Posts filed under “Think Tank”

Bernanke to speak

With Barron’s now chiming in with its belief of what Bernanke should do with rates, and that is higher, as emergency rates are not appropriate now that the emergency has receded, Bernanke speaks at 11am on Asia and the Financial Crisis where off topic monetary policy comments are always possible as its getting tougher for him to avoid talking about the near record low in the US$ and record high in gold. For years, government officials would say the market should set the FX rate but it is the direct impact of government policies that has debased the $. Since 1999, the first time DJIA 10,000 was reached, federal government debt has risen 95% while nominal GDP is up just 47%. The Oct Nat’l Assoc of Home Builders index is expected to rise 1 pt to 20, the highest since April ’08 and would be up for a 4th straight month. The uncertainty over the extension of the tax credit could influence the number.

Category: MacroNotes

David R. Kotok co-founded Cumberland Advisors in 1973 and has been its Chief Investment Officer since inception. He holds a B.S. in Economics from The Wharton School of the University of Pennsylvania, an M.S. in Organizational Dynamics from The School of Arts and Sciences at the University of Pennsylvania, and a Masters in Philosophy from the University of Pennsylvania. Mr. Kotok’s articles and financial market commentary have appeared in The New York Times, The Wall Street Journal, Barron’s, and other publications. He is a frequent contributor to CNBC programs. Mr. Kotok is also a member of the National Business Economics Issues Council (NBEIC), the National Association for Business Economics (NABE), the Philadelphia Council for Business Economics (PCBE), and the Philadelphia Financial Economists Group (PFEG).


Some Observations about Spot Interest Rates and Forward Interest Rates: with help from Jason Benderly, Jim Bianco, Ned Davis & Howard Simons
October 18, 2009

“What going to happen to interest rates when the inflation comes?” This is a recurring question in our quarterly client review meetings.

In a normal cycle one can make some reasonable projections about the changes in interest rates when the economy bottoms. The usual sequence is that the Fed first allows the economic recovery to gain traction and then eventually starts to tighten policy by raising the short-term interest rate. Other rates also rise, first in anticipation of Fed action and then as the Fed persists. At some point the Fed reaches a level which slows the inflation tendency of the economy. The yield curve flattens and longer-term rates stop rising, even as short-term rates continue to do so. In extreme cases the short-term rate is pushed above the long-term rate.

We are not in a normal cycle.

The operation of interest rates and Fed policy is quite different this time, as the Fed is engaged in quantitative easing; there is no serious inflation, there is huge federal debt issuance and the policy-prescribed interest rate is effectively near zero. Traditional dynamics of monetary policy don’t work. There are many reasons why this is true, and we will discuss them in future Commentaries. Japan is an example of how this zero-rate status with no inflation and huge deficits can persist for a very long time.

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Category: Think Tank

Words from the (investment) wise 10.18.09

Words from the (investment) wise for the week that was (October 12 – 18, 2009)

Risky assets remained in favor during the past week, generally helped along by fairly robust economic data and better-than-expected corporate earnings reports. A number of bourses, crude oil, inflation-linked bonds and high-yielding corporate bonds and currencies recorded fresh highs for the year, whereas gold hit an all-time high of $1,070.20 per ounce.

Assets such as government bonds and the US dollar saw fading demand as safe havens, now that the global economy is on the mend. Similarly, credit default spreads tightened markedly and the CBOE Volatility Index (VIX) declined to its lowest level since early September 2008.

The Dow Jones Industrial Index passed a psychological milestone this week as the Index broke above the 10,000 level for the first time in a year, although it then declined again to fall shy of the roundophobia number by four basis points by the closing bell. The Dow first broke above 10,000 more than ten years ago in 1999 and has since done so on 26 occasions. Yes, a ten-year buy-and-hold index investor has had no capital gain over the period!


Source: The Wall Street Journal, October 16, 2009.

Meanwhile, according to the Financial Times, a survey of 44 leading economists by the National Association of Business Economics (NABE) showed the jobs that were lost during the Great Recession are not expected to return before 2012, while anemic wage growth of only 1% this year and 2.2% next year is forecast – the slowest two-year period on record. “But the way that investors are almost relying on unemployment to stay high [and central banks not to start exiting from the exceptionally low interest rates any time soon] demonstrates that the recovery, in markets and the economy, remains on shaky foundations,” warned FT’s investment editor, John Authers.


Source: Walt Handelsman, October 14, 2009.

The past week’s performance of the major asset classes is summarized by the chart below – a set of numbers that indicates an increase in risk appetite.



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 (+1.4%) and MSCI Emerging Markets Index (+2.1%) both made headway last week to take the year-to-date gains to +25.6% and an impressive +70.4% respectively. Interestingly, Chile is now only 1.5% down from its July 2007 highs and could be one of the first markets to wipe out all the financial crisis losses.

Notwithstanding a down-day on Friday, US indices closed higher for the week. The year-to-date gains remain firmly in positive territory and are as follows: Dow Jones Industrial Index +13.9%, S&P 500 Index +20.4%, Nasdaq Composite Index +36.8% and Russell 2000 Index +23.4%.

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Category: Think Tank

Dick Alford on Opportunities Lost by the Fed

Our colleague Richard Alford comments on recent Fed history and particularly how the organization failed to take notice of the warnings of one of its longest serving bureaucrats — Ted Truman — as he ended decades of service at the central bank.   I worked with Dick at the FRBNY where he contributed to the weekly report for the FOMC on the foreign currency markets.    — Chris

Opportunities Lost
By Richard Alford (

Against a backdrop of continued financial fragility and extraordinary policy actions, policymakers are discussing re-balancing global growth, restoring financial stability, and the future of the Dollar as the world’s reserve currency. In 2005, Edwin Truman proposed a list of policy measures that if followed would have reduced the US external imbalance and placed the reserve status of the Dollar on better footing.  Truman’s proposal differed from the standard litany of US fiscal discipline, Dollar adjustment, and increased demand in surplus countries. It called upon the Federal Reserve to slow the growth in US demand. More recent research, by Shin and Adrian, suggests that if the Fed had heeded Truman’s prescription, then monetary policy would have also mitigated the recent turmoil in financial markets.

In short, the Fed ignored external imbalance and the increasingly precarious nature of financial institution balance sheets when it pursued accommodative policy during the bubble years. The Fed disagrees. The official Fed position is that US monetary policy has no role to play in adjusting external imbalances:

“Members of the Committee noted that monetary policy was not well equipped to promote the adjustment of external imbalances …..Fiscal policy had a potentially larger role to play by promoting an increase in national saving, but the adjustment would involve shifts in demand and output both domestically and abroad…..” (FOMC 2004)

Truman pointed to the excess of total demand (gross domestic purchases/”absorption”) over potential output and the more rapid growth of demand relative to the growth of potential output. He concluded that:

“external adjustment is not just about the effects of exchange rates on exports, imports, and trade balances. It is also about slowing the rate of growth of domestic demand (gross domestic purchases) relative to the growth of production (GDP). To achieve any adjustment of the imbalance in real terms as a share of GDP, the growth rate of the former must be less than the growth rate of the latter.”
“… What the Federal Reserve has not acknowledged is that monetary policy has a role to play in slowing the growth of total domestic demand relative to the growth of total domestic supply or domestic output.”
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Category: Markets, Think Tank

Muddle Through, R.I.P?

Muddle Through, R.I.P?

Savings Equal Investments

Japanese Disease

Who Will Buy the Debt?

The New Muddle Through Economy

I first wrote about the Muddle Through Economy in 2002, and the term has more or less become a theme we have returned to from time to time. In 2007 I wrote that we would indeed get back to a Muddle Through Economy after the end of the coming recession. If you Google the term, at least for the first four pages more than half the references are to this e-letter. I get a lot of flak from both bulls and bears about being either too optimistic or too pessimistic. Being in the muddle through middle is comfortable to me.

Last week I expressed my concern that we as a country are taking actions that could indeed “Kill the Goose” of our free-market economy. I rightly got letters asking me how I could maintain Muddle Through in the face of that letter. I have given it a lot of thought and research. How likely are we to muddle through in the face of $1.5 trillion and larger deficits? Today we take another look at Muddle Through. It should be interesting.

But first, two housekeeping items. I want to welcome the 150,000 members of the National Association of the Self-Employed to this letter. They have asked me to be a special consulting economist to their group, and they will send this letter each week to their members. Since its beginning in 1981, the National Association for the Self-Employed has pioneered support for micro-businesses and the self-employed, and been a forceful advocate for small business in this country. ( I am honored. I am pleased to add you to my 1 million closest friends. I hope you find it useful.

Second, I will be going to South America at the end of next week, to Buenos Aires, Montevideo, Sao Paulo and Rio. I will be speaking in those cities and traveling with my new Latin American partner, Enrique Fynn of Fynn Capital (based in Uruguay). If you would like to find out about this tour or what services he can help you with, you can go to and sign up and Enrique will get in touch with you. And as always, if you are an accredited investor, you can go to that website and one of my partners in the world will get back to you. (In this regard, I am president of and a registered representative of Millennium Wave Securities, LLC, member FINRA.) And now to the letter.

Muddle Through, R.I.P.?

I defined a Muddle Through Economy in the past as one of slow growth (in the area of 1-2%) and a slack employment environment, such as we had in 2002 and the early part of 2003. In early 2007, I suggested we would return at some point to such an environment at the end of the recession I was predicting.

I am not surprised about the response of the Fed to the current recession and credit crisis, whether it’s the large monetization of debt or the low interest rates. Assuming they more or less remove the monetary easing in a reasonable manner, there is nothing that would make me think we do not eventually recover, albeit at a very slow Muddle Through pace, with a jobless recovery that lasts for several years. It will not be pleasant, but we’ll survive.

However, gentle reader, never in my wildest dreams did I think we could be looking at government deficits of $1.5 trillion dollars and actually budgeting future deficits of over $1 trillion as far as the eye can see. And there is real reason to think that under current plans, $1 trillion deficits are optimistic. Look at the graph above from the Heritage Foundation. They suggest that current policy would bring us closer to a $2 trillion deficit by 2019.

And that assumes nominal growth that is north of 3% and unemployment dropping back below 5% in reasonably short order. If you make less optimistic assumptions, the number can become much larger rather quickly. Where do we find that much money to finance that large a deficit? We will look at what might be the answer, but first we need to look at a basic concept in economics.

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Category: Think Tank

Wise Words from Economists ?

Mike Panzner just got back from The Economist’s “Buttonwood Gathering” in New York and thought I’d share a few of the more interesting (and, in some cases, quite enlightening) quotes (in no particular order) from the movers-and-shakers at the (well attended) conference: Secretary Tim Geithner, United States Department of the Treasury: “Generally, we did not…Read More

Category: Bailouts, Credit, Think Tank

Get your gold, now at Harrods

In case it was missed yesterday, a new sign of the times is apparent in a world of paper currencies with some being badly debased. Harrods, the huge department store in London, announced that they will be selling gold.

Category: MacroNotes

Economic data of the day

Following the 3 pt drop in the weekly ABC poll on Wednesday, the preliminary Oct UoM confidence figure also fell and was below expectations. At 69.4, it’s down 4.1 pts from Sept (which was the highest since Jan) and was 3.9 pts below forecasts. Most of the drop was in the Outlook as it fell…Read More

Category: MacroNotes

The King Report: Goldie’s Revenue Contributions

> Once again, just like in July, August & September, Benito juiced the system during expiry week. The previous three weeks, the Fed balance sheet contracted modestly. But for the week ended on Wednesday, Benito poured $54.747B into the system via the monetization of $70.699B of MBS… Term auction credit declined 22.937B. (See Table 9)…Read More

Category: Think Tank

Operation 1100

The following is the morning research note from a  major trading desk in NY ~~~ During options expiration week, the dealer community’s desire to “pin” the market to certain key levels renders all other thoughtful analysis moot. Options traders, like all traders, seek liquidity, and liquidity is in the big round number strikes – SPX…Read More

Category: Think Tank