Posts filed under “Think Tank”
Following an almost 50 bps drop in yields over the past month, the $35b 3 year auction was mixed. The yield was almost 3 bps above where the when issued was trading just prior. On the other hand, the bid to cover was good at 2.62 (but below the level of the June auction) and above the average going back through last year of 2.52. The level of indirects totaled 54% but is not comparable to previous auctions because of a change in its measurement. The short end of the curve is most sensitive to expectations of fed policy and the fed funds futures are pricing in the slowest pace of rate hikes in a while. Today’s auction was therefore an easy sell but the recent drop in yields relative to the June auction, made it a touch less attractive. Today’s results say nothing about inflation expectations because of the short maturity. Tomorrow’s 10 year auction though will.
> We are stunned – no, we’re shocked, shocked over the following admission from an Assistant US Attorney about the theft of Goldman’s proprietary trading codes. Bloomberg: At a court appearance July 4 in Manhattan, Assistant U.S. Attorney Joseph Facciponti told a federal judge that Aleynikov’s alleged theft poses a risk to U.S. markets. Aleynikov…Read More
Category: Think Tank
Comments today from the British Chambers of Commerce highlight the favorable backdrop, in my opinion, for hard assets/commodities as they call on the Bank of England to print more money. Not only do they want the BoE to complete its current asset purchase plan but “they should go beyond 150b pounds” as while the “worst…Read More
There are those who sweat over every decision, worrying about how it will affect their lives and investments. Then there is the school of thought that we should focus on the big decisions. I am of the latter school.
85% of investment returns are a result of asset class allocations and only 15% come from actually picking investment within the asset class. Getting the big picture right is critical. In this week’s Outside the Box we look at a very well written essay about the biggest of all question in front of us today. Do we face deflation or inflation?
This OTB is by my good friends and business partners in London, Niels Jensen and his team at Absolute Return Partners. I have worked closely with Niels for years and have found him to be one of the more savvy observers of the markets I know. You can see more of his work at www.arpllp.com and contact them at email@example.com.
John Mauldin, Editor
Outside the Box
Make Sure You Get This One Right
By Niels C. Jensen
“You can’t beat deflation in a credit-based system.”
As investors we are faced with the consequences of our decisions every single day; however, as my old mentor at Goldman Sachs frequently reminded me, in your life time, you won’t have to get more than a handful of key decisions correct – everything else is just noise. One of those defining moments came about in August 1979 when inflation was out of control and global stock markets were being punished. Paul Volcker was handed the keys to the executive office at the Fed. The rest is history.
Now, fast forward to July 2009 and we (and that includes you, dear reader!) are faced with another one of those ‘make or break’ decisions which will effectively determine returns over the next many years. The question is a very simple one:
Are we facing a deflationary spiral or will the monetary and fiscal stimulus ultimately create (hyper) inflation?
Unfortunately, the answer is less straightforward. There is no question that, in a cash based economy, printing money (or ‘quantitative easing’ as it is named these days) is inflationary. But what actually happens when credit is destroyed at a faster rate than our central banks can print money?
A Story within the Story
Following the collapse of the biggest credit bubble in history, there has been no shortage of finger pointing and the hedge fund industry, which has always had an uncanny ability to be at the wrong place at the wrong time, has yet again been at the centre of attention. And politicians, keen to divert attention away from themselves as the true culprits of the crisis through years of regulatory neglect, have been quick at picking up the baton. Admittedly, the hedge fund industry is guilty of many stupid things over the years, but blaming it for the credit crisis is beyond pathetic and the suggestion that increased regulation of the hedge fund industry is going to prevent future crises is outrageously naïve.
If you prohibit private investors from investing in hedge funds which on average use 1.5-2 times leverage but permit the same investors to invest in banks which use 25 times leverage and which are for all intents and purposes bankrupt, then you either don’t understand the world of finance or you don’t want to understand. Shame on those who fall for cheap tactics.
Let’s begin by setting the macro-economic frame for the discussion. I have been quite bearish for a while, suspecting that the growing optimism which has characterised the last few months would eventually fade again as reality began to sink in that this is no ordinary recession and that ‘less bad’ doesn’t necessarily translate into a quick recovery. I still believe there is a good chance of enjoying one, maybe two, positive quarters later this year or early next; however, a crisis of this magnitude doesn’t suddenly fade into obscurity, just because the economy no longer shrinks at an annual rate of 6-8%.
Going forward, not only will economic growth disappoint, but the economic cycles will become more volatile again (see chart 1) with several boom/bust cycles packed into the next couple of decades. This is a natural consequence of the Anglo-Saxon consumer-driven growth model having been bankrupted. Growing consumer spending over the past 30 years led to rapidly expanding service and financial sectors both of which will now contract for years to come as overcapacity forces players to downsize.
This will again lead to higher corporate earnings volatility which will almost certainly drive P/E ratios lower, making conditions even trickier for equity investors. At the bottom of every major bear market in the last 200 years, P/E ratios have been below 10. As you can see from chart 2 overleaf, few countries are there yet. The next decade is therefore not likely to be a ‘buy and hold’ market for equity investors. The combination of low economic growth and pressure on valuations will create severe headwinds. The most likely way to make money in equities will be through more active trading.
Category: Think Tank
Good Evening: After early losses in the wake of Thursday’s very poor unemployment report, the major U.S. stock market averages rallied back this afternoon to finish mixed. Shares of financial companies and traditionally defensive names made for odd bedfellows in leading today’s comeback, but economically sensitive sectors like materials were heavy for most of today’s…Read More
The euro is rallying to the highest level of the day vs the $ after a Canadian official, speaking anonymously, said that while the G8 will likely discuss the US$ and its reserve currency status, there will not be explicit US$ reserve currency comments in the official communique. With about 70% of China’s almost $2…Read More
The Treasury’s 10 yr TIPS auction was solid as the yield was about 1 basis point below expectations and the bid to cover of 2.51 is the highest since Jan ’00 and well above the average over the past year and a half of 2.13. The level of indirect buyers at 49.7% is no longer…Read More
The June ISM services number was one point more than expected at 47 and up from 44 in May and it’s at the highest since Sept ’08 when it was at 50, the cut off between contraction and expansion. Business Activity rose 7.4 points to just shy of 50 at 49.8. New Orders rose to…Read More
Kevin Lane is one of the founding partners of Fusion Analytics, and is the firm’s director of Quantitative Research. He is the main architect for developing their proprietary stock selection models and trading algorithms. Mr. Lane is a member of the Market Technicians Association. ~~~ As seen below in the S&P 500 has been capped…Read More