Thank you for this fine analysis Mr. Staines. Any attempt to address current economic problems - whether in the U.S., Europe, or Asia - without addressing the significant and long running trade imbalances, is likely to be ineffective at best, and counterproductive at worst.
My own focus is on the U.S. economy and financial markets, and observing the policy debates here is rather frustrating, as they present a false dichotomy between austerity and stimulus without understanding that the accounting identities you mention will by necessity produce large deficits so long as the U.S. runs large current account deficits.
The difference between the present and the boom years is that the private sector's ability to absorb capital inflows (take on debt) blew up, and the capital went into the public sector instead. To those who understand this, it is no mystery that government debt issuance exploded as private debt issuance imploded. Those Dollars going to China, Japan, and the oil exporters had to go somewhere. Once they could no longer run through New York and into the mortgage markets, etc, they turned to Washington.
In the case of the U.S., as with the eurozone periphery, debt fueled prosperity is an illusion that cannot last. In the case of the U.S., though nominally it is not in a currency union which would make it impossible to restore competitiveness through exchange rate adjustments, it is effectively in something quite similar, as PBOC and BOJ intervention prevents the currency markets from making what would be the natural adjustments.
Other than vague complaints about undervalued Chinese currency, I have yet to see any U.S. policy maker present the kind of analysis that suggests they understand this. Instead we get the sort of ridiculous theatrics we have seen, and the problem grinds on.
It's difficult to say what the end game will be in either Europe or the U.S. My own outlook for Europe is not very optimistic, but for the U.S. it is more hopeful - as dismal as things look here, the obstacles to a workable solution are far fewer.
Can The Markets Take A Strong U.S. Dollar? [View article]
Thank you for your comment VIvian, As you surmised, the U.S. Dollar index is indeed a weighted index number, roughly composed as follows:
Euro (EUR), 58.6% weight Japanese Yen (JPY) 12.6% weight Pound sterling (GBP), 11.9% weight Canadian dollar (CAD), 9.1% weight Swedish krona (SEK), 4.2% weight and Swiss franc (CHF) 3.6% weight
My preference for this index is that it gives a better indication of broad demand for the Dollar than a straight forex pair quote.
You are right that I do not give specific buy and sell calls on specific securities; I am not in the business of providing advisory service, newsletters, or trade recommendations.
My articles are intended to give readers more general observations on market conditions and trends. Each reader can use - or ignore - this information in making investment decisions as approriate for their own situation.
For All The Drama, Markets Are Just Trading In A Range [View article]
Thanks but do bear in mind that corporates are no safe haven in a full on crisis. After Lehman they were taken to the woodshed along with everything else (save Treasuries).
With Europe under severe pressure, another crisis is within the realm of realistic probability. As mentioned in a previous article, I am watching 3 month US Dollar LIBOR and EURIBOR, and it doesn't look very pretty. Now we are seeing desperation policy moves like the SNB's unlimited purchase peg to the euro. Things could get ugly so please, stay alert!
For All The Drama, Markets Are Just Trading In A Range [View article]
If you prefer ETFs, the offerings from Barclay's (LQD) and Vanguard (VCIT) are reasonable choices. If you prefer open end funds, there are solid offerings from a number of groups such as PIMCO (PBDDX), Vanguard (VFICX), and Fidelity (FCBFX). One fund that often flies under the radar is Managers Bond (MGFIX) - it is managed by a team led by former Morningstar manager of the year Dan Fuss of Loomis Sayles. The management fee is on the high side, but you get a top notch team to invest your money.
Disclosure - we hold LQD in the income portfolio, and only use actively managed funds for our foreign bond allocation.
Seems counter-intuitive, doesn't it? My simple approach is to be invested when the prevailing trend is bullish, and be on the sidelines when it is bearish. After a high volume selloff, if we can't get back through previous support/resistance levels, the risk remains weighted to the downside.
An Investing Model That Hedges Itself Against Crashes [View article]
The classic, at least to me, is Mebane Faber's paper on quantitative tactical allocation in the Journal of Wealth Management. The findings described there inform his book The Ivy Portfolio. That model basically uses a 10 month simple moving average for each component ETF in the portfolio to signal whether that allocation should be long or in cash.
Faber tracks this model on his website, as does Seeking Alpha author Doug Short, if I recall correctly. Interestingly, Faber co-manages the Cambria global ETF (GTAA), but it seems to vary quite a bit from the basic model, and the performance record is not particularly impressive, though its history is brief.
I have done extensive back testing with this model as well as several variations of it, and found that it did indeed avoid severe drawdowns, and outperformed buy and hold. In essence it generates alpha on the downside. The limitation I found is that it is too slow to generate buy signals, as post-crash rallies tend to be as acute and sudden as crashes. Therefore the model misses a lot of downside but quite a bit of upside as well.
I continue to work on quantitative models that address this limitation, but my suspicion is that there is really no substitute for the kind of good trader's sense that comes with experience, combined with a strict sell discipline when trades go the wrong way. It's tempting to look for a magic bullet, and a simple model like this is probably a good idea for self-directed investors who don't want to put in a lot of time and study.
U.S. Markets Are Getting Defensive As Economic Headwinds Loom [View article]
You make a very good point about seeking to increase the total purchasing power of your assets, this is something that is frequently overlooked. The Krona is an interesting idea, but the lack of depth and liquidity would probably keep me away.
As for Singapore, I like it in general, as well as a number of "Asian Tiger" markets, but in a bear market they will all be taken down pretty much indiscriminately. Even now we're at a point where you look at a bunch of different charts, and they look like the same chart. In other words, correlations are moving toward 1, which was a characteristic of the last crisis phase.
In this environment sitting on a large allocation to US Dollar denominated cash actually looks like one of the least bad among a number of unattractive options.
U.S. Markets Are Getting Defensive As Economic Headwinds Loom [View article]
Thank you Happy. I'm not sure it is an arb opportunity. Are you contemplating something like a long equities/short commodities pair trade? That would make me very nervous.
Except for the gold miners, in the short term the stocks still look bearish to me; they have been caught up in the general equity downdraft like they always are. The commodities themselves appear to be beneficiaries of a flight to the safety of hard assets. Gold is displaying this is a very powerful way - so powerful that it is carrying the miners along for the ride.
In the longer term I am still trying to get my head wrapped around the stagflation scenario, but at present have nothing more to go on than the market itself. Right now it tells me commodities are holding up nicely.
Panic Subsiding: Look for a Risk-On Rally [View article]
Aloha Shirley. Your observation of the Bollinger Bands has merit; two standard deviations is a pretty large move away from the mean, and the distance between the upper and lower bands is the widest it has been since March-April 2009. Barring any new developments that spook the markets, looking for some mean reversion here seems like a reasonable strategy.
Panic Subsiding: Look for a Risk-On Rally [View article]
That is a good point Hobo. Your comment prompted me to go back to look at a 15 minute chart of the VIX and the put/call ratio for last week. The VIX is a measure of all options, not just downside options. A high value could just as easily mean investors expect a large upside move as a downside move, so the term "fear gauge" is something of a misnomer.
Having looked at the VIX, which last week went to its highest level since the May 2010 "flash crash" and indicates a wide spread of expectations for future equity prices, I then looked at the CBOE equity put/call ratio. This is a better gauge of investor directional anticipation, and though it moved back up on Friday, it is only at the upper end of a range that has been typical of the past year.
Markets Strong This Earnings Season; Enthusiasm Appears Global [View article]
Thank you for your comments, please forgive the delay in response. Taking them one at a time:
@Default to Reality: The editors changed the original title to my article, as is their prerogative. It lent a tone of overall bullishness that was neither my intention, nor, I think, what was expressed in the outlook.
@whidbey: enthusiasm for stocks in general is not catching, but the week was an aberrant one, with attention diverted to political antics; the best stocks are still acting reasonably well, but who can blame investors for staying on the sidelines until the nonsense stops?
@Kinabalu: no oxymoron intended; the context is fund investors seeing that their active managers often don't earn the extra fees, and resigning themselves to indexing mediocrity. There are more than these two alternatives.
The Week Ahead: Keep Focused on What the Markets Are Telling Us [View article]
That is a fair point, and I did not fail to take note, as moving average crosses are a regular component of my technical analysis. However, the distance between these lines is very small, both have positive slopes, and the broader commodity complex, as noted in the article, is displaying good relative strength. In such a case where the preponderance of evidence goes against a single technical indicator, my tendency is to discount that indicator.
My bigger concern, as voiced above, is a sustained rise in the US Dollar, possibly related to some adverse credit event. The terrible action in the bank stocks is sending a signal that should not be ignored. It is unlikely to be related to a still low probability of US default. Keep an eye on the eurozone default swap rates. Since Italian rates blew out two Fridays ago there has been trouble in the wind. Check the spike in LIBOR over the last two weeks.
Among the "hard truths" Dan Tynan believes IT departments need to accept: popular consumer devices such as Apple's (AAPL) iPhone and iPad have to be accommodated, as more employees bring self-purchased devices to work; and users will increasingly access cloud services and mobile apps of their own choosing. [View news story]
To the extent that apps and data migrate to "the cloud" they will be relatively device and OS agnostic, so this notion does have some merit. Even in enterprises where the systems are kept in house but web enabled, for example in a Citrix environment, client software is already available for iOS, Android and Linux devices. That cat is already out of the bag and unlikely to be wrangled back in.
How to Change the Dreary Economic Outlook [View article]
No argument about lender constraints but my point was that I'm not seeing a lot of small business people who want to borrow. At least not for the right reasons. There are guys in trouble who want a lifeline but C&I bankers aren't likely to lend to them.
The point was most of these folks aren't looking for a loan, they're looking for a paying customer, and I have my doubts about how government policy is going to be able to fix that.
How to Change the Dreary Economic Outlook [View article]
Spot on Professor. In numerous conversations with small business owners and managers, I have not heard a single mention of regulatory uncertainty, health care issues, or the confounded national debt when discussing their businesses. Some, but not many, cite inability to borrow. Nearly every one expresses the same two concerns:
1. Revenues, or lack thereof 2. Margin pressure; they're being beaten to death on pricing and competitors are taking business at or even below cost
Seems like a deflationary scenario. What is less clear to me is the mechanics of how the "FDR solution" would be applied, and specifically how it would help. Care to elaborate, perhaps in a sequel to this article?
The Euro Endgame [View article]
My own focus is on the U.S. economy and financial markets, and observing the policy debates here is rather frustrating, as they present a false dichotomy between austerity and stimulus without understanding that the accounting identities you mention will by necessity produce large deficits so long as the U.S. runs large current account deficits.
The difference between the present and the boom years is that the private sector's ability to absorb capital inflows (take on debt) blew up, and the capital went into the public sector instead. To those who understand this, it is no mystery that government debt issuance exploded as private debt issuance imploded. Those Dollars going to China, Japan, and the oil exporters had to go somewhere. Once they could no longer run through New York and into the mortgage markets, etc, they turned to Washington.
In the case of the U.S., as with the eurozone periphery, debt fueled prosperity is an illusion that cannot last. In the case of the U.S., though nominally it is not in a currency union which would make it impossible to restore competitiveness through exchange rate adjustments, it is effectively in something quite similar, as PBOC and BOJ intervention prevents the currency markets from making what would be the natural adjustments.
Other than vague complaints about undervalued Chinese currency, I have yet to see any U.S. policy maker present the kind of analysis that suggests they understand this. Instead we get the sort of ridiculous theatrics we have seen, and the problem grinds on.
It's difficult to say what the end game will be in either Europe or the U.S. My own outlook for Europe is not very optimistic, but for the U.S. it is more hopeful - as dismal as things look here, the obstacles to a workable solution are far fewer.
Can The Markets Take A Strong U.S. Dollar? [View article]
As you surmised, the U.S. Dollar index is indeed a weighted index number, roughly composed as follows:
Euro (EUR), 58.6% weight
Japanese Yen (JPY) 12.6% weight
Pound sterling (GBP), 11.9% weight
Canadian dollar (CAD), 9.1% weight
Swedish krona (SEK), 4.2% weight and
Swiss franc (CHF) 3.6% weight
My preference for this index is that it gives a better indication of broad demand for the Dollar than a straight forex pair quote.
You are right that I do not give specific buy and sell calls on specific securities; I am not in the business of providing advisory service, newsletters, or trade recommendations.
My articles are intended to give readers more general observations on market conditions and trends. Each reader can use - or ignore - this information in making investment decisions as approriate for their own situation.
For All The Drama, Markets Are Just Trading In A Range [View article]
With Europe under severe pressure, another crisis is within the realm of realistic probability. As mentioned in a previous article, I am watching 3 month US Dollar LIBOR and EURIBOR, and it doesn't look very pretty. Now we are seeing desperation policy moves like the SNB's unlimited purchase peg to the euro. Things could get ugly so please, stay alert!
For All The Drama, Markets Are Just Trading In A Range [View article]
Disclosure - we hold LQD in the income portfolio, and only use actively managed funds for our foreign bond allocation.
Not Sold On The Rally Attempt [View article]
An Investing Model That Hedges Itself Against Crashes [View article]
Faber tracks this model on his website, as does Seeking Alpha author Doug Short, if I recall correctly. Interestingly, Faber co-manages the Cambria global ETF (GTAA), but it seems to vary quite a bit from the basic model, and the performance record is not particularly impressive, though its history is brief.
I have done extensive back testing with this model as well as several variations of it, and found that it did indeed avoid severe drawdowns, and outperformed buy and hold. In essence it generates alpha on the downside. The limitation I found is that it is too slow to generate buy signals, as post-crash rallies tend to be as acute and sudden as crashes. Therefore the model misses a lot of downside but quite a bit of upside as well.
I continue to work on quantitative models that address this limitation, but my suspicion is that there is really no substitute for the kind of good trader's sense that comes with experience, combined with a strict sell discipline when trades go the wrong way. It's tempting to look for a magic bullet, and a simple model like this is probably a good idea for self-directed investors who don't want to put in a lot of time and study.
U.S. Markets Are Getting Defensive As Economic Headwinds Loom [View article]
As for Singapore, I like it in general, as well as a number of "Asian Tiger" markets, but in a bear market they will all be taken down pretty much indiscriminately. Even now we're at a point where you look at a bunch of different charts, and they look like the same chart. In other words, correlations are moving toward 1, which was a characteristic of the last crisis phase.
In this environment sitting on a large allocation to US Dollar denominated cash actually looks like one of the least bad among a number of unattractive options.
U.S. Markets Are Getting Defensive As Economic Headwinds Loom [View article]
Except for the gold miners, in the short term the stocks still look bearish to me; they have been caught up in the general equity downdraft like they always are. The commodities themselves appear to be beneficiaries of a flight to the safety of hard assets. Gold is displaying this is a very powerful way - so powerful that it is carrying the miners along for the ride.
In the longer term I am still trying to get my head wrapped around the stagflation scenario, but at present have nothing more to go on than the market itself. Right now it tells me commodities are holding up nicely.
Panic Subsiding: Look for a Risk-On Rally [View article]
Panic Subsiding: Look for a Risk-On Rally [View article]
Having looked at the VIX, which last week went to its highest level since the May 2010 "flash crash" and indicates a wide spread of expectations for future equity prices, I then looked at the CBOE equity put/call ratio. This is a better gauge of investor directional anticipation, and though it moved back up on Friday, it is only at the upper end of a range that has been typical of the past year.
Markets Strong This Earnings Season; Enthusiasm Appears Global [View article]
@Default to Reality: The editors changed the original title to my article, as is their prerogative. It lent a tone of overall bullishness that was neither my intention, nor, I think, what was expressed in the outlook.
@whidbey: enthusiasm for stocks in general is not catching, but the week was an aberrant one, with attention diverted to political antics; the best stocks are still acting reasonably well, but who can blame investors for staying on the sidelines until the nonsense stops?
@Kinabalu: no oxymoron intended; the context is fund investors seeing that their active managers often don't earn the extra fees, and resigning themselves to indexing mediocrity. There are more than these two alternatives.
The Week Ahead: Keep Focused on What the Markets Are Telling Us [View article]
My bigger concern, as voiced above, is a sustained rise in the US Dollar, possibly related to some adverse credit event. The terrible action in the bank stocks is sending a signal that should not be ignored. It is unlikely to be related to a still low probability of US default. Keep an eye on the eurozone default swap rates. Since Italian rates blew out two Fridays ago there has been trouble in the wind. Check the spike in LIBOR over the last two weeks.
Among the "hard truths" Dan Tynan believes IT departments need to accept: popular consumer devices such as Apple's (AAPL) iPhone and iPad have to be accommodated, as more employees bring self-purchased devices to work; and users will increasingly access cloud services and mobile apps of their own choosing. [View news story]
How to Change the Dreary Economic Outlook [View article]
The point was most of these folks aren't looking for a loan, they're looking for a paying customer, and I have my doubts about how government policy is going to be able to fix that.
How to Change the Dreary Economic Outlook [View article]
1. Revenues, or lack thereof
2. Margin pressure; they're being beaten to death on pricing and competitors are taking business at or even below cost
Seems like a deflationary scenario. What is less clear to me is the mechanics of how the "FDR solution" would be applied, and specifically how it would help. Care to elaborate, perhaps in a sequel to this article?