Clippings 2009

[Bylo Selhi]

A similar chart for Canada

That chart omits the recent discontinuity.

I assumed you could fill in the blanks.

[newguy]

In the above debt/GDP graphs the GDP may be overstated according to this site. Shadow Stats This is due to the changes in measuring inflation then applying it to nominal GDP. I find the changes to stats by governments worriesome. I know there is a lot of cynics/skeptics on this forum so please tell me what to believe.
Does anyone know a similar site to this for Canada ?

newguy

[patriot1]

The variable being graphed is nominal debt/nominal GDP. The quotient of two nominals is a real, so there no need to include the rate of inflation anyway.

Like price/earnings, etc.

[newguy]

Doh!
Thinking about it, it would pretty much have to be like you said.
I'm still wondering if Canada has done all these adjustments to the CPI.

newguy

[FrostedGlass]

Transcript of interview with David Swensen of the Yale endowment fund:

http://www.wealthtrack.com/transcript_05-22-2009.php

CONSUELO MACK: So your recommendation for individuals basically is to invest in index funds?

DAVID SWENSEN: Yup.

CONSUELO MACK: And your recommended asset allocation at this point would be for an equity-oriented investor, would be what?

DAVID SWENSEN: 30% in U.S. stocks. 15% in Treasury bonds. 15% in Treasury Inflation-Protected Securities. And then in my book, I talk about 20% in REITs. I've got a 15% allocation to foreign developed equities, and a 5% allocation to emerging markets.

[Taggart]

I don't often post material from blogs, but I found this via a link from the UK's Financial Times.

The only problem is, I still haven't figured out quite how to be a cockroach investor, but I'm working on it.

Capitalism Evolving: Be a Cockroach Not a Dinosaur

Not Dying, Adapting

[WishingWealth]

Somewhere in Clippings or another thread there was some mention of the bond war between Krugman & Ferguson.

Daniel Gross from Slate: http://www.slate.com/id/2219769/

The Bond War
Why Paul Krugman and Niall Ferguson are hammering each other about T-Bill interest rates.
...
Both the Fergusonians and the Krugmanites (of whom I count myself one) err in reading too much into short-term fluctuations in bond prices. There's so much more at work. Randall Forsyth of Barron's explains a technical reason for the short-term spike in 10-year and 30-year rates. Banks and financial institutions that own mortgages hedge their exposure to refinancing by buying and selling Treasury bonds. When mortgage rates start to rise, as they've done in recent weeks, institutions do the opposite and sell. "While mortgage investors previously had bought noncallable Treasuries to offset the risk of their mortgages, mortgage investors have unwound that hedge, selling their Treasuries," Forsyth writes.

Finally, the notion that the market is telling us something—anything—ultimately rests on the erroneous assumption that financial markets represent the collective wisdom of rational actors processing information efficiently. There are plenty of cool-minded forward-thinking investors in the markets. But there are also a lot of lunatics, fools, sharks, widows and orphans, government actors with ulterior motives, algorithmic traders, greedy speculators, and whack jobs. The markets resemble the Star Wars bar scene more than they do the economics faculty lounge at Princeton.

One former denizen of that lounge, Federal Reserve Chairman Ben Bernanke, seemed to split the difference yesterday. "However, in recent weeks, yields on longer-term Treasury securities and fixed-rate mortgages have risen," he told Congress. "These increases appear to reflect concerns about large federal deficits but also other causes, including greater optimism about the economic outlook, a reversal of flight-to-quality flows, and technical factors related to the hedging of mortgage holdings."

WW

[DavidR]

Daniel Gross from Slate: http://www.slate.com/id/2219769/

The Bond War
The markets resemble the Star Wars bar scene more than they do the economics faculty lounge at Princeton.

WW

What a great line!

[WishingWealth]

I don't often post material from blogs, but I found this via a link from the UK's Financial Times.

The only problem is, I still haven't figured out quite how to be a cockroach investor, but I'm working on it.

Capitalism Evolving: Be a Cockroach Not a Dinosaur

Not Dying, Adapting

That's a good one too from the article:

...
Perhaps my credentials should be reviewed. Everything I needed to know about the markets I learned on the old and notorious Vancouver Stock Exchange. For example, in a world of extravagant claims from big government, big academe and big Wall Street the old definition of a promotion is useful: ”In the beginning the promoter has the vision and the public has the money. At the end of the promotion the public has the vision and the promoter has the money.”

And as we're learning, not only in VCR.

WW

[Peculiar_Investor]

The Wall Street Journal - June 6th

Wall Street's Clearance Sale Leaves Few Bargains - Jason Zweig.

Interesting points to ponder:

In fact, whatever's garbage has been good. According to Strategas Research Partners, stocks in the S&P 500 with positive earnings have underperformed those with losses (or no profits) by a 24% margin since March 9. Stocks that pay dividends have been dragging behind those that don't. The smaller a company, the more money it is losing and the deeper in debt it is, the hotter its stock has been over the past three months.

and then continuing the garbage metaphor

After all, once any kind of garbage gets hot, it's only a matter of time before it begins to stink.

PS. Posting this from snowy Calgary.. Aargh, but that's for another thread about Global Warming or the like.

[Mike Schimek]

Interesting points to ponder:

Seems fairly clear; (%s for discussion purposes only) if a bank/insurance/etc. went down 80% then recovered; going up 100%, it's still down 60%, which is still an amazing deal if a recovery comes.

If a "non garbage" (as Jason Zweig would call it, in this article) stock is down 40% and the recovered 50% since then (half the recovery amount of a "garbage" stock), it is only down 10%.

So the "garbage" stocks are still 60% cheaper than they were, while the "non garbage" stocks are only 10%.

I'd still be picking through the garbage at that price.

I never liked Jason Zweig's way of looking at things (or presenting them) for some reason. I have a gut feeling that if Benjamin Graham were alive today, and read the comments inserted into his book by J.Z. (Ben Graham's book), Ben would be appalled.

[Taggart]

Interesting points to ponder:

I never liked Jason Zweig's way of looking at things (or presenting them) for some reason. I have a gut feeling that if Benjamin Graham were alive today, and read the comments inserted into his book by J.Z. (Ben Graham's book), Ben would be appalled.

Mike,

As I recall Buffett was supposed to be the co-author of the final edition of "The Intelligent Investor". Unfortunately, it didn't quite turn out that way. Ben and Warren couldn't agree with each other on the changes to be made in the revised book.

[DenisD]

The Investment World Is Not Flat By Larry Swedroe

With the way all major equity asset classes plummeted last year, you may be wondering if international diversification still matters.

...

The severe losses experience by all major equity asset classes (and commodities as well) in 2008 seems to support this view. But before you swallow that story, consider the wide dispersion of returns for the first five months of 2009.

...

It is also important for you to recognize that because equity markets do experience periods of high correlation, you need to hold a sufficient amount of high-quality fixed income assets to keep the risk of your overall portfolio at a level that is consistent with your ability, willingness and need to take risk. Getting this right is the most important asset allocation decision you will make.

[Taggart]

The Wall Street Journal - June 6th

Wall Street's Clearance Sale Leaves Few Bargains - Jason Zweig.

Interesting points to ponder:

In fact, whatever's garbage has been good. According to Strategas Research Partners, stocks in the S&P 500 with positive earnings have underperformed those with losses (or no profits) by a 24% margin since March 9. Stocks that pay dividends have been dragging behind those that don't. The smaller a company, the more money it is losing and the deeper in debt it is, the hotter its stock has been over the past three months.

and then continuing the garbage metaphor

After all, once any kind of garbage gets hot, it's only a matter of time before it begins to stink.

PS. Posting this from snowy Calgary.. Aargh, but that's for another thread about Global Warming or the like.

All the article says to me is that it doesn't always have to be "quality" value, but money can be made on deep value, cigar butt stocks, or whatever you want to call them. It's phychologically more difficult to buy garbage than quality though.

[Taggart]

Fortune (U.S.)

June 10, 2009

Betting the farm

As world population expands, the demand for arable land should soar. At least that's what George Soros, Lord Rothschild, and other investors believe.

[WishingWealth]

And for a breather, Crisis Lite: A series.
@ MarketWatch: http://www.marketwatch.com/story/chapte ... genumber=1

Memoirs of a Minyan
(Editor's note: "Memoirs of a Minyan" is a first-person account that follows Minyanville founder Todd Harrison through a Wall Street trading career to the Internet media business, with some important lessons about the nature of money along the way. This e-book will publish each Wednesday over 18 weeks).

NEW YORK (MarketWatch) -- It was the turn of the century and change was afoot.

As Y2K fears swept the street and the stock market scaled the wall of worry, Wall Street was flush with newfound wealth and irrational exuberance.

It was an exciting time to be a trader as money magically meandered overhead like some sort of magic carpet ride. If you weren't cutting a rug, you were missing out. And everyone, from taxi drivers to stay-at-home moms, was wearing dancing shoes.

I was already a veteran of my chosen profession, having honed my skills at Morgan Stanley for seven years before managing the derivative portfolio at a multibillion-dollar New York hedge fund.
...

WW

[WishingWealth]

Even for a card carrying commie* like WW, I don't like what I see.
It seems every f*&^%$ lemonade stand* needs some subsidies or another just to get started or stay in business.
Nobody* wants to risk a penny in new ventures anymore*.

And of course it is put in better words by Carney from the BofC.
http://bankofcanada.ca/en/speeches/2009/sp110609.html

Rebalancing the Global Economy
...
Redistribution of Risk Between Public and Private Sectors

The financial panic required a bold response from the public sector. The loss of faith in the solvency of core banking institutions at times threatened the very functioning of the global financial system. While absolutely necessary, the response to the crisis has profoundly shifted risk from the private sector to the public sector. Since October, the G-7 has committed that no systemically important financial institutions will be allowed to fail. Across the world, bank financings have been guaranteed. With securitization markets still moribund, assets have been purchased and tail risks assumed by the public sector. Governments have even guaranteed warranties on certain car models. With these precedents, there will be further pressure for a host of new risk-sharing arrangements.8

We need to think carefully about where risks are best held as we emerge from this crisis. There are two considerations. First, risks that can be priced are best borne by the private sector, whereas uncertainties that have a wide and significant potential impact are best borne by the public sector. Second, risks are endogenous: Public policy and private decisions influence aggregate risk in the system. For example, the widespread private use of collateral to mitigate counterparty risk reduced credit risk but sharply increased liquidity risk. Similarly, the public sector's recent assumption of some risks creates moral hazard. If left unchecked, this will eventually promote private behaviours that will add overall risk to the system.

The expedient should not become permanent. Governments have assumed extraordinary tail risks and quite ordinary financial risks. They should decide whether to keep the former or to effectively shut down the activities associated with them (for example, some aspects of securitization). They should return the latter to the private sector.
...

WW

* exaggerating a bit of course.

[WishingWealth]

Taggart: Do you have an El Cheapo link to the article:

"Nobody knows how to measure true earnings. Everybody knows the precise amount of a dividend declaration.

Peter Bernstein, Dividends and the Frozen Juice Syndrome
"

Not sure I'll read it paragraph by paragraph if it's dense and math heavy but I'll look at the pictures.

Lazy me again; but I did try - a bit.
You can see a lot just by looking - sometimes.

WW

[Taggart]

Taggart: Do you have an El Cheapo link to the article:

"Nobody knows how to measure true earnings. Everybody knows the precise amount of a dividend declaration.

Peter Bernstein, Dividends and the Frozen Juice Syndrome
"

Not sure I'll read it paragraph by paragraph if it's dense and math heavy but I'll look at the pictures.

Lazy me again; but I did try - a bit.
You can see a lot just by looking - sometimes.

WW

Unfortunately, no. All I've been able to find is the abstract. To get the full PDF, they want you to pay for it.

[tidal]

Too Big to Fail? How About Too Big to Exist?

It may be true, in fact, that complex networks such as financial systems face an inescapable trade-off - between size and efficiency on one hand, and global stability on the other. Once they have been assembled, in other words, globally interconnected and integrated financial networks just may be too complex to prevent crises like the current one from reoccurring.

Rather than waiting until the next cascade is imminent, and then following the usual modus operandi of propping up the handful of firms that seem to pose the greatest threat, it may be time for a new approach: preventing the system from becoming overly complex in the first place...

...Risk managers have started to pay more attention to systemic risk of late, but unfortunately they haven't made nearly enough progress. A 2006 report co-sponsored by the Federal Reserve Bank of New York and the National Academy of Sciences concluded that even defining systemic risk was beyond the scope of any existing economic theory. Actually managing such a thing would be harder still, if only because the number of contingencies that a systemic risk model must anticipate grows exponentially with the connectivity of the system.

So if the complexity of our financial systems exceeds that of even the most sophisticated risk models, how can government regulators hope to manage the problem?

There is no simple solution, but one approach is close to what the government already does when it decides that some institutions are "too big to fail," and therefore must be saved...

An alternate approach is to deal with the problem before crises emerge. On a routine basis, regulators could review the largest and most connected firms in each industry, and ask themselves essentially the same question that crisis situations already force them to answer: "Would the sudden failure of this company generate intolerable knock-on effects for the wider economy?" If the answer is "yes," the firm could be required to downsize, or shed business lines in an orderly manner until regulators are satisfied that it no longer poses a serious systemic risk. Correspondingly, proposed mergers and acquisitions could be reviewed for their potential to create an entity that could not then be permitted to fail.

Government regulators telling firms they can't grow or innovate sounds like dangerous meddling in free markets. But there are at least three reasons to think that it is reasonable.

First, there is already a precedent for precisely this kind of government intervention - namely anti-trust law, which effectively guards against firms growing so large that they stifle competition...

...Second, the current crisis has demonstrated that markets do not automatically regulate systemic risk any more than they automatically guarantee competition. Pragmatically speaking, therefore, government intervention is required to prevent markets from destroying themselves, and the relevant question is what kind of intervention is effective: preventive management, or after-the-fact rescue.

Third, and most fundamentally, there is something badly wrong with the kind of free market that ends up at the mercy of a single firm. Failing to deal with systemic risk, in other words, creates a world that is not only uncertain, but also unjust, in that individual firms can generate immense profits by taking risks that everyone else ends up bearing as well. Taking free-market principles seriously, therefore, requires us to acknowledge that firms that are "too big to fail" are really too big to be permitted to exist.

This is also in the current Harvard Business Review. Online there, they have a farewell to Peter Bernstein, and what turns out to be a farewell essay from Peter Bernstein will be in the July/August issue: "The Moral Hazard Economy".

The Obama administration and the U.S. Federal Reserve - along with counterparts around the world - are doing their utmost to thaw the credit freeze that took hold in the fall of 2008. But these measures, says the author, serve to show how badly the housing and derivatives bubbles deformed the economy and the global financial system. The first effect of the bailouts will be a dramatic rise in the size and cost of government borrowing, which will have serious inflationary consequences. Just as important is the transformation of the U.S. central bank into a version of the "bad bank" touted as a solution to the crisis. How disastrous the consequences will be depends on whether our appetite for risk has been increased by the bailouts or reduced by the meltdown.

[ghariton]

Too Big to Fail? How About Too Big to Exist?

I would argue that it is not whether a frirm is too big, but rather whether it has significant external effects.

The banking system clearly does have external effects -- liquidity. So do telecommunications, transportation, and energy, as examples.

In the last three cases, the traditional approach was not to stop firms from becoming very large. Rather, it was to ensure their financial health by prohibiting or drastically limiting competition. Of course, in a world of "public utilities", i.e. government-protected monopolies, there was no need to motivate management to innovate. Plain old terlelphone service was good enough, for example, in telecommunications. If you wanted to rent a 1200-baud modem from the telephone company, why, you could have data services too.

Innovation came later, It was a tradeoff -- telephone systems are now much less secure financially, and your friendly local carrier could go under. (Think Qwest.) Was the tradeoff worth it?

First, there is already a precedent for precisely this kind of government intervention - namely anti-trust law, which effectively guards against firms growing so large that they stifle competition...

No. Antitrust prohibits monopolization through anticompetitive means, e.g. predation. It does not prohibit monopolization through being more efficient than your competitors, or simply having a product that customers desire more.

Microsoft is a controversial example, to be sure. But I personally find it very beneficial that their word processing application has become the de facto world standard. I suppose the same effect could have been reached through open standards. But somehow those products don';t work as seamlessly,

Second, the current crisis has demonstrated that markets do not automatically regulate systemic risk any more than they automatically guarantee competition. Pragmatically speaking, therefore, government intervention is required to prevent markets from destroying themselves.

I certainly agree with the first half. But the second half smuggles in an assumption, namely that government regulation will always reduce systemic risk. I have seen no evidence of that, and can think of several (anecdotal) examples where government regulation actually increased systemic risk.

Third, and most fundamentally, there is something badly wrong with the kind of free market that ends up at the mercy of a single firm. Failing to deal with systemic risk, in other words, creates a world that is not only uncertain, but also unjust, in that individual firms can generate immense profits by taking risks that everyone else ends up bearing as well.

If a firm imposes costs, for example in the form of bearing of risk, on others, then that is a negative externality. Even fairly extreme free market advocates would accept that these externalities should be internalized, through taxes or regulation. It is not at all evident that the best solution is to control the size of the firm, rather than the activity causin g the external costs.

George

[newguy]

With a subtitle like "From tech stocks to high gas prices, Goldman Sachs has engineered every major market manipulation since the Great Depression - and they're about to do it again" run, don't walk, to your nearest kiosk and buy Matt Taibbi's latest piece in Rolling Stone magazine

If America is now circling the drain, Goldman Sachs has found a way to be that drain.

http://zerohedge.blogspot.com/2009/06/g ... major.html

Really interesting article and it covers a wide range of topics but a tough read in this format.

I'm not sure how much to beleive becuase it's all the rumours we've always heard about the Goldman - government conection but never had proof for.

newguy

[WishingWealth]

As W said, (paraphrasing) [s]WALL STREET[/s]Iceland got drunk.
At The Big Money: http://tbm.thebigmoney.com/articles/jud ... d?page=0,0

Can Iceland Be Saved?
The plan to get an entire country out of debtors’ prison.
By Rob Cox

At one end of Laugavegur, Reykjavik’s main shopping (and partying) street, Icelanders jostle in the aisles of a Bonus discount grocery to fill their baskets with ham, dried codfish, and other staples. A mile or so up the road, on the ground floor of a shiny new office tower that also houses the stock market, sits an Apple (AAPL) store that is perhaps the only one of its kind: Save a salesman, it is completely empty.

This neatly illustrates the state of play in Iceland eight months after it essentially went bust. No country embraced the excesses of the credit bubble as zealously as this north Atlantic island nation of about 310,000 people. As a result, it’s hard to find a place that’s suffering the deprivations of the crunch to the same degree. It’s not just that iPods are off the shopping list in favor of processed pork. The nation is massively indebted, consumer spending is in free fall, its big banks have been taken over by the state, and capital controls restrict the flow of money outside the country.

But as hard as Icelanders will need to toil to fulfill the demands of their financial rescuers—including $5 billion from the International Monetary Fund, a phalanx of Nordic neighbors, and even the Faroe Islands—don’t cry for them. Iceland, unlike many of the other nations that went mad for credit, has lots of things going for it: an average age of 37, a highly educated work force, a nearly positive birthrate, overfunded pension schemes, and abundant natural resources. With a little extra creativity, the place should emerge stronger from its recent fall from grace.
...

WW

[newguy]

The author of the piece I linked to in the previous post will be on BNN on thursday on the close according to Kim Parlee on today's show. I'm suprised no ones commented on it, it's supposedly all over Wall st..

newguy

[WishingWealth]

newguy: "but a tough read in this format. "

That did it for me.
With so much available to read in a decent format, I simply gave up after a couple of paragraphs.

WW (Only going for the truly free lunches)