Posts filed under “Think Tank”


David Rosenberg is a 20 year veteran of the Street, David most recently was Merrill Lynch’s chief North American Economist, where he correctly warned about the Housing and Credit Collapse and Recession in advance. He is the Chief Economist of Canada’s Gluskin Sheff




The Weekend Journal ran with an article by James Grant, which admittedly took
us by surprise (he is a true giant in the industry, as an aside) — From Bear to Bull
and in the article, he relies mostly on the thought process from two economic
think-tanks — Michael Darda from MKM Partners and the folks over at the
Economic Cycle Research Institute.

We highly recommend this article for everyone to read to understand the other
side of the debate. But we have some major problems with the points being

1. Mr. Grant starts off by saying that “as if they really knew, leading economists
predict that recovery from our Great Recession will be plodding, gray and
jobless.” Well, frankly, it doesn’t really matter what “leading economists” are
saying because Mr. Market has already moved to the bullish side of the
debate having expanded valuation metrics to a point that is consistent with
4% real GDP growth and a doubling in earnings, to $83 EPS, which even the
consensus does not expect to see until we are into 2012. We are more than
fully priced as it is for mid-cycle earnings.

2. Nowhere in Mr. Grant’s synopsis do the words “deleveraging” or “credit
contraction” show up. Yet, this is the cornerstone of the bearish
viewpoint. Attitudes towards homeownership, discretionary spending
and credit have changed, and the change is secular, not merely cyclical.
After all, didn’t consumers just see a record $20 billion of outstanding
credit evaporate in August?

3. Mr. Grant emphasizes (the Darda argument) how we had a huge bounce in
the economy after the worst point of the Great Depression (in fact, the
subtitle of the article contains: “The deeper the slump, the zippier the
recovery”). Well, we didn’t have the Great Depression this time around —
real GDP did not contract 25% but rather by 3.7%. We probably have to go
now and redefine what a massive slump is. But all we had in the mid-part
of the 1930s — between the worst point in 1932 to the 1937-38 relapse —
was a statistical recovery, and nothing more than that. Nobody from that
era will recall that any year was particularly good — each one was just
different shades of pain and sacrifice. By the end of the decade, the
unemployment rate was still 15%, the CPI was deflating at a 2% annual
rate and the level of nominal GDP, as well as industrial production, still
had yet to re-attain its 1929 peak. The equity market in 1941 was no
higher than it was in 1933 (and long bond yields were heading below 2%)
and even a child knows that it was WWII that brought the economy out of
its malaise, not the seven years of New Deal stimulus.

So, to concentrate on the wiggles in the GDP data in the 1930s, no
matter how large, totally misses the point about what the decade was
really about, which was social change, a focus on family, less
discretionary spending, and a trend towards frugality that few market
pundits seem to comprehend. But the 1930s were the antithesis of the
1920s — not unlike what we are witnessing today. To concentrate on a
bungee jump that wasn’t even sustained is akin to focusing on the noise
around the trend-line as opposed to the trend-line itself.

4. The very sexy argument about how all the government stimulus is going
to give the economy a really big lift — combined monetary and fiscal
measures are worth 19.5% of GDP. This is viewed as a good thing, of
course, but nowhere in the analysis is there a comment about how this
“stimulus” is just there to cushion the blow and smooth the transition as
wide swaths of private sector credit vanish. We are at the point where
85% of housing activity is still being supported by government
interventions. Is this really desirable? According to BusinessWeek, it’s
not just the FHA financing 40% of new mortgage originations but the
USDA is also allowing builders and lenders to take advantage of rural
mortgages that require no-money down and with 100% financing
through “a little-known loan program”.

Well, as with most bulls, this new era of state capitalism is a reason to
rejoice. But from our lens, what would be more noteworthy would be an
article explaining that the massive government incursion with all this
“stimulus” is actually more a reason to be concerned than be jubilant —
what it really symbolizes is an economy that is so sick that it continues to
require massive doses of medication.

It’s not what all the stimulus does that matters — of course, it is there to act as a
cushion — but it is what all the stimulus has come to symbolize. A fundamentally
weak economic backdrop and a precarious banking system that has government
guarantees to thank for its survival.

We noted last week that the Nikkei posted six 20%+ rallies since its bubble
burst in 1990 and no fewer than four 50%+ rallies. Indeed, you can count
423,000 rally points from all the up-days since the secular bear market began in
1990 and yet the index is down 74% since that time. So actually, there is
nothing in this flashy move off the lows in the S&P 500 that is inconsistent with
a pattern of a bear market rally — this is not the onset of a whole new
sustainable bull market. These are rallies than can only be rented, not owned,
and are purely technically-motivated and momentum-driven. They are not
premised on improved fundamentals, despite data that are skewed to the
upside by rampant government intervention. Just remember, nobody ever built
more bridges or paved more river beds to skew the economic data than the
Liberal Democratic Party (LDP) did in Japan for much of the 1990s.

Category: Think Tank

Let’s get real about dollar-equities causation

The following is a guest post from a market strategist at a major research firm . . . ~~~ The dollar rallied, did it? That was the “cause” of yesterday’s weakness in the energy and metals commodities, which in turn “caused” the related equities to sell off? Hogwash! Stocks are calling the tune here, folks….Read More

Category: Currency, Think Tank, Trading

Mortgage rates below 5%, Fed high five!

The MBA said the average 30 yr mortgage rate for the week ended Friday fell below 5% for the first time since late May, at 4.97%. In response, refi’s rose 17.4%, the highest since May while purchases were up 5.6%. This news comes as the FOMC discusses the fate of their purchases of MBS/Agency debt…Read More

Category: MacroNotes

The Dollar’s Role in Rising Risk Appetites

Good Evening: After a couple of wobbly sessions on Friday and Monday, U.S. stocks resumed rising on Tuesday. With little in the way of economic news, it was left to a falling dollar to buoy investor risk appetites. The greenback obliged by setting a new low for 2009, and commodity prices understandably reacted by heading…Read More

Category: Markets, Think Tank

The Drunk and the Liquor Store

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 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).


A few thousand miles of flying gives one a chance to catch up on some research reports. In this case the stack was about the debt-to-GDP ratio and what it means.

It is clear that the United States is on a borrowing binge. And also clear that the Nancy Pelosi-led US Congress has no will to restore any discipline to its spending habits.

Now we all know that borrowing at increasing rates cannot go on forever. And we also know that it can go on for a long time. And history shows that the adjustment process is non-linear. In other words, there is a period when the increased borrowing in order to finance consumption seems to be painless. We are in that period now.

This usually is followed by a shock. What triggers the shock? When does it occur? These are the types of questions we wrestle with each day as a money manager. And these are exactly the questions without easy answers. A bunch of research reports has proven that to these tired eyes.

Here is what we do know. The total of all government debt in the US has now breached the 100% of GDP level. We get this number courtesy of Ned Davis and by tallying up all the debt of the federal, state and local governments. This ratio has not been this high since World War II. It is climbing in a vertical fashion and can be projected to set a new record each and every foreseeable month.

Unlike World War II, the US debt explosion is not due to military and interest expense. Ned Davis has calculated the spending to GDP ratio without interest payments or defense. Again we are at an all-time high in the post World War II period. We cannot blame the spending spree on the army.

Total credit market debt to GDP in the US is a record 373% as of June 30th. In the UK it is 233%. In Japan it is 225%. We have become the most profligate borrower of the large countries in the world.

Private sector and household debt is not the problem. In the last two months the household debt declined by a huge $37 billion. Non-financial corporate debt is also not the problem. It is barely increasing.

The problem simply is government. It is borrowing at all levels and without restraint.

From Japan we learned that increasing borrowing can continue for a very long time. And that we can get it without much inflation and with persistent very low interest rates. The reason is that borrowing is a way of loading a debt burden on the economy. The larger the debt burden the slower the economy will grow. This is especially true when the borrowing is for consumption purposes. That is the current condition of the United States.

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Category: Think Tank

July FHFA Home Price Index

The July FHFA Home Price Index rose .3% m/o/m, .2% less than expected and June was revised lower to a gain of .1%, down from the initial report of up .5%. Y/o/Y prices are down 4.2% and are (only) 10.5% below its April 2007 high. According to the FHFA, their index is back to the…Read More

Category: MacroNotes

Will the US$ be an FOMC topic of discussion?

As the FOMC begins their two day meeting today not only will they have to juggle the current stabilization in the US economy with their extremely accommodative policies, I wonder whether they will discuss the US$ and the price of gold as price stability (stable currency) is one of their two mandates. The $ index…Read More

Category: MacroNotes

Did Policy Economists Get It That Wrong?

Bob Eisenbeis is Cumberland’s Chief Monetary Economist. Prior to joining Cumberland Advisors he was the Executive Vice President and Director of Research at the Federal Reserve Bank of Atlanta. Bob is presently a member of the U.S. Shadow Financial Regulatory Committee and the Financial Economist Roundtable. His bio is found at He may be reached at

It has become fashionable for commentators to bash economists for having missed the financial crisis of 2007-2009. Nobel Prize winner Robert Lucas provided a recent rebuttal to critics in a guest article in The Economist of August 6, 2009. Unfortunately, it was a rather unconvincing effort.

More recently, Nobel laureate Paul Krugman, in his NY Times article of September 2, 2009 entitled “How Did Economists Get It So Wrong?” took his own shots at the profession. He essentially repeats two criticisms that were addressed in Lucas’ article. The first is the profession’s fixation on elegant mathematical models, and the second is its belief in efficient markets – the idea that market participants use all available information when making economic decisions and pricing securities. He claims that in the world of theory – which many economists tend to believe is the “real” world – markets are inherently stable and do not admit the possibility of “catastrophic failures in a market economy” like the current crisis. Should a problem occur then it could be easily corrected by appropriately administered Federal Reserve policy. Are these criticisms well-deserved and are they directed at the right people?

Krugman’s critique has brought forth a host of rebuttals from academic economists who defended their performance. Still, one has to concede that Krugman has some valid points. The first concerns the bias among theorists for stability and stationarity in their models. Models serve a useful purpose in all fields of physical and social science. In economics, the trend has been toward building models that exhibit stationarity and stability, so that they tend toward a fixed long-run equilibrium and naturally return to that equilibrium if shocked. Publish these types of models and you will advance your academic career. There has been relatively little interest in the contemporary academic profession in market imperfections or in models that may admit such properties.

However, what critics also fail to recognize is that academic economists are not engaged in the same activity as business and policy economists. Academics are not building forecasting and prediction models of the kind the critics seem to be demanding or expecting. Academic economists are mostly unconcerned and largely uninformed about the week-to-week data releases or the policy moves that the Federal Reserve makes and that fill time on CNBC, Fox Business, and Bloomberg TV. In fact, academia puts little value on forecasting. Once you have built a forecasting model, there is nothing more to be gained intellectually from the academician’s perspective by running the model week by week as new data becomes available. This is really the province of the Federal Reserve and other government agencies, economic consultants, the business economists that populate Wall Street and large corporations who have to make business and policy decisions based upon the outcomes of those forecasts.

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Category: Think Tank

When do we junk the velcro for the shoelaces?

As my 7 year son last week junked his velcro sneakers for a pair of Nike’s with shoelaces as he finally learned to tie them, it was hard not to think about when the private sector was finally going to learn how to tie its shoelaces again without the help of government velcro. The FOMC…Read More

Category: MacroNotes

Words from the (investment) wise 9.20.09

Words from the (investment) wise for the week that was (September 14 – 20, 2009)

Marking the one-year anniversary of the Lehman Brothers demise, risky assets last week again marched higher to the tune of economic data supporting the argument of a global economic recovery. A realization among investors that the economic transition from recession to recovery was gaining momentum, resulted in many global stock markets scaling fresh peaks for the year.

Ben Bernanke, Federal Reserve chairman, on Tuesday said the US recession “is very likely over”. However, he remained cautious about the shape of the recovery and said he expected a “moderate” recovery in 2010 with growth “not much faster than the underlying potential growth rate of the economy”, i.e. approximately 3%.

“At the moment we don’t see (the economy) getting better or worse, but that’s better than you could say six months ago,” added Warren Buffett. “The terror of last year is gone and that’s thanks in part to the government.”


Source: Tom Toles,

Not only did the US stock market indices record up-days on every day except Thursday, but all ten economic sectors that make up the S&P 500 also closed the week in the black. Most other stock markets (mature and emerging alike), commodities, oil, precious metals, high-yielding currencies and corporate bonds also put in a stellar performance as a bullish mood prevailed.

The CBOE Volatility Index (VIX), or “fear gauge”, traded at about the same level (23.9) as before the Lehman bankruptcy in September last year. Also, government bonds and other safe-haven assets such as the US dollar and Japanese yen were out of favor as investors sought higher returns elsewhere.

As investors started assuming more risk since March, the US Dollar Index headed lower, hitting a one-year low last week and trading in a confirmed downtrend as far as primary trend indicators are concerned. The combination of low interest rates and quantitative easing has made the US dollar an attractive currency for funding carry-trade transactions (i.e. selling low-yielding currencies to finance the purchase of higher-yielding currencies). (Click here for a short technical analysis.)

The declining dollar, central bank purchases, the de-hedging by gold producers and rising inflation expectations served as catalysts for gold bullion’s strength, causing the yellow metal to close above the $1,000 level for the sixth consecutive day on Friday. While gold’s move grabbed the headlines, platinum (+42.5%) and silver (+50.5%) have actually outperformed gold (+13.9%) significantly since the start of the year.



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.

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Category: Think Tank