Search Results
Results 751–800
of 913 found.
The Case for Going Global Is Stronger Than Ever
If we have learned anything from the current financial mess, its that building wealth is dependent on rational analysis, careful decision making, and risk management. Thats why sticking close to home at a time when our markets are more uncertain than ever is a recipe for disaster and absolutely the wrong thing to do. Not only will you miss out on the worlds fastest-growing markets, but the odds are exceptionally high that you will miss as much as 50% or more in potential returns over the next decade.
An Economy at Stall Speed
The economy is at stall speed, it is quite possible well see further downward revisions to the already anemic growth numbers, and Congress and the President are dithering over the debt ceiling. It will not take much to push us into an outright recession. We can go a few days, I think, with the latter problem, but not too long or the markets will throw up.
Kicking the Can Down the Road One More Time
I hope Europe pulls it off. I really do. They have done the US a huge favor by adopting this latest plan, as it keeps their banking system from imploding; because their banks are essentially insolvent with all the sovereign debt on their books. Such a banking crisis, which would be worse than 2008, in my opinion, would no doubt plunge a world already slowing down back into recession and pull our own slow-growth economy down into recession with them. How long can they kick the can down the road? My guess is that it will be longer than we suspect.
Back to the Basics
This week we are going to revisit some themes concerning the problems of the debt and the deficit. I am getting a number of questions, so while long-time readers may have read most of this in one letter or another, it is clearly time for a review, especially given the deficit/debt-ceiling debate. I will probably offend some cherished beliefs of most readers, but that is the nature of the times we live in. It is the time of the Endgame, where things are not as black and white as they have been in the past.
What Happened to the Jobs?
The economy will be slowing down. A recession in 2012 is a real possibility if there is any type of shock coming from Europe. Most European leaders are basing their thinking more on hope than on reality. When Greece defaults there will be a domino effect. And you could actually see a banking crisis before we get actual sovereign defaults. The market does not get it. Neither in Europe nor in the US. When someone says the market has already priced in a default, go back and ask them how well the market priced in a crisis in the spring of 2008. The market doesn?t know jack.
My View on the Last Half of the Year
The economy should be in Muddle Through range (around 2% growth), absent any shocks. For instance, today we had the June ISM number, which was stronger than most analysts expected, at 55.3. There was a lot of whispering that it could dip below 50. Some of the internal components were a little soft, though. New Orders were barely above 50. And Backlogs fell below 50. Exports fell to the lowest level in two years (more on that below). Of the 18 industries surveyed, only 12 reported growth. But Muddle Through is not going to allow us to really cut into the unemployment problem.
Could the Eurozone Break Up?
If the euro is not going to fall sharply, if reducing unit labor cost takes too long to restore competitiveness and growth and if deflation is unfeasible or (if achieved) self-defeating, there is only one other way to restore competitiveness and growth: Leave the monetary union, go back to national currencies and thus achieve a massive nominal and real depreciation. After all, in all emerging market financial crises where growth was restored, a move to flexible exchange rates was necessary and unavoidable on top of official liquidity, austerity and reform and debt restructuring and reduction.
Time to Get Outraged
This week we look at data from the Bank of International Settlements, by which (if someone does a lot of work) you can figure out how much US banks have written in credit default swaps to banks in Europe on Greek, Irish, and Portuguese debt. The details should not make you happy. I meditate on whether one should buy a house now, and then discuss ?the way out? of all this mess and why we will Muddle Through.
Economic Whiplash
The political winds in Europe are shifting. The crowd that runs the various member countries today will not long survive the changes. There will be new politicians with different mandates as it becomes clear that the costs of the bailout are going to fall on the backs of the solvent countries and that austerity is going to mean hellishly bad deflation, high and rising employment, and depression in the indebted countries. And with the US economy slowing down, it might not take much to push us over the edge.
A Random Walk Through the Minefield
In the last 48 hours, so much news has come out of Europe that has me frankly shaking my head. It is a strange game of brinksmanship they are playing, and it is one we should be paying attention to (as if the brinkmanship played by US politicians over the debt ceiling is not enough). This week we look at what seems to be European leaders taking random walks through the minefield at the very heart of the European Experiment. As Paul Simon wrote, ?A man sees what he wants to see and disregards the rest.?
All for One Euro and One Euro for All?
What Will the EU Do? Seriously, will Trichet really say ?non? when they once again peer down at the abyss? He blinked last time. But if the desire is to acknowledge in private what they cannot say in public - that Greece should leave the eurozone and go back to the drachma - there is no better way than to not take Greek debt onto the ECB?s books. It is not a matter of whether Greece defaults, but when. It may be easier in the long run to clean up the mess they have now than continue to create even more debt that cannot be paid.
Kicking the Can to the End of the Road
A crisis is brewing in the US and one is coming to a slow boil in Europe. We visit Greece and Ireland and ponder how this will end. It is all well and good to kick the can down the road, but what happens when you come to the end of the road? The European answer seems to be to haul in the heavy equipment and extend the road. In short, we are watching the biggest bubble of all time, the bubble of government debt, try to keep from popping. My bet is that it can?t. And while the ride will be bumpy, the world our kids get will be better off at the end of the process.
Muddle Through, or Crisis?
This week I finish the two-part letter on the Endgame and give you my thoughts on the economy over the next five years. This is the second part of a speech I gave last week at the Strategic Investment Conference in La Jolla. It is a rather bold forecast, and fraught with peril and likely errors, but that is my job here. I must offer one large caveat! If the facts change so will my forecast, but this is the view into my very cloudy crystal ball as I see it today. As always, remember that those of us in the forecasting world are often wrong but seldom in doubt. Read accordingly.
The Endgame Headwinds
By Endgame I mean the period of time in which many of the developed economies of the world will either willingly deleverage or be forced to do so. This age of deleveraging will produce a fundamentally different economic environment lasting anywhere from 4-6 years. Now, whether this deleveraging is orderly, as now appears to be the case in Britain, or more resembles what I have long predicted will be a violent default in Greece, it will create a profoundly different economic world from the one we have lived in for 60 years.
The 'Miracle' of Compound Inflation
Investors will face the ?zero bound? in interest rates for a while longer. They can sit on their cash and earn nothing. They can fret and wring their hands about a ramp-up in inflation, but the evidence so far does not support it. They can stay in the US dollar, in which case they can watch their dollars weaken relative to the rest of the world. Travelling in Sicily or Rome validates how strong the euro is relative to the dollar. All you have to do is buy a dinner or hotel room.
The Cure for High Prices
Today we once again think about the inflation/deflation debate, turn our eyes to Europe and the very interesting election happening there this Sunday, and speculate a little about what could derail the US economy. The old line is that the cure for high prices is high prices. When prices rise, businesses tend to respond by producing more. If the price of something gets too high, then people buy less, which then leads to too much supply, which lowers prices. Rinse and repeat. Last week I wrote about what I think is the potential for inflation in the US to rise to uncomfortable levels (4-5%)
The Curve in the Road
We have chosen deliberately to take the inflation road. We have not traveled that road for some time. The Fed may think they know what is around the curve and what to do if inflation comes back, but no two crises are the same. I worry about these things. If the Fed and the US government wanted a weaker dollar, the return of inflation, and the potential for yet another boom-bust, they could not have designed better policies than the ones they?re pursuing.
The Plight of the Working Class
Although the headline unemployment number went down to 8.8%, the only way you can get to that number is by not counting the millions who have dropped out of the employment pool, too discouraged to look, but who will take a job if they can get one. If you go back and take the number of people in the labor force just two years ago, the unemployment picture is back over 10% (back-of-my-napkin math).
Unintended Consequences
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.
The End of QE2?
The Fed committed to buying $600 billion of Treasuries between the beginning of QE2 in November and the end of June. June is 3 months away. What will happen when that buying goes away? The hope when QE2 kicked off was that it would be enough to get the economy rolling, so that further stimulus would not be deemed necessary. We?ll survey how that is working out, with a quick look at some recent data, and then we go back and see what happened the last time the Fed stopped quantitative easing.
Inflation and Hyperinflation
Companies and households typically deal with excessive debt by defaulting; countries overwhelmingly usually deal with excessive debt by inflating it away. While debt is fixed, prices and wages can go up, making the total debt burden smaller. People can?t increase prices and wages through inflation, but governments can create inflation, and they?ve been pretty good at it over the years. Inflation, debt monetization, and currency debasement are not new. They have been used for the past few thousand years as means to get rid of debt. In fact, they work pretty well.
Are Booming Economies Good for the Markets?
The important question is whether booming growth is always good for equity markets. On that, the data is mixed. While strong growth usually leads to higher earnings, it typically leads to tighter liquidity. The most dangerous periods for equity markets are typically strong economic activity combined with rapidly rising oil prices. In 34% of the years since 1950 with economic growth have experienced declining EPS growth. A doubling in the oil price is not good for markets. If we begin to work on the deficit with cuts and tax increases, it will be a headwind for economic growth and earnings.
When Irish Eyes Are Voting
Mauldin reviews the Irish economy, citing a recent Vanity Fair article by Michael Lewis. Ireland's housing bubble caused prices to rise approximately 500%. More than 20% of the Irish workforce was employed in construction. Irish banks financed this, using selling bonds to other European banks. The Irish government made good on those debts, burdening its taxpayers. The end results is excessive debt for the EU, which appears to be unsupportable. On the crisis in the Middle East, Bahrain is the key country to watch out for.
A Random Walk Around the Frontlines
Today we do a Random Walk Around the Frontlines, surveying what?s going on in the world. The US economy continues to improve in fits and starts. Inflation for the last six months has risen rather smartly. And for the last three months inflation on an annualized basis is running over 3%. The recent drop in the unemployment rate was entirely due to rather dramatic drops in what is known as the participation rate - fewer people looking for jobs. The Fed needs to end its program of quantitative easing.
The Future of Public Debt
Mauldin looks at an important paper from the Bank of International Settlements on ?The Future of Public Debt.? While the debt supercycle is still growing on the back of increasing government debt, there is an end to that process, and we are fast approaching it. Drastic measures are necessary to check the rapid growth of current and future liabilities of governments and reduce their adverse consequences for long-term growth and monetary stability. This leads the BIS to conclude that the question is when markets will start putting pressure on governments, not if.
An Excerpt from Endgame
Growth does not look that great, and people don?t feel the recovery. This is unlikely to change. The U.S. and most developed economies are currently facing many major headwinds that will mean that going forward, we?ll have slower economic growth, more recessions, and higher unemployment. Three large structural changes have happened slowly over time that we expect to continue going forward. The U.S. economy will have higher volatility,lower trend growth, and higher structural levels of unemployment (The United States here is a proxy for many developed countries with similar problems.)
A Bubble in Complacency
The just released Q4 GDP of 3.2% may be overstated by 0.5% to 1.0% as a result of statistical adjustments. Consumer spending advanced, but that must be tempered by the support from fiscal and monetary policies. The growth in the deficit poses imminent danger of another recession, and the political landscape makes it unlikely a solution will emerge. Mauldin would like to see 'thought leadership' in the upcoming presidential election cycle, in order to build support for viable policies to revive the economy.
The Unsustainable Meets the Irresistible
States are the largest component of US GDP, and states' revenues have declined 10% from their peak. On top of that, federal stimulus support for states is running out. Congress should allow states to declare bankruptcy and force unions to come to the bargaining table. The US is on an unsustainable path. Absent very serious fiscal remedies, long before we get to 2019 the bond markets will have taken away our ability to finance our debt at low rates.
Thinking the Unthinkable
Mauldin criticizes Bernanke's comment that a benefit of QE2 has been rising equity prices, arguing that this would amount to a third mandate for the Fed. He commends Richard Fisher of the Dallas Fed for his comments that monetary policy is not a tool to solve the country's fiscal problems. Mauldin then says that a big treat to his growth forecast is continued sovereign debt problems in Europe. Lastly, he questions whether China can engineer a soft landing for its economy, given rising inflation.
Forecast 2011: Better than Muddle Through
Mauldin reviews his prior-year forecast. He was right on currencies and gold, but missed the bull market in equities. For 2011, he likes gold relative to the euro, pound and yen, but is less bearish on the pound than he was a year ago. He fears the Kamchatka volcanoes (in Russia) will trigger a spate of bad wealth which will lead to scarce resources and inflation. He is optimistic about the job market and employment, and forecasts that the US economy will grow 2.5-3% in 2011. He fears, however ,that structural problems in the work force will leave many untrained for employment.
Some Thoughts on Market Timing
I have real doubts that there will be ?hundreds of billions? of losses in the municipal bond market. It would take a default by almost every major municipal issuer, and a lot of small ones, to create a hundred billion in defaults, something not likely to happen. States will be forced to make spending cuts. Mauldin also cites three sources who he "highly respects" who advise to hedge US equity portfolios going into 2011.
Kicking the Can Down the Road
A collapse of a major European bank could trigger counterparty mayhem in the US banking system, at least among our major investment banks. The ECB is now earnestly continuing to kick the can down the road, buying ever more debt off the books of banks, buying time for the banks to acquire enough capital. If the ECB were to keep this up, even in a deflationary, deleveraging world it would eventually bring about inflation and the lowering of the value of the euro against other currencies. One country after another in Europe is coming under pressure. This week the debt of Belgium was downgraded.
Unintended Consequences
The recent rise in interest rates is due to the reallocation of globally indexed funds away from sovereign debt and into something else. The may be a prelude to a sovereign default or a more rapid rise in rates, which could unfold very quickly. Global deleveraging is not over. QE2 and the nervousness of investors around the world are pushing up interest rates.
Texas, Ireland and Ten Little Indians
Mauldin contrasts the plights of Iceland and Ireland in dealing with excessive leverage. Iceland devalued its currency, while Ireland must accept a bailout package. Iceland's economy is recovering; Ireland's may take years. Mauldin compares the situation in Spain and Portugal to those two countries. The stronger EU countries must rescue the weak, just as Texas is being asked to rescue fiscally troubled states like California.
Recessions are on the Margin
We had a slate of good news over the past few weeks, including data on business confidence, housing, and unemployment. GDP growth is slowing, but it is still north of 2%. The economy may be able to handle only taking away the tax cuts for those with over $250,000 in income. It will slow things down, but probably not enough to cause a recession. Given that government spending is going to go down (at least I hope so), unemployment is going to take time to get under control; and with the whole developed world in a mess, it is hard to see an environment where we can average 3.5% for this decade.
O Deflation, Where is Thy Sting?
The economy growing between one and two percent. That is better than recession but not good enough to really bite into the unemployment rate, which means trouble. Mauldin examines the construction of the BLI's CPI index and specifically the role of housing: inflation, when you take out housing costs, is a jaunty 1.9%. Right in the Fed target range of 1.5-2%. The Fed's QE program may create inflation where we can least afford it - in energy and food.
First, Let's Lower the Bar
Mauldin responds to criticisms of a recent email he sent regarding healthcare reform. Next, he notes that for the last 18 months the trade-weighted yuan has dropped well over 10%, which he calls extraordinary. On the recently announced unemployment results, he says government "fiddling" with seasonal adjustments distorted the numbers. Last, he comments on the Irish sovereign debt issue.
Thoughts on Liquidity Traps
Lacy Hunt writes that the Oct employment situation was dramatically weaker than the headline 159k increase in employment measures. The most distressing aspect is the loss of another 124K full-time jobs, bringing the 5-month loss to 1.1 million. John Hussman discusses liquidity traps, where investors prefer cash to debt (because of low interest rates) and the central bank loses control. Fiscal policy, not monetary policy, impacts economic growth and inflation - and the proper fiscal measures, such as infrastructure spending, may be the best hope for growth.
Be Careful What You Wish For
Q3 GDP numbers were unimpressive, and it would not surprise Mauldin to see GDP growth be closer to 1% in the 4th quarter, unless we start to see evidence of more inventory building. That is not good for jobs, personal income, tax collections needed to cover deficits at all levels, or consumer confidence. A further threat is posed by large numbers of people whose 99 weeks of unemployment will soon expire. Republicans face big challenges once they gain power, and Mauldin says a VAT is the only way to reduce budget deficits.
The Subprime Debacle: Act 2, Part 2
Buyers of mortgage-backed securities may be able to join together and force issuers to buy back those securities, if the loans they contain are defective. This is further complicated by the fact that some of those buyers were non-US entities. Bank of America is badly exposed through its acquisition of Countrywide, as are "dozens" of other banks.
The Subprime Debacle: Act 2
The housing market has not yet begun to recover, and it is not only going to take longer but the decline in prices may be greater than many have forecast. But the real problem is the foreclosure crisis, where banks have foreclosed in situations where they had no right to do so. Several options exist for resolution, including sorting out the details of each case in a legal forum. A more ominous outcome would be to force investment banks to buy back securities with faulty titles.
The Ride of the Keynesian Cowboys
Mauldin reviews the just-released employment statistics, concluding that the "job picture is terrible." Add to that forecast weak GDP growth, lack of consumer spending, and feeble credit demand, and the Fed is left with one more "bullet" - QE2 - which is advocated by "Keynesian Cowboys" at the Fed. Others at the Fed, though, have warned about the unintended consequences of a possible QE2, and Mauldin doubts it will "work."
The Morality of Chinese Growth
Mauldin provides highlights from a recent conference. John Hofmeister is the former president of Shell Oil. He paints a very stark (even bleak) picture of the future of energy production in the US unless we change our current policies. David Rosenberg argues that GDP growth has been helped largely by inventory rebuilding, which is not sustainable. The analysts at GaveKal discuss the tension between Chinese policies toward economic growth and the social welfare it provides for its citizens.
Pushing on a String
The Fed will move forward with aggressive quantitative easing (QE), unless economic growth reaches 1.5 percent to 2.0 percent. The Fed's QE efforts thus far have been ineffective, because funds remain on banks' balance sheets. Future efforts would likely lower interest rates or possibly devalue the dollar, but it is unlikely it will stimulate growth.
The Chances of a Double-Dip
This commentary features a letter from Gary Shilling on the chances of a double-dip recession. Shilling notes that investors early this year believed that rapid job creation and the restoration of consumer confidence would spur retail spending. A funny thing happened, however, on the way to super-charged growth. In April, investors began to realize that the euro zone financial crisis, which had been heralded at the beginning of the year by the decline in the euro, was a serious threat to global growth. Stocks retreated, commodities fell, Treasury bonds rallied and the dollar rose.
The Last Half
Mauldin provides another excerpt from his forthcoming book. He argues that growth in government spending comes at the expense of private sector growth. Fiscal stimulus will not work in the current environment, because we are now at the end of an unprecedented debt cycle. The preferred solution is for a country to grow its way out of debt, but that requires running a trade surplus, which cannot be accomplished by all countries simultaneously.
The Last Chapter
Mauldin presents content from his forthcoming book. He reviews some fundamental precepts of economics, focusing on the Keynesian approach the US is taking to revive the economy. He presents data from Woody Brock showing that the US debt may rise by as much as $1.5 trillion per year. Ultimately, he says, the bond market will revolt and interest rates will rise and the results will be very unpleasant. Using taxes or savings to handle a large fiscal deficit reduces the amount of money available to private investment.
The Dark Side of Deficits
At the start of each bull cycle, the markets had single-digit P/E ratios, with no exception. No secular bull market ever began with high P/E ratios, even though significant rallies often started from high P/E ratios. The lesson of history is that all periods of high valuations come to an unhappy end. The most significant driver of stock market returns is the valuation embedded in the P/E ratio. We are still in a secular bear market. Valuations, while lower, are still not at what could be called historical cyclical bottoms. Patience is the order of the day. We will get there.
How We Get Through This Mess
Don't expect a v-shaped recovery, but GDP may still grow in Q3. Unemployment and deficits will remain high. It is going to be a tough environment for the next 6-8 years. Growth opportunities will be in entrepreneurial ventures that can adapt to this environment and to future unforeseen hurdles.
Results 751–800
of 913 found.
