American in Paris

EFA: Diversify Your Portfolio Outside the U.S.

Where do you get the forward looking PE ratios on Yahoo? I see only trailing twelve month figures.

And Bernanke Didn't Think Unemployment Would Reach 10%

Ah yes, doing nothing as the Right advocates would have been the right solution. Let the unemployment rise to 20%.

And oh, by the way, as an American living in Europe, our quality of life is vastly superior to the American. In large part due to 'socialized medicine, a modern public transportation system, funding for the arts, restrictions on destroying magnificent old buildings, and laws that protect workers from being laid with a one month's severance.


Oh, and I choose my doctor d


On Nov 08 06:24 AM Steve in Greensboro wrote:

> Don't worry, Mr. Slavo. All we need to do is more of what we have
> been doing: print more money and have another stimulus or two. Plus,
> let's raise taxes by socializing medicine, taxing carbon dioxide
> emissions, allowing the Bush tax cuts to expire in 2011, imposing
> a VAT, etc. Plus, let's impose massive tariffs like the G-20's "balanced
> trade" plan. Paul Krugman thinks these are all good ideas and he
> has a Nobel prize -- in economics!
>
> Happy days are here again!

The Imminent Collapse of Municipal Bonds

It is not a great article. It is a terrible article. Municipalities have enjoyed much lower default rates than corporate bonds.

There is no evidence of a massive wave of muncipal defaults pending.

The author doesn't cite a single relevant fact such as the size of budget deficit. Instead he talks about long term trends such as compensation per employee. Frankly speaking, compensation per employee tells me little about the balance sheet and cash flows of a municipal entity (a city, a hospital, a state, etc.).

And what is this nonsense about low yields. The US faces zero inflation and you can buy the Vanguard High Yield fund, which is yielding over 4% tax free or the Van Eck High Yield municipal bond fund, which is yielding 6.5%. The tax equivalent yield of the latter for those in the 35% bracket is nearly 10%.

Long on irrelevant details, short on cogent argument.

On Nov 05 08:13 AM Michael Clark wrote:

> Great article. This is one of the reasons we are clearly not at
> the bottom of the crisis yet. There is SO MUCH complacency in the
> market at the moment. When one considers all the black clouds on
> the horizon (Fed policy/dollar death scenario - commodity price appreciation
> scenario; mortgage resets; mortgage defaults continuing to rise;
> commercial real estate melting down; local and state governments
> becoming insolvent; S&P future valuation at PE 145) -- this is
> not a 'wall of worry', this is a 'wall of water' approaching with
> Tsunami-like power and speed -- one has to wonder why there is so
> much blithe self-satisfaction among so many investors. "We survived
> another crisis, oh well." But these crises are likely to come wave
> after wave.
>
> The Municipal Bond appreciation reminds me of the Spanish Index appreciation.
> Who in their right mind invests in an entity that is already dead,
> bloating, and beginning to smell? Take a look at the chart of SMSI,
> the Madrid Index.
>
> I guess a rising tide lifts ALL boats. And Mister Bernanke has been
> trying to convince the world that this rising tide will never recede,
> as long as he is managing the dike. Once the dam breaks, however,
> all this complacency is going to seem like a toxic potion of self-delusion.
> The tide doesn't rise for ever, even if the Inflationists' creed
> claims it does. And the Wall of Worry will soon be transformed into
> a wall of shame -- again. This time we will have to take away the
> punch bowl and shut down Party Town at the Federal Reserve. And
> I guess we'll have to revoke Mister Bernanke's title (and Nobel Prize)
> as 'Savior of the World' -- and he'll have to go to work for Goldman
> Sachs.

Painful Unemployment Report

Hi Karl,

You really don't get it. Do you really think without the government's deficit spending the economy would be better shape today?

That's a ridiculous idea. We would still be in recession and the unemployment rate would be 15% today, not 10.2%.

All this pseudo-populist talk thrown about the politically disenfranchised Right is cheap, particularly since there is no intelligent alternative to aggregate demand stimulus.

And letting the banks fail would lead to a complete meltdown of the financial system.

If the banks go down, you go down ....


On Nov 06 11:36 AM Karl Denninger wrote:

> It is not a lagging indicator for loan defaults - and never has been.
>
>
> All modern economies are credit-based. That is why the chart I presented
> on Employment Trends has a near-perfect correlation with the END
> of recessions when it turns up, and also provides a nice leading
> indicator that typically warns 6-12 months before a recession is
> "officially" declared.
>
> For consumers to consume they must have income. Can't get around
> this - defaults and thus economic slowdown take a few months to start
> to ripple through the economy once employment starts to slack, but
> when it turns up the removal of the downward pressure on loan (credit)
> performance correlates almost exactly with the resumption of positive
> economic activity.
>
> We have NOT turned the corner.

Wall Street: Dumb as It Ever Was

Shadow Statistics is a bunch of rubbish. I have a background in statistics and am intimately acquainted with how the government samples populations to to form estimates. It's quite solid.

Shadow Statistics is just one notch above the Conspiracy Theorists. Just one short step ....


On Nov 06 09:47 AM BerkeleyBob wrote:

> Thanks for a small but healthy dose of realism. More is at stake
> here than trivial rounding errors being seized upon by "experts";
> the unpleasant fact remains that basic economic measures are massaged
> and manipulated until they have little meaning. Do you believe the
> employment or cpi numbers promulgated by the government? The folks
> at Shadow Statistics sure don't. Nothing like some good roots reggae
> to get you through the hard days--how about "Times Tough" by Toots?

Cause for Concern: No Change from the Fed

The Fed did the right thing. The economy is incredibly weak with massive excess capacity.

The dumbest thing you could do is nip the recovery in the bud.

With $770B of the $1.4T in commercial mortgages maturing in the next five years currently underwater, FDIC revises its rules (.pdf) to allow banks to keep loans on their books as 'performing' even when the underlying properties no longer cover the outlay.

Come on, Tom, you know as well I do that if the value of the mortgage is more than the value of the property, then the likelihood of default increases dramatically.

I know accountants would rather be precisely wrong than vaguely right, but banks have a moral obligation to provide accurate information.

If a property is underwater, then the bank should write down part of the value of the loan even if the loan is performing.


On Oct 31 08:05 PM Tom Armistead wrote:

> A lot of the indignation that has been prompted by this release,
> whether sourced from the Fed or from the FDIC, is misplaced. It
> runs to more than 30 pages and critics would do well to read the
> entire document before jumping to conclusions.
>
> The fact of the matter, as Sam Zell and others have observed, is
> that most of the owners are able to make their payments because the
> cash flow from the properties is sufficient to cover debt service.
> The decline in market value is heavily influenced by increased cap
> rates and more restrictive underwriting by banks. It's a catch 22,
> you can't borrow money because the market price has declined because
> banks aren't lending under the same terms as before. Under the circumstances
> the banks have been extending and have now received regulatory approval
> of their actions.
>
> But the regulators are careful to provide a long and tedious set
> of examples, which abundantly clarify that pretending is not acceptable.
> Extending a loan when the borrower does not have the ability to repay
> will not excuse the banks from recognizing a loss on the situation.
>
>
> For the mark to market vigilantes, the Fed is not modifying GAAP,
> just using common sense, if the customer makes the payments the loan
> is performing. That's what performance is, making the payments.
>
>
> Not stated explicitly, the Fed is also trying to provide clarity
> so the banks don't over-react in the other direction and deny credit
> to those who are able to pay, thereby creating losses where none
> had to be. All in all, a good approach, and one that makes me more
> comfortable with the prospect of a successful resolution of the CRE
> crises.

Do Alternative ETFs Belong in Your Portfolio?

Leveraged ETFs work quite well as long term buy and hold investments if the investor rebalances them when the cumulative return diverges more than 5% from the underlying index.

An optimal portfolio is a leveraged portfolio as James Tobin pointed out.

I have a brokerage fund that charges under 2% annual margin. There I buy broad market ETFs like Vanguard World Stock ETF and margin up 50%.

In my retirement funds I buy developed market leveraged ETFs and keep some cash in reserve for rebalancing.

'John Maynard Keynes and International Relations: Economic Paths to War and Peace,' by Donald Markwell

To the contrary, the roots of this economic crisis was laissez faire thinking of which the Republicans are the most hardline advocates.

The toxic waste was made in America and devoured by banks around the world.


On Oct 24 08:22 AM ETRADERVIC wrote:

> Exactly. I would amend your comment to state that, although Economics
> is still considered an Art by an unfortunate number, a great deal
> of progress has been made in Economics since Keynes.
> The Democrat Party has gone off the deep end and embraced both through-back
> Economic and Political policies. The Democrat Party is in need of
> an overhaul. They need to be replaced with candidates that will
> represent the people.
> The Economic positions of the current administration's policies are
> like physicists promoting Newtonian concepts when everyone else is
> on Quantum Theory.
>
> "The foundations are as valid as ever, but they do not completely
>
> describe any world, let alone the world of today. Meanwhile politicians
> apply "Keynesian" policies that Keynes would have totally repudiated."

Global Markets in Review: Risky Assets Disconnect from Fundamentals

Buy and hold works well when the portfolio is well defined. The applicable portfolio is the universe of financial assets, not just American stocks and bonds.

Those of us who have 20% to 30% in cheap emerging market index funds are quite happy.

It's takes 15 to 20 years of continuous stock picking to isolate true talent from noise.

Not encouraging for stock pickers ....


On Oct 19 12:29 PM Value Added wrote:

> Buy and hold has performed worse than that, my friend. You wrote:
>
> "The Dow first broke above 10,000 more than ten years ago in 1999
> and has since done so on 26 occasions. Yes, a ten-year buy-and-hold
> index investor has had no capital gain over the period!" This neglects
> inflation, so in fact buy and hold has *lost* you more than 25% (official
> CPI). In reality, because CPI tends to under-report, you've probably
> lost more than that.
>
> The only way to beat the market is to identify winning horses early
> in the stretch. Index investing is a losing proposition.

More on the Mutual Fund vs. ETF Debate: Part II

You fail to mention the advantage that mutual funds have in preserving NAV. ETFs can often and significantly from NAV. Buying at a price above NAV happens all the time.

Also Vanguard equity mutual funds rarely generate distributions.

So it is not the mutual fund structure that explains the distribution performance of mutual funds. Rather it is the fact that so many of the funds are actively managed.

It is highly unlikely that actively managed ETFs will generate smaller distributions than passively managed mutual funds.

TIPS: Risks, Reasons, Strategies

The principal adjustment is taxed.

It's Time to Sell Equities and Look to These 3 Areas

Your analysis is not at all convincing. Japan printed money just as ferociously as the Fed with no impact on prices.

Inflation depends not only on the money supply (assuming you can determine the appropriate aggregate), but also the velocity.

Inflation is not compatible with the economic weakness we see today.

And remember, what really drove the 70s inflation were COLA (cost of living adjustment) labor contracts. Those don't exist any more.


On Sep 18 01:09 PM Ad Orientem wrote:

> Unfortunatly the evidence does not support this. Most of the cash
> flow has been into the bond market not the stock market by a margin
> of nearly of 10:1. The dollar's decline is because the United States
> is essentially bankrupt and we are printing money as fast as the
> paper and ink can be loaded into the machines.
>
> At some point this will come to a halt. But it will be a very painful
> halt. The FED will have to do what Paul Volker did to arrest the
> great inflation of the 1970's- early 80's. We need to raise interest
> rates sharply. But this would turn the current severe recession
> into a full blown depression. In short we are between a rock and
> a hard place.

The Recovery Was Too Expensive

Yes, there is a big difference because you don't understand finance.

IThe US deficit would probably have been larger without the stimulus because the recession would have been deeper and last longer.

Second of all, US Treasuries are bought by Americans, not just foreigners. To the extend that the debt is owed by the US government to US citizens, it's a wash at the level of national accounting.

Stop the debt is evil routine ...


On Sep 18 08:49 AM Edvard wrote:

> Putting this in simple terms by analogy (that is based upon historical
> fact):
>
> 200 years ago, on the small island of Bahrain in the Persian Gulf,
> the main commodity was pearls. Wealthy merchants retained boats
> and divers to harvest pearls from the sea.
>
> The merchants would employ the divers on an insufficient wage, and
> then lend them money to make ends meet. These divers soon acquired
> debts that could not be paid, and as a result, effectively became
> indentured. When they died, these debts were inherited by their
> children, so that the children also became indentured servants simply
> by their birth.
>
> Sounds horrible doesn't it? When I told this story to my wife, she
> became appalled by the injustice of it.
>
> Then I asked her, what is the difference between this and the situation
> that the government has created for each American citizen right now?
> In the same way, our children will be responsible for this debt at
> birth. They will be born indentured.
>
> In fact, there is no difference, just that the super-criminals that
> created this debt (without any agreement from us) are doing it on
> a much larger and more heinous scale. And they will probably never
> see justice.

The Recovery Was Too Expensive

It isn't an excellent article. It is an excellent of right wing demagoguery.

Without rescuing the banks, the global financial system would have collapsed, which is what happened during the Great Depression.

Last fall AT&T was forced to 24 hour commericial paper deals because the banks would lend for longer terms.

The cost of not doing anything (laissez-faire) would have cost many multiples of the money spent.

Get real.


On Sep 18 04:29 AM Andrew Butter wrote:

> Excellent article.
>
> Perhaps you can explain this to me:
>
> When Mark Zandi of Moody's presented to the Financial Stability Committee
> in July he presented a table showing that the Fed had deployed $2.7
> trillion to "fight the credit crunch".
>
> To my simple way of thinking that should be reflected as $2.7 trillion
> extra on the Fed's balance sheet, unless they just gave the money
> away without getting a pledge of collateral (regardless of how they
> value the collateral).
>
> What did I miss?