Bruman

Stephen Roach on Charlie Rose

Nicely written Ed. I've been trying to frame similar issues in my mind for a while. The big thing on my mind is "on what basis will the future of US economic growth be based." Yes, the liquidity and solvency of banks are important, because without that we can't get the other parts of the economy moving. But even with a functioning financial system, the economy still has to PRODUCE something that people want. I get the sense that the last 10 years has basically been about companies collecting rents from labor arbitrage, but also a kind of "consumer arbitrage" based on the fact that US consumers had been used to paying higher prices for stuff not produced in China and also consumers having more access to debt.

I used to live and work in Brazil, and during the Brazilian Miracle of the late 1960s, it was said by the military government "Brazil is doing well; Brazilians, not so well." I see this unfolding in the US these days. US-based corporations may end up doing well by globalizing, but the benefits of that growth will not trickle down to the average US citizen or resident until we can unburden ourselves from the consumption debts that we've accumulated.

New ETF Could Give Hedgies a Run for Their Money

Interesting concept. My guess is that a mixed hedge fund product like that won't be terribly useful other than the diversification benefit. More useful would be funds that track individual hedge fund strategies like fixed income arbitrage, equity long-short, etc. (how would you track global macro with replication?). The odd thing is that a no-performance fee fund would reduce capital attracted to active strategies and potentially drain much of their business... but if there aren't enough active funds, how would you calibrate your replication?

Hard to Assess Stock Valuations Here, But Major Selling Appears Wrongheaded

Seems to me that P/B or even P/S is the optimal metric for this environment, P/B if you can measure BV and P/S if you can't, but I basically agree with you Roger.

Stocks did drop around 90% peak-to-trough in the Great Depression. If we are about 50% down from the peak, a similar fall today would still represent an 80% loss, which I find kinda scary.

The Curious Case of the Stubborn Market Leaders

How did you decide to use that trendline in the NASDAQ 100 vs SP500? It seems like a strange time period to use.

Evidence That Big Inflation Is Coming

I agree with the basic premise, but I do think that the collapse of asset prices has brought on short term deflation. When asset prices collapse, like housing and the stock market, you have basically eliminated a portion of the money supply, because assets that had been convertible to money are now convertible to much much less. That means that many other prices must fall in order for markets to clear (e.g. costs of iPods now have to drop before the quantity produced can be sold, because people aren't feeling as rich). The contraction of credit also means that prices need to drop to clear markets.

Eventually goods production may slow so that prices can creep up for markets to clear, but this may mean that employment is down, reducing people's income, and forcing other prices down. Thus, these are money supply issues.

There is also the question of the velocity of money. Inflation/deflation can happen if the number of transactions rises or falls rapidly. This is a part of the money equation MV = YP or (money supply)*(velocity) = (output)*(price levels). Usually money supply changes faster than velocity, but that may not be the case presently.

At the same time, I do agree that central banks are flooding the system with money, and that is likely to produce inflation down the road. But I think that deflation has happened and may persist for another 3 months or so.

50% Returns, No Risk?

OK, I'll defend Roger here, and just add that he should have mentioned some other stuff to avoid all the flak he got here.

Roger makes a very valid point about something that a lot of people don't necessarily think about. They see their portfolios down and think "The market is tanking, finances are tight, I might be laid off; maybe I'll not contribute to my 401(k) this year."

Roger's point is that's crazy. You can put the money into a money market/cash, and the match will mean that you're up 50% on day one (or whatever the match value is). This happens whether the market goes up or down. If you think we've returned to a growth trend, then put it in the market; but if you think we're in for more rough waters, keep the 50% and put it in cash for now.

The two things Roger should have added:

1) Don't leave it in cash forever. At some point, if it's going to serve for retirement, you're going to need that money to grow (unless we have very long term deflation, which is a whole other issue), so you'll eventually want it invested somewhere else... but lock in that 50% gain right now.

2) That 50% gain isn't going to compound at 50% every year. You'll get one shot of 50% returns, and then it will return whatever your investment plan justifies... but don't use a down market as an excuse to forget about grabbing that 50% right now.

ETF Deathwatch

Roger, I always enjoy your blogs. One point on Barclays though; profitable divisions sometimes get raided for cash when other divisions fail, so I've been staying away from ETNs until the credit environment improves. An interesting question is whether there is enough of a lag so that one can use credit spread changes as a timing signal to pick up ETNs and profit from a reduction in the discount-to-NAV.

The Downfall of Keynesian Economics and the U.S. (Part 1 of 3)

You pose an interesting problem, which has a bunch of embedded assumptions that need to be questioned, but you do not actually attack Keynesianism at all. You seem to define Keynesianism as "well, government spent money on the war in Vietnam and tried to keep interest rates low." That's not Keynesianism. Keynesianism is about government borrowing and increasing fiscal spending in times of economic difficulty and then paying back in times of economic prosperity. This is to address deflation and underconsumption.

It is possible that the inflation of the 1970s is a result of monetary effects from both the Vietnam war and previous Keynesian spending, and this may be why Reagan's policies were so effective for a while, but none of this suggests that government shouldn't be providing stimuli in difficult times. One of the main problems we face now is that government did not pay back its debt during the recent good times.

As for the 3 farmers, remember that we have a fractional reserve banking system, so it should not be possible to lend out 100% of the money supply. If you could lend 100% of the money supply, your example would work. But even lenders keep some money around to pay for next week's groceries (at least for their own consumption).

Is Apple a Better Stock Than Google?

Do these companies have similar capital structures?

Stronger Dollar and the Stock Market

I suspect that the "rally" in the dollar is about weakening conditions in Euroland, not strengthening conditions in Dollarville. This makes the rally very unstable, IMHO. The Dollar may not drop much more, but I don't see it rising substantially anytime soon.

Three CEFs Offering Assets on the Cheap

I've always been a little foggy on what factors drive the discount or premium on CEFs. Yeah, sure, there's supply and demand, which is basically about popularity, which is more or less unpredictable. But what else?

Burst Bubble? Commodities' Long-Term Story Remains Intact

I think that the commodities story still has legs to it in the long term, especially Gold, but the need to delever is overwhelming in the short term, so people who placed commodity bets on borrowed money need to sell.