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Kevin Flynn, CFA

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  • There's Just One Catch [View article]
    Also Hyman Minsky. It may well be that the Fed's determination to combat financial stress has lengthened the duration of the average bull market while increasing the size of the declines in bear markets. I'm expecting a big one myself at the end of the current bull.
    Dec 2, 2014. 04:01 PM | 1 Like Like |Link to Comment
  • There's Just One Catch [View article]
    Alexander, I'll cop a nolo contendere on the Catholic school Latin!

    The "lower for longer" theme is another example in a long succession of excuses for why one cycle is going to be better than all the others. They all appeal on some intuitive grounds - e.g., less excess should mean less correction.

    I'm not aware of any evidence about weaker business cycles lasting longer. But weaker economies ARE more susceptible to catching a cold, and I think Q1-14 was a good example of that. Besides being not strong to begin with, the current cycle has two major vulnerabilities: stock market valuation is far, far ahead of the real economy (whatever perma-bulls may say - it's denied in every cycle), and the central banks have almost nothing left to cushion the fall.
    Dec 2, 2014. 09:40 AM | 2 Likes Like |Link to Comment
  • There's Just One Catch [View article]
    I see the 7-10 year horizon for stock returns as being quite bleak at this point. I just think that they're going to go up more first.
    Dec 2, 2014. 09:25 AM | 3 Likes Like |Link to Comment
  • There's Just One Catch [View article]
    Yes. The point is that each various rallying cry for why things are just fine and must stay that way for a really, really long time is flawed in at least one important aspect.
    Dec 2, 2014. 09:23 AM | 2 Likes Like |Link to Comment
  • Before It's Too Late [View article]
    You make a good point. I would add that the Street's mantra is to ride a trade that works until it doesn't, and that most trades are broken by too many people crowding into it. The short-term effect is the increased sense of conviction that the trade must be right (we're all here), the long-term effect is that the boat sinks.
    Nov 24, 2014. 08:22 AM | Likes Like |Link to Comment
  • Before It's Too Late [View article]
    The stock market is usually able to shrug off interest rate increases, so long as they are not out of the blue. If the banks leave cash in the form of 2-year notes instead of reserves at the Fed, it helps the banks NIM but doesn't change much else. Velocity will increase if output increases and the banks lend out the excess reserves, not move them from one government ledger to another.
    Nov 20, 2014. 08:50 PM | Likes Like |Link to Comment
  • Before It's Too Late [View article]
    You make a very good point. Frankly I don't think raising FF rates to 1% will have much of any impact on the economy, nor should it. But the timing often makes the central bank look responsible.
    Nov 20, 2014. 07:37 PM | Likes Like |Link to Comment
  • Before It's Too Late [View article]
    That's the $64K question, isn't it? My own work indicates that the peak began late summer. They usually last about a year, but the end can be brought forward or put back by credit flows. What I can say definitively is that the Street as a whole always projects the end of the cycle to be at least two or three years into the future. Always.
    Nov 20, 2014. 04:32 PM | 1 Like Like |Link to Comment
  • A Unique Way To Use The Shiller PE As A Market Indicator [View article]
    I love your charts, but would add one big caveat: the upper limit of your safety zone is the 15-year band that includes one of the two greatest bubbles of the 20th century. That band is going to drop dramatically next year and the year after as the 1999-2000 valuations fall off the measurement period. The tech bubble has induced a kind of dangerous complacency to valuations - "well, they aren't as high as 1999 so it's not really that serious," ignoring the fact that the sheer excess of the 1999-style mania is unlikely to recur in the lifetime of anyone reading this article.

    Unless you expect manias that have occurred twice in 115 years to start recurring every 15 years, you should focus on the 25-year band instead - both it and the 20-year band indicate valuations out of the "safety" zone.

    Yet the Shiller P/E, like most valuation measures, doesn't determine when prices will fall - only how far they have to fall before they hit the ground.
    Nov 14, 2014. 11:01 AM | Likes Like |Link to Comment
  • The Halls Of Mirrors [View article]
    It's a good point, and one I have made in the past myself - the inflation has been predominantly in asset prices.
    Nov 13, 2014. 11:41 AM | 1 Like Like |Link to Comment
  • The Halls Of Mirrors [View article]
    My thanks to both Josh B and DrewDunkin, although I wish I had ended this article with a better summary.

    It's quite possible that QE by the ECB lifts asset prices and lowers the euro first, with little to no immediate impact on either its economy or inflation, except that brought on by higher import prices (here oil could play a big role). Exchange rate declines usually follow the J-curve effect, implying EU recovery beginning sometime next year.

    The short-term US market focus will likely be on the "global central bank put," but there is a lot of worry out there (and by me) about the ramifications of an undeclared developing currency war. What will it mean to the U.S., for example, if the dollar keeps rising against the yen and the euro? What will it mean to Japan and the EU if the US business cycle does end next year (or a few months later)? The latter may have nothing to do with BOJ or ECB policy, but the fallout for central banks could be intense.
    Nov 13, 2014. 11:23 AM | Likes Like |Link to Comment
  • The Halls Of Mirrors [View article]
    The seasonal outperformance of November-May is well known and getting an awful lot of play these days, but the fact that fourth quarter bottoms usually happen in November isn't getting as much. Nothing ever HAS to happen in the stock market, but I can't help but think the current flush of confidence is very ripe for a stumble. Too much certainty.

    Nothing ever stops the Thanksgiving-to-New Year's rally, the question is what level it takes off from and how much of one we get. If the ECB moves when the market mood is in the gutter again, the rebound should be sharp. If prices are already overextended, the reaction could be short-lived. So a QE move should be supportive if it's real money, but it's hard to say how much of the move the market will have already bought up by the time it happens. There's always a chance the ECB does something else.

    I don't think the BOJ has already bought its full allocation of equities, but don't know for sure and haven't really looked at its timetable.
    Nov 13, 2014. 10:31 AM | Likes Like |Link to Comment
  • The Halls Of Mirrors [View article]
    bbro, let me first repeat that economies are dynamic. Though the business cycle has proved to be a permanent way of economic life, I don't know if any cycle has lasted exactly as long as the long-run average. They can run longer or shorter for a variety of reasons, and one of the variables most difficult to pin down ahead of time is changes in credit market and investment mentality. They give extra life and they take it away, though they cannot give immortality.

    For me, a mix of employment, sales, and credit data suggest that the cycle has recently entered its peak phase. The last peak was 2007, cycles usually max out at 8 years, peaks last roughly a year. Whether this peak lasts nine months or eighteen, I couldn't say yet, though I would certainly love to meet someone who could.
    Nov 13, 2014. 10:17 AM | Likes Like |Link to Comment
  • Prepare For A Noisy November [View article]
    Japan is doing the same thing to a much greater extent. The usual condition that blows up the relationship is a collapse in the currency and/or a sovereign default. Those can be very complex issues, but a useful rule of thumb is that so long as the ratio of government debt to GDP and the trade balance stay out of the ridiculous zone, the relationship is sound. Despite popular misconception, economic collapse is usually what causes the debt/GDP ratio and trade balance to go haywire, not the other way around.
    Nov 5, 2014. 11:52 PM | 1 Like Like |Link to Comment
  • Prepare For A Noisy November [View article]
    For accounting purposes, a bond is an asset for the buyer and a liability for the issuer. You may wonder how it is that Treasury debt - which is issued by the executive branch and authorized by the legislature - can be held as an asset by other governmental agencies. But cash falls into that category too - if Warren Buffett died and left his money to the Federal Reserve, ultimately that money is still a claim on the US Treasury.
    Oct 31, 2014. 05:43 PM | 1 Like Like |Link to Comment