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Michael Allen  

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  • Equity Returns And Inflation [View article]
    Real total returns on equities have exceeded inflation about 3.2% per year since 1890. There were only three periods when 10-year total real returns were negative, so for the most part, stocks are a reasonable, if imperfect hedge against inflation. What hurts equities is not so much inflation itself, but abrupt and unexpected rises in the rate of inflation. The reason for this is that during extreme inflationary shocks, input costs and output costs typically rise at very different rates, making it difficult for corporate profits to advance. If you can forecast these shocks accurately, you can probably make a lot of money. If there is any evidence that anyone can make such forecasts consistently, I would appreciate being educated about it.
    Jun 9, 2013. 10:01 AM | 5 Likes Like |Link to Comment
  • Right Now Is One Of The Worst Times To Buy Stocks In The Past 40 Years [View article]
    After just checking my own data, I can partially answer my own question. The ratio of foreign-derived profits to the total has doubled over the past 40 years, but the relationship between the profit/gdp ratio and the subsequent 4-year profit growth rate has not changed at all. I don't fully understand the reason for this, but it's clear from the data that foreign profits do not alter the equation. It is probably because the driver of the relationship is the volatility of margins, not the level of revenues, and foreign profits suffer the same volatility in margins as domestic profits. They also, apparently, don't offer any diversification benefits.
    Jun 1, 2013. 12:14 PM | Likes Like |Link to Comment
  • Right Now Is One Of The Worst Times To Buy Stocks In The Past 40 Years [View article]
    Thanks for this very complete and succinct summary of the bear case. Corporate profits/GDP have never before been sustained at the current level, but every time this issue is raised, someone will claim that "this time it is different." To be fair, U.S. companies source more of their profits from overseas than in the past. It seems intuitive to me that overseas profits must be subject to similar constraints on profit margins, but I wonder if you are aware of any empiracal research on the limits of overseas profits / GDP?
    Jun 1, 2013. 11:42 AM | 2 Likes Like |Link to Comment
  • How The Experts Were Wrong: Gold Failed To Hold $1,400 And The Taylor Rule [View article]
    I find it difficult to believe that there are very many professional hedge fund managers who are unaware of the Taylor rule. It is neither obscure nor magic. It is basic economic theory that you would have to know about (but not necessarily fully agree with) if you were qualified to be investing other people's money.
    Jun 1, 2013. 03:39 AM | 3 Likes Like |Link to Comment
  • Japan's Turbulence And The Euphoria Trap [View article]
    gggl: good point. Try pricing the S&P500 in yen all these years and it don't look so hot either!
    May 30, 2013. 03:38 PM | Likes Like |Link to Comment
  • A False Dawn In The Land Of The Rising Sun [View article]
    Using the same methodology as yours, Harry Dent famously predicted that the Dow would hit 40,000 in the fist decade of the current millennium. Thirteen years later it has yet to breach 16,000, and of course, now it seems he is bearish. Like Dent, you are taking a single input in a very complex equation and assuming all other inputs are constant, which is highly unlikely. You are right about one thing, though: importing a bunch of 25-year olds who don't speak Japanese wouldn't solve anything.
    May 29, 2013. 01:40 PM | Likes Like |Link to Comment
  • A False Dawn In The Land Of The Rising Sun [View article]
    The working age population is irrelevant in that it's lack of growth in numbers is not a cause for economic weakness. There is no shortage of available labor, and my argument is that there doesn't ever need to be. Labor cost is an altogether different issue, but a 20% decline in the value of the yen goes a very long way toward making Japanese labor more attractive. That's the point of Abenomics. It may be the only point. At the current exchange rate, Japanese labor is not particularly expensive relative to other industrialized nations.
    May 28, 2013. 06:57 PM | 1 Like Like |Link to Comment
  • A False Dawn In The Land Of The Rising Sun [View article]
    1. The Japanese market reflects the prospects of Japanese companies, not that of the government. There's an important difference.
    2. The working age population is irrelevant. The problem right now is not a lack of people, but a lack of jobs. When the immediate problem is remedied, Japan's white collar labor force is still absurdly unproductive and huge improvements are still possible. Japan also has the most highly educated female population in the world and could easily double its productive population by welcoming more women into the workforce any time that it wants to. Other countries have over-come this barrier of traditional roles when it became economically necessary - there is no reason for the Japanese to be any different.
    2. Excluding debt issuance, debt servicing costs, and reconstruction costs related to the Tohoku earthquake, Japanese tax revenues are just under 70% of basic expenditures. To increase revenues, there is nothing more potent than weakening of the currency. A 20% weakening of the yen from its peak alone could easily increase all sources of taxes enough to bridge a third of the gap. What else can you think of that would be this powerful?
    3. There will still be a very large gap, a large part of which is a result of years and years of inefficient capital usage. It appears that Japanese companies have already made huge progress on this, but it's difficult to judge because at the same time they've been working on improving capital efficiency, they've been hit by a debilitating currency and a wave of natural disasters.
    4. I have no idea how it will all end, but Abenomics will get Japan moving forward instead of backward.
    May 28, 2013. 10:22 AM | 1 Like Like |Link to Comment
  • Regime Change, Economist Style [View article]
    I found your idea interesting so I was really only brainstorming. Velocity ought to have something to do with perceived risk in the system, i.e., if banks are lending more or less relative to the amount of liquidity they have, then it might have something to do with their perception of risk, which in turn might be correlated to the perceptions that equity investors have. If you want to delve into R2s, using coincident data, I get an R2 of .11. On the lagged data I get .22. On pre-87, with a negative co-efficient I get .4, but post 87 with a postive coefficient, I get .33. It does not make any sense to me that there would be a causal negative relationship. The problem is that you are measuring different risks as perceived by different groups and the only real connection is the time and place. What accounts for the fact that the market is currently so high relative to velocity? A reversal of the previous regime change? I eagerly await your hypotheses.
    Aug 30, 2012. 03:28 PM | Likes Like |Link to Comment
  • Regime Change, Economist Style [View article]
    If you lag the Velocity data by 5 years, you get a slightly better fit for all years and an indication that the multiples are headed down. It's not a great fit, but I don't know why it should be (nor do I know why it should be lagged 5 years). Growth in M2 has to count for something and that has certainly not been a constant. Also, the profits leave out financials, which are a much larger part of the S&P earnings volatility in some years than in others.
    Aug 30, 2012. 09:12 AM | Likes Like |Link to Comment
  • 'No QE' Bernanke Will Disappoint Markets Friday [View article]
    Thank you for the very thoughtful analysis and logical conclusions, but I would suggest one caveate: if you look at your scatter plot comparing CPI to M2, you will notice that although the most-likely outcome of 8% growth in M2 is 4% inflation, the R2 is actually not very tight, and the range of possible outcomes is somewhere between 0% and 8% inflation. Interestingly, this is about the same range as it would be for growth in M2 of anywhere between 4% and 8%. This is not very precise, and therefore, unlikely to be the only tool used in policy decisions.
    Aug 28, 2012. 11:46 AM | 1 Like Like |Link to Comment
  • Remedial Math For Business Reporters Covering [View article]
    There are many legitimate reasons to restate GAAP earnings. Stock compensation has never been one of them unless you think that your employees work for free. There's no difficulty in getting your head around this; compensation is an expense, whether you pay in cash, or options, or bowls of rice. There are people with common sense who understand this, and there are idiots who don't, and to the extent that idiots are allowed to drive the price of a stock because smart money is too timid to step in and exercise control over these morons, then the market becomes dysfunctional and allocates assets to the wrong companies and screws up the entire economy by giving poorly run companies the ability to disrupt the business of well run companies. We divert money from talented business managers to talented grifters.
    Aug 27, 2012. 10:04 PM | 2 Likes Like |Link to Comment
  • 3 Reasons A Portfolio Of GAFS Offers A Sound Long-Term Investment [View article]
    Looking for the next Boeing or Disney is a good starting point, but was the time to buy Boeing after the 40% decline in 2001, or just before it? Why buy any of these stocks now?
    Aug 22, 2012. 12:07 AM | Likes Like |Link to Comment
  • Winning In A World Without Yield: A Portfolio Level Solution [View article]
    I stand corrected about the Russel 3x ETFs. The decay of either the 2x or 3x ETF is extraordinary. Part of the problem is that over-night moves in the russel have been positive while day-trade returns have been negative since the TZA was introduced, so it is not just the decay. At any rate, I need to change the way I execute the trade. This is so sad actually because many people are not allowed to go short or buy options.
    Aug 5, 2012. 09:16 PM | 1 Like Like |Link to Comment
  • Winning In A World Without Yield: A Portfolio Level Solution [View article]
    There is decay, but it is not always so prohibitive. For example, SSO is supposed to deliver 2x the SPY return. If you held it for the past 860 days, i.e., from the trough in 2009, the return was 1.92x that of SPY. Granted, it is indeed better to short the inverse ETF in a bull market than to buy the geared ETF so that the decay is on your side. Likewise you make more shorting the geared fund in a bear market than buying the inverse, but you also take more risk and tie up more capital.
    Aug 5, 2012. 05:49 PM | 1 Like Like |Link to Comment