More on Related Themes
2014-11-23 Weighing the Week Ahead: Are Investors Too Complacent? by Jeff Miller of New Arc Investments
There is no investment edge from repeating what you read in the morning paper. Here was my list – still worth watching: Geo-political that is not on the current radar – a true black swan. An increase in the PCE index that was not accompanied by strong economic growth. Wage increases that were not accompanied by strong economic growth. Declining profit margins that were not accompanied by strong economic growth and increased revenues. An increase in the chances for a business cycle peak (the official definition of a recession). Remote at this point. An increase in financial stress t
2014-11-22 2015 Is Shaping Up to Be a "Turkey" of a Year for the U.S. Economy and Stock Market by Paul Kasriel of Econtrarian
As U.S. thin-air credit growth is on track to slow in 2015, thin-air credit growth in the eurozone and in Japan is likely to accelerate as the European Central Bank and the Bank of Japan step up their QE programs. These foreign QE programs could indirectly stimulate U.S. exports. But the dominant factor affecting the U.S. economy in 2015 will be below-normal growth in U.S. thin-air credit. So, as you gather your family around you on Thursday, November 27, to give thanks for our bountiful 2014 economic harvest, bear in mind that next year’s harvest is likely to be a “turkey”
2014-11-14 Bad #Deflation by Keith McCullough of Hedgeye Risk Management
Obviously times, technologies, and mostly everything other than the Old Wall have changed. But the very basic difference between what I’ll call good vs. bad #deflation has not.
2014-11-02 Weekly Market Summary by Urban Carmel of The Fat Pitch
A number of studies show a poor risk/reward profile in the near term for US equities. That does not mean that equities will fall. This market has shown a strong propensity to defy precedents. This might well be another such situation. The question for us is always risk vs reward. We believe the odds of a 5% rally appear much smaller than those for a 5% retracement. Therefore, initiating new longs here is uninteresting.
2014-09-22 Alternative Approaches for Managing Emerging Market Equity Portfolios by Roger Edgley, Laura Geritz, Andrey Kutuzov, and Ajay Krishnan of Wasatch Funds
The shortcomings of indexing are especially evident in frontier markets, where some very small markets have significant weights. This paper discusses three approaches for targeting inefficiencies in emerging markets. These approaches are designed to fit together and complement each other within an investment portfolio. Overlap is generally minimal, so investors may reasonably employ all three.
2014-07-09 Choosing Winners in Asian Credit: Key Trends and Themes by Raja Mukherji, Ronie Ganguly of PIMCO
Key trends include Asian credit supply, which is on track for another record year in 2014, and China's priority to promote cleaner and more efficient energy. Our bottom-up research and careful risk assessments – informed by macroeconomic perspectives – have us favoring select investments in several sectors of Asian credit markets, including state-owned enterprises in China and Korea, investment grade new issues and Basel III Tier 2 bank capital bonds. ?
2014-06-25 Just Because the Fed Is Doing the Right Thing Now Is No Guarantee It Will Continue to Do So by Paul Kasriel of Econtrarian, LLC
The Fed is continuing to slow the growth in the amount of credit it is creating. In December 2013, the year-over-year growth in the sum of Fed outright holdings of securities and its net repurchase agreements (repurchase agreements minus reverse repurchase agreements) was 41.1%. As of May, the year-over-year growth in this sum had slowed to 24.8%.
2014-05-09 The Media's Reporting of the April Unemployment Rate -- A Little Knowledge Can Be Dangerous by Paul Kasriel of Econtrarian, LLC
Economists have “trained” the media to quickly check out what has happened to the labor force when the unemployment rate declines. If the unemployment rate drops and so, too, does the labor force, then the decline in the unemployment rate might not be a signal of a strengthening labor market. Rather, under these circumstances, the decline in the unemployment rate might reflect potential workers becoming discouraged over the lack of employment opportunities and, therefore, dropping out of the labor force.
2014-04-30 Does Negative GOFO Signal Higher Prices for Gold Financed in Currencies? by Ade Odunsi of AdvisorShares
In recent weeks a number of gold commentators have once again highlighted the strong inverse relationship over the last year between the price of gold in dollar terms and the London Bullion Market Association Gold Forward Offered Rate "GOFO". Since the first week of July 2013 when the price of gold bounced decisively, the GOFO rate has fairly reliably predicted the future direction of the gold price.
2014-04-17 Two Major Players Graduate from MSCI FM 100 ? Is it Still Worth Tuning into? by Russ Koesterich of iShares Blog
Major changes are coming to the MSCI Frontier Markets 100 Index. Russ K explains the significance and why it reinforces his view that investors should have an allocation to the frontier.
2014-03-19 If They Will Lend, Someone Will Spend (on Something) by Paul Kasriel of Econtrarian, LLC
Upon awakening from my winter hibernation way up here in beautiful northeastern Wisconsin, I have noticed that bank asset managers have been anything but hibernating. Rather, they have been quite busy expanding their loans and securities.
2014-03-06 Evolution of SRI Leads Investors to a Sustainable Future by Chat Reynders of AdvisorShares
It?s no secret that positive screening as an investment strategy is becoming increasingly popular as advisors seek ways to identify substantive investment opportunities. The practice focuses investors on the elements of a company that can make a positive impact both on the bottom line and on society, pointing to socially progressive companies that generate returns.
2014-02-20 Where the Frontier Lies by Robert Harvey of Matthews Asia
My last research trip to Asia included eight flights and nearly 50 grueling hours in the air. During this time, I had the opportunity to ponder a question I am frequently asked, ?How do you define a frontier market??
2014-02-19 Help Your Clients Make a Bigger Impact With Their Investments in 2014 by Jorge Newbery of American Homeowner Preservation
Investing with the hope of gaining a good return is a given. But today’s investors are looking for returns that go beyond dollars and cents. Between 2010 and 2012, sustainable and responsible investing (SRI) grew more than 22 percent, reaching $3.74 trillion in total managed assets. To put that number into perspective, think of it this way: more than one dollar of every nine dollars under professional management in the United States is invested according to SRI strategies.
2014-01-15 Fed Tapering -- Shades of 1937? by Paul Kasriel of Econtrarian, LLC
In the press conference immediately following the December 17-18, 2013 FOMC meeting, Fed Chairman Bernanke indicated that it was the FOMC’s current plan to have terminated Federal Reserve outright securities purchases by the end of 2014, commencing with a $10 billion reduction in securities purchases immediately after the December 2013 FOMC meeting and then continuing to taper its purchases by about $10 billion after each 2014 FOMC meeting. Of course, this tapering plan is subject to modification in either direction depending on forthcoming economic and financial market developments.
2014-01-10 Exploring Ceylon Tea Country by Jodi Morris of Matthews Asia
Riding by train through the Sri Lankan highlands recently, I found it difficult not to be mesmerized by the views of mountains blanketed in tea plantings and cool mist. My days spent exploring Sri Lanka’s mountainous interior were among my favorite as a first-time visitor to the country.
2013-12-23 2013 Festivus Airing of Grievances - I've Got a Lot of Problems with You People! by Paul Kasriel of Econtrarian, LLC
I often hear this from some of the cable news hosts and their guests. You see, according to these "economic theorists", when the unemployed and/or lower-income populace receive various types of funds from the government, they spend these funds, thus increasing nominal aggregate spending in the economy. What could be wrong with that in an economy that is operating below its potential?
2013-12-11 Q3:2013 Flow-of-Funds Report - 'Tis the Season to Be Jolly by Paul Kasriel of Econtrarian, LLC
I know that being a Debbie Downer gets more face time on cable news, but after looking at the Fed’s latest Financial Accounts of the U.S. report, formerly known as the Flow-of-Funds report, I cannot contain my optimism about the economy’s prospects in the New Year.
2013-12-05 Response to Gulliver Travails' Comment on "Unless the Fed Goes Cold Turkey..." by Paul Kasriel of Econtrarian, LLC
Notice that my definition of TOTAL thin-air credit is the SUM of Fed credit and depository institution (bank) credit. This is important when analyzing the effect of a Fed purchase of securities FROM the banking system. So, let’s start with that scenario -- the Fed purchases $X of securities from the banking system.
2013-11-25 Unless the Fed Goes Cold Turkey on Us, Expect a Bountiful Economic Harvest for Thanksgiving 2014 by Paul Kasriel of Econtrarian, LLC
If your Thanksgiving family dinner conversation is anything like mine this Thursday, it will be dominated by a discussion of how the U.S. economy and its financial markets will be behaving after nearly a year of Dr. Janet Yellen at the helm of the Fed. Well, I am going to give my family an advance copy of what I plan to say so that we can just concentrate on willing a Packers victory over the Lions. As a preview, I am bullish about what things will look like by Turkey Day 2014 even if Chairwoman Yellen becomes a little hawkish. (Perhaps too cute with the animal references?)
2013-11-15 In the Wake of Disaster by Robert Horrocks of Matthews Asia
As humanitarian organizations scrambled to send relief to the Philippines this week following the country’s battering by Typhoon Haiyan, foreign governments prepared to support the rebuilding and economists looked to assess the tragedy’s near-term impact.
2013-11-14 This May Sting Just a Bit: Global Diversification by Jeff Hussey of Russell Investments
Russell Investments’ global chief investment officer argues that times when global diversification falls out of favor might provide opportunities for investors.
2013-11-06 Sergeant Friday Questions a Treasury Spokeswoman -- Just the Facts, Ma'am by Paul Kasriel of Econtrarian, LLC
Sergeant Friday: What has been the behavior of total federal outlays in the past five fiscal years? Treasury Spokeswoman: As shown in Chart 1, the year-over-year change in federal outlays ballooned to 17.9% in FY 2009 because of the sharp increase in income security expenditures (e.g., unemployment insurance benefits, food stamps) due to the most severe recession since the early 1930s, TARP expenditures to recapitalize our financial system and a fiscal stimulus program.
2013-10-24 Africa's “Glass With Attitude” by Mark Mobius of Franklin Templeton
Africa has been an area of interest to our team, for many reasons. One might say Africa’s biggest asset is its youthful population. With a median age of under 20 in many countries today, that means a very high portion of Africa’s population is dependent on the adult workforce. Tomorrow, however, it means that the workforce will be massive, and the ratio of dependents to workers (the dependency ratio) could be among the lowest in the world. This huge and youthful population is a key rationale for our interest there.
2013-09-25 Surprise... by Blaine Rollins of 361 Capital
Clearly, the numbers didn’t meet the Fed’s preconditions for tapering. And while the jobless rate has fallen to 7.3% (from 8.1% when QE3, the current round of quantitative easing began), Bernanke had to acknowledge what’s been obvious to all. The decline in the jobless rate hasn’t occurred just because more folks are getting jobs; it’s because many are dropping out of the workforce, which means they’re not counted as unemployed by the government.
2013-09-18 Smart Beta and the Pendulum of Mispricing by Vitali Kalesnik of Research Affiliates
The Research Affiliates approach to equity investment management is based upon the insight that stock prices are “noisy” and “mean-reverting.”
2013-09-03 Forward Guidance Who Are You Going to Believe, the Fed or Your Lying Eyes? by Paul Kasriel of Econtrarian, LLC
Recently, a commentary published by the Federal Reserve Bank of San Francisco, “How Stimulatory Are Large-Scale Asset Purchases?”, came to my attention.
2013-08-20 Epic Climb Up and to the Right... by Blaine Rollins of 361 Capital
Interest rates continue to make an epic climb up and to the right...
2013-08-14 Does the Recent Decline in the Unemployment Rate Reflect an Improving Labor Market? by Paul Kasriel of Econtrarian, LLC
Last Friday the BLS reported that the national unemployment rate declined by two-tenths of a percentage point in July vs. June. On the surface, that would seem to be good news for the labor market, right? Not according to the knee-jerk analysis by a lot of jerks on cable financial news.
2013-08-02 QE Why $85 Billion per Month? Why Not $170 or $42 -1/2 Billion? by Paul Kasriel of Econtrarian, LLC
Am I the only one who wondered how the Federal Reserve arrived at a figure of $85 billion as the amount of longer-maturity securities it planned to purchase per month in its third round of quantitative easing (QE)? Why not double that amount? Why not half that amount? How will the Fed know when it is time to “taper” its securities purchases? How will the Fed know by how much to taper? Inquiring minds want to know.
2013-07-30 Revisiting “The Cost of Socially Responsible Investing” by Paul A. Ruud (Article)
Endowments have been warned that socially responsible investing incurs a financial cost, based on research by two prominent academicians. But that research ? which has been presented and debated in this publication ? is based on a tenuous model that is highly sensitive to its assumptions. Change those assumptions reasonably, as I did in my research, and the cost of SRI becomes trivial.
2013-07-22 If the Fed Wants to Lower Bond Yields, Perhaps It Should Switch to QT by Paul Kasriel of Econtrarian, LLC
Whenever I forget to mute CNBC or Bloomberg TV, I invariably hear some wag explaining to us that the goal of the Fed’s policy of quantitative easing (QE) is to lower bond yields in order to stimulate borrowing by the nonbank public and thus, increase aggregate spending. If, in fact, the Fed’s paramount goal is to lower bond yields, then I suggest that it might want to consider quantitative tightening (QT). Why?
2013-07-12 Rising Rates: Time to Position, Not Panic by Douglas Peebles of AllianceBernstein
It finally happened. After endless discussion about the potential for rates to rise, they finally didin a big way. During May and June, the 10-year US Treasury yield soared by nearly one percent, and markets reeled. Instead of panicking, investors should make sure their portfolios are positioned effectively.
2013-07-03 Will the Recent Rise in Interest Rates Shut Down Household Spending? by Paul Kasriel of Econtrarian, LLC
Not likely. Today, June 27, the yield on the Treasury 10-year security closed at 2.47% according to the Bloomberg public (i.e., free) website. According to the Fed, this security closed at 1.66% on May 1. All else the same, household borrowing and spending would be stronger had this interest rate not risen by 81 basis points in the space of about two months. But it is doubtful that the recent rise in bond yields of many stripes will shut down consumer borrowing and spending.
2013-06-28 Does Fed “Tapering” Represent Fed Tightening? by Paul Kasriel of Econtrarian, LLC
It depends. On what? Whether a reduction in the amount by which Federal Reserve purchases of securities increases each month represents a tightening in monetary policy depends on how much loans and securities on the books of private depository institutions (i.e., commercial banks, S&Ls and credit unions) change each month. Whether Fed monetary policy gets more restrictive or more accommodative when Fed the Fed begins to taper the amount of securities its purchases per month depends on what happens to the growth in the SUM of Fed credit and depository institution credit.
2013-06-25 Letters to the Editor by Various (Article)
Adam Apt responds in the latest exchange of letters on the topic of socially responsible investing. A reader responds to Geoff Considine’s article, A Better Alternative to Cap-Weighted Bond Indices, which appeared June 11. A reader responds to Wade Pfau’s article, Retirement Income Designations ? Which Should You Choose?, which appeared last week.
2013-06-20 The Best Time to Invest by Mark Mobius of Franklin Templeton Investments
I frequently speak at investment conferences around the world, and get questions ranging from my outlook for a particular market to highly sophisticated investment concepts. One seemingly simple question asked by a young lady years ago at a conference in Canada which I attended with the founder of Templeton Investments, the late Sir John Templeton, was particularly timeless. She asked: “I’ve just inherited some money from my grandfather. When is the best time for me to invest it?”
2013-06-18 Letter to the Editor by Various (Article)
Adam Kanzer responds to several letters to the editor that appeared last week. Those letters were in response to his article, Exposing False Claims about Socially Responsible Investing, which appeared June 4. Kanzer’s article was in response to Adam Apt’s article, Measuring the Cost of Socially Responsible Investing, which appeared May 21.
2013-06-17 2013 Midyear Economic Update -- Another False Dawn? by Paul Kasriel of Econtrarian, LLC
We’ve seen this movie before since midyear 2009, haven’t we? The pace of economic activity begins to quicken and it looks as though a full-throated cyclical expansion might finally be at hand, only to have the economy slip back into the doldrums. Nominal private domestic spending on currently-produced goods and services grew in the first quarter at an annualized rate of 5.5% compared to 3.4% in the previous quarter. Consumer spending accelerated, housing sales picked up and business spending on equipment and software continued to grow at a healthy pace.
2013-06-11 Letters to the Editor by Various (Article)
A number of readers responded to Adam Kanzer’s article, Exposing False Claims about Socially Responsible Investing, which appeared last week. Kanzer’s article was in response to Adam Apt’s article, Measuring the Cost of Socially Responsible Investing, which appeared the week before. Several readers responded to other articles as well.
2013-06-04 Exposing False Claims about Socially Responsible Investing A Response to Adler and Kritzman by Adam M. Kanzer (Article)
When the Domini 400 Social Index was launched in 1990, the common wisdom said that if you limited your investable universe by anything other than financial factors, you would limit your returns. The performance of the index has proven that assumption to be false. Nevertheless, the assumption lives on.
2013-06-04 An Advisor’s Perspective on Prophets and Profits by Gary Moore (Article)
More than 30 years on Wall Street have proven to me that many advisors could do more business ? and do more good for our clients, profession and the world ? if we considered the moral views of investors, whether we agree with those views or not.
2013-05-24 Sri Lanka's Victory by Teresa Kong of Matthews Asia
Sri Lanka has begun to reap the fruits of peace. By diverting resources that were previously spent on its military toward things like infrastructure, tourism and education, its economy has experienced solid growth. As our small car sat in traffic on the main road leading to the Colombo airport, my driver told me about the newly planned highway scheduled to open later this year. The Colombo-Katunayake Expressway, he said, would reduce my 1.5-hour trip to about 20 minutes. More importantly, I thought, we wouldn’t be driven off the road by rickshaws referred to locally as “tuk-tuks.
2013-05-21 Measuring the Cost of Socially Responsible Investing by Adam Jared Apt (Article)
Quite apart from its motivations, the consequences of socially responsible investing have intrigued analysts. The actual results, as distinct from the desired results, cannot be taken for granted. Mark Kritzman has written about the subject, but his research was little noticed until recently, when SRI achieved renewed prominence in the form of popular demands that institutional portfolios divest themselves of investments in fossil-fuel companies. Kritzman’s point, and the conclusion of his analysis, is that SRI, properly understood, incurs a cost to the portfolio.
2013-04-27 The Cashless Society by John Mauldin of Millennium Wave Advisors
A cashless future might be farther off than we either fear or hope. Not only is it farther away than some think, we are actually seeing an increase in the use of cash all over the world (and this is not just a US phenomenon). We will look at some interesting factoids that make for thought-provoking discussions, but when we couple them with research on the rise of the unreported economy (aka the underground economy) and the number of people who get some form of government assistance, we may find problematic consequences resulting from hidden incentives that work in unintended ways.
2013-04-26 Why The Fed's Balance Sheet Matters Neosho Capital Takes On Alan Blinder by Chris Richey of Neosho Capital
We anticipate the Fed will begin slowing, but not eliminating, its QE purchases later this year, barring another severe downturn in the intervening period. As such, we expect macro-economic factors such as currency, interest rates, growth, and inflation to continue to be a significant influence on stock market returns and that the long-term benefits of active portfolio management and individual company performance will continue to be masked by these macro influences.
2013-04-19 Fast Emerging Asia by Taizo Ishida of Matthews Asia
Over the past 20 years, Asia has come a long way to evolve into an asset class in itself. China and India have famously led the way as symbols of emerging nations. But when I think about seeking growth in Asia, I am particularly drawn to the region’s smaller equity markets as attractive hunting grounds for investment opportunities. Asia continues to change at a rapid pace, and this change is not restricted to China’s ever-changing landscape, but to many other areas that may see fewer media headlines.
2013-04-19 "America Has Faced the Unknown Since 1776," So Says Warren Buffett by Paul Kasriel of Econtrarian, LLC
So wrote Warren Buffett in his March 1, 2013 letter to Berkshire Hathaway Inc. stockholders. In the phrase before this quote, Mr. Buffett wrote: “Of course, the immediate future is uncertain ” And after this quote, he wrote: “It’s just that sometimes people focus on the myriad of uncertainties that always exist while at other times they ignore them (usually because the recent past has been uneventful).”
2013-04-19 Gold Buyers Get Physical As Coin and Jewelry Sales Surge by Frank Holmes of U.S. Global Investors
Even with the gold price dropping, why are gold coins selling at a premium? It’s Economics 101: The coin supply is limited and the demand is high. This buying trend isn’t only occurring in the U.S. In Bangkok, Thailand, for example, crowds of buyers were filling stores, eagerly waiting in multiple lines to purchase gold jewelry and coins.
2013-04-10 Looking for Warm Milk and a Blanket by Blaine Rollins of 361 Capital
Conspiracy theory economists would say that the Government fudged the data weaker so that it could help sell $60-70 billion in U.S. debt this week. Whatever the outcome, last week we had a perfect storm of high expectations for the data + very below average March weather + the payroll tax hike impact + the upcoming sequester worry. Economic data will move violently from month to month, but unfortunately last week, it was mostly in the WEAKER THAN EXPECTED direction and investors did not hesitate to bring pain on risk assets.
2013-04-08 Ben Bernanke, the Rodney Dangerfield of Fed Chairmen by Paul Kasriel of Econtrarian, LLC
First it was 2012 presidential candidate Rick Perry, who wanted to deal with Ben Bernanke’s money-printing “Texas style”. Then 2012 presidential candidate Mitt Romney indicated that Ben Bernanke had better have his personal effects packed up and ready to move out of his Fed office by January 21, 2013.
2013-03-27 Why Not a Quantitative Target for Quantitative Easing? by Paul Kasriel of Econtrarian, LLC
When I should have been practicing my bass guitar in preparation for my band class Thursday evening, I, instead, watched the first few minutes of Federal Reserve Chairman Bernanke’s post-FOMC press conference. A number of press inquiries were related to adding specificity to the FOMC’s criteria for modifying its current $85 billion per-month purchases of securities. In the short time that I watched the press conference, Chairman Bernanke did not seem to satisfy the press on this issue.
2013-03-22 Power of Positive Screening: Pursuing Strength of Social and Financial Returns by Chat Reynders, Patrick McVeigh of Reynders, McVeigh Capital Management
Market volatility and sweeping changes to mainstream views of investing are catalyzing acceptance of tactics that combine fundamentals with a progressive outlook on social issues. Positive screening brings balanced companies to the fore of the investment landscape: this practice isolates sound equities that demonstrate strength of balance sheet, dependability of management, and a commitment to act as part of a global community focused on positive change.
2013-02-22 Only Do What Only You Can Do by Satya Patel of Matthews Asia
Sri Lanka is a tiny country of approximately 21 million people, with roughly the same population as the city of Mumbai and a total land mass nearly as big as Ireland and slightly bigger than the U.S. state of West Virginia. Despite being diminutive relative to other Asian countries, exports are an important part of Sri Lanka's economy, just as they are for its neighbors.
2013-02-20 Sequestration Will Slow Real GDP Growth But Not Because of Demand-?Side Effects by Paul Kasriel of Econtrarian, LLC
In my February 5, 2013 commentary "2013 Economic Outlook Bright Sunshine for the U.S., Some Cloud Abroad," I argued that changes in federal fiscal policy have no material impact on total spending on the economy, but rather affect the distribution or composition of a given amount of total spending. The crux of my argument was that other private spending would "crowd in/out" changes in demand emanating from changes in tax and/or government spending policies. In this commentary, I will amend that argument.
2013-01-18 2013 International Outlook by Colin Moore of Columbia Management
We continue our outlook for 2013 with a review of select international economies and financial markets. Similar to the U.S. the road to recovery will be bumpy and we expect financial markets to continue being affected by macroeconomic uncertainties. While the overall environment remains uncertain, some of the significant headwinds in 2012, e.g. the Chinese leadership transition and a complete disintegration of the eurozone, are perhaps less concerning for markets than they were a year ago.
2012-12-11 Peak Oil or Peak Energy? A Happy Solution by John Mauldin of Millennium Wave Advisors
A consistent theme in this letter has been the connections between items that may seem to be far removed from each other but are actually linked at the very core. If you push on one end you get a reaction in what would seem to be the most unlikely spots. Today we explore the connection between the fiscal deficit and energy policy.
2012-11-20 Letters to the Editor by Various (Article)
Readers respond to our articles, The Downside to Socially Responsible Investing, which appeared last week, and, Lacy Hunt on Our Economic Future, which appeared on November 6.
2012-09-06 Reconnaissance: Strategy Notes by Douglas Clark Johnson of Codexa Capital
Pessimism about the next administration's impact on the emerging markets is held in check by the likely convergence of US and Chinese economic interests. More than ever, Ms. Smith needs Ms. Wong. To borrow a recent Financial Times headline, "Obama should pray that China overtakes the US." To us, Indonesia and Malaysia look pretty promising by this standard. Other stories include a look at timber and an update on Bahrain's economy.
2012-08-29 Reconnaissance: Strategy Notes by Douglas Clark Johnson of Codexa Capital
The Non-Aligned Movement summit in Tehran is probably the most important conference hosted there since the 1979 revolution. Iran is doing its best to use the forum as an opportunity to assert its position in world affairs. In market activity, we think fundamentals in India call for less exuberance in gold than some would suggest. Our outlook for South Asia meanwhile recognizes valuation opportunities in the smaller markets of Sri Lanka and Bangladesh.
2012-07-28 /______ a Dollar? by Dan Ariely of Dan Ariely Blog
As part of the PoorQuality: Inequality exhibition that is currently on display at the CAH, we are showing a piece of art by Jody Servon entitled /______ A DOLLAR. This piece started out as one hundred $1 bills stuck flat against the wall. The bills hung there in a simple, uniform shape, Washington after Washington. The money was there for the taking, but only if you needed it. Jody asked viewers to think about the value of a single dollar, to contemplate their needs in relation to their wants.
2012-07-25 An Excess of Reserve by Carl Tannenbaum of Northern Trust
Bank credit has expanded nicely over the past two years, yet financial institutions continue to hold substantial pools of excess reserves with the Fed. Some suggest that this extended conservatism is hindering the economic expansion, and are calling on the Fed to lower the rate it pays on excess reserves. The ECB has already taken this step. We think that a cut in the interest rate on excess reserves is unlikely.
2012-05-08 Jobs: Tale from Two Continents by Komal Sri-Kumar of TCW Asset Management
As in the case of Europe, the U.S. unemployment situation is likely to get worse in coming months because few moves toward meaningful structural changes in the labor market (e.g., training for the unemployed to improve skills), or fiscal shifts to aid hiring (e.g., targeted employment tax-credits) are likely to be implemented before the November presidential elections. We may have to wait for a reelected President Obama, or President Romney, to move in this direction in 2013.
2012-05-01 Don't End the Fed, Mend the Fed by Paul Kasriel of Northern Trust
Congressman Ron Paul has written a book entitled End the Fed. I have to admit that I have not read his book. But I have read many of Congressman Pauls excellent (in my opinion) essays on monetary theory and policy. Congressman Paul likely argues in End the Fed that the Fed and other central banks have created monetary "mischief" in the past and are likely to continue to do so in the future. Because of this monetary mischief, I assume that Congressman Paul would like to replace the Fed and other central banks with some form of a gold standard. I share Congressman Pauls sentiments.
2012-04-24 Kasriels Parting Thoughts Mortgage Refinancing: Stimulative or Redistributive? by Paul Kasriel of Northern Trust
It is a little acorn for you to bury today and dig up in the future when some partial-equilibrium yahoo on CNBC says that total spending in the economy will get a boost as households refinance their mortgages at lower interest rates. Yes, the folks doing the refinancing will now have more income left over after making their monthly mortgage payment to spend on other things. But what about the ultimate lender who has had his higher-interest security called away from her? She was earning 6% on her loan but now is able to earn only 4% on the same type of loan.
2012-04-20 Venerated Voices Q1 2012 Awards by Advisor Perspectives (Article)
We published our quarterly update for the Venerated Voices awards. Rankings were issued in three categories: The Top 25 Venerated Voices by Firm, The Top 25 Venerated Voices by Author and The Top 10 Venerated Voices by Commentary.
2012-04-17 The Cyclical Macroeconomic Impact of Taxmageddon 2013 and Seniors Worried about the Debt by Paul Kasriel of Northern Trust
December 31, 2012, the current federal personal income tax rate structure will revert to the structure that prevailed at the close of the Clinton administration. And among other things, tax rates also will go up because of the additional taxes on investment income as part of the Affordable (Health) Care Act. All told, tax revenues will increase by about $500 billion in 2013, which is about 3.2% of the Blue Chip survey average forecast of 2012 nominal GDP.
2012-04-16 Kasriels Parting Thoughts Recent Federal Budgetary Trends: Facts, Not Opinions by Paul Kasriel and Asha Bangalore of Northern Trust
The federal budget deficit reached its widest gap on a 12-month moving total basis in February 2010 at $1.478 trillion. Although remaining at astronomical levels, the budget deficit has been trending lower and stood at $1.246 trillion in March 2012. The year-over-year growth in the 12-month moving total of federal outlays peaked at 19.7% in July 2009. In March 2012, the year-over-year change in the 12-month moving total of federal outlays was minus 1.1%. The median growth in the year-over-year moving total of federal outlays from December 1955 through March 2012 is 6.6%.
2012-04-13 Recent Federal Budgetary Trends: Facts, Not Opinions by Paul Kasriel of Northern Trust
The federal budget deficit reached its widest gap on a 12-month moving total basis in February 2010 at $1.478 trillion. Although remaining at astronomical levels, the budget deficit has been trending lower and stood at $1.246 trillion in March 2012.
2012-04-10 Paul Kasriel's Parting Thoughts on the Economy by Robert Huebscher (Article)
Paul Kasriel, the chief economist at Northern Trust, will retire at the end of this month. In this interview, he explains why he is optimistic about the prospects for the US economy and why supposed headwinds - from the price of oil to the housing market - pose much less of a threat than most people believe.
2012-04-05 NewsLetter - April 2012 by Harold Evensky of Evensky & Katz
Although we continue to believe in the tenets of Modern Portfolio Theory, the concept is Buy-and-Manage not Buy-and-Forget. As a consequence, we made numerous adjustments to our strategic allocations over the years. And, consistent with our buy-and-manage philosophy, for the last few years weve been studying investment markets and have come to believe that long-term future returns are likely to be even lower then we estimated in 2002, market risk will be higher and the benefits from diversification less (i.e., correlations will be higher).
2012-04-05 Why Should Not Stocks Have Done Well? or Business, With Enemies Like This, Who Needs Friends? by Paul Kasriel of Northern Trust
Brent crude oil is trading around $122 and change today, down from a peak of $128.31 on March 9. The rapid run-up in oil prices since late-January has made a dent in household budgets and keeps us wondering if it is permanent. The reasons for the jump in oil prices in recent months is largely a supply story the Iran nuclear controversy raising concerns about future oil supply and actual supply bottlenecks in several spots of the world. The support to this thesis is visible in the recent behavior of industrial metal prices.
2012-04-04 Kasriel's Parting Thoughts - Has the Fed Boosted the Stock Market? by Paul Kasriel of Northern Trust
The Feds actions have benefited the stock market as well as aggregate demand for goods and services in the U.S. economy. Would you have preferred that the Fed sit idle as it did in the early 1930s, with likely similar results for the stock market and the economy in recent years as occurred at that time? The Fed has simply provided some of the credit to the economy that the private MFI system would have had it not been crippled with loan losses. And even with the Feds additional credit creation, total MFI credit growth has fallen short of the long-run normal credit creation of private MFIs.
2012-03-30 Kasriels Parting Thoughts Mary Matlins Economics by Paul Kasriel of Northern Trust
There is a controversy about whether one should use real GDP or real GDI to evaluate the performance of the U.S. economy. Real GDP is obtained by adding up spending across the economy and real GDI is computed by adding up income earned. Conceptually, GDP and GDI are identical but the source data for each is different and they yield different numbers. The GDI measure is gaining attention; Jeremy Nalewaik of the Fed has pointed out the National Bureau of Economic Research uses monthly indicators, GDI and GDP to determine official dates of business cycle peaks and troughs.
2012-02-14 Hey, Big Spender? by Paul Kasriel of Northern Trust
Some political movement ought to unfurl the Mission Accomplished banner with regard to reining in federal government spending. As shown in the chart below, in the 12 months ended January 2012, the cumulative total of federal outlays-defense, non-defense, entitlements, interest on the debt-increased only 1.5% vs. the 12 months ended January 2011. The median growth in 12-month cumulative total federal outlays from January 1954 through January 2012 is 6.6%. Starting with the 12 months ended March 2010, this measure of growth in federal outlays has been below the long-run median.
2012-02-07 If Current Bank Credit Trends Continue, Bet Against the Feds Interest Rate Forecast by Paul Kasriel of Northern Trust
A majority of FOMC members expect that the interest rate on federal funds, an interest rate controlled by the Fed, will not be increasing until late in 2014. If the current trend in the behavior of bank credit continues in 2012 and into 2013, I believe that the FOMC will be lifting its federal funds rate target early in the second half of 2013. Again, if the current growth trend in bank credit continues, a failure on the part of the FOMC to raise its federal funds rate target and shrink its balance sheet will sow the seeds of a rate of consumer inflation above the FOMCs 2% annualized target.
2012-02-03 Sri Lanka's Story by Taizo Ishida of Matthews Asia
Ever since Sri Lanka ended more than 25 years of civil war in early 2009, its economy has been on the upswing. The countrys stock market has quadrupled in the two years since the end of its long and bitter conflict, helped by strong, pent-up domestic demand. Among Sri Lankas top priorities has been a rebuilding of its tourism industry, and officials have set a target of attracting 2.5 million visitors by 2016. They may well get there if they keep pace with their 2011 annual growth rate, which saw a 30% increase to 856,000 visitors.
2012-01-27 12 Trades for 2012 by Komal Sri-Kumar of TCW Asset Management
Earlier this month, I suggested that investors closely watch 12 macroeconomic and financial indicators in deciding whether the world economy is improving or worsening (12 Indicators for 2012, January 3, 2012). Some readers wrote to ask if I would discuss what those indicators would mean for investment strategies. That was the genesis of the present piece which is intended to be consistent with expectations on the economic and financial fronts.
2011-12-23 Should the Definition of the Central Bank Lender of Last Resort Function Be Expanded? by Paul Kasriel of Northern Trust
If the ECB needed to expand its balance sheet to maintain the specified rate of growth in combined ECB and MFI credit, the ECB could purchase in the open market the requisite amount of pan-euro bonds rather than individual-country sovereign debt. In this way, the ECB could fulfill its expanded lender-of-last resort function without taking on individual-country sovereign-debt credit risk.
2011-12-23 Twenty Years of Investing in Asia by Paul Matthews and Mark Headley of Matthews Asia
This month Asia Insight speaks with Paul Matthews and Mark Headley to get their thoughts on 20 years of investing in Asia. Why were you so convinced of Asias growth prospects at a time when few others were? Paul: As a young businessman trying to build an asset management firm focused on Asia ex Japan, the challenge for me was that Japan was 95% of the investment universe and also a majority of the market for asset gathering. While based in Hong Kong, I was given the task of looking for ways to build the business and so I was attracted to the markets that were open and growing.
2011-12-12 Europe Crisis: Not Over Yet! by Komal Sri-Kumar of TCW Asset Management
On Friday European leaders completed their 14th or 15th crisis-related summit meeting since the beginning of 2010. Fitting a pattern, the results were termed a success by the leaders. Wolfgang Schuble told Focus magazine that he was certain that the leaders will be able to handle the debt crisis in Europe with the agreed, far-reaching measures on institutional reform of the European currency union. A close examination of factors behind the agreement suggests, however, that the decisions may end up being another band-aid solution to the still festering crisis.
2011-12-06 Storm Clouds Across the Globe by Komal Sri-Kumar of TCW Asset Management
Major world equity markets had their best weekly performance in three years, boosted by economic numbers from the US, and by hopes that European leaders may find a solution to the debt crisis. U.S. manufacturing showed signs of regaining momentum, with both new orders and exports coming on strong. At weeks end, jobs numbers for November indicated that the open unemployment rate had dropped from 9.0% to 8.6%. Healthy sales on Black Friday (November 25), the traditional beginning of the holiday shopping season, also cheered investors during the following week.
2011-11-28 Unexpected Encounters in Saudi Arabia by Tim Hanson of Motley Fool
Like most frontier and emerging markets, Saudi Arabia needs better infrastructure to serve its people as well as inland businesses. Further, reliance on one major export, oil, subjects the country to sharp cyclicality. And finally, the countrys strict religion likely deters knowledge workers from the country. As Saudi Arabia modernizes to more and more resemble neighbors such as Dubai and Qatar, it will undoubtedly experience growing pains. As long-term investors, however, we are willing to put up with those pains so long as we benefit from compelling long-term progress.
2011-11-26 Breakup Of The EuroGreece Will Be The First To LeaveGermany Leaks A Bombshell Proposal by Monty Guild and Tony Danaher of Guild Investment Management
In our opinion, global stock markets are beginning to price in a breakup of the Euro-Zone currency.Some will quit under pressure or be forced out and possibly some will quit because they do not want to pay part of the bill to bail out less conservative more spending oriented sister states. We anticipate that Greece will be the first to leave the Euro. The Greeks are perceived to be thumbing their nose at their European neighbors, and the Euro community could use Greece as an object lesson for other countries who might consider the role of non-cooperation.
2011-11-26 With Rising Wages, Will China Remain a Manufacturing Hub? by Frank Holmes of U.S. Global Investors
In 2010, countries such as Hong Kong, Japan, South Korea and Germany depended on China for data processing, apparel, and iron and steel exports. Chinas largest import partners in 2010 were Japan, South Korea, the U.S., Germany and Australia. For those companies not already doing business in China, theres one dominant factor that shows they should start: the vast domestic market. Companies may be able to find a cheaper workforce in Bangladesh, India or Sri Lanka, but being located in China allows convenient access to what is rapidly becoming the worlds largest consumer market.
2011-11-23 We Are All Keynesians Now - Except Me by Paul Kasriel of Northern Trust
If you want federal debt reduction, you are going to get it Super-Committee "failure" or not. The recent debt-ceiling legislation calls for $1.0 trillion less-than-otherwise federal spending over the next 10 years.
2011-11-23 Unexpected Encounters in Saudi Arabia by Tim Hanson of Motley Fool
As long-term investors, however, we are willing to put up with pains so long as we benefit from compelling long-term progress. With a large and growing population, an economy backstopped by a valuable global commodity, and a variety of surprisingly well-run companies, Saudi appears to offer just that. Look for us to continue adding to our funds exposure to the country and the region in the coming months and years.
2011-11-22 Europe Is in for a Long Recession by Paul Kasriel of Northern Trust
Collectively, the 27 sovereign nations that make up the EU most likely entered a recession this quarter. Given that the EU represents the largest economy in the world, a recession there is no small beer for the rest of the world. The Greek tragedy morphed into an Italian comedy. Now, it has become a French farce. The plot behind all of these theater forms is how an economy struggles when deprived of adequate bank credit. Although eurozone MFI credit is growing, its growth is much slower than it was prior to the global recession.
2011-11-11 Just as Domestic Demand Picks Up, Foreign Demand Weakens by Asha Bangalore of Northern Trust
The Commerce Departments first estimate of Q3:2011 real GDP growth was 2.5% annualized. Although this headline was better than the 0.8% annualized real GDP growth in the first half of 2011, underneath the headline, the news was even cheerier. Real final sales to domestic purchasers grew at an annualized rate of 3.2% in Q3:2011, the fastest growth of this measure since the 4.9% posted in Q2:2010. So, is it onward and upward for the U.S. economy going forward? Unlikely. Although things may be looking up for domestic demand, foreign demand for U.S. exports is expected to wane.
2011-11-10 Italys Crisis is Also a Global One by Komal Sri-Kumar of TCW Asset Management
The most important risk indicator in Europe-and for the global economy-is Italys ten-year bond yield. Italys 1.9 trillion in total public debt makes the country too big to save. After rising to over 6% in recent weeks and stubbornly staying above that critical level, the yield surged by over one-half percentage point today to more than 7.25%. Just as important, the ten-year German bond, the regions safe haven, fell in yield to 1.72%. Clearly, the market is suggesting that Italy is not too far behind Greece in either being forced to restructure its debt, or default on its obligations.
2011-10-25 Europe: What to Look for on Wednesday by Komal Sri-Kumar of TCW Asset Management
European leaders ongoing crisis summit in Brussels, Belgium is the 13th such meeting since 2010. The ultimate resolution of the European debt crisis, repeatedly promised during the past year and a half, is now set to be announced on Wednesday. What are some of the central elements of the solution likely to be? Even though we are just two days from the self-imposed deadline, some of the important decisions have yet to be made. Frances President Nicolas Sarkozy insisted yesterday that more long hours of discussion were necessary before the European leaders could announce major decisions.
2011-10-19 Developed Europe: Economic Review September 2011 by Team of Thomas White International
With the world anxiously watching, Developed Europe battled against its sovereign debt problems on several fronts all through September. Investors became increasingly concerned as the month progressed because Euro-zone leaders delayed making a decision on paying Greece the next installment of its bailout package, despite the beleaguered country declaring that it would run out of money by mid-October without the aid tranche. News reports from the region indicated that the installment was being delayed to pressure Greece into speeding up crucial structural reforms.
2011-10-18 Volatility Rears its Ugly Head by Jeremy Blackman of Hester Capital Management
The major debate in the financial markets today revolves around whether or not the U.S. is going to experience a double-dip recession. We do not expect a recession, but if that does happen it should be a shallow one. We remain cautiously optimistic that the politicians in the US and Europe will eventually do the right thing as the consequences of not acting in a prudent and responsible manner are not pretty. We anticipate that markets will continue to be volatile until Europe finds resolution for its problems and until politicians across the globe learn to compromise across party lines.
2011-10-14 European Financial Crisis: Approaching Dnouement by Komal Sri-Kumar of TCW Asset Management
The French word dnouement connotes a form of final resolution of a problem or an issue. We may be approaching such an end point in the European debt crisis. After repeated bailouts of debt-ridden countries through the imposition of austerity and adding to debt levels-actions which only worsened the countries debt ratios-European leaders are discussing seriously, for the first time, the possibility of significant haircuts for creditors. Kicking the can down the road, the trite phrase used to describe the European policy reaction, may no longer be the path for debt-ridden economies.
2011-10-04 Value Investing Lessons from Moneyball by Laurence B. Siegel (Article)
Is baseball a metaphor for life, as many literati have suggested, or for value investing? Michael Lewis' 2003 bestseller Moneyball argues the latter. More recently, the book has been adapted to make a thoughtful movie that will be of special interest to investors who believe in trying to find hidden bargains.
2011-09-28 With Apologies to James Carville, It's the Demand, Stupid by Paul Kasriel of Northern Trust
If there were more demand for goods and services in the economy, then corporations allegedly sitting on all that cash would start to use it. Our current weak economic growth is largely the result of inadequate aggregate demand for goods and services, not inadequate supply. And that is why I suggested a properly designed Federal Reserve quantitative easing could chum up aggregate demand until banks are able to create adequate amounts of credit on their own to get the job done. Monetary policy is all about affecting aggregate demand; fiscal policy is all about affecting aggregate supply.
2011-09-19 Benjamin Strong and Milton Friedman - Ironically, Something in Common? by Paul Kasriel of Northern Trust
Had Milton Friedman not passed away in 2006 and were alive and writing today, he would be arguing forcefully in favor of continued Federal Reserve quantitative easing. Friedman argued that had Benjamin Strong been alive to influence Federal Reserve policy in 1930 and 1931, the recession of 1929 would not have degenerated into the Great Depression. If Milton Friedman were alive today to influence the current Federal Reserve monetary policy debate, the near stagnant economic environment we find ourselves in would not need to persist.
2011-09-09 Fed 'Twisting' Will Stimulate Economic Activity for Bond Traders by Paul Kasriel and Asha Bangalore of Northern Trust
The consensus view is that after adjourning from its September 20-21 meeting the FOMC will announce a plan to lengthen the maturity structure of its securities portfolio by increasing the proportion of longer-maturity securities in the portfolio.
2011-09-08 If Some Dare Call It Treason, Was Milton Friedman a Traitor? by Paul Kasriel of Northern Trust
The principal factor accounting for the current exceptionally weak economic recovery is not unusually high uncertainty, too burdensome regulation and taxation, excessive federal government spending and/or debt or a major structural change in the economy, but rather inadequate depository institution credit creation. The reason depository institutions are not creating normal amounts of credit is that they suffered enormous losses after the residential real estate bubble burst and they remain concerned about current and/or future capital adequacy.
2011-09-06 Its the Jobs, Stupid! Part VI by Komal Sri-Kumar of TCW Asset Management
The zero U.S. job growth also had an impact beyond its own borders. Even though U.S. markets were closed yesterday for the Labor Day holiday, Asian and European equity markets fell sharply on growing fears that the data release signaled the beginning of a U.S. recession. (Concerns about the solvency of the European banking system were the other reason for the market setback.) The United States and the European Union each account for about one-quarter of world GDP, and emerging markets cannot maintain global growth despite their faster pace of expansion.
2011-08-29 What We Learned from Jackson Hole by Komal Sri-Kumar of TCW Asset Management
We heard about the frailty of developed economies on both sides of the Atlantic. However, Bernanke seemed to suggest eventual additional monetary measures, rather than recommend that structural reforms carry the bulk of adjustments in the U.S. economy. And while the head of the IMF pointed to the inadequate level of European bank capital compared with the size of the sovereign loan losses they may experience, she was not yet ready to recommend that the European powers undertake measures to reduce the level of debt. Simply put, we are nowhere near achieving a successful economic stabilization.
2011-08-23 Letters to the Editor by Various (Article)
A reader responds to our article, Jeremy Grantham Guarantees Gold will Crash, which appeared on May 18, 2010. Another reader responds to Michael O. Kokesh's Letter to the Editor, published last week, which was in response to Paul Kasriel's July 26 commentary, Washington Had a Spending Problem.
2011-08-19 Paris Accord: Much Ado About Nothing by Komal Sri-Kumar of TCW Asset Management
As I have emphasized repeatedly in the past, none of these band-aid measures is likely to end the European debt crisis. Several countries of the region are excessively in debt, pure and simple. When that is the case, the solution ought to be a reduction in the level of debt through the exchange of existing debt for discount bonds, reduced-interest rate bonds, or equity. Unless the European powers recognize and act on this reality, European debt will continue to be a millstone around the global economys neck.
2011-08-16 Letter to the Editor by Various (Article)
A reader responds to Paul Kasriel's commentary, Washington Had a Spending Problem, which was published on July 26.
2011-08-15 The August 9 FOMC Decision - Ineffective at Best, Dangerous at Worst by Paul Kasriel of Northern Trust
The FOMCs decision to commit to holding its federal funds target in a range of zero to 25 basis points at least through mid 2013 strikes me as an ineffective way to accomplish one of its goals full employment of the labor force and potentially dangerous with regard to another of its goals stability in an index of goods/services prices. In my view, the Fed should abandon an interest-rate targeting approach to monetary policy. Rather, it should adopt a quantitative-targeting approach targeting the growth in the quantity of combined Federal Reserve and commercial bank credit.
2011-08-12 I was sent to Washington to Change the Trajectory of Government Spending by Paul Kasriel of Northern Trust
In the 12 months ended Jul 11, cumulative total federal outlays were 2.7% higher than cumulative federal outlays in the 12 months ended Jul 10. The average year-over-year % change in 12-month cumulative outlays from 1956 through today has been 7.6%. And with 12-month cumulative total federal receipts growing at 8.7% the cumulative deficit in the 12 months ended Jul 11 was $1.225 trillion, $36 billion less than the cumulative deficit in the 12 months ended Jul 10. With continued fiscal progress of this nature, S&P will beupgrading U.S. debt faster than the Fed can change its forecast!
2011-08-09 Implications of the Debt Downgrade by David A. Rosenberg of Gluskin Sheff
As we had suggested in recent weeks, a U.S. downgrade was going to likely be more negative for the equity market than Treasuries, and that is exactly how the week is starting off. The reason is that history shows that downgrades light a fire under policymakers and the belt-tightening budget cuts ensue, taking a big chunk out of demand growth and hence profits. It is not just the United States the problem of excessive debt is global, from China to Brazil to many parts of Europe. And lets not forget the Canadian consumer.
2011-08-08 S&Ps Downgrade of U.S. Sovereign Debt Some People Actually Pay Them for these Opinions? by Paul Kasriel of Northern Trust
S&P stated the obvious after the U.S. markets closed on August 5 - the projected growth in U.S. public debt is on a long-term unsustainable path. Rather than paying S&P for this opinion, all you need to do is look at some past CBO projections and you would have arrived at the same opinion years ago.
2011-07-28 U.S. Debt Ceiling If Cooler Heads Do Not Prevail by Paul Kasriel of Northern Trust
What would be the immediate economic effect of a sudden balancing of the U.S. federal government budget? The $1.26 trillion decline in federal outlays would represent a negative demand shock to the U.S. economy. Some entities who were expecting payments from the federal government would be disappointed. These disappointed entities might have to cut back on some of their planned spending in order to be able to honor their payment commitments to others. Alternatively, these disappointed entities might have to increase their borrowing in order to honor their payment commitments.
2011-07-27 Washington Had a Spending Problem by Paul Kasriel of Northern Trust
Although Washington does not seem to have a current spending problem, what about a spending problem going forward? Specifically, if the programs specified in President Obamas February 2011 budget proposal were implemented, how would growth in federal total outlays in an eight-year Obama presidential tenure compare with growth in federal total outlays of other presidents tenures? To answer this question, I have relied on projections of total federal outlays by the Congressional Budget Office (CBO), the nonpartisan scorekeeper of all things fiscal.
2011-07-27 U.S. Businesses Appear to Have Selective Uncertainty by Paul Kasriel of Northern Trust
Business hiring remains weak and business capital spending is robust. The capital spending part is illustrated in the chart below showing the 8-quarter annualized growth in shipments of nondefense capital goods deflated by the PPI for capital goods. I would think that if abnormally-high business uncertainty prevailed today, there would have been considerably slower growth in price-adjusted purchases of nondefense capital goods than what has occurred.
2011-07-22 Continued Sluggish Economic Growth Expected Through 2012 by Asha Bangalore of Northern Trust
Bernanke indicated that the FOMC would be prepared to make monetary policy more accommodative if things do not improve. He emphasized the importance of the employment situation improving. Our forecast does not call for an acceleration in real GDP growth in the second half of 2011 nor does it call for a decline in the unemployment rate. Rather, we see the unemployment inching higher. Although we do not envision a meaningful risk of a contraction in indexes of consumer prices for goods and services in the next 12 months, we do envision continued declines in house prices.
2011-07-22 Today's Europe Debt Solution Not a Panacea by Komal Sri-Kumar of TCW Asset Management
News from Brussels suggests that European Union leaders have reached yet another agreement to bail out Greece. For the first time since the birth of the Eurozone in 1999, the proposed plan contemplates a default on bonds issued by a Eurozone country, in this instance, Greece. Remember, as recently as last Friday, the European bank test results made no assumption of a default by a Eurozone member. Greece, Ireland and Portugal will also enjoy reduced interest rates on their bailout programs as part of the new solution.
2011-07-21 Poor People or Old People - Who Do We Want to Help? by Paul Kasriel of Northern Trust
Milton Friedman used to talk about the "tyranny of the status quo." By that, he meant that it is difficult to change public policy because of entrenched interest groups allied with policies that have been in effect for decades. I would argue that opposition to changes in our current Social Security and Medicare programs is an example of tyranny of the status quo. The original intent of both was to provide an income support floor for our retired senior citizens. So, why do these programs supplement the income directly through Social Security and indirectly through Medicare to wealthy seniors?
2011-07-19 Do We Have a Medicare Budgetary Problem or an Aging Population Problem? by Paul Kasriel of Northern Trust
If it makes sense for corporations to borrow to fund capital expenditures, why does it not make sense for the federal government to do so as well? By the gov making investments in physical capital (infrastructure) and human capital (education), the economy's future growth rate would be expected to be enhanced. This would imply higher future tax revenues (without higher tax rates) to pay the interest and principal on the debt issued to fund capital expenditures. So, rather than trying to balance the overall budget, would it not make more sense to bring into balance the operating expenses?
2011-06-28 Passing Fad or Enduring Legacy? The Case for Owning Gold in Good Times and Bad by Team of Emerald Asset Advisors
Gold has been one of the few shining stars during a challenging 10+ years for most investors. In May, gold breached $1,500 an ounce, a new record. In fact, since bottoming out at $252 an ounce in 1999, gold has been enjoying a steady long-term bull run. This has prompted some prognosticators to warn that the "gold bubble" is ready to burst. On the other side of the coin, the more bullish "gold bugs" view the rally as confirmation of their long-held belief in the value of owning gold. Today, gold is still viewed by many as a somewhat exotic investment with little value.
2011-06-23 U.S. Monetary Policy: A Case of Self-Induced Paralysis? by Paul Kasriel of Northern Trust
Part of the decreased real GDP growth/increased unemployment rate central-tendency forecasts for June vs. April can be attributed to supply interruptions from Japan and higher energy prices. But given the FOMC's assumption that the supply interruptions are dissipating and that energy prices are declining, this explanation does not apply to the reduced real GDP growth and unemployment rate central-tendency forecasts for 2012. I think the central-tendency forecasts for real GDP growth and the unemployment rate are optimistic for 2011 and 2012 in the absence of continued quantitative easing.
2011-06-20 Overseeing Systemic Risk: The 10 most systemically risky financial firms in the US by Viral Acharya, Thomas F. Cooley, Robert Engle and Matthew Richardson of VoxEU
As part of the US policy response to the global crisis, the Dodd-Frank Financial Reform Act calls for regulators to identify systemically risky financial firms ? the sort that took the US financial crisis global. But how to identify these firms remains unclear. Some claim the task is impossible. This column begs to differ and names the 10 most systemically risky financial firms in the US.
2011-06-09 Economy Brakes Even Before Fed Takes Its Foot Off the Accelerator by Paul Kasriel and Asha Bangalore of Northern Trust
Although quantitative easing might not help stimulate domestic spending on goods, services and assets, in the words of our grandmothers-it couldn't hurt. All else the same, if the Fed purchases securities in the open market, the seller of these securities can do one or a combination of three things with them - spend them, lend them or just hold them. If sales proceeds are spent or lent, then there is a net increase in spending on something in the economy. Only if the sales proceeds are just held would quantitative easing not lead to a net increase in spending in the economy.
2011-06-07 Its the Jobs, Stupid! Part V by Komal Sri-Kumar of TCW Asset Management
Job creation still appears not to be a priority for the Obama administration. After the first year was spent implementing a comprehensive health care reform in the midst of a financial crisis, and bailing out financial institutions considered too big to fail, the emphasis switched to fiscal and monetary measures that had little direct impact on jobs.
2011-05-13 Three Reasons to Believe in $100 Oil by Frank Holmes of U.S. Global Investors
After selling off nearly 14% last week, oil prices finished this week slightly higher at $99.65 per barrel. While the end result was a net positive, the volatility continued. Oil reached $104/bbl, then fell to around $96, before nesting just below $100. As an investor, this volatility can be difficult to handle. Throw in the uncertainty of today?s geopolitical environment, and investors feel the need to downsize their positions in commodity investments, such as oil. Markets could remain volatile in the short-term, but here are three long-term indicators to support $100+/bbl oil prices.
2011-04-29 The Fed Terminates QE, We Lower our GDP Forecast by Asha Bangalore of Northern Trust
We have been putting a lot of emphasis on monetary financial institution (MFI) credit as a cyclical determinant of domestic demand for goods and services. We define MFI credit as the sum of the credit extended by the Fed, the commercial banking system, loan system and the credit union system. MFI credit is credit figuratively created ?out of thin air.? There is a distinction between created credit and transfer credit. In the latter is transferred from the grantor of this credit to the recipient of credit. Transfer credit, then, is funded by the grantor by postponing some spending.
2011-04-11 One Man?s Fiscal Austerity is Another?s Prosperity? by Paul Kasriel of Northern Trust
Fiscal austerity is the rage in the developed economies. The proponents of fiscal austerity argue that it will lead to economic prosperity. The opponents of fiscal austerity argue that it will lead to poverty. If the government decides to spend less, then, it will need less funding. This, in turn, implies that the government will either cut back on its current taxation or cut back on its current borrowing. The former recipients of the cut-back government expenditures will indeed experience a decline in their spendable funds. However, taxpayers will find themselves with extra spendable funds.
2011-03-26 Unintended Consequences by John Mauldin of Millennium Wave Advisors
Governments around the world need to be alert and make difficult choices to deal with a world excess liquidity. From an investor?s point of view, enjoy the current ride in emerging markets but recognize that they are high beta to the U.S. economy and stock markets. The next time the United States goes into recession?and there will be a next time?it is likely that emerging markets will suffer significant losses. So, emerging markets are a trade and not a long-term investment.
2011-03-25 To QE or Not to QE? That is the Question by Paul Kasriel and Asha Bangalore of Northern Trust
Historically, % changes in MFI credit "explain" a large proportion changes in nominal GDP. Commercial bank credit accounts for the largest component of private MFI credit. Since the FOMC commenced its second round of easing in early November 2010, the increase in Federal Reserve and commercial bank credit has been dominated by the increases in Federal Reserve credit. If the FOMC terminates its easing policy in June and private MFI credit creation does not pick up, total MFI credit growth will slow. All else the same, this would augur poorly for nominal GDP growth in the second half of 2011.
2011-03-25 Quantitative Easing: How the Rest of the World Reacts by Komal Sri-Kumar of TCW Asset Management
The decision was made to implement new purchases of $600 billion in U.S. Treasurys by June 2011. The transactions would expand the balance sheet of the Federal Reserve to about $2.9 trillion, a multiple of the $800 billion dollar level it was at in September 2008. This paper examines how the countries which have been recipients of the newly created liquidity have responded to the Feds move. While the Fed explained that its purchase of securities was intended to make riskier assets, the excess liquidity also made its way to foreign countries to take advantage of attractive interest rates.
2011-03-24 European Debt: Another Domino Falls by Komal Sri-Kumar of TCW Asset Management
Portugal will be the third European country to be bailed out in recent months following Greece (May 2010) and Ireland (November 2010). It also follows a pattern of individual governments and the EU repeatedly asserting that no bailout is necessary, that the high bond yields and rating downgrades are unjustified, and that speculators are largely to blame for Europes problems.
2011-03-15 The Latest, and Most Devasting Supply Shock by Louis-Vincent Gave of GaveKal
It has been a rough year so far in Asia, with unprecedented floods across Queensland, droughts in Sri Lanka, southern India and northern China, the Christchurch earthquake and now, most devastating of all, the Japanese earthquake and tsunami. Of course, there is already no doubt that in terms of human suffering and economic cost, this latest tragedy dwarfs all the others; at times like these, it is very hard to not feel either highly emotional, or completely despondent. As such, in an attempt to gain clarity, it is normal to fall back on history, and rely on it as a guide.
2011-03-14 European Debt: Band Aids are Still the Solution! by Komal Sri-Kumar of TCW Asset Management
During the early hours of Saturday, the major European powers met in Brussels and agreed on measures to resolve the long-simmering debt problems in the weaker economies. Although the meeting was considered to be preparatory for the European Union summit set for March 24 and 25, the surge in Greek and Irish debt yields, in particular, pushed the leaders to announce an accord. A closer examination of the terms of the treaty suggests, however, that this is just another temporary solution that may provide relief for a few days. It is unlikely to be a permanent solution.
2011-03-01 Musings on Proposed Government Spending Cuts and Current Energy Price Increases by Paul Kasriel of Northern Trust
Just as labor is an important input in the production of goods and services, so is energy(E). An increase in the price of E reflects a relative shortage of E from what was the case. Just as the price of labor can increase from an increase in demand or a decrease in supply, so, too, can the price of E. Assume that before an increase in the price of E, the economy was set to go from 3% growth to 4% growth. Assume that the increase in the price of E has resulted from an increase in the demand for E. At the higher price of E due to demand, the economy will not be able to rise from 3% to 4%.
2011-02-23 Don?t Know Much about Geography, Don?t Know Much Trigonometry, But Sarah Palin Does Know Her ... by Paul Kasriel of Northern Trust
On November 8, 2010, Sarah Palin commented that the Fed?s quantitative easing monetary policy was tantamount to printing money out of thin air. Sarah Palin may not know much about geography, but she does know her Fed policy. I would phrase quantitative easing a little differently. It is the Federal Reserve creating a specific amount of credit figuratively out of thin air. Theoretically, the Federal Reserve can create an unlimited amount of credit out of thin air. Of course, there would be dire economic consequences if the Fed were to create an unlimited amount of credit out of thin air.
2011-01-25 Advisor Perspectives Announces First Venerated Voices Awards by Advisor Perspectives (Article)
Advisor Perspectives, a leading publisher serving financial advisors and the financial advisory community, today announced its first Venerated Voices? awards, recognizing the market commentators who were most frequently read by advisors during 2010. Awards were issued in three categories: The Top 25 Venerated Voices? by Firm, The Top 25 Venerated Voices? by Author and The Top 10 Venerated Voices? by Commentary.
2011-01-11 Its the Jobs, Stupid! Part IV by Komal Sri-Kumar of TCW Asset Management
Even though the unemployment rate declined to 9.4% in December from 9.8% in November, the drop was largely due to 260,000 individuals leaving the work force. Now, with the unemployment compensation extended as part of an agreement that President Obama reached last month with the Republican opposition, the unemployment rate will likely resume its climb toward the 10%-mark. Here are three suggestions to deal with the growing problem of unemployment in the U.S. economy.
2011-01-05 11 Wishes for a Better 2011 by Komal Sri-Kumar of TCW Asset Management
The beginning of a new year is a time to make resolutions. It is also a good time to set out ones wishes regardless of whether they can be actually achieved during the following months. In that spirit, here are my top wishes for the U.S. and global economy during 2011. Achievement of even a few of them would help bring about sustainable economic growth as well as reduce the level of risk in the financial system.
2011-01-04 The 2011 Economic Outlook ? Credit Given Where Credit Is Due by Paul Kasriel of Northern Trust
With regard to 2011 real GDP growth, we now expect Q4/Q4 growth of 3.3% vs. 3.0%. An upward revision of 2011 Q4/Q4 real consumption growth to 2.9% from 2.5% in November is the primary factor accounting for the upward revision to the real GDP growth forecast. We are more optimistic about 2011 real GDP growth primarily because QE2 implies that the Fed will be purchasing all of the additional Treasury debt issued in conjunction with the Obama-McConnell tax and unemployment insurance compromise. We currently see more upside risk to our 2011 real GDP growth forecast than downside risk.
2010-12-17 Postcard from Bangladesh by Taizo Ishida of Matthews Asia
While some foreign investors may consider Bangladesh a ?frontier? market, its market capitalization already surpasses that of Pakistan, Vietnam, Sri Lanka and New Zealand. I believe there is a good chance that this market will be a more integrated part of the Asian investment landscape soon.
2010-12-15 U.S. Economy Rays of Hope by Komal Sri-Kumar of TCW Asset Management
I have had three recommendations in 2010: 1) Extend the Bush tax cuts of 2001 and 2003 for at least one more year. 2) Implement Free Trade Agreements (FTAs) with South Korea, Panama and Colombia all important U.S. trade partners. 3) Permit greater flexibility in labor markets.
2010-11-24 Corporations, Give Thanks - With 'Enemies' Like This, Who Needs Friends? by Paul Kasriel of Northern Trust
On November 23, the Bureau of Economic Analysis updated its analysis of U.S. corporate profits. After-tax corporate profits from current operations hit their highest level, $1.221 trillion, since the beginning of this data series, 1947:Q1. Paul Kasriel gives further analysis.
2010-11-17 I Wonder What Milton Friedman and Karl Drunner Would Say About Allan Meltzer by Paul Kasriel of Northern Trust
On November 9, I wrote a commentary entitled ''Quantitative Easing in the mid 1930s Appeared to be Successful''. In my commentary, I did not mention what happened to the U.S. unemployment rate as a variation on quantitative easing was taking place. So, let?s do this now.
2010-11-16 Reducing Portfolio Risk through Sustainable Investing by Jon Quigley (Article)
By incorporating a broad swath of extra-financial data as a risk factor and tilting a portfolio away from companies with poor environmental, social and governance policies, we can better reduce that portfolio's risk of extremely negative outcomes.
2010-11-15 I Am Shocked, Shocked that the QE2 is Akin to Printing Money and Public Debt Monetization! by Paul Kasriel of Northern Trust
Whenever the sum of Federal Reserve and commercial banking system credit increases, credit is being created out of thin air and debt is being monetized. The magnitude of the credit creation being contemplated by the Fed is not extraordinary in an historical context. It is not an extraordinary increase in credit creation given the current amount of resource underutilization in the U.S. economy. Being shocked by the implications of QE2 with respect to ?printing money? and the ?monetization of debt? would appear to be either naïve or hypocritical.
2010-11-12 They Just Don't Get It by Paul Kasriel of Northern Trust
Had the Fed said that QE2 would involve the purchase of $600 billion of Treasury bills rather than Treasury coupon securities, we could have avoided this phase of uninformed criticism of the policy. Of course, the chorus of critics would have complained that by the Fed purchasing bills rather than coupons it was not affecting the ?important? part of the yield curve.
2010-11-10 The Quantitative Easing in the mid 1930s Appeared to have been Successful by Paul Kasriel of Northern Trust
There is much skepticism as to whether the Fed?s second round of quantitative easing, QE2, will be effective in stimulating the nominal demand for goods and services in the U.S. economy. Keying off Mark Twain?s aphorism that although history may not repeat, it often rhymes, perhaps we can get some guidance as to whether QE2 will be successful from the results of the quantitative easing that was initiated in the second half of 1933.
2010-11-05 Global Market Commentary by Monty Guild and Tony Danaher of Guild Investment Management
Investors should keep gold for long-term investment, as well as oil-related holdings. The U.S. dollar, Japanese yen, British pound and the euro are poor long-term prospects. Investors should continue to hold shares of growing companies in India, China, Singapore, Malaysia, Thailand, Indonesia, Colombia, Chile and Peru, as well as food-related shares such as grains, wheat, corn, soybeans and farm suppliers. Finally, investors should continue to hold U.S. stocks for a further rally.
2010-11-04 QE2 Is Likely to Be More Successful than QE1 by Paul Kasriel of Northern Trust
The theory behind quantitative easing is that an increase in the quantity of combined central and commercial bank credit will lead to an increase in nominal aggregate spending on goods, services and assets. Indeed, the correlation coefficient between percentage changes in the annual average of combined Federal Reserve and commercial banking system credit and the percentage changes in nominal U.S. GDP from 1960 through 2006 is relatively high, at 0.62. This correlation coefficient is reduced to 0.49, however, when the period is extended through 2009. Northern Trust explains why.
2010-11-03 A Refresher Before Fed's Announcement of Second Round of Quantitative Easing by Asha Bangalore of Northern Trust
The Federal Reserve is widely expected to announce the second round of quantitative easing after the Federal Open Market Committee meeting on November 4. The goal of QE2 will be to bring about an increase in real GDP above the tepid 2.0 percent pace reported for the third quarter, as well as bring down the 9.6 percent unemployment rate. The reputation of the Bernanke Fed largely rests on the success of this new policy. Northern Trust present charts of Treasury bond yields since 2007, with markers for major monetary policy events.
2010-11-02 Debtor Bailouts: Lesson from Brussels by Komal Sri-Kumar of TCW Asset Management
The 440 billion ($617 billion) European Union bailout package approved earlier this year provided new loans to debtor nations from the EU and the IMF in return for pre-agreed austerity programs. Germany, the major creditor nation and the biggest single contributor to the bailout package, agreed on Friday to provide the fund permanent status, but only if the debt reduction cost were shared with private investors. A variation of the decision that Germany made last week is likely to confront President Obama during the next two years as the U.S. deals with its own bailout programs.
2010-10-28 What the G-20 Achieved by Komal Sri-Kumar of TCW Asset Management
A key item on the agenda last weekend during the meeting of G-20 finance ministers was the U.S. desire to have member nations' current account deficits and surpluses limited to 4 percent of GDP. A country with a bigger surplus (e.g., China) would have to let its currency appreciate. The United States, however, cannot insist on deciding on the size of QE2 based purely on domestic considerations, accuse Chinese authorities of currency manipulation, and expect other countries to provide a level playing field for American exports all at the same time.
2010-10-21 Readers' Questions Answered Part IV by Mark Mobius of Franklin Templeton
Mark Mobius responds to reader questions on initial public offerings, non-listed entities, China's 20-year prospects, and markets in Thailand, Indonesia and Sri Lanka.
2010-10-11 In QE We Trust by Komal Sri-Kumar of TCW Asset Management
Senior monetary officials worldwide have complained about the massive inflows of capital into their financial markets resulting from expectations of monetary easing in the United States. One of the major pitfalls of quantitative easing is that beggar-thy-neighbor currency interventions do not result in increased growth for all participating countries. Instead, they sharply increase the risk to exporters and international investors and, eventually, dampen global growth.
2010-10-08 The Effectiveness of QE2 Depends on Quantities, Not Interest Rates or Exchange Rates by Paul Kasriel of Northern Trust
The level of U.S Treasury security interest rates or the level of the U.S. dollar foreign-exchange rate are not the correct way to think about the prospective effectiveness of QE2. What transpires with respect to commercial bank credit will determine the effectiveness of QE2 in increasing aggregate demand for U.S. goods and services.
2010-09-24 The Real Economic Cost of Government Is Spending - So, What Do You Want to Cut? by Paul Kasriel of Northern Trust
Because the private sector generally uses productive resources more efficiently than the government does due to competitive pressures, the economy's long-run potential real economic growth rate is hurt by increases in federal spending. The largest projected increase in spending by an order of magnitude over the next decade is for entitlement programs - Social Security, Medicare and Medicaid. Millions of baby boomers will become eligible for Social Security and Medicare benefits over the next 10 years. Northern Trust also discusses home sales, employment and leading economic indicators.
2010-09-08 What is Wrong With QE by Komal Sri-Kumar of TCW Asset Management
The clamor from some economists for additional quantitative easing in the United States comes after two years and $1.5 trillion of such easing have already taken place. Similarly to the Japanese experience, the U.S. economy's growth has slowed to a crawl after just a few quarters of adrenaline rush due to increased liquidity. Even though newly minted cash has surged, bank lending to the private sector has not. And, again not surprisingly, U.S. banking sector profitability has sky-rocketed.
2010-09-08 Michael Boskin?s Summer of Economic History Amnesia by Paul Kasriel of Northern Trust
Michael Boskin, former chairman of the President?s Council of Economic Advisers under George H.W. Bush, argues in a recent editorial for the Wall Street Journal that the current economic recovery is so feeble because of economic policies pursued by the current presidential administration. There is another reason for the relative weakness in the first year of this current recovery, however: the unprecedented contraction in nominal and real bank credit in the post-WWII era.
2010-09-02 I Renounce Monetarism (with apologies to Mr. Lippman of Pendant Publishing) by Paul Kasriel of Northern Trust
Monetarists such as Milton Friedman hold that the M2 money supply is a leading indicator of aggregate demand. Indeed, from 1960 through 1989, the price-adjusted M2 money supply had a relatively high correlation with real aggregate demand for goods and services. As charts presented in this commentary illustrate, however, from 1990 through the second quarter of 2010 the correlation between real M2 and real final sales of domestic product deteriorated dramatically.
2010-08-24 Why Hasn't the Stimulus Been More Stimulative? by Paul Kasriel of Northern Trust
The $790 billion stimulus package was supposed to put the economy firmly on a trajectory toward recovery. As one Obama administration economic advisor has said, however, the economy is still having trouble reaching 'escape velocity.' This is because fiscal policy must be accompanied by bank financing in order to stimulate aggregate demand. Otherwise, fiscal policy just reallocates total aggregate demand toward government spending and away from private spending. Policymakers should therefore concentrate more on invigorating bank credit if they want faster economic growth.
2010-08-24 Urbanization, Past and Present by Douglas Clark Johnson of Codexa Capital
The discovery of an 18th century ship reminds us that the United States was once itself an emerging market. This suggests cues for today's investors as the world's population fills more and more megacities. Continued urbanization will have important implications for resource use and infrastructure development.
2010-08-18 Bank Credit ? One Month Does Not Make a Trend, But... by Paul Kasriel of Northern Trust
U.S. commercial bank total credit increased at an annualized rate of 8.3 percent in July. If this is the beginning of an upward trend in bank credit, then we can feel a lot more confident about the prospects of rising real GDP growth rates in 2011. Subsequently, if bank credit continues to grow on a sustained basis and aggregate demand growth starts to pick up in the first half of 2011, then the Fed would be expected to begin raising policy interest rates around mid-year.
2010-08-09 It's the Jobs, Stupid! - Part III by Komal Sri-Kumar of TCW Asset Management
The unemployment rate is a leading indicator of economic activity in this business cycle due to the potent force of discouraged consumers, rather than a lagging indicator, as we have been taught in our economics courses. That, in turn, means that we cannot ignore the large number of jobless workers in the belief that economic growth will subsequently cure the problem we won't have sustained economic growth unless we lower unemployment first. The disappointing employment numbers last Friday are indicative of this trend.
2010-07-20 Cash Investing: Considerations for Investing in a Low Interest-Rate Environment by Northern Trust Investments (Article)
Northern Trust's chief economist, Paul Kasriel, forecasts that interest rates will remain low for the remainder of 2010. Investors are looking for guidance on how they should best position their cash and fixed income portfolios to take this environment into consideration, and should consider the tradeoff between liquidity and yield. We thank Northern Trust for their sponsorship.
2010-07-19 U.S. Lessons From Last Week: A Fiscal Dead End by Komal Sri-Kumar of TCW Asset Management
With the Obama administration's $787 billion stimulus money mostly spent or committed, the fiscal deficit has risen and borrowing needs have gone up, but the private sector is still incapable of generating sufficient employment or economic growth. While the $8,000 first-time home buyer credit temporarily helped housing, and 'cash-for-clunkers' was a boon to the automotive industry and car dealers last fall, the end of programs like these has typically been marked by a falloff in demand.
2010-07-13 Chronicle of the Quarter by Bob Veres (Article)
Bob Veres provides one of his Client Articles, which is a service for advisors to send to their clients; it's a daily blog about what it felt like to watch the market during the past fiscal quarter. It communicates several points: perhaps most importantly, that what seems clear in hindsight (the markets gave back their first quarter gains) is not at all clear as it is experienced.
2010-07-09 Potholes in the Recovery Road ? Reduce Speed Ahead by Paul Kasriel of Northern Trust
The second-half GDP growth forecast has been lowered to 1.8 percent and Q4/Q4 GDP growth in 2011 will be 3.2 percent. This is a business cycle unlike any other in the post-war era. In prior cycles, as the Fed raised the funds rate, growth in bank credit slowed. In the current environment, even with the Fed holding the funds rate at less than 25 basis points, bank credit continues to contract. Thus, we are going to utter the six most dangerous words in economic forecasting: This time it might be different.
2010-06-29 Chinese RMB: Much Ado About Nothing! by Komal Sri-Kumar of TCW Asset Management
Komal Sri-Kumar comments on US China relations, looking at how both sides view the appreciation of the RMB. Washington has lectured and Chinese officials have retaliated with their own diagnosis that the crux of the problem was lack of adequate regulation of U.S. financial institutions, and have suggested that the Obama administration should reduce the fiscal deficit rather than focus on the exchange rate. What Sri-Kumar believes is missing from this conversation is an understanding of the role played by exchange rates in balancing international trade.
2010-06-25 When It Comes to Increasing Aggregate Demand, What?s Fiscal Policy Without Monetary Policy? by Paul Kasriel of Northern Trust
In order for an increase in government spending to result in an increase in total aggregate demand, the government's spending needs to be financed by the central bank and the commercial banking systems. Although the Fed and the banking system have helped fiscal policy to stimulate total aggregate demand through a cumulative increase in Treasury borrowing of $1,455 billion, the help was not all that spectacular. No wonder the results of the recent fiscal stimulus program were something less than awe-inspiring with regard to increasing aggregate demand.
2010-06-23 Recipe for a Lost Decade, or Two by Paul Kasriel of Northern Trust
There are legitimate concerns that the U.S. could catch the 'Japanese' disease and endure a lost decade in terms of normal economic growth. As has been the case in Japan, weak U.S. money and bank credit growth is occurring in the context of very low monetary policy interest rates. The private financial system is not transforming the inexpensive credit being offered it by the Fed into credit for the private nonfinancial sector of the U.S. economy. Until this transmission mechanism between the Fed and the economy gets mended, we are unlikely to experience potential economic growth.
2010-06-15 Airplane Musings - Part Deux by Paul Kasriel of Northern Trust
Although U.S. federal government spending continues to increase, the rate of growth in that spending has slowed enormously. In the 12 months ended May 2010, accumulated spending by the federal government totaled $3.437 trillion, just 2.6 percent higher than the 12-month accumulated total federal spending for May 2009. This is quite a deceleration in growth from the 15.3 percent registered for the 12 months ended 2009 vs. 2008, near the trough of the last recession.
2010-06-07 Jobs Report: Another Myth-Buster by Komal Sri-Kumar of TCW Asset Management
Three myths continue to circulate regarding the prospects for U.S. economic growth. The first is that an increase in the fiscal deficit would have a Keynesian multiplier effect in boosting the economy. The second is that strong economic growth since mid-2009 is proof of the success of the stabilization plan. The third is that the ongoing European sovereign debt crisis will not impede a U.S. economic recovery, because U.S. exports to Europe are a small part of total U.S. exports, which in turn are not a huge component of U.S. GDP.
2010-06-04 All We Are Sayin' Is Give Free Markets A Chance by Paul Kasriel of Northern Trust
Before we can determine whether or not free markets have failed, we must actually have free markets. Central banks currently create or destroy credit by by holding a key short-term interest rate below or above the unobservable free-market equilibrium. The Securities & Exchange Commission determines which credit rating agencies receive official 'approval.' Lastly, without their debt being implicitly guaranteed by the federal government, Fannie and Freddie would not have been able to have consistently fund themselves at interest rates below other financial institutions.
2010-06-02 Gold: Early 1930s vs. Early 2010s by Paul Kasriel of Northern Trust
Some argue that gold will outperform general stocks in the early 2010s, as it did in the 1930s. If this is true, then it will be for entirely different reasons. Investors currently gravitate toward gold as a hedge against future inflation, or because of a loss of faith in the fiat currency. U.S. gold mining stocks were strong performers in the 1930s, by contrast, because the U.S. Treasury was guaranteeing gold miners a steady or rising price as production costs were falling.
2010-05-27 Greece, Portugal and Spain Are the Least of Our Economic/Financial Challenges by Paul Kasriel and Asha Bangalore of Northern Trust
The debt problems that Greece, Portugal and Spain are currently facing have undoubtedly had a negative effect on global financial markets, and will probably have some negative effect on global economic activity. Problems with these countries, however, will not derail the global economic recovery that is currently underway. The biggest threat to the continuation of the global economic recovery would be some policy mistake by the Chinese economic policymakers resulting in a rapid deflation of the Chinese real estate bubble, which, in turn, would reduce Chinese real GDP growth.
2010-05-24 European Discord? by Komal Sri-Kumar of TCW Asset Management
German taxpayers have started to view the European Union merely as a 'transfer union,' where they incur tax hikes and spending cuts in order to make transfers that enable their southern neighbors to maintain social welfare provisions. Sooner or later, the political willingness to continue this pattern merely in order to sustain a common currency will cease. At that time, the choice will be to reconstitute the euro area, or agree that weaker nations with debt problems need to reduce and restructure their debts rather than pile on more.
2010-05-20 A Strategic Proposal to Combat Strategic Residential Mortgage Defaults by Paul Kasriel of Northern Trust
More and more we are hearing that occupants of residential real estate with mortgages far in excess of the current market value of their properties are choosing to default on their mortgage agreements. Many of these borrowers have calculated that it would take many years for the value of their properties to rise back to the amount outstanding on their mortgages. One tactic for lenders to stop these strategic defaults may be to write down the principal on the mortgage outstanding to an amount closer to the current actual market value of the property.
2010-05-11 ECB Sterilization -Trichet's Maginot Line? by Paul Kasriel of Northern Trust
European Central Bank president Jean-Claude Trichet has stated that the ECB will drain by other means the amount of base money it creates through sovereign debt purchases. If Milton Friedman was correct that inflation is everywhere and always a monetary phenomenon, however, then Trichet need not worry about a sustained acceleration in euro area inflation given recent declines in euro area money and credit aggregates. Northern Trust also comments on the Federal Reserve's swap lines with other central banks, and a recent small business survey.
2010-05-10 Think U.S. Double-Dip: Again by Komal Sri-Kumar of TCW Asset Management
Even though the National Bureau of Economic Research, the unofficial arbiter of the start and end of U.S. recessions, has not yet decided that the most recent recession has ended, the consensus view is that the economy recovering. Positive developments notwithstanding, Komal Sri-Kumar expects signs of a renewed economic downturn to manifest themselves during coming months. The slingshot effect of monetary and fiscal stimuli has still been less than stellar given the steepness of the economic decline during 2008-2009.
2010-05-06 Global Market Correction Has Begun! by Komal Sri-Kumar of TCW Asset Management
The upward march of global equity markets in recent months is unsustainable. While U.S. corporate earnings have recorded healthy increases in recent quarters and, thereby, have been supportive of equity prices, the worldwide macroeconomic backdrop has continues to cause concern. The risks include, but are not limited to, a surge in the level of sovereign debt, a plunging dollar as foreign holders decide to cut their exposures in U.S. Treasury obligations, and a surge in U.S. Treasury bond yields.
2010-04-29 Declines in Bank Loans - Write-Downs or Pay-Downs? by Paul Kasriel of Northern Trust
The record decline in commercial bank loans/leases the U.S. experienced in 2009 was dominated by pay-downs (payments on loans) rather than write-downs (reductions in recognized value). Pay-downs have negative implications for new aggregate demand whereas write-downs are irrelevant with regards to new aggregate demand. Declines in capital limit the ability of banks to create new credit. The continued contraction in commercial bank loan/lease balances is cause for caution with regards to near-term growth in economic activity.
2010-04-19 Consistency Counts (Well, If You're Into That Sort of Thing) by Isbitts of Emerald Asset Advisors
Let's call the current global stock market what it is: a combination of government stimulus propping up prices, investors playing catch-up now that the S&P 500 is 75 percent higher than it was in March 2009, investors extrapolating forward recent improvements in the economy and concluding that the next opportunity in stocks is here, and investors who continue to spend and borrow until forced by law or contract to stop. We were here in 1987, we were here in early 2000, and we were here in mid-2007. Here we are again.
2010-04-16 It's Been a While by Paul Kasriel of Northern Trust
Inflation is forecast to be 1.7%, rather than 2.5% as in Northern's previous forecast. Lack of credit creation in the private sector will result in a muted recovery, with GDP growing 2.8% in 2010. They are are in agreement with the Federal Open Market Committee that ?economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.?
2010-04-14 Federal Deficit Reduction - Growth Helps at the Margin by Paul Kasriel and Asha Bangalore of Northern Trust
The Congressional Budget Office tell us that we cannot grow our way out of the long-term federal budget deficit. The acceleration in real and nominal economic growth the U.S. economy has experienced in the past two quarters, however, is helping to reduce the deficit in the short-term. When growth picks up, corporate profits and household income do too. Thus, tax revenues pick up, or at least do not contract as much, while expenditures such as unemployment insurance benefits and food stamps slow down, not to mention government capital injections into teetering financial institutions.
2010-04-13 Greek Rescue: Third Time is Still Not a Charm! by Komal Sri-Kumar of TCW Asset Management
Global markets reacted positively to the European Union's display of solidarity Sunday with debt-burdened Greece. Should Greece need a bailout, European finance ministers said, the country would be able to borrow up to 30 billion euros at about a 5 percent interest rate for a three-year loan. Assistance from the International Monetary Fund could add another 15 billion euros, for a total aid package of 45 billion euros. The eventual, sustainable solution, however, is to reduce Greek debt to a level that the Greek economy can service rather than pile on more debt.
2010-03-18 Dollar: Beleaguered No More? by Komal Sri-Kumar of TCW Asset Management
After weakening for most of the past decade, the dollar has appreciated significantly against the euro and the pound sterling, the two major European currencies, over the past three months. This is due more to the weakness of European currencies than to the strength of the dollar. Fears of stagnation in Europe, uncertainties over upcoming U.K. elections, and concerns that Portuguese and Spanish debt sovereign may come under attack by hedge funds have all dragged on European currencies. Compared to this turbulence, the U.S. economy seems like a safe haven.
2010-03-18 We Suggest Investors Listen to What China Is Saying by Monty Guild and Tony Danaher of Guild Investment Management
It is clear from China's pronouncements that the government is willing to raise the value of its currency, but that it will delay doing so if the U.S. or any other major nation threatens the country or pressures it to take action. If Western politicians keep their mouths shut, China probably will raise the value of the Yuan. Guild and Danaher also comment on recent gold purchases by the Chinese and Indian governments amidst inflation fears, as well as market conditions in China, Brazil, Russia, India, Europe and the U.S.
2010-03-08 Follow-up on Greece: A Lesson on Iceland by Komal Sri-Kumar of TCW Asset Management
Voters in Iceland rejected a referendum on a $5.3 billion debt repayment arrangement with British and Dutch depositors in the failed Icesave Bank. Iceland's real GDP declined by 7 percent in 2009, and voters feared that the debt burden, along with austerity measures from the IMF, would make economic prospects even worse. Similarly, whether Greece receives loans from France and Germany or meets its $31 billion April and May funding requirements from bond investors, the country's debt burden will probably increase and constrain future growth prospects.
2010-03-05 Greek Bailout: This is a Trojan Horse! by Komal Sri-Kumar of TCW Asset Management
Eurozone members may be reenacting the story of the Trojan Horse in their efforts to rescue Greece from a debt crisis. The bailout brings unintended consequences that could weaken the entire eurozone. Greece shows no indication that it will take the necessary austerity measures to keep its fiscal house in order after a bailout takes place. A Greek bailout could make Spain and Portugal think that they are entitled to a similar financial rescue. And a bailout could feed resentment from German taxpayers, who would bear much of the burden.
2010-02-25 As Greece Goes, So Goes the U.S.? by Paul Kasriel and Asha Bangalore of Northern Trust
Greece's debt crisis may not make much of an impact on U.S. economic growth. In the third and fourth quarters of 2009, total U.S. exports increased at annual rates of 24.6 percent and 28.1 percent, respectively. South America and the Pacific Rim accounted for a combined 31.7 percent of U.S. exports in the fourth quarter of last year, while Europe accounted for just 23.1 percent. Kasriel and Bangalore also comment on the likely prospects for a low federal funds rate in the long term, and record lows for new home sales.
2010-02-23 Hey Big Spender? by Paul Kasriel of Northern Trust
The most serious fiscal challenge ahead is spending, not deficits and debt. And the most serious spending challenge the government will face relates to the diversion of productive resources to future retirees, which will build over the next 20 years are more baby boomers retire. The second spending challenge facing government is ballooning interest payments on prior debt issued. Prior federal policies that established retiree entitlement programs and funded rapidly rising spending with the issuance of debt are to blame for these problems.
2010-02-22 Not So Fast! by Paul Kasriel and Asha Bangalore of Northern Trust
Annualized growth rates over the first three quarters of 2010 will be less than one half of the 5.7 percent growth rate in the fourth quarter of 2009. Consumer inflation showed signs of slowing in January. Other than a costmetic increase in the discount rate, the Fed will probably find no pressing reason to tighten monetary policy this year.
2010-02-19 Debt Levels in G-7 Countries by Monty Guild and Tony Danaher of Guild Investment Management
Stock markets in faster-growing countries will resume their rise after China stops raising interest rates to reign in runaway food and real estate prices. Asian countries should see declining debt levels by 2014 as European countries face an ongoing debt crisis. Investors should capitalize on weakness in the current volatile, and often irrational, markets.
2010-02-03 Does Anyone in Washington Know What Needs to Be Done to Create Jobs? by Paul Kasriel of Northern Trust
?If what small- and medium-sized businesses need to increase their hiring is increased sales, then it would seem that fiscal stimulus coupled with Fed-created credit is the right medicine.? The current ($787 billion) stimulus has only been partially spent, and policy makers should not push for another stimulus until more of the remaining funds have been spent.
2010-01-25 If M Does Not Pickup, Will V Save Us? by Paul Kasriel of Northern Trust
?To summarize, M2 growth currently is extremely weak. It likely will remain relatively weak through 2010 as credit creation by depository institutions will be impeded by capital constraints. If invest
2010-01-16 When the Fed Stops the Music by John Mauldin of Millennium Wave Advisors
Some time in the coming few years the bond markets of the world will be tested. Normally a deleveraging cycle would be deflationary and lower interest rates would be the outcome. But in the face of su
2009-12-21 Q4 2009 May Be as Good as It Gets Until Q4 2010 by Paul Kasriel of Northern Trust
2009-12-19 The Age of Deleveraging by John Mauldin of Millennium Wave Advisors
2009-09-01 Politics and Fund Managers by Robert Huebscher (Article)
Those readers who would like to know whether to invest with Democrat or Republican fund managers finally have some guidance, thanks to a new academic study. We report the results, along with a host of reasons why you shouldn't read too much into this data. We also provide the names of the top fund manager donors to each party over the period from 1992 to 2006.