from 11.5 in Oct. It’s the highest since June ’07 but the figure measures the direction of change, not the degree. New Orders jumped sharply to 14.8 from 6.2 but Backlogs fell 4 pts to -5.4. Employment improved by more than…Read More

Category: MacroNotes

Initial Claims flat but extended benefits rise

Initial Jobless Claims totaled 505k, in line with estimates and flat with a revised 505k last week. Continuing Claims, which covers the first 26 weeks of benefits, fell by 39k but were slightly above forecasts. Emergency Unemployment Compensation which takes us past 26 weeks rose by 101k which makes clear that the fall in Continuing…Read More

Category: MacroNotes

The US$ catches a bid

The US$ index is rising to a one week high and the US$ is also higher against emerging market currencies such as Brazil, Taiwan, and Indonesia, so the bounce is broad based. Whether it was Bernanke uttering the dollar word in terms of its impact on commodity prices and inflation on Monday, Trichet following up…Read More

Category: MacroNotes